45140 Federal Register / Vol. 71, No. 152 / Tuesday, August 8, 2006 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 411 

[CMS–1303–F] 

RIN 0938–AN69 

Medicare Program; Physicians 

Referrals to Health Care Entities With 

Which They Have Financial 

Relationships; Exceptions for Certain 

Electronic Prescribing and Electronic 

Health Records Arrangements 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule. 

SUMMARY: As required by section 101 of 

the Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (MMA), this final rule creates an 

exception to the physician self-referral 

prohibition in section 1877 of the Social 

Security Act (the Act) for certain 

arrangements in which a physician 

receives compensation in the form of 

items or services (not including cash or 

cash equivalents) (‘‘nonmonetary 

remuneration’’) that is necessary and 

used solely to receive and transmit 

electronic prescription information. In 

addition, using our separate legal 

authority under section 1877(b)(4) of the 

Act, this rule creates a separate 

regulatory exception for certain 

arrangements involving the provision of 

nonmonetary remuneration in the form 

of electronic health records software or 

information technology and training 

services necessary and used 

predominantly to create, maintain, 

transmit, or receive electronic health 

records. These exceptions are consistent 

with the President’s goal of achieving 

widespread adoption of interoperable 

electronic health records to improve the 

quality and efficiency of health care 

while maintaining the levels of security 

and privacy that consumers expect. 

DATES: Effective date: These regulations 

are effective on October 10, 2006. 

FOR FURTHER INFORMATION CONTACT: Lisa 

Ohrin, (410) 786–4565, or Linda 

Howard, (410) 786–5255. 

SUPPLEMENTARY INFORMATION: 

I. Background 

This final rule establishes exceptions 

to the physician self-referral law for 

certain arrangements involving the 

donation of electronic prescribing and 

electronic health records technology 

and training services. Set forth below is 

a brief background discussion 

addressing: 

• The physician self-referral law and 

its exceptions; 

• A summary of the relevant 

provisions of the Medicare Prescription 

Drug, Improvement, and Modernization 

Act of 2003 (MMA), (Pub. L. 108–173); 

• The Secretary’s authority to 

implement exceptions under section 

1877(b)(4) of the Social Security Act 

(the Act); and 

• The November 9, 2005 Open Door 

Forum on electronic prescribing and 

electronic health records. 

A. The Physician Self-Referral Law and 

Exceptions 

Section 1877 of the Act, also known 

as the physician self-referral law: (1) 

Prohibits a physician from making 

referrals for certain designated health 

services (DHS) payable by Medicare to 

an entity with which he or she (or an 

immediate family member) has a 

financial relationship (ownership 

interest or compensation arrangement), 

unless an exception applies; and (2) 

prohibits the entity from submitting 

claims to Medicare or billing the 

beneficiary or third party payor for 

those referred services, unless an 

exception applies. The statute 

establishes a number of exceptions and 

grants the Secretary the authority to 

create additional regulatory exceptions 

for financial relationships that do not 

pose a risk of program or patient abuse. 

B. Section 101 of the MMA 

Section 101 of the MMA added a new 

section 1860D to the Act establishing a 

prescription drug benefit in the 

Medicare program. As part of the new 

statutory provision, in section 1860D– 

4(e)(4) of the Act, the Congress directed 

the Secretary to adopt standards for 

electronic prescribing in connection 

with the new prescription drug benefit 

with the objective of improving patient 

safety, quality of care, and efficiency in 

the delivery of care. (See H.R. Conf. Rep. 

No. 108–391, at 455, 456 (2003)). 

Section 1860D–4(e)(6) of the Act directs 

the Secretary, in consultation with the 

Attorney General, to create an exception 

to the physician self-referral prohibition 

that would protect certain arrangements 

involving the provision of compensation 

in the form of nonmonetary 

remuneration (consisting of items and 

services in the form of hardware, 

software, or information technology and 

training services) that is necessary and 

used solely to receive and transmit 

electronic prescription information in 

accordance with electronic prescribing 

standards published by the Secretary 

under section 1860D–4(e)(4) of the Act. 

Specifically, this new exception sets 

forth conditions under which the 

provision of such remuneration by 

hospitals, group practices, and 

prescription drug plan (PDP) sponsors 

and Medicare Advantage (MA) 

organizations (collectively, for purposes 

of this preamble discussion, donors) to 

prescribing physicians (collectively, for 

purposes of this preamble discussion, 

physician recipients) would be 

protected. As we noted in the preamble 

to the October 11, 2005 proposed rule, 

depending on the circumstances, 

provisions in the existing physician selfreferral regulations may also provide 

protection for the donation of these 

items and services to physicians. 

In addition to mandating the new 

exception to the physician self-referral 

prohibition, section 1860D–4(e)(6) of the 

Act directs the Secretary to create a 

corresponding safe harbor under the 

anti-kickback statute (section 1128B(b) 

of the Act, 42 U.S.C. 1320a–7b(b)). The 

Health and Human Services Office of 

Inspector General (OIG), the agency that 

enforces the anti-kickback statute, is 

promulgating that safe harbor through a 

separate rulemaking. We have attempted 

to ensure as much consistency as 

possible between our final electronic 

prescribing exception and the 

corresponding final safe harbor, given 

the differences in the respective 

underlying statutes. One significant 

difference in the statutory schemes is 

that complying with a safe harbor under 

the anti-kickback statute is voluntary, 

whereas fitting in an exception under 

section 1877 of the Act is mandatory. In 

other words, arrangements that do not 

comply with a safe harbor may not 

necessarily violate the anti-kickback 

statute. Rather, such arrangements are 

subject to the customary case-by-case 

review under the statute. If an 

arrangement fails to meet all 

requirements of a physician self-referral 

exception, however, it violates section 

1877 of the Act. Another difference is 

that section 1877 of the Act applies only 

to referrals from physicians, while the 

anti-kickback statute applies more 

broadly. 

C. Section 1877(b)(4) Authority 

Section 1877(b)(4) of the Act 

authorizes the Secretary to create 

regulatory exceptions for financial 

relationships that he determines do not 

pose a risk of program or patient abuse. 

Using this authority, this final rule also 

sets forth terms and conditions for a 

separate exception to the physician selfreferral prohibition for certain 

arrangements involving the donation of 

electronic health records software or 

information technology and training 


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services. Information technology, and 

electronic health records in particular, 

supports treatment choices for 

consumers and enables better and more 

efficient care, while maintaining the 

levels of security and privacy that 

consumers expect. We seek to encourage 

the adoption of such technology through 

this final rulemaking. We believe that 

electronic health records systems that 

are secure and interoperable may 

mitigate many of our concerns regarding 

the potential anticompetitive effects of 

stand-alone electronic health records 

systems. 

D. Open Door Forum 

We held an Open Door Forum early 

in the comment period for the proposed 

rule, on November 9, 2005, to discuss 

the benefits and risks of donating 

electronic prescribing and electronic 

health records technology. The OIG also 

participated in this Open Door Forum. 

This Open Door Forum was in addition 

to, and not in lieu of, the public 

comment process. During this Open 

Door Forum, panelists representing the 

health care industry (for example, the 

American Hospital Association and the 

American College of Physicians), the 

health information technology industry, 

and members of the public contributed 

to the discussion. Panelists described 

the types of technology they believe are 

necessary to have a useful, workable, 

interoperable electronic health records 

system, including software, training, 

connectivity, upgrades, and a help desk 

function. The following topics were also 

included in the discussion: 

• The cost of the technology to the 

donor versus the value to the physician 

and a cap on the value of the 

technology; 

• Safeguards necessary to protect 

against program or patient abuse, 

including permissible donors and 

recipients and donation selection 

criteria; 

• Staged implementation; 

• Standards for the certification of the 

technology; 

• Physician certification of technical 

and functional equivalence; and 

• The limitations of electronic 

prescribing functionality alone as 

opposed to electronic prescribing 

functionality integrated into electronic 

health records software. 

II. Provisions of the October 11, 2005 

Proposed Rule 

On October 11, 2005, we published a 

proposed rule to issue three exceptions 

under the physician self-referral statute 

(70 FR 59182). The first proposed 

exception addressed arrangements 

involving electronic prescribing 

technology as required by section 101 of 

the MMA. Many industry and 

government stakeholders had expressed 

concerns that the MMA provision was 

not sufficiently useful or practical, and 

would not adequately advance the goal 

of achieving improved health care 

quality and efficiency through 

widespread adoption of interoperable 

electronic health records systems. 

Accordingly, we proposed two 

additional exceptions to address 

donations of certain electronic health 

records software and directly related 

training services, using our authority at 

section 1877(b)(4) of the Act. One 

proposed exception would have 

protected certain arrangements 

involving nonmonetary remuneration in 

the form of interoperable electronic 

health records software certified in 

accordance with criteria adopted by the 

Secretary (and directly related training 

services). The second proposed 

exception would have protected certain 

arrangements involving donations of 

electronic health records technology 

made before the adoption of 

certification criteria. The proposed rule 

for safe harbors under the anti-kickback 

statute, issued the same day, contained 

comparable proposals. 

In response to our proposed rule, we 

received 74 timely filed comment 

letters. The majority of the comments 

came from hospitals and health systems, 

trade associations, and vendors. We also 

received comments from information 

technology organizations, health plans, 

and providers. 

The OIG received 71 timely filed 

comment letters. The majority of the 

comments came from the same types of 

entities from which CMS received its 

comments. However, the OIG also 

received comments from 

pharmaceutical manufacturers and 

pharmacies. 

Overall, the commenters welcomed 

the establishment of exceptions and safe 

harbors for electronic prescribing and 

electronic health records technology 

arrangements. However, we received 

many specific comments about various 

aspects of the proposed rule. 

After considering these public 

comments, we are finalizing two 

exceptions: 

• An exception that protects certain 

arrangements involving electronic 

prescribing technology (new 

§ 411.357(v)); and 

• An exception that protects certain 

arrangements involving interoperable 

electronic health records software or 

information technology and training 

services (new § 411.357(w)). 

These final exceptions create separate 

and independent grounds for protection 

under the physician self-referral law. 

For the convenience of the public, we 

are providing Chart 1 that lays out 

schematically the overall structure and 

approach of the final exceptions, details 

of which we are providing in sections III 

and IV of this preamble. Readers are 

cautioned that the final exceptions 

contain additional conditions and 

information not summarized in Chart 1. 

CHART 1. 

MMA-mandated electronic prescribing exception 

§ 411.357(v) 

Electronic health records exception 

§ 411.357(w) 

Authority for Exception ....................................... Section 101 of the MMA .................................. Section 1877(b)(4) of the Social Security Act. 

Covered Technology .......................................... Items and services that are necessary and 

used solely to transmit and receive electronic prescription information.

Software necessary and used predominantly 

to create, maintain, transmit, or receive 

electronic health records. Software packages may include functions related to patient administration, for example, scheduling 

functions, billing, and clinical support. 

Includes hardware, software, internet 

connectivity, and training and support services.

Software must include electronic prescribing 

capability. 


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CHART 1.—Continued 

MMA-mandated electronic prescribing exception 

§ 411.357(v) 

Electronic health records exception 

§ 411.357(w) 

Information technology and training services, 

which would include, for example, internet 

connectivity and help desk support services. 

Standards with Which Donated Technology 

Must Comply.

Applicable standards for electronic prescribing 

under Part D (currently, the first set of 

these standards is codified at § 423.160).

Electronic prescribing capability must comply 

with the applicable standards for electronic 

prescribing under Part D (currently, the first 

set of these standards is codified at 

§ 423.160). 

Electronic health records software must be 

interoperable. Software may be deemed 

interoperable under certain circumstances. 

Donors and Recipients ....................................... As required by statute, protected donors and 

recipients are hospitals to members of their 

medical staffs; group practices to physician 

members; PDP sponsors and MA organizations to prescribing physicians.

Entities that furnish designated health services (DHS) to any physician. 

Selection of Recipients ....................................... Donors may not take into account directly or 

indirectly the volume or value of referrals 

from the recipient or other business generated between the parties.

Donors may use selection criteria that are not 

directly related to the volume or value of referrals from the recipient or other business 

generated between the parties. 

Value of Protected Technology .......................... No limit on the value of donations of electronic prescribing technology.Physician recipients must pay 15 percent of 

the donor’s cost for the donated technology 

and training services. 

The donor may not finance the physician recipient’s payment or loan funds to the physician recipient for use by the physician recipient to pay for the items and services. 

Expiration of the Exception ................................ None ................................................................. Exception sunsets on December 31, 2013. 

General Comments and Responses to 

the Proposed Rule 

Comment: Most commenters 

supported the promulgation of 

exceptions for electronic prescribing 

and electronic health records 

arrangements. Commenters observed 

that both the Congress and the 

Administration have recognized the 

compelling need for rapid and 

widespread adoption of electronic 

prescribing and electronic health 

records technology. Several commenters 

suggested that fraud and abuse concerns 

should not impede the adoption of 

health information technology. In this 

regard, commenters suggested that the 

final rule should better balance the goal 

of preventing fraud and abuse with the 

goal of creating incentives for health 

information technology arrangements 

that reduce fraud and abuse, increase 

quality and efficiency, and improve 

patient care. One commenter asserted 

that investments in health information 

technology and the desire to provide an 

incentive to participate in health 

information technology systems do not 

raise typical fraud and abuse concerns 

present with other financial 

arrangements. However, another 

commenter noted that the proposed rule 

generally struck an appropriate balance 

between the needs of physicians who 

may require assistance to develop health 

information technology systems and the 

underlying purpose of Federal fraud and 

abuse laws to promote the professional 

independence of the physicians 

receiving the support. 

Response: We disagree with the 

commenter that suggested that financial 

arrangements involving incentives in 

the form of health information 

technology do not pose the same fraud 

and abuse concerns as other financial 

arrangements between parties in a 

potential referral relationship. Indeed, 

our enforcement experience 

demonstrates that improper 

remuneration for Medicare referrals may 

take many forms, including free 

computers, facsimile machines, 

software, and other goods and services. 

However, we recognize that certain 

arrangements for the transfer of health 

information technology between parties 

with actual or potential referral 

relationships may further the important 

national policy of promoting 

widespread adoption of health 

information technology to improve 

patient safety, quality of care, and 

efficiency in the delivery of health care. 

We believe the final rule strikes the 

appropriate balance between promoting 

the adoption of health information 

technology and protecting against 

program or patient abuse. 

Comment: Several commenters stated 

that the Congress and the 

Administration need to offer meaningful 

financial incentives for practitioners to 

accept the increased cost and workflow 

burdens associated with the 

implementation of health information 

technology. For example, the 

government could provide modest addon payments to physicians who employ 

health information technology as part of 

overall quality improvement measures. 

Some commenters observed that the 

proposed rule would remove a minor 

impediment to the adoption of health 

information technology, but suggested 

that we must play a larger role in 

providing capital for the technologies 

that assist physicians in providing 

quality care and avoiding medical 

errors. 

Response: These comments address 

matters outside the scope of this 

rulemaking. However, we note that the 

Administration supports the adoption of 

health information technology as a 

normal cost of doing business. 

Specifically, the 2007 Budget states that 

‘‘[t]he Administration supports the 

adoption of health information 

technology (IT) as a normal cost of 


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doing business to ensure patients 

receive high quality care.’’

Comment: Some commenters 

complained that the proposed 

exceptions were too narrow and vague. 

These commenters urged that the final 

exceptions should be easy to 

understand, interpret, and enforce so 

that donors and physicians readily can 

distinguish permissible activities from 

those that violate the statute. Some 

commenters believe that the proposed 

rule was too complex and might have 

the unintended effect of discouraging 

participation in health information 

technology arrangements. 

Response: As described in this 

preamble, we have adopted a number of 

modifications and changes that address 

the commenters’ concerns. Although the 

final exception at § 411.357(v) addresses 

only electronic prescribing 

arrangements, the final exception at 

§ 411.357(w) protects a broad scope of 

arrangements involving electronic 

health records technology. We have 

made a number of changes that clarify 

and simplify the final rules. We have 

endeavored to create bright line 

provisions to the extent possible. 

Moreover, we do not believe that the 

Congress, in enacting section 1860D–

4(e)(6) of the Act, intended to suggest 

that a new exception is needed for all 

arrangements involving the provision of 

electronic prescribing items and 

services, nor do we believe that an 

exception is needed for all electronic 

health records arrangements. Many 

arrangements can be structured to fit in 

existing exceptions. 

Comment: Some commenters 

observed that the description of the 

nonmonetary remuneration that would 

be included in the exceptions as 

proposed did not reflect the many 

existing combinations and varieties of 

electronic prescribing, electronic health 

records, and similar technology. 

Response: As discussed in greater 

detail, we believe that the final 

exceptions are sufficiently broad to 

accommodate the most essential current 

and evolving electronic prescribing and 

electronic health records technology. 

We began this rulemaking process by 

looking to the guidance from the 

Congress in section 101 of the MMA 

with respect to electronic prescribing 

technology. Using our regulatory 

authority, we have added a separate 

exception for arrangements involving 

electronic health records software or 

information technology and training 

services. We believe that we have 

appropriately balanced the goal of 

promoting widespread adoption of 

health information technology against 

the significant fraud and abuse concerns 

that stem from the provision of free or 

reduced cost goods or services to actual 

or potential referral sources. 

Comment: A commenter suggested 

that the final rule should include 

provisions that allow us to evaluate and 

ensure that the regulatory requirements, 

once enacted, have not negatively 

impacted key stakeholders or business 

segments within the health care 

industry. 

Response: Nothing in this rulemaking 

prevents us from reviewing the impact 

of the regulations on stakeholders in the 

health care industry. As with all 

regulatory exceptions, we may, in future 

rulemaking, propose modifications or 

clarifications to the exception as 

appropriate. 

Comment: We solicited comments on 

whether and, if so, how to take into 

account physician access to publicly 

available software at free or reduced 

prices. One commenter urged that the 

availability of free public software 

should not impact the design of the final 

exceptions. In addition, the commenter 

stated that we should grant physicians 

and hospitals substantial latitude in 

selecting interoperable technology that 

best meets their needs. 

Response: After further consideration, 

we concluded that it was not necessary 

to take the availability of publicly 

available software into account in 

developing the final exceptions. 

Hospitals, physicians, and other donors 

will have great flexibility in selecting 

technology that will qualify for 

protection under the exceptions. 

Nothing in this rule limits the choice of 

health information technology, although 

certain technology, such as noninteroperable electronic health records 

software (as discussed in section IV), 

would not qualify for protection because 

it would not meet all of the conditions 

of the exception. 

Comment: Some commenters 

suggested that the exceptions under the 

physician self-referral law should mirror 

the safe harbors under the anti-kickback 

statute in all respects in order to 

promote the rapid and widespread 

adoption of electronic prescribing and 

electronic health records technology. A 

few commenters suggested that OIG not 

adopt anti-kickback statute safe harbors 

or that any safe harbors should be 

stricter than any corresponding 

exceptions to the physician self-referral 

law. 

Response: We believe consistency 

between these exceptions and the 

corresponding safe harbors under the 

anti-kickback statute is preferable. We 

have attempted to ensure as much 

consistency between the two sets of 

regulations as possible given the 

underlying differences in the two 

statutory schemes. 

Comment: A few commenters 

requested that the Federal physician 

self-referral exception preempt State 

laws that prohibit physician selfreferrals relating to health information 

technology. One commenter wanted the 

physician self-referral exceptions, once 

finalized, to preempt any State laws or 

regulations that conflict with the 

provisions of the exceptions. 

Response: The MMA specifically 

dictated that the Part D electronic 

prescribing standards would preempt 

any State law or regulation that—(1) Is 

contrary to the adopted final Part D 

electronic prescribing standards or that 

restricts the Secretary’s ability to carry 

out Part D of title XVIII; and (2) pertains 

to the electronic transmission of 

medication history and of information 

on eligibility benefits, and prescriptions 

with respect to covered Part D drugs 

under Part D. No similar authority was 

provided with respect to the physician 

self-referral exception for the donation 

of electronic prescribing technology. 

Moreover, the legal authority for the 

electronic health records exception in 

this rule is derived from section 

1877(b)(4) of the Act, which similarly 

does not provide authority to preempt 

State physician selfπreferral laws. 

Existing Federal physician self-referral 

law permits States to regulate physician 

self-referrals concurrently. 

Comment: Some commenters inquired 

whether the electronic information that 

is transmitted via electronic prescribing 

or electronic health records systems 

would be considered remuneration for 

purposes of the physician selfπreferral 

law. 

Response: Whether a particular item 

or service constitutes remuneration for 

purposes of the physician self-referral 

law depends on the particular facts and 

circumstances. Typically, information 

about a particular patient’s health 

status, medical condition, or treatment 

exchanged between or among the 

patient’s health care providers and 

suppliers for the purpose of diagnosing 

or treating the patient would not 

constitute remuneration to the recipient 

of the information. In this regard, the 

electronic exchange of patient health 

care information is comparable to the 

exchange of such information by mail, 

courier, or phone conversation. Thus, 

when related to the care of individual 

patients, information such as test 

results, diagnosis codes, descriptions of 

symptoms, medical history, and 

prescription information are part of the 

delivery of the health care services and 

would not have independent value to 

the recipient. However, in other 


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situations, information may be a 

commodity with value that could be 

conferred to induce or reward referrals. 

For example, data related to research or 

marketing purposes, or information 

otherwise obtained through a 

subscription or for a fee, could 

constitute remuneration for purposes of 

the physician self-referral law. 

III. Response to Comments and Final 

Rule Provisions Regarding Electronic 

Prescribing Exception Required Under 

Section 101 of the MMA (proposed 

§ 411.357(v)) 

A. Summary of the Proposed Provisions 

Related to § 411.357(v) 

On October 11, 2005, as mandated in 

the MMA, we proposed adding a new 

paragraph (v) to the existing regulations 

at § 411.357 for certain electronic 

prescribing arrangements. We proposed 

the following: 

• That the exception would protect 

certain arrangements involving the 

provision of nonmonetary remuneration 

(in the form of hardware, software, or 

information technology and training 

services) necessary and used solely to 

receive and transmit electronic 

prescription information. We construed 

this language broadly to include internet 

connectivity services (of all types, 

including broadband or wireless), and 

upgrades of equipment and software 

that significantly enhance functionality. 

• That the donated technology must 

be part of, or used to access, a 

prescription drug program that meets 

applicable standards under Medicare 

Part D. 

• That the technology must be 

donated by a hospital to members of its 

medical staff, by a group practice to its 

members, or by a PDP sponsor or MA 

organization to prescribing physicians, 

as long as all of the exception 

conditions are satisfied. 

• That the physician could not make 

the receipt of donated technology a 

condition of doing business with a 

donor. 

• That protected arrangements must 

be fully and completely documented. 

• That the exception would not 

protect donations of technology that 

replicate technology the physician 

already possessed. To ensure 

compliance with this provision, we 

proposed requiring physicians to certify 

that they did not already possess 

equivalent technology. Moreover, we 

proposed that donors would not be 

protected if they knew or should have 

known that the physicians already 

possessed equivalent technology. 

• That neither a physician’s eligibility 

for donated technology, nor the amount 

or nature of the technology, could be 

determined in any manner that takes 

into account the volume or value of 

referrals or other business generated 

between the parties. 

• That the parties could not take any 

action to impede the compatibility or 

interoperability of the technology. 

• That the donor could not restrict 

the ability of the physician to use the 

technology for any patient, regardless of 

payor. 

• Limiting the value of donated 

technology that could be protected by 

the exception. 

• A separate exception for 

multifunctional items and services used 

for electronic prescribing (for example, 

multi-use hand-held devices) because 

we recognized the limitations imposed 

by the ‘‘used solely’’ standard set forth 

in the MMA. 

B. General Comments 

Comment: Many commenters stated 

that the proposed electronic prescribing 

exception was too narrow to be useful 

and should be merged into an electronic 

health records exception, noting that 

physicians would likely resist adopting 

stand-alone electronic prescribing 

systems. One commenter observed that 

the proposed rule was generally in 

accordance with the congressional 

intent underlying section 101 of the 

MMA. 

Response: We agree that the proposed 

exception was consistent with 

congressional intent. As we are not free 

to ignore a congressional mandate, we 

must promulgate the electronic 

prescribing exception described in 

section 101 of the MMA. However, we 

are also promulgating a separate 

exception for electronic health records 

arrangements that incorporate an 

electronic prescribing component. This 

new exception should address the 

commenters’’ concerns. 

C. Specific Comments 

1. Protected Compensation in the Form 

of Items and Services (Nonmonetary 

Remuneration) 

The proposed rule clarified the items 

and services that would qualify for the 

new exception (for purposes of this 

preamble, ‘‘qualifying electronic 

prescribing technology’’) that the 

Congress authorized only for the 

provision of items and services that are 

‘‘necessary and used solely’’ to transmit 

and receive electronic prescription drug 

information. 

a. Covered Technology 

In our proposed exception, we 

proposed protecting hardware, software, 

or information technology and training 

services that met the various exception 

conditions. We interpreted the statutory 

language to include the donation of 

broadband or wireless internet 

connectivity, training, information 

technology support services, and other 

items and services used in connection 

with the transmission or receipt of 

electronic prescribing information. 

Comment: Various commenters 

suggested that the scope of covered 

technology should be expanded to 

include: billing, scheduling, and other 

administrative functions; 

implementation and maintenance of the 

system; upgrades; and licenses, rights of 

use, or intellectual property. 

Commenters also urged that any 

exception cover educational sessions 

and consulting assistance related to the 

electronic prescribing technology. 

Commenters generally agreed that the 

provision of equipment for personal, 

non-medical purposes should not be 

protected. One commenter suggested 

that it would not be possible to develop 

a comprehensive list of protected 

remuneration that would sufficiently 

reflect all possible electronic prescribing 

items and services. The commenter 

recommended that we periodically 

review the scope of protected items and 

services, and expand it as needed. 

Response: We agree that it would be 

difficult to provide a comprehensive list 

of items and services covered by the 

exception. Although a specific list 

would provide a ‘‘bright line’’ rule, in 

this case, it would also impede the 

ability of the exception to accommodate 

novel or rapidly evolving technologies 

in the marketplace. For these reasons, 

we are not promulgating a specific list 

of protected items and services. 

Consistent with the MMA mandate, 

covered items and services under 

§ 411.357(v) include ‘‘hardware, 

software, and information technology 

and training services’’ that are necessary 

and used solely for electronic 

prescribing and that meet the other 

conditions of the exception. We believe 

that licenses, rights of use, intellectual 

property, upgrades, and educational and 

support services (including, for 

example, help desk and maintenance 

services) are items and services that 

potentially can fit in the exception if all 

conditions of the exception are met. 

Billing, scheduling, administrative, and 

other general office software cannot. 

Operating software that is necessary for 

the hardware to function can qualify for 

protection under the exception because 

it is integral to the hardware and 

distinct from other software 

applications that are not necessary to 

transmit and receive electronic 


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prescribing information. Interfaces 

designed to link the donor’s existing 

electronic prescribing system to the 

physician’s existing electronic 

prescribing system can qualify for 

protection. The exception does not 

protect the provision of technology for 

personal, nonmedical purposes, nor 

does the exception protect the provision 

of office staff. 

Comment: We solicited comments on 

whether the exception should protect 

electronic prescribing technology that is 

used for the transmission of prescription 

information for items and services that 

are not drugs (for example, durable 

medical equipment (DME) or laboratory 

tests). Several commenters suggested 

that the exception should support the 

use of electronic prescribing technology 

for all the functions currently 

accomplished through written 

prescriptions, in order to encourage 

provider utilization of electronic 

prescribing technology to increase 

safety, cost-effectiveness, and efficiency. 

The commenters suggested including 

the use of electronic prescribing 

technology used for prescribing medical 

supplies and durable medical 

equipment, physical therapy, dialysis 

testing, laboratory tests, and other 

nondrug prescriptions. A commenter 

from the clinical laboratory industry 

supported a broad reach, but only if 

clinical laboratories were included as 

permissible donors under the exception. 

Response: We agree generally with the 

first set of commenters. We have 

reviewed further the language in section 

101 of the MMA. The exception 

mandated by section 1860D–4(e)(6) of 

the Act requires that the donated 

technology be capable of receiving and 

transmitting ‘‘electronic prescription 

information’’ in accordance with the 

electronic prescribing standards 

promulgated for purposes of the MMA 

electronic prescription drug programs 

described in section 1860D–4(e)(1) 

through (3) of the Act. We believe that 

the specific term electronic 

‘‘prescription information’’ as 

commonly used and as used in section 

1860D–4(e)(6) of the Act retains a broad 

meaning, to include information about 

prescriptions for any items that would 

normally be conducted with a written 

prescription. In contrast, the 

information to be transmitted under an 

electronic prescription drug program 

established under section 1860D–4(e)(2) 

of the Act is clearly limited to drug 

information for Part D eligible 

individuals. Moreover, we do not 

believe that the statutory language is 

intended to be construed to prohibit the 

use of the donated technology for the 

transmission and receipt of orders or 

prescriptions for other items and 

services or to require the use of separate 

systems depending on the payor or the 

item or service to be prescribed or 

ordered. We believe this approach is 

consistent with the broad applicability 

of the physician self-referral law, the 

objectives of the electronic prescribing 

standards, and the patient safety, 

quality, and efficiency goals underlying 

the mandated exception. Accordingly, 

we are defining ‘‘prescription 

information’’ for purposes of the 

exception to mean information about 

prescriptions for drugs or any other item 

or service normally accomplished 

through a written prescription. With 

respect to the clinical laboratory 

commenter, consistent with the MMA 

language, we are not including clinical 

laboratories as permissible donors under 

the exception. However, we have 

expanded the new exception for 

electronic health records arrangements 

to include clinical laboratories. 

b. ‘‘Necessary and Used Solely’’

In the proposed rule, we proposed 

protecting items and services that are 

necessary and used solely to transmit 

and receive electronic prescription 

information. We stated that the 

exception would not protect 

arrangements in which donors provide 

items or services that are technically or 

functionally equivalent to items that the 

receiving physician already possessed 

or services that the physician had 

already obtained. We proposed 

requiring the physician to certify that 

the items and services provided were 

not technically or functionally 

equivalent to those that the physician 

already possessed or had already 

obtained. We also proposed that 

arrangements would not be protected if 

the donor knowingly provided 

technology that duplicated the 

physician’s existing technology. We 

indicated that we would consider 

‘‘necessary,’’ for purposes of the 

exception, upgrades of equipment or 

software that significantly enhance the 

functionality of the item or service. 

Because the term ‘‘necessary’’

appeared in our proposed rule in the 

discussions of all three proposed 

exceptions, many commenters chose to 

address comments on the meaning of 

the term ‘‘necessary’’ in the context of 

the proposed exceptions for electronic 

health records arrangements. We intend 

to interpret the term ‘‘necessary’’

uniformly for both new exceptions. 

Thus, there is a detailed discussion of 

our interpretation of the term 

‘‘necessary’’ in section IV.C of this 

preamble, which addresses the new 

electronic health records exception. We 

are addressing here only the comments 

received on the ‘‘necessary and used 

solely’’ requirement that are specific to 

the proposed electronic prescribing 

exception. 

Comment: One commenter observed 

that the ‘‘necessary and used solely’’

requirement ensures that items and 

services will be used to encourage 

electronic prescribing activities. This 

commenter suggested including an 

additional requirement that the items or 

services clearly be intended to promote 

the interoperability of health 

information technology and the 

improvement of quality in a clinical 

setting. 

Response: We agree that it was the 

intent of the Congress to encourage 

electronic prescribing activities, in part, 

through the development of an 

exception for donations of certain items 

and services necessary and used solely 

for electronic prescribing transactions. 

However, the additional standards 

suggested by the commenter, while 

reflecting laudable goals, are not 

sufficiently ‘‘bright line’’ for purposes of 

this exception. We have included a 

requirement at § 411.357(v)(3) intended 

to ensure that protected technology 

meets Part D electronic prescribing 

standards applicable at the time of the 

donation, including any standards 

relating to interoperability. 

Comment: Some commenters 

expressed concern that we have taken 

an unnecessarily narrow interpretation 

of the statutory language ‘‘necessary and 

used solely to receive and transmit 

electronic prescription information in 

accordance with the standards 

promulgated under [section 101 of the 

MMA].’’ One commenter explained its 

view that the phrase ‘‘necessary and 

used solely’’ should be read such that 

the word ‘‘necessary’’ modifies the 

phrase ‘‘in accordance with the 

standards issued under this subsection.’’

In other words, in this commenter’s 

view, the protected hardware, software, 

and services must be ‘‘necessary’’ to 

perform electronic prescribing 

transactions ‘‘solely’’ in accordance 

with CMS-established data interchange 

standards. The commenter explained 

that this interpretation would be 

consistent with the purpose of the 

exception and the practical realities of 

computers and electronic transactions. 

Response: We appreciate the 

comment; however, we do not believe 

that the commenter’s proposed 

interpretation is the best or most logical 

reading of the statutory language. We 

believe the better and less strained 

reading is that the Congress intended for 

all donated technology to be necessary 

for the receipt and transmission of 


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electronic prescription information and 

to be used solely for that purpose. 

Limiting the exception to necessary 

items and services helps ensure that the 

exception does not become a means of 

conveying valuable items and services 

that do not further the underlying policy 

goals and that might, in reality, 

constitute disguised payments for 

referrals. As we noted in the preamble 

to the proposed rule, we believe that the 

Congress included the ‘‘used solely’’

requirement to safeguard against 

abusive arrangements in which the 

donated technology might constitute a 

payment for referrals because it might 

have additional value attributable to 

uses other than electronic prescribing. 

For example, a computer that a 

physician can use to conduct office or 

personal business might have value to 

the physician apart from its electronic 

prescribing purpose. Accordingly, 

consistent with section 101 of the MMA, 

the final exception requires that the 

protected items and services be 

necessary and used solely to receive and 

transmit electronic prescribing 

information. 

We note that software that bundles 

general office management, billing, 

scheduling, electronic health records, or 

other functions with the electronic 

prescribing features does not meet the 

‘‘used solely’’ requirement and is not 

protected by the final electronic 

prescribing exception. In some cases, 

the provision of such bundled software 

may be eligible for protection under the 

new exception for electronic health 

records arrangements at § 411.357(w). 

Comment: One commenter suggested 

that the definition of ‘‘necessary’’

include all components required for a 

physician to be enabled to prescribe 

electronically whether or not other 

functionality is available or 

incorporated into the electronic 

prescribing technology. 

Response: We believe that the 

commenter is referring to technology 

that is beyond the scope of the MMAmandated exception. We have elected 

not to finalize a multifunctional 

electronic prescribing exception. The 

final exception for arrangements 

involving the donation of electronic 

health records technology may address 

the commenter’s concerns. 

Comment: Many commenters 

requested that we eliminate the 

proposed requirement that physicians 

provide written certification that the 

donated technology is not technically or 

functionally equivalent to the 

technology that the physician already 

possesses. Several commenters 

expressed concern about the potential 

difficulty of making this determination, 

the potential lack of expertise on the 

part of some physicians, and the 

potential increased cost that could arise 

by having an outside expert provide a 

determination of technical or functional 

equivalence. 

Response: For the reasons noted in 

section IV of this preamble with respect 

to the electronic health records 

exception, we are not adopting the 

proposed requirement that physicians 

provide written certification that the 

donated technology is not technically or 

functionally equivalent to technology 

the physician already possesses. 

Although we have eliminated the 

certification requirement, we retained 

the requirement for written 

documentation regarding the specifics 

of the arrangement in the final 

exception at § 411.357(v)(7). 

We do not believe that items and 

services are ‘‘necessary’’ if the physician 

already possesses equivalent items and 

services. The provision of duplicative 

items and services poses a heightened 

risk of abuse, since such arrangements 

would confer independent value on the 

physician (that is, the value of the 

existing items and services that may be 

put to other uses) unrelated to the need 

for electronic prescribing technology. 

Thus, if a donor knows that the 

physician already possesses equivalent 

items or services, or acts in deliberate 

ignorance or reckless disregard of that 

fact, the exception will not protect the 

donation. Therefore, prudent donors 

may want to make any reasonable 

inquiries to potential physician 

recipients and document the 

communications. We do not believe this 

requirement necessitates the hiring of 

technical experts by either the donor or 

the physician recipient. 

Comment: One commenter supported 

our interpretation of the term 

‘‘necessary’’ as permitting upgrades of 

equipment or software that significantly 

enhance the functionality of an item or 

service. Another commenter suggested 

that we should not require that the 

upgrades ‘‘significantly’’ enhance the 

functionality of the item or service. 

Rather, the commenter believes that we 

should allow the marketplace to 

determine whether an upgrade 

constitutes a beneficial improvement. 

Response: Although we continue to 

believe that the term ‘‘necessary’’ does 

not preclude upgrades of equipment or 

software that significantly enhance the 

functionality of the item or service, we 

agree with the commenter that 

distinguishing ‘‘significant’’

enhancements from other beneficial 

improvements introduces unnecessary 

complexity. Under the final exception, 

any upgrade that is necessary and used 

solely to transmit and receive electronic 

prescribing information is protected (as 

long as all other conditions of the 

exception are satisfied). 

Comment: Many commenters noted 

that it would be impractical to require 

physicians to acquire or use software 

and hardware solely for electronic 

prescribing. Several commenters noted 

that, in most cases, single-use 

technology is of limited value to a 

physician, and could result in 

inefficiencies. Another commenter 

expressed concern that the ‘‘used 

solely’’ standard would preclude the use 

of robust electronic clinical support 

tools, such as tools to identify drug-todrug interactions or to conduct drug-tolab or prescription data analysis. This 

commenter urged that any exceptions 

from the physician self-referral 

prohibition for health information 

technology arrangements promote 

access to all information needed by 

physicians to evaluate alternative drug 

therapies, identify potential drug-todrug interactions, and to improve safety, 

quality, and efficiency of patient care. 

Response: The ‘‘used solely’’

condition derives directly from the 

MMA language. We believe that many of 

the arrangements of interest to the 

commenters are addressed best by the 

electronic health records exception, 

which is not restricted to technology 

used solely for electronic prescribing. 

The MMA-mandated electronic 

prescribing exception reasonably is 

interpreted to encompass electronic 

tools that provide information necessary 

to formulate, transmit and receive a 

medically appropriate prescription for a 

patient. These tools would include 

electronic clinical support tools 

identifying alternative drug therapies, 

drug-to-drug interactions, or a payor’s 

formulary information. 

The nature of the ‘‘prescription data 

analysis’’ tools referenced by the 

commenter is not clear. We believe the 

appropriate inquiry would be whether 

the tool is used to formulate, transmit 

and receive a medically appropriate 

prescription for a patient. To the extent 

the data analysis tool (or any other 

electronic item or service) is used to 

transmit and receive data unrelated to 

formulating a medically appropriate 

prescription for a patient (for example, 

data collected for marketing purposes), 

the tool would not be necessary for 

electronic prescribing and would not be 

protected under the exception. 

c. Standards 

The MMA required that donated 

electronic prescribing technology must 

comply with the standards for electronic 

prescribing under Medicare Part D at the 


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time the items and services are donated. 

In the November 7, 2005 Federal 

Register (70 FR 67568), we finalized the 

first set of these standards (the 

‘‘foundation standards’’). We proposed 

in § 411.357(v)(2) a requirement that the 

items and services be provided as part 

of, or be used to access, an electronic 

prescription drug program that complies 

with the applicable standards under 

Medicare Part D at the time the items 

and services are donated. 

We received no comments on this 

issue. The final exception requires that 

the donated technology must comply 

with the applicable standards under 

Medicare Part D at the time the items 

and services are donated. 

2. Permissible Donors and Physician 

Recipients 

We proposed protecting the same 

categories of donors and physician 

recipients listed in section 101 of the 

MMA. 

Comment: We received numerous 

comments requesting that we expand 

the list of permissible donors and 

physician recipients. 

Response: Because most commenters 

commented on this issue jointly with 

the proposed electronic health records 

exception, we included a detailed 

discussion of these comments in our 

discussion of the electronic health 

records exception in section IV.D. of 

this preamble. 

We are finalizing the exception 

consistent with the MMA-mandated 

donors and physician recipients set 

forth by the Congress. We are not 

persuaded that additional donors or 

physicians are necessary to achieve the 

purpose of this exception for electronic 

prescribing. The enumerated categories 

of donors and physicians reflect 

individuals and entities centrally 

involved in the ordering, processing, 

filling, or reimbursing of prescriptions. 

Accordingly, protected donors and 

physicians under § 411.357(v) are 

hospitals to members of their medical 

staffs, group practices to their physician 

members, and PDP sponsors and MA 

organizations to prescribing physicians. 

For the convenience of the reader, we 

note the following: 

• Group practice is defined as 

specified in § 411.352; 

• Members of a group practice is 

defined as all persons covered by the 

definition of ‘‘member of a group 

practice’’ at § 411.351; 

• PDP sponsor or MA organization is 

defined as specified in § 423.4 and 

§ 422.2, respectively. 

3. Selection of Physician Recipients 

We proposed additional conditions in 

proposed §§ 411.357(v)(5) and (v)(6) 

related to how donors select recipients 

of the electronic prescribing technology. 

These proposed conditions were 

designed to minimize the risk that 

donors would select recipients for the 

improper purpose of inducing or 

rewarding the generation of Medicare 

business. Proposed § 411.357(v)(5) 

would require that the recipients 

(including their groups, employees, or 

staff) refrain from making the donation 

of qualifying electronic prescribing 

technology a condition of doing 

business with the donor. Proposed 

§ 411.357(v)(6) would preclude 

protection if the eligibility of a 

physician to receive items and services 

from a donor, or the amount or nature 

of the items or services received, is 

determined in any manner that takes 

into account the volume or value of the 

physician’s referrals or other business 

generated between the parties. We 

observed that this requirement would 

not preclude selecting a recipient based 

upon the total number of prescriptions 

written by the recipient, but would 

preclude selecting the recipient based 

upon the number or value of 

prescriptions written by the recipient 

that are dispensed or paid by the donor 

(as well as on any other criteria based 

on any other business generated 

between the parties). (see October 11, 

2005 proposed rule, (70 FR at 59187)). 

Comment: Commenters requested that 

we confirm that donors can select 

physician recipients of electronic 

prescribing technology based upon the 

total number of prescriptions written by 

the physician, but cannot select them 

based upon the number or value of 

prescriptions written by the physician 

recipient that are dispensed or paid by 

the donor (or on any other criteria based 

on any other business generated 

between the parties). A commenter 

supported excluding from the protection 

of the exception donations that take into 

account directly the volume or value of 

referrals or other business generated 

between the parties. This commenter 

expressed concern that donors would 

employ such selection criteria to 

disadvantage small practices and 

practices in rural or underserved areas. 

To counter this potential disadvantage, 

the commenter suggested that the final 

rule include incentives to promote 

donations to small practices, especially 

in rural and underserved areas. Other 

commenters suggested that donors, such 

as PDP sponsors and MA organizations 

should be permitted to consider the 

volume and value of prescriptions 

written by the physician recipient, 

particularly for a donor’s patient or plan 

population. 

Response: To safeguard against the 

use of donated technology to disguise 

referral payments, we are adopting our 

proposal that neither the eligibility of a 

physician to receive items and services, 

nor the amount or nature of the items 

or services received, may be determined 

in a manner that takes into account, 

directly or indirectly, the volume or 

value of the physician’s referrals or 

other business generated between the 

parties. Notwithstanding, in the instant 

case, we believe that prohibiting the 

selection of recipients based on total 

number of prescriptions written by the 

recipient would be inconsistent with the 

MMA mandate and congressional intent 

to promote the use of electronic 

prescribing. Accordingly, we confirm 

our interpretation, for purposes of the 

exception at § 411.357(v), that donors 

may select physician recipients of 

electronic prescribing technology based 

upon the total number of prescriptions 

written by the physician, but cannot 

select them based upon the number or 

value of prescriptions written by the 

physician that are dispensed or paid by 

the donor (or on any other criteria based 

on any other business generated 

between the parties). They also may not 

select physician recipients based on the 

overall value of prescriptions written by 

the physician or on the volume or value 

of prescriptions written by the 

physician that are reimbursable by the 

Medicare program. 

We are not persuaded that PDP 

sponsors or MA organizations should be 

permitted to offer technology selectively 

based on the volume or value of 

business generated for the plan by the 

recipient, especially in the context of 

Part D, which includes some 

reimbursement based on the plan’s 

costs, rather than capitated payments. 

The exception would not protect 

arrangements that seek to induce a 

physician to change loyalties from other 

providers or plans to the donor (for 

example, a hospital using an electronic 

prescribing technology arrangement to 

induce a physician who is on the 

medical staff of another hospital to join 

the donor hospital’s medical staff), 

because such arrangements take into 

account business generated for the 

donor. We understand the commenter’s 

concern about donors excluding rural 

and underserved area physicians from 

their health information technology 

arrangements. Some donors may favor 

large or urban practices over small or 

rural ones. However, we can discern no 

‘‘incentives’’ that could be included 

appropriately in an exception to address 


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this concern, nor has the commenter 

proposed any with respect to assisting 

rural or solo practitioners. We note that 

our decision not to limit the value of 

technology that can qualify under the 

exception may assist rural and solo 

practices insofar as donors may want to 

provide them with greater resources in 

recognition of their greater need for 

assistance in adopting electronic 

prescribing technology. 

Comment: Some commenters 

supported our proposal to exclude from 

the protection of the exception 

donations that are a condition of doing 

business with the donor. 

Response: We are retaining the 

proposed requirement that recipients (or 

any affiliated group, employee, or staff 

member) cannot make the receipt of 

items or services a condition of doing 

business with the donor. We have 

clarified that the condition applies with 

respect to all individuals and entities 

affiliated with the recipient. 

4. Value of Technology: Cap 

In our proposed rule, we solicited 

public comments on various means by 

which we might limit the value of 

protected technology under the 

electronic prescribing exception. We 

indicated that we were considering a 

limit on the value of protected 

technology as a further safeguard against 

program or patient abuse. We received 

a large number of comments on this 

topic, the majority of which opposed 

any limit on the value of donated 

technology. Because these commenters 

typically commented jointly on this 

issue for all three proposed exceptions 

(and each commenter typically had the 

same concerns under all three proposed 

exceptions), an extensive description of 

these comments is found in section IV 

of this preamble. Having considered the 

comments, we are persuaded not to 

limit the value of the donated 

technology under the new exception for 

electronic prescribing arrangements at 

§ 411.357(v). We believe the final 

conditions of the exception, including 

the ‘‘necessary and used solely’’

requirement and the conditions related 

to how donors select physician 

recipients, should be sufficient to guard 

against program and patient abuse. 

Although we are not limiting the value 

of donated technology, it is not our 

expectation that donors will necessarily 

want, or be in a position, to donate 

unlimited amounts of electronic 

prescribing technology. 

5. Additional Conditions on the 

Provision of Qualifying Electronic 

Prescribing Technology 

a. All Payors Requirement 

In proposed § 411.357(v)(4), we stated 

that we would require that, where 

possible, physicians must be able to use 

the protected technology for all patients 

without regard to payor status. 

Comment: Commenters universally 

supported the requirement that, where 

possible, physicians must be able to use 

the donated technology for all patients 

regardless of payor source. 

Response: We agree, and we have 

included this requirement in the final 

exception. 

b. Documentation 

We proposed at § 411.357(v)(7) a 

requirement that the arrangement for the 

donation of electronic prescribing 

technology be in writing, be signed by 

the parties, identify with specificity the 

items or services being provided and 

their values, and include a certification 

that the donated items and services are 

not technically or functionally 

equivalent to items and services the 

physician recipient already has. We 

stated that, to permit effective oversight 

of protected arrangements, the writing 

must cover all qualifying electronic 

prescribing technology provided by the 

donor to the physician. For example, if 

a donor provides a piece of hardware 

under one arrangement and 

subsequently provides a software 

program, the agreement regarding the 

software would have to include a 

description of the previously donated 

hardware (including its nature and 

value). 

Comment: Some commenters 

supported the requirement that any 

transfers of technology and services be 

memorialized in a written agreement. 

One commenter objected to including a 

written agreement requirement in the 

exception, arguing that the requirement 

would cause an unnecessary delay and 

increase paperwork. Another 

commenter suggested that the exception 

permit the arrangement between the 

donor and physician recipient to be 

captured through a combination of 

agreements between the recipient, 

donor, and service provider, rather than 

one agreement. Commenters also urged 

us to remove the technical and 

functional equivalence certification 

requirement from the exception. 

Response: We have adopted a 

documentation requirement in the 

exception at § 411.357(v)(7) with several 

modifications. With respect to the 

condition requiring that the 

documentation cover all of the 

electronic prescribing items and 

services provided by the donor to the 

physician recipient, we have added 

language to the final exception 

clarifying that the written 

documentation requirement can be 

satisfied by incorporating by reference 

other agreements between the parties or 

by the use of cross references to a master 

list of agreements between the parties 

that is maintained and updated 

centrally, is available for review by the 

Secretary upon request, and preserves 

the historical record of agreements. We 

have eliminated the certification of 

technical and functional nonequivalence. In addition, given our 

decision not to limit the value of 

protected donations, we have 

eliminated the requirement that the 

agreement specify the value of the 

donated technology. However, in the 

interests of transparency and 

accountability, we are requiring that the 

parties document the donor’s cost for 

the technology. We have retained the 

remaining documentation requirements, 

as proposed, at § 411.357(v)(7). 

c. Commercial and Other Messaging 

Comment: A commenter requested 

clear and specific rules prohibiting 

inappropriate commercial messaging 

through electronic prescribing 

technology, including electronic 

detailing messages from a manufacturer 

promoting a particular brand or brandname drug. This commenter suggested 

that such messaging may 

inappropriately influence clinical 

decision-making. The commenter gave 

the following as examples of 

inappropriate messaging: (1) Messages 

disguised as ‘‘clinical alerts’’ based 

upon biased research not published in 

the public domain; and (2) alerts 

purporting to save a patient money 

when, in reality, the out-of-pocket 

expense for the drug to the patient is 

higher. Another commenter suggested 

that we should prohibit commercial 

messaging and require that donated 

technologies present information in a 

neutral and transparent manner so as 

not to influence clinical decision 

making improperly. Similarly, another 

commenter noted that pop-up 

messaging could influence 

inappropriately prescribing patterns. 

The commenter provided the example 

of making the procedure for prescribing 

certain formulary drugs very easy and 

straightforward, while attempts to 

prescribe other formulary drugs trigger 

multiple pop-up notices or require a 

series of additional steps. 

Response: We do not believe it would 

be feasible or appropriate to regulate the 

content of commercial messaging or 


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formulary compliance activities through 

these exceptions to the physician selfreferral law. The regulation of speech is 

outside the scope of this rulemaking. 

Nor, in any event, would a condition in 

these exceptions related to the accuracy 

or objectivity of the content of messages 

or formulary activities be sufficiently 

‘‘bright line’’ to be practical or readily 

enforceable. Nothing in this rulemaking 

should be construed to authorize or 

approve any commercial messaging, 

formulary compliance activity (or any 

other conduct) that is prohibited by any 

Federal, State, or local law or regulation. 

Moreover, technology used for 

marketing purposes would not meet the 

‘‘necessary and used solely’’ standard 

required by the MMA for the electronic 

prescribing exception because 

marketing information is not the type of 

clinical support that is integral to 

prescribing accurate and appropriate 

items and services for patients. 

d. Other Conditions 

Comment: Many commenters 

supported the prohibition against 

donors or their agents taking any actions 

to disable or limit interoperability or 

otherwise impose barriers to 

compatibility. 

Response: We agree, and we are 

retaining this requirement in the final 

exception. 

Comment: Commenters generally 

agreed that the provision of equipment 

for personal, nonmedical purposes 

should not be protected. 

Response: The exception does not 

protect the provision of technology for 

personal, nonmedical purposes. 

6. Multifunctional Technology 

We proposed using our regulatory 

authority under section 1877(b)(4) of the 

Act to create an additional exception to 

protect the provision by DHS entities to 

physician recipients of some limited 

hardware (including necessary 

operating system software) and 

connectivity services that are used for 

more than one function, as long as a 

substantial use of the item or service 

would be to receive or transmit 

electronic prescription information. 

Comment: Most commenters 

supported a single exception that would 

extend protection to technology beyond 

what is ‘‘necessary and used solely’’ for 

electronic prescribing. Many 

commenters expressed the hope that 

multifunctional technology ultimately 

would be captured in an electronic 

health records technology exception. 

Response: We have decided not to 

create a separate exception for 

multifunctional technology. Instead, we 

are creating a new exception for the 

protection of certain arrangements 

involving electronic health records 

software, information technology and 

training services (including connectivity 

services) that will serve more directly to 

further the overall goal of widespread 

adoption of interoperable electronic 

health records technology without some 

of the program or patient abuse risks 

inherent in gifts of multifunctional 

hardware. Our review of the totality of 

the public comments supports this 

approach, as more fully described in the 

next section. 

D. Summary of the Final Provisions 

Related to § 411.357(v) 

This final rule at § 411.357(v) contains 

one exception for items and services 

that are necessary and used solely to 

receive and transmit electronic 

prescription information. The exception 

mirrors the MMA language and protects 

donations of hardware, software, 

internet connectivity, and training and 

support services, provided that the 

technology meets the applicable 

standards under Medicare Part D at the 

time the items and services are donated. 

(See November 7, 2005 final rule (70 FR 

67568) for the current, or ‘‘foundation,’’

standards.) Further, donations may not 

take into account, directly or indirectly, 

the volume or value of referrals from the 

physician or other business generated 

between the parties. We have not placed 

a monetary limit on the value of 

donations of electronic prescribing 

technology. We have retained most of 

the key provisions from the proposed 

rule; however, the final rule does not 

include a requirement for physician 

certification of technical and functional 

non-equivalence. We emphasize that: (1) 

The final rule protects technology 

necessary and used solely to receive and 

transmit any prescription information, 

whether related to drugs or to other 

items or services normally ordered by 

prescription; and (2) donations may be 

in an unlimited amount. 

We are not finalizing a separate 

exception for multifunctional electronic 

prescribing technology. 

IV. Response to Comments and Final 

Rule Provisions Regarding Electronic 

Health Records Exception (Proposed 

§ 411.357(w)) 

A. Summary of the Proposed Provisions 

Related to § 411.357(w) 

Prior to publication of the proposed 

rule, many in the hospital industry, 

among others, raised the issue of the 

need for protection under an exception 

for arrangements involving technology 

other than electronic prescribing. To 

encourage the adoption of electronic 

health records technology consistent 

with the ultimate goal of achieving fully 

interoperable electronic health records 

for all patients, we proposed using our 

legal authority at section 1877(b)(4) of 

the Act to issue two exceptions related 

to electronic health records software 

and training services that are necessary 

and used to receive, transmit, and 

maintain electronic health records of the 

donor’s or physician’s patients. We did 

not propose protecting hardware in 

either exception, because we believe 

electronic health records software and 

training services are the components of 

electronic health records systems most 

likely to be needed by physicians, and 

because donations of valuable, 

multifunctional hardware (such as 

computers and servers) would 

inherently pose a higher risk of 

constituting a disguised payment for 

referrals. The first proposed exception 

would have applied to donations made 

before the Secretary adopts product 

certification criteria, including criteria 

for interoperability, functionality, and 

privacy and security of electronic health 

records technology. (In the proposed 

rule (70 FR 59197), we referred to this 

proposed exception as the ‘‘preinteroperability’’ exception.) We 

proposed the following: 

• That the electronic health records 

software must be necessary and used 

solely for the transmission, receipt, and 

maintenance of patients’ electronic 

health records and prescription drug 

information. 

• Defining ‘‘necessary’’ consistent 

with the definition of the term in the 

proposed exception for electronic 

prescribing arrangements. 

• That the software would have to 

include an electronic prescribing 

component that meets the applicable 

standards under Medicare Part D at the 

time the software is donated. 

• That the pre-interoperability 

exception would not protect the 

provision of other types of technology 

(for example, billing, scheduling, or 

general office management software) or 

any software or staff used by the 

physician to conduct business or engage 

in activities unrelated to the physician’s 

medical practice. We also proposed that 

the exception would not protect the 

provision of staff to the physician or the 

physician’s office. 

• Defining the term ‘‘electronic health 

records’’ and we solicited comments on 

an appropriate definition. 

• Including documentation 

provisions comparable to those 

proposed for the electronic prescribing 

exception. 

• Prohibiting protection for any 

arrangement in which the donor (or any 


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person on the donor’s behalf) disabled 

the interoperability of any component of 

the software or otherwise imposed 

barriers to compatibility. 

• Limiting the aggregate value of 

protected technology that a donor could 

provide to a physician under the preinteroperability exception or in 

combination with the other proposed 

exceptions. We noted that we were 

considering the same alternatives for 

setting a value limit that were proposed 

for the electronic prescribing exception. 

These could include: An aggregate 

dollar cap; a limitation that would 

require cost sharing by the physician; or 

another methodology, for example, a 

reduction in the amount of any cap over 

time. 

• Including the same categories of 

donors and physician recipients that we 

proposed for the electronic prescribing 

exception. 

• Including other requirements drawn 

from the proposed electronic 

prescribing exception, for example, the 

restriction on arrangements tied to the 

volume or value of referrals or other 

business generated between the donor 

and recipient (proposed § 411.357(x)(4)); 

a prohibition on conditioning business 

on the receipt of technology (proposed 

§ 411.357(x)(3)); and an all payors 

condition (proposed § 411.357(x)(7)). 

• Sunsetting the pre-interoperability 

exception once product certification 

criteria were finalized. 

Recognizing that some enhanced 

flexibility in the conditions applicable 

under an exception for electronic health 

records arrangements might be 

appropriate once standards and product 

certification criteria were developed for 

electronic health records (including 

standards for interoperability) and 

adopted by the Secretary, we proposed 

a second exception that we referred to 

as the ‘‘post-interoperability’’ exception. 

We noted that adoption of uniform 

interoperability standards, as well as 

product certification criteria to ensure 

that products meet those standards, 

would help prevent technology from 

being used by unscrupulous parties to 

lock in streams of referrals or other 

business. In summary, we proposed the 

following for the post-interoperability 

exception: 

• That protected technology must be 

certified in accordance with product 

certification criteria adopted by the 

Secretary, and must include an 

electronic prescribing component that 

complies with applicable electronic 

prescribing standards established by the 

Secretary for the Part D program, to the 

extent that those standards are not 

incorporated into the product 

certification criteria. 

• That the same conditions proposed 

for the pre-interoperability exception 

would apply, with the following 

exceptions: (1) We proposed including 

some additional software applications 

as long as electronic health records and 

electronic prescribing remain core 

functions; (2) we proposed including 

additional categories of donors and 

physician recipients; (3) we proposed 

including specific selection criteria to 

identify acceptable methods for 

selecting physician recipients; and (4) 

we proposed a potentially larger limit 

on the value of protected technology. 

We also proposed and solicited public 

comment on the scope and conditions 

for the electronic health records 

exceptions. 

As noted previously in this preamble 

and in the proposed rule, our decision 

to propose these exceptions did not 

reflect a view that all electronic health 

records arrangements would require 

protection under an exception to the 

physician self-referral law. Moreover, in 

many cases, such arrangements may 

qualify for such protection under 

existing exceptions or may not implicate 

the physician self-referral law. 

B. General Comments 

Comment: Most commenters 

expressed concern with the pre- and 

post-interoperability bifurcated 

approach to the exceptions, asserting 

that a bifurcated approach was not 

necessary, too confusing, and/or 

contrary to the goal of achieving 

widespread adoption of health 

information technology. These 

commenters urged us to abandon the 

bifurcated approach and to publish one 

final exception for remuneration in the 

form of electronic health records 

technology. Commenters urged us and 

the OIG to adopt similar approaches to 

a post-interoperability exception under 

the physician self-referral law and a 

post-interoperability safe harbor under 

the anti-kickback statute. 

Response: We have finalized one 

exception for arrangements involving 

the donation of electronic health records 

software or information technology and 

training services at § 411.357(w). 

Comment: Some commenters 

suggested that we incorporate the 

general concept of interoperability into 

the pre-interoperability exception, even 

if we do not require product 

certification. Many commenters stated 

that encouraging electronic health 

records arrangements before 

interoperability standards are available 

would be undesirable public policy. 

Some commenters believe that a 

product certification process that would 

include interoperability standards is 

already underway and within the 

timeframe for this rulemaking. Others 

expressed that we should either not wait 

until certification standards are adopted 

before finalizing the postinteroperability exception, or not 

finalize either of the exceptions until 

the certification standards are adopted. 

One commenter expressed that, since 

timetables for the rulemaking and for 

the certification standards are not 

known, we should consider 

promulgating the regulation from the 

pre-interoperability perspective and 

address the post-interoperability era in 

the future. 

Response: We agree with the 

commenters that a bifurcated approach 

is not necessary. We are not 

promulgating separate exceptions for 

pre- and post-interoperability as we had 

proposed in the October 11, 2005 

proposed rule. The industry has made 

considerable progress in developing 

certification criteria for electronic health 

records products within a very short 

time. In fact, one certification 

organization has already completed an 

initial set of certification criteria for 

ambulatory electronic health records. In 

some cases, there may be products for 

which no certification criteria are 

available. To address this situation, and 

to ensure interoperability to the extent 

possible, the final exception requires 

that donated software be interoperable 

at the time of the donation (regardless 

of whether the product is actually 

certified), and bars a donor or any entity 

on its behalf from taking any actions to 

disable or limit interoperability. This 

latter condition also protects against 

donors that improperly may attempt to 

create closed or limited electronic 

health records systems by offering 

technology that functionally or 

practically locks in business for the 

donor. 

Comment: Many commenters 

supported the proposed prohibition 

against donors or their agents taking any 

actions to disable or limit 

interoperability or otherwise impose 

barriers to compatibility of the donated 

technology with other technology, 

including technology owned or operated 

by competing providers and suppliers. 

Response: We have included this 

requirement in the final exception. We 

believe this condition helps ensure that 

remunerative arrangements involving 

health information technology will 

further the policy goal of fully 

interoperable health information 

systems and will not be misused to steer 

Medicare referrals to the donor. 

Comment: Some commenters 

suggested that early adopters of 

electronic health records technology 


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should be offered incentives or rewards 

because, otherwise, physicians might 

delay investing their own funds in 

electronic health records systems while 

waiting for a donor to offer them free 

technology. The commenters continued 

that this delay would have a detrimental 

effect on the adoption of electronic 

health records technology. 

Response: It is unclear what types of 

incentives or rewards the commenters 

are requesting. We note that the 

exception does not provide incentives 

or rewards, nor would it be appropriate 

for an exception to do so; rather, the 

exception protects the donation of 

certain electronic health records 

technology when all conditions of the 

exception are satisfied. The exception 

would not protect any cash 

reimbursement paid to physician 

recipients for costs they incurred in 

adopting technology. 

Comment: One commenter requested 

that we and the OIG coordinate with the 

Internal Revenue Service (‘‘IRS’’) to 

provide guidance through an IRS 

revenue ruling publication to alleviate 

concerns related to tax exemption. 

Response: The commenter should 

contact the IRS directly with its 

concerns. 

C. Specific Comments 

1. Protected Compensation in the Form 

of Items or Services (Nonmonetary 

Remuneration) 

a. Covered Technology 

We proposed protecting the donation 

of electronic health records software 

and directly related training services 

that are necessary to receive, transmit, 

and maintain electronic health records 

of the entity’s or physician’s patients, 

provided that the software includes an 

electronic prescribing component. 

Importantly, we stated our intention to 

protect donations of systems that 

improve patient care rather than of 

systems comprised solely or primarily 

of technology that is incidental to the 

core functions of electronic prescribing 

and electronic health records. 

Comment: Some commenters asked 

whether our proposal to protect certain 

technology necessary and used to 

‘‘receive, transmit, and maintain’’

electronic health records would include 

technology used to develop, implement, 

operate, facilitate, produce, and 

supplement electronic health records. 

Response: We intended that the final 

rule would encompass the types of uses 

described by the commenters. To make 

this intent clear, we have clarified the 

final rule to provide that the protected 

technology must be necessary and used 

predominantly to ‘‘create, maintain, 

transmit, or receive’’ electronic health 

records. 

Comment: Most commenters believe 

that the proposed scope of protected 

remuneration was too narrow. A few 

commenters suggested that we limit the 

scope of the protected technology. 

Commenters variously suggested that 

the exception should also protect 

remuneration in the form of hardware, 

operating software, connectivity items, 

support services, secure messaging, 

storage devices, clinical decision 

support technology, services related to 

training and ongoing maintenance, 

rights, licenses, and intellectual 

property, as well as interfaces and 

translation software to allow physician 

offices to exchange data with hospital 

systems, all of which the commenters 

considered necessary for a fullyfunctioning electronic health records 

system. 

Some commenters encouraged us to 

exclude from protection hardware and 

broadband wireless internet 

connectivity and to tailor the protection 

of this exception narrowly to cover 

software, training, and information 

technology support services. One 

commenter opined that ongoing 

support, such as help desk support, 

could pose a risk of abuse, because the 

physician would become dependent on 

the donor for the help desk support, and 

might feel obligated to refer to the donor 

to ensure continuation of that support. 

This commenter suggested that we 

protect initial, start-up support services, 

but not long-term, ongoing system 

support. A few commenters suggested 

that the scope of support services, 

training, and other items and services 

should be a defined contribution not to 

exceed 365 person-days. 

Response: We have carefully 

considered the comments in light of our 

intention to promote the adoption of 

electronic health records without risk of 

program or patient abuse. The final rule 

protects electronic health records 

software or information technology and 

training services necessary and used 

predominantly to create, maintain, 

transmit, or receive electronic health 

records. 

To ensure that the exception is only 

available for software, information 

technology and training services that are 

closely related to electronic health 

records, the exception provides that 

electronic health records functions must 

predominate. The core functionality of 

the technology must be the creation, 

maintenance, transmission, or receipt of 

individual patients’ electronic health 

records. In addition, the donated 

software must have electronic 

prescribing capability, either through an 

electronic prescribing component or the 

ability to interface with the physician’s 

existing electronic prescribing system, 

that meets the applicable standards 

under Medicare Part D at the time the 

items and services are provided. 

Although electronic health records 

purposes must predominate, protected 

software packages may also include 

other software and functionality directly 

related to the care and treatment of 

individual patients (for example, patient 

administration, scheduling functions, 

billing, clinical support software, etc.). 

This condition recognizes that it is 

common for electronic health records 

software to be integrated with other 

features. 

We interpret ‘‘software, information 

technology and training services 

necessary and used predominantly’’ to 

include, by way of example, the 

following: 

• Interface and translation software; 

• Rights, licenses, and intellectual 

property related to electronic health 

records software; 

• Connectivity services, including 

broadband and wireless internet 

services; 

• Clinical support and information 

services related to patient care (but not 

separate research or marketing support 

services); 

• Maintenance services; 

• Secure messaging (for example, 

permitting physicians to communicate 

with patients through electronic 

messaging); and 

• Training and support services (such 

as access to help desk services). 

We interpret the scope of covered 

electronic health records technology to 

exclude—

• Hardware (and operating software 

that makes the hardware function); 

• Storage devices; 

• Software with core functionality 

other than electronic health records (for 

example, human resources or payroll 

software); and 

• Items or services used by a 

physician primarily to conduct personal 

business or business unrelated to the 

physician’s practice. 

Further, training and support services 

do not include the provision of staff to 

physicians or their offices. For example, 

the exception would not protect the 

provision of staff to transfer paper 

records to the electronic format. We 

believe that most physicians already 

possess the hardware necessary to 

operate electronic health records 

systems. Moreover, hardware represents 

a much lower cost to the physician 

when compared to electronic health 

records software. Requiring investment 

by a physician recipient in the hardware 


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portion of the electronic health records 

system safeguards further against 

program abuse. 

Finally, consistent with our 

discussion in the proposed rule and our 

goal of widespread adoption of 

electronic health records, we are not 

protecting systems comprised solely or 

primarily of technology that is 

incidental to electronic prescribing and 

electronic health records. As previously 

discussed, we intend that this exception 

protect electronic health records 

technology arrangements in which the 

electronic health records component 

predominates. 

Although we share the concerns of 

those commenters that ongoing 

remuneration, such as maintenance and 

help desk support, creates long-term 

remunerative ties between donors and 

recipients, we believe that requiring 

donated electronic health records to be 

interoperable protects against the 

‘‘tying’’ of referral sources (physicians) 

to donor entities seeking referrals. 

Further, the cost sharing requirement 

and sunset provision in the final 

electronic health records exception 

should also address this concern. 

Comment: With respect to internet 

connectivity services, some commenters 

suggested that donations for 

connectivity should be limited to any 

necessary devices for connectivity and 

technical support for selecting and 

installing the appropriate connectivity 

services, but should not include 

connectivity fees, which should be an 

ongoing expense of the physician. Other 

commenters suggested that covered 

technology should include ‘‘T1’’ lines or 

other enhanced broadband connectivity 

(including connectivity needed to 

transfer medical images and EKGs 

(especially in rural areas)), routers to 

speed download times, secure 

connections and messaging, and 

ongoing maintenance and support and 

interfaces. 

Response: The final exception 

protects the donation of all forms of 

connectivity services. We believe the 

choice of appropriate connectivity 

services is an individual determination 

best made by the donors and physician 

recipients given their specific 

circumstances. We note that the cost 

sharing requirement of § 411.357(w)(4) 

will apply to these services, including 

connectivity fees. The exception does 

not protect routers or modems necessary 

to access or enhance connectivity 

because hardware is not protected 

remuneration under the exception. As 

noted in the preceding response, 

concerns about ongoing donations of 

connectivity services are also addressed 

by the sunset provision. 

Comment: Several commenters urged 

us to protect arrangements involving the 

donation of billing software and other 

software for administrative functions, 

such as registration and patient 

scheduling, because much of the ‘‘return 

on investment’’ (that is, value) for 

physicians who incorporate an 

electronic health records system into 

their practices is the integration of 

clinical and administrative systems. 

Commenters noted that the scope of the 

exception should account for the fact 

that the products on the market 

increasingly integrate administrative 

functions with the clinical electronic 

health records functions. One 

commenter suggested that the exception 

should at least prohibit the donation of 

technology that is unrelated to the 

actual electronic health records 

software, such as technology related to 

office administration. The commenter 

requested that the exception protect 

integrated bundles of applications that 

include an electronic health records 

component, provided the physician 

pays for the technology that is unrelated 

to the electronic health records 

software. Another commenter suggested 

that the exception should not protect 

clearly separable administrative 

software (for example, billing, coding, 

and practice management software), but 

protect those elements of an electronic 

health records system that incidentally 

facilitate administrative functions, such 

as software that links to diagnosis codes 

for billing purposes. The commenter 

suggested that these functions that 

dually support patient care and practice 

administration are valuable to the 

physician and a driving force behind 

adoption of electronic health records 

systems. 

Response: As previously noted, the 

final exception protects the donation of 

electronic health records software 

packages that include core functionality 

of electronic prescribing and the 

creation and maintenance of individual 

patients’ electronic health records. 

Protected software packages may also 

include other software and functionality 

directly related to the care and 

treatment of individual patients (for 

example, patient administration, 

scheduling functions, billing, clinical 

support software, etc.). 

Comment: A commenter asked for 

further clarification on whether the 

exception would cover the donation of 

an electronic health records system 

operating within an ‘‘Application 

Service Provider’’ model. 

Response: Subject to the cost sharing 

requirement and other conditions of the 

final exception, we would consider the 

donation of an electronic health records 

system operating within an 

‘‘Application Service Provider’’ model 

(a business model that provides 

computer-based services over a 

network) as covered technology. 

Comment: A few commenters 

requested that the final rule require 

donors to provide data migration 

services to a physician if the physician 

chooses to abandon the donated 

electronic health records system and 

purchase his or her own electronic 

health records system. 

Response: We believe it is not 

appropriate to require donors to provide 

data migration or any other specific 

service to physicians who choose to 

switch electronic health records 

systems. Donors may provide services if 

they wish, as long as the arrangement 

otherwise complies with the exception. 

We note that, to the extent the data 

migration services involve the provision 

of staff to the physician’s office in order 

to transfer the data, the services would 

not be protected. 

Comment: A commenter 

recommended that the exception 

specifically protect the provision of 

patient portal software that enables 

patients to maintain on-line personal 

medical records, including scheduling 

functions. 

Response: Nothing in this final 

exception precludes protection for 

patient portal software if it meets all 

conditions of the exception. 

Comment: Some commenters urged us 

to remove the proposed requirement 

that an electronic health records system 

include an electronic prescribing 

component because such a requirement 

may stifle investment in electronic 

health records technology in situations 

where electronic prescribing is not 

considered a significant need. These 

commenters suggested that patients 

would benefit most if we permit donors 

to first adopt electronic health records 

technology and then add electronic 

prescribing. Other commenters 

supported making an electronic 

prescribing component a mandatory 

part of the donated electronic health 

records system. 

Response: Nothing in this exception 

prevents donors from adopting any 

particular form of technology. However, 

to qualify for the protection of this 

exception for arrangements in which the 

donor provides electronic health records 

technology to potential referral sources, 

we are requiring that the donated 

electronic health records system include 

electronic prescribing capacity, either in 

an electronic prescribing component or 

the ability to interface with the 

physician’s existing electronic 

prescribing system that meets the 


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applicable standards under Medicare 

Part D at the time the items and services 

are donated. We are including this 

requirement, in part, because of the 

critical importance of electronic 

prescribing in producing the overall 

benefits of health information 

technology, as evidenced by section 101 

of the MMA. It is our understanding that 

most electronic health records systems 

routinely include an electronic 

prescribing component. 

Comment: One commenter urged that 

the availability of public software, such 

as VISTA, is not relevant to the 

requirements of an exception. The 

commenter explained that hospitals and 

physicians must be allowed flexibility 

to determine which software best meets 

their needs, as long as it also meets the 

final interoperability standards. 

Response: We agree that hospitals and 

physicians should have flexibility to 

determine which software best meets 

their needs. We are not adopting any 

express requirements related to public 

software. Nothing in this final rule 

limits physician choice with respect to 

health information technology. 

Protection is only available under this 

exception for technology that meets the 

conditions of the exception, including 

interoperability. We expect that 

physicians would appropriately 

evaluate any offer of health information 

technology to ensure that it best meets 

their needs before accepting the 

donation. 

b. Definition of Electronic Health 

Records 

Comment: We requested comments on 

how to define ‘‘electronic health 

record.’’ One commenter suggested that 

we should define electronic health 

record as electronically originated and/ 

or maintained clinical health 

information, that may incorporate data 

derived from multiple sources and that 

replaces the paper record as the primary 

source of patient information. Another 

commenter suggested that we protect 

any interoperable component or module 

of an electronic health record. Another 

commenter suggested that ‘‘electronic 

health record’’ be defined for purposes 

of this exception to accomplish two 

objectives: (1) To promote a connected 

system of electronic health care 

information available to all doctors and 

patients whenever and wherever 

possible; and (2) to promote the 

collection of quality and outcome 

measures to facilitate pay-forperformance payment methodologies. 

This commenter referred to the 

Medicare Payment Advisory 

Commission (‘‘MedPAC’’) description of 

electronic health record clinical 

information technology and suggested 

that we define ‘‘electronic health 

record’’ to include applications that 

permit the following functions: 

• Tracking patients’ care over time; 

• Allowing physicians to order 

medications, laboratory work, and other 

tests electronically and access test 

results; 

• Providing alerts and reminders for 

physicians; and 

• Producing and transmitting 

prescriptions electronically. 

(See MedPAC ‘‘Report to the Congress: 

Medicare Payment Policy’’ at 206 (2005) 

(available at http://www.medpac.gov/ 

publications/congressional_reports/ 

Mar05_EntireReport.pdf.) A commenter 

requested that we define ‘‘electronic 

health record’’ broadly enough to 

include applications that capture 

clinical trial data. Another commenter 

did not think it was in the best interest 

of the industry for us to propose such 

a definition at this time. 

Response: For the purpose of this 

regulation, we are adopting a broad 

definition of ‘‘electronic health record’’

to read as follows: ‘‘A repository of 

consumer health status information in 

computer processable form used for 

clinical diagnosis and treatment for a 

broad array of clinical conditions.’’ We 

are adopting a broad definition 

consistent with our goal of encouraging 

widespread adoption of electronic 

health records technology. 

Comment: A commenter stated that 

the term ‘‘electronic health record,’’ as 

used in the proposed rule, is 

inconsistent with the same terminology 

when used within the information 

technology industry, and is therefore 

confusing. The commenter suggested 

that we may have meant to use the term 

‘‘electronic medical record.’’ According 

to the commenter, an ‘‘electronic health 

record’’ is commonly used to describe 

the broad concept of the total health 

care data that exists regarding an 

individual within an electronic universe 

(including, for example, the patient’s 

personal health record, medication 

history stored by an insurance plan, 

electronic imaging results stored at a 

hospital, etc.). An ‘‘electronic medical 

record’’ typically refers to patientcentric, electronically maintained 

information about an individual’s health 

status and care that focuses on tasks and 

events related to patient care, is 

optimized for use by a physician, and 

relates to care within a single clinical 

delivery system. 

Response: We recognize that there are 

several ways in which information 

technology terms are used, including 

the terminology ‘‘electronic health 

record’’ and ‘‘electronic medical 

record.’’ For purposes of this exception, 

we have opted to use the term 

‘‘electronic health record,’’ and we have 

included a definition of ‘‘electronic 

health record’’ in this final rule. 

Comment: We solicited comments on 

whether we should require that, in order 

to qualify for protection under this 

exception, electronic health records 

software include a computerized 

physician order entry (‘‘CPOE’’) 

component. Many commenters stated 

that, without either agreed upon 

standards or product criteria, a CPOE 

component should not be required. 

These commenters noted that CPOE and 

electronic prescribing functionalities 

can be quite similar and may be 

redundant. These commenters were 

concerned that mandating 

implementation of CPOE technology 

along with electronic health records 

software could deter development of 

either system. Another commenter 

noted that most of the off-the-shelf 

generic CPOE programs have proven 

ineffective to date. Some commenters 

supported permitting CPOE as part of 

the electronic health records software, 

as long as it is not a particular type of 

CPOE. 

Response: We are not persuaded to 

require that electronic health records 

technology include a CPOE component 

in order to qualify for protection under 

this exception. We note that nothing in 

this exception mandates the 

implementation of any particular 

technology or functions. 

Comment: Most commenters opposed 

our proposal to require that electronic 

health records software be compatible 

with Public Health Information Network 

(‘‘PHIN’’) preparedness standards or 

BioSense standards in order to qualify 

for the protection of this exception. 

These commenters pointed out that 

there is currently no industry consensus 

on preparedness standards, nor are there 

product certification criteria established 

for these programs. These commenters 

were concerned that clinicians and 

patients may be alarmed by the idea of 

clinician systems being linked to 

government systems for biosurveillance 

purposes. 

Response: We are not including this 

requirement in the final exception. 

c. ‘‘Necessary and Used Solely’’ and 

Technical and Functional Equivalence 

1. Interpretation of ‘‘Necessary’’

We proposed interpreting ‘‘necessary’’

in the electronic health records 

exception consistent with our 

interpretation of the term in section 


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II.A.1 of the proposed rule in the 

exception for electronic prescribing. 

Comment: Some commenters asked 

whether our proposal to protect certain 

technology necessary and used to 

‘‘receive, transmit, and maintain’’

electronic health records would include 

technology used to develop, implement, 

operate, facilitate, produce, and 

supplement electronic health records. 

Response: We intend that the final 

rule will encompass the types of uses 

described by the commenters. To make 

this intent clear, we have clarified the 

final rule to provide that the protected 

technology must be necessary and used 

predominantly to ‘‘create, maintain, 

transmit, or receive’’ electronic health 

records. 

Comment: One commenter requested 

that we clarify that the term ‘‘necessary’’

would not preclude the provision of 

outpatient-focused (also referred to as 

‘‘ambulatory-focused’’) electronic health 

records software to physicians who may 

already have access through the internet 

or otherwise to an inpatient-focused 

electronic health records systems. 

Response: The final rule does not 

preclude the provision of outpatient or 

ambulatory electronic health records 

software to physicians who already have 

access to inpatient-focused systems. 

2. Technical and Functional 

Equivalence 

We proposed requiring the physician 

recipient of donated electronic health 

records technology to certify that the 

items and services to be provided are 

not technically or functionally 

equivalent to items or services the 

physician already possesses or has 

obtained. The proposed exception 

would have required that the 

certification be updated before the 

provision of any necessary upgrades or 

items and services not reflected in the 

original certification. We expressed our 

concern that the certification process 

would be ineffective as a safeguard 

against program or patient abuse if it 

were a mere formality or if physicians 

simply executed a form certification 

provided by a donor. Therefore, we 

proposed that the donor must not have 

actual knowledge of, and not act in 

reckless disregard or deliberate 

ignorance of, the fact that the physician 

possessed or had obtained items and 

services that were technically or 

functionally equivalent to those donated 

by the donor and that the exception 

would protect the physician only if the 

certification were truthful. 

Comment: Several commenters 

requested further clarification regarding 

the meaning of ‘‘technically or 

functionally equivalent’’ and the 

meaning of ‘‘significantly enhance the 

functionality’’ as we used those terms in 

the proposed rule. Other commenters 

expressed concerns about the 

requirement, asserting that it would 

deter physicians who are not technology 

experts from adopting health 

information technology, and might 

result in physicians hiring costly 

technology consultants to evaluate their 

existing systems. A commenter 

expressed concern that the exception 

not hinder the goals of widespread 

adoption of electronic health records by, 

for example, excluding from protection 

technology that would standardize the 

technology used by all physician 

recipients or updated, user-friendly 

technology that would replace outdated, 

outmoded, or unusable technology. For 

these reasons, several commenters 

stated that technical and functional 

equivalence was not an appropriate or 

workable standard for assessing whether 

donated items and services are 

necessary and that, accordingly, the 

requirement should not be adopted. 

Other commenters suggested 

modifications to the proposed rule. One 

commenter suggested that hospitals 

should incorporate inquiries regarding 

the technological items and services 

physicians possess into the surveys 

physicians must complete to acquire 

and maintain physician privileges. 

Another suggested that any costs 

associated with the certification process 

should be included as part of the 

services offered by the donor. A few 

commenters suggested that we should 

provide financial assistance in 

evaluating the existing technology, 

while another commenter proposed that 

we publish guidelines for technological 

equivalence upon which all donors and 

physicians could rely. Some 

commenters urged that the certification 

requirement incorporate a ‘‘good faith’’

standard for compliance, while other 

commenters expressed concern that 

donors would not be in a position to 

evaluate the technology already 

possessed by potential physician 

recipients and, therefore, that protection 

under this exception for donors should 

not hinge on the physician’s 

certification. Another commenter 

requested that we provide ‘‘templates’’

for the written certification to ensure a 

simple and transparent certification 

process. One commenter expressed 

concern that a requirement for ongoing 

certification to account for upgrades or 

new software, hardware, or services 

would create an unnecessary burden. 

Another commenter proposed that there 

should be one certification required 

once interoperability standards for all 

health information technology 

components are finalized. 

Response: Having considered the 

public comments, we have concluded 

that our proposal to require physicians 

to certify in writing that they do not 

possess equivalent technology might 

become unnecessarily burdensome. We 

are not requiring a written certification. 

The final exception requires that 

protected donations be limited to 

electronic health records software or 

information technology and training 

services that are necessary and used 

predominantly to create, maintain, 

transmit, or receive electronic health 

records. We do not believe software and 

services are ‘‘necessary’’ if the physician 

recipient already possesses the 

equivalent software or services. The 

provision of equivalent items and 

services poses a risk of abuse, since 

such arrangements potentially confer 

independent value on the recipient (that 

is, the value of the existing items and 

services that might be put to other uses) 

unrelated to the need for electronic 

health records technology. Thus, if a 

donor knows that the physician already 

possesses the equivalent items or 

services, or acts in deliberate ignorance 

or reckless disregard of that fact, the 

donor will not be protected by the 

exception. Thus, prudent donors may 

want to make reasonable inquiries to 

potential physician recipients and 

document the communications. We do 

not believe this requirement necessitates 

the hiring of technical experts by either 

the donor or physician recipient. 

The final exception would not 

preclude upgrades of items or services 

that enhance the functionality of the 

physician’s existing technology, 

including upgrades that make software 

more user-friendly or current, nor 

would it preclude items and services 

that result in standardization of systems 

among donors and physicians, provided 

that the standardization enhances the 

functionality of the electronic health 

records system (and any donated 

software is interoperable). 

Comment: Many commenters 

requested further clarification of our 

concern about the risk of physicians 

intentionally divesting themselves of 

technically or functionally equivalent 

technology that they already possess or 

have obtained in order to shift costs to 

the donor. (See October 11, 2005 

proposed rule, (70 FR 59188).) These 

commenters expressed the opinion that 

physicians would not intentionally 

divest themselves of health information 

technology given the low adoption rate 

of health information technology and 

the time and resource commitment 


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necessary to implement and maintain a 

health information technology system. 

Response: Although we believe that 

there is a real potential for a physician 

to divest intentionally himself or herself 

of health information technology to shift 

the costs to a donor, we are not 

including any specific conditions to 

address such divestiture. Rather, we 

believe that the totality of the conditions 

in the final exception, including, for 

example, the cost sharing requirement 

and the sunset provision, should 

adequately address our concerns. We 

believe that physicians, acting as 

prudent buyers, are less likely to divest 

themselves of technology for which they 

would have to contribute to the 

replacement cost. 

d. Interoperability/Standards 

The implementation of electronic 

health information technology is a 

national priority that has the potential 

to improve our health care system. 

Interoperable electronic health 

information technology would allow 

patient information to be portable and to 

move with consumers from one point of 

care to another. This would require an 

infrastructure that can help clinicians 

gain access to critical health information 

when treatment decisions are being 

made, while keeping that information 

confidential and secure. We believe that 

the promise of a secure and seamless 

information exchange that reduces 

medical errors, improves the quality of 

patient care, and improves efficiency 

will be realized only when we have a 

standardized system that is open, 

adaptable, interoperable, and 

predictable. 

As discussed in the proposed rule, we 

believe that interoperable electronic 

health records technology, once 

implemented, has the potential to 

increase health care quality and 

improve efficiency, which are outcomes 

consistent with our goals in exploring 

Pay-for-Performance options. We also 

believe it is important to promote these 

open, interconnected, interoperable 

electronic health records systems that 

help improve the quality of patient care 

and efficiency in the delivery of health 

care to patients, without protecting 

arrangements that hinder marketplace 

competition, serve as marketing 

platforms, or are mechanisms to 

influence clinical decision-making 

inappropriately. We proposed two types 

of conditions that would make 

compatibility and interoperability of 

donated technology key features of 

protected arrangements. These features 

would encourage the adoption of open, 

interconnected, interoperable systems, 

and thereby reduce the risk of fraud and 

abuse. First, we proposed that once 

interoperability and other product 

criteria have been recognized, electronic 

health records technology should be 

certified in accordance with standards 

adopted by the Secretary. Second, we 

proposed that a donor (or entity acting 

on behalf of the donor) not limit or 

restrict the use of the technology with 

other electronic prescription or health 

records systems, or otherwise impose 

barriers to compatibility. 

Comment: Many commenters 

advocated a requirement that all 

donations meet the Certification 

Commission for Healthcare Information 

Technology (CCHIT) approved 

certification levels of functionality, 

interoperability, and security. One 

commenter suggested that we measure 

interoperability based on accepted, 

consensus-driven standards that are 

already in place, such as the Electronic 

Health Record-Lab Interoperability and 

Connectivity Standards or other 

interoperability standards adopted by 

the Federal government as part of the 

Consolidated Health Informatics 

initiative (see http://www.hhs.gov/ 

healthit/chi.html). Some commenters 

expressed concern that clinicians who 

adopt health information technology 

before the existence of final certification 

standards would be unfairly penalized. 

These commenters were also concerned 

about the chilling effect on some early 

adoption arrangements where 

certification standards are not yet 

available. These commenters requested 

that we consider ‘‘grandfathering’’

clinicians whose existing health 

information technology systems are not 

compliant with the certification 

standards by permitting them a one-time 

opportunity to upgrade their systems to 

be compliant with CCHIT certification 

criteria. As an alternative to requiring 

CCHIT certification, a few commenters 

recommended that we condition the 

ongoing use of the exception on the 

donated software being capable of 

exchanging health care information in 

compliance with applicable standards 

once adopted by the Secretary and on 

no action being taken that would pose 

a barrier to the information exchange. 

Response: Having considered the 

options, and consistent with 

Department policy, we have concluded 

that software will qualify for the 

protection of the exception if it is 

interoperable as defined in this final 

rule. Software will be deemed to be 

interoperable if it is certified by a 

certifying body recognized by the 

Secretary. Nothing in the final rule 

precludes donors from providing 

physicians with upgrades to software 

that meet the definition of 

‘‘interoperable’’ or would make the 

software comply with then-existing 

certification standards. 

Comment: We indicated in the 

October 11, 2005 proposed rule (70 FR 

59186) that we were considering 

defining the term ‘‘interoperable’’ for 

purposes of the exception to mean ‘‘the 

ability of different operating and 

software systems, applications, and 

networks to communicate and exchange 

data in an accurate, secure, effective, 

useful, and consistent manner.’’ One 

commenter agreed with this proposed 

definition. Another commenter 

suggested that we adopt the definition 

developed by the National Alliance for 

Health Information Technology 

(NAHIT): ‘‘the ability of different 

information technology systems and 

software applications to communicate, 

to exchange data accurately, effectively, 

and consistently, and to use the 

information that has been exchanged.’’

One commenter suggested that the 

definition of interoperability be flexible 

enough to adapt to evolving industry 

standards. A few commenters suggested 

defining interoperability as ‘‘the 

uniform and efficient movement of 

electronic healthcare data from one 

system to another, such that clinical or 

operational purpose and meaning of the 

data is preserved and unaltered.’’ One 

commenter opposed any definition of 

interoperability that would require a 

donor to support electronic 

transmissions from technology supplied 

by other vendors or to host applications 

accessible by software supplied by other 

vendors. 

Response: Having reviewed the public 

comments and upon further 

consideration, we are defining 

‘‘interoperable’’ to mean that, at the time 

of the donation, the software is ‘‘able to 

(1) communicate and exchange data 

accurately, effectively, securely, and 

consistently with different information 

technology systems, software 

applications, and networks, in various 

settings, and (2) exchange data such that 

the clinical or operational purpose and 

meaning of the data are preserved and 

unaltered.’’

Interoperability must apply in various 

settings, meaning that the software must 

be interoperable with respect to 

systems, applications, and networks that 

are both internal and external to the 

donor’s or physician recipient’s 

systems, applications, and networks. In 

other words, software will not be 

considered interoperable if it is capable 

of communicating or exchanging data 

only within a limited health care system 

or community. 

We believe this definition reflects our 

intent to protect only those 


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arrangements that will foster open, 

interconnected, interoperable electronic 

health records systems that help 

improve the quality of patient care and 

efficiency in the delivery of health care 

to patients, without undue risk that 

donors might use arrangements to lock 

in referrals from physician recipients. 

We are mindful that the ability of 

software to be interoperable is evolving 

as technology develops. In assessing 

whether software is interoperable, we 

believe the appropriate inquiry is 

whether the software is as interoperable 

as feasible given the prevailing state of 

technology at the time the items or 

services are provided to the physician 

recipient. Parties should have a 

reasonable basis for determining that 

software is interoperable. We believe it 

would be appropriate—and, indeed, 

advisable—for parties to consult any 

standards and criteria related to 

interoperability recognized by the 

Department. Compliance with these 

standards and criteria will provide 

greater certainty to donors and 

recipients that products meet the 

interoperability requirement, and may 

be relevant in an enforcement action. 

We note further that parties wishing to 

avoid any uncertainty can avail 

themselves of the ‘‘deeming’’ provision, 

which provides that software that is 

certified by a body recognized by the 

Secretary will be deemed to be 

interoperable for purposes of the 

exception. In order to ensure 

interoperability, products must have an 

up-to-date certification at the time of 

donation, and we are requiring that, to 

meet the deeming provision, the 

software must have been certified 

within 12 months prior to the date of 

the donation. 

We are including the condition that 

the donor (or any person on the donor’s 

behalf) must not take any actions to 

limit or restrict the ability of the items 

or services to be interoperable with 

other electronic prescription 

information items or services or 

electronic health information systems. 

We believe this condition clearly 

reflects our intent that donors should 

not limit or restrict the use, 

compatibility, or interoperability of 

donated technology. We note that 

compliance with the condition in 

§ 411.357(w)(3) is a separate 

requirement from compliance with 

§ 411.357(w)(2), which requires that 

products must be interoperable and will 

be deemed interoperable if a certifying 

body recognized by the Secretary has 

certified the software within no more 

than 12 months prior to the date it is 

provided to the physician. For example, 

if a donor takes actions that would 

cause a certified product to fall out of 

compliance with the interoperability 

standards that apply to the certified 

product, we would consider that to be 

an action to limit or restrict the use or 

compatibility of the items or services for 

purposes of § 411.357(w)(3). We are not 

persuaded to protect arrangements 

where use, compatibility, or 

interoperability is limited to the 

products of specific vendors. To the 

contrary, we believe that inherent in the 

concept of interoperability is the ability 

of technology to communicate with 

products of other vendors. 

Comment: Many commenters 

supported the proposed prohibition 

against donors or their agents taking any 

actions to disable or limit 

interoperability or otherwise impose 

barriers to compatibility of the donated 

technology with other technology, 

including technology owned or operated 

by competing providers and suppliers. 

Response: We have revised 

§ 411.357(w)(3) to clarify this 

requirement in the final exception. We 

believe this condition will help ensure 

that donations of health information 

technology will further the policy goal 

of fully interoperable health information 

systems and will not be misused to steer 

business to the donor. 

2. Permissible Donors and Physician 

Recipients 

a. Donors 

We proposed to limit the scope of 

protected donors under the electronic 

health records exception to hospitals, 

group practices, PDP sponsors, and MA 

organizations, consistent with the 

MMA-mandated donors for the 

electronic prescribing exception. We 

indicated that we selected these donors 

because they have a direct and primary 

patient care relationship and a central 

role in the health care delivery 

infrastructure that would justify 

protection under the exception for the 

provision of electronic health records 

technology that would not be 

appropriate for other types of providers 

and suppliers, including providers and 

suppliers of ancillary services. 

Comment: Most commenters stated 

that the proposed scope of potential 

donors was too limited. Commenters 

variously suggested that the protected 

donors include some or all of the 

following categories: 

• Nursing facilities; 

• Assisted living and residential care 

facilities; 

• Intermediate care facilities for 

persons with mental retardation; 

• Mental health facilities; 

• Organizations providing population 

health management services (such as 

disease and care management programs 

and services); 

• All components of an integrated 

delivery system (‘‘IDS’’) (including 

network providers or other entities that 

operate, support, or manage network 

providers); 

• Clinical laboratories; 

• Pharmaceutical manufacturers; 

• Durable medical equipment 

suppliers; 

• Radiation oncology centers; 

• Community health centers; 

• Physician-hospital organizations; 

• Health plans; 

• Regional Health Information 

Organizations (‘‘RHIOs’’); 

• Dialysis facilities; and 

• Other entities that, in the 

commenters’ views, enhance the overall 

health of a community. 

One commenter representing dialysis 

facilities suggested that the exception 

should protect donations of 

nonmonetary remuneration by all 

providers that maintain medical staffs 

pursuant to medical staff bylaws when 

the donations are made to members of 

the medical staff. Another commenter 

suggested that a clinical data exchange 

(or community-wide health information 

system) should be included as a 

protected donor, because individual 

stakeholders in health information 

technology projects are unlikely to 

develop, purchase, or donate items 

necessary to implement and maintain a 

true community-wide clinical data 

exchange. A few commenters stated that 

health plans and pharmacy benefits 

managers (PBMs) should be protected 

donors because, according to the 

commenters, these entities develop 

health information technology and are 

engaged with physicians on a direct 

level to increase the utilization of 

electronic prescribing and electronic 

health records technology. These 

commenters urged that the risk to the 

Medicare program and its beneficiaries 

is reduced because health plans and 

PBMs have business incentives to limit 

utilization of prescriptions. A few 

commenters suggested that we should 

permit any entity that has an interest in 

donating health information technology 

to do so. 

Response: Recognizing that extending 

the protection of the exception to a 

wider group of donors may further 

facilitate the dissemination of the 

technology and after carefully 

considering the recommendations of the 

commenters, we have expanded the list 

of protected donors. In an effort to 

create a bright line rule, protected 

donors include all entities (as that term 

is defined at § 411.351) that furnish 

DHS. DHS entities may donate covered 


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technology to any physician. To the 

extent that a PDP sponsor or MA 

organization is an entity that furnishes 

DHS, donations of electronic health 

records software or information 

technology and services by the PDP 

sponsor or MA organization would be 

permissible, provided that all 

conditions of the exception are met. 

(When PDP sponsors and MA 

organizations do not satisfy that 

definition, the physician self-referral 

prohibition may not be implicated.) 

Moreover, PDP sponsors and MA 

organizations potentially may avail 

themselves of other existing exceptions. 

In identifying the final list of 

protected donors, we considered the 

important goal of encouraging the rapid 

adoption of interoperable electronic 

health records by physicians and other 

providers. We believe that, although 

some types of DHS entities may have a 

more direct and central role in the 

provision of care to patients than other 

DHS entities, the goal of widespread 

adoption of interoperable electronic 

health records is sufficiently important 

to permit all types of DHS entities to 

donate covered technology. Expanding 

the list of permissible donors beyond 

those identified in the proposed rule 

will expedite adoption of electronic 

health records. We also believe that our 

concerns about the potential for 

increased utilization or anticompetitive 

behavior that could arise from 

permitting an expanded list of donors to 

donate electronic health records 

technology are addressed through the 

additional conditions and limitations 

included in the final rule. Specifically, 

we believe that the requirements that 

donated software be interoperable and 

that physicians contribute 15 percent to 

the cost of the donated technology, and 

the limited duration of the exception (it 

sunsets on December 31, 2013), if met, 

provide adequate protection against 

program and patient abuse. We caution 

that compliance with each condition of 

the exception is mandatory in order for 

an arrangement to enjoy the protection 

of the exception. We are not expanding 

the list of protected donors to include 

every type of health care entity 

requested by the commenters as the 

physician self-referral law does not 

apply to many of the suggested entities 

(for example, pharmaceutical 

manufacturers and RHIOs). In addition, 

as discussed in this preamble, 

protection under this exception may not 

be needed for all arrangements 

involving the provision of electronic 

health records items and services. 

Comment: A commenter requested 

that Federally qualified health clinics 

(FQHCs), as defined in the Medicaid 

statute and Medicare regulations, 

should be included as permissible 

donors. 

Response: As entities furnishing DHS, 

FQHCs are protected donors under the 

final rule. 

Comment: A commenter requested 

that we expand the list of permissible 

donors to include research and 

manufacturing entities and suggested 

that blind trusts could be established 

utilizing funds from several 

pharmaceutical companies to reduce the 

risk of program or patient abuse. 

Another commenter requested that we 

include entities in the research-based 

biopharmaceutical industry as 

permissible donors, noting that the 

widespread adoption of health 

information technology could reduce 

the need for proprietary systems used 

solely for purposes of clinical trial 

programs. One commenter requested 

that health information technology 

vendors be included as protected 

donors. 

Response: We are not including 

research and manufacturing entities, 

entities in the research-based 

biopharmaceutical industry, or health 

information technology vendors as 

protected donors for purposes of this 

final exception because they are not 

subject to the prohibitions of the 

physician self-referral law as they are 

not entities furnishing DHS. With 

respect to the establishment of blind 

trusts, such arrangements would be 

outside the scope of this rulemaking. 

Comment: One commenter strongly 

urged us to expand the list of protected 

donors to give physicians the 

opportunity to choose between different 

software offerings. Other commenters 

suggested that the exception should 

require an open, transparent Request for 

Proposal (‘‘RFP’’) process whereby the 

donating entity would be required to 

offer technology from a minimum of 

three vendors for the physician to select. 

These commenters expressed the view 

that a multivendor, open RFP process 

would ensure competitive market 

pricing and would allow physicians to 

participate in the selection process to 

ensure that services meet the needs of 

their clinical practices, while also 

protecting against the physician being 

locked in by the donating entity. 

Another commenter requested that the 

final rule clearly state that physicians 

should be free to choose their own 

electronic health records systems or 

should be offered a choice by entities 

providing subsidies or assistance for 

purchasing these systems. 

Response: Physicians remain free to 

choose any electronic health 

information technology that suits their 

needs. However, we are not requiring 

donors to facilitate that choice for 

purposes of the exception, although 

donors must offer interoperable 

products and must not impede the 

interoperability of any technology they 

decide to offer. We decline to require 

the type of RFP process requested by the 

commenter, as it would be 

unnecessarily complex, burdensome 

and impractical, and would increase 

significantly the transaction costs for 

donating electronic health records 

technology. In addition, nothing in this 

exception requires donors to donate any 

particular level, scope, or combination 

of items and services. 

Comment: Commenters from the 

laboratory industry strongly urged us to 

include laboratories as protected 

donors. They argued that reducing 

duplicative laboratory testing is a 

potential benefit to the implementation 

of interoperable electronic health 

records. These commenters stated that 

clinical laboratories should be included 

in the exception to achieve a level 

playing field and the goal of widespread 

adoption of technology. 

Response: Because clinical 

laboratories are entities furnishing DHS, 

we are including them as permissible 

donors under the final exception. 

Comment: A commenter suggested 

that the exception should protect 

nonmonetary remuneration offered by 

partnerships or consortia of otherwise 

permissible donors, so that parties could 

work together and share the cost of 

expanding needed health information 

technology in the community. 

Response: We discern nothing in the 

final exception that necessarily would 

preclude a partnership or consortium of 

otherwise permissible donors from 

entering into a protected arrangement, 

provided the conditions of the 

exception are satisfied. 

b. Physician Recipients 

Comment: Most commenters 

expressed the view that the categories of 

protected physician recipients were too 

limited and urged us to be more 

expansive. Commenters suggested that 

some or all of the following should be 

included as permissible recipients: 

• Nonmedical staff physicians; 

• Physicians who are network 

providers; 

• Physicians who have contracted 

with an IDS; 

• Physicians and other licensed 

health care professionals whose patients 

regularly receive inpatient and/or 

outpatient care at the donor hospital or 

health system; 

• Hospitalists; 

• Intensivists; 


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• Physician assistants; 

• Nurse practitioners; 

• Audiologists; and 

• Independent contractors of group 

practices. 

Commenters noted that many 

nonphysician providers would benefit 

greatly from protection under this 

exception, given the fact that 

nonphysician providers generally have 

limited resources available to fund 

office technology. 

Response: We agree with the 

commenters who suggested expanding 

the list of protected physician recipients 

of donated technology to further the 

goal of, and achieve the benefits of, 

widespread adoption of electronic 

health information technology. The final 

rule permits donation of protected 

remuneration by an entity that furnishes 

DHS to any physician. Because the 

physician self-referral law only applies 

to donations to physicians, it is 

unnecessary for us to expand the 

exception to protect donations to 

nonphysicians. 

Comment: Many commenters 

suggested that the categories of 

permissible recipients be expanded to 

include the following providers and 

suppliers and their staffs: 

• Nursing facilities; 

• Assisted living and residential care 

facilities; 

• Intermediate care facilities for 

persons with mental retardation; 

• Mental health facilities; 

• Clinical laboratories; 

• Durable medical equipment 

providers; 

• Pharmacies, including long term 

care pharmacies; 

• Community health centers; 

• Network providers or other entities 

that operate, support or manage network 

providers; 

• Physician-hospital organizations; 

• Health plans; 

• RHIOs; and 

• Other entities designed to enhance 

the overall health of the community. 

Commenters also requested that 

FQHCs, as defined in the Medicaid 

statute and Medicare regulations, 

should be included as permissible 

recipients. 

Response: We decline to adopt the 

commenters’ suggestion for permitting 

donations to these types of entities and 

their staffs. We note that the physician 

self-referral law applies only when a 

physician is a party to the financial 

(either compensation or ownership) 

arrangement. Donations to the types of 

entities suggested by the commenters for 

inclusion as permissible recipients 

under the final exception would not 

implicate the physician self-referral law 

if made by other nonphysician entities. 

Comment: Many commenters 

requested that we permit donors to 

donate technology to all members of a 

group practice, or to the group practice 

as a whole, even if all members do not 

routinely provide services to the donor. 

Some commenters suggested that we 

should permit group practices to donate 

to other group practices. One 

commenter asked for clarification as to 

whether the proposed exception would 

apply only to the specific physician 

recipient of the donated technology or 

whether, for example, all members of a 

group practice could use the technology 

that was donated to the physician. 

Response: The final rule contains no 

limitation on the physician’s 

membership on a donor hospital’s 

medical staff. The final exception does 

not protect donations from one group 

practice to another group practice; 

however, group practices, because they 

are entities that furnish DHS, may 

donate covered technology to any 

physician. 

Comment: Some commenters stated 

that a hospital donor may not want to 

donate the full value of an electronic 

health records system to physicians 

outside of its medical staff. These 

commenters suggest permitting outside 

physicians to have access to the 

information in the hospital’s electronic 

health records system by allowing the 

outside physicians to use or sublicense 

the hospital’s electronic health records 

system at the cost to the hospital. These 

commenters also suggested allowing 

outside physicians to take advantage of 

the pricing obtained by the hospitals for 

electronic health records technology 

and related services. 

Response: We have expanded the 

final exception to include all physicians 

as recipients when the donor is an 

entity that furnishes DHS. Nothing in 

the exception requires hospitals or other 

donors to offer physicians a full 

electronic health records system. We 

interpret the commenters’ suggestion 

that community physicians be permitted 

to access electronic data at the hospital’s 

cost to be a comment seeking 

clarification that any aggregate dollar 

limit on donated technology be 

calculated based on the donor’s costs 

rather than retail value to the recipient. 

In this regard, the final exception 

incorporates a cost sharing requirement 

based on the donor’s costs. It does not 

incorporate an aggregate dollar limit. 

3. Selection of Physician Recipients 

In light of the enhanced protection 

against program or patient abuse offered 

by interoperable electronic health 

records systems, this final rule permits 

donors to use selective criteria for 

choosing physician recipients, provided 

that neither the eligibility of a 

physician, nor the amount or nature of 

the items or services donated, is 

determined in a manner that directly 

takes into account the volume or value 

of referrals or other business generated 

between the parties. We have 

enumerated several selection criteria 

which, if met, are deemed not to be 

directly related to the volume or value 

of referrals or other business generated 

between the parties (for example, a 

determination based on the total 

number of hours that the physician 

practices medicine or a determination 

based on the size of the physician’s 

medical practice). Selection criteria that 

are based on the total number of 

prescriptions written by a physician are 

not prohibited. However, the final rule 

prohibits criteria based upon the 

number or value of prescriptions written 

by the physician that are dispensed or 

paid by the donor, as well as any criteria 

directly based on any other business 

generated between the parties. The final 

exception does not protect arrangements 

for which selection criteria are designed 

to induce a physician to change 

loyalties from other providers or plans 

to the donor. 

We expect that this approach will 

ensure that donated technology can be 

targeted at physicians who use it the 

most in order to promote a public policy 

favoring adoption of electronic health 

records, while discouraging especially 

problematic direct correlations with 

Medicare referrals. This approach is a 

deliberate departure from other 

exceptions under the physician selfreferral law based on the unique public 

policy considerations surrounding 

electronic health records and the 

Department’s goal of encouraging 

widespread adoption of interoperable 

electronic health records. We caution, 

however, that outside of the context of 

electronic health records as specifically 

addressed in this final rule, and except 

as permitted in § 411.352(i) (special 

rules for productivity bonuses and profit 

shares distributed to group practice 

physicians), both direct and indirect 

correlations between the provision of 

free or deeply discounted goods or 

services and the volume or value of 

referrals or other business generated 

between the parties are prohibited. 

Comment: Several commenters 

commended us for our efforts to prevent 

program or patient abuse by prohibiting 

efforts to increase referrals or other 

changes in practice patterns. Some 

commenters noted that we should not 

allow donors to choose physicians 

selectively based upon the volume of 

their prescribing, size of practice, or 


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whether they would be likely to adopt 

the technology, and stated that donors 

should give technology to all 

physicians. 

One commenter suggested eliminating 

the criteria permitting donors to select 

physicians based on any reasonable and 

verifiable manner that is not directly 

related to the volume or value of 

referrals or other business generated 

between the parties. The commenter 

stated that this criteria is too openended and subjective and could become 

a major loophole. Other commenters 

supported the use of such criteria and 

expressed the view that the use of 

selection criteria to select physician 

recipients will improve quality of care 

and ensure successful adoption of 

health information technology by 

physicians. These commenters offered 

suggestions on the standards for 

selection criteria. Some commenters 

suggested that we consider broad 

criteria for the selection of physicians, 

and that donors should be permitted to 

make this decision based upon their 

own financial model. 

A commenter recommended that 

selection criteria related to the volume 

or value of referrals should be 

permitted, as long as the criteria are 

linked to achieving greater improvement 

in quality of patient care or greater 

success in adoption of health 

information technology. The commenter 

provided the following examples: 

• Participation in hospital quality 

improvement activities; 

• Participation in medical staff 

meetings and activities; 

• Specialty; 

• Department (if health information 

technology is rolled out by department); 

• Readiness to use health information 

technology; 

• Consistent use of hospital-based 

information technology systems; 

• Acting as a ‘‘physician champion’’

of hospital-based information 

technology systems; 

• Willingness to serve as a trainer for 

other physicians; 

• Size of medical practice; or 

• Willingness to contribute some 

resources to the health information 

technology project. 

Another commenter requested that 

any list of criteria included in the rule 

be inclusive, rather than exclusive, and 

that we provide further guidance on 

how to interpret the criteria. 

Response: Some of the commenters’

suggestions are too subjective, 

impractical, or not sufficiently brightline to be ‘‘deeming’’ provisions for 

purposes of this rulemaking. 

Accordingly, those suggestions are not 

appropriate here. Although we believe it 

is important to provide some guidance 

with respect to selection criteria, we do 

not believe it is possible to enumerate 

a comprehensive list. Therefore, we are 

providing several bright-line criteria in 

the final rule, along with a general 

provision that permits other reasonable 

and verifiable selection criteria that do 

not relate directly to the volume or 

value of referrals. We are finalizing the 

criteria enumerated in the proposed 

rule, in addition to a criterion related to 

the provision of uncompensated care, 

specifically—

• The determination is based on the 

total number of prescriptions written by 

the physician (but not the volume or 

value of prescriptions dispensed by the 

donor); 

• The determination is based on the 

size of the physician’s medical practice 

(for example, total patients, total patient 

encounters, or total relative value units); 

• The determination is based on the 

total number of hours that the physician 

practices medicine; 

• The determination is based on the 

physician’s overall use of automated 

technology in his or her medical 

practice (without specific reference to 

the use of technology in connection 

with referrals made to the donor); 

• The determination is based on 

whether the physician is a member of 

the donor’s medical staff, if the donor 

has a formal medical staff; 

• The determination is based on the 

level of uncompensated care provided 

by the physician; or 

• The determination is made in any 

reasonable and verifiable manner that 

does not directly take into account the 

volume or value of referrals or other 

business generated between the parties. 

Comment: Some commenters inquired 

whether the exception would permit a 

donor to offer a staggered rollout of 

electronic health records technology so 

that the technology could be provided 

on a selective basis, either by specialty, 

hospital department, or otherwise. 

These commenters suggested that the 

exception should not enumerate specific 

examples of instances when a staggered 

offering is deemed ‘‘not directly related 

to’’ referrals or other business, but rather 

should allow donors to offer health 

information technology as appropriate 

for each hospital’s individual financial 

situation. 

Response: The final rule prohibits the 

selection of recipients using any method 

that takes into account directly the 

volume or value of referrals from the 

recipient or other business generated 

between the parties. The final rule 

provides some examples of acceptable 

criteria and permits any other 

determination that is reasonable and 

verifiable. Given the potential variation 

in arrangements, it is not entirely clear 

to us how the commenters would 

implement their ‘‘staggered rollout.’’

Such arrangements should be evaluated 

for compliance with the exception on a 

case-by-case basis. We note that nothing 

in the exception requires that 

technology be provided to all potential 

recipients contemporaneously. 

Comment: One commenter 

recommended that we reaffirm that 

physicians who receive donated 

technology remain free to choose what 

health information may or may not be 

shared with the hospital or entity 

providing the technology, consistent 

with current law and the wishes of 

patients and physicians. 

Response: Nothing in this final rule 

regulates the sharing of health 

information. In addition, nothing in this 

final rule permits donors to influence 

the medical decision making of 

physicians or requires physicians to act 

in a manner that would violate any legal 

or ethical obligation to patients. 

Comment: A commenter requested 

that we prohibit donors from selecting 

physicians in a manner that punishes or 

rewards past prescribing practices or 

influences their future prescribing 

practices. Another commenter 

recommended that we expressly permit 

any incidental increase to the volume of 

referrals resulting from increased 

quality and patient care. 

Response: Any selection criteria 

directly related to past, present, or 

future volume of prescriptions 

dispensed or paid by the donor or billed 

to the Medicare program, or directly 

related to any other business generated 

between the parties, are strictly 

prohibited. Any selection criteria that 

punish or reward past prescribing 

practices or seeks to influence future 

prescribing practices would give rise to 

an inference that the selection criteria 

are tied directly to the volume or value 

of referrals. We are not adopting the 

commenter’s suggestion that we 

expressly permit increases in the 

volume of referrals attributable to 

increased quality in patient care. 

Whether an increase in the volume of 

referrals between a donor and physician 

recipient is attributable to increased 

quality in patient care, rather than an 

impermissible incentive, requires an 

evaluation of the particular facts and 

circumstances. 

Comment: A commenter requested 

that PDP sponsors and MA 

organizations be permitted to determine 

eligibility, or the amount or nature of 

the items and services, in a manner that 

takes into account the volume and value 

of prescriptions written by the 


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physician that are paid by the PDP 

sponsor or MA organization. This 

commenter believes that PDP sponsors 

and MA organizations have the financial 

incentive to control drug utilization 

costs to compete effectively in the 

Medicare Part D marketplace. 

Response: We are not persuaded by 

this commenter. Neither eligibility, nor 

the amount or nature of the items or 

services, may be determined by taking 

into account the volume or value of 

prescriptions written by the physician 

and paid by the PDP sponsor or MA 

organization. Nothing in the exception 

precludes PDP sponsors and MA 

organizations from offering protected 

items and services to physicians with 

whom they have network agreements. 

Comment: One commenter requested 

that we protect donations when 

provided to a physician who provides a 

certain level of uncompensated care or 

a combination of uncompensated care 

and services to a certain number of 

Medicaid patients. 

Response: The provision of 

uncompensated care would be an 

acceptable selection criterion and we 

have included it in the list of selection 

criteria deemed not to be directly 

related to the volume or value of 

referrals or other business generated 

between the donor and physician 

recipient. For example, a hospital can 

elect to provide technology only to rural 

and solo practitioners who provide high 

levels of uncompensated care when 

selecting among eligible physicians. The 

total number of Medicaid patients 

served by the practice could also be 

acceptable as long as there is no direct 

correlation with the number of 

Medicaid patients referred to the donor 

(or the value of the services provided). 

We do not believe it would be 

appropriate for us to establish a 

threshold level of uncompensated care 

necessary to qualify for protection under 

this exception. Donors should have 

flexibility to respond to the particular 

needs of their communities by selecting 

recipients based on levels of 

uncompensated care that reflect those 

needs. 

4. Value of Technology: Cap 

We proposed, as a further safeguard 

against program or patient abuse, to 

limit the aggregate value of the 

qualifying electronic prescribing 

technology that a donor could provide 

to a physician. We solicited public 

comment on the applicable amount and 

methodology for limiting the aggregate 

value of donated technology. 

We also indicated that we were 

considering setting an initial cap, for 

both the electronic prescribing and 

electronic health records exceptions, 

which could be lowered after a certain 

period of time sufficient to promote the 

initial adoption of the technology. This 

approach would have the effect of 

encouraging investments in the desired 

technology while also ensuring that (as 

often occurs with technology), as costs 

decrease and technology becomes more 

widely adopted, the exception cannot be 

abused to disguise payments for 

referrals. 

Comment: We solicited public 

comments that address the retail and 

nonretail costs (that is, the costs of 

purchasing from manufacturers, 

distributors, or other nonretail sources). 

Only a few commenters provided 

concrete information on the cost of 

health information technology, while 

most commenters simply noted that the 

cost was high, financial incentives were 

imperative, and adoption was not 

equally affordable by all sectors of the 

health care industry. 

Response: We appreciate commenters 

providing this information, and we have 

considered this information in finalizing 

the exception. Again, we note that the 

Administration supports the adoption of 

health information technology as a 

normal cost of doing business to ensure 

patients receive high quality care. 

Comment: Most commenters shared 

the opinion that there should not be a 

cap on the value of donated technology, 

stating that there is not a consistent or 

appropriate way to determine fair 

market value or establish a monetary 

cap that would accommodate all 

situations and account for the rapid 

advancement in technology. Some 

commenters believe that the attempt to 

ascertain the value of donations for the 

purpose of fraud protection could 

become a barrier to adoption of 

electronic health records, unnecessarily 

discourage potential donors from 

providing technology, or result in a 

reduction on the ‘‘return on investment’’

for electronic prescribing and electronic 

health records technology. Other 

commenters expressed concern that a 

low cap might discourage the 

implementation of electronic health 

records technology, while a high cap 

may serve to pressure hospitals to 

provide the maximum allowable 

amount. However, a few commenters 

shared our concern that allowing donors 

to provide items or services without 

limiting the value of such support could 

provide a potential for program or 

patient abuse. 

One commenter asserted that the 

value of donations will be self-limiting, 

because donors are unlikely to spend 

more than is necessary, thereby 

eliminating the need for a cap. Another 

commenter argued that a cap is not 

necessary as long as the donation is 

made without limiting or restricting the 

use of the electronic prescribing or 

electronic health records technology to 

services provided by the donating 

entity, and as long as the donation does 

not take into account the volume or 

value of referrals or other business 

generated between the parties. 

Response: We agree with the 

commenters that determining the value 

of donated technology poses certain 

difficulties and we are not including a 

cap on the amount of protected 

donations in the final exception. While 

gifts of valuable items and services to 

existing or potential referral sources 

typically pose a high risk of program or 

patient abuse, we believe that the 

combination of conditions in the final 

exception should adequately safeguard 

against abusive electronic health records 

arrangements. 

Comment: Most commenters, while 

opposing the imposition of a cap, 

offered other suggestions for limiting the 

value of protected nonmonetary 

remuneration. Several commenters 

suggested a limit on the value of 

protected nonmonetary remuneration in 

the form of a percentage contribution 

from the physician, that is, cost sharing 

by the recipient. These commenters 

suggested requiring either a set 

percentage contribution by the 

physician or a scaled percentage 

contribution by the physician that 

would be lowered once a predetermined 

threshold amount was reached. Some 

commenters also suggested that we 

consider a cost sharing method that 

would be based on set amounts that 

would be donated, with the physician 

recipient paying any remaining costs. 

The amounts could be revised over time 

to account for the fluctuating expense of 

technology and other changes that may 

arise. One commenter noted that studies 

have shown that individuals value 

services more when they share a portion 

of the cost. This commenter suggested 

that we should require, at a minimum, 

that physicians contribute towards the 

purchase of wireless Internet access. 

Response: We agree that cost sharing 

is an appropriate method to address 

some of the risks inherent in unlimited 

donations of technology. Accordingly, 

the exception establishes a contribution 

percentage that the physician must 

incur. Specifically, the final rule offers 

protection under this exception only if 

the physician pays 15 percent of the 

donor’s cost of the technology. With 

respect to calculation of the costs, 

particularly for internally-developed 

(‘‘homegrown’’) software (that is, 

software that is not purchased from an 


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outside vendor) and internallydeveloped add-on modules and 

components (that is, software purchased 

from an outside vendor and internally 

customized to ensure operational 

functionality), parties should use a 

reasonable and verifiable method for 

allocating costs and are strongly 

encouraged to maintain 

contemporaneous and accurate 

documentation. Methods of cost 

allocation will be scrutinized to ensure 

that they do not inappropriately shift 

costs in a manner that provides an 

excess benefit to the physician recipient 

or results in the physician effectively 

paying less than 15 percent of the 

donor’s true cost of the technology. 

We believe the 15 percent cost sharing 

requirement is high enough to 

encourage prudent and robust electronic 

health records arrangements without 

imposing a prohibitive financial burden 

on physicians. Requiring financial 

participation by a physician should 

result in selection of technology 

appropriate for the physician’s practice 

and increase the likelihood that the 

physician will actually use the 

technology. Moreover, this approach 

requires physicians to contribute 

towards the benefits they may 

experience from the adoption of 

interoperable electronic health records 

(for example, a decrease in practice 

expenses). We note that, depending on 

the circumstances, a differential in the 

amount of cost sharing imposed by a 

donor on different recipients could give 

rise to an inference that an arrangement 

is directly related to the volume or value 

of referrals or other business generated 

between the parties, thus, rendering the 

arrangement ineligible for the protection 

of the exception. In this regard, the basis 

for the differential should be closely 

scrutinized. 

We also note that all donated software 

and health information technology and 

training services are subject to the cost 

sharing requirements. It is our 

understanding that many updates and 

upgrades are included in the initial 

purchase price of the technology and 

would not trigger additional cost 

sharing responsibility on the part of the 

physician at the time of the update or 

upgrade. Any updates, upgrades, or 

modifications to the donated electronic 

health records system that were not 

covered under the initial purchase 

agreement for the donated technology 

are subject to separate cost sharing 

obligations by the physician (to the 

extent that the donor incurs additional 

costs). To ensure that physician 

recipients incur the requisite 15 percent 

of the costs, a donor (and any party 

related to the donor) is prohibited from 

providing financing or making loans to 

the physician to fund the physician’s 

payment for the technology. 

Comment: One commenter stated that 

we should study the issue of a cap since 

health information technology 

capabilities and costs are rapidly 

evolving. 

Response: As noted in the earlier 

responses, we are not implementing in 

the final rule a cap on the value of 

donations of electronic health records 

technology. 

Comment: A few commenters 

suggested that the final rule should 

allow donors to reimburse physicians 

for previously implemented electronic 

health records systems in an amount 

equal to the lesser of the fair market 

value of the donated technology or the 

cap on the value of donations, should a 

cap be adopted. These commenters also 

requested that the donor give assurance 

to physicians that any technology 

previously purchased that is equivalent 

to donated technology and meets the 

applicable interoperability standards 

would be integrated into the donor’s 

system. 

Response: We are not adopting these 

suggestions. The commenters’

suggestions go beyond the scope of the 

exception and appear to be a request for 

the exception to provide retroactive 

protection for previously purchased 

technology. The exception protects 

donations of technology that meet all of 

the conditions of the exception. The 

exception does not protect 

reimbursement for previously incurred 

expenses, as this would pose a 

substantial risk of program and patient 

abuse. 

5. Additional Conditions 

The proposed rule also listed 

additional conditions including a 

restriction on conditioning business on 

the receipt of electronic health records 

technology, a requirement that the 

donor not have actual knowledge or act 

in reckless disregard or deliberate 

ignorance of the fact that the physician 

possesses or has obtained duplicative 

items or services, an all-payors 

requirement, and a requirement that the 

arrangement not violate the antikickback statute or any Federal or State 

law or regulation governing billing or 

claims submission. 

Comment: One commenter suggested 

omitting any requirement that the 

written agreement documenting the 

arrangement specify the covered items 

and services and their values. Another 

commenter requested clarification as to 

whether all parties to a three-tier 

technology arrangement (that is, the 

donor-distributor of the technology, the 

vendor of the technology, and the 

physician recipient of the technology) 

would be required to sign the written 

agreement required by the exception. 

Response: In light of the cost sharing 

condition of the final exception, we are 

requiring documentation of the cost to 

the donor of the donated technology, 

and the physician’s contribution to that 

cost. Moreover, we are requiring that the 

cost sharing contribution be made and 

documented before the items and 

services can qualify for protection under 

the exception. The documentation must 

be specific as to the items and services 

donated, the actual cost to the donor, 

and the amount and confirmation of the 

physician’s cost sharing obligation. The 

documentation must cover all of the 

electronic health records items and 

services to be provided by the donor (or 

any party related to the donor) to the 

physician. With respect to this 

requirement, we have added language to 

the final exception clarifying that the 

written documentation requirement can 

be satisfied by incorporating by 

reference the agreements between the 

parties or by the use of cross references 

to a master list of agreements between 

the parties that is maintained and 

updated centrally and is available for 

review by the Secretary upon request 

and preserves the historical record of 

agreements. Nothing in the exception 

requires that agreements between 

donors and physicians also be signed by 

third party vendors; however, such 

documentation may be a prudent 

business practice. 

Comment: A few commenters 

suggested that we not sunset the preinteroperability exception once the postinteroperability exception is finalized, 

as we had proposed. 

Response: We are not finalizing a 

separate pre-interoperability exception. 

Comment: One commenter suggested 

that the entire electronic health records 

exception sunset no later than five years 

from the date of publication of the final 

rulemaking, with the possibility for the 

sunset to be delayed upon an 

administrative finding by the Secretary 

that there is a still a need for the 

exception. The commenter observed 

that, in the future, electronic health 

records technology will be a standard 

and necessary part of a medical practice, 

and there will no longer be a need for 

third parties to donate it to physicians 

to spur adoption of the technology. 

Moreover, the commenter observed that 

incompatibility across a network of 

providers will cease to be an issue once 

interoperability of technology becomes 

the norm. For these reasons, the 

commenter concluded that the rationale 

for establishing an exception to the 


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physician self-referral law will decrease 

over time. 

Response: We agree with this 

commenter that the need for an 

exception for donations of electronic 

health records technology should 

diminish substantially over time as the 

use of such technology becomes a 

standard and expected part of medical 

practice. Over time, physicians and 

others who receive donated technology 

from third parties may begin to realize 

the economic benefits from increased 

efficiencies and quality of care, at which 

point they should be expected to 

shoulder the costs associated with 

producing any benefits. As we indicated 

earlier in this rulemaking, we are 

promulgating a physician self-referral 

exception for the donation of valuable 

technology to promote its use in the 

interests of quality of care, patient 

safety, and health care efficiency, 

notwithstanding the risk of fraud and 

abuse normally associated with gifts of 

valuable goods and services to referral 

sources. Our goal is to promote the 

beneficial uses of technology without 

undue risk of program or patient abuse. 

As the technology becomes widely used 

and an accepted part of medical 

practice, the balance of competing goals 

underlying the exception changes. 

A sunset provision would also 

address some of our concerns about gifts 

of unlimited amounts of valuable 

technology. As noted previously in this 

final rule, we have concluded that we 

cannot develop an appropriate cap on 

the amount of protected technology. A 

sunset provision, in effect, would cap 

the amount of protected technology that 

could be donated by third parties in a 

different way, thereby safeguarding 

against program and patient abuse in the 

long term. 

We solicited comments on our overall 

approach to crafting a set of conditions 

for the exception and how we might 

ensure that the conditions, taken as a 

whole, provide sufficient protection 

against program and patient abuse. 

Given the difficulties inherent in 

limiting the value of donated technology 

and our relaxing of the ordinary 

principle that remuneration cannot be 

linked in any manner to the volume or 

value of referrals, we believe that the 

sunset provision suggested by the 

commenter will provide appropriate 

additional protection. 

For all of these reasons, we are 

adopting the suggestion of the 

commenter, with modifications. We are 

sunsetting the exception on December 

31, 2013. This date is consistent with 

the President’s goal of adoption of 

electronic health records technology by 

2014. (See President George W. Bush’s 

Health Information Technology Plan 

announced April 26, 2004; http:// 

www.whitehouse.gov/infocus/

technology/economic_policy200404/ 

chap3.html.) Under § 411.357(w)(13), all 

donations of items and services must 

occur, and all conditions of the 

exception must have been satisfied, on 

or before December 31, 2013. Nothing in 

the exception would preclude the 

Secretary from extending the time 

period pursuant to notice and comment 

rulemaking; we do not believe it would 

be appropriate to have a condition in a 

regulation that is contingent on an 

administrative determination. 

We note that we are not similarly 

sunsetting the electronic prescribing 

exception at § 411.357(v), as that 

exception is mandated by statute, and 

we do not have authority to limit its 

duration. 

Comment: Many commenters 

supported the prohibition against 

donors or their agents taking any actions 

to disable or limit interoperability or 

otherwise impose barriers to 

compatibility. 

Response: We agree and we are 

retaining this requirement in the final 

exception. 

D. Summary of the Final Provisions 

Related to § 411.357(w) 

Consistent with the majority of public 

comments, we have finalized one 

exception for arrangements involving 

electronic health records that effectively 

combines the pre- and postinteroperability proposals. Separate 

exceptions are no longer necessary, in 

part, because criteria for product 

certification are available. Therefore, we 

have finalized one exception for 

arrangements involving electronic 

health records software or information 

technology and training services 

necessary and used predominantly to 

create, maintain, transmit, or receive 

electronic health records. 

The final conditions for the exception, 

in combination, should promote the 

important national policy goal of open, 

interconnected, interoperable electronic 

health records systems that improve the 

quality of patient care and efficiency in 

the delivery of health care to patients, 

without protecting arrangements that 

pose a risk of program or patient abuse. 

In summary, the final exception 

includes the following conditions: 

• The exception protects 

arrangements involving nonmonetary 

remuneration in the form of software or 

information technology and training 

services necessary and used 

predominantly to create, maintain, 

transmit, or receive electronic health 

records (provided all conditions of the 

exception are satisfied). We have not 

included hardware. We have clarified 

that the exception covers ‘‘information 

technology services,’’ including, for 

example, connectivity and maintenance 

services. We interpret ‘‘training 

services’’ to include help desk and other 

similar support. We have eliminated the 

language that required the training 

services to be ‘‘directly related’’ because 

that language was superfluous in light of 

the language requiring the training 

services to be ‘‘necessary and used 

predominantly’’ for electronic health 

records purposes. 

• We have not adopted the proposal 

that the protected technology be used 

solely for electronic health records 

purposes. Instead, we have included a 

condition making clear that electronic 

health records purposes must 

predominate. Thus, depending on the 

circumstances, software that relates to 

patient administration, scheduling 

functions, billing, clinical support, etc., 

can be donated. We have also expressly 

prohibited the provision of any 

technology used primarily to conduct 

personal business or business unrelated 

to the physician’s medical practice, as 

well as the provision of staff to the 

physician or the physician’s office. 

To qualify for protection, at the time 

of donation, the software must be 

interoperable as defined at § 411.351. 

Software will be deemed to be 

interoperable if a certifying body 

recognized by the Secretary has certified 

the software no more than 12 months 

prior to the date it is provided to the 

physician. Software must contain 

electronic prescribing capability (either 

in an electronic prescribing component 

or the ability to interface with the 

physician’s existing electronic 

prescribing system) which complies 

with the applicable standards under 

Medicare Part D (the first set of which 

were promulgated at § 423.160 (see the 

E-Prescribing and the Prescription Drug 

Program final rule (70 FR 67568, 

November 7, 2005)) at the time the items 

and services are donated. Moreover, the 

donor (or any agent of the donor) must 

not take any steps to disable the 

interoperability of any technology or 

otherwise impose barriers to the 

compatibility of the donated technology 

with other technology. 

• The final exception protects broader 

categories of donors and physician 

recipients than we proposed. All 

entities that furnish DHS may make 

protected donations to any physician. 

• This final rule clarifies that donors 

may select physicians for receipt of 

electronic health records technology 

using means that do not directly take 

into account the volume or value of 


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referrals from the physician or other 

business generated between the parties. 

The final rule sets forth specific criteria 

that will be deemed to meet this 

condition. 

• The final rule does not limit the 

aggregate value of technology that may 

qualify for protection under this 

exception. It does contain a requirement 

that the physician pay 15 percent of the 

donor’s costs. The donor (or any party 

related to the donor) may not fund any 

portion of this contribution. 

• The final exception adopts the 

proposed documentation requirements 

and includes a requirement that the 

donor’s costs be documented in the 

written agreement between the parties, 

and permits documentation through 

incorporation of other agreements 

between the parties. The final exception 

does not require that physicians certify 

that they do not already possess 

equivalent technology. However, the 

final exception does preclude protection 

if the donor knows that the physician 

already has equivalent technology or 

acts in deliberate ignorance or reckless 

disregard of that fact. 

• The final exception adopts the 

proposed conditions related to use of 

the technology for any patient without 

regard to payor status and not 

conditioning business on donations. 

• The final exception sunsets on 

December 31, 2013. 

V. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 60- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to evaluate fairly 

whether OMB should approve an 

information collection, section 

3506(c)(2)(A) of the Paperwork 

Reduction Act of 1995 (PRA) requires 

that we solicit comment on the 

following issues: 

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

Section 411.357 Exceptions to the 

referral prohibition related to 

compensation arrangements 

We solicited public comments on the 

information collection requirements 

listed under § 411.357(v) and 

§ 411.357(w). Section 411.357(v) sets 

forth the exception for certain 

arrangements involving the donation of 

electronic prescribing items and 

services. Section 411.357(w) sets forth 

an exception for certain arrangements 

involving the donation of interoperable 

electronic health records software or 

information technology and training 

services. Specifically, § 411.357(v) 

addresses the donation of nonmonetary 

remuneration (consisting of items and 

services in the form of hardware, 

software, or information technology and 

training services) necessary and used 

solely to receive and transmit electronic 

prescription information. Section 

411.357(w) addresses the donation of 

nonmonetary remuneration (consisting 

of items or services in the form of 

software or information technology and 

training services) necessary and used 

predominantly to create, maintain, 

transmit, or receive electronic health 

records. For the purposes of this 

explanation of burden, the items and 

services discussed in § 411.357(v) and 

§ 411.357(w) will be collectively 

referred to as ‘‘electronic health 

information technology.’’

Both § 411.357(v) and § 411.357(w) 

contain conditions for their respective 

exceptions. The conditions for both 

sections require that arrangements for 

the items and services provided must be 

set forth in a written agreement that is 

signed by the involved parties, specifies 

the items or services being provided and 

the cost of those items or services (and, 

in the case of the electronic health 

records exception, the amount of the 

physician’s contribution), and covers all 

of the electronic health information 

technology to be provided by the donor. 

The aforementioned requirements 

associated with these exceptions are 

limited to donations made to physicians 

by entities furnishing DHS (for purposes 

of this Section V and Section VI, ‘‘DHS 

Entities’’). We do not know how many 

DHS Entities will use the exceptions 

that apply to electronic health 

information technology. However, we 

expect that few group practices will use 

either exception for donations to their 

members because existing exceptions 

will likely apply to permit a group 

practice to provide its physician 

members with electronic health 

information technology. In addition, 

because the donation of electronic 

health information technology is 

voluntary, we believe that some DHS 

Entities will not avail themselves of this 

exception and will therefore not 

experience any paperwork burden. 

We expect that every DHS Entity that 

chooses to provide electronic health 

information technology to physicians 

will likely use a model agreement that 

lists or describes the items and services 

to be donated. We expect that State or 

national organizations representing 

attorneys, physicians, group practices, 

and DHS Entities will create model 

agreements for their constituents. We 

also expect that attorneys for large DHS 

Entities (for example, academic medical 

centers or other entities that include 

hospitals and possibly skilled nursing 

facilities or home health agencies) will 

create one model agreement for use by 

all of their clients that are donors. In 

addition, we expect a DHS Entity that 

donates electronic health information 

technology to create a single model 

agreement for use for memorializing 

donations of electronic prescribing and 

electronic health records technology, 

because we believe that virtually no 

donor entity will need or want an 

agreement that is limited just to the 

provision of electronic prescribing 

technology. 

The burden associated with these 

requirements is the time and effort 

needed to gather the necessary 

information for the agreement, to draft 

the agreement, and to review and sign 

the written document. For donor 

entities (or their attorneys), we estimate 

that it will take 1.5 hours to create a 

model agreement and another 15 

minutes to tailor the model agreement 

for each physician and sign the 

personalized agreement. Further, we 

estimate that, on average, each 

physician will spend 15 minutes 

reading and signing an agreement, 

including time spent listening to an 

explanation from the group practice 

manager or other physician 

representative. We recognize that a 

physician (and a donating entity) will 

have to understand the differences 

between the items and services that the 

donor is offering and the items and 

services that the physician already 

possesses or has obtained. 

We expect that no more than 150 

State or national organizations or 

attorneys for large hospital systems (or 

other DHS Entities) will draft 

agreements for the hospitals and other 

DHS Entities. Because we estimate it 

will take 1.5 hours to prepare a model 

agreement, and 150 different 

organizations will prepare these 

agreements, it could take a maximum of 

225 hours to prepare all model 

agreements. 


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As of April 2006, 609,562 physicians 

provided Part B physician services to 

Medicare beneficiaries. To calculate the 

maximum number of hours required to 

complete the agreements, we assume 

that 60,956 physicians (10 percent of the 

total number of physicians providing 

Part B physician services to Medicare 

beneficiaries) will begin the process of 

developing or using electronic 

prescribing and/or electronic health 

records each year. We believe that onefifth (or 20 percent) of those physicians 

will accept donations of and sign 

agreements for electronic health 

information technology each year. We 

assume that each of these 12,191 

physicians (60,956 × 0.20) will accept 

two donations of electronic health 

information technology, and each 

donation will require that an agreement 

be signed by the donor DHS Entity and 

the physician. Each agreement will 

require 15 minutes (0.25 hours) of the 

physician’s time. Therefore, the 

physicians might spend 6,096 hours 

annually in interacting with two donors 

(2 agreements (that is, 1 per donation) 

× 0.25 hours for each agreement × 

12,191 physicians). 

As noted, we expect that a donor 

entity will spend 15 minutes tailoring 

and signing each agreement into which 

it enters. We estimated that 12,191 

physicians will enter into 2 agreements 

each. Therefore, each year, 24,382 

agreements will be signed. Each 

agreement will require 15 minutes (0.25 

hours) of the donor entity’s time, or 

6,096 hours per year (24,382 × 0.25 

hours). 

We assume that donating entities will 

not interact with each individual 

physician, but instead will spend time 

with individuals or entities that 

represent physician recipients of 

donated technology. On average, these 

representatives represent approximately 

25 physicians each. We estimate that a 

donor entity will spend approximately 2 

hours with each physician 

representative. We estimate that the 

average yearly burden for donor entities 

for the interactions with physician 

representatives may be 975 hours 

([12,191 physicians/25 physicians per 

representative] × 2 hours per 

interaction). This is in addition to the 

time spent tailoring and signing 

physician-specific agreements discussed 

above. 

Assuming that the average cost for the 

donors and physician recipients 

involved in this process is $75 per hour, 

the annual paperwork burden for the 

first year should cost $1,004,400 ($75 × 

[225 hours preparing master agreements 

+ 6,096 physician hours + 6,096 donor 

hours + (975 donor hours spent with 

group practice or physician 

representatives × 2 agreements per 

physician)]) with each additional future 

year costing $987,525 ($75 × [6,096 

physician hours + 6,096 donor hours + 

(975 donor hours spent with group 

practice or physician representatives × 2 

agreements per physician)]). 

An additional requirement for both 

exceptions will be that of maintaining 

the written agreements required to 

comply with § 411.357(v) and 

§ 411.357(w), and, if necessary, making 

them available to the Secretary upon 

request. We are requiring entities to 

maintain information that they already 

maintain as part of their usual and 

customary business practices. In 

addition, the information would only be 

collected during the conduct of an 

administrative action, investigation, or 

audit involving a Federal governmental 

agency regarding specific individuals or 

entities. 

We believe that the recordkeeping 

requirements in this section are exempt 

from the PRA under both 5 CFR 

1320.3(a)(2) and 5 CFR 1320.4(a)(2). 

These requirements are not effective 

until they are approved by OMB. 

VI. Regulatory Impact Analysis 

A. Overall Impact 

We have examined the impact of this 

rule as required by Executive Order 

12866 (September 1993, Regulatory 

Planning and Review), the Regulatory 

Flexibility Act (RFA) (September 19, 

1980, Pub. L. 96–354), section 1102(b) of 

the Social Security Act, the Unfunded 

Mandates Reform Act of 1995, Pub. L. 

104–4), the Congressional Review Act (5 

U.S.C. 804(2)), and Executive Order 

13132. 

Executive Order 12866 (as amended 

by Executive Order 13258, which 

merely reassigns responsibilities of 

duties) directs agencies to assess all 

costs and benefits of available regulatory 

alternatives and, when regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for final rules 

with economically significant effects 

(that is, a final rule that will have an 

annual effect on the economy of $100 

million or more in any one year, or will 

adversely affect in a material way the 

economy, a sector of the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

State, local, or tribal governments or 

communities). Because we believe that 

the economic impact of this final rule 

will not exceed $100 million annually, 

we have not prepared an RIA. However, 

we have analyzed alternatives and 

assessed benefits and costs in order to 

provide a basis for informed responses 

that have helped us make final 

decisions. 

This final rule creates two new 

exceptions to the physician self-referral 

prohibition. The first exception permits 

certain entities to provide to physicians 

hardware, software, or information 

technology and training services 

necessary and used solely to receive and 

transmit electronic prescription 

information, provided that certain 

conditions are satisfied. The second 

exception permits DHS Entities to 

provide to physicians software and 

information technology and training 

services necessary and used 

predominantly to create, maintain, 

transmit, or receive electronic health 

records, provided that certain 

conditions are satisfied. (Electronic 

prescribing technology and electronic 

health records technology are 

collectively referred to as ‘‘electronic 

health information technology’’ for 

purposes of this Section VI.) 

The exceptions should facilitate the 

adoption of electronic prescribing and 

electronic health records technology by 

filling a gap rather than creating the 

primary means by which physicians 

will adopt these technologies. In other 

words, we do not believe that donor 

entities will contribute toward all of the 

health information technology used by 

physicians. 

Recently, Modern Healthcare 

presented findings from its annual 

survey (conducted in December 2005 

through early January 2006) of 601 

health care executives regarding 

whether respondents (about 80 percent 

of which were hospitals or health care 

systems that include hospitals) would 

be willing to contribute to physician 

office health information technology if 

the physician self-referral provisions 

and the anti-kickback statute did not 

prohibit such donations. The findings 

showed that 70.2 percent of respondents 

would be willing to allocate money to 

help a referring physician buy and use 

clinical information technology (up 

from 59 percent last year). Table 1 

shows the breakdown percentages of 

respondents that would be willing to 

subsidize varying amounts of the startup 

costs for computerizing physicians’

practices. 


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TABLE 1 

Percentage of 

all respondents 

Percentage of startup 

costs respondents would 

be willing to subsidize 

29.80 ................. no amount 

32.36 ................. 20 percent or less 

8.77 ................... 21–40 percent 

15.16 ................. 41–60 percent 

4.28 ................... 61–80 percent 

9.69 ................... 81–100 percent 

This survey indicates that, as of the 

beginning of calendar year 2006, over 60 

percent of the CEOs surveyed did not 

see their institutions providing more 

than 20 percent of the costs necessary to 

initiate the computerization of 

physician offices for the purpose of 

clinical information technology. (Conn, 

Joseph, ‘‘Subsidies: Ready to give, but 

* * *,’’ Modern Healthcare, S5, 

February 13, 2006). Interestingly, this 

same survey showed that 65.1 percent of 

the executives indicated that moving 

toward an electronic health record was 

one of their top 10 information 

technology priorities, whereas only 51.6 

percent chose ‘‘improve patient-care 

capabilities.’’ (Conn, Joseph, ‘‘EHRs: 

Still in hot pursuit,’’ Modern 

Healthcare, S1, February 13, 2006). 

However, 42.1 percent of the surveyed 

executives indicated that they expected 

their organizations to spend 

approximately 1.6 percent to 3.0 percent 

of their total operating budget on 

information systems. Nearly 21 percent 

of the executives predicted that their 

organizations would spend less than 1.6 

percent, and 37.3 percent predicted that 

their organizations would spend more 

than 3.0 percent of their total operating 

budget on information systems. (Conn, 

Joseph, ‘‘Budgets: Opening the wallet,’’

Modern Healthcare, S2, February 13, 

2006). 

We believe that health care entities 

are waiting for the completion of a 

sizeable number of national standards 

before committing substantially for 

electronic health records items and 

services, first for themselves, and then 

for physicians and other entities in their 

communities. 

The final rule establishing the first set 

of standards for electronic prescribing in 

the Part D program, which was 

published on November 7, 2005 (70 FR 

67568), discusses the expected cost for 

the hardware, software, training and 

information technology needed by 

prescribing practitioners, including 

physicians. In the preamble to that rule, 

we presented a Regulatory Impact 

Analysis covering the expected effects 

of electronic prescribing and the 

specific standards. Our analysis showed 

the possibility of substantial and 

economically significant positive health 

effects on consumers and net positive 

economic effects on affected entities, 

such as physicians, pharmacies, and 

health plans. Our analysis focused on 

the likelihood that DHS Entities will 

find it in their interest to pay some or 

all of the costs of qualifying health 

information technology to encourage 

physician adoption of such technology. 

This final rule removes a potential 

obstacle to the provision of qualifying 

health information technology by 

certain entities. This final rule applies 

to donations of qualifying health 

information technology by DHS Entities, 

and we expect that many donor entities 

may not need to use these exceptions, 

given the existing provisions at 

§ 411.352 for group practices and the 

exception at § 411.355(c) for managed 

care services. (See 66 FR 856 and 69 FR 

16054.) Of particular importance, 

managed care services furnished by 

prepaid health plans or their contractors 

may fall within a previously codified 

exception (See § 411.355(c)). We believe 

that prepaid plans have substantial 

economic incentives (incentives that are 

larger than those for most other entities) 

to encourage the adoption of health 

information technology by contracting 

physicians. 

Regardless of whether donations are 

allowed under existing exceptions or 

those that are included in this final rule, 

we encouraged commenters to provide 

information on the costs that likely will 

be incurred by entities that choose to 

provide qualifying health information 

technology to physicians, as well as 

other related costs that likely will be 

incurred by both donors and physicians, 

such as costs incurred for changes in 

office procedures. 

Our analysis under Executive Order 

12866 of the expenditures that entities 

may choose to make under this final 

rule is restricted by the potential effects 

of outside factors, such as technological 

progress and other market forces, future 

certification standards, and companion 

final anti-kickback statute safe harbors. 

Furthermore, both the costs and 

potential savings of electronic 

prescribing, electronic health records, 

and administrative software such as 

billing and scheduling vary to the extent 

to which each element operates as a 

stand-alone system or as part of an 

integrated system. We solicited 

comments to help identify both the 

independent and synergistic effects of 

these variables. 

As discussed in the November 7, 2005 

E-Prescribing final rule (70 FR 67584 

through 67588), donors may experience 

net savings with electronic prescribing 

in place, and patients will experience 

significant positive health effects. We 

have not repeated that analysis in this 

final rule. 

There are numerous studies reporting 

that electronic health records in the 

ambulatory setting can result in a 

substantial improvement in clinical 

process. The effects of electronic health 

records include—

• Reducing unnecessary or 

duplicative lab and radiology test 

ordering by 9 to 14 percent (Bates, D., 

et al., ‘‘A randomized trial of a 

computer-based intervention to reduce 

utilization of redundant laboratory 

tests,’’ American Journal Medicine 

106(2), 144–50 (1999)); (Tierney, W., et 

al., ‘‘The effect on test ordering of 

informing physicians of the charges for 

outpatient diagnostic tests,’’ New 

England Journal of Medicine 322(21): 

1499–504 (1990)); (Tierney, W., et al., 

‘‘Computerized display of past test 

results. Effect on outpatient testing,’’

Annals Internal Medicine 107(4): 569–

74 (1987)); 

• Lowering ancillary test charges by 

up to 8 percent (Tierney, W., et al., 

‘‘Computer predictions of abnormal test 

results. Effects on outpatient testing,’’

JAMA 259: 1194–8 (1988)); 

• Reducing hospital admissions due 

to adverse drug events (ADEs), costing 

an average of $17,000 each, by 2 to 3 

percent (Jha, A., et al., ‘‘Identifying 

hospital admissions due to adverse drug 

events using a computer-based 

monitor,’’ Pharmacoepidemiology and 

Drug Safety 10(2), 113–19 (2001)); and 

• Reducing excess medication usage 

by 11 percent (Wang, S., et al., ‘‘A costbenefit analysis of electronic medical 

records in primary care,’’ American 

Journal of Medicine 114(5): 397–403 

(2003)); (Teich, J., et al., ‘‘Effects of 

computerized physician order entry on 

prescribing practices,’’ Archives of 

Internal Medicine 160(18): 2741–7 

(2000)). 

There is also evidence that electronic 

health records can reduce 

administrative inefficiency and paper 

handling. (Khoury, A., ‘‘Support of 

quality and business goals by an 

ambulatory automated medical record 

system in Kaiser Permanente of Ohio,’’

Effective Clinical Practice 1(2): 73–82 

(1998)). 

These studies show a consistent 

pattern of reductions in clinical 

utilization reported to arise from 

electronic health records use in 

ambulatory settings. Although financial 

estimates were not performed in these 

studies, these reductions in utilization 

could yield savings that accrue to the 

Medicare program because of its high 

volume of payments for ambulatory and 

inpatient care. Other studies have 


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estimated that electronic health records 

in the ambulatory setting will save $78 

billion to $112 billion annually, across 

all payors. This estimate includes up to 

$34 billion in annual savings from 

ambulatory computerized provider 

order entry (Johnston, D., et al., ‘‘The 

Value of Computerized Provider Order 

Entry in Ambulatory Settings,’’ Center 

for IT Leadership, Wellesley, MA 

(2003)) and up to $78 billion annually 

from interoperability of electronic 

health records (Walker, J., et al., ‘‘The 

Value of Health Care Information 

Exchange and Interoperability,’’ Health 

Affairs, http://www.healthaffairs.org 

(online exclusive) (2005)). At the same 

time, the costs of electronic health 

records and other health information 

technology are substantial. 

The range of cost estimates for 

electronic health records alone is wide. 

At one extreme, there are software 

systems under development that may be 

offered to physician settings free or at 

the cost of perhaps several thousand 

dollars, while others may cost $20,000 

to $30,000. Extrapolated to the universe 

of health plans, hospitals, and 

physicians, total investment costs are 

likely to reach the billions of dollars. 

It is unclear how rapidly adoption is 

now occurring. A recent study indicates 

‘‘practices are encountering greaterthan-expected barriers to adopting an 

[electronic health records] system, but 

the adoption rate continues to rise.’’

(Gans, D., et al., ‘‘Medical Groups’

Adoption of Electronic Health Records 

and Information Systems,’’ Health 

Affairs, September/October 2005). This 

study dealt only with group practices, 

and found greater difficulties in smaller 

groups. We can infer similar 

implementation difficulties for 

individual physician practices. For 

example, this study found the average 

initial cost of implementing an 

electronic health records system to be 

$33,000 per physician, with 

maintenance costs of $1,500 per 

physician per month, numbers which 

‘‘would translate into about a 10 percent 

reduction in take-home pay each year 

for most primary care practices’’ if 

amortized over 5 years. (See Gans, D.). 

HealthLeadersMedia interviewed 

individuals from 5 medical practices to 

try to determine reasons (other than 

money) for the fact that, as of 2005, only 

14 percent of physician groups used 

database-driven electronic health 

records systems. One sole practitioner 

put $70,000 into hardware and software 

to duplicate the system she had used 

when in a group practice. Although this 

physician reduced much of the external 

paper flood, she has not saved money. 

She replaced transcription costs with 

scanning expenses. This physician is 

pleased that she can document more 

detail electronically than by hand, 

resulting in more appropriate 

reimbursement. A small rural clinic 

hired a vendor after a year’s search, but 

then endured multiple delays and 

missed deadlines. After firing its 

vendor, it hired another vendor with a 

similar lack of results. Finally, it hired 

a vendor that the rural health clinic had 

interviewed two years earlier after 

discovering that this vendor had 

significantly upgraded its clinical 

documentation system, and the rural 

health clinic is now satisfied. On the 

other hand, a physician practice with 

over 500 physicians reported that, 

because it spent a lot of time in design, 

workflow analysis, and early 

development before employing any 

system, it is very satisfied with its 

physician-friendly system. Another 

physician practice, with five physician 

members, successfully adopted 

information technology with its third 

contractor resulting in financial and 

clinical benefits, including running the 

practice much more efficiently which 

resulted in treating more patients. 

Finally, a group practice with 13 

internists borrowed $600,000 for 

hardware and software for an electronic 

health records system. Annual 

transcription costs have decreased from 

$150,000 to $30,000 and records are 

easily shared. (Baldwin, Gary, ‘‘Paper 

Charts No More,’’ http:// 

www.healthleadersmedia.com (May 

2006)). 

Another recent study reviewed a 

broader range of providers and argued 

that the economic incentives of most 

stakeholders do not support health 

information technology investments. 

According to that article, ‘‘The greater 

marvel is that any physician, at his or 

her personal expense, would install a 

system that * * * saves money for 

every health care stakeholder except the 

adopting physician.’’ (Kleinke, J.D., 

‘‘Dot-Gov: Market Failure and the 

Creation of a National Health 

Information Technology System,’’

Health Affairs, September/October 

2005). This study is also more 

pessimistic than most about the 

business case for managed care plans to 

make health information technology 

investments, arguing that investments 

benefit not only the investing firm but 

also its competitors. Many other studies, 

discussed in this section, are more 

optimistic about economic returns to 

physicians. However, the disparate 

results illustrate the uncertainty that 

prevents us from making confident 

quantitative estimates of rates of 

adoption. Even so, a recent survey by 

the Center for Studying Health System 

Change indicated that between 2000–

2001 and 2004–2005, the proportion of 

physicians in their own practices 

reporting access to information 

technology for treatment guidelines 

increased from 52.9 percent to 64.8 

percent, and the number of 

electronically prescribing physicians 

increased from 11.4 percent to 21.9 

percent. In addition, the percent of 

physicians in practices who reported 

that they had used information 

technology to exchange clinical data 

increased from 40.6 percent to 50.1 

percent during this time period. (Reed, 

Marie C. and Grossman, Joy M., 

‘‘Growing Availability of Clinical 

Information Technology in Physician 

Practices,’’ Data Bulletin No. 31, Center 

for Studying Health System Change, 

http://www.hschange.com (June 2006). 

The major barriers to physician 

adoption of clinical information 

technology include start-up and 

maintenance costs, and the significant 

effort and costs of changing workflow to 

use information technology effectively. 

(Bates, David W., ‘‘Physicians and 

Ambulatory Electronic Records,’’ Health 

Affairs, (September/October 2005). 

However, in an interview, Joy Grossman 

of the Center for Studying Health 

System Change, cited above, indicated 

her belief that one reason for the delay 

in physician adoption of information 

technology is that physicians want to 

make sure that the type of technology 

and software they purchase will not 

become obsolete and also will be 

compatible with tools used by hospitals, 

other physicians, and health plans. 

(Agovino, Theresa, ‘‘Doctor Access to 

Information Technology Up,’’ the 

Associated Press, reported by the 

Houston Chronicle at http:// 

www.chron.com (June 6, 2006)). 

We assume that health information 

technology costs and benefits will be 

realized eventually. Even without 

government intervention, there is a 

lively market today, and as consensus 

standards evolve, that market will grow. 

The question as to the regulatory impact 

of this final rule is: taking into account 

available policy instruments (notably 

the development of interoperability 

standards), to what extent does the use 

of these physician self-referral 

exceptions accelerate adoption of 

electronic prescribing and electronic 

health records technology? 

We do not have good baseline 

information. There are numerous 

estimates for the adoption rate of 

electronic prescribing by health plans, 

hospitals, physicians, and (for 

prescribing of drugs only) pharmacies. 


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1Center for Information Technology (CITL, a 

research organization chartered in 2002) http:// 

www.citl.org, Wellesley, MA (781–416–9200) 2003 

report: ‘‘The Value of Computerized Provider Order 

Entry in Ambulatory Care.’’

However, these estimates are clouded by 

uncertainty. For example, some studies 

count facsimile transmission of 

prescriptions as electronic prescribing 

while others do not. The majority of 

physician offices now use computers 

and have high-speed internet access, but 

less than one in five uses electronic 

health records. (Goldsmith, J., et al., 

‘‘Federal Health Information Policy: A 

Case of Arrested Development,’’ Health 

Affairs, July/August 2003 (citing 17 

percent adoption)). The Gans study 

found that about 12 percent of medical 

group practices have a fully 

implemented electronic health records 

system, and another 13 percent are in 

the process of implementation. For 

smaller group practices, both of these 

percentages fall to 10 percent. (See 

Gans, D., supra.) 

As discussed in this section, we 

estimate that 2 percent of physicians 

and an unknown number of DHS 

Entities will be affected by these 

exceptions each year. Put another way, 

only one in five physicians adopting 

electronic health information 

technology will utilize these exceptions 

annually. 

As explained in the November 7, 2005 

E-Prescribing final rule (70 FR 67585), 

we believe that between 5 and 18 

percent of prescribers, including 

physicians, are currently participating 

in some electronic prescribing. In 

addition, we explained that we believe 

that the proportion of prescribers using 

electronic prescribing would increase by 

about 10 percent annually over the next 

5 years. We believe it is likely that about 

one in five of those prescribers will 

receive assistance under these 

exceptions. (Another one in five will 

receive assistance under the exceptions 

already in place that apply to managed 

care plans and group practices.) 

These estimates depend primarily on 

the decisions of DHS Entities as to 

whether to provide assistance to 

physicians for electronic health 

information technology and the 

decisions of physicians and group 

practices to implement these systems. 

We solicited information about the 

intentions of DHS Entities to make 

donations of qualifying health 

information technology to physicians 

and the willingness of physicians and 

group practices to implement these 

systems. 

Even if we were able to determine 

more precisely the number of 

physicians who are currently engaged 

in, and the number of physicians who 

will engage in, electronic prescribing, 

we cannot estimate with certainty the 

number of those physicians who will 

receive donated items and services. 

Some entities may be unwilling or 

unable to donate items or services, and 

some physicians already have the 

requisite items and services. In addition, 

we cannot estimate with certainty the 

cost of the electronic health information 

technology that a physician will need 

from a donor. 

Although we do not know the cost of 

the electronic health information 

technology, we describe below several 

studies of the costs and benefits of 

equipping doctors with such 

technology. The speed of adoption 

depends on the extent to which 

physicians realize net benefits 

(discussed extensively in the proposed 

rule) and on the extent to which our 

exceptions incrementally affect the costs 

and savings of the technology. 

One study of data on the costs 

associated with an internally-developed 

electronic health records system for 

several internal medicine clinics in an 

integrated delivery system indicated 

that software development and 

maintenance would cost about $1,600 

per provider per year. (See Wang, 

supra.) Use of commercially available 

software may cost twice as much. 

Financial benefits of electronic health 

records include not having to ‘‘pull’’

patient charts whenever a patient is to 

be seen and reduced transcription costs. 

In addition, electronic clinical decision 

support has been shown to reduce ADEs 

and redundant radiology and clinical 

laboratory tests; the maintenance of upto-date information about alternative 

drugs reduces the use of expensive 

medications. Finally, when a medical 

record has complete and accurate 

information about services provided, 

billing errors are reduced, including 

failure to bill for a furnished service. 

The 5-year cost-benefit analysis of the 

internally-developed electronic health 

records system discussed above 

indicated savings per practitioner. (See 

Wang, supra.) 

In another article, Dr. Kenneth Adler 

reported on his 86-physician, multispecialty group practice’s adoption of an 

electronic health records system 

beginning in 2003. (Adler, K., ‘‘Why It’s 

Time to Purchase an Electronic Health 

Records System,’’ American Academy of 

Family Practitioners, November/ 

December 2004). This group practice 

found that its electronic health records 

system improved communication, 

access to data, and documentation, 

which led to better clinical and service 

quality. The electronic health records 

system also saved the group practice 

money, and Dr. Adler expects that other 

group practices that adopt electronic 

health records systems will save money 

in addition to the other benefits listed 

above. 

In a third study, the Central Utah 

Multi-Specialty Clinic, a 59-physician, 

9-location group practice, installed an 

electronic health records system in 

April 2002. (Barlow, S., et al., ‘‘The 

Economic Effect of Implementing an 

EMR in an Outpatient Clinical Setting,’’

Journal of Healthcare Information 

Management, 18(1): 46–51 (2004)). 

During its first year of operation, the 

group practice experienced direct 

reductions in spending and increases in 

revenue of more than $952,000 

compared with the prior year, and 

anticipates savings of more than $8.2 

million over the first 5 years of 

implementation. Once again, the savings 

are expected to result from reduced 

transcription costs, a reduced number of 

paper charts and related maintenance 

(including storage), and more 

appropriate coding because of improved 

documentation. (This study did not 

include information about the start-up 

or annual costs of the electronic health 

records system. Therefore, caution 

should be used in drawing conclusions 

on any cost savings based on the results 

of this study.) 

Finally, we note that the Center for 

Information Technology Leadership 

(CITL), in its 2003 report, ‘‘The Value of 

Computerized Provider Order Entry in 

Ambulatory Settings’’ 1 found that the 

average first year total cost of a basic 

electronic prescribing software system 

was approximately $3,000 per 

physician. This estimate was based on 

a survey of commercially available 

software. 

The following are our responses to 

comments to the Regulatory Impact 

Analysis in the proposed rule: 

Comment: One commenter asserted 

that the estimate that we used in the 

proposed rule for the cost of information 

technology items and services is too 

low. Another commenter estimated that 

electronic health records systems cost 

between $700 and $800 per physician 

per month during the first 5 years of 

implementation. A third commenter 

estimated that the implementation cost 

for each physician will range from 

$15,000 to $35,000. Another commenter 

asserted that donors will probably 

donate approximately $5,000 per 

physician and that no donor will 

provide items and services worth over 

$35,000 per physician. One commenter 

agreed that donations will result in a 

reduction of the utilization of unneeded 


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45168 Federal Register / Vol. 71, No. 152 / Tuesday, August 8, 2006 / Rules and Regulations 

health care services. Finally, a 

commenter agreed that there should not 

be a significant impact on small 

businesses. 

Response: We recognize that the cost 

of implementing information technology 

in the physician office setting currently 

appears to be substantial, with benefits 

that will be recognized, but not 

immediately. Recently, Robert Miller 

and colleagues at the University of 

California, San Francisco, presented 

findings from case studies of 14 sole 

practitioners and small group practices 

in twelve States. They found that startup costs average $44,000 per physician 

and annual maintenance costs average 

$8,400 per physician per year. However, 

they also found that the physicians 

recoup their investment costs in 2.5 

years, with over half of the financial 

benefits coming from improved billing 

services. In addition, physician practice 

revenues increased by $17,000 per year 

and efficiency savings and gains from 

greater physician productivity averaged 

$15,800 per physician per year. (Miller, 

Robert H., et al., ‘‘The Value of 

Electronic Health Records in Solo or 

Small Group Practices, Health Affairs, 

September/October 2005.) 

We presented information above in 

this section from a recent Modern 

Healthcare survey that indicated a 

breakdown of the funding that 501 

health care executives anticipated that 

their institutions will spend to help 

physician practices with information 

technology. (Conn, Joseph, ‘‘Subsidies: 

Ready to give, but * * *,’’ Modern 

Healthcare, S5, February 13, 2006). The 

figures in that article are not 

considerably different from the 

commenter’s estimates. 

Comment: One commenter believes 

that donors will be concerned about the 

direct impact to their patient 

populations and the common good. 

Response: We hope that donors will 

recognize that physicians need systems 

that will work for their patients and 

practices. We believe that the studies we 

have cited indicate the importance of 

physicians being able to use the systems 

they are purchasing and implementing. 

If a system does not work for a 

physician, he or she will abandon the 

system. 

We believe that donations protected 

under this exception will create no net 

costs to the economy. This rule will 

permit cost-shifting, allowing DHS 

Entities to bear financial burdens that 

otherwise would have been borne by 

physicians and their patients. We 

anticipate that electronic prescribing 

and electronic health records 

technology ultimately should save 

donor entities and physicians the costs 

and other burdens associated with 

incorrect drug prescribing or 

dispensing, and result in reductions in 

the costs of medical transcribing and 

other paperwork. Similarly, obtaining 

accurate health records in a timely 

manner should benefit patients, 

physicians, and DHS Entities. The 

November 7, 2005 E-Prescribing final 

rule (70 FR 67586) cites an estimate 

from the CITL that nationwide adoption 

of electronic prescribing will eliminate 

nearly 2.1 million ADEs per year. In 

turn, this reduction of ADEs will 

prevent nearly 1.3 million provider 

visits, more than 190,000 

hospitalizations, and more than 136,000 

life-threatening ADEs. We hope to see a 

significant reduction in ADEs each year 

as nationwide adoption of electronic 

health information technology occurs. 

We estimate that 10 percent of the 

609,562 physicians who provide Part B 

services to Medicare beneficiaries 

(60,956 physicians) will adopt 

electronic prescribing and electronic 

health records technology each year. We 

believe it is likely that DHS Entities will 

donate software or other items or 

services to no more than one-fifth (or 20 

percent) of these physicians (or to fewer 

than 12,191 physicians) under these 

exceptions, and perhaps another onefifth (or 20 percent) of these physicians 

(again fewer than 12,191 physicians) 

will receive donations under the 

existing exceptions that apply to 

managed care services and to group 

practices. We estimate that, at most, 

each physician will receive a total of 

$3,000 worth of donated items and 

services per donation under the 

exceptions. Therefore, assuming that 2 

percent of physicians (1⁄5 of the 10 

percent of physicians adopting the 

technology per year) will receive $3,000 

worth of donated electronic health 

information technology, annual 

donations approximate $36 million. 

We expect that many physicians 

already own handheld devices and will 

have begun to computerize their own 

medical practices. We also expect that 

DHS Entities will see immediate 

benefits from the expanded use of 

electronic prescribing and electronic 

health records technology. We 

anticipate that these savings will be 

greater than the costs incurred by donor 

entities using these exceptions, but we 

cannot quantify the savings at this time. 

We note that a significant benefit of 

electronic health records was 

recognized in 2005. Patients from the 

Veterans Administration (VA) Hospital 

in New Orleans had been evacuated to 

other VA hospitals throughout the 

United States because of the effects of 

Hurricane Katrina. (See http://www1.va.

gov/opa/pressrel/pressrelease.cfm?id=

1152). Because the VA system makes 

extensive use of electronic prescribing 

and electronic health records, complete 

patient medical information was quickly 

made available to VA clinicians 

throughout the country. The Ochsner 

Clinic in New Orleans had also 

computerized its patient records prior to 

Hurricane Katrina and, thus, was able to 

recover its practice after the hurricane. 

The estimates above are highly 

sensitive to assumptions. The cost to the 

donor for the donated items and 

services might be significantly higher or 

lower than discussed above. The rate of 

adoption may be higher or lower than 

estimated. The proportion of physicians 

receiving remuneration could be higher 

or lower than estimated, depending on 

the willingness of DHS Entities to 

subsidize investment in health 

information technology. 

We also note that, at this time, there 

are mixed signals about the potential of 

electronic prescribing and electronic 

health records to reduce costs. For 

example, many estimates are based in 

part on the reduction of medical errors. 

However, one study has also shown that 

medical errors, and potentially costs, 

can increase if software is poorly 

designed or implemented (Koppel, et 

al., 2005). Therefore, achieving reliable 

cost savings requires a more substantial 

transformation of care delivery that goes 

beyond simple use of any one kind of 

health information technology. 

This rule likely will have an effect on 

the actual rate of adoption of electronic 

prescribing and electronic health 

records technology. Potential donors 

may be unlikely to provide assistance 

unless they believe it will accelerate the 

adoption of the technology. To the 

extent adoption is advanced, the costs 

and benefits of these technologies will 

be realized sooner. However, we are 

unable to provide any quantitative 

estimate of the likely effect of these 

exceptions, taken alone, in the larger 

panorama of all health information 

technology investment decisions, 

market evolution, standards adoption, 

and use of existing physician selfreferral exceptions. 

Finally, we believe it unlikely that 

annual effects will exceed $100 million 

in the 5-year timeframe that we 

generally use in our economic impact 

projections. If our estimate of the 

independent and direct effects of these 

new exceptions is accurate, and if the 

resulting acceleration in adoption is 

relatively small, this final rule is not a 

major rule. However, we have 

completed all the elements of a RIA 

because the uncertainty is so great. 


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Federal Register / Vol. 71, No. 152 / Tuesday, August 8, 2006 / Rules and Regulations 45169 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 requires 

that agencies assess the anticipated 

costs and benefits of Federal mandates 

before issuing any rule that may result 

in the mandated expenditure by State, 

local, or tribal governments, in the 

aggregate, or by the private sector, of 

$100 million in 1995 dollars (a 

threshold adjusted annually for inflation 

and now approximately $120 million). 

This final rule imposes no mandates. 

Any actions taken under this rule are 

voluntary. Furthermore, such actions 

are likely to result in net cost savings, 

not net expenditures. Any expenditure 

undertaken by government-owned 

hospitals in their business capacity will 

not necessarily have an impact on State, 

local, or tribal governments, or their 

expenditure budgets, as such. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it issues a final rule 

that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

For the reasons given above, this final 

rule will not have a substantial effect on 

State or local governments, nor does it 

preempt State law or have Federalism 

implications. 

B. Impact on Small Businesses 

The RFA requires agencies to analyze 

options for regulatory relief for small 

entities when a final rule may create a 

significant impact on a substantial 

number of small entities. For purposes 

of the RFA, small entities include small 

businesses, nonprofit organizations, and 

small governmental jurisdictions. Most 

hospitals and physicians are considered 

small entities, either by nonprofit status 

or by having revenues of less than $6 

million a year. Almost all physicians in 

private practice (or all practices of 

which they are members) are small 

entities because their annual revenues 

do not meet the Small Business 

Administration’s $8.5 million threshold 

for small physician practices. 

Individuals and States are not included 

in the definition of a small entity, and 

this final rule will not have a financial 

impact on small governmental entities. 

We have determined that this final 

rule will not have a significant impact 

on small entities because it does not 

increase regulatory burden or otherwise 

meet the RFA standard of ‘‘significant 

impact.’’ While the aggregate impacts 

may be substantial, it is unlikely that 

near term effects on individual 

practitioners will be substantial as a 

proportion of revenues (for example, 

neither a $3,000 donation nor a $450 

cost sharing contribution (15 percent of 

$3,000) is significant compared to 

typical practice revenues in the 

hundreds of thousands of dollars). We 

expect our new exceptions ultimately to 

be highly beneficial to physicians and 

DHS Entities (most in both categories 

are small entities), as well as to affected 

entities and persons who are not ‘‘small 

entities’’ as defined in the RFA: PDP 

sponsors, MA organizations, and our 

beneficiaries. 

Nothing in this final rule meets any of 

the other thresholds requiring in-depth 

analysis. Although it affects a 

substantial number of small rural 

hospitals, there is no significant 

economic effect on small rural hospitals 

(more than 3 to 5 percent of total costs/ 

revenues), it imposes no unfunded 

mandates or costs on either private or 

public entities, and it neither preempts 

State law nor otherwise has Federalism 

implications. 

C. Conclusion 

We have concluded that this final rule 

will not have a significant economic 

effect. Although the final exceptions 

may shift costs from physicians and 

patients to permissible donor entities 

and may lead to faster adoption of 

health information technology with 

substantial benefits, it is unclear 

whether, and we believe unlikely that, 

these effects will reach the threshold of 

$100 million annually in the near term, 

even though the long-term cumulative 

costs and benefits are likely to be many 

times this threshold. This rule will 

remove a potential obstacle to certain 

entities providing electronic prescribing 

and electronic health records 

technology and services to physicians. 

The rule will permit cost shifting, 

allowing DHS Entities to bear financial 

burdens that otherwise would have been 

borne by physicians and their patients. 

We believe that this rule will provide 

substantial positive health effects on 

consumers and net positive economic 

effects on affected entities, including 

physicians and DHS Entities. 

We are not preparing analyses for 

either the RFA or section 1102(b) of the 

Act because we have determined, and 

we certify, that this rule will not have 

a significant economic impact on a 

substantial number of small entities or 

a significant impact on the operations of 

a substantial number of small rural 

hospitals. 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects in 42 CFR Part 411 

Kidney diseases, Medicare, Physician 

referral, Reporting and recordkeeping 

requirements. 

■ For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR 

chapter IV part 411 as set forth below: 

PART 411—EXCLUSIONS FORM 

MEDICARE AND LIMITATIONS ON 

MEDICARE PAYMENT 

■ 1. The authority citation for part 411 

is revised to read as follows: 

Authority: Secs. 1102, 1860D–4(e)(6), 1871, 

and 1877(b)(4) and (5) of the Social Security 

Act (42 U.S.C. 1302, 1395w–104(e)(6), 

1395hh, and 1395nn(b)(4) and (5)). 

Subpart J—Financial Relationships 

Between Physicians and Entities 

Furnishing Designated Health Services 

■ 2. Section 411.351 is amended by 

adding the definitions of ‘‘electronic 

health record’’ and ‘‘interoperable’’ in 

alphabetical order to read as follows: 

§ 411.351 Definitions. 

* * * * * 

Electronic health record means a 

repository of consumer health status 

information in computer processable 

form used for clinical diagnosis and 

treatment for a broad array of clinical 

conditions. 

* * * * * 

Interoperable means able to 

communicate and exchange data 

accurately, effectively, securely, and 

consistently with different information 

technology systems, software 

applications, and networks, in various 

settings; and exchange data such that 

the clinical or operational purpose and 

meaning of the data are preserved and 

unaltered. 

* * * * * 

■ 3. Section 411.357 is amended by 

adding paragraphs (v) and (w) to read as 

follows: 

§ 411.357 Exceptions to the referral 

prohibition related to compensation 

arrangements. 

* * * * * 

(v) Electronic prescribing items and 

services. Nonmonetary remuneration 

(consisting of items and services in the 

form of hardware, software, or 

information technology and training 

services) necessary and used solely to 

receive and transmit electronic 

prescription information, if all of the 

following conditions are met: 

(1) The items and services are 

provided by a—

(i) Hospital to a physician who is a 

member of its medical staff; 


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(ii) Group practice (as defined at 

§ 411.352) to a physician who is a 

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 payor status, the 

donor does not restrict, or take any 

action to limit, the physician’s right or 

ability to use the items or services for 

any patient. 

(5) Neither the physician nor the 

physician’s practice (including 

employees and staff members) makes 

the receipt of items or services, or the 

amount or nature of the items or 

services, a condition of doing business 

with the donor. 

(6) Neither the eligibility of a 

physician for the items or services, nor 

the amount or nature of the items or 

services, is determined in a manner that 

takes into account the volume or value 

of referrals or other business generated 

between the parties. 

(7) The arrangement is set forth in a 

written agreement that—

(i) Is signed by the parties; 

(ii) Specifies the items and services 

being provided and the donor’s cost of 

the items and services; and 

(iii) Covers all of the electronic 

prescribing items and services to be 

provided by the donor. This 

requirement will be met if all separate 

agreements between the donor and the 

physician (and the donor and any 

family members of the physician) 

incorporate each other by reference or if 

they cross-reference a master list of 

agreements that is maintained and 

updated centrally and is available for 

review by the Secretary upon request. 

The master list should be maintained in 

a manner that preserves the historical 

record of agreements. 

(8) The donor does not have actual 

knowledge of, and does not act in 

reckless disregard or deliberate 

ignorance of, the fact that the physician 

possesses or has obtained items or 

services equivalent to those provided by 

the donor. 

(w) Electronic health records items 

and services. Nonmonetary 

remuneration (consisting of items and 

services in the form of software or 

information technology and training 

services) necessary and used 

predominantly to create, maintain, 

transmit, or receive electronic health 

records, if all of the following 

conditions are met: 

(1) The items and services are 

provided by an entity (as defined at 

§ 411.351) to a physician. 

(2) The software is interoperable (as 

defined at § 411.351) at the time it is 

provided to the physician. For purposes 

of this paragraph, software is deemed to 

be interoperable if a certifying body 

recognized by the Secretary has certified 

the software no more than 12 months 

prior to the date it is provided to the 

physician. 

(3) The donor (or any person on the 

donor’s behalf) does not take any action 

to limit or restrict the use, compatibility 

or interoperability of the items or 

services with other electronic 

prescribing or electronic health records 

systems. 

(4) Before receipt of the items and 

services, the physician pays 15 percent 

of the donor’s cost for the items and 

services. The donor (or any party related 

to the donor) does not finance the 

physician’s payment or loan funds to be 

used by the physician to pay for the 

items and services. 

(5) Neither the physician nor the 

physician’s practice (including 

employees and staff members) makes 

the receipt of items or services, or the 

amount or nature of the items or 

services, a condition of doing business 

with the donor. 

(6) Neither the eligibility of a 

physician for the items or services, nor 

the amount or nature of the items or 

services, is determined in a manner that 

directly takes into account the volume 

or value of referrals or other business 

generated between the parties. For 

purposes of this paragraph, the 

determination is deemed not to directly 

take into account the volume or value of 

referrals or other business generated 

between the parties if any one of the 

following conditions is met: 

(i) The determination is based on the 

total number of prescriptions written by 

the physician (but not the volume or 

value of prescriptions dispensed or paid 

by the donor or billed to the program); 

(ii) The determination is based on the 

size of the physician’s medical practice 

(for example, total patients, total patient 

encounters, or total relative value units); 

(iii) The determination is based on the 

total number of hours that the physician 

practices medicine; 

(iv) The determination is based on the 

physician’s overall use of automated 

technology in his or her medical 

practice (without specific reference to 

the use of technology in connection 

with referrals made to the donor); 

(v) The determination is based on 

whether the physician is a member of 

the donor’s medical staff, if the donor 

has a formal medical staff; 

(vi) The determination is based on the 

level of uncompensated care provided 

by the physician; or 

(vii) The determination is made in 

any reasonable and verifiable manner 

that does not directly take into account 

the volume or value of referrals or other 

business generated between the parties. 

(7) The arrangement is set forth in a 

written agreement that—

(i) Is signed by the parties; 

(ii) Specifies the items and services 

being provided, the donor’s cost of the 

items and services, and the amount of 

the physician’s contribution; and 

(iii) Covers all of the electronic health 

records items and services to be 

provided by the donor. This 

requirement will be met if all separate 

agreements between the donor and the 

physician (and the donor and any 

family members of the physician) 

incorporate each other by reference or if 

they cross-reference a master list of 

agreements that is maintained and 

updated centrally and is available for 

review by the Secretary upon request. 

The master list should be maintained in 

a manner that preserves the historical 

record of agreements. 

(8) The donor does not have actual 

knowledge of, and does not act in 

reckless disregard or deliberate 

ignorance of, the fact that the physician 

possesses or has obtained items or 

services equivalent to those provided by 

the donor. 

(9) For items or services that are of the 

type that can be used for any patient 

without regard to payor status, the 

donor does not restrict, or take any 

action to limit, the physician’s right or 

ability to use the items or services for 

any patient. 

(10) The items and services do not 

include staffing of physician offices and 

are not used primarily to conduct 

personal business or business unrelated 

to the physician’s medical practice. 

(11) The electronic health records 

software contains electronic prescribing 

capability, either through an electronic 

prescribing component or the ability to 

interface with the physician’s existing 

electronic prescribing system that meets 

the applicable standards under 

Medicare Part D at the time the items 

and services are provided. 


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Federal Register / Vol. 71, No. 152 / Tuesday, August 8, 2006 / Rules and Regulations 45171 

(12) The arrangement does not violate 

the anti-kickback statute (section 

1128B(b) of the Act), or any Federal or 

State law or regulation governing billing 

or claims submission. 

(13) The transfer of the items or 

services occurs and all conditions in 

this paragraph (w) are satisfied on or 

before December 31, 2013. 

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare-Hospital 

Insurance; and Program No. 93.774, 

Medicare-Supplementary Medical Insurance 

Program) 

Dated: June 28, 2006. 

Mark B. McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Approved: July 14, 2006. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 06–6667 Filed 8–1–06; 8:45 am] 

BILLING CODE 4120–01–P 


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