77492 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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. 

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 

§ 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. 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77493 

115–123). Specifically, we codified in 

regulations our longstanding policy that 

the writing requirement in various 

compensation arrangement exceptions 

in § 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 § 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 valuebased 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 antikickback statute; (3) the Health 

Insurance Portability and 

Accountability Act of 1996 (Pub. L. 

104–191) (HIPAA); and (4) the rules 

under 42 CFR part 2 related to opioid 

and substance use disorder treatment. 

Through the Regulatory Sprint, HHS 

aims to encourage and improve— 

• A patient’s ability to understand 

treatment plans and make empowered 

decisions; 

• Providers’ alignment on an end-toend treatment approach (that is, 

coordination among providers along the 

patient’s full care journey); 

• Incentives for providers to 

coordinate, collaborate, and provide 

patients with tools to be more involved; 

and 

• Information-sharing among 

providers, facilities, and other 

stakeholders in a manner that facilitates 

efficient care while preserving and 

protecting patient access to data. 

The Department believes that the 

realization of these goals would 

meaningfully improve the quality of 

care received by all American patients. 

As part of the Regulatory Sprint, CMS, 

the HHS Office of Inspector General 

(OIG), and the HHS Office for Civil 

Rights (OCR) each issued requests for 

information to solicit comments that 

may help to inform the Department’s 

approach to achieving the goals of the 

Regulatory Sprint (83 FR 29524, 83 FR 

43607, and 83 FR 64302, respectively). 

We discuss our request for information 

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 VolumeBased 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 volumebased 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 

77494 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

1For more information about the Shared Savings 

Program, see http://www.cms.gov/Medicare/ 

Medicare-Fee-for-Service-Payment/ 

sharedsavingsprogram/index.html. 

2For more information about the Innovation 

Center’s innovative health care payment and service 

delivery models, see https://innovation.cms.gov/. 

3For 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-AbuseWaivers.html. 

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 highquality 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 twosided 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

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 MedicareMedicaid (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

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

c. Commercial Payor and ProviderDriven 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 selfreferral 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#valuebased-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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77495 

public on how to address any undue 

impact and burden of the physician selfreferral 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 CMSsponsored 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 physicianowned 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 SelfReferral 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 valuebased arrangements, along with 

integrally-related definitions for valuebased 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 selfreferral 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 

77496 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 ValueBased 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 volumebased 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 § 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-forperformance 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 § 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 valueVerDate Sep<11>2014 18:07 Dec 01, 2020 Jkt 253001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\02DER2.SGM 02DER2
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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 selfreferral 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 

§ 411.357(aa): 

• 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. 

• 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 valuebased enterprise. 

• 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 valuebased enterprise; and (4) that have a 

governing document that describes the 

value-based enterprise and how the VBE 

participants intend to achieve its valuebased purpose(s). 

• Value-based purpose means: (1) 

Coordinating and managing the care of 

a target patient population; (2) 

improving the quality of care for a target 

patient population; (3) appropriately 

reducing the costs to, or growth in 

expenditures of, payors without 

reducing the quality of care for a target 

patient population; or (4) transitioning 

from health care delivery and payment 

mechanisms based on the volume of 

items and services provided to 

mechanisms based on the quality of care 

and control of costs of care for a target 

patient population. 

• VBE participant means an 

individual or entity that engages in at 

least one value-based activity as part of 

a value-based enterprise. 

• 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 § 411.357(aa) apply. 

We refer to these activities as valuebased activities. In the proposed rule, 

we acknowledged that sometimes valuebased 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 valuebased 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 § 411.351, ‘‘valuebased 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 

§ 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 selfreferral 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 

§ 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 valuebased 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 

77498 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

4For 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. 

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 

§ 411.351) and a physician; otherwise, 

the physician self-referral law’s 

prohibitions would not be implicated. 

Also, because the exceptions at final 

§ 411.357(aa) apply only to 

compensation arrangements (as defined 

at § 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 valuebased 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 ‘‘valuebased 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. 

The final exceptions at § 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 valuebased enterprise. At final § 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 valuebased 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 ‘‘valuebased enterprise’’ finalized at § 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 valuebased 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 valuebased enterprise. (Provided that a valuebased enterprise exists, an arrangement 

between the enterprise and a physician 

who is a VBE participant in the valuebased enterprise may qualify as a 

‘‘value-based arrangement’’ for purposes 

of the exceptions at § 411.357(aa) if the 

value-based enterprise is itself an 

‘‘entity’’ as defined at § 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 valuebased 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 § 411.357(aa) 

apply. At final § 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 

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based arrangement to which the 

exceptions at final § 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 § 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 § 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 § 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 § 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 

§ 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 § 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 § 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 valuebased 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 (lemondropping) 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 inkind remuneration provided by an 

entity to a physician or an immediate 

family member of a physician under an 

arrangement between a physician (or 

77500 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 valuebased 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 valuebased purpose of the value-based 

enterprise. 

With respect to the examples 

provided by the commenters, we note 

that the scope of the physician selfreferral 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 nonmedical 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 valuebased 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 valuebased 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 valuebased purposes.’’ 

Response: The determination 

regarding whether a value-based activity 

is reasonably designed to achieve at 

least one value-based purpose is a factspecific determination. Parties must 

have a good faith belief that the valuebased 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 § 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 valuebased 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 § 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 valuebased 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 § 411.353 and is applicable 

to parties utilizing the new exceptions 

for value-based arrangements at final 

§ 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 § 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 ‘‘valuebased 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 § 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 valuebased purpose of the value-based 

enterprise: (1) The provision of an item 

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

§ 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 valuebased 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 valuebased 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 § 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 ‘‘valuebased enterprise’’ will preclude a new 

VBE participant from providing valuebased 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 valuebased 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 valuebased 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 

77502 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 valuebased 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 valuebased 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 valuebased 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 valuebased 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 valuebased 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 valuebased 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 § 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 valuebased 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 valuebased purpose that would unlock access 

to the exceptions at § 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 ValueBased 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 entityspecific 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 valuebased 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 valuebased 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 teambased 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 

77504 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

may qualify under the Shared Savings 

Program pre-participation waiver: 

• Infrastructure creation and 

provision. 

• Network development and 

management, including the 

configuration of a correct ambulatory 

network and the restructuring of 

existing providers and suppliers to 

provide efficient care. 

• Care coordination mechanisms, 

including care coordination processes 

across multiple organizations. 

• Clinical management systems. 

• Quality improvement mechanisms 

including a mechanism to improve 

patient experience of care. 

• Creation of governance and 

management structure. 

• Care utilization management, 

including chronic disease management, 

limiting hospital readmissions, creation 

of care protocols, and patient education. 

• Creation of incentives for 

performance-based payment systems 

and the transition from fee-for-service 

payment system to one of shared risk of 

losses. 

• Hiring of new staff, including care 

coordinators (including nurses, 

technicians, physicians, and/or nonphysician practitioners), umbrella 

organization management, quality 

leadership, analytical team, liaison 

team, IT support, financial management, 

contracting, and risk management. 

• 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). 

• Consultant and other professional 

support, including market analysis for 

antitrust review, legal services, and 

financial and accounting services. 

• Organization and staff training 

costs. 

• Incentives to attract primary care 

physicians. 

• 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 § 411.351, ‘‘target 

patient population’’ means an identified 

patient population selected by a valuebased 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 

§ 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 § 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 valuebased 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 costsaving 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 valuebased 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 (lemondropping) would not be permissible 

under most circumstances, as we will 

not consider the selection criteria to be 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 valuebased 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 § 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 § 411.357(aa). The 

definition of ‘‘target patient population’’ 

at final § 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 valuebased 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 valuebased 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 § 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 § 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 § 411.351. 

In the physician self-referral regulations, 

the term ‘‘entity’’ is used to indicate an 

entity (as defined at § 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 nonnatural 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 § 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 

§ 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 

77506 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 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 valuebased 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 valuebased 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-sizefits-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 

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

§ 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 

§ 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 § 411.357(aa) for valuebased arrangements. We are finalizing in 

all three exceptions at § 411.357(aa) a 

separate requirement to ensure that, 

regardless of the nature of the valuebased 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 § 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 valuebased arrangement engage in valuebased activities that include, at a 

minimum, the coordination and 

management of the care of the target 

patient population or that the valuebased 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 § 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 § 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 selfreferral law is not the driver of 

innovation or the barrier to innovation. 

The final exceptions at § 411.357(aa) are 

applicable to the compensation 

77508 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

arrangements between parties in a CMSsponsored 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 CMSsponsored model, program, or other 

initiative can be structured to satisfy the 

requirements of at least one of the 

exceptions at § 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 CMSsponsored 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 § 411.357(aa)(1), we are finalizing 

an exception that applies to a valuebased 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 § 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 

§ 411.357(aa)(3), we are finalizing an 

exception that applies to any valuebased 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 valuebased 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 

§ 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 allinclusive exception to the physician 

self-referral law for any type of valuebased arrangement rather than the threeexception 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 valuebased 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 valuebased 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 valuebased 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77509 

nature, commercially reasonable. In 

contrast, a few commenters urged CMS 

to include requirements that the valuebased 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 § 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 selfreferral 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 selfreferral 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 valuebased definitions at § 411.351, satisfy all 

the requirements of an applicable 

exception at final § 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 

§ 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 § 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 § 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 

§ 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 § 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 programspecific 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 

§ 411.357(c) to protect compensation 

arrangements with employed physicians 

may continue to utilize the exception at 

§ 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 

§ 411.357(aa). The commenters stated a 

desire to continue to utilize the 

exception at § 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 valuebased 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 § 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 

77510 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

exceptions, however, are only available 

to parties that qualify under the valuebased definitions. Parties may utilize 

the exception at § 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 § 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, factspecific. 

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 valuebased 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 § 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 (§ 411.357(aa)(1)) 

We proposed at § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77511 

contracts for the assumption of full 

financial risk on behalf of the valuebased 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 § 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 valuebased 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 fullfinancial 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 § 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 § 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 

§ 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 

§ 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 

77512 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

intended to address a different concern. 

We are finalizing at § 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 § 411.357(aa)(1)(v) 

related to directing a physician’s 

referrals to a particular provider, 

practitioner, or supplier (84 FR 55781). 

Under final § 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 valuebased 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 

§ 411.352(d)(2) and (i), the exception for 

physician recruitment at 

§ 411.357(e)(4)(iv), and the exception for 

assistance to compensate a 

nonphysician practitioner at 

§ 411.357(x)(2) (84 FR 55781). We are 

finalizing at § 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 § 411.357(aa)(1) 

comparable, in some respects, to the 

exception at § 411.357(n) for risksharing 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 § 411.357(n).) Although the final 

exception at § 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 risksharing arrangements is also warranted 

in the full financial risk exception. 

Finally, like the exception at 

§ 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 § 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 twosided 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 § 411.351) and a 

physician who is a VBE participant in 

the value-based enterprise. The valuebased 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 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 valuebased system to evolve and more 

meaningfully participate in the valuebased system. As discussed in detail in 

II.A.2.b.(3). of this final rule, we are 

finalizing at § 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- 

77514 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 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 § 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 § 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 § 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 § 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 valuebased 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 (§ 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 

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

§ 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 

§ 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 § 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 

§ 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 § 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 § 411.357(aa)(2)(iii). 

Integrated into most of the CMSsponsored 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 

§ 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 

77516 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

5https://www2.deloitte.com/us/en/insights/ 

industry/health-care/volume-to-value-basedcare.html (last accessed June 18, 2020). 

Secretary upon request. We are 

finalizing our proposals to include these 

requirements in the meaningful 

downside financial risk exception at 

§ 411.357(aa)(2)(iv), (vi), and (viii). 

We also proposed a requirement at 

§ 411.357(aa)(2)(vii) related to directing 

a physician’s referrals to a particular 

provider, practitioner, or supplier (84 

FR 55781). Under final 

§ 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 § 411.357(aa) are designed 

to accommodate movement toward twosided 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 § 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 § 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 valuebased 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 § 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. 

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 valuebased 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 § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 valuebased 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 valuebased 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 § 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 valuebased 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 valuebased 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 valuebased 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 valuebased 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 § 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 § 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 valuebased 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 ‘‘prerisk’’ 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 

§ 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 

77518 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 valuebased 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 valuebased 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 

§ 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 

(§ 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 valuebased payment system. They also 

asserted that permitting physicians and 

physician groups (especially smaller 

practices that are not used to risksharing 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 selfreferral regulations are necessary to 

foster the delivery of coordinated 

patient care and achieve the Secretary’s 

vision of transitioning to a truly valuebased health care delivery and payment 

system, we proposed an exception at 

§ 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). 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77519 

Because the exception at proposed 

§ 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 valuebased purposes on which their valuebased 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 § 411.357(aa)(2), but 

we are not finalizing the alternative 

proposal regarding the conditioning of 

remuneration. Final § 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 

§ 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 valuebased activities are expected to further 

the value-based purpose(s) of the valuebased 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 selfexplanatory. 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 § 411.354(e)(3) (modified, in part, 

from existing § 411.353(g)(1)(ii)) would 

apply. We are finalizing our proposal 

regarding the writing and signature 

requirements in the exception at 

§ 411.357(aa)(3). We remind readers that 

the value-based purpose of the 

arrangement must relate to the valuebased 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 valuebased 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 

§ 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 § 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, 

77520 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 valuebased—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 § 411.357(aa)(3). We provided a 

detailed example of appropriate 

monitoring of a value-based 

arrangement for compliance with the 

proposed exception at § 411.357(aa)(3), 

including the consequences of valuebased 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 valuebased 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 

§ 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 valuebased 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 § 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 § 411.354(d)(1). 

We believe that requiring immediate 

termination of a value-based 

arrangement due to an ineffective valuebased 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 valueVerDate Sep<11>2014 18:07 Dec 01, 2020 Jkt 253001 PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 E:\FR\FM\02DER2.SGM 02DER2
Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 411.357(aa)(3)(vii) 

with respect to monitoring of valuebased 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 singlemodality 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 valuebased 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 § 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 dualmodality 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 nationallyrecognized 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 valuebased 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 selfreferral law. Under final 

§ 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 valuebased arrangement no longer satisfied 

the requirements of § 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 selfreferral law. The hospital’s (or valuebased 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 selfreferral 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 valuebased purpose of the value-based 

enterprise and would no longer qualify 

as a ‘‘value-based activity’’ as that term 

is defined at final § 411.351. In turn, the 

arrangement would not qualify as a 

‘‘value-based arrangement’’ and the 

exception at § 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 valuebased enterprise, as well as ensuring 

77522 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 valuebased 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 valuebased 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 valuebased 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 

§ 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 valuebased definitions and exceptions will 

ensure that even ‘‘no risk’’ value-based 

arrangements that satisfy all the 

requirements of the definitions and the 

requirements of § 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 selfreferral 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 valuebased 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 

§ 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 § 411.354(e) (formerly at § 411.353(g)) 

would apply to value-based 

arrangements. One commenter 

requested that we eliminate the 

signature requirement from the valuebased 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 selfreferral law do not add burden to these 

practices. (See, for example, 83 FR 

59993.) Nothing in the final value-based 

arrangement exception at 

§ 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 

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

§ 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 valuebased 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 

§ 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 valuebased activity will be deemed to be 

reasonably designed to achieve at least 

one value-based purpose of the valuebased 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 § 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 valuebased arrangement due to a value-based 

activity no longer furthering the valuebased 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 valuebased 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 valuebased 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 valuebased arrangement is required if a valuebased 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 

77524 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 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 

§ 411.357(aa)(3)(vii)(B)(2) a 90-day 

timeframe for the termination of valuebased 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 

§ 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 valuebased arrangements. 

Response: The final regulations at 

§ 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 § 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 valuebased 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 § 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 

§ 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 

§ 411.357(aa)(3)(vii), either the valuebased 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. 

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

§ 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 § 411.357(aa) Are Applicable 

(§ 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 §§ 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 

§ 411.354(c)(2) and (3). 

Under our current regulations, if an 

indirect compensation arrangement 

exists, the exception for indirect 

compensation arrangements at 

§ 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 § 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 

§ 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 § 411.355 of our 

regulations. 

As we stated in the proposed rule (84 

FR 55786), an unbroken chain of 

financial relationships described in 

§ 411.354(c)(2)(i) may include a valuebased arrangement as defined at 

§ 411.351 in this final rule. Thus, an 

unbroken chain of financial 

relationships that includes a valuebased arrangement could form an 

‘‘indirect compensation arrangement’’ 

for purposes of the physician selfreferral law if the circumstances 

described in § 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 § 411.357(p), which 

includes requirements not found in the 

exceptions for value-based arrangements 

at § 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 § 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 

77526 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 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 

§ 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 § 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 § 411.357(aa) applicable to 

certain indirect compensation 

arrangements that include a value-based 

arrangement in the unbroken chain of 

financial relationships described in 

§ 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 § 411.357(aa) 

applicable to certain indirect 

compensation arrangements that 

include a value-based arrangement in 

the unbroken chain of financial 

relationships described in 

§ 411.354(c)(2)(i). Specifically, under 

the regulation finalized at 

§ 411.354(c)(4)(iii), the exceptions at 

§ 411.357(aa) are available to protect the 

physician’s referrals to the entity when 

an indirect compensation arrangement 

(as defined at § 411.354(c)(4)(2)) 

includes a value-based arrangement (as 

defined at § 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 § 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 

§ 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 § 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 valuebased purposes (as defined at § 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 

§ 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 § 411.351 in this final 

rule), the exceptions at § 411.357(aa) 

would be available to protect the valuebased arrangement (that is, the indirect 

compensation arrangement) between the 

hospital and the physician. (The parties 

could also utilize an applicable 

exception in § 411.355 to protect 

individual referrals for designated 

health services or the exception at 

§ 411.357(p) to protect the indirect 

compensation arrangement between the 

hospital and the physician, but it is 

unlikely that all the requirements of 

§ 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 § 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 

§ 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 § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77527 

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. 

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 

§ 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 § 411.354(c)(4)(iii) to 

provide that the exceptions at 

§ 411.357(aa) are applicable when an 

unbroken chain described in 

§ 411.354(c)(2)(i) includes a value-based 

arrangement (as defined in § 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 § 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 § 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 § 411.357(p), no 

other exception in § 411.357 is 

applicable to indirect compensation 

arrangements (84 FR 55786). The 

commenters requested that we confirm 

that the exception at § 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 § 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 § 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 § 411.357(n). The exception at 

§ 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. 

The risk-sharing arrangement between 

the MCO or IPA and the physician may 

be direct or indirect. An indirect risksharing 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 § 411.351), the unbroken 

chain of financial relationships may 

constitute an indirect compensation 

arrangement under § 411.354(c)(2). If so, 

the exception at § 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 

§ 411.357(p) would also apply. If the 

MCO or IPA is not itself furnishing 

designated health services (as described 

in § 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 

77528 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

7Executive 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-qualitytransparency-american-healthcare-put-patientsfirst/. 

for which a claim is submitted to 

Medicare.) 

To be clear, the exception for risksharing arrangements at § 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 

§ 411.357(n), the exception for risksharing 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 

§ 411.357(n) is meant to cover all risksharing 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 § 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 § 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 

§ 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 § 411.354(c)(4)(ii) and 

(iii)(B) that expressly state that the 

exception at § 411.357(n) is applicable 

in the case of an indirect compensation 

arrangement in which the entity 

furnishing designated health services 

described in § 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-talkabout-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 selfreferral 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 alreadyrequired 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 machinereadable 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 

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

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 selfreferral 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 

§ 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 valuebased exceptions to the physician selfreferral 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 

77530 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 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— 

• Does the arrangement make sense as 

a means to accomplish the parties’ 

goals? 

• How did the parties calculate the 

remuneration? 

• Did the calculation result in 

compensation that is fair market value 

for the asset, item, service, or rental 

property? 

These questions relate, respectively, 

to the definition of commercial 

reasonableness, the volume or value 

standard and the other business 

generated standard, and the definition 

of fair market value. In this section of 

the 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 (§ 411.351) 

In the proposed rule, we proposed to 

include at § 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 § 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 

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

77532 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 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 § 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 valuebased 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 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 § 411.354(d)(4)(v) or the 

exceptions for the rental of office space 

at § 411.357(a)(3), the rental of 

equipment at § 411.357(b)(2), personal 

service arrangements at 

§ 411.357(d)(1)(iii), and fair market 

value compensation at § 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 § 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 

77534 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 411.357(l) and in the 

new exception for limited remuneration 

to a physician finalized at § 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 § 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 § 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 § 411.357(l) and 

the new exception for limited 

remuneration to a physician at 

§ 411.357(z). Unless the context 

indicates otherwise, the term ‘‘referral’’ 

has the meaning set forth in § 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 § 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 brightline 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 § 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 § 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 

§ 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 

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

§ 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 

§ 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 § 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 

§ 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 selfreferral 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 

§ 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 § 411.357(d)(1). We are 

aware that, because personal service 

arrangements may not satisfy these 

requirements, parties often rely on the 

exception at § 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 

(§ 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, 

77536 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 inoffice 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 

§ 411.354(d)(2) and (3) that deem unitbased 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. Unitbased 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 

§ 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 

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

§ 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 

§ 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 § 411.351 of our regulations, 

the exception for academic medical 

centers at § 411.355(e)(1)(ii), and various 

exceptions for compensation 

arrangements in section 1877(e) of the 

Act and § 411.357 of our regulations, 

including the new exception established 

in this final rule for limited 

remuneration to a physician at 

§ 411.357(z). In addition, the regulation 

at final § 411.354(d)(5)(i) applies for 

purposes of section 1877(h)(4) of the Act 

and the group practice regulations at 

§ 411.352(g) and (i). The final policies 

do not apply for purposes of applying 

the exceptions at § 411.357(m), (s), (u), 

(v), and (w), or for purposes of applying 

the new exception finalized in this final 

rule at § 411.357(bb) for cybersecurity 

items and services. We are including 

regulation text at § 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 

§ 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 § 411.354(d)(5) and 

(6) do not apply for purposes of 

determining the existence of an indirect 

compensation arrangement under 

§ 411.354(c)(2) or applying the special 

rule on compensation that is deemed to 

be set in advance at § 411.354(d)(1). For 

the reasons discussed below in response 

to comments, the final special rules at 

§ 411.354(d)(5) and (6) do not apply for 

purposes of applying the special rules 

for unit-based compensation at 

§ 411.354(d)(2) and (3). We are 

including regulation text at 

§ 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 § 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 

§ 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 § 411.354(d)(2) for unitbased 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 

77538 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

policies set forth in this final rule, as 

described in our response to comments 

below, the special rules at 

§ 411.354(d)(2) and (3) are not 

applicable to compensation that takes 

into account the volume or value of 

referrals under final § 411.354(d)(5)(i) or 

(6)(i) or to compensation that takes into 

account other business generated by a 

physician under final § 411.354(d)(5)(ii) 

or (6)(ii). We have revised the regulation 

text at § 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 § 411.354(d)(5) or 

(6), that determination is final. The 

special rules at § 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 § 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 × collections from 

personally performed services) + (.50 × 

collections from referred designated 

health services) + (.50 × 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 § 411.354(d)(2) for unitbased 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 

§ 411.354(d)(2) and (3) are not 

applicable to compensation that takes 

into account the volume or value of 

referrals under final § 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 § 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 § 411.354(d)(5) or 

(6), that determination is final. The 

special rules at § 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 × 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 § 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 

§ 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 § 411.354(d)(5)(iv) and (6)(iv), 

these special rules do not apply for 

purposes of applying the exceptions at 

§ 411.357(m), (s), (u), (v), and (w), or for 

purposes of applying the new exception 

established in this final rule at 

§ 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 § 411.354(d)(5)(i)(B) and 

(ii)(B), and at proposed 

§ 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 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77539 

policy is designated at 

§ 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 § 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 § 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 

§ 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 § 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 

§ 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 

§ 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 

§ 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 § 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 § 411.354(d)(5) and (6). 

However, as described below in our 

response to comments, we are revising 

the regulations at § 411.354(c)(2) 

regarding the existence (that is, 

definition) of an indirect compensation 

arrangement. We believe the revisions to 

§ 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. 

77540 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 411.354(d)(5) or (6), no 

special rule, including those at 

§ 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 § 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 × the value of the physician’s 

referrals of designated health services) + 

(.20 × the value of the other business 

generated by the physician for the 

entity) + (.20 × 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 selfreferral law’s volume or value and other 

business generated standards. We 

believe that the policies finalized at 

§ 411.354(d)(5) and (6), coupled with 

the new condition at § 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 § 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 

§ 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 

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

§ 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 § 411.356(c)(1) and (3), both of which 

incorporate the requirements of 

§ 411.362, including the requirement at 

§ 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 thencurrent 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 § 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 § 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 § 411.354(d)(2) were met. Thus, 

even prior to this final rule, the 

productivity bonus ‘‘safe harbor’’ at 

§ 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 § 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 §§ 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 

77542 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 outcomesbased bonuses, as described by the 

commenter, could fall within the 

circumstances of the special rules at 

final § 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 caseby-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 § 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 § 411.354(d)(5) and (6) do not 

apply for purposes of applying the 

exceptions for medical staff incidental 

benefits at § 411.357(m), professional 

courtesy at § 411.357(s), communitywide health information systems at 

§ 411.357(u), electronic prescribing 

items and services at § 411.357(v), 

electronic health records items and 

services at § 411.357(w), and 

cybersecurity technology and related 

services at new § 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 

§ 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 § 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 § 411.354(d)(5) and (6) can be 

easily applied. 

Comment: A few commenters 

requested that CMS confirm that the 

proposed special rules at § 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 § 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 (§ 411.352(g)) and the 

requirements under the special rules for 

profit shares and productivity bonuses 

at § 411.352(i). 

Response: Except as specified in 

§ 411.354(d)(5)(iv) and (6)(iv), the 

proposed special rules interpreting the 

volume or value standard at 

§ 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 § 411.354(d)(5)(iv) and 

(6)(iv), the proposed special rules 

interpreting the other business 

generated standard at § 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 

§ 411.354(c)(2) finalized in this final 

rule, and because the special rules at 

final § 411.354(d)(5) and (6) have only 

prospective application, the special 

rules at § 411.354(d)(5) and (6) do not 

apply to the determination of whether 

an indirect compensation arrangement 

exists under § 411.354(c)(2). For the 

reasons explained in the response to a 

comment below, the special rules at 

final § 411.354(d)(5) and (6) do not 

apply for purposes of applying the 

special rules on unit-based 

compensation at § 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 § 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 § 411.354(d)(5)(i) applies for 

purposes of interpreting and applying 

the group practice regulations at 

§ 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 

§ 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 

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

§ 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 fixedrate 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 

§ 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 § 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 

§ 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 § 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 

§ 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 

§ 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 § 411.354(d)(4)(vi). 

77544 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

Comment: A few commenters asserted 

that the existing special rules at 

§ 411.354(d)(2) and (3) regarding perunit 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 

§ 411.354(d)(2) and (3), because they 

would no longer be necessary if we 

finalize our proposals at § 411.354(d)(5) 

and (6). The commenters suggested 

revisions to § 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 § 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 personallyperformed 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 § 411.354(d)(5) and 

(6) or whether it is because the unitbased compensation satisfies the 

requirements of the special rules for perunit compensation at § 411.354(d)(2) 

and (3). The commenter then questioned 

whether the special rules for unit-based 

compensation at § 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 § 411.354(d)(2). 

The same is true for the deeming 

provision at § 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 § 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 § 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 § 411.354(d)(2) and (3) 

finalized here, the special rules for unitbased compensation would not apply. 

On and after the effective date of this 

final rule, the special rules at 

§ 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 

§ 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 

§ 411.354(d)(2) and (3) from the 

physician self-referral regulations, 

although we are adding language to both 

§ 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 

§ 411.354(d)(5) or (6). Because the 

special rules at final § 411.354(d)(5) and 

(6) have prospective application only, 

we are confirming in regulation text at 

§ 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 § 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 selfreferral law. 

Comment: Several commenters 

expressed strong support for the 

proposal to remove the term ‘‘varies 

with’’ from the regulations at 

§ 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 § 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 § 411.352(c)(2) and 

establish the special rules interpreting 

the volume or value standard and other 

business generated standard at 

§ 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 

§ 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 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 411.354(d)(2) and (3) and the 

exception at § 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 

§ 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 

§ 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 

§ 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 

§ 411.357(p) (66 FR 867) or, if the entity 

is a MCO or IPA, the exception at 

§ 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 § 411.357(n) to indirect 

compensation arrangements.) In Phase I, 

we also finalized special rules related to 

unit-based compensation at 

§ 411.354(d)(2) and (3) to be applied 

when analyzing compliance with the 

requirements of the exceptions in 

§ 411.357, including the exception for 

indirect compensation arrangements at 

§ 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 § 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 § 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 timebased 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 

§ 411.354(d)(2) and (3). Commenters 

noted that, similarly, the exception for 

indirect compensation arrangements at 

§ 411.357(p), like § 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 

§ 411.354(c)(2) or included in the 

definition and then excepted under 

§ 411.357(p) after applying the special 

rules at § 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 § 411.354(d)(2) and (3) 

(69 FR 16059). We continued that we 

intended to exclude under the exception 

at § 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 

§ 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 

77546 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 

§ 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 selfreferral law. Unless all the elements of 

final § 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 § 411.354(c)(1). 

Therefore, the referral and billing 

prohibitions of the physician selfreferral 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 unitbased compensation at the definitional 

stage at final § 411.354(c)(2)(ii), many 

unbroken chains of financial 

relationships will no longer be required 

to satisfy the writing requirement at 

§ 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 selfreferral 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 § 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 

§ 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 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 × 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 § 411.354(d)(4). 

4. Patient Choice and Directed Referrals 

(§ 411.354(d)(4)) 

Historically, when the conditions of 

the special rule at § 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 farreaching 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 § 411.355 or § 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, 

§ 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 § 411.354(d)(4). To that 

end, we proposed to include in the 

exceptions at § 411.355(e) for academic 

medical centers, § 411.357(c) for bona 

fide employment relationships, 

§ 411.357(d)(1) for personal service 

arrangements, § 411.357(d)(2) for 

physician incentive plans, § 411.357(h) 

for group practice arrangements with a 

hospital, § 411.357(l) for fair market 

value compensation, and § 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 § 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 § 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 § 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 § 411.357(z). Although the 

requirement is not included in the new 

exceptions for value-based arrangements 

at final § 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 

77548 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 

§ 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 § 411.354(d)(4) to include a 

condition at § 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 § 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 

§ 411.354(d)(4), in addition to meeting 

the other conditions of § 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 § 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 § 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 

§ 411.357(c)(5), the exception for bona 

fide employment relationships requires 

compliance with the conditions of the 

special rule for directed referrals at 

§ 411.354(d)(4). (The exceptions for 

personal service arrangements and fair 

market value compensation have 

identical requirements at 

§ 411.357(d)(1)(viii) and (l)(7), 

respectively.) Under § 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 whollyowned providers and suppliers in the 

current term, the compensation would 

not meet the condition at 

§ 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 whollyowned providers and suppliers), the 

existence of the compensation 

arrangement would be contingent on the 

value of the physician’s referrals in 

violation of § 411.354(d)(4)(vi). 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77549 

We also proposed to revise 

§ 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 

§ 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 

§ 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 

§ 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 § 411.354(d), which sets 

forth special rules on compensation, 

rather than include it in § 411.354(e), 

which sets forth special rules for 

compensation arrangements. We are 

finalizing the proposed restructuring of 

and nonsubstantive revisions to 

§ 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 § 411.354(d)(5). 

Commenters agreed that compliance 

with the conditions of the special rule 

at § 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 § 411.355(e) for academic 

medical centers, § 411.357(c) for bona 

fide employment relationships, 

§ 411.357(d)(1) for personal service 

arrangements, § 411.357(d)(2) for 

physician incentive plans, § 411.357(h) 

for group practice arrangements with a 

hospital, § 411.357(l) for fair market 

value compensation, and § 411.357(p) 

for indirect compensation arrangements 

an affirmative requirement for 

compliance with § 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 

§ 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 § 411.354(d)(4), 

with which the compensation 

arrangement must comply under the 

exceptions at §§ 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 § 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 § 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 

§ 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 § 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 

§ 411.354(d)(4) and our previouslystated 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 § 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 

77550 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

§ 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 § 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 § 411.354(d)(4)(vi), 

rather than the final regulation at 

§ 411.354(d)(5)(i), in our response to the 

commenters. 

The condition at § 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 

§ 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 § 411.354(d)(4). We 

emphasize that § 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 § 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 

§ 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 § 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 

§ 411.354(d)(4) and and the 

compensation arrangement would not 

satisfy the applicable exception’s 

requirement of compliance with 

§ 411.354(d)(4). 

Comment: One commenter expressed 

support for the affirmative requirement 

for compliance with the conditions of 

§ 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 

§§ 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 § 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 § 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 § 411.354(d)(4), rather than 

include it with other special rules 

related to compensation arrangements at 

§ 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 § 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 § 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 § 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 

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

§ 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 

§ 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 

§ 411.354(d)(5). However, a 

compensation arrangement will have to 

satisfy the conditions of § 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 

§ 411.355(e) or § 411.357(c), (d)(1), 

(d)(2), (h), (l), (p), or (z). The commenter 

is correct that the requirement to 

comply with § 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 § 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 

§ 411.351, they were uncertain whether 

the term ‘‘referrals’’ has the meaning 

ascribed to it at § 411.351 in all 

instances in which it appears in the 

regulations. Several commenters asked 

if the term ‘‘referrals’’ in § 411.354(d)(4) 

is intended to encompass more than the 

defined term ‘‘referrals’’ at § 411.351. 

One commenter stated that, if the 

meaning of ‘‘referrals,’’ as used at 

§ 411.354(d)(4), is not limited to the 

definition at § 411.351, the proposed 

inclusion of a requirement for 

compliance with the conditions of 

§ 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 selfreferral regulations, it has the meaning 

set forth at § 411.351. 

Response: The introductory language 

to § 411.351 states clearly that, unless 

the context indicates otherwise, the 

term ‘‘referral’’ has the meaning set forth 

in § 411.351. The term ‘‘referral,’’ as 

used at § 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 § 411.354(d)(4) have the 

meaning set forth in the definition of 

‘‘referral’’ at § 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 § 411.351 throughout the physician 

self-referral regulations, including in the 

special rules on compensation at 

§ 411.354(d). 

5. Fair Market Value (§ 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 § 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, 

§ 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 

77552 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

definition drawn from § 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 § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77553 

8Fair 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) 

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 § 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 § 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’slength 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 

§ 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 § 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 § 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 § 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 wellinformed 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 § 411.351 

includes an appropriate definition for 

‘‘general market value.’’ 

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). 

77554 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 selfreferral law—asset acquisition, 

compensation for services, and rental of 

equipment or office space. Under our 

final regulation at § 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 wellinformed 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 § 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 § 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 

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

77556 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

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

77558 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 selfreferral 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 thirdparty 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 (§ 411.352) 

In the proposed rule, we proposed 

certain revisions to the group practice 

rules at § 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 

(§ 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 § 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 § 411.352(g) and (i). We are 

affirming here that we interpret the 

requirements of § 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 

§ 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 

§ 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 § 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 

§ 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 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 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 § 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 § 411.354(d)(5)(iv). 

Therefore, with respect to both 

§ 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 

§ 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 § 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 § 411.352 apply to 

group practices that operate in a FFS 

payment environment. We do not agree 

that our final regulations at § 411.352 

will prohibit a group practice from 

participating and succeeding in a valuebased health care delivery and payment 

system. 

2. Special Rules for Profit Shares and 

Productivity Bonuses (§ 411.352(i)) 

a. Distribution of Profits Related to 

Participation in a Value-Based 

Enterprise 

We proposed a new § 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 

§ 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 valuebased 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 valuebased 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 § 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 

§ 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 

§ 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 § 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 

§ 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 

77560 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

physician’s participation in a valuebased 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 § 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 § 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 

§ 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 valuebased 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 valuebased 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 § 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 § 411.352(g). 

The commenter asserted that making 

these revisions would eliminate any 

inference that § 411.352(i)(3) is not an 

exception to § 411.352(g). 

Response: The commenter is correct 

about the structure of the three 

provisions in § 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 § 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 

§ 411.352(i)(3) provides that 

notwithstanding paragraph (g) of 

§ 411.352, profits from designated 

health services that are directly 

attributable to a physician’s 

participation in a value-based 

enterprise, as defined at § 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 valuebased 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 

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

§ 411.352(i) 

We proposed to restructure and 

renumber § 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 § 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 

§ 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 § 411.354(d) and our 

special rules for compensation 

arrangements at § 411.354(e). As stated 

in the proposed rule, our addition of 

introductory language at § 411.352(i) 

and revised language at § 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 

§ 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 

§ 411.352(i)(1)(ii) as proposed. 

We highlight that the final regulation 

at § 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 § 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 § 411.351) or a location that 

qualifies as a ‘‘same building’’ under 

§ 411.351 and meets the requirements at 

§ 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 § 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 § 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 § 411.352(i)(1) until January 

1, 2022. Through December 31, 2021, 

the definition of ‘‘overall profits’’ will 

be as set forth at existing § 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 

77562 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 411.352(i)(2), which was also 

proposed in the 1998 proposed rule (as 

a definition in § 411.351), was not 

congruently omitted when finalized. We 

explained further in the proposed rule 

that, under the definition of ‘‘designated 

health services’’ at § 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 

§ 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 

§ 411.352(i)(2) to revised 

§ 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 § 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 § 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 § 411.352(i)(2)(ii) to 

§ 411.352(i)(1)(iii)(B). We are finalizing 

this proposal. As noted, to avoid 

complications associated with the 

restructuring of § 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 

§ 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 § 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 § 411.352(i)(3), which 

the commenter found beneficial for 

group practices). The commenter 

asserted that we should not finalize the 

revisions to § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 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 § 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 § 411.351. 

This was not our intention when using 

the acronym ‘‘DHS’’ in the definition of 

‘‘overall profits’’ in the regulation text at 

§ 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 

§ 411.352(i)(1)(ii). However, because the 

regulation text at § 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 § 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 

§ 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, fulltime 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 

§ 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 serviceby-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 

77564 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 serviceby-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-byservice 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 serviceby-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 § 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 § 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 § 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 § 411.352(f) or, 

potentially, whether the revenues from 

patient care services are treated as 

receipts of the practice, as required at 

§ 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 § 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 

§ 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 

§ 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 costand 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 § 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 § 411.352, including 

§ 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 

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

§ 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 § 411.352(i)(1) 

and make necessary revisions. Through 

December 31, 2021, the definition of 

‘‘overall profits’’ will be as set forth at 

existing § 411.352(i)(2). We note that the 

delayed effective date applies to all 

revisions at final § 411.352(i)(1), 

including the removal of the reference 

to ‘‘Medicaid.’’ Also, to avoid 

complications associated with the 

restructuring of § 411.352(i), we are also 

delaying the effective date of final 

§ 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 § 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 

§ 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 

77566 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 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 

§ 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 

§ 411.352(i)(3) to § 411.352(i)(2) and 

proposed minor changes to the deeming 

provisions themselves. In addition, we 

proposed to update the language of 

existing § 411.352(i)(1) (relocated to 

§ 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 § 414.22 of this chapter 

included in existing § 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 § 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 

§ 411.352(i)(1)(iii)(B). Therefore, we 

proposed corresponding revisions at 

§ 411.352(i)(2)(ii)(B) (to be renumbered 

from current § 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) § 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 § 411.352(i), as 

explained in our responses to comments 

below, we are delaying the effective date 

of these updates at final § 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 § 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 § 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 

§ 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 § 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 § 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 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 414.22(a) relates to the 

establishment of physician work RVUs. 

The regulation at § 414.22(b) relates to 

the computation of practice expense 

RVUs. The regulation at § 414.22(c) 

relates to the computation of 

malpractice expense RVUs. We believe 

the reference to § 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 

§ 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 SelfReferral Law From the Federal AntiKickback 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 antikickback 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 selfreferral 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 selfreferral 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 

§ 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 selfreferral 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 antikickback statute (or any other Federal or 

77568 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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: 

§ 411.353(f)(1)(iii); § 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); 

§ 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 § 411.357(e)(6)(i) 

and (n): ‘‘, provided that the 

arrangement does not violate the antikickback 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 

§ 411.351. We noted that the exceptions 

for referral services at § 411.357(q) and 

obstetrical malpractice subsidies at 

§ 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 antikickback 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 § 411.357(l), and we 

are not finalizing our proposal to 

remove that requirement at 

§ 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 

§ 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 

§ 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 § 411.357(l). 

The statutory exception for the rental of 

office space at section 1877(e)(1) of the 

Act and § 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 

§ 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 antikickback statute in the exception for fair 

market value compensation at 

§ 411.357(l) serves as a substitute 

safeguard, in lieu of certain safeguards 

that are included in the statutory 

exceptions but omitted from 

§ 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 

§ 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 antikickback statute, sham lease 

arrangements or other abusive 

arrangements could potentially be 

excepted under § 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 

§ 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 § 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 § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 antikickback statute. (See 66 FR 879.) 

Similarly, compliance with the antikickback statute does not entail 

compliance with the physician selfreferral 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 antikickback statute from all the regulatory 

exceptions except the exception for fair 

market value compensation at 

§ 411.357(l). Because this requirement 

will remain in § 411.357(l), we are not 

finalizing our proposal to delete the 

definition of ‘‘does not violate the antikickback statute’’ at § 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 antikickback 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 antikickback 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 

§ 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 intentbased 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 

§ 411.357(l) for fair market value 

compensation. As previously noted in 

this final rule, the requirement that the 

arrangement does not violate the antikickback statute in § 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 

§ 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 

§ 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 § 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 

§ 411.351. We note that the requirement 

that the arrangement does not violate 

the anti-kickback statute at 

§ 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 § 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 (§ 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 

77570 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

9ESRD 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 pertreatment payment amount, they do not qualify as 

designated health services. 

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 § 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 nowdeleted exception at § 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, § 411.355(d) provided that the 

referral prohibition in § 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 § 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 § 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 § 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 

§ 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 § 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 selfreferral 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. 

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 § 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 

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

§ 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 

77572 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

services’’ finalized at § 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 selfreferral 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 

§ 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 § 411.351 has 

consistently referred to the definition of 

‘‘physician’’ at section 1861(r) of the 

Act. However, although the definition of 

‘‘physician’’ at § 411.351 crossreferences section 1861(r) of the Act, the 

two definitions are not entirely 

harmonious. In particular, the definition 

of ‘‘physician’’ at § 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 § 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 

§ 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 § 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 § 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 § 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. 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77573 

The revised definition will align the 

regulatory definition of ‘‘physician’’ at 

§ 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 selfreferral 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 selfreferral law. However, we do not believe 

that the referral prohibition at 

§ 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 § 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 § 411.351) 

implicates the referral and billing 

prohibitions of the physician selfreferral 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 selfreferral 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 § 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 § 411.351 to two 

proposed arrangements to provide 

77574 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

10See, 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.’’ 

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 

§ 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 § 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 

§ 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. 

In the proposed rule, we also clarified 

the ‘‘used solely’’ requirement at 

§ 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. 

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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 carveout, 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 

77576 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 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 § 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 

§ 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 

§§ 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 § 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 § 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 § 411.351 to clarify that 

a transaction can involve persons or 

entities, but did not propose any 

substantive changes to the exception at 

§ 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 § 411.357(f), 

but updated the term ‘‘isolated 

transaction’’ at § 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 

§ 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 § 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 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 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 § 411.351 and the 

introductory chapeau language in 

§ 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 § 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 § 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 

§ 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 

§ 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 

§ 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 § 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 

§ 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 § 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 § 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 § 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 onetime 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 § 411.357(f) as an 

instance of forgiveness of an amount 

owed. We are further clarifying at 

§ 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 § 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 § 411.357(f) does not 

retroactively bring the compensation 

arrangement that gave rise to the dispute 

into compliance with the physician selfreferral 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 § 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 

77578 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 411.357(d)(1) or the 

exception for fair market value 

compensation at § 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 onetime 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 

§ 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 onetime 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 411.351 

and we are explicitly stating in 

subparagraph (2) of the definition of 

‘‘isolated financial transaction’’ at 

§ 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 selfreferral 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 § 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 

§ 411.354(e)(4) and the exception for 

limited remuneration to a physician at 

final § 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 

§ 411.357(z), a 90-day period for 

obtaining required writings under 

77580 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

§ 411.354(e)(4), and the requirement 

under § 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 

§ 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 § 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 § 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 § 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 § 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 § 411.355 through 

§ 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 

§ 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 (§ 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 selfreferral 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 

§ 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 caseby-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 § 411.353(c)(1) as proposed, 

without substantive modifications (73 

FR 48700 through 48705). We 

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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 

§ 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 § 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 § 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 § 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 § 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 selfreferral 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 selfreferral 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 selfreferral 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 

77582 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 selfreferral 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 § 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 

§ 411.354(e)(3), coupled with the 

clarification of the writing requirement 

at § 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 § 411.357(z). Thus, while 

the parties are relying on the exception 

at § 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 selfreferral 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 

§ 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 

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

§ 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 § 411.357(k)(1) ends the 

earlier of 6 months after the payment 

and the date the value causing the onetime payment or excess nonmonetary 

compensation is corrected (paid or 

repaid) by the physician (or the 

physician organization in whose shoes 

the physician stands under 

§ 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 

§ 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 

§ 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 

§ 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 § 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 § 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 § 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 

77584 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 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 

§ 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 

§ 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 § 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 § 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 selfreferral law. If the payment discrepancy 

or the failure to reconcile it (that is, 

recover excess compensation or collect 

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

§ 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 nowremoved 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 selfreferral 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 

§ 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 

77586 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 selfreferral 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 

§ 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 

§ 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 § 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 selfreferral 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 selfreferral 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 

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

(§ 411.354(b)) 

a. Titular Ownership or Investment 

Interest (§ 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 

§ 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 § 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 § 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 § 411.354(b). We explained 

that, under proposed § 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 

§ 411.354(b)(3)(vi) as proposed. The new 

regulation at § 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 

77588 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 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 

§ 411.354(b)(3) supported excluding 

titular ownership from qualifying as an 

ownership or investment interest under 

§ 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 

§ 411.354(b)(3)(vi) codifies this policy. 

The policy we are explicitly articulating 

in regulatory text at § 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 § 411.355 

or § 411.357. 

b. Employee Stock Ownership Program 

(§ 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, 

§ 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 

§ 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 

§ 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 

§ 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 § 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 § 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 § 411.354(b)(3)(i) and may not 

satisfy the requirements of an applicable 

exception at § 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 § 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 

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

§ 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, 

§ 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 

§ 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 

§ 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 § 411.357 or the 

physician’s individual referrals must 

satisfy the requirements of an applicable 

exception in § 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 selfreferral 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 § 411.354(b)(3)(vii) is 

necessary; that is, whether existing 

§ 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 § 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 

§ 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 § 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 

§ 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 (§ 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 §§ 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 selfdisclose 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 § 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 § 411.353(g) (73 FR 

48705 through 48709). As finalized in 

the FY 2009 IPPS final rule, § 411.353(g) 

applied only to the signature 

requirement of an applicable exception 

77590 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

11Our 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 § 411.354(e). See 83 FR 59715 

through 59717. 

in § 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 

§ 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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). 

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 § 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 § 411.353(g)(2) 

in order to align the regulatory 

provision at § 411.353(g) with section 

1877(h)(1)(E) of the Act. We proposed, 

in the alternative, to delete § 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 § 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 

§ 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 selfreferral 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, 

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

§ 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 

§ 411.354(e)(3), and incorporate a 

special rule for noncompliance with the 

writing requirement into the new 

special rule at § 411.354(e)(3). In this 

final rule, the special rule on writing 

and signature requirements is 

designated as § 411.354(e)(4) and a new 

rule on electronic signatures is included 

in our regulations at § 411.354(e)(3). 

Under the special rule for writing and 

signature requirements at 

§ 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 § 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 

§ 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 § 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 

§ 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 § 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 selfreferral law by relying on 

§ 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 § 411.354(d)(1), though 

we did clarify that § 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 § 411.354(d)(1), 

including codifying requirements at 

§ 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 § 411.354(e)(4) to 

reduce the modified compensation 

terms to writing. We emphasize that the 

requirements in new § 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 § 411.354(d)(1) is redesignated as 

§ 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 § 411.354(d)(1)(ii). 

Under § 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 § 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 § 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 § 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 § 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 

§ 411.354(e)(4), during the 90-day 

period after the items or services are 

77592 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 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 

§ 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 

§ 411.357(z). Under § 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 § 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 

§ 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 § 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 § 411.354(e)(3); 

the special rule on writing and signature 

requirements, which was proposed at 

§ 411.354(e)(3), will be designated as 

§ 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 § 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 § 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 

§ 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 

§ 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 socalled 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 § 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. 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 411.354(e)(2) and the 

new exception for limited remuneration 

to a physician at § 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 § 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 § 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 § 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 selfreferral 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 § 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 selfreferral 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 

§ 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 

77594 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 

§ 411.354(d)(1). However, as we 

explained in the proposed rule, the 

special rule at current § 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 

§ 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 § 411.354(d)(1), 

which will be redesignated as 

§ 411.354(d)(1)(i), compliance with the 

new set in advance rule at 

§ 411.354(d)(1)(ii) will be required for 

any modification of the compensation 

terms of an arrangement. The set in 

advance requirements at 

§ 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 § 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 §§ 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 § 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 § 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 § 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 

§ 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 

§ 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 § 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 

§ 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 § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 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 § 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, § 411.354(d)(1)(ii) would 

not be triggered. Lastly, reflecting our 

current policy, § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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 

§ 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 § 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 

§ 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 § 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 

§ 411.354(d)(1)(i). Under 

§ 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 

§ 411.354(d)(1)(i) in order to satisfy the 

77596 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 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 

§ 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 

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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 § 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 

§ 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 § 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 § 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 

§ 411.354(d)(1)(ii) are met. This policy, 

coupled with the new exception for 

limited remuneration to a physician at 

§ 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 § 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 § 411.357(l). 

Depending on the facts and 

circumstances, records of payments 

made while utilizing the exception at 

§ 411.357(z) may establish that the 

compensation under the ongoing 

arrangement satisfied the set in advance 

requirement of § 411.357(l). Parties that 

utilize the exception at § 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 

§ 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 

§ 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 selfreferral law exceptions. To provide 

greater clarity and certainty to 

stakeholders, we are codifying this 

policy at § 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 (§ 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 § 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 

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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 

§ 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 

§ 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 § 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 

§ 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 § 411.357(a)(3) and the exception for 

the rental of equipment at 

§ 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 § 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 § 411.357(a)(3) and 

§ 411.357(b)(2), rented office space or 

equipment may not exceed that which 

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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 § 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 

§ 411.357(l). We note, however, that the 

arrangements would have to satisfy the 

commercial reasonableness requirement 

at § 411.357(l)(4) and the remaining 

requirements of the exception for fair 

market value compensation. 

7. Exception for Physician Recruitment 

(§ 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 § 411.357(e). 

As finalized in the 1995 final rule, 

§ 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 

§ 411.357(e). Relying on our authority 

under section 1877(b)(4) of the Act, we 

expanded the exception at 

§ 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 

§ 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 

§ 411.357(e)(4)(iii). Under the Phase II 

regulation, if a recruited physician 

joined a physician practice, 

§ 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 

§ 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 

§ 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 

§ 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 selfinterest 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 

77600 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 

§ 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 

§ 411.357(e)(4) includes a sole practice 

consisting of only one physician. (See, 

for example, the definition of ‘‘entity’’ at 

§ 411.351). Under the definition of 

‘‘physician’’ at § 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 selfreferral 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 (§ 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 § 411.357(g). Because 

our prior rulemaking regarding 

§ 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 

§ 411.357(g) to reflect our interpretation 

of section 1877(e)(4) of the Act (63 FR 

1702). (The prior regulation at 

§ 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 

§ 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 § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77601 

faculty member; and (2) compensation 

for teaching, general utilization review, 

or administrative services. 

In Phase II, we finalized the exception 

at § 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, § 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 § 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 § 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 

§ 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 § 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 

§ 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 § 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 allencompassing 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 

77602 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 

§ 411.357(g) to compensation 

arrangements between hospitals and 

physicians. We also noted that the 

proposed regulation at § 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 § 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 

§ 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 nonmedical 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 

§ 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 § 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 § 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 § 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, 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77603 

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 

§ 411.357(i) is limited to payments for items or 

services that are ‘‘not specifically excepted by 

another provision in §§ 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). 

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 

§ 411.357(g) (84 FR 55819). 

In the proposed rule, we stated our 

belief that § 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 § 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 § 411.357(g) was intended to have the 

same meaning as ‘‘patient care services’’ 

as defined at § 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 § 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 (§ 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 § 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 § 400.202 of this 

Chapter), but not including clinical 

laboratory services or those items or 

services that are specifically excepted 

by another provision in §§ 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 § 411.357(i) in Phase II. 

Thus, as finalized in Phase II, the 

exception for payments by a physician 

at § 411.357(i) stated that the exception 

could not be used for items or services 

that are specifically excepted by another 

exception in §§ 411.355 through 

411.357, with a parenthetical clarifying 

that this included the exception for fair 

market value compensation at 

§ 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 

§ 411.357(i) nor § 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 

§§ 411.355 through 411.357 (including 

§ 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 § 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 § 411.357(i) could not be 

used for items or services specifically 

excepted under § 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 § 411.357(l) instead of 

§ 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 § 411.357(a) 

(72 FR 51059). In 2015, when we 

finalized the exception at § 411.357(y) 

for timeshare arrangements, we 

reaffirmed our position that the 

exception for payments by a physician 

77604 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

13Section 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 § 411.357(v). Although 

§ 411.357(v), unlike all the other exceptions at 

§ 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 

§ 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. 

14Elsewhere in this final rule, we are finalizing 

our proposal to extend § 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. 

is not available for arrangements 

involving the rental of office space (80 

FR 71325 through 71327). 

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 § 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 § 411.357(i), it is important 

to distinguish between the statutory 

exceptions found at section 1877(e) of 

the Act (codified at § 411.357(a) through 

§ 411.357(i) of our regulations) and the 

regulatory exceptions (codified at 

§ 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. 

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 

§ 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 

§ 411.357(i) would not be available to 

protect compensation arrangements 

specifically addressed by one of the 

statutory exceptions, codified in our 

regulations at § 411.357(a) through (h). 

Under the proposal, parties would 

generally be able to rely on the 

exception at § 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 § 411.357(j) et 

seq. may be applicable. However, for the 

reasons noted previously in this section 

II.D.9., § 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. 

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 § 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 § 411.357(a), 

§ 411.357(b), § 411.357(l) (for direct 

compensation arrangements), or 

§ 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 § 411.357(d)(1) 

to protect arrangements for the rental of 

office space. We noted that § 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 

§ 411.357(i)(2) the reference to 

exceptions in §§ 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 §§ 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 

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

After reviewing the comments, we are 

finalizing our proposal at § 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 § 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 § 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 § 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 

§ 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 § 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 (§ 411.357(l)) 

In the 1998 proposed rule, we 

proposed an exception at § 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 openended 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 

§ 411.357. 

In Phase I, we finalized § 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 § 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 § 411.357(l) to 

arrangements for the rental of office 

space, and emphasized that § 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 § 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 

§ 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 § 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 § 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 § 411.357(a) because the 

term of the arrangement was less than 

1 year, and could not satisfy the 

requirements of § 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 § 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 

77606 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 411.357(l), to date, has 

not been applicable to arrangements for 

the rental of office space, it does not 

include a prohibition on percentagebased 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 

§ 411.357(l) prohibitions on percentagebased 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 

§ 411.357(a)(5)(ii) and 

§ 411.357(p)(1)(ii). 

Unlike the exception for the rental of 

office space at § 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 

§ 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 

§ 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 shortterm 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 antikickback statute, which, as explained 

below and in section II.D.1. of this final 

rule, is not being removed from 

§ 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 § 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 § 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 

§ 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 

§ 411.357(l)(5) functions as an important 

safeguard that substitutes for certain 

requirements included in certain 

statutory exceptions but omitted from 

§ 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 

§ 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 § 411.357(l)(6). 

In this final rule, we are taking the 

opportunity to reorganize the exception 

at § 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, § 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; § 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; § 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 

§ 411.357(l)(1). Specifically, 

§ 411.357(l)(1) will require the 

arrangement to be in writing and signed 

by the parties; while § 411.357(l)(i) 

through § 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 (§ 411.357(l)(1)(i)); the 

compensation that will be provided 

under the arrangement 

(§ 411.357(l)(1)(ii)); and timeframe of the 

arrangement (§ 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 § 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 § 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 

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

§ 411.357(l)(4). Fourth, as explained in 

section II.E.1. of this final rule, we are 

modifying the requirement at 

§ 411.357(l)(2) to permit parties to rely 

on § 411.357(l) and § 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 § 411.357(l)(7) that any 

arrangement that includes a directed 

referral requirement must satisfy all the 

conditions of § 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 § 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 § 411.357(y). 

(See 80 FR 71325 through 71326). 

However, the exception at § 411.357(y) 

includes several requirements not found 

in the exception for the rental of office 

space at § 411.357(a), such as a 

requirement at § 411.357(y)(2) that the 

arrangement is between a physician and 

a hospital or a physician organization 

and the requirement at § 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 § 411.357(a) or 

§ 411.357(y). As modified in this final 

rule, the exception for fair market value 

compensation at § 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 § 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 § 411.357(l). One 

commenter that addressed our request 

for comments on § 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 

§ 411.357(l)(5). We believe that the 

requirement that the arrangement does 

not violate the anti-kickback statute in 

§ 411.357(l)(5) functions as an important 

substitute safeguard for requirements 

that are included in certain statutory 

exceptions but omitted from 

§ 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 

§ 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 § 411.357(d)(1)(vi). We are 

concerned that, if we remove the 

requirement at § 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 § 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 § 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 

§ 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 § 411.351. Most 

exceptions that include a commercial 

reasonableness requirement, including 

exceptions that apply to arrangements 

that could also be excepted by 

§ 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 

§ 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 

§ 411.357(l) is a different and less 

demanding standard than the 

requirement in other exceptions. 

Comment: One commenter supported 

our proposal at § 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 

77608 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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). 

§ 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 § 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 § 411.357(l)(2). Under 

§ 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 

§ 411.357(a)(7), § 411.357(b)(6), and 

§ 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 § 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 

§ 411.357(l)(2) retain the burden of proof 

under § 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 § 411.357(l)(2). Therefore, 

we are not including an indefinite 

holdover provision in § 411.357(l). 

11. Electronic Health Records Items and 

Services (§ 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 § 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 

§ 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 

(§ 411.357(w)(2)) and data lock-in 

(§ 411.357(w)(3)), clarify that donations 

of certain cybersecurity software and 

services are permitted under the EHR 

exception, remove the sunset provision 

at § 411.357(w)(13), and modify the 

definitions of ‘‘electronic health record’’ 

and ‘‘interoperable’’ at § 411.351 to 

ensure consistency with the Cures Act 

(84 FR 55822). We also proposed to 

modify the requirement at 

§ 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 

§ 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 § 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 § 411.357(w)(2) and (3) below in 

subsections (1) and (2), respectively. 

(1) The ‘‘Deeming Provision’’ 

(§ 411.357(w)(2)) 

The existing regulation at 

§ 411.357(w)(2) requires that software 

donated under the EHR exception is 

interoperable. The deeming provision at 

§ 411.357(w)(2) provides certainty to 

parties that donated software satisfies 

the interoperability requirement at 

§ 411.357(w)(2). Specifically, 

§ 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 § 411.357(w)(2) 

(84 FR 55823). Our current regulation at 

§ 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 

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

§ 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 § 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 § 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 § 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 ‘‘thenapplicable’’ 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 

§ 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 § 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 

§ 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 § 411.357(w)(2) that the software is 

interoperable, as defined at § 411.351; 

the exception merely requires that the 

77610 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

16We 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. 

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 § 411.357(w)(2) in 

order to be ‘‘interoperable’’ as defined at 

§ 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 

§ 411.357(w)(2). However, if the 

electronic health records software is still 

interoperable (as defined at § 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 § 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 Lockin (§ 411.357(w)(3)) 

The current requirement at 

§ 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, 

§ 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 § 411.357(w)(3) to 

recognize these significant updates 

since the 2013 EHR final rule (84 FR 

55823). Specifically, we proposed at 

§ 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 § 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 § 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 § 411.357(w)(3) with the PHSA 

information blocking provision and the 

information blocking definition in 45 

CFR part 171. 

After reviewing comments on our 

proposal, we are not finalizing the 

proposed modification of 

§ 411.357(w)(3). Rather, based on the 

comments and for the reasons explained 

below, we are removing § 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 

§ 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 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77611 

17 85 FR 25642 (May 1, 2020). 

18For 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. 

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 § 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 § 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. 

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, § 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 § 411.357(w)(3) and 

limitations of the original requirement 

at § 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 

§ 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 

§ 411.357(w)(2). We believe that this 

requirement and the optional deeming 

provision at § 411.357(w)(2) will ensure 

that donations of items and services 

under § 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-infoblocking. 

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 

§ 411.357(w) protects electronic health 

records software or information 

technology and training services 

necessary and used predominantly to 

create, maintain, transmit, or receive 

77612 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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. 

In the 2006 EHR final rule, we 

emphasized that software and 

information technology and training 

services donated under § 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 

§ 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 

§ 411.351 that will apply to both the 

EHR exception and the cybersecurity 

exception at § 411.357(bb). As finalized, 

the cybersecurity exception at 

§ 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 § 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 § 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 

§ 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 § 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 § 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 

§ 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 

§ 411.357(w)(4) would apply to 

donations of cybersecurity software 

under § 411.357(w), given that there is 

no cost contribution requirement in the 

cybersecurity exception at proposed 

§ 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 § 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 § 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 § 411.357(w) and § 411.357(bb). As 

noted in the proposed rule and 

reiterated above, parties seeking to 

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

§ 411.357(w)(4), but there is no cost 

contribution requirement under the 

standalone cybersecurity exception at 

§ 411.357(bb). Thus, if parties rely on 

the exception at § 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 

§ 411.357(w)(4). If parties structure such 

a donation to satisfy the requirements of 

§ 411.357(w) and § 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 

§ 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 

§ 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 § 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 § 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 § 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 § 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 

§ 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 § 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 

77614 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 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 § 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 § 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 

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

§ 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 § 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 

§ 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 § 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 § 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 § 411.351, then 

§ 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 § 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 

§ 411.357(w)(2). To avoid any 

implication that we are incorporating a 

certification requirement into the 

definition of ‘‘interoperable’’ at 

§ 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 

(§ 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 

§ 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 

77616 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 411.351, or defined in line 

with the definition of ‘‘rural provider’’ 

at § 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 

§ 411.357(w)(4) as it pertains to the 

timing of payments. Under revised 

§ 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 

§ 411.357(w)(4)(ii) requires that the cost 

contribution amount must be paid at 

reasonable intervals. Specifically, as 

finalized, § 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 

§ 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 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77617 

records system is improved when 

physicians have a certain level of buyin 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 § 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 

§ 411.357(aa). There is no requirement 

in the exceptions at final 

§ 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 § 411.351), no recipient 

contribution is required, provided that 

the arrangement satisfies all the 

requirements of an applicable exception 

at final § 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 

§ 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 

77618 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 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 § 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 § 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 

§ 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 selfreferral 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 § 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 

§ 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 § 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 selfreferral 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 

§ 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 

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

(§ 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 § 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 

§ 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 

§ 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 § 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 § 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 

§ 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. 

77620 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

12. Exception for Assistance to 

Compensate a Nonphysician 

Practitioner (§ 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 § 411.357(e). In Phase III, 

we declined one commenter’s request to 

expand § 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 

§ 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 § 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 § 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 § 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 § 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 § 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 § 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 

§ 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 

§ 411.357(x)(3)) at the time the services 

are provided, are not NPP patient care 

services for purposes of § 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 

§ 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 § 411.357(x)(1)(v) (84 FR 

55826). 

We also proposed conforming changes 

to the term ‘‘referral’’ as defined at 

§ 411.357(x)(4) for purposes of the 

exception. Specifically, we proposed to 

revise § 411.357(x) to change references 

to ‘‘referral’’ when describing the 

actions of an NPP to ‘‘NPP referral’’ and 

revise § 411.357(x)(4) accordingly. We 

stated, and affirm here, that it is 

unnecessary to have a general definition 

of ‘‘referral’’ at § 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 

§ 411.357(x). We did not propose 

substantive changes to the definition 

itself; however, we proposed to move 

the definition to § 411.357(x)(4)(ii) in 

order to accommodate the inclusion of 

the related definition of ‘‘NPP patient 

care services’’ within section 

§ 411.357(x)(4) (84 FR 55826). 

We also proposed a related change to 

§ 411.357(x)(1)(v)(A). As drafted, 

§ 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 § 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 § 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 

§ 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 

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

§ 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 § 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 § 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 § 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 

§ 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 

§ 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 

§ 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 

§ 411.357(x) should be aligned with the 

exception for physician recruitment at 

§ 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-ofDate References 

a. Medicare+Choice (§ 411.355(c)(5)) 

Section 1877(b)(3) of the Act and 

§ 411.355(c) of the physician selfreferral 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 § 411.355(c) to 

77622 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 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 § 411.355(c)(5) may be 

inconsistent with other program 

regulations. Current § 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 § 411.355(c)(5) to 

more accurately reference Medicare 

Advantage plans. Under this proposal, 

§ 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 § 411.355(c)(5). In 

light of this, we sought comments 

regarding whether § 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 

§ 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 

(§ 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 § 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 § 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 § 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 § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 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 § 411.357(k) for nonmonetary 

compensation, the exception at 

§ 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 

§ 411.357(k) for nonmonetary 

compensation would not apply to the 

arrangement. Similarly, the exception at 

§ 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 perinstance 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 

§ 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 

§ 411.357(z) with several modifications. 

77624 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

19As 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. 

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 

§ 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 § 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 § 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 § 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 § 411.357(z) is 

higher than the annual limit for the 

exception for nonmonetary 

compensation at § 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 § 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 

§ 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 § 411.357(p)(1)(ii) 

for indirect compensation arrangements 

and § 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 § 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 § 411.355 or the 

arrangement for the other items or 

services fully complies with the 

requirements of another exception in 

§ 411.357. To illustrate, assume an 

entity has an established call coverage 

arrangement with a physician that fully 

satisfies the requirements of 

§ 411.357(d)(1) or § 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 

§ 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 

§ 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. 

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 § 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 § 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 § 411.354(e)(4), the parties would 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77625 

have up to 90 consecutive calendar days 

to document and sign the arrangement.) 

In the proposed rule, we noted that 

§ 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 § 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 

§ 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 

§ 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 § 411.357(l)(2), we will 

not consider an arrangement for items or 

services that is protected under the 

exception at § 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 

§ 411.357(z) with certain modifications, 

as noted above. We are also making 

certain modifications to the exception 

for personal service arrangements at 

§ 411.357(d)(1) and the exception for 

fair market value compensation at 

§ 411.357(l) to ensure that § 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 § 411.357(z) may 

be made. Many commenters requested 

that we not limit the exception at 

§ 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 

§ 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 

§ 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 

§ 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 § 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 § 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, 

77626 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 shortterm 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 § 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 decisionmaking. 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 perepisode 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 selfreferral 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 § 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 § 411.357(z). 

Under our regulations at § 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 § 411.357(z), under 

§ 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 § 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 § 411.357(z). 

Returning to the example earlier in this 

response, if, in a direct compensation 

arrangement under § 411.354(c)(1)(i), 

the entity paid Dr. A $500 for her 

services relying on § 411.357(z), 

assuming no other payments during the 

calendar year relying on § 411.357(z), 

the amount counted towards Dr. A’s 

annual aggregate remuneration limit for 

payments received from the entity 

under § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77627 

from the entity to the physician. What 

constitutes a direct compensation 

arrangement with an individual 

physician under § 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 

§ 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 gobetween 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 § 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 § 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 

§ 411.357(z)(1). 

The annual aggregate remuneration 

limit on remuneration under 

§ 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 § 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 shortterm lease of equipment, the amount 

allocated to the annual aggregate 

remuneration limit under § 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 

§ 411.357(z), the remuneration under 

those arrangements would not be 

counted towards the physician’s annual 

limit under § 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 antikickback 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 

77628 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 antikickback 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 § 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 

§ 411.357(a)(3) of our regulations. With 

respect to the final exception for limited 

remuneration to a physician at 

§ 411.357(z), the regulatory exception 

omits certain requirements that are 

found in many statutory exceptions that 

are potentially applicable to 

arrangements excepted under 

§ 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 § 411.357(z) that the 

arrangement not violate the antikickback 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 § 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 

§ 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 § 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 § 411.357(z) and, as explained 

elsewhere in this final rule, because we 

prioritize the protection of patient 

choice, we are also requiring at 

§ 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 § 411.354(d)(4). As revised 

in this final rule, § 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 § 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 § 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 § 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 

§ 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 

§ 411.357(z)(1)(vi), the conditions of 

§ 411.354(d)(4), including the set in 

advance and writing requirement, must 

be satisfied only if the arrangement to be 

excepted under § 411.357(z) conditions 

a physician’s compensation on referrals 

to a particular provider, practitioner, or 

supplier. To be excepted under 

§ 411.357(z), an arrangement need not 

satisfy the conditions of § 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 § 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 § 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 § 411.357(z), we 

reiterate here that, to the extent that 

remuneration implicates the antikickback 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 

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

§ 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 § 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 § 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 § 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 § 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 

§ 411.357(d) and fair market value 

compensation at § 411.357(l) to ensure 

consistency with our policy regarding 

the application of § 411.357(z). 

Specifically, the commenter requested 

that we revise § 411.357(d)(1)(ii) to 

explicitly provide that an arrangement 

that satisfies all the requirements of 

§ 411.357(z) need not be covered by a 

personal service arrangement protected 

under § 411.357(d)(1) or be listed on a 

master list of contracts. Similarly, the 

commenter requested that we revise 

§ 411.357(l)(2) to explicitly provide that, 

if an arrangement for items or services 

fully satisfied the requirements of 

§ 411.357(z), the parties could also rely 

on § 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 § 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 

§ 411.357(z) if all its requirements are 

satisfied, including that the 

remuneration does not exceed the 

annual aggregate remuneration limit 

established at final § 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 

§ 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 § 411.357(z) would be 

counted towards the annual aggregate 

remuneration limit in § 411.357(z)(1). 

The provision at § 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 

§ 411.357(z) to protect a separate 

arrangement for the provision of 

personal services. Therefore, we are 

modifying § 411.357(d)(1)(ii) to state 

77630 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

20See, 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-hitsmajor-hospital-system-possibly-one-of-the-largestin-u-s-history/ar-BB19vtPQ?li=BBnbcA1. 

22See, 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. 

that a personal service arrangement 

excepted under § 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 § 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 § 411.357(d)(1) for a 

separate personal service arrangement. 

Insofar as personal services provided 

under an arrangement that satisfies all 

the requirements at § 411.357(z) are 

excluded from the ‘‘covers all services’’ 

requirement in § 411.357(d)(1)(ii), it is 

not necessary to incorporate a personal 

service arrangement excepted under 

§ 411.357(z) by reference or list it on a 

master list of contracts. 

The exception for fair market value 

compensation provides at § 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 § 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 § 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 § 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 § 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 § 411.357(z) with the 

exception for nonmonetary 

compensation at § 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 

§ 411.357(k), the new exception at 

§ 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 

§ 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 (§ 411.357(bb)) 

Relying on our authority under 

section 1877(b)(4) of the Act, in the 

proposed rule, we proposed an 

exception at § 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. 

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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77631 

23Public Law 114–113, 129 Stat. 2242. 

24HCIC Task Force Report, available at https://

www.phe.gov/preparedness/planning/cybertf/ 

documents/report2017.pdf. 

25 Id. at 27. 

(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 selfreferral 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

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 § 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 § 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 

§ 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 § 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 § 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 valuebased arrangement (as defined at final 

§ 411.351) to which the new exceptions 

at § 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 anticompetitive 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 

77632 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

26See, 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). 

27 In the proposed rule, the ‘‘necessary and used 

predominantly’’ condition was included in the 

proposed regulations at § 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 § 411.357(bb)(1). 

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 anticompetitive 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. 

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 § 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. 

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— 

• Services associated with 

developing, installing, and updating 

cybersecurity software; 

• Cybersecurity training services, 

such as training recipients on how to 

use the cybersecurity technology, how 

to prevent, detect, and respond to cyber 

threats, and how to troubleshoot 

problems with the cybersecurity 

technology (for example, ‘‘help desk’’ 

services specific to cybersecurity); 

• Cybersecurity services for business 

continuity and data recovery services to 

ensure the recipient’s operations can 

continue during and after a 

cybersecurity attack; 

• ‘‘Cybersecurity as a service’’ models 

that rely on a third-party service 

provider to manage, monitor, or operate 

cybersecurity of a recipient; 

• Services associated with performing 

a cybersecurity risk assessment or 

analysis, vulnerability analysis, or 

penetration test; or 

• Services associated with sharing 

information about known cyber threats, 

and assisting recipients responding to 

threats or attacks on their systems. 

We 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 § 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 § 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 § 411.357(bb)(1)(ii) is finalized 

at § 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 § 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 

§ 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 

77634 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 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 § 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 cybersecurityspecific 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 

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

§ 411.357(bb) must be satisfied in order 

to avoid violation of the physician selfreferral 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 selfreferral 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 § 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 selfreferral 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 

§ 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 

77636 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 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 § 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 

§ 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 

§ 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 widelyrecognized 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77637 

28Appendix B, Version 1.1 (April 16, 2018) 

available at https://nvlpubs.nist.gov/nistpubs/ 

CSWP/NIST.CSWP.04162018.pdf. 

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 readonly 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 

§ 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 § 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 

§ 411.357(bb), we proposed to include 

its definition at § 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 § 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 § 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). 

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 standalone (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 

§ 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. 

77638 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 industryneutral 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 

§ 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 § 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 

§ 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 

§ 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 § 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 

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

§ 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 

§ 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 

§ 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, twofactor 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 § 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 

77640 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 

§ 411.357(bb)(1)(ii). However, this requirement is 

designated as § 411.357(bb)(1)(i) in this final rule. 

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 § 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 

(§ 411.357(bb)(1)(i)) 29

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 

§ 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 higherrisk, 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 § 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 § 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 

§ 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 

§ 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 

§ 411.357(bb)(1)(i). Final 

§ 411.357(bb)(1)(i) is identical to 

proposed § 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 § 411.357(bb)(1)(i), and we are 

not restricting the types of entities that 

may make donations under the final 

cybersecurity exception at 

§ 411.357(bb). 

We received the following comment 

and our response follows. 

Comment: Commenters generally 

supported the requirement at final 

§ 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 § 411.357(w)(6), under 

which certain selection criteria would 

be deemed to satisfy the requirement at 

final § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77641 

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 § 411.357(bb)(1)(iii). However, this 

requirement is designated as § 411.357(bb)(1)(ii) in 

this final rule. 

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 § 411.357(bb)(1)(i). 

d. Requirement for Recipients 

(§ 411.357(bb)(1)(ii)) 30

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 

§ 411.357(w)(5). At final 

§ 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 cybersecurityrelated 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 

§ 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 § 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 

§ 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 § 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 

§ 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 § 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 

77642 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

31 In the proposed rule, the requirement that the 

arrangement is documented in writing was 

designated at § 411.357(bb)(1)(iv). However, this 

requirement is designated as § 411.357(bb)(1)(iii) in 

this final rule. 

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 § 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 

(§ 411.357(bb)(1)(iii)) 31

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 § 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 

§ 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 § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77643 

stakeholders that the relevant inquiry 

for determining compliance with the 

writing requirement at final 

§ 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 selfreferral 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 § 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 costshifting 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 selfprotective 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 § 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 

77644 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

requirements at § 411.357(bb)(1)(i) and 

§ 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 

§ 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 

§ 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 § 411.354(c)(2), as revised 

in this final rule, exist, there would be 

an indirect compensation arrangement 

that implicates the physician selfreferral 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 selfreferral 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-ofScope 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 § 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 

§ 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 

§ 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 

§§ 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 § 411.357(t). In addition, 

we are including headers for certain 

paragraphs within our regulations, for 

example, § 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 selfreferral 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-ofscope 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- 

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

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

We 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 (§ 411.357) 

We are finalizing new exceptions for 

compensation arrangements that 

facilitate value-based health care 

delivery and payment in a value-based 

enterprise (§ 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 

§ 411.351). The exception for valuebased arrangements with meaningful 

downside financial risk to the physician 

at § 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 

§ 411.357(aa)(3) requires the 

arrangement to be set forth in writing 

and signed by the parties. All 

exceptions at § 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 

(§ 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 (§ 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 selfreferral 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 

77646 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

32APM Measurement: Progress of Alternative 

Payment Model; Health Care Payment Learning & 

Action Network, October 2019; see https://hcplan.org/apm-measurement-effort/ and http://hcplan.org/workproducts/apm-methodology-2019.pdf. 

33 Id. 

34 Id. 

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

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 valuebased 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 

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

§ 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 § 411.357(aa) for 

value-based arrangements are 

available—we reasonably expect parties 

to enter into arrangements such as the 

following: 

• Providing staff and other resources 

to physicians at below fair market value 

to help with patient education, preadmission evaluations, and postprocedure follow-up and monitoring. 

• 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. 

• 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 betterpositioned 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. 

• 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. 

• 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 

§ 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 § 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 valuebased 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 

77648 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

35William 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. 

36Brian 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). 

37Amol 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. 

38See Vera Gruessner, 3 Ways Bundled Payment 

Models Brought Hospital Cost Savings Down, 

Health Payer Intelligence (Jan. 2017), available at 

https://healthpayerintelligence.com/news/3-waysbundled-payment-models-brought-hospital-costsavings. 

39See David Muhlestein, et al., Recent Progress in 

the Value Journey: Growth of ACOs and ValueBased Payment Models in 2018, Health Affairs 

(Aug. 2018) available at https://

www.healthaffairs.org/do/10.1377/ 

hblog20180810.481968/full/. 

40See 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-bundledpayments.html. 

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 selfreferral 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

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 selfreferral 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

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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77649 

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-basedpayment-adoption-drives-5.6-reduction-in-carecosts. 

42See 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/pressreleases.html#!release/highmark-saves-more-than1-billion-in-avoided-cost-with-true-performanceprogram. 

43See 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/highmarkstrue-performance-program-avoided-health-carecosts-by-more-than-260-million-in-2017. 

44See 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/primarycare-acos-from-blue-cross-nc-and-aledade-showsignificant-savings-and-quality-improvements. 

45See 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/uhgstudy-shows-higher-quality-care-under-set-monthlypayments-403552.html. 

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. 

47Andrea B. Neiman, et al., CDC Grand Rounds: 

Improving Medication Adherence for Chronic 

Disease Management — Innovations and 

Opportunities, 66 Weekly 45 (Nov. 17, 2017), 

Continued 

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 valuebased 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. 

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

A collaboration between a physicianled 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

There are also studies that suggest 

that improved care coordination may 

decrease costs and enhance health 

outcomes. One randomized, controlled 

trial evaluated the cost-effectiveness of 

a home-based care coordination 

program that targeted older adults with 

problems self-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 teambased or coordinated care, increase 

patient medication adherence rates.47

77650 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

available at https://www.cdc.gov/mmwr/volumes/ 

66/wr/mm6645a2.htm. 

48William H. Shrank, MD, MSHS, et al., Waste in 

the U.S. Health Care System, Estimated Costs and 

Potential for Savings. 

Specifically, in a 2015 study, patients 

assigned to team-based care—including 

pharmacist-led medication 

reconciliation and tailoring, pharmacistled 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). 

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 valuebased 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. 

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 

§ 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 § 411.351; 

(2) establishes special rules at 

§ 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 § 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 antikickback 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 

§ 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 

§ 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 § 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 § 411.351 to clarify CMS 

policy regarding the types of 

compensation arrangements to which 

the exception at § 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 selfreferral 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 

§ 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 § 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 § 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77651 

49American 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/regulatoryoverload-report.pdf. 

50Senate 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. 

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 § 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 selfreferral 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 § 411.352(i) that become 

effective January 1, 2022 and continued 

qualification as a ‘‘group practice’’ 

under the regulations at § 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 § 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 fulltime 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 antikickback 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.) 

CMS publishes aggregate SRDP 

settlement data on its website at https:// 

www.cms.gov/Medicare/Fraud-andAbuse/PhysicianSelfReferral/SelfReferral-Disclosure-ProtocolSettlements. 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. 

77652 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

51See 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-ofhealthcare-sector-data-breaches.pdf. 

52See Naveen Goud, ECMC Spends $10 Million 

to Recover from a Cyberattack, Cybersecurity 

Insiders, available at https://www.cybersecurityinsiders.com/ecmc-spends-10-million-to-recoverfrom-a-cyber-attack/. 

53See 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/. 

54See 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-ransomwarehackers-hit-a-german-hospital/. 

55See 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-shutsdown-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/uhshealth-system-confirms-all-us-sites-affected-byransomware-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-afterransomware-attack-all-400-uhs-systems-backonline; and Press Release, Universal Health 

Services, Statement from Universal Health Services 

(Oct. 29, 2020), available at https://

www.uhsinc.com/statement-from-universal-healthservices/. 

56See Health Sector Cybersecurity Coordination 

Center, A Cost Analysis of Healthcare Sector Data 

Breaches. 

57 Id. 

58See HCIC Task Force Report, available at 

https://www.phe.gov/Preparedness/planning/ 

CyberTF/Documents/report2017.pdf. 

59 Id. 

60See 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. 

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. 

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 

(§ 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. 

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 wellresourced 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 selfreferral 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77653 

61CMS Program Statistics, https://www.cms.gov/ 

research-statistics-data-systems/cms-programstatistics/2018-medicare-providers. 

62U.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. 

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 valuebased 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 § 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 Medicareenrolled 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. 

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. 

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 

77654 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

63https://www.aha.org/sites/default/files/ 

regulatory-overload-report.pdf. 

64Note that the figure is adjusted for inflation 

between 2017 and 2018. 

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 taxexempt 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 selfreferral 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 

§ 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 selfreferral 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77655 

extent to which this rule will reduce 

compliance burden for hospitals and 

entities other than hospitals. 

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 § 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 valuebased 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 valuebased 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 

§ 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 

77656 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 indepth 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

Category Primary 

estimate Low estimate High estimate Year dollar 

Discount 

rate 

(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 

■ 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 

■ 2. Subpart J is amended by revising 

§§ 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. 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 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 (§ 424.80 of this chapter); 

(2) The rules regarding purchased 

diagnostic tests (§ 414.50 of this 

chapter); 

(3) The rules regarding payment for 

services and supplies incident to a 

physician’s professional services 

(§ 410.26 of this chapter); or 

(4) Any other applicable Medicare 

laws, rules, or regulations. 

§ 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 

§ 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 

§ 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 § 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 

§ 1001.952(t)(2)(iii) of this title or a 

77658 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

‘‘downstream contractor’’ as defined at 

§ 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 § 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 

§ 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 § 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 § 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 § 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’slength 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 wellinformed 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 wellinformed 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-inlaw, 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, § 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 § 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 

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

77660 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 taskoriented 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 oralmotor 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 § 411.352(g) (or 

the contract must satisfy the 

requirements of the personal service 

arrangements exception in § 411.357(d)), 

and the independent contractor’s 

arrangement with the group practice 

must comply with the reassignment 

rules in § 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 

§ 411.353(a), and the group practice is 

subject to the limitation on billing for 

those referrals in § 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 § 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 

§ 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 

§§ 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 

§ 416.164(b), for which separate 

payment is made to an ASC. 

Referral— 

(1) Means either of the following: 

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

§ 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 valuebased 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 

77662 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 valuebased 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 valuebased activity as part of a value-based 

enterprise. 

§ 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 § 411.351. 

(c) Range of care. Each physician who 

is a member of the group, as defined at 

§ 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 

§ 411.351. 

(4) For a group practice located 

outside of a HPSA (as defined at 

§ 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 

§ 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 

Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 77663 

is not counted as a member of the group 

for purposes of § 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 § 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. 

§ 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 

77664 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

collected amounts on a timely basis, as 

defined at § 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 § 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 

§ 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. 

§ 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 § 411.355 or § 411.356 need not also 

meet an exception for compensation 

arrangements set forth in § 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. 

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

§ 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 §§ 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 

77666 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 

§ 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 § 411.357 

(other than § 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 § 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 §§ 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 §§ 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 valuebased arrangement (as defined at 

§ 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 §§ 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 §§ 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 peruse 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 §§ 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 § 411.355 or 

§ 411.357. 

(iv) The compensation arrangement 

complies with both of the following 

conditions: 

(A) The requirement to make referrals 

to a particular provider, practitioner, or 

supplier is set out in writing and signed 

by the parties. 

(B) The requirement to make referrals 

to a particular provider, practitioner, or 

supplier does not apply if the patient 

expresses a preference for a different 

provider, practitioner, or supplier; the 

patient’s insurer determines the 

provider, practitioner, or supplier; or 

the referral is not in the patient’s best 

medical interests in the physician’s 

judgment. 

(v) The required referrals relate solely 

to the physician’s services covered by 

the scope of the employment, personal 

service arrangement, or managed care 

contract, and the referral requirement is 

reasonably necessary to effectuate the 

legitimate business purposes of the 

compensation arrangement. In no event 

may the physician be required to make 

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

§ 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 

§ 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). 

§ 411.355 General exceptions to the 

referral prohibition related to both 

ownership/investment and compensation. 

The prohibition on referrals set forth 

in § 411.353 does not apply to the 

following types of services: 

(a) Physician services. (1) Physician 

services as defined at § 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 § 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 § 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 

§ 411.351) that are physician services 

under § 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. 

77668 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

(2) Location where service is 

furnished. They are furnished in one of 

the following locations: 

(i) The same building (as defined at 

§ 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 § 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 § 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 

§ 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 § 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 selfmanagement 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 

§ 424.57(c) of this chapter. 

(v) [Reserved] 

(vi) All other requirements of the inoffice 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 § 400.202 of this chapter) that 

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

§ 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 

§ 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 

77670 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 §§ 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 § 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. 

§ 411.356 Exceptions to the referral 

prohibition related to ownership or 

investment interests. 

For purposes of § 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 § 411.351 of this part) by the 

provider. A ‘‘rural provider’’ is an entity 

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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 

§ 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 § 411.362 not 

later than September 23, 2011. 

§ 411.357 Exceptions to the referral 

prohibition related to compensation 

arrangements. 

For purposes of § 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— 

77672 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

(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 § 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 

§ 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 

§ 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 

§ 411.354(d)(4). 

(2) Physician incentive plan 

exception. In the case of a physician 

incentive plan (as defined at § 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 

§ 422.208, the entity or any downstream 

contractor (or both) complies with the 

requirements concerning physician 

incentive plans set forth in §§ 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 

§ 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 

§ 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 

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

§ 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 fulltime 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 § 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 onetime 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 

77674 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

(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 §§ 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 § 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 

§ 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 § 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 

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

§ 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 

§ 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 

77676 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

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 § 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 § 411.354(c)(2)(ii) satisfies 

the conditions of § 411.354(d)(4). 

(q) Referral services. Remuneration 

that meets all of the conditions set forth 

in § 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 § 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 

§ 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 § 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 

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

§ 411.355(e)), or physician organization 

(as defined at § 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 

§ 411.355(e)), or physician organization 

(as defined at § 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 

§ 411.352) to a physician who is a 

77678 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

member of the group (as defined at 

§ 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 § 411.351) that is not a 

laboratory company. 

(2) The software is interoperable (as 

defined at § 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: 

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

§ 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 § 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 § 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 § 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 

§ 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 

77680 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

in whose shoes the physician stands 

under § 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 CLIAwaived 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 

§ 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 

§ 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 § 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 valuebased 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 

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

77682 Federal Register / Vol. 85, No. 232 / Wednesday, December 2, 2020 / Rules and Regulations 

(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. 

■ 3. Effective January 1, 2022, § 411.352 

is further amended by revising 

paragraph (i) to read as follows: 

§ 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 § 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