```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
                      MEDICARE SELF-REFERRAL LAWS

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON HEALTH

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 13, 1999

                               __________

                             Serial 106-54

                               __________

         Printed for the use of the Committee on Ways and Means

                    U.S. GOVERNMENT PRINTING OFFICE
65-695 CC                   WASHINGTON : 2000

_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel
                                 ------                                

                         Subcommittee on Health

                   BILL THOMAS, California, Chairman
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
JIM McCRERY, Louisiana               GERALD D. KLECZKA, Wisconsin
PHILIP M. CRANE, Illinois            JOHN LEWIS, Georgia
SAM JOHNSON, Texas                   JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  KAREN L. THURMAN, Florida
JIM RAMSTAD, Minnesota
PHILIP S. ENGLISH, Pennsylvania

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                              ----------                              

                                                                   Page

Advisory of May 4, 1999, announcing the hearing..................     2

                               WITNESSES

Health Care Financing Administration, Kathleen A. Buto, Deputy 
  Director, Center for Health Plans and Providers................    13
U.S. Department of Health and Human Services, D. McCarty 
  Thornton, Chief Counsel to the Inspector General, Office of the 
  Inspector General..............................................    16
                                 ------                                
American College of Radiology, J. Bruce Hauser, M.D..............    71
American Medical Group Association, and Scott & White Health 
  Plan, C. David Morehead, M.D...................................    67
Northwestern Memorial Hospital, Mitchell J. Wiet.................    60
Teplitzky, Sanford V., Ober, Kaler, Grimes and Shriver, and 
  National Health Lawyers Association............................    55
                                 ------                                

                       SUBMISSIONS FOR THE RECORD

Alliance for Referral Integrity, Alexandria, VA, et. al, joint 
  statement......................................................    80
Alliance Imaging, Inc., Anaheim, CA, Russell Phillips, letter....    81
American Academy of Family Physicians, statement.................    84
American Academy of Ophthalmology, William Rich, III, statement..    88
American Association of Ambulatory Surgery Centers, Chicago, IL, 
  statement and attachment.......................................    89
American Association of Orthopaedic Surgeons, Rosemont, IL, 
  William W. Tipton, Jr., statement..............................    91
American Clinical Laboratory Association, statement..............    94
American College of Cardiology, Bethesda, MD, statement..........    95
American College of Physicians-American Society of Internal 
  Medicine, statement............................................    96
American Hospital Association, statement.........................   102
American Medical Association, E. Ratcliffe Anderson, Jr., letter 
  and attachment.................................................   105
American Physical Therapy Association, Alexandria, VA, statement.   110
American Society of Clinical Pathologists, statement.............   113
American Society of Echocardiography, Raleigh, NC, statement.....   114
American Urological Association, Inc., Baltimore, MD, Lloyd H. 
  Harrison, letter...............................................   116
Anderson, E. Ratcliffe, Jr., American Medical Association, letter   105
Association of American Medical Colleges, statement..............   117
Association of Freestanding Radiation Oncology Centers, Laguna 
  Beach, CA, statement...........................................   119
Cenac, Dwight S., Home Care Association of America, Jacksonville, 
  FL, statement..................................................   125
Federation of American Health Systems, statement.................   120
Harrison, Lloyd H., American Urological Association, Inc., 
  Baltimore, MD, letter..........................................   116
Home Care Association of America, Jacksonville, FL, Dwight S. 
  Cenac, statement...............................................   125
Joint Council of Allergy Asthma and Immunology, Palatine, IL, 
  statement......................................................   127
Mauro, Matthew A., Society of Cardiovascular and Interventional 
  Radiology, Fairfax, VA, letter.................................   142
McLane, James W., NovaCare, Inc., King of Prussia, PA, statement.   136
Medical Group Management Association, statement..................   129
National Coalition for Quality Diagnostic Imaging Services, 
  Houston, TX, statement.........................................   133
NovaCare, Inc., King of Prussia, PA, James W. McLane, statement 
  and attachments................................................   136
Outpatient Ophthalmic Surgery Society, Bellevue, WA, statement...   138
Phillips, Russell, Alliance Imaging, Inc., Anaheim, CA, letter...    81
Premier, Inc., James L. Scott, letter............................   141
Rich, William, III, American Academy of Ophthalmology, statement.    88
Scott, James L., Premier, Inc., letter...........................   141
Society of Cardiovascular & Interventional Radiology, Fairfax, 
  VA, Matthew A. Mauro, letter...................................   142
Stark Law Coalition, statement...................................   143
Tipton, William W., Jr., American Association of Orthopaedic 
  Surgeions, Rosement, IL, statement.............................    91
Waldheger  Coyne, a Legal Profession Association, 
  Cleveland, OH, statement.......................................   149

                      MEDICARE SELF-REFERRAL LAWS

                              ----------                              

                         THURSDAY, MAY 13, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                    Subcommittee on Health,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:02 p.m., in 
room 1100, Longworth House Office Building, Hon. William Thomas 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON HEALTH

                                                CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE

May 4, 1999

No. HL-5

                      Thomas Announces Hearing on

                    Medicare ``Self-Referral'' Laws

    Congressman Bill Thomas (R-CA), Chairman, Subcommittee on Health of 
the Committee on Ways and Means, today announced that the Subcommittee 
will hold a hearing on the Health Care Financing Administration's 
(HCFA) implementation of the Medicare self-referral laws and its impact 
on the health care marketplace. The hearing will take place on 
Thursday, May 13, 1999, in the main committee hearing room, 1100 
Longworth House Office Building, beginning at 1:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a wirtten statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    ``Self-referral'' is the term used to describe the situation where 
a physician or other provider refers a patient to a medical facility in 
which the physician has a financial interest. In the Omnibus Budget 
Reconciliation Act of 1989 (OBRA 89, P.L. 101-508), the Congress passed 
what became known as ``Stark I'' after the main sponsor, Rep. Pete 
Stark (D-CA). Under that law, in general, if a physician has a 
financial relationship with a clinical laboratory, that physician 
cannot make a referral to the laboratory for the furnishing of services 
for which Medicare pays. The Omnibus Budget Reconciliation Act of 1993 
(OBRA 93, P.L. 103-66) extended the law to apply to referrals for 10 
``designated health services'' in addition to clinical laboratory 
services. This law became known as ``Stark II.'' Five years after 
passage of Stark II, on January 9, 1998, HCFA issued a proposed rule to 
implement it. Today, after an additional 17 months, HCFA seems no 
closer to issuing a a final rule on the Federal statute.
      
    The guiding principle for the self-referral laws was to prevent 
physicians from inappropriately referring patients based on the 
potential for financial gain. Yet, the health care delivery system has 
changed profoundly since passage of the first self-referral laws. Since 
1989, the health care system has rapidly moved away from the 
traditional fee-for-service way of delivering medical care. Today, the 
health care system has moved towards a more coordinated, integrated 
approach.
      
    The Balanced Budget Act of 1995 (BBA95) included several amendments 
to the self-referral laws. The two major changes were the repeal of the 
prohibitions based on compensation arrangements and the revision of the 
list of facilities subject to the ban. BBA95 was vetoed by President 
Clinton on December 6, 1995.
      
    In announcing the hearing, Chairman Thomas stated: ``Physicians and 
hospitals are subject to a bewildering array of overlapping State and 
Federal statutes. Many of the steps physicians and hospitals take to 
integrate their practices are subject to a multitude of laws, including 
self-referral law, anti-kickback law, Federal tax law regulating the 
conduct of tax-exempt organizations, State referral bans, corporate 
practice of medicine prohibition and the Federal False Claims Act. The 
fact that it has taken the HCFA more than 6 years to put out a final 
rule is further evidence that these laws are in need of an overhaul.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on implementation of existing self-referral 
statutes and on areas for reform. The Subcommittee will also consider 
proposals put forward by the Administration and Members of Congress.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Thursday, May 
27, 1997, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Health office, room 1136 Longworth House 
Office Building, at least one hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.

      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.

      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

    Chairman Thomas [presiding]. The Subcommittee will please 
come to order.
    Today, we revisit the issue of the Federal Government's 
physician self-referral laws. Few laws have been as vexing for 
physicians and hospitals, and I dare say, apparently for 
bureaucrats as well. The cost of complying with this daunting 
law is considerable and has an impact on seniors' ability to 
gain access to coordinated systems of medical care. And, after 
all, that is what we are supposed to be focusing on, the 
ability of seniors to get care.
    Self-referral is the term used to describe the situation 
where a physician refers a patient to a medical facility in 
which the physician has a financial interest.
    The first legislative measures aimed at the potential 
problem of self-referrals were passed as part of the 1989 
Budget Reconciliation Act. That statute applied only to 
physicians and clinical laboratories. In 1993, the self-
referral ban was extended to 10 other designated health 
services, including, for example, hospital services, outpatient 
drugs, durable medical equipment, and home health services.
    Five years after passage of the second self-referral law, 
HCFA finally published a proposed rule in 1998. Today, after 
yet another year, HCFA seems no closer to issuing a final rule 
on self-referral law.
    I have been told that a final rule is a week or so away, or 
a year or so away, or, fill in the blank.
    The guiding principle for the self-referral laws was to 
prevent physicians from inappropriately referring patients 
based on the potential for financial gain. These laws were 
meant to provide a bright-line test, and yet we are further 
from clarity in this area of the law than probably any other 
area of health policy.
    At a time when physicians and hospitals are subject to 
heightened scrutiny by Federal investigators, they have a right 
to know, I think, what the law is. One legal writer paraphrased 
Sir Thomas Moore when talking about the self-referral laws, he 
said, ``It is unjust to bind the people by a set of laws that 
are too many to be read and too obscure to be understood.''
    To further complicate matters, physicians and hospitals are 
subject to a bewildering array of overlapping State and Federal 
statutes. Many of the steps physicians and hospitals take to 
integrate their practices are subject to Federal self-referral 
as well as a multitude of other Federal and State laws, 
including the Federal anti-kickback law, Federal False Claims 
Act, Federal tax-exempt law, and the State self-referral bans.
    Representatives from the Health Care Financing 
Administration and the Office of Inspector General will testify 
today that the self-referral laws are a weapon in the Federal 
Government's arsenal against fraud and abuse. And yet not a 
single case has been prosecuted under the self-referral laws. 
The Federal Government has used non-compliance with these laws 
as a threat, but it has never once prosecuted a case.
    And this tells me two things. First, I mean, the law is not 
really an effective weapon in the fight against fraud and 
abuse; otherwise the Inspector General and the Justice 
Department would have made enforcement of the self-referral 
laws a priority as they have with the False Claims Act and the 
Federal anti-kickback statute.
    Second, since Federal investigators use the self-referral 
law to threaten physicians and hospitals, even though the 
status of the law is unclear, that seems to me a tacit 
admission that compliance is virtually impossible and that it 
only serves as a means to bully providers.
    While today we will be considering the various options of 
reforming self-referral law, let me remind everyone that over 
the past several years this Subcommittee has built a pretty 
good record on fighting Medicare fraud and abuse. In both the 
Health Insurance Portability and Accountability Act of 1996, 
HIPAA, and in the Balanced Budget Act of 1997, we have 
stiffened penalties, beefed up the resources of both the 
Inspector General and HCFA.
    Today, we have enacted 65 statutory provisions to preserve 
the integrity of the Medicare Trust Funds, and I would ask 
unanimous permission to put in the 65 concrete steps that we 
have used to fight waste, fraud, and abuse.
    [The information follows:]

65 Concrete Steps to Fight Health Care, Waste, Fraud, and Abuse

          Summary of HIPAA of 1996 and BBA of 1997 Anti-fraud

The Health Insurance Portability and Accountability Act of 1996 
(HIPAA)

    1. Provides significant new funding to combat waste, fraud, 
and abuse: Over $5 billion through 2003 appropriated to fight 
fraud and abuse through the new Health Care Fraud and Abuse 
Control and the Medicare Integrity Programs.
    2. Increases the number of investigators on the street by 
31 percent: New programs have resulted in increasing the number 
of full-time federal investigators fighting health care fraud 
and abuse from 1,187 to 1,553 in the past two years.
    3. Expands Medicare and Medicaid fraud and abuse penalties: 
Makes Medicare and Medicaid program-related fraud penalties 
applicable to other federal health care programs, such as the 
Civilian Health and Medical Program of the Uniformed Services 
(CHAMPUS).
    4. Increases civil penalties for fraud and abuse: Increases 
civil monetary penalties for health care fraud and abuse from 
$2,000 to $10,000 for each item and service subject to a 
violation.
    5. New penalties for illegally retaining ownership or 
control in a health care entity: Imposes new civil monetary 
penalties on individuals excluded from Medicare or State health 
care programs who maintain ownership or control interest in 
entities participating in Medicare or Medicaid.
    6. New penalties for improper billing: Imposes new civil 
monetary penalties against persons who submit bills for more 
expensive services than provided or for services that are not 
medically necessary.
    7. New penalties for improper inducement: Imposes new civil 
monetary penalties against persons offering improper financial 
incentives to induce beneficiaries to obtain services from a 
particular provider or supplier.
    8. New penalties for false certification of home health 
services: Imposes new civil monetary penalties of the greater 
of $5,000 or three times the amount incorrectly paid for false 
certification by a physician of the need for home health 
services.
    9. Adds new criminal penalties for fraud and abuse: New 
federal criminal penalties for fraud and abuse violations 
specifically related to both the private market and public 
health care programs are added to Title 18 of the United States 
Code.
    10. New penalties for health care theft or embezzlement: 
Provides for fines and/or imprisonment of up to 10 years for 
theft or embezzlement relating to health care programs.
    11. New penalties for false statements: Provides for fines 
and/or imprisonment of up to 5 years for false statements 
relating to health care matters.
    12. New penalties for obstruction of justice: Provides for 
fines and/or imprisonment of up to 5 years for obstruction of 
criminal health care investigations.
    13. New penalties for money laundering: Specifically makes 
it a crime to launder money that comes from the commission of a 
federal health care offense.
    14. Injunctive relief in health care offenses: Authorizes 
injunctive relief and freezing of assets in cases involving 
federal health care offenses.
    15. New authority to issue subpoenas: Authorizes the 
issuance and enforcement of subpoenas of records and testimony 
by the Attorney General for investigation of health care 
offenses.
    16. New forfeiture authority: Authorizes the forfeiture of 
property related to the commission of a health care offense, 
with amounts recovered to be deposited into the hospital 
insurance trust fund.
    17. New penalties for wrongful disclosure of confidential 
health information: Provides that obtaining disclosing, or 
using individually identifiable health information is 
punishable by fines of up to $50,000 and/or imprisonment of up 
to one year, with additional fines of up to $250,000 and up to 
10 years imprisonment for the intent to sell or transfer such 
information for commercial advantage, personal gain, or 
malicious harm.
    18. New mandatory exclusion from participation in Medicare 
and State health programs for felonies: Adds new mandatory 
exclusions from Medicare and Medicaid for felony convictions 
related to health care fraud or controlled substances.
    19. New permissive exclusion authority for misdemeanors: 
Authorizes new discretionary exclusions from Medicare and 
Medicaid for misdemeanor convictions related to health care 
fraud or controlled substances.
    20. New mandatory minimum exclusionary periods: Establishes 
a 3-year minimum exclusionary period for criminal misdemeanors 
related to health care fraud or controlled substances or 
conviction of obstruction of a health care investigation, and a 
minimum exclusionary period due to license revocation or 
suspension commensurate with the length of such revocation or 
suspension.
    21. New permissive exclusion of individuals with ownership 
or control interest in sanctioned entities: Adds new permissive 
exclusion from Medicare and Medicaid for individuals who have 
an ownership or control interest, or who are managing 
employees, of a sanctioned entity.
    22. New sanctions against practitioners for failure to 
comply with quality requirements: Establishes a one-year 
minimum exclusionary period for practitioners who fail to meet 
Medicare or Medicaid quality standards or who fail to complete 
peer review corrective action plans.
    23. Establishes the new Fraud and Abuse Control Program: 
This program coordinates federal, state, and local law 
enforcement efforts against fraud and abuse in federal and 
private health care programs.
    24. Establishes the new Medicare Integrity Program: This 
program authorizes the Department of Health and Human Services 
(HHS) to enter into contracts with private entities with 
expertise in rooting out waste, fraud, and abuse to perform 
audits and reviews of provider payments.
    25. Establishes the new Beneficiary Incentive Program: This 
program provides incentives for beneficiaries to ferret out 
waste, fraud and abuse by authorizing the Secretary of HHS to 
share monetary recoveries with beneficiaries reporting health 
care fraud and abuse.
    26. New data for law enforcement: Establishes the Health 
Integrity and Protection Data Bank to report final adverse 
actions against health care providers.
    27. Provides guidance to providers seeking to comply with 
the law: Requires the Secretary of HHS to issue binding 
advisory opinions regarding whether a proposed transaction 
would violate the anti-kickback rules.
    28. Provides additional funds for investigation and re-
certification: Authorizes the Health Care Financing 
Administration to collect fees from physicians to cover the 
costs of investigation and issuance of program identifiers.

The Balanced Budget Act of 1997 (BBA)

    29. Three strikes and you are out: Requires that providers 
convicted of three program-related offenses be excluded 
permanently from Medicare and other federal health programs, 
and that providers convicted of two program-related offenses be 
excluded from federal health programs for at least 10 years.
    30. Excludes convicted felons from Medicare: Authorizes the 
Secretary to refuse to enter into provider agreements with 
persons or entities convicted of prior felonies.
    31. Excludes practitioners and entities excluded from 
Medicare from an health care programs: Expands the scope of 
Medicare exclusions to include exclusion from all other federal 
and state health care programs, other than the Federal 
Employees Health Benefit Program
    32. Clearly identifies Medicare providers: Requires 
providers to provide the Secretary with their Social Security 
Number or Employer Identification Number as a condition of 
participation in the Medicare program.
    33. Prevents transfer of illicit businesses to family 
members: Authorizes the Secretary to exclude entities from the 
Medicare program in which ownership or control is transferred 
to immediate family members in anticipation of, or following, a 
conviction or exclusion action.
    34. Further increases civil penalties: Imposes new civil 
monetary penalties of up to $50,000 per act for providers who 
violate anti-kickback rules.
    35. Penalizes providers who do businesses with other 
providers excluded from Medicare: Imposes new civil monetary 
penalties on providers who hire or contract with persons or 
entities the provider ``knows or should know'' have been 
excluded from the Medicare program.
    36. New sanctions for providers not reporting to data bank: 
Imposes new civil monetary penalties for failure to report 
adverse fraud actions to the Health Integrity and Protection 
Data Bank.
    37. $50,000 surety bonds for certain Medicare providers and 
suppliers: Requires home health agencies, durable medical 
equipment suppliers, CORFs, and rehabilitation agencies to post 
surety bonds of at least $50,000 and to disclose ownership and 
control information.
    38. Expansion of $50,000 surety bond requirement: Provides 
authority to the Secretary to extend surety bond requirements 
to other Part A and Part B providers.
    39. Itemized bills for services: Requires providers to 
furnish beneficiaries with itemized bills for Medicare services 
upon request.
    40. Sanctions for failure to provide itemized bills: 
Imposes civil monetary penalties of up to $100 for failure of 
providers to respond to beneficiaries' request for itemized 
bills.
    41. Toll-free hotline for beneficiaries to fight waste, 
fraud and abuse: Requires the Inspector General to establish a 
toll-free hotline for Medicare beneficiaries to report fraud 
and billing irregularities.
    42. Disclosure to beneficiaries of provider financial 
interest: Requires hospitals to disclose to beneficiaries 
requiring post-acute care any provider in which the hospital 
has a financial interest.
    43. Maintenance and disclosure of information on post-
hospital home health agencies and other entities: Requires 
hospitals that have a financial interest in a home health 
agency or other entity to which they refer beneficiaries to 
disclose to the Secretary and the public the nature of the 
financial interest, the number of individuals discharged from 
the hospital requiring home health services,, and the 
percentage of those individuals,who receive home health care 
from the related provider.
    44. Disclosure of ownership information for durable medical 
equipment suppliers: Prohibits the Secretary of HHS from 
issuing or renewing provider numbers for DME suppliers unless 
the supplier provides the Secretary on a continuing basis with 
full and complete information about the identity of each person 
with an ownership or control interest in the supplier or in any 
subcontractor in which the supplier has an ownership interest.
    45. New authority to prevent Medicare overpayment: Provides 
the Secretary with new authority to reduce Medicare 
reimbursement where the current payment amount is grossly 
excessive and inherently unreasonable.
    46. New sanctions for durable medical equipment suppliers 
who engage in coercive or abusive practices: Authorizes the 
Secretary of HHS to establish sanctions, including program 
exclusions, for DME suppliers who engage in sales practices 
designed to coerce beneficiaries to purchase ``upgraded'' 
durable medical equipment.
    47. Better direction for providers: Requires the Secretary 
to issue advisory opinions regarding the physician self-
referral rules.
    48. Home health payment changes to reduce waste and abuse: 
Requires the Secretary to move from ``cost-based'' 
reimbursement to a prospective payment systems for home health 
agencies by October 1, 1999.
    49. Better data on home health visits to prevent waste and 
abuse: Requires that home health claims contain the 
identification number for the prescribing physician and 
information on length of service (as measured in 15 minute 
increments).
    50. Ends payment advances for home health agencies: 
Eliminates periodic interim payments to home health agencies.
    51. Better definition of skilled nursing and home health 
benefits: Includes statutory definition of ``part-time'' and 
``intermittent'' skilled nursing and home health aide services.
    52. Prevents abuse of home health benefits: Requires the 
Secretary to conduct a study to clarify when a beneficiary is 
``homebound.''
    53. Prevents home health agency payment abuses: Requires 
home health agencies to submit claims on the basis of the 
location where a service is actually furnished, and not where 
the home health agency billing office is located.
    54. Prevents unnecessary use of home health agency 
services: Authorizes the Secretary to establish national 
guidelines to prevent unnecessary billing for home health 
services.
    55. Prevents unnecessary use of home health agency 
services: Clarifies that a person could not qualify for 
Medicare's home health benefit on the basis of their simply 
needing a nurse to draw a blood sample.
    56. Skilled nursing payment changes to reduce waste and 
abuse: Requires the Secretary to replace ``cost-based'' 
reimbursement with a prospective payment system for skilled 
nursing facility services by July 1, 1998.
    57. Prevents unnecessary ordering of equipment and 
supplies: Eliminates Medicare payments for unnecessary durable 
medical equipment and supplies by requiring nursing homes to 
use consistent coding and directly bill for these services.
    58. Requires additional diagnostic information for better 
accountability: Includes non-physician practitioners in the 
requirement to provide diagnostic codes when ordering items or 
services to be furnished by another health entity.
    59. Better data on skilled nursing visits to prevent waste 
and abuse: Requires physicians who visit patients in nursing 
homes to include the facility's identification number on their 
claim to make detection of inappropriate visits easier to 
track.
    60. Annual audit to protect against fraud in the 
Medicare+Choice program: Requires the Secretary of HHS to 
conduct an annual audit of the financial records of at least 
one-third of Medicare+Choice organizations offering 
Medicare+Choice plans and for the General Accounting Office to 
evaluate the results of such audits.
    61. New right to inspect, audit, and evaluate the quality 
of services provided by Medicare+Choice contractors: Provides 
authority to the Secretary of HHS to inspect and evaluate the 
quality, appropriateness, and timeliness of services provided 
under a Medicare+Choice plan and the solvency and capacity of 
such plan.
    62. Expansion of sanctions to protect beneficiaries 
enrolled in Medicare+Choice plans: Makes the same sanctions 
applicable to physicians and entities improperly billing 
beneficiaries under traditional fee-for-service Medicare 
applicable to physicians and entities improperly billing 
beneficiaries enrolled in Medicare+Choice plans.
    63. New sanctions for Medicare+Choice Plans to protect 
beneficiaries: Authorizes new intermediate sanctions, including 
civil monetary penalties, for Medicare+Choice organizations 
that fail to provide medically necessary items or services, 
impose excess premiums, deny or discourage enrollment by 
eligible individuals, furnishes false information to 
beneficiaries or the Secretary of HHS, employs or contracts 
with excluded providers, or fails to comply with 
Medicare+Choice consumer protections and balance billing 
limitations.
    64. Additional penalties for Medicare+Choice organizations 
failing to meet contract terms: Imposes additional civil 
monetary penalties for Medicare+Choice organizations that 
substantially fail to fulfill their contract with the Medicare 
program, carry out the contract in a manner inconsistent with 
the efficient administration of the Medicare program, or no 
longer meet conditions of participation in the Medicare+Choice 
program.
    65. New exclusionary authority' for Medicare+Choice 
organizations: Authorizes the Secretary to terminate contracts 
with Medicare+Choice organizations in accordance with formal 
investigation and compliance procedures.

                                

    Chairman Thomas. I would also like to remind everyone that 
a number of other people have called for simplification of 
these statutes, including, I might add, my friend and 
distinguished Ranking Member, Mr. Stark. In July 1998, he 
issued a press release and a letter to the Institute of 
Medicine asking for input on, ``fundamentally simpler ways to 
prevent abuse in referrals.'' And I would ask unanimous consent 
to place that in the record as well.
    [The information follows:]

Stark Seeks Ideas for Improvement and Simplification of Referral Laws

    Citing complexity of the laws and regulations governing 
physician referrals to services in which the physician has an 
ownership or compensation arrangement, Rep. Pete Stark (D-CA) 
is calling for ideas on how to stop referral abuses while 
simplifying the rules on doctors.

          ``Numerous studies have shown that when doctors have an 
        ownership or compensation arrangement with an ancillary 
        service, they tend to order more services and more expensive 
        services,'' said Stark. ``It is an abuse of the Medicare Trust 
        Fund, the taxpayer, and the patient who is subjected to 
        questionable and unnecessary tests.''
          ``Stopping these abuses--which include the abuse of hospitals 
        which have an ownership interest in downstream services--is 
        complex,'' said Stark. ``I am asking the health community for 
        ideas on how we can improve and simplify the current laws 
        without opening Medicare to abuse.''

    Stark released a letter he sent to the Institute of 
Medicine outlining possible ideas to improve the referral 
rules.

          ``The Institute will probably not be able to do work in this 
        area without appropriate funding,'' said Stark. ``But I hope 
        that the ideas I've raised in the letter will encourage others 
        to offer suggestions directly to me on ways to improve this 
        area of Medicare law without weakening our efforts against 
        abuse of the program.''

    [The letter follows:]

                                

                                                       June 8, 1998
Dr. Kenneth I. Shine, M.D.
President, Institute of Medicine
Washington, D.C.

    Dear Dr. Shine:

    In the mid-80s, the Institute of Medicine helped start the national 
debate on the ethical issue of physician referral of patients to 
services from which the physician could profit. Nearly fifteen years 
later, the regulation of referrals remains a difficult issue, and new 
issues involving referrals by hospitals and other institutions to post-
acute care services have developed.
    A series of laws have been passed that tried to address the 
physician referral conflict of interest. Five years after the last of 
these laws was passed, the Health Care Financing Administration has 
finally issued proposed rules to implement those laws. The regulations 
are controversial, with many individual doctors and groups complaining 
that they will interfere with the delivery of efficient and ethical 
medical care, increase costs, and micro-manage doctors' offices. Yet we 
know from past studies and certain on-going investigations that the 
problem of abusive referral is a real problem--one that abuses the 
public as both patient and as taxpayer. There is also some evidence 
that areas where the law was not applied have been subject to abuse and 
that ethical issues also arise in hospital referrals. In the meantime, 
staff at HCFA have indicated that to process the comments they are 
receiving on the regulation will require at least another year, and 
possibly more, before final regulations can be issued. In short, the 
controversy drags on and many providers who seek to do the right thing 
find themselves caught in uncertainty.
    Therefore, I request that the Institute of Medicine convene a work 
group, hopefully late this summer, on the issue of how best to address 
referral problems and whether there may be a way to reach consensus on 
fundamentally simpler ways to prevent abuse in referrals. Specifically, 
would it be possible to:
     eliminate a number of the designated health services in 
the physician referral laws, and replace them with a system where a 
doctor may refer for the service, but through the use of actual 
acquisition cost or other payment changes, remove excessive financial 
incentives to over-refer and over-test? A related question is whether 
physician practice expense payments are sufficient to make profit 
margins on in-office services unnecessary?
     allow a physician to have any ownership or compensation 
arrangement the physician desires in exchange for accepting a 
``normative practices screen.'' Under this approach, a physician could 
have, for example, an ownership interest in a lab partnership, but if 
he or she does not exceed the norms of testing (adjusted by specialty, 
severity of patient, etc.) of those with no ownership or compensation 
relationship, then there would be no problem. If the norm were 
exceeded, however, there would be potential recovery with penalty by 
the public insurers (Medicare/Medicaid), if practices were found to be 
without clinical indication.
     other ways to simplify the current Physician Referral laws 
without abandoning their ability to stop the abuses documented in the 
late 1980's and early 1990's?
     ways to address the problem of referral by institutions?
    Thank you for your consideration of this request. I would like to 
work with you on how such a Working Group could include the key 
physician organizations and develop a consensus for improvement of the 
regulations or amendments to the law.
            Sincerely,
                                                 Pete Stark
                                                 Member of Congress

                                

    Chairman Thomas. But with all due respect, we may be asking 
the wrong question. The law says that a physician who owns an 
interest in a clinical laboratory cannot refer a patient to the 
clinical laboratory and then bill Medicare. But, if that same 
physician purchases that same lab equipment and, instead, puts 
it in his or her own office, that same physician can bill 
Medicare all he or she wants without self-referral problems.
    Asking about referral patterns and asking the Federal 
regulators to micro-manage physicians practices may be 
pointless or impossible, when the real issue is not referrals 
but the appropriateness of the medical care provided.
    Members of the Subcommittee can agree, I hope, that the 
overarching goal is to provide to our seniors the proper 
medical care in the proper setting. The healthcare delivery 
system today is very different from when the first self-
referral laws were considered now a decade ago.
    For example, the emergence of utilization review and other 
coordinated-care models in both managed care and fee-for-
service provided, are, I believe, a more appropriate method of 
checking any potential abuses with regard to self-referrals.
    And prior to recognizing the panel, I will turn the mike 
over to the gentleman from California, Mr. Stark.
    Mr. Stark. Thank you, Mr. Chairman. I am not sure I ever 
would have chosen to have my name associated with this law. I 
would much rather be known for extending health insurance to 
the uninsured. But I don't have that much choice.
    I would note that the impetus for this law started with 
antifraud officials in the Reagan Administration and then was 
continued by those in the Bush Administration. It was a 
bipartisan effort to fight waste, fraud and over-utilization in 
the Medicare system. And it was proven that those problems 
existed and still exist today.
    In spite of the problems with the law, it's been a success. 
As the OIG will testify, we have prevented billions of dollars 
worth of business deals which would have ended up abusing 
patients through over-testing and unnecessary services. And in 
this sense, the law has been self-enforcing.
    In other ways, the complexity of the law has been an 
embarrassment. The law purports to be simple: Don't create 
temptation to make a medical judgment based on the money you 
get. That ought to be the golden rule, like the AMA code of 
ethics against referral.
    But it is the medical shysters, and the exemptions designed 
to allow people to end-run the law and make money in special 
situations that have made the law complicated. Every time we 
have attempted to define the law's parameters, we have just 
created an opportunity for unscrupulous attorneys to create a 
loophole based on our exemptions. And the beat goes on.
    As we try and make the law more definitive, this creates 
ways to get around it. And now there are even new issues, where 
you have hospitals buying referrals.
    I don't know what that does for medical care. I will tell 
you this, it steals the taxpayers' money.
    We have a court case that was outlined in the healthcare 
fact sheet we got this morning of a doctor who was brought to a 
town by a hospital. Let's assume there is more than one 
hospital. I don't know. He was given a $20,000-a-month 
guarantee--that is $240,000 a year--$15,000 in moving expenses, 
$10,000 in a signing bonus, and 25,000 bucks a year in free 
office rent.
    Now that all ends up being paid for by the taxpayers 
through Medicare. And I don't know that if anybody tries to 
tell me with a straight face that that hospital just did this 
out of the goodness of their heart, not anticipating that they 
were going to get referrals from this doctor, then I think you 
have got to believe in the tooth fairy and the boiling seas.
    There are thousands more examples. If this money had come 
from a pharmaceutical company, we would say, ``Oh my goodness, 
they are giving this doc all this money to use their 
pharmaceuticals,'' which does happen, I might add. The oncology 
profession has quadrupled their fees through the high markups 
of drugs which they think only they can administer. And 
Medicare is paying the bill, and I know no way that the 
patients are advantaged by the extra profits these doctors are 
making on the pharmaceuticals. And I can assure you the 
taxpayers are being disadvantaged.
    Now, I suspect that a doctor in jail would have the same 
meritorious effect that one of our colleagues in jail would 
have, and that we would all clean up our act and they will as 
well. We are seeing it with Columbia. My hope is that Columbia 
executives will rot in jail for a while, and then we won't have 
to do so much legislating because other hospital executives 
will get the message that if you steal from the Government, you 
do hard time.
    So this is basically a bunch of specialists, and mostly 
their attorneys, dreaming up ways to get money to which they 
are not entitled. And it is difficult to write laws to keep 
abreast of people who have creative genius in stealing money 
from the Government.
    We have, in the tax field, as we all know, a new loophole 
every year created by some creative genius who is figuring out 
a way to get around the law. And it is why the Tax Code is this 
thick. Not because we decided to make it complicated. It is 
because of the innate greediness of those who don't want to pay 
their fair share.
    So it is, and we will hear from the Government about the 
number of pending fraud cases and the fact that we ought to 
give HCFA some more money to go after these people and round 
them up. Perhaps if they found that they would go to jail if 
they steal or harm our patients by over-utilization of 
services, or, on the managed-care side, under-utilization, that 
the profession would self-police.
    But I do not think that the answer is just every time it is 
inconvenient for some physician to not get all the money to 
which they feel they are entitled, to send their lawyers here 
to bleed all over the place and say the law is complicated.
    I just say, don't take the money. You make enough money as 
a physician just getting the fee to which you are entitled. And 
when you start to branch out--if you want to go into another 
business--quit billing Medicare for your medical practice and 
go into the other business. It's a free country.
    But I do not see that we ought to encourage under any 
circumstances the bundling of services or the increase in the 
provision of services. And I agree with the Chair, we shouldn't 
allow a lot of physicians to buy the equipment and operate it 
in their office if it isn't good medical practice.
    That is beyond the ability of this Committee to determine, 
but my sympathies lie largely with the Inspector General's 
Office and the bureaucrats who are overworked and underpaid in 
trying to keep ahead of a group who use their ill-gotten gains 
to hire fancy attorneys and accountants to get around the laws.
    So we will hear today from the bleeding hearts about they 
aren't making enough money off Uncle Sam, and I look forward 
with great interest to their protestations.
    [The opening statement of Hon. Jim Ramstad follows:]

Statement of Hon. Jim Ramstad, a Representative in Congress from the 
State of Minnesota

    Mr. Chairman, thank you for calling this important hearing 
on the Medicare self-referral laws.
    As elected government officials, we try to solve problems 
that are brought to us by our constituents. Many times we are 
able to help, and that is our job. Some other times, however, 
we may overshoot our mark and actually enact legislation that 
unintentionally causes a series of other problems. It is then 
our responsibility to revisit our efforts and undo as much of 
the damage as we can.
    Such is the case before us today. While the self-referral 
laws were intended to 
remove potential conflicts of interest from physician decision 
making, we are seeing that they are actually raising health 
care costs, interfering in the practice of medicine and 
disrupting the development of new, innovative approaches for 
delivering health care services to America's seniors.
    In addition, it is my understanding that hospitals and 
physicians are subject to a myriad of other over-lapping 
federal and state laws that are also aimed at rooting out 
fraud, abuse and kickbacks within the health care system. This 
prompts one to consider whether these laws, with all their 
unintended and problematic consequences, are appropriate and 
necessary anyway.
    The famous health care creed is ``first do no harm.'' If 
our policies are doing more harm than good, it is imperative 
that we as health care policy makers find ways to fix them.
    Thank you again, Mr. Chairman, for calling this important 
hearing. I look forward to hearing from today's witnesses on 
ways we can provide relief from any unnecessary government 
rules and regulations without compromising the integrity of the 
Medicare system.

                                

    Chairman Thomas. A public service announcement. This 
doesn't necessarily apply to the panel I am about to introduce. 
From the Health Care Financing Administration, we have gotten 
Kathleen Buto, who has been a long-time professional in this 
area, a civil service servant who has been through a number of 
administrations, and we look forward to her testimony.
    We also have Mr. McCarty Thornton, who is back with us 
again from the Office of Counsel to the Inspector General and 
has been involved, directly with the question of medical 
integrity.
    So, any written testimony will be a part of the record, and 
you can address this in any way you see fit. Start with Ms. 
Buto, and then go to Mr. Thornton.

  STATEMENT OF KATHLEEN A. BUTO, DEPUTY DIRECTOR, CENTER FOR 
       HEALTH PLANS AND PROVIDERS, HEALTH CARE FINANCING 
                         ADMINISTRATION

    Ms. Buto. Thank you very much, Chairman Thomas, Congressman 
Stark and distinguished Subcommittee Members. Thank you for 
inviting us to discuss limits on physician self-referral.
    These limits are based on numerous studies, as others have 
already pointed out, showing that physicians made far more 
referrals when they had a financial interest in a testing or 
treatment facility. They were enacted in law with leadership 
from this Subcommittee to prevent increased costs and potential 
harm to beneficiaries from unnecessary treatments.
    However, important exceptions to these limits are needed to 
protect beneficiaries' access to care and to take into account 
the many detailed financial arrangements in today's healthcare 
delivery system.
    Adequately defining these exceptions and determining 
whether new exceptions are warranted has proven to be a 
daunting task. We have spent a great deal of time meeting and 
talking with industry associations, individual providers, and 
their attorneys in an effort to deal fairly and proactively 
with the many issues subject to interpretation. And we are 
continuing to do so.
    We have taken steps in our proposed rules to clarify the 
law and create appropriate flexibility. One of the most 
important steps establishes that compensation arrangements are 
generally permissible as long as they meet fair-market value 
standards, further a legitimate business purpose, and are not 
tied to the volume or value of physician referrals.
    This exception goes a long way in simplifying the policy 
under the law. Our proposed rules also significantly limit the 
information that physicians are required to report for 
financial relations related to the 10 new designated services 
added to the law in 1993.
    We are not asking physicians to submit information 
regarding these financial relationships, as we did for clinical 
lab services. Instead, physicians need only keep on file the 
kind of information that they would normally maintain to meet 
IRS, SEC, and other Medicare and Medicaid rules. This would be 
sufficient to demonstrate compliance in the event of a 
complaint investigation or a spot audit.
    No other type of enforcement actions will be taken until 
outstanding questions are resolved and a final rule is 
published.
    We continue to evaluate the 12,800 comments we have 
received on the proposed rules and are open to ideas to further 
simplify the regulations and the law itself in ways that do not 
undermine its intent. We are considering a wide range of 
clarifications and other suggestions to determine whether they 
would meet the statutory requirement that exceptions not create 
a risk of program or patient abuse.
    But we must take care to uphold the law's intent and 
prevent arrangements that would increase cost to taxpayers and 
subject beneficiaries to possible harm from unnecessary tests 
and procedures.
    I am pleased that we were able to issue, pretty much in 
record time, an interim final rule with comment to implement 
the advisory opinion provisions in the Balanced Budget Act and 
that we have already begun to process a number of requests for 
advisory opinions. Some 20 have been received, and we have 
issued two opinions. Currently we are looking at about eight 
that remain in the workload.
    We greatly appreciate the good-faith efforts made by 
physicians to comply with the law and to work with us to 
address the issues that it raises. We look forward to 
continuing to work with these groups and with the Subcommittee 
to resolve remaining issues.
    I thank you for holding this hearing, and I am happy to 
answer your questions.
    [The prepared statement follows:]

Statement of Kathleen A. Buto, Deputy Director, Center for Health Plans 
and Providers, Health Care Financing Administration

    Chairman Thomas, Congressman Stark, distinguished 
Subcommittee Members, thank you for inviting us to discuss 
limits on physician self-referrals for Medicare and Medicaid 
beneficiaries. These limits were enacted into law, with 
leadership from this Subcommittee, to prevent increased program 
costs and potential harm to beneficiaries from unnecessary 
tests and treatments. They are based on numerous studies 
showing that physicians made far more referrals when they had a 
financial interest in a testing or treatment facility. Some 
studies also found higher prices and lower quality with self-
referrals. The American Medical Association has declared self-
referral unethical in most instances.
    Self-referral limits play an important role in bolstering 
our successful efforts against fraud, waste, and abuse. 
However, we would all agree that we must take great care in 
translating this important legislation into policy. Important 
exceptions are needed to protect beneficiaries' access to care, 
and we must take into account the many detailed financial 
arrangements in today's health care delivery system. We would 
also all agree that physicians and other health care entities 
have by and large made a good faith effort to comply with the 
law without final regulations to clarify many issues.
    We have taken steps in our proposed regulations to clarify 
the law and create appropriate flexibility. One of the most 
important provisions establishes that referrals to an entity 
with which a physician has a compensation arrangement are 
generally permissible as long as the compensation is at ``fair 
market value,'' furthers a legitimate business purpose, and is 
not tied to the volume or value of physician referrals. This 
exception goes a long way in simplifying the policy under the 
law.
    We are evaluating the 12,800 comments we received on these 
proposed regulations, and are open to ideas to further simplify 
the regulations and the law itself in ways that do not 
undermine its intent. But we must take care to uphold its 
intent and prevent arrangements that would increase costs to 
taxpayers and subject beneficiaries to possible harm from 
unnecessary tests and procedures.
                               Background
    Concern about the ethical risks inherent in physician self-
referral dates back at least to a 1986 Institute of Medicine 
study. A 1989 HHS Inspector General study documented that 
physicians who owned or invested in independent clinical 
laboratories referred Medicare patients for 45 percent more 
laboratory services than did physicians who did not have such 
financial interests. In 1991, the American Medical Association 
Council on Ethical and Judicial Affairs concluded that 
physicians should not refer patients to a health care facility 
outside their office at which they do not directly provide 
services and in which they have a financial interest. And in 
1992, the American Medical Association House of Delegates voted 
to declare self-referral unethical in most instances.
    Limits on self-referral were first enacted into law as part 
of the Omnibus Budget Reconciliation Act of 1989. The law took 
effect January 1, 1992. It bars referral of Medicare patients 
to clinical laboratories by physicians who have, or whose 
family members have, a financial interest in those 
laboratories. The Omnibus Reconciliation Act of 1993 expanded 
the scope of the ban on self-referral to 10 additional 
designated health services, including:
     physical therapy;
     occupational therapy;
     radiology services;
     radiation therapy services and supplies;
     durable medical equipment and supplies;
     parenteral and enteral nutrients, equipment and supplies;
     orthotics, prosthetics, and prosthetic devices and 
supplies;
     home health services;
     outpatient prescription drugs; and
     inpatient and outpatient hospital services.
    The 1993 law also expanded and clarified exceptions, and 
applied the referral limits to Medicaid. Provisions related to 
the new designated health services were effective January 1, 
1995.
    The self-referral law works differently from the law 
against kickbacks, which was enacted as part of the Social 
Security Amendments of 1972. Enforcement of the anti-kickback 
law requires proof of ``knowing'' and ``willful'' illegal 
remuneration, such as bribes or rebates, for patient referrals, 
and it can result in criminal sanctions. Self-referral laws, on 
the other hand, are generally self-enforcing. The simple 
existence of an improper financial relationship is subject to 
loss of Medicare payment or a civil fine. This creates a 
powerful incentive to proactively comply with the law through 
due diligence efforts to avoid financial arrangements that may 
unethically lead to substantial increases in use of services. 
The law's preventive nature makes a highly effective 
contribution to our increasingly successful efforts to protect 
Medicare and Medicaid program integrity.
                               Exceptions
    As mentioned above, the law includes many important 
exceptions. It also gives the Health and Human Services 
Secretary authority to create new exceptions through 
regulations as long as they do not create a risk of program or 
patient abuse. One of the most important exceptions is for most 
services physicians provide in their own offices or through 
their group practices. There are more than a dozen additional 
exceptions, including ones for managed care plans, rural 
providers, and isolated financial transactions.
    Adequately defining these exceptions and determining 
whether new exceptions are warranted has proven to be a 
daunting task. We have spent a great deal of time meeting and 
talking with industry associations, individual providers, and 
their attorneys in efforts to deal fairly and proactively with 
the many issues subject to interpretation. We are continuing 
these efforts.
                              Regulations
    We published proposed regulations for the clinical 
laboratories referral ban on March 11, 1992, and a final rule 
with comment period on August 14, 1995. These regulations have 
been in effect since September 13, 1995.
    We published proposed regulations for the other designated 
services on January 9, 1998. These proposed regulations were 
generally well received. The American Hospital Association has 
said they make it easier for physicians and hospitals to work 
together in integrated systems. The proposed regulations 
include several clarifications and create new exceptions, 
providing flexibility for physicians while not compromising the 
intent of the law. They:
     create a ``fair market value'' exception to make clear 
that compensation arrangements are generally permissible as long as 
they are at fair market value, further a legitimate business purpose 
and are not tied to the volume or value of physician referrals. 
Physicians must simply put in writing the terms of their arrangements, 
the items or services the physician will provide, and the time period 
involved. The agreement must be commercially reasonable and not based 
on the volume or value or referrals made, and must comply with the 
anti-kickback statute;
     state that token gifts, such as free parking at a 
hospital, are allowed as long as the value is $50 or less with an 
annual maximum of $300 and there is no direct link to patient 
referrals.
     clarify that physicians can provide crutches to patients 
as long as the physicians do not profit;
     allow for discounts as long as they are passed along to 
the patient or insurer with no benefit to the physician;
     clarify that a financial transaction qualifies for the 
``isolated'' exception only if another financial relationship does not 
occur within six months; and
     clarify an exception for recruitment payments made by 
hospitals to encourage physicians to relocate to the hospital's 
geographic area, and invite comments on how that geographic area should 
be defined.
    The Omnibus Reconciliation Act of 1997 instructed the 
Health Care Financing Administration to issue, upon request, 
advisory opinions as to whether particular arrangements would 
violate self-referral policy. We published a final regulation 
implementing this provision January 9, 1998. To date, we have 
issued two such advisory opinions and are working on several 
others.
                       Reporting and Enforcement
    Our proposed regulations also significantly limit the 
information that physicians are required to report for 
financial relations related to the 10 new designated services. 
Also, we are not asking physicians to submit information 
regarding these financial relationships as we did for clinical 
laboratory services. Instead, physicians need only keep on file 
the kind of information that they would normally maintain to 
meet Internal Revenue Service, Securities Exchange Commission, 
and other Medicare and Medicaid rules. This would be sufficient 
to demonstrate compliance in the event of a complaint 
investigation or spot audit. No other type of enforcement 
actions will be taken until outstanding questions are resolved 
and a final rule is published.
                               Conclusion
    While the general response to our proposed regulations was 
positive, many outstanding issues remain. We extended the 
public comment period by two months in order to provide more 
time for interested parties to respond. The public comment 
period closed on March 10, 1998. We are reviewing the 12,800 
comments we received and continuing to evaluate how we should 
address the many concerns that have been raised in final 
regulations. Many comments involve issues related to physicians 
in multi-specialty group practices and to a requirement in the 
law for direct supervision by physicians of services provided 
in physician offices. We are considering a wide range of 
clarifications and other suggestions to determine whether they 
can be addressed through regulations and would meet the 
statutory requirement that exceptions not create a risk of 
program or patient abuse.
    We greatly appreciate the good faith efforts made by 
physicians to comply with the law and to work with us to 
address the many issues raised by this complex legislation. We 
look forward to continuing to work with physician groups and 
this Subcommittee to resolve remaining issues. I thank you for 
holding this hearing, and I am happy to answer your questions.

                                

    Chairman Thomas. Thank you very much, Ms. Buto. Mr. 
Thornton.

    STATEMENT OF D. McCARTY THORNTON, CHIEF COUNSEL TO THE 
   INSPECTOR GENERAL, OFFICE OF THE INSPECTOR GENERAL, U.S. 
            DEPARTMENT OF HEALTH AND HUMAN SERVICES

    Mr. Thornton. Thank you, Mr. Chairman. In 1989, OIG 
conducted the very first study on physician ownership from 
healthcare entities to which they make referrals. We found that 
patients of referring physicians who own or invest in clinical 
labs receive 45 percent more of such services than all Medicare 
patients in general.
    Nine more studies have appeared in the professional 
literature, including four in the New England Journal of 
Medicine and three in the Journal of the American Medical 
Association. They support and expand on our original 1989 
findings, often finding significant increases in utilization 
where there is a financial reward for doing so.
    The studies have been subject to criticism, in that most of 
them do not measure other factors, such as whether the 
additional referrals are medically necessary. However, it 
should be noted that some of the studies do address such 
issues.
    For example, the 1992 study in the New England Journal 
found that self-referring physicians ordered medically 
unnecessary MRI scans about 36 percent of the time more often 
than physicians making referrals where they had no financial 
arrangement.
    While these studies may not be conclusive, taken as a 
whole, they strongly support, we believe, the proposition that 
many physicians respond to financial rewards for ordering 
ancillaries.
    Now, before the enactment of section 1877, which I will 
refer to as ``the section,'' the only statute available to 
handle the self-referral issue was the anti-kickback statute, a 
broadly-worded statute which requires proof of ``knowingly and 
willfully'' paying anything of value to induce the referral of 
Federal program business. It was and is very unrealistic to 
rely on the anti-kickback statute as a means to control self-
referral.
    The difficulty in proving knowing and willful behavior 
cannot be underestimated, as it requires proof of the mental 
thoughts and motivations of particular human beings.
    The serious limitations of the anti-kickback statute can be 
illustrated by our case against the Hanlester Network, where we 
had, we thought, very strong evidence of intent to pay for 
referrals. For example, only physicians in a position to refer 
were solicited for investments in the labs. And the numbers of 
shares offered to each physician were related to the expected 
amount of referrals from each doctor.
    The labs harassed investors if referrals were lower than 
expected and even expelled some investors who did not refer 
enough. However, when our case reached the Ninth Circuit, they 
disagreed and vacated our case.
    By contrast, the section is a condition of Medicare and 
Medicaid payment with no mental element. I note that the 
Hanlester joint ventures that I just spoke of were formed 
before the section went into effect. Under the section, section 
1877, none of the complicated evidence I described regarding 
intent would be needed.
    Under the section, billings for clinical lab services 
ordered by physician-investors were as of then not payable. 
Very simple.
    While the section contains areas of ambiguity, it has 
established certain core principles for Medicare and Medicaid 
providers which we believe have been a great benefit to the 
programs. Most of these principles are relatively clear and 
unambiguous. For example, under the section, one cannot bill 
the programs for a designated health service from a joint 
venture owned by a disparate group of physician-investors.
    Similarly, one cannot enter a personal-services contract 
with a referring physician for more than fair-market value. Nor 
can the compensation vary according to the volume or value of 
referrals.
    These core principles have been largely effective. For 
example, while questionable joint ventures were proliferating 
in the late eighties and early nineties, they are much less 
common today. Much of the credit for this development must be 
given to the section.
    Another positive feature of the section is that it is, to a 
large degree, self-enforcing. Healthcare companies being 
purchased, merged, or refinanced, which has certainly been a 
predominant trend in this decade, are legally required to 
undergo a due-diligence examination, including an examination 
of current contracts with physicians and ancillary providers.
    To sum up, the research on physician behavior indicates 
that financial incentives do increase the rate at which 
physicians order items and services, although, obviously, this 
does not apply to every physician.
    It may now be appropriate to revisit the section, to assess 
whether its objectives could be achieved with simpler 
provisions. It would also be appropriate to determine if there 
are any significant loopholes.
    Our recommendation is that whatever changes are considered, 
the section should continue to function as a bulwark against 
inappropriate incentives to physicians.
    Thank you, sir.
    [The prepared statement follows:]

Statement of D. McCarty Thornton, Chief Counsel to the Inspector 
General, Office of the Imspector General, U.S. Department of Health and 
Human Services

    Good morning Mr. Chairman and members of the Subcommittee. 
I am D. McCarty Thornton, Chief Counsel to the Inspector 
General for the Office of Inspector General (OIG) at the 
Department of Health and Human Services. We appreciate the 
opportunity today to address the law concerning physician self 
referral, i.e, situations where physicians obtain financial 
incentives which may increase their ordering of items and 
services paid by Federal health care programs.
    Much has been learned since 1989 about the issue of self-
referral, when it became a matter of attention by this 
committee and the Congress, and by our office. We suspected 
then-that physician referral of patients to health care 
entities like clinical laboratories with which they have a 
financial interest creates a situation where the financial 
reward can insinuate itself into patient care, and possibly 
lead to inappropriate use of medical services. Now we are 
convinced that self referral has consequences in the real 
world. Our own law enforcement experience, and the findings of 
ten studies published in the professional literature, indicate 
that many (but certainly not all) physicians respond to 
financial incentives by increasing their ordering of medical 
items and services. If unaddressed, this situation could result 
in unnecessarily higher costs to patients, insurers, and the 
Medicare and Medicaid programs, and can prevent patients from 
receiving the best quality of care. It could also expose 
patients to unnecessary medical procedures.
    In response to this issue, in 1989 the Congress enacted 
Section 1877 of the Social Security Act, and in 1993 enacted 
significant amendments thereto. This statute, also known as the 
``Stark Law,'' established certain core concepts regarding self 
referral which have proved effective in preventing many abusive 
arrangements. For example, one cannot ``joint venture'' a 
clinical laboratory with a group of physicians whose only 
relationship to the laboratory is to refer laboratory work and 
share investment profits. Because this law is a condition of 
payment under the Medicare program, it is largely self 
enforcing, and it is accomplishing much of its basic purpose.
    Section 1877 has been subject to considerable criticism, 
resulting from ambiguity in how the law applies to certain 
particular types of business arrangements among physicians and 
other health providers. In addition, we are well aware that the 
structure of medical practice is becoming increasingly complex, 
as physicians and other medical care entities try to deliver 
patient care through managed care and other integrated systems. 
We can well appreciate how complicated is the task of those 
physicians, medical service providers, and members of Congress 
who wish to reduce the potentially harmful incentives of 
physician ownership, while encouraging the development of 
modern medical care systems. Yet the statute and the proposed 
regulations of the Health Care Financing Administration do 
contain many exceptions intended to accommodate these concerns. 
While it may be time to revisit the statute to see if its 
objectives can be achieved in simpler, more understandable 
ways, we would caution against changes which would allow 
arrangements to flourish which give financial rewards to 
physicians who may inappropriately increase their ordering of 
items and services separately paid by Medicare and Medicaid.
                      Concerns About Self-Referral
    The overall concern about self-referral is that when a 
physician sits down with a Medicare or Medicaid beneficiary, 
that the medical decisions made should be on the basis of what 
is in the best medical interest of that beneficiary. That is 
what the beneficiaries have a right to expect, and do expect. 
They want to be assured that financial interests are not 
affecting physician decisions about their medical care.
    There are other related concerns, including: over-
utilization, patient choice, and competition. The over-
utilization issue relates to the items and services ordered for 
patients which would not be ordered if the physician had not 
been rewarded financially. Such over-utilization becomes a 
direct cost to the health care system, including Medicare and 
Medicaid. The patient choice issue concern relates to the 
steering of patients to a less convenient, lower quality, or 
more expensive provider, just because that provider is 
rewarding the doctor. And lastly, where referrals are 
controlled by those sharing profits, the medical marketplace 
suffers since new competitors can no longer win the business 
with superior quality, service or price.
                       Inspector General's Report
    In the late 1980's, a trend developed where various kinds 
of ancillary providers, such as laboratories, MRI facilities, 
physical therapy clinics and others, would syndicate or joint 
venture themselves with physicians in a position to refer 
business, often in exchange for only a nominal investment. In 
June 1988, the Congress mandated that the OIG conduct a study 
on physician ownership and compensation from health care 
entities to which they make referrals. We published the report 
in May 1989. (Financial Arrangements Between Physicians and 
Health Care Businesses, OAI-12-88-01410.)
    Our methodology included surveys of health care providers 
and analysis of claims information. First, we conducted two 
surveys of health care providers to determine the prevalence of 
physician financial involvement with other health care entities 
and the nature of such arrangements. One survey was sent to 
physicians; the other to independent clinical laboratories, 
independent physiological laboratories, and durable medical 
equipment manufacturers. We used claims information from HCFA's 
Part B Medicare Annual Data files for 1987 to assess 
utilization patterns for patients of physician-owners 
identified through our survey of health care businesses. 
(Physicians with designated specialty codes indicating 
radiology or pathology were dropped from the analysis of 
clinical and physiological labs since these physicians are not 
in a position to refer patients.) Finally, we interviewed State 
officials, industry representatives, health care experts, and a 
sub-sample of provider respondents to our survey.
    We found that 12 percent of physicians were owners of 
entities to which they referred patients and eight percent had 
compensation arrangements with such entities. Twenty-five 
percent of independent clinical laboratories, 27 percent of 
independent physiological laboratories, and eight percent of 
durable medical equipment companies were owned at least in part 
by physicians who made referrals of items or services to them.
    We found that patients of referring physicians who own or 
invest in clinical laboratories received 45 percent more such 
services than all Medicare patients in general, regardless of 
place of service. We estimated that this increased utilization 
of services provided by independent clinical laboratories by 
patients of physician-owners cost the Medicare program $28 
million in 1987. The projected costs of the increased 
utilization of these services by patients of physician-owners 
would be $103 million in 1995, if there were no change in 
utilization patterns.
    The study also found that patients of physicians known to 
be owners or investors of independent physiological 
laboratories use 13 percent more physiological testing services 
than all Medicare patients in general. We found no difference 
in number of durable medical equipment services. However, our 
study did not examine cost differences for either physiological 
tests or durable medical equipment, nor did we examine 
differences in the kinds of medical equipment provided to 
patients of physician-owners and non-owners. In other words, we 
did not study the question of whether owners ordered more 
expensive tests or equipment compared to non-owners.
           Additional Studies of the Effect of Self-Referral
    Since our initial study in 1989, nine more major studies 
have appeared in the professional literature, including four in 
the New England Journal of Medicine and three in the Journal of 
the American Medical Association. They support and expand upon 
our original 1989 findings. For example, a quite comprehensive 
study published in September 1991 by the Florida Health Care 
Cost Containment Board found that 93 percent of diagnostic 
imaging facilities in Florida were joint ventures with 
physicians. It also found that compared to non-doctor 
affiliated facilities of the same type, doctor-affiliated 
clinical labs, diagnostic imaging facilities, and physical 
therapy facilities: performed more procedures on a per-patient 
basis; charged higher prices; and were not located in rural or 
urban under served areas.
    Additional studies have found increased utilization for a 
variety of services when the physicians have ownership 
interests in the entities to which they refer their patients, 
including clinical laboratory services, radiology services 
(particularly for high costs services such as MRI and CT 
scans), physical therapy and rehabilitation, radiation therapy 
and psychiatric evaluation. I have attached a synopsis of the 
various studies on this subject.
    The studies have been subject to criticism in that most of 
them do not eliminate or measure other factors besides 
financial rewards which could influence a physician to use more 
of an ancillary item or service. Some physicians have sicker 
patient populations than others. Some physicians are more 
familiar with and thus may be higher utilizers of certain 
ancillaries than other physicians. Most of the studies do not 
attempt to assess medical necessity of the ancillary items or 
services delivered. However, some of the studies address such 
issues. For example, a 1992 study in the New England Journal of 
Medicine by Swedlow, et al., assessed the medical 
appropriateness of MRI scans. The study found that self-
referring physicians ordered medically inappropriate MRI scans 
about 36 percent more often than physicians making referrals 
where they had no financial arrangement.
    A 1990 nationwide study by Hillman, et al. in the New 
England Journal of Medicine compared the frequency and costs of 
the use of diagnostic imaging for four clinical presentations 
(acute upper respiratory symptoms, pregnancy, low back pain, or 
(in men) difficulty in urinating) as performed by physicians 
who used imaging equipment in their offices (self-referring) 
and as ordered by physicians who always referred patients to 
radiologists (radiologist-referring). The authors concluded 
that self-referring physicians used imaging examinations at 
least four times more often than radiologist-referring 
physicians and the charges were usually higher when the imaging 
was done by the self-referring physicians. Significantly, the 
authors reported that these differences could not be attributed 
to differences in the mix of patients, the specialties of the 
physicians or the complexity of the imaging examinations 
performed.
    Despite their shortcomings, these studies taken as a whole 
strongly support the proposition that many physicians respond 
to financial rewards. We are not aware of any body of 
professional literature to the contrary, nor is it likely the 
New England Journal of Medicine and Journal of the American 
Medical Association would publish a total of seven studies on 
this topic if the studies lacked probity. Moreover, our law 
enforcement experience tells us that some physicians respond 
inappropriately to financial rewards. Not infrequently, when we 
find cases of abnormally high and questionable utilization, 
there is a financial reward at work.
         Federal Legislation Prohibiting Medicare Payment for 
                         Self-Referred Services
    Before the enactment of section 1877 of the Social Security 
Act, the only statute available to handle the self-referral 
issue was the Medicare and Medicaid anti-kickback statute (42 
U.S.C. Sec. 1320a7b(b)). This is a broadly-worded, criminal 
statute which requires proof of ``knowingly and willfully'' 
paying anything of value in exchange for the referral of 
Federal program business. The statute is also a basis for 
exclusion from Medicare and Medicaid.
    As of 1989, the anti-kickback statute had never been 
applied to the area of physician investment in ancillary 
facilities where the physician was sending patients. In April 
1989, we issued a Fraud Alert on Joint Venture Arrangements, 
which specified those types of investment interests between 
physicians and the providers of ancillary medical facilities 
which we considered to be clearly violative of the anti-
kickback law. This Fraud Alert was intended as a warning to 
those engaging in abusive self-referral schemes, and we sent a 
copy to each and every provider of health care services to the 
Medicare program.
    Nevertheless, it was and is very unrealistic to rely on the 
anti-kickback statute as a means to control self referral. 
First, as noted above, in a kickback case the burden of proof 
on the government is to establish a mental element--``knowingly 
and willfully'' intending to induce referrals. The difficulty 
in proving such a subjective notion cannot be underestimated, 
as it requires proof of the mental thoughts and motivations of 
particular human beings. This difficulty is compounded by the 
fact that the Federal Courts of Appeal have adopted at least 
three distinctly different interpretations of the term 
``willfully'' as used in the anti-kickback statute. [Contrast 
Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995), 
U.S. v. Jain, 93 F.3d 436 (8th Cir. 1996), cert denied, 520 
U.S. 1273, 117 S.Ct. 2452, 138 L.Ed.2d 210 (1997), and U.S. v. 
Starks, 157 F.3d 833 (11th Cir. 1998).]
    The serious limitations of the anti-kickback statute can be 
illustrated by our case against the Hanlester Network, which 
set up three clinical laboratory companies in Southern 
California which were largely shell labs--most of the actual 
testing was performed at a large SmithKline lab. Only 
physicians in a position to refer were solicited for 
investment, shares were offered in nominal total amounts, and 
the numbers of shares offered to each physician were related to 
the expected amount of referrals from them. Physicians were 
bared from investing in any other labs, and were required to 
sell back their shares if they ceased being in a position to 
refer. Very high rates of return (up to 300-400 percent) were 
discussed if the physicians would follow through with 
referrals. The laboratories monitored referrals from all the 
investors, harrassed them if referrals were lower than 
expected, and even expelled some investors who did not refer 
enough. We believed that we had sufficient proof of a kickback 
violation, but the Ninth Circuit disagreed. See Hanlester 
Network, supra. The court held that we had to show that the 
defendants specifically knew about the anti-kickback statute 
and specifically intended to violate that statute.
    The Hanlester joint ventures were formed before Section 
1877 went into effect in 1992. Under Section 1877, none of the 
above evidence regarding intent would be needed to handle the 
situation; billings for such clinical laboratory services 
ordered by physician investors were then not payable, period.
    With the realization that the anti kickback statute would 
not handle the self referral issue, and based in part on the 
results of our 1989 study, in November, 1989, Congress passed 
Section 1877 of the Social Security Act (``Stark I''). Section 
1877 prohibited Medicare payment for clinical laboratory 
services where the physician (or immediate family member) who 
orders the service has a ``financial relationship'' with the 
laboratory. The statute defined the term ``financial 
relationship'' to include both ownership or investment 
interests in an entity (which may be through equity, debt or 
other means) and compensation arrangements with an entity 
(which are defined as arrangements involving any remuneration 
between a physician and an entity). The statute contained a 
number of detailed exceptions to the definition of financial 
relationship to provide for legitimate arrangements between 
physicians and laboratories.
    In the Omnibus Budget Reconciliation Act of 1993 (OBRA 
'93), Congress expanded the scope of section 1877 to include 10 
additional services--so-called ``designated health services.'' 
(These amendments are often referred to as ``Stark II.'') In 
addition to clinical laboratory services, the statute now 
covers:
     physical therapy services;
     occupational therapy services;
     radiology services, including MRIs, CAT scans and 
ultrasound services;
     radiation therapy services and supplies;
     durable medical equipment and supplies;
     parenteral and enteral nutrients, equipment, and supplies;
     prosthetics, orthotics, and prosthetic devices and 
supplies;
     home health services;
     outpatient prescription drugs; and
     inpatient and outpatient hospital services.

    In addition, the statute was expanded from applying to just 
Medicare to apply to Medicaid as well. OBRA '93 also added new 
exceptions and revised the existing exceptions so that 
legitimate arrangements between entities and physicians can be 
accommodated.
    Significantly, Section 1877 is a condition of Medicare and 
Medicaid payment; in other words, by law a provider must be in 
compliance in order to be entitled to be paid by the programs. 
Those not in compliance with Section 1877 may not bill the 
programs, and if they have, they are liable to return program 
payments. For this basic remedy, the government need not prove 
that the defendant ``knowingly and willfully'' intended to 
induce referrals, as it must under the anti-kickback statute.
    While Section 1877 contains areas of ambiguity, the statute 
has established certain core principles for Medicare and 
Medicaid providers which have been of great benefit to these 
programs and their beneficiaries. Most of these principles are 
relatively clear and unambiguous. For example, under Section 
1877, one cannot bill the programs for clinical laboratory 
services from a joint venture owned by a disparate group of 
physician investors. The same simple rule applies to the other 
designated health services, and there are some reasonable 
exceptions, such as for physician ownership in whole hospitals. 
Similarly, one cannot enter a personal services contract with a 
referring physician for more than fair market value, nor can 
the compensation vary according to the volume or value of 
referrals.
    The importance of these core principles should not be 
underestimated. They have made it much more difficult to 
structure business relationships in the health care industry to 
financially reward physicians for referrals. For example, while 
questionable joint ventures were proliferating in the late 
1980's and early 1990's, they are much less common today. Much 
of the credit for this development must be given to Section 
1877.
    Another positive feature of Section 1877 is that it is to a 
large degree self-enforcing. As noted above, the primary remedy 
for Section 1877 is denial of payment, with no mental element 
of the offense. This simple approach has lead to self 
enforcement through the actions of accountants and attorneys 
performing due diligence examinations in connection with health 
care corporate restructuring and financing. Health care 
companies being purchased, merged or refinanced, which has 
certainly been a predominant trend in the 1990's, are legally 
required to undergo a ``due diligence'' examination, including 
an examination of current contracts with physicians and 
ancillary providers. We are informed that compliance with 
Section 1877, being a payment requirement, is commonly one of 
the subjects carefully studied by those performing due 
diligence.
    On the other hand, it is comparatively rare that OIG finds 
evidence of violations sufficient to meet the strict legal 
standard in the civil monetary penalty authorities in Section 
1877, which require the government to establish that an offense 
was committed with the following states of mind: that the 
improper claim was filed with 
actual knowledge, recklessness, or conscious disregard of the 
law. All these tests require proof of a mental element. Where 
evidence sufficient to meet this standard is uncovered, the 
case usually involves offenses other than Section 1877, and the 
cases are handled by the Department of Justice under the False 
Claims Act (which has the identical mental element to prove an 
offense).
                               Conclusion
    The research on physician behavior indicates that financial 
incentives do increase the rate at which physicians order items 
and services. Obviously, this conclusion does not apply to 
every physician. But as a general matter, section 1877 does 
address an issue which has a real potential cost to the 
Medicare and Medicaid programs and their beneficiaries and 
could adversely affect quality of care. It may be appropriate 
to revisit the statute to assess whether its objectives could 
be achieved with any simpler provisions, but it would also be 
appropriate to determine if there are any significant 
loopholes. Our recommendation is that whatever changes are 
considered, the statute should continue to function as a 
bulwark against inappropriate financial incentives for 
physicians to order ancillary items and services. We are ready 
to assist the subcommittee in evaluating proposed changes to 
the statute.

                                

Attachment

                         Self-Referral Studies

    A. Financial Arrangements Between Physicians and Health 
Care Businesses: Office of Inspector General--OAI-12-88-01410 
(May 1989)

    In 1989, the Office of Inspector General (OIG) issued a 
study on physician ownership and compensation from entities to 
which they make referrals. The study found that patients of 
referring physicians who own or invest in independent clinical 
laboratories received 45% more clinical laboratory services 
than all Medicare patients in general, regardless of place of 
service. OIG also concluded that patients of physicians known 
to be owners or investors in independent physiological 
laboratories use 13% more physiological testing services than 
all Medicare patients in general. Finally, while OIG found 
significant variation on a State by State basis, OIG concluded 
that patients of physicians known to be owners or investors in 
durable medical equipment (DME) suppliers use no more DME 
services than all Medicare patients in general.

B. Physicians' Responses to Financial Incentives--Evidence from 
a For-Profit Ambulatory Care Center, Hemenway D, Killen A, 
Cashman SB, Parks CL, Bicknell WJ. New England Journal of 
Medicine, 1990;322;1059-1063

    Health Stop, a chain of for-profit ambulatory care centers, 
changed its compensation system from a flat hourly wage to a 
system where doctors could earn bonuses that varied depending 
upon the gross income they generated individually. A comparison 
of the practice patterns of fifteen doctors before and after 
the change revealed that the physicians increased the number of 
laboratory tests performed per patient visit by 23% and the 
number of x-ray films per visit by 16%. The total charges per 
month, adjusted for inflation, grew 20%, largely due to an 
increase in the number of patient visits per month. The authors 
concluded that substantial monetary incentives based on 
individual performance may induce a group of physicians to 
increase the intensity of their practice, even though not all 
of them benefit from the incentives.

C. Frequency and Costs of Diagnostic Imaging in Office 
Practice--A Comparison of Self-Referring and Radiologist-
Referring Physicians; Hillman BJ, Joseph CA, Mabry MR, Sunshine 
JH, Kennedy SD, Noehter M: New England Journal of Medicine, 
1990;322:1604-1608

    This study compared the frequency and costs of the use 
diagnostic imaging for four clinical presentations (acute upper 
respiratory symptoms, pregnancy, low back pain, or (in men) 
difficulty in urinating) as performed by physicians who used 
imaging equipment in their offices (self-referring) and as 
ordered by physicians who always referred patients to 
radiologists (radiologist-referring). The authors concluded 
that self-referring physicians use imaging examinations at 
least four times more often than radiologist-referring 
physicians and that the charges are usually higher when the 
imaging is done by the self-referring physicians. These 
differences could not be attributed to differences in the mix 
of patients, the specialties of the physicians or the 
complexity of the imaging examinations performed.

D. Joint Ventures Among Health Care Providers in Florida: State 
of Florida Cost Containment Board (September 1991)

    This study analyzed the effect of joint venture 
arrangements (defined as any ownership, investment interest or 
compensation arrangement between persons providing health care) 
on access, costs, charges, utilization, and quality. The 
results indicated that problems in one or more of these areas 
existed in the following types of services: (1) clinical 
laboratory services; (2) diagnostic imaging services; and (3) 
physical therapy services-rehabilitation centers. The study 
concluded that there could be problems or that the results did 
not allow clear conclusions with respect to the following 
health care services: (1) ambulatory surgical centers; (2) 
durable medical equipment suppliers; (3) home health agencies; 
and (4) radiation therapy centers. The study revealed no effect 
on access, costs, charges, utilization, or quality of health 
care services for: (1) acute care hospitals; and (2) nursing 
homes.

E. New Evidence of the Prevalence and Scope of Physician Joint 
Ventures; Mitchell JK Scott E: Journal of the American Medical 
Association, 1992;268:80-84

    This report examines the prevalence and scope of physician 
joint ventures in Florida based on data collected under a 
legislative mandate. The results indicate that physician 
ownership of health care businesses providing diagnostic 
testing or other ancillary services is common in Florida. While 
the study is based on a survey of health care businesses in 
Florida, it is at least indicative that such arrangements are 
likely to occur elsewhere.
    The study found that at least 40% of Florida physicians 
involved in direct patient care have an investment interest in 
a health care business to which they may refer their patients 
for services; over 91% of the physician owners are concentrated 
in specialties that may refer patients for services. About 40% 
of the physician investors have a financial interest in 
diagnostic imaging centers. These estimates indicate that the 
proportion of referring physicians involved in direct patient 
care who participate in joint ventures is much higher than 
previous estimates suggest.

F. Physicians' Utilization and Charges for Outpatient 
Diagnostic Imaging in a Medicare Population; Hillman BJ, Olson 
GT, Griffith PE, Sunshine JH, Joseph CA, Kennedy SD, Nelson WR, 
Bernhardt LB: Journal of the American Medical Association, 
1992, 268:2050-2054

    This study extends and confirms the previous research 
discussed in section C, above, by focusing on a broader range 
of clinical presentations (ten common clinical presentations 
were included in this study); a mostly elderly, retired 
population (a patient population that is of particular interest 
with respect to Medicare reimbursement); and the inclusion of 
higher-technology imaging examinations. The study concluded 
that physicians who own imaging technology employ diagnostic 
imaging in the evaluation of their patients significantly more 
often and as a result, generate 1.6 to 6.2 times higher average 
imaging charges per episode of medical care than do physicians 
who refer imaging examinations to radiologists.

G. Physician Ownership of Physical Therapy Services: Effects on 
Charges, Utilization, Profits, and Service Characteristics; 
Mitchell JM, Scott E: Journal of the American Medical 
Association, 1992; 268:2055-2059

    Using information obtained under a legislative mandate in 
Florida, the authors evaluated the effects of physician 
ownership of freestanding physical therapy and rehabilitation 
facilities (joint venture facilities) on utilization, charges, 
profits, and service characteristics. The study found that 
visits per patient were 39% to 45% higher in facilities owned 
by referring physicians and that both gross and net revenue per 
patient were 30% to 40% higher in such facilities. Percent 
operating income and percent markup were significantly higher 
in joint venture physical therapy and rehabilitation 
facilities. The study concluded that licensed physical 
therapists and licensed therapist assistants employed in non-
joint venture facilities spend about 66% more time per visit 
treating patients than those licensed workers in joint venture 
facilities. Finally, the study found that joint ventures also 
generate more of their revenues from patients with well-paying 
insurance.

H. Consequences of Physicians, Ownership of Health Care 
Facilities--Joint Ventures in Radiation Therapy; Mitchell JM, 
Sunshine JH: New England Journal of Medicine, 1992;327;1497-
1501

    This study examined the effects of the ownership of 
freestanding radiation therapy centers by referring physicians 
who do not directly provide services (``joint ventures'') by 
comparing data from Florida (where 44% of such centers were 
joint ventures during the period of the study) to data from 
elsewhere (where only 7% of such centers were joint ventures). 
The frequency and costs of radiation therapy treatments at 
free-standing centers were 40% to 60% higher in Florida than in 
the rest of the United States; there was no below-average use 
of radiation therapy at hospitals or higher cancer rates to 
explain the higher use or higher costs. In addition the 
analysis shows that the joint ventures in Florida provide less 
access to poorly served populations (rural counties and inner-
cities) than non-joint venture facilities. Some indicators 
(amount of time spent by radiation physicists with patients and 
mortality among patients with cancer) show that joint ventures 
cause either no improvement in quality or a decline.

I. Increased Costs and Rates of Use in the California Workers' 
Compensation System as a Result of Self Referral by Physicians; 
Swedlow A, Johnson G, Smithline N, Milstein A: New England 
Journal of Medicine, 1992;327;1502-1506

    The authors analyzed the effects of physician self-referral 
on three high-cost medical services covered under California's 
workers' compensation: physical therapy, psychiatric evaluation 
and magnetic resonance imaging (MRI). They compared the 
patterns of physicians who referred patients to facilities of 
which they were owners (self-referral group) to patterns of 
physicians who referred patients to independent facilities 
(independent-referral group). The study found that physical 
therapy was initiated 2.3 times more often by the self-referral 
group than those in the independent-referral group (which more 
than offset the slight decrease in cost per case). The mean 
cost of psychiatric evaluation services was significantly 
higher in the self-referral group (psychometric testing, 34% 
higher; psychiatric evaluation reports 22% higher) and the 
total cost per case of psychiatric evaluation services was 26% 
higher in the self-referral group than in the independent-
referral group. Finally, the study concluded that of all the 
MRI scans requested by the self-referring physicians, 38% were 
found to be medically inappropriate, as compared to 28% of 
those requested by physicians in the independent-referral 
group. There were no significant differences in the cost per 
case between the two groups.

J. Medicare: Referrals to Physician-Owned Imaging Facilities 
Warrant HCFA's Scrutiny (GAO Report No. B-253835; October 1994)

    The U.S. General Accounting Office (GAO) issued a report 
regarding: (1) referrals by physicians with a financial 
interest in joint-venture imaging centers; and (2) referrals 
for imaging provided within the referring physicians' practice 
settings. The analyzes are based on information collected by 
researchers in Florida for the Florida Health Care Cost 
Containment Board and include information on 1990 Medicare 
claims for imaging services ordered by Florida physicians. GAO 
analyzed approximately 1.3 million imaging services performed 
at facilities outside the ordering physicians' practice 
settings and approximately 1.2 million imaging services 
provided within the ordering physicians' practice settings. 
These results are significant because they are based on a 
large-scale analysis of physician referral practices.
    GAO found that physician owners of Florida diagnostic 
imaging facilities had higher referral rates than nonowners for 
almost all types of imaging services. The differences in 
referral rates were greatest for costly, high technology 
imaging services: physician owners ordered 54% more MRI scans, 
27% more computed tomography (CT) scans, 37% more nuclear 
medicine scans, 27% more echocardiograms, 22% more ultrasound 
services, and 22% more complex X rays. Referral rates for 
simple X rays were comparable for owners and nonowners. In 
addition, while referral practices among specialties differed, 
physician owners in most specialties had higher referral rates 
than nonowners in the same specialty.
    GAO also compared the imaging rates of physicians who have 
in-practice imaging patterns (i.e., more than 50% of the 
imaging services they ordered were provided within their 
practice affiliations) with physicians with referral imaging 
patterns (i.e., more than 50% of the imaging services they 
ordered were provided at facilities outside their practice 
affiliations). GAO found that physician with in-practice 
imaging patterns had significantly higher imaging rates than 
those with referral imaging patterns--the imaging rates were 
about 3 times higher for MRI scans; about 2 times higher for CT 
scans; 4.5 to 5.1 times higher for ultrasound, 
echocardiography, and diagnostic nuclear medicine imaging; and 
about 2 times higher for complex and simple X rays.

                                

    Chairman Thomas. Thank you very much. I guess you went up 
the hill and then came down again.
    One of the difficulties I have in dealing with what it is 
that we are going to do with this is, in large part, the 
testimony you just gave, that this is a very important 
provision. However, if we are going to change it, we ought to 
make sure that we change it in a way that it doesn't diminish 
and so forth, and so forth. And what we need to do ultimately 
is figure out what you folks are going to do with it.
    When are we going to get something that could be used? And 
I want to put it in this context because I believe everybody in 
this effort is attempting honestly to make the law work. In 
fact, as I said in my opening comments, we, in 1996 and 1997, 
gave you enormous new tools. And I know on a couple of them you 
fought--kind of resisted accepting them. I think you are now 
comfortable with them.
    Let me ask the question this way: If we had the HIPAA 
provisions and the BBA provisions in place today, and the 
proposal was the legislation called self-referral legislation, 
1993, what hole would the self-referral legislation fill, if we 
had the 1996 and 1997 laws on the books, as we have now? What 
would you want it to look like to give you a more complete 
arsenal, but not difficult to administer, overlapping, or 
confusing, or impossible to implement provisions?
    Either one of you. I don't mind.
    Mr. Thornton. Mr. Chairman, I think as a practical matter, 
the vast majority of the questionable physician-incentives 
schemes that we used to see would be legalized and probably 
would come back into being if there was no self-referral law. 
The HIPAA statute and BBA statute, although they contained many 
very laudable provisions, do not address this issue.
    And neither does the anti-kickback statute. As a practical 
matter, the anti-kickback statute would be available to attack 
a self-referral scheme only if it was egregious.
    Chairman Thomas. If we are really trying for what the 
lawyers call a ``bright-line structure,'' it makes some sense, 
I think, on the ownership question. I mean, I think there you 
can draw lines and it is fairly easy to determine.
    Are you basically saying then that you are going back to 
1993 and defending in its entirety--because I thought at the 
end of your testimony I didn't hear that--defending in its 
entirety the self-referral law? Or is it possible for us to 
discuss that the ownership aspect is an important part, but it 
is the compensation attempt to figure out what the bright lines 
are in an ever-changing, modifying relationship that is causing 
you most of the problems? Is that an accurate statement?
    Would it be OK if the law was just the ownership part, or 
would you still have holes if it was just that?
    Mr. Thornton. The basic problem is that this issue is a 
little bit like squeezing on a balloon: If we squeezed only on 
the ownership part of the balloon, the other part would get 
bigger in volume. By that, I mean that it would be relatively 
simple to reward physicians through compensation arrangements 
if there were controls only on, say, joint-venture investments.
    Just an example, the group practice exception, if it didn't 
exist at all, could be used to reward doctors for referrals 
that wouldn't be in the form of ownership; it would be another 
form but economically the same thing.
    Ms. Buto. If I could just add to what Mac was saying. I 
think one of the things that we tried to do in our proposed 
rule on designated health services was to simplify as much as 
possible the compensation test to fair-market value, not 
related to volume and value of referrals. We have gotten some 
comments on that and other suggestions we are taking a look 
at--by and large, the fir market value exception was very well 
received as a way to simplify the compensation side of these 
provisions and as a way to apply, if you will, a common-sense 
approach to it.
    So we feel like that has assisted a great deal in terms of 
the complexity of what we see on the compensation side.
    Chairman Thomas. Well, Ms. Buto, in your testimony, both on 
page 1 and on page 3, you talk about exceptions. And when you 
take a look at trying to write these regulations, you start 
with a general prohibition of any referral by a doctor to a 
facility with which a doctor has a financial relationship. Then 
you have four 
exceptions on the ownership and compensation provision, four 
exceptions to the law's investment provision, and eight 
exceptions to the law's financial arrangement. You have, right 
there, 16 different 
exceptions.
    And it sounds to me that the way you are going to be 
finally getting this thing structured is to simply continue to 
make exceptions. At what point do all of the exceptions that 
you have structured, swallow the idea of trying to write a 
general rule that works?
    Ms. Buto. Well, that has obviously been the tough part of 
writing the regulation. And I think the way I have approached 
it, and I know the staff have done this in working with medical 
groups and others, is that we actually believe there is some 
evidence on the joint venture side in terms of some of the 
abuses that were pre-1989, that the law actually has a real 
due-diligence effect. What we are trying to do, and actually we 
are doing this very much at the urging of medical associations, 
medical groups, and others, is to craft the law in a way that 
recognizes legitimate, bona fide relationships. And that is why 
there are exceptions. If we were not to have them, I think the 
law would really be too blunt an instrument. We do need to 
recognize legitimate arrangements.
    Chairman Thomas. Just let me leave you with this thought, 
because I think my colleague from Louisiana is going to pursue 
a line of questioning which will also reinforce my argument: 
that if there was a belief that Republicans, as a new majority, 
were not interested in going after crooks, if we weren't 
interested in making sure that fraud and abuse were eradicated, 
we would not have done a number of things that we did.
    In fact, I would still continue to pursue Dr. Gonzalez, who 
was convicted of Medicare fraud in New York and was supposed to 
go to prison and fled this country and went to the Dominican 
Republic, and your Administration has refused to extradite him. 
I have written letter after letter to try to get, as the 
gentleman from California said, a public hanging, figuratively, 
I assume, which would be very helpful in this area.
    I have a nominee. Only trouble is, he is down in Santo 
Domingo. He was convicted and should be in prison and was 
required to reinstate $3.2 million worth of money.
    I think that would be a far better example to chill fraud 
and abuse if you could get the Administration to extradite him 
so that we can illustrate that we are all interested in 
eradicating fraud and abuse.
    But your example of trying to create legitimate exceptions 
to try to make a law work still doesn't make sense to me. When 
I first encountered geometry, I spent a summer trying to draw a 
triangle that had more or less than 180 degrees. At what point, 
do we 
decide that maybe we ought to take a look at what we now have 
on the books, as I indicated at the beginning of this 
discussion, and where would it be best to structure it in a way 
that maximizes our ability to do this and get some regs out and 
then enforce the law?
    I don't know that the way you are going about it will ever 
produce a really useful took in conjunction with the newer 
tools that we have given you. The purpose of this hearing is to 
ask what I consider to be a fairly fundamental question.
    Even if this was a good idea in 1993, if we have what we 
now have on the books that we passed in 1996 and 1997, what 
would you be asking for to provide you with the tools that we 
would get into place relatively quickly and that we could write 
regs for?
    And that may be an adjustment to the 1993 law so that we 
can move forward. I think the idea that you are trying to 
justify a position that 5 years after you still can't write a 
reg for, except with exceptions, proves the point.
    And that is all I hope we can get out of these hearings. 
Our goal is the same. Your defense of an indefensible position 
I think is relatively difficult, unless, of course, you want to 
provide us with the regs. And if you don't, I think it is self-
evident.
    The gentlewoman from Connecticut wishes to inquire?
    Mrs. Johnson of Connecticut. Why did it take 6 years? I 
want to try to keep the answers short so we get through the 
whole thing.
    You know, just briefly, here we are 6 years after the law 
was written and no regs. In a nutshell, why?
    Ms. Buto. Well, in a nutshell, we actually focused on 
getting the first self-referral regs out on lab services. And 
we did that. Our 
notion was that there were some basic definitions, like 
definitions of group practice, that needed to get on the books. 
Those were published in 1995.
    We then began to work with the designated health services, 
and I have to say that going from labs to 10 different health 
services, including home health and outpatient hospital 
services, and inpatient services, and DME, and so on was not 10 
times more difficult, but involved a lot of other 
considerations----
    Mrs. Johnson of Connecticut. In other words, in a word, it 
was terribly complex?
    Ms. Buto. Well, it is just the number of organizations 
involved and the interests that they had were important to 
listen to. I actually think it is good we took that time 
because I think the rule and the fair-market value exception 
grew out of those series of discussions----
    Mrs. Johnson of Connecticut. So, in fact, one-size-did-not-
fit-all?
    Ms. Buto. Well, actually, on the fair-market value rule, we 
moved to simplify a lot of the compensation exceptions based on 
the fact that a number of folks from different suppliers 
pointed out that we needed that simplification.
    Mrs. Johnson of Connecticut. Rule of thumb, it is my belief 
that if any law takes 6 years to write into regulations, it is 
much too complicated and your regulations are going to be 
almost impossible for the real-world person to comply with. You 
are asking a small VNA who wants to merge with another small D 
and VNA to understand what you are doing here. And it has taken 
you 6 years to figure it out, and you haven't finished.
    So I would really say when I hear testimony, Mr. Thornton, 
from you saying areas of ambiguity? After 6 years. So go back 
to that anti-kickback standard. Of course it has a high 
standard: It is criminal. So it has to be willful and knowing. 
If you want a lower standard in a civil area, let's get a 
simpler, lower standard. But we have a model.
    And of fraudulent payment, that is our interest here. Just 
because you are ownership doesn't mean it is fraudulent. If you 
are in a small town--we went through this years ago when we 
passed this. And the only people who can afford to invest in 
the MRI or the cat scan originally were the physicians. They 
had to do it to keep medical practice up, to give people 
options.
    And we came forward and said that is criminal. See so this 
was hard to write because it doesn't work across the board in 
every single area. So I think, you know, in all fairness to the 
real world, when you are still sitting here testifying that 
there are areas of ambiguity, that you had, what was it, 1,200 
comments still. I appreciate your diligence.
    Ms. Buto. Twelve thousand.
    Mrs. Johnson of Connecticut. Twelve thousand. But that 
tells you, 6 years later you still have 12,000 comments. So 
progress? What did you have the first time, 120,000 comments?
    Ms. Buto. No. I have forgotten what the number was, but it 
wasn't even--I don't think it was even as high as 12,000 the 
first time.
    Mrs. Johnson of Connecticut. My concern is, when you saw us 
passing the BBA of 1997, you will remember that one of our big 
interests was to encourage the whole medical sector to develop 
a provider-sponsored network because we want to be able to have 
somebody to compete with the insurance company, and, frankly, 
cut the insurers out. So there wouldn't be insurers second-
guessing medical decisions.
    How can you develop a provider-sponsored network with your 
interpretation of this law, and particularly without it being 
clarified? I mean how could you do that?
    And then second, how can you guard against--I mean, we do 
have good fraud statutes that do seem to be guarding against 
fraud at the same time, at least in certain sectors, 
collaborative relationships are developed. I want to see more 
collaborative relationships develop among providers so we don't 
have the question of insurance issues, of an insurer making 
medical decisions.
    How can we do that, and especially when you don't have any 
clear path laid out that a small little group could follow?
    Ms. Buto. If I could address the PSO issue. The Medicare-
plus choice plans, as I am sure you know, and PSO's that are 
Medicare capitated plans are exempt from the self-referral 
provision.
    Mrs. Johnson of Connecticut. See. What does that tell you? 
What does that tell you? Those are the systems in the private 
sector that are the majority, I mean, if you are just looking 
at the real world out there. And they are the ones we hope to 
grow. But if you want the providers out there that are serving 
the current fee-for-service clients, to do this, to be part of 
groups, to create groups, to get into them, how can they do it 
with this? How can hospitals talk to local physicians with this 
law?
    Ms. Buto. Well, we think that the law actually allows a lot 
of collaboration, and that is one reason why, although it has 
taken a long time, we have spent the time to work with those 
organizations to try to make it possible for those kinds of 
legitimate arrangements that apply.
    Mrs. Johnson of Connecticut. Yes. And I appreciate that. 
You worked with us in writing the law to help recognize some of 
those relationships. But it does raise very significant 
questions in my mind that you are having to adjust to what is 
happening in the real world. And you are. And I appreciate 
that. I appreciate your thinking about these things and hearing 
that input.
    But what it has meant is that we can't get clear law on the 
books because the law no longer fits what is happening in the 
world. So I would go back to my Chairman's original question, 
given what is on the books, like anti-kickback standards and 
such, and given what is happening, where is that simple hole 
that you need. Because not all self-referral is a bad thing, 
and that is why we have a lot of exceptions.
    Certainly collaboration is a good thing. It is one of the 
ways we are cutting administrative costs. And that is a good 
thing. So I would urge you to really help us look at how do we 
wipe the complexity off the books and start with some simple 
way of attacking the remainder, instead of trying to attack 
something that is endemic and systemic to the kind of change 
that in the end is going to be the future.
    You are, in a sense, legislating what would be a 
diminishing group. They have already diminished way down in the 
under-65 group. And they will diminish way down once we get 
ourselves established better in the modern programs for seniors 
because that is the only way to manage chronic illness. And so 
that is what is going to happen.
    So you are legislating to a diminishing problem. We have 
strong, now, fraud and abuse--we didn't have those. We didn't 
have fraud and abuse capability when this law was written that 
we have now.
    So I will relinquish my time. I know we have to go vote. 
But I would ask you--OK. We will recess the hearing so we can 
go vote. But I would ask you to take seriously the Chairman's 
admonition that after 6 years of regulation-writing and 12,000 
more comments, that ought to tell us that this is a path that 
by the time we ever get to the end of it, it will be so 
anachronistic that we ought to be thinking about the right path 
to go down, not the wrong path to go down.
    It just paralyzes the kind of, the development of the 
collaborative 
relationships that are so vital to us. Medicine has changed. So 
regulation and law has to change. And it is a little 
discouraging to hear you so tied up with doing something that 
just is already a mindset away from where we have to go.
    And I notice, Mr. Thornton, none of you answered clearly 
Mr. Thomas' question, what is that hole? what is that piece 
that the new tools don't let you get at, that this law you 
might need to get at. You need to do that for us.
    Mr. Thornton. May I respond?
    Mrs. Johnson of Connecticut. Yes.
    Mr. Thornton. I think the percentage of Medicare 
beneficiaries in managed-care plans is 17 percent now, and I 
think CBO's estimate is that it goes to 34 percent. But whether 
that is right or wrong, there is going to be a considerable 
Medicare population still in fee-for-service for quite a long 
time. And we are of the opinion that the Stark Law does address 
basically a fee-for-service problem. So yes, it is a 
diminishing problem but still a very substantial one.
    Mrs. Johnson of Connecticut. Well, it is diminishing and it 
is substantial. I would certainly agree with that. It is also 
true that the law hasn't been in force all these 6 years 
because there have been no regulations. So we are getting both 
some bad over-effects and some under-effects. And I don't see--
I mean, tell me when you are going to do this. Are you going to 
be done in 6 months? Are you going to be done in a year? Are 
you going to be done in 2 years? Twelve thousand comments is a 
lot of comments.
    Ms. Buto. Yes. Let me try to address that. It is always 
hard to predict when a regulation is going to come out.
    Mrs. Johnson of Connecticut. Right.
    Ms. Buto. But we are committed to getting it done in HCFA 
within the next 6 months, and we hope to get it published 
within the next year. We are going to try very hard to do that. 
We are certainly well aware that it has been too long, and we 
will proceed to try to do that on that schedule.
    Mrs. Johnson of Connecticut. Well, I hope that in doing it, 
you really will make space for the development of the 
collaborative relationships that are essential. There will be 
parts of the country where managed care will not serve. Still, 
they will need collaborative relationships of a different type 
than we have had in the past. We simply can't, we can't reward, 
in a sense, the isolation of services that the old system 
tended to develop.
    And in your regulations, I think you have to be very, very 
careful to allow rural to collaborate. And when providers 
collaborate, there is integration of reward systems--of 
compensation systems. And so, representing an area that is 
quite rural, and watching the inability--I mean, they don't 
have the legal resources and I tell them well they can get an 
advisory opinion now, this does not make them feel good. They 
don't have time for that.
    This is big change in the next year, the next 2 years in 
our rural systems and our small hospital systems. And you are 
compromising the quality of that change. It must go on. And it 
is going to go on faster. If you are going to take year before 
these are final, so much will happen in this next year. So I do 
worry about your not being willing to say this is the little 
piece we need given these new pieces.
    So, I know it is a big question and with little time, but I 
am appalled that we, in government, could pass a law and not 
tell people what we mean by it for 6 years, and particularly 6 
years at a time of really extraordinary change.
    We will recess just for a minute, I must go vote, and then 
resume our questioning.
    [Recess.]
    Mr. McCrery [presiding]. The Committee will come to order. 
Thank you for being patient. We hope we won't be interrupted 
again this afternoon.
    I would like to follow up on some of the line of 
questioning regarding advisory opinions because I know as we 
have considered the advisability of advisory opinions in the 
past, I think first in 1995 and then more recently in 1997, 
those of you who have worked in HCFA and around Medicare for 
awhile, resisted that. And I understand some of the reasons for 
that.
    But, now that we have that available to the marketplace and 
considering the complexity that you all have discovered in 
trying to write regulations that cover every conceivable 
development in the marketplace, do you now think that maybe 
advisory opinions are a little more advisable than they were a 
few years ago?
    Mr. Thornton.
    Mr. Thornton. Sir, we did express our concerns about 
advisory opinions very strongly, but we have done our best 
since 1996 to implement that authority. At the Inspector 
General's Office, it is our responsibility to issue advisory 
opinions under the anti-kickback statute and the other major 
sanction statutes. And HCFA was 
recently given the authority to issue advisory opinions under 
the Stark Law.
    I think our advisory opinion process was set up in a way, 
working with the staff of this Committee and with some advice 
from the industry, in which some of our concerns have been 
alleviated. And I believe that any commentator would have to 
agree that we have implemented in good faith. We have issued 31 
advisory opinions to date; 24 of them have been favorable to 
the requestors. And we established an office to handle these 
advisory opinions.
    We still have some concern that they may prove to be a 
problem in some kickback cases. But I would say to you that it 
has not been a significant problem so far.
    So, yes, the process has not been as fraught with problems 
as we had feared.
    Mr. McCrery. Ms. Buto, it is going to be HCFA's 
responsibility to issue the advisory opinions under the self-
referral rules, what do you expect to be the volume this year 
of advisory opinions coming out of HCFA?
    Ms. Buto. We have received over the past year or so about 
20 requests for advisory opinions. A number of those, it turned 
out, didn't actually have to do with self-referral or 
designated health services, and they were essentially 
withdrawn. We have about eight right now that we are working 
on. And we have issued two opinions that were favorable to the 
requestors.
    I think they serve a useful purpose, and they certainly 
alleviate concerns that requestors have. As long as they 
understand, you know, the context in which the advice is given, 
I think they are very helpful.
    Mr. McCrery. As Mr. Thomas pointed out earlier, there are 
four exceptions to the ownership and compensation provisions, 
four exceptions to the investment provisions, eight exceptions 
to the financial arrangement provisions, and, I understand, you 
are working on more exceptions. Physicians are worried that 
they can't even accept meals at a place where they might refer 
patients for fear that that would be financial arrangement.
    And I understand that you are in the process of maybe 
crafting a small-item exception, which is all swell, but it 
just seems to me that you would welcome advisory--the 
opportunity to respond to requests from physicians for advisory 
opinions, knowing that you cannot possibly anticipate every 
situation and craft and exception for.
    You would be--I mean, you would be doing nothing but 
writing exceptions to regulations which aren't even finalized 
yet.
    It just seems to me that if you all aren't already, you 
should advertise the availability of advisory opinions among 
those in the marketplace. And that may relieve you of the 
burden of trying to craft all these exceptions. And you could 
use the advisory opinion instead.
    Ms. Buto. I agree. We are very aware of the fact that we 
need to get the regulations out because a number of the 
advisory-opinion requests go to, now what is fair-market value? 
This was a proposal we made to simplify the compensation part 
of these exceptions. We would like to be able to give some 
advice on that, but until we 
finalize the regulations, which I hope we will do, as I said, 
within the schedule I laid out, it is hard to give any 
definitive advice.
    So I think you are right that once the regulations are out, 
it will be a vehicle that we want to use to clarify.
    Mr. McCrery. Mr. Thornton, you talked a little bit about 
the kinds of arrangements that physicians might have with, say, 
a clinical lab that would not be an ownership interest but 
would be some sort of compensation that would fall under the 
self-referral prohibition. Could you give me an example of 
that?
    Mr. Thornton. Well, one area is compensation arrangements 
which are functionally the same as joint ventures, which causes 
concern. Am I in the right ballpark?
    Mr. McCrery. Yes. Explain.
    Mr. Thornton. Sir?
    Mr. McCrery. Explain.
    Mr. Thornton. Yes, sir. I call it clinics without walls, or 
group practices without walls. We recognize that legitimate 
group practices should have an exception. But if that exception 
is too large, too loose, then physicians who are unrelated and 
who don't even know each other can be brought into a legal 
entity, not as investors, but brought in under contracts, 
compensation contracts. Ancillaries can be established in the 
middle of this wheel of referrals, if I could be metaphorical 
for a second, and that the doctors could proceed to profit, 
split the profits of what they order from the set of ancillary 
facilities in the middle of the wheel.
    That is sort of a basic description of a joint venture, but 
it can be legally created using compensation arrangements. That 
is one concern.
    Mr. McCrery. You also referred to an arrangement, or maybe 
it was Ms. Buto that referred to this, an arrangement in which 
a physician would be compensated based on the volume of 
referrals. That would fall under the self-referral prohibition? 
Is that right?
    Ms. Buto. Yes. You are talking about physicians who benefit 
from the volume of referrals?
    Mr. McCrery. Yes.
    Ms. Buto. Yes. That is essentially one of the underpinnings 
of the self-referral statute. That is one of the things that 
the law is intended to try to discourage. Now, there are some 
exceptions, as people have pointed out, like the in-office 
ancillary exception, which allows a solo practitioner to order 
tests and perform them in his or her own office. And that is 
obviously a benefit from referral, but that exception is 
clearly spelled out in the statute.
    Group practices also have the ability to benefit as a group 
from referrals within the group. So, again, that is a group 
practice exception.
    Mr. McCrery. Do you think that these types of arrangements 
are distinguishable from those that are meant to be covered by 
the anti-kickback statute?
    Mr. Thornton. Yes, sir.
    Mr. McCrery. That seems pretty close to me that, I mean, if 
you paid based on the number of referrals, that is tantamount 
to a kickback.
    Mr. Thornton. Well, I can only tell you, having tried to 
construct many kickback cases over my career, that proving 
knowing and willful conduct in a criminal trial beyond a 
reasonable doubt is really quite a burden and is really only 
practical where the proof is very obvious and very egregious. 
It is simply not a violation of the kickback statute per se to 
have one of these clinics without walls that I referred to or a 
typical joint venture.
    And as I described in my testimony, we found a joint 
venture in California, the Hanlester group, where we thought we 
had a lot of other evidence of intent to induce referrals by 
payment of money. We had tapes of sales pitches. We had lots of 
good evidence about what was going on, and yet, the courts hold 
us to a very high standard with respect to anti-kickback 
statutes, as they probably should.
    I believe the Ninth Circuit was inappropriately selective, 
shall we say, or inappropriately burdensome in their analysis 
of what we had to prove, but they have the last word.
    Mr. McCrery. Well, let me just close by saying that I agree 
with you that courts should hold us, hold the Government to a 
high standard in proving its case. Maybe we should think about 
the same standard when we are talking about self-referral, not 
assuming that all physicians are in it to make the maximum 
amount of money. Not all physicians are crooks. So maybe we 
should keep that in mind as we go through fashioning these 
regulations.
    Mr. Stark.
    Mr. Stark. Thank you, Mr. Chairman.
    I know earlier, Chairman Thomas referred to someone who is 
hiding out in the Dominican Republic, and I share his concern 
over a guy named Recarey from Florida, who allegedly gave 
$74,000 to Jeb Bush as a kind of a bribe, is hiding out in 
Spain after stealing millions of dollars from the Government. 
We know where he is, but we are unable to extradite him as 
well.
    I am sure that there are a lot of examples where we could 
be more strenuous in law enforcement, and I certainly would 
join with Chairman Thomas--maybe we can get Jeb Bush to call 
him [Recarey] up and ask him to come back for a visit.
    But, be that as it may, I suppose there are bad apples in 
every barrel.
    Ms. Buto, in view of the President's commitment against 
fraud, waste, and abuse in Medicare, will you commit to us that 
you are going to assign the staff to this project and get it 
done in the year 2000?
    Ms. Buto. Yes, I am willing to make that commitment, and I 
will do everything we can to make sure we can get that done.
    Mr. Stark. Thank you. I am sure you will make a lot of 
people happy, and maybe one or two people unhappy in getting it 
done.
    Ms. Buto. I think they are sitting right behind me.
    Mr. Stark. Mr. Thornton, you indicated that you had about 
30 or 40 cases of people who asked for advisory opinions, and 
that about three-quarters of the people who asked for those got 
approval and about a quarter did not. Why would somebody then 
go and hire a law firm to do due diligence when they could just 
get a letter from you?
    Mr. Thornton. Yes, sir. Well, actually those are two, I 
think, quite different functions. Any time a healthcare entity 
is sold or merged or refinanced, the purchasing company, the 
merging company, or the bank, or whoever, for their own legal 
protection, does what we call a due diligence examination.
    Mr. Stark. But could they, if they were worried about 
something that was involved in referrals or kickbacks in that 
combination, wouldn't you give them a ruling on that?
    Mr. Thornton. We certainly would if they asked.
    Mr. Stark. How much do you charge?
    Mr. Thornton. A very reasonable rate, sir. We--[Laughter.]
    We issue our advisory opinions for a couple of thousand.
    Mr. Stark. So what you are telling me is that HCA and 
Columbia's attorneys should have come to you instead of going 
to whomever they paid before they got into trouble because it 
would have been a lot cheaper. Right?
    Mr. Thornton. I had better not comment on that question, 
sir. But one of the next witnesses does a lot of due diligence 
work, and compliance with section 1877 is one of the primary 
things that they look at. And they don't--and my point is that 
the court----
    Mr. Stark. They charge more than you do?
    Mr. Thornton. Well, they certainly see more than I do, but 
the core concepts of section 1877, which we believe are 
relatively clear and unambiguous, are looked at in those due 
diligence examinations, and many corrections are made.
    Mr. Stark. Let me try this: In the American Medical 
Association's code of medical ethics, this is a statement, ``In 
general, physicians should not refer patients to a healthcare 
facility which is outside their office practice and at which 
they do not directly provide care or services when they have an 
investment in that facility.''
    Now, if you don't agree to that, you are ineligible for the 
AMA. If that were changed to say, ``any financial interest or 
remuneration''--in other words, if you broadened that or said 
that an investment interest can very quickly be turned into a 
compensation agreement, would you say that simple AMA medical 
ethics would cover most of the cases that you see?
    Mr. Thornton. Well, it clearly would. That would basically 
keep physicians completely isolated from relationships with 
other medical providers----
    Mr. Stark. Financially isolated.
    Mr. Thornton. Yes, sir. I think that that would be going 
too far, that section 1877 sets up certain core principles 
which are useful but allow many types of compensation and 
investment interests, and that the AMA should be applauded, as 
we have stated to them, for coming out with their ethical 
standards along those lines.
    Mr. Stark. Can you outline for us some of the loopholes 
that you have seen evolve since 1993, and might you care to 
make any recommendations about what we should do about closing 
those loopholes?
    Mr. Thornton. Yes, sir. As we say, we have learned a lot 
since 1993, and the statute could be made both more flexible 
and there are a couple of loopholes that we would recommend 
attention to, such as the exception to the investment or 
ownership provisions, which relate to a hospital. I believe the 
statute says that what is excepted is an investment in a 
hospital itself, but not a subdivision of a hospital.
    What we are seeing, Mr. Stark, more and more is what is 
called a ``hospital within a hospital,'' that a wing of the 
hospital will be separately incorporated and syndicated with 
the physicians who practice in that particular part of the 
hospital. That is a problem. That is a way to circumvent the 
intent of this exception.
    But there are other ways where the statute could probably 
be made more flexible as well, sir.
    Mr. Stark. Thank you. Thank you both for your work in this, 
and, in the face of a lot of criticism, for continuing to serve 
the taxpayers, at least patients, well.
    Mr. Thornton. Thank you, sir.
    Mr. McCrery. Mrs. Johnson.
    Mrs. Johnson of Connecticut. We could argue about whether 
this does, in fact, serve the patients well in a number of 
instances. But, I wanted to ask you about your logic in the 
issue of ambulance restocking and interpreting restocking as an 
inducement. Why do you think it is an inducement?
    Mr. Thornton. Well, the advisory opinion said that we could 
not exclude that practice from being an inducement. Now, we 
were asked whether it could----
    Mrs. Johnson of Connecticut. That doesn't make you include 
it as an inducement.
    Mr. Thornton. Well, we could only give a favorable advisory 
opinion if we could conclude that the restocking of ambulances 
was incapable of influencing where the ambulance goes. And we 
could not reach that conclusion. We didn't say it was violative 
of the anti-kickback statute, but we could not conclude that it 
was never, ever a problem.
    Mrs. Johnson of Connecticut. This is a perfect case in 
point. You referred to, in your testimony, to ambiguity. 
Because of the ambiguity, and you could not rule this out, 
hospitals in self-defense have had to stop restocking. That 
means that if an ambulance delivers a patient to the hospital, 
in the old days, whatever equipment was used in that trip was 
restocked by the hospital. And the ambulance was ready to 
answer the next call.
    Now, they have to go--remember, a lot of these are 
volunteer organizations. They have to go through the system, 
restock, and only then are they ready for the next call. 
Furthermore, they don't get the low cost that the hospitals get 
in the purchase. So this is increasing costs for the taxpayer 
and reducing responsiveness of the system.
    Now, maybe my area of Connecticut is unique, but in the 
rural areas, there is no choice of hospitals. And in the urban 
area, there is very little. I mean, clearly, if you had a 
person with a certain kind of extreme complexity, you would go 
to one of the big Hartford hospitals, or you might go to Yale 
if you are closer. But to think that restocking is an 
inducement--furthermore, if you get restocking in any hospital 
you go to, then it is not inducement.
    So what you have done by refusing to recognize it, as long 
as this is everywhere, it is not preferential.
    Mr. Thornton. We actually have issued several advisory 
opinions that hold just that, actually, that where there is a 
system for restocking ambulances, everybody does it, and there 
is not the potential problem of one hospital offering 
restocking and influencing people to come to just that one 
hospital. Where you have an EMS system in place that the 
ambulances go to and all the hospitals restock, we have 
approved, I think, two or three arrangements just like that.
    Mrs. Johnson of Connecticut. But see, you have to approve 
them one by one. This is a very big nation. You know, why are 
you putting that burden on the system when there is no evidence 
at all that this has ever worked to do that? On paper, of 
course, it might possibly. No evidence at all. The problem with 
this law is that it comes to influence situations like this in 
which there is no evidence of inducement, there is no evidence 
of fraud.
    And yet, furthermore, there is evidence of efficiency, of 
better service, of more responsiveness. But when you take that 
limited approach, which you feel you have to under this law, it 
frankly hurts the healthcare system. It hurts access and it 
hurts cost.
    Now, recognizing this and having made some favorable 
rulings, do you or do you not have the authority to say, this 
is off the table, under this law?
    Mr. Thornton. Well, we would have that authority under the 
advisory opinion procedure.
    Mrs. Johnson of Connecticut. Can you do an advisory opinion 
for the Nation on this subject?
    Mr. Thornton. No. We do advisory opinions for particular 
people, although all of our advisory opinions are posted on the 
Internet and are good advice for everyone.
    Mrs. Johnson of Connecticut. I understand. Yes. But that is 
not sufficient. It really isn't. In this case, would you have 
the authority under the law to say that we do not see this as a 
situation of inducement?
    Mr. Thornton. And we have several opinions.
    Mrs. Johnson of Connecticut. I don't mean that. I am saying 
blanketly across the country. If you can't, I want to see the 
examples of situations in which you proved that it is an 
inducement.
    Mr. Thornton. Well, we just said that giving away the 
products was an inducement. If the hospital were to charge the 
ambulance company and they were to pay, that would be perfectly 
legal.
    Mrs. Johnson of Connecticut. Well, as I say, I would like 
to see some examples of where this is proved to be an 
inducement, where you see it as an inducement. Give me an 
example; not right now, but please give me an example of a 
system where you decided this was an inducement.
    Mr. Thornton. I would be happy to provide what information 
we have about this----
    Mrs. Johnson of Connecticut. Well, I want information on a 
specific example. If you are making a ruling like this that is 
making it harder for every little ambulance company throughout 
the district and, particularly, the volunteers, to operate, I 
want an example of where it has worked against the taxpayer and 
against the patient because I see it, your decisions working 
against the taxpayer and against the patient.
    So just give me, afterward--I know you can't do it off the 
top of your head--an example of how the law in this instance is 
protecting us, the taxpayer and the patient. I would appreciate 
that. Thank you.
    Mr. Thornton. All right. We will get back to you.
    [The letter and advisories follow:]

                      Department of Health & Human Services
                                      Washington, D.C., May 2, 1999
The Honorable Nancy L. Johnson
U.S. House of Representatives
Washington, D.C.

    Dear Ms. Johnson:

    During my testimony at the hearing on May 13, 1999, regarding the 
physician self-referral statute (the ``Stark Law''), you asked me to 
provide you with further information relating to the issue of ambulance 
restocking. In particular, you requested examples of abusive ambulance 
restocking arrangements.
    By way of background, the ambulance restocking issue arises under 
the Federal anti-kickback statute. The anti-kickback statute, section 
1128B(b) of the Social Security Act, is a criminal statute that 
prohibits the intentional payment of remuneration to induce or reward 
referrals of Federal health care program business. By contrast, as you 
know, the Stark Law is a civil authority limited to self-referral by 
physicians.
    Pursuant to a congressional directive, the Office of Inspector 
General (``OIG'') issues advisory opinions addressing whether 
particular existing or proposed arrangements potentially violate the 
anti-kickback statute, and, if so, whether the OIG would subject them 
to sanctions, including civil money penalties and program exclusion. In 
essence, we are asked to opine as to the anti-kickback implications of 
a particular set of facts presented by the requesting party. Advisory 
opinions must be issued within a relatively short time frame that 
precludes independent OIG investigation of the facts.
    One of the difficulties of the advisory opinion process is that we 
are required to respond to all proper requests based on the facts 
presented, irrespective of whether we believe the subject matter 
represents a significant fraud and abuse problem. Thus, issuance of an 
advisory opinion in and of itself is not necessarily indicative of an 
OIG enforcement priority. This was the case with ambulance restocking. 
I am unable to provide you with any specific examples of fraudulent or 
abusive restocking programs, largely because ambulance restocking 
programs have not been the subject of OIG enforcement activity.
    In crafting an advisory opinion, the OIG does not determine the 
intent of the parties based on their documentary submissions. We issue 
a favorable opinion only where we conclude that an arrangement includes 
safeguards sufficient to ensure there is little or no risk of program 
fraud or abuse, regardless of the parties' intent. Accordingly, an 
unfavorable opinion is not a determination that an arrangement violates 
the statute; it means only that (i) the arrangement may violate the 
statute if the requisite intent to induce referrals is present and (ii) 
we are not satisfied that the arrangement as described by the party 
requesting the opinion poses only a minimal risk of fraud or abuse.
    In many respects, ambulance restocking raises issues that fit 
squarely within established anti-kickback jurisprudence. The restocking 
of supplies and medications without charge constitutes the provision of 
free goods by the hospital to the ambulance provider. The OIG's concern 
with the provision of free goods to potential referral sources is 
longstanding and clear: such arrangements are highly suspect. To take a 
clear hypothetical example, the provision of free goods to a referral 
source pursuant to a written contract that expressly conditions the 
free goods on referrals of Federal program beneficiaries would violate 
the anti-kickback statute. In other words, if a hospital were to enter 
into a written contract with an ambulance provider that stated that the 
hospital would give the ambulance company free supplies and medications 
if the ambulance company agreed to steer Medicare patients to the 
hospital, the provision of free supplies and medications pursuant to 
such contract would clearly constitute prohibited remuneration under 
the statute.
    The medical center that requested the first advisory opinion 
dealing with ambulance restocking (OIG Advisory Opinion 97-6) described 
a particular set of facts that clearly implicated the anti-kickback 
statute. Based on the facts presented, we could not reasonably conclude 
that the anti-kickback statute was not implicated. Indeed, it appears 
that the hospital sought a negative opinion to justify terminating a 
restocking arrangement, so as to lower hospital costs.
    Following publication of Advisory Opinion 97-6, we heard from many 
representatives of ambulance companies, municipal emergency medical 
services (``EMS'') providers, and hospitals concerned about the 
legality of ambulance restocking arrangements. In our many 
conversations with these providers, three general facts emerged. First, 
a wide range of ambulance restocking arrangements exists. Second, some 
hospitals were threatening to eliminate restocking programs, creating a 
potential financial issue for volunteer and municipal EMS providers. 
Third, the perception of many ambulance providers was that some 
hospitals were looking for reasons to eliminate costly restocking 
programs.
    To allay some of these concerns, we issued a clarifying letter to 
the American Ambulance Association on November 25, 1997, clearly 
stating that ambulance restocking arrangements are not all potentially 
illegal, and we made several suggestions for compliance with the anti-
kickback statute. For example, if the ambulance company reimburses the 
hospital at fair market value for the restocked goods, the anti-
kickback concern is alleviated. A copy of that letter is enclosed.
    In the ensuing months we received three additional requests from 
hospitals engaged in ambulance restocking programs. The facts described 
in these requests were markedly different from the first request. All 
three of the new requests involved ambulance restocking programs 
conducted pursuant to comprehensive, coordinated EMS delivery systems 
involving all of an area's ambulance providers and hospitals. With the 
limited exception of one part of one of the three programs, we approved 
all of these arrangements because we were persuaded that they posed 
little or no risk of Federal health care program fraud or abuse.\1\ We 
have received no further advisory opinion requests on the topic of 
ambulance restocking and very few further informal inquiries. Copies of 
these favorable opinions are enclosed.
---------------------------------------------------------------------------
    \1\ See OIG Advisory Opinions Nos. 98-7, 98-13, and 98-14.
---------------------------------------------------------------------------
    I hope this information is helpful. If you or your staff have 
further questions, please contact me or Kevin McAnaney, Chief, Industry 
Guidance Branch.
            Sincerely,
                                        D. McCarty Thornton
                             Chief Counsel to the Inspector General
    Enclosures

                                

Advisory Opinion No. 98-7

    Ladies and Gentlemen:

    We are writing in response to your request for an advisory 
opinion, in which you ask whether an ambulance restocking and 
continuing education arrangement (the ``Arrangement'' \1\) 
constitutes prohibited remuneration under the anti-kickback 
statute, section 1128B(b) of the Social Security Act (the 
``Act'') and, if so, whether the Arrangement constitutes 
grounds for the imposition of sanctions under the anti-kickback 
statute, section 1128B(b) of the Act, the exclusion authority 
related to kickbacks, section 1128(b)(7) of the Act, or the 
civil monetary penalty provision for kickbacks, section 
1128A(a)(7) of the Act.
---------------------------------------------------------------------------
    \1\ Specifically, the Arrangement includes (1) a ``drug box'' 
exchange program; (2) a linens and medical supply exchange program; (3) 
a ``pedi bag'' exchange program for pediatric supplies; and (4) a 
continuing emergency medical services education program.
---------------------------------------------------------------------------
    You have certified that all of the information you provided 
in your request, including all supplementary letters, is true 
and correct, and constitutes a complete description of the 
material facts regarding the Arrangement. In issuing this 
opinion, we have relied solely on the facts and information you 
presented to us. We have not undertaken any independent 
investigation of such information. This opinion is limited to 
the facts presented. If material facts have not been disclosed, 
this opinion is without force and effect.
    Based on the facts certified in your request for an 
advisory opinion, we conclude that the Arrangement could 
constitute prohibited remuneration under the anti-kickback 
statute if the requisite intent to induce referrals were 
present, but that the OIG will not subject the Arrangement, as 
described in the request and supplemental submissions, to 
sanctions arising under the anti-kickback statute pursuant to 
sections 1128B(b), 1128(b)(7), or 1128A(a)(7) of the Act.
    This opinion may not be relied on by any persons other than 
the addressees and is further qualified as set out in Part III 
below and in 42 C.F.R. Part 1008.
                         I. Factual Background
    The requesters of this advisory opinion are twenty non-
profit hospitals located in ten counties in the City A area of 
State B (the ``Hospitals'') and the City A Hospital Association 
(the ``Association''), a non-profit corporation exempt from 
federal income tax pursuant to section 501(c)(6) of the 
Internal Revenue Code.\2\ The Hospitals represent all of the 
hospitals in the City A area.
---------------------------------------------------------------------------
    \2\ The Hospitals are all members of the Association. The 
Association has presented itself as an additional requestor on the 
ground that it facilitates the uniform participation of the Hospitals 
in the Arrangement. Although trade associations are not typically 
appropriate requesters on behalf of their members, see 42 C.F.R. 
Sec. 1008.11, a trade association may be a proper requestor if it is 
itself a party to an arrangement that is the subject of a request for 
an advisory opinion.
---------------------------------------------------------------------------
    The Hospitals and the Association are dues paying members 
of the Region C Emergency Medical Services Council, Inc. (the 
``Council''), a State B nonprofit and tax exempt corporation 
founded in 1972, whose membership also includes all private and 
public ambulance providers in the area, local educational 
institutions, physicians, and at-large community members. The 
Council's mission is to coordinate the efforts of public and 
private ambulance service pre-hospital care providers, hospital 
emergency department staff, and consumers to ensure the best 
possible pre-hospital medical care for the victims of sudden 
illness or injury. The Council develops protocols for, and 
conducts ongoing evaluation and improvement of, the local 
emergency medical services (``EMS'') delivery system, performs 
EMS quality assurance audits, distributes drug boxes to the 
local ambulances, provides continuing education to EMS 
personnel, sponsors education programs related to EMS for the 
general public, acts as an information clearinghouse for EMS 
activities, and otherwise seeks to promote high quality EMS 
care for the region.
    Under the Council's auspices and pursuant to Council-
developed protocols, the Hospitals and EMS organizations in the 
City A area have engaged in various drug and medical supply 
exchange programs in connection with emergency medical 
transports since approximately 1973. Typically under these 
exchange programs, a receiving hospital restocks an ambulance 
with medications and supplies used in connection with emergency 
medical pre-hospital services provided to the transported 
patient. The ambulance providers are not charged, and do not 
pay, for the restocked items. Drugs are exchanged through a 
``drug box'' program, pursuant to which EMS squads exchange 
depleted drug boxes used during a patient run for fully-stocked 
boxes provided by the receiving hospital. Hospital pharmacists 
review the used drug boxes, replenishing used, outdated, or 
improperly sealed items, and return them to inventory for 
future exchange.\3\
---------------------------------------------------------------------------
    \3\ The drug box exchange program has been approved by the State B 
Board of Pharmacy and complies with [code section redacted], which 
provides a mechanism for EMS units to obtain drug stocks legally ``on a 
replacement basis'' from hospitals to which patients are delivered. We 
have previously stated our belief that ambulance restocking performed 
pursuant to a state law mandate would not violate the anti-kickback 
statute. However, because [code section redacted] permits, but does not 
require, drug restocking by hospitals, the statute is insufficient by 
itself to foreclose the possibility of improper intent to induce 
referrals.
---------------------------------------------------------------------------
    Under the linens and medical supplies exchange program, 
receiving hospitals restock ambulances with linens and medical 
supplies used on patients during emergency pre-hospital 
services. The program enables ambulances to be fully stocked at 
all times and ensures standardization of supplies, so that, for 
example, tubing used by EMS units can be connected to hospital 
systems without interruption.
    The continuing education programs in which the Hospitals 
participate serve to update EMS personnel on the latest 
techniques in patient care. These programs also enable EMS 
personnel to remain current with emergency room protocols in 
the Hospitals. Hospital personnel also visit EMS squads to test 
the skills of EMS personnel, as required by regional standing 
orders pertaining to EMS certification.
    Also under the Arrangement, Hospital Z in City A, the 
area's children's specialty hospital and a requestor of this 
opinion, distributes ``pedi bags'' to EMS providers to ensure 
that EMS units carry a variety of pediatric-sized airway tubes 
and related equipment for use with children. These bags have 
been distributed to all EMS squads in the City A area. Private 
EMS squads pay a nominal start-up fee of $100 per bag. Hospital 
Z provides the bags to community and volunteer EMS squads at no 
charge. As with the other exchange programs, the supplies 
within the bags are restocked on an exchange basis, and all 
adult hospitals in the area keep on hand a small supply of 
these children's items.
                           II. Legal Analysis

A. Law

    The anti-kickback statute makes it a criminal offense 
knowingly and willfully to offer, pay, solicit, or receive any 
remuneration to induce referrals of items or services 
reimbursable by any Federal health care program.
    See 42 U.S.C. Sec. 1320a-7b(b). Where remuneration is paid 
purposefully to induce referrals of items or services for which 
payment may be made by a Federal health care program, the anti-
kickback statute is violated. By its terms, the statute 
ascribes criminal liability to parties on both sides of an 
impermissible ``kickback'' transaction.
    The statute has been interpreted to cover any arrangement 
where one purpose of the remuneration was to obtain money for 
the referral of services or to induce further referrals. United 
States v. Kats, 871 F.2d 105 (9th Cir. 1989); United States v. 
Greber, 760 F.2d 68 (3d Cir.), cert. denied, 474 U.S. 988 
(1985). ``Remuneration'' for purposes of the anti-kickback 
statute includes the transfer of anything of value, in cash or 
in kind, directly or indirectly, covertly or overtly. Violation 
of the statute constitutes a felony punishable by a maximum 
fine of $25,000, imprisonment up to five years, or both. 
Conviction will also lead to automatic exclusion from Federal 
health care programs, including Medicare and Medicaid. This 
Office may also initiate administrative proceedings to exclude 
persons from Federal and state health care programs or to 
impose civil monetary penalties for fraud, kickbacks, and other 
prohibited activities under sections 1128(b)(7) and 1128A(a)(7) 
of the Act.\4\
---------------------------------------------------------------------------
    \4\ Because both the criminal and administrative sanctions related 
to the anti-kickback implications of the Arrangement are based on 
violations of the anti-kickback statute, the analysis for purposes of 
this advisory opinion is the same under both.
---------------------------------------------------------------------------
    This Office's concern with the provision of goods and 
services for free or at below-market rates to potential 
referral sources is longstanding and clear: such arrangements 
are suspect under the anti-kickback statute. The provision of 
free or below-market rate goods or services to a referral 
source may violate the anti-kickback statute if one purpose of 
the gift is to induce referrals of Federal health care program 
business.
    The provision by a hospital of free supplies, medications, 
and services to an ambulance service fits squarely within the 
meaning of remuneration for purposes of the anti-kickback 
statute. An inference may be drawn that one purpose of such 
remuneration is to induce the ambulance company to bring 
patients to the hospital. However, the strength of that 
inference may vary with the circumstances of the specific 
arrangement.
    In assessing the potential risk of fraud or abuse under the 
anti-kickback statute, our concerns are principally fourfold: 
increased risk of over utilization, increased program costs, 
patient freedom of choice, and unfair competition. Because it 
is limited to emergency medical services, the Arrangement does 
not increase the risk of over utilization and is unlikely to 
lead to increased costs to Federal health care programs. 
Neither the number of Federal program beneficiaries requiring 
emergency transport in the City A area, nor the treatment these 
patients will require or receive at the Hospitals, is related 
to the existence or operation of the Arrangement.\5\
---------------------------------------------------------------------------
    \5\ This advisory opinion only relates to drugs, supplies, and 
educational programs provided by the Hospitals that directly relate to 
the provision of emergency pre-hospital services in the City A area. 
Restocking of drugs or supplies used in the course of non-emergency 
services and educational programs not directly related to emergency 
medical services are outside the scope of this opinion.
---------------------------------------------------------------------------
    With respect to freedom of choice and unfair competition, 
under the Arrangement it appears that emergency ambulance crews 
have relatively limited opportunities to steer patients to 
particular hospitals. In life threatening cases, the selection 
of a receiving hospital will be dictated by the patient's 
condition. In other circumstances, the choice of receiving 
hospital will frequently be dictated by the patient, the 
patient's physician, or the patient's insurer. Notwithstanding, 
there will inevitably be situations in which ambulance company 
personnel would be able to steer patients who do not have a 
preference to a particular facility. In the circumstances 
presented here, however, there would appear to be no financial 
reason arising from the Arrangement for ambulance personnel to 
steer patients to a particular hospital, since all area 
hospitals participate in the Arrangement.
    However, the mere fact that all hospitals may be restocking 
ambulances without charge does not immunize conduct that might 
otherwise violate the anti-kickback statute. Some institutions 
may well participate in the restocking because of fear of 
adverse competitive consequences if they do not. In short, 
remuneration that is given to retain or maintain existing 
referrals may violate the anti-kickback statute.
    We previously addressed the application of the anti-
kickback statute to an ambulance restocking arrangement in OIG 
Advisory Opinion 97-6 (October 8, 1997). Based on the specific 
facts presented by the hospital requestor, we found that, 
notwithstanding a state administrative regulation that required 
ambulances to transport patients to the facility of the 
patient's choice except in exigent circumstances, the 
hospital's proposed arrangement for free restocking of supplies 
and medications posed a risk of improper steering and unfair 
competition. Accordingly, we concluded that the arrangement 
could potentially violate the anti-kickback statute if the 
requisite intent to induce referrals were present.
    The facts presented here differ in material respects from 
those presented in OIG Advisory Opinion 97-6. First, the 
Arrangement is not a unilateral arrangement; rather, it was 
developed and implemented pursuant to an ongoing effort by the 
Council and its members to maintain and improve a regional 
emergency medical system through a comprehensive program that 
coordinates all EMS components. The Council, a non-profit 
corporation founded in 1972, is open to all hospitals and 
emergency ambulance providers in the area, as well as local 
educational institutions, physicians, and other community 
members. Regional EMS councils, like the one at issue here, 
were formed in the early 1970s in response to a growing 
recognition of the inadequacy of then existing emergency 
medical care and the high cost in human lives and physical 
disabilities due to accidents and sudden illness and injury.\6\ 
EMS councils were established to coordinate emergency care 
among all levels of a region's EMS system, including public 
safety organizations, private and hospital-based ambulance 
services, hospitals and other critical care facilities, and 
local physicians and community groups.
---------------------------------------------------------------------------
    \6\ See, e.g. Accidental Death and Disability: The Neglected 
Disease of Modern Society, National Academy of Sciences and National 
Research Council (September 1966).
---------------------------------------------------------------------------
    Second, the restocking aspects of the Arrangement are not 
free-standing; the Arrangement is part and parcel of a 
comprehensive and coordinated regional effort to integrate and 
improve all aspects of the emergency medical care system. In 
addition to the drug and supply exchange programs, the Council 
establishes protocols addressing various aspects of the 
emergency medical system and otherwise administers the exchange 
and educational programs.\7\ It also conducts ongoing 
evaluation and improvement of the local EMS delivery system, 
performs EMS quality assurance audits, sponsors educational 
programs related to EMS for the general public, acts as an 
information clearinghouse for EMS activities, and otherwise 
seeks to promote high quality EMS care for the region.
---------------------------------------------------------------------------
    \7\ The ``pedi bag'' program is administered by the local 
children's medical center, but is part of the comprehensive regional 
EMS system and is included in the Arrangement for purposes of this 
advisory opinion.
---------------------------------------------------------------------------
    Third, regional and local programs to improve and 
coordinate the delivery of quality emergency medical services 
have been actively encouraged and promoted by the Federal 
government over the past twenty-five years. In 1973--the year 
the first exchange program began in the City A area--the 
Federal government enacted the Emergency Medical Services 
Systems Act of 1973 (``EMSSA''), Pub. L. 93-154, 87 Stat. 594 
(1973), which provided federal funding for the development of 
regional EMS systems at the state, regional, and local 
levels.\8\ These regional systems were to develop 
comprehensiveprograms to improve such areas as communications 
(including ``911'' systems); transportation; provision and 
training of emergency personnel; facilities; critical care 
units; use of public safety agencies; accessibility to care; 
consumer participation, education, and information; transfer of 
patients; standard medical record keeping; independent review 
and evaluation of EMS; disaster linkage; and mutual aid 
agreements among communities. EMSSA was one of several Federal 
legislative efforts to promote EMS delivery systems, including 
the Highway Safety Act of 1966, Pub. L. 89-594, 80 Stat. 731 
(1966), which established an EMS program in the Department of 
Transportation; the Emergency Medical Services for Children 
Program, under the Public Health Act, Pub. L. 98-555, 99 Stat. 
2854 (1984), which provided funds for enhancing pediatric EMS; 
and the Trauma Care Systems Planning and Development Act of 
1990, Pub. L. 101-590, 104 Stat. 2915 (1990).
---------------------------------------------------------------------------
    \8\ EMSSA defined ``emergency medical services system'' as ``a 
system which provides for the arrangement of personnel, facilities, and 
equipment for the effective and coordinated delivery in an appropriate 
geographical area of health care services under emergency conditions . 
. . and which is administered by a public or nonprofit private entity 
which has the authority and the resources to provide effective 
administration of the system.'' 87 Stat. at 595.
---------------------------------------------------------------------------
    Finally--and importantly--the Arrangement is likely to have 
a positive impact on the quality of patient care. By providing 
a mechanism to ensure that ambulances are fully stocked with 
current medications and appropriate supplies compatible with 
all local hospital emergency rooms and that EMS personnel are 
adequately trained, the Arrangement is likely to foster fast, 
efficient, and effective pre-hospital emergency care for the 
City A area community. This significant community benefit, 
coupled with the conditions, requirements, and limitations 
outlined above, persuade us that the Arrangement poses minimal 
risk of fraud and abuse under the anti-kickback statute, and 
therefore the OIG would not subject it to sanction.
                            III. Conclusion
    The advisory opinion process is a ``means of relating the 
anti-kickback statute to the particular facts of a specific 
arrangement.'' 62 Fed. Reg. 7350, 7351 (February 19, 1997). The 
advisory opinion process permits this Office to protect 
specific arrangements that contain limitations, requirements, 
or controls that give adequate assurance that Federal health 
care programs cannot be abused.'' Id. In evaluating an 
arrangement's potential to lead to fraud or abuse of Federal 
health care programs, no one fact or element is necessarily 
dispositive. Here, we are persuaded that the Arrangement is 
likely to result in substantial community benefit consistent 
with longstanding national policy objectives. We are further 
persuaded that, taken as a whole, the aspects of the 
Arrangement described above--including, but not limited to, the 
Arrangement's relationship to a coordinated regional EMS 
system, the role of the regional Council, the Arrangement's 
limitation to emergency medical services, and the uniformity of 
the Arrangement acrossproviders--create sufficient limitations, 
requirements, or controls so as to give adequate assurance that 
the Arrangement will not lead to program abuse under the anti-
kickback statute.\9\
---------------------------------------------------------------------------
    \9\ We express no opinion regarding liability of the requesters 
under the False Claims Act or other legal authorities in connection 
with any improper billing or claims submission directly or indirectly 
related to, or arising from, the Arrangement.
---------------------------------------------------------------------------
    Accordingly, we conclude that while the Arrangement might 
technically violate the anti-kickback statute if the requisite 
intent to induce referrals were present, the OIG will not 
impose sanctions on the requesters under sections 1128(b)(7) 
(as it relates to kickbacks) or 1128A(a)(7) of the Act, based 
on the facts certified in the requesters' request for an 
advisory opinion.
                            IV. Limitations
    The limitations applicable to this opinion include the 
following:

       This advisory opinion is issued only to the 
requesters listed on the Attached Distribution List, which are 
the requesters of this opinion. This advisory opinion has no 
application, and cannot be relied upon, by any other individual 
or entity.
       This advisory opinion may not be introduced into 
evidence in any matter involving an entity or individual that 
is not a Requestor to this opinion.
       This advisory opinion is applicable only to the 
statutory provisions specifically noted in the first paragraph 
of this advisory opinion. No opinion is herein expressed or 
implied with respect to the application of any other Federal, 
state, or local statute, rule, regulation, ordinance, or other 
law that may be applicable to the Arrangement.
       This advisory opinion will not bind or obligate 
any agency other than the U.S. Department of Health and Human 
Services.
       This advisory opinion is limited in scope to the 
specific arrangement described in this letter and has no 
applicability to other arrangements, even those which appear 
similar in nature or scope.

    This opinion is also subject to any additional limitations 
set forth at 42 C.F.R. Part 1008.
    The OIG will not proceed against the requesters with 
respect to any action that is part of the Arrangement taken in 
good faith reliance upon this advisory opinion as long as all 
of the material facts have been fully, completely, and 
accurately presented, and the Arrangement in practice comports 
with the information provided. The OIG reserves the right to 
reconsider the questions and issues raised in this advisory 
opinion and, where the public interest requires, modify or 
terminate this opinion. In the event that this advisory opinion 
is modified or terminated, the OIG will not proceed against any 
requestor with respect to any action taken in good faith 
reliance upon this advisory opinion, where all of the relevant 
facts were fully, completely, and accurately presented and 
where such action was promptly discontinued upon notification 
of the modification or termination of this advisory opinion.
            Sincerely,
                                        D. McCarty Thornton
                             Chief Counsel to the Inspector General

                                

Advisory Opinion No. 98-13

    Ladies and Gentlemen:

    We are writing in response to your request for an advisory 
opinion, in which you ask whether an ambulance restocking 
program, coordinated through a local emergency medical services 
council (the ``Program''), constitutes prohibited remuneration 
under the anti-kickback statute, section 1128B(b) of the Social 
Security Act (the ``Act''), and, if so, whether the Program 
constitutes grounds for the imposition of sanctions under the 
anti-kickback statute, section 1128B(b) of the Act, the 
exclusion authority related to kickbacks, section 1128(b)(7) of 
the Act, or the civil monetary penalty provision for kickbacks, 
section 1128A(a)(7) of the Act.
    You have certified that all of the information you provided 
in your request, including all supplementary information, is 
true and correct, and constitutes a complete description of the 
material facts regarding the Program. In issuing this opinion, 
we have relied solely on the facts and information you 
presented to us. We have not undertaken any independent 
investigation of such information. This opinion is limited to 
the facts presented. If material facts have not been disclosed, 
this opinion is without force and effect.
    Based on the facts certified in your request for an 
advisory opinion, we conclude that the Program could constitute 
prohibited remuneration under the anti-kickback statute if the 
requisite intent to induce referrals were present, but that the 
OIG will not subject the Program, as described in the request 
and supplemental submissions, to sanctions arising under the 
anti-kickback statute pursuant to sections 1128B(b), 
1128(b)(7), or 1128A(a)(7) of the Act.
    This opinion may not be relied on by any persons other than 
the addressees and is further qualified as set out in Part IV 
below and in 42 C.F.R. Part 1008.
                         I. Factual Background
    The requesters of this advisory opinion are eight fire 
departments (listed on the attached distribution list) and The 
County X Ambulance District located in County X, State Y. All 
of the fire departments and the ambulance district are owned 
and operated by municipal governments and provide emergency 
medical services (``EMS'').
    The requesters are members of the County X Emergency 
Medical Services Council (the ``Council''), a non-profit 
association founded in 1980. The Council is an advisory and 
coordinating organization whose mission is to promote and 
advance EMS throughout County X. Membership on the Council 
includes those who are providing EMS and those who are 
interested in furthering the goals of the Council. The 
Council's current membership includes public and private 
ambulance providers, hospitals, medical directors, and local 
educational facilities. The Council's goals include: 
standardization of EMS practices and equipment; provision of 
education and training for EMS providers; and improvement of 
EMS capabilities in the Council's service area. Through its 
Executive Committee, the Council may appoint working committees 
to accomplish its goals. One such committee is a practice 
committee.
    The practice committee has oversight of the restocking 
Program and is responsible for standardizing the Program within 
the local EMS community, educating Council members regarding 
the Program, and disseminating information about the Program. 
The Program has been in operation in County X for eighteen 
years. The Program provides for the free exchange of drugs and 
medical supplies used by EMS providers when they bring an 
individual to a hospital for emergency treatment. Currently, 
all hospitals and EMS providers in the County X service area 
participate in the Program. Under the Program protocol, the 
hospital that receives the patient restocks the ambulance with 
the medications and supplies used in connection with the 
patient's emergency medical treatment. Both an EMS provider and 
a representative of the receiving hospital fill out and sign an 
emergency medical response for each patient (the ``Report''). 
One copy of the Report is placed in the patient's record and 
one copy of the Report is used for inventory documentation of 
the expended drugs and medical supplies. The ambulance 
providers are not charged, and do not pay, for restocked items. 
The cost of the drugs and medical supplies is charged to the 
patient by the receiving hospital in the manner of other 
billing for the services to the patient.
                           II. Legal Analysis
    The anti-kickback statute makes it a criminal offense 
knowingly and willfully to offer, pay, solicit, or receive any 
remuneration to induce referrals of items or services 
reimbursable by any Federal health care program. See section 
1128B(b) of the Act. Where remuneration is paid purposefully to 
induce referrals of items or services for which payment may be 
made by a Federal health care program, the anti-kickback 
statute is violated. By its terms, the statute ascribes 
criminal liability to parties on both sides of an impermissible 
``kickback'' transaction. For purposes of the anti-kickback 
statute, ``remuneration'' includes the transfer of anything of 
value, in cash or in-kind, directly or indirectly, covertly or 
overtly.
    The statute has been interpreted to cover any arrangement 
where one purpose of the remuneration was to obtain money for 
the referral of services or to induce further referrals. United 
States v. Kats, 871 F.2d 105 (9th Cir. 1989); United States v. 
Greber, 760 F.2d 68 (3d Cir.), cert. denied, 474 U.S. 988 
(1985). Violation of the statute constitutes a felony 
punishable by a maximum fine of $25,000, imprisonment up to 
five years, or both. Conviction will also lead to automatic 
exclusion from Federal health care programs, including Medicare 
and Medicaid.
    This Office may also initiate administrative proceedings to 
exclude persons from Federal and state health care programs or 
to impose civil monetary penalties for fraud, kickbacks, and 
other prohibited activities under sections 1128(b)(7) and 
1128A(a)(7) of the Act.
    This Office's concern with the provision of goods and 
services for free or at below-market rates to potential 
referral sources is longstanding and clear: such arrangements 
are suspect under the anti-kickback statute. The provision of 
free or below-market rate goods or services to a referral 
source may violate the anti-kickback statute if one purpose of 
the gift is to induce referrals of Federal health care program 
business.
    The provision by a hospital of free supplies and 
medications to an ambulance provider fits squarely within the 
meaning of remuneration for purposes of the anti-kickback 
statute. An inference may be drawn that one purpose of such 
remuneration is to induce the ambulance provider to bring 
patients to the hospital. However, the strength of that 
inference may vary with the circumstances of the specific 
arrangement.
    In assessing the potential risk of fraud or abuse under the 
anti-kickback statute, our concerns are principally fourfold: 
increased risk of over utilization, increased program costs, 
patient freedom of choice, and unfair competition. Because it 
is limited to emergency medical services, the Program does not 
increase the risk of over utilization and is unlikely to lead 
to increased costs to Federal health care programs. Neither the 
number of Federal program beneficiaries requiring emergency 
transport in County X, nor the treatment these patients will 
require or receive at a hospital, is related to the existence 
or operation of the Program.
    With respect to freedom of choice and unfair competition, 
emergency ambulance crews have relatively limited opportunities 
to steer patients to particular hospitals. In life threatening 
cases, the selection of a receiving hospital will be dictated 
by the patient's condition. In other circumstances, the choice 
of receiving hospital will frequently be dictated by the 
patient, the patient's physician, or the patient's insurer. 
Notwithstanding, there will inevitably be situations in which 
ambulance provider personnel would be able to steer patients 
who do not have a preference to a particular facility. In the 
circumstances presented here, however, there would appear to be 
no financial reason arising from the Program for ambulance 
personnel to steer patients to a particular hospital, since all 
area hospitals participate in the Program.
    However, the mere fact that all hospitals may be restocking 
ambulances without charge does not immunize conduct that might 
otherwise violate the anti-kickback statute. Some institutions 
may well participate in the restocking because of fear of 
adverse competitive consequences if they do not. In short, 
remuneration that is given to retain or maintain existing 
referrals may violate the anti-kickback statute.
    We previously addressed an ambulance restocking arrangement 
that raised concerns under the anti-kickback statute in OIG 
Advisory Opinion 97-6 (October 8, 1997). Based on the specific 
facts presented by the hospital requester, we found that, 
notwithstanding a state administrative regulation that required 
ambulances to transport patients to the facility of the 
patient's choice except in exigent circumstances, the 
hospital's proposed arrangement for free restocking of supplies 
and medications posed a risk of improper steering and unfair 
competition. Accordingly, we concluded that the arrangement 
could potentially violate the anti-kickback statute if the 
requisite intent to induce referrals were present.
    The facts presented here differ in material respects from 
those presented in OIG Advisory Opinion 97-6 for the following 
reasons:
    First, the Program is not a unilateral arrangement; rather, 
it is part of an ongoing effort by the Council and its members 
to maintain and improve EMS throughout the County X service 
area. The Council, a non-profit association founded in 1980, is 
open to all hospitals and emergency ambulance providers in the 
area, as well as local educational institutions, physicians, 
and other community members. Regional EMS councils, like the 
one at issue here, were formed in the early 1970s in response 
to a growing recognition of the inadequacy of then existing 
emergency medical care and the high cost in human lives and 
physical disabilities due to accidents and sudden illness and 
injury. EMS councils were established to coordinate emergency 
care among all levels of a region's EMS system, including 
public safety organizations, private and hospital-based 
ambulance providers, hospitals and other critical care 
facilities, and local physicians and community groups.
    Second, the restocking aspects of the Program are not free-
standing; the Program is part and parcel of a coordinated 
regional effort to integrate and improve the emergency medical 
care system. In addition to the drug and supply exchange 
programs, the Council promotes the standardization of practices 
and equipment within the emergency medical system and provides 
education and training for EMS providers. It also evaluates and 
supports requests for improvements to the local EMS delivery 
system, sponsors educational programs related to EMS, and 
otherwise seeks to promote high quality EMS care for the 
region.
    Third, regional and local programs to improve and 
coordinate the delivery of quality EMS have been actively 
encouraged and promoted by the Federal government over the past 
twenty-five years. In 1973 the Federal government enacted the 
Emergency Medical Services Systems Act of 1973 (``EMSSA''), Pub 
L. 93-154, 87 Stat. 594 (1973), which provided federal funding 
for the development of regional EMS systems at the state, 
regional, and local levels. These regional systems were to 
develop comprehensive programs to improve such areas as 
communications (including ``911'' systems); transportation; 
provision and training of emergency personnel; facilities; 
critical care units; use of public safety agencies; 
accessibility to care; consumer participation, education, and 
information; transfer of patients; standard medical record 
keeping; independent review and evaluation of EMS; disaster 
linkage; and mutual aid agreements among communities. EMSSA was 
one of several Federal legislative efforts to promote EMS 
delivery systems, including the Highway Safety Act of 1966, 
Pub. L. 89-594, 80 Stat.731 (1966), which established an EMS 
program in the Department of Transportation; the Emergency 
Medical Services for Children Program, under the Public Health 
Act, Pub. L.98-555, 99 Stat. 2854 (1984), which provided funds 
for enhancing pediatric EMS; and the Trauma Care Systems 
Planning and Development Act of 1990, Pub. L. 101-590,104 Stat. 
2915 (1990).
    Finally--and importantly--the Program is likely to have a 
positive impact on the quality of patient care. By providing a 
mechanism to ensure that ambulances are fully stocked with 
current medications and appropriate supplies, the Program is 
likely to foster fast, efficient, and effective pre-hospital 
emergency care for the County X service area. These significant 
community benefits, coupled with the conditions, requirements, 
and limitations outlined above, persuade us that the Program 
poses minimal risk of fraud and abuse under the anti-kickback 
statute, and therefore the OIG would not subject it to 
sanction.
                            III. Conclusion
    The advisory opinion process is a ``means of relating the 
anti-kickback statute to the particular facts of a specific 
arrangement.'' 62 Fed. Reg. 7350,7351 (February 19, 1997). The 
advisory opinion process permits this Office to protect 
specific arrangements that ``contain limitations, requirements, 
or controls that give adequate assurance that Federal health 
care programs cannot be abused.'' Id. In evaluating an 
arrangement's potential to lead to fraud or abuse of Federal 
health care programs, no one fact or element is necessarily 
dispositive. Here, we are persuaded that the Program is likely 
to result in substantial community benefit consistent with 
longstanding national policy objectives. We are further 
persuaded that, taken as a whole, the aspects of the Program 
described above--including, but not limited to, the Program's 
relationship to a coordinated regional EMS system, the role of 
the regional Council, the Program's limitation to emergency 
medical services, and the uniformity of the Program across 
providers--create sufficient limitations, requirements, or 
controls so as to give adequate assurance that the Program will 
not lead to program abuse under the anti-kickback statute.
    Accordingly, we conclude that while the Program might 
technically violate the anti-kickback statute if the requisite 
intent to induce referrals were present, the OIG will not 
impose sanctions on the requesters under sections 1128(b)(7) 
(as it relates to kickbacks) or 1128A(a)(7) of the Act, based 
on the facts certified in the requesters' request for an 
advisory opinion.
                            IV. Limitations
    The limitations applicable to this opinion include the 
following:

    This advisory opinion is issued only to the requesters 
listed on the Attached Distribution List, which are the 
requesters of this opinion. This advisory opinion has no 
application, and cannot be relied upon, by any other individual 
or entity.
    This advisory opinion may not be introduced into evidence 
in any matter involving an entity or individual that is not a 
requester to this opinion.
    This advisory opinion is applicable only to the statutory 
provisions specifically noted in the first paragraph of this 
advisory opinion. No opinion is herein expressed or implied 
with respect to the application of any other Federal, state, or 
local statute, rule, regulation, ordinance, or other law that 
may be applicable to the Program.
    This advisory opinion will not bind or obligate any agency 
other than the U.S. Department of Health and Human Services.
    This advisory opinion is limited in scope to the specific 
arrangement described in this letter and has no applicability 
to other arrangements, even those which appear similar in 
nature or scope.
    This opinion is also subject to any additional limitations 
set forth at 42 C.F.R. Part 1008.
    The OIG will not proceed against the requesters with 
respect to any action that is part of the Program taken in good 
faith reliance upon this advisory opinion as long as all of the 
material facts have been fully, completely, and accurately 
presented, and the Program in practice comports with the 
information provided. The OIG reserves the right to reconsider 
the questions and issues raised in this advisory opinion and, 
where the public interest requires, rescind, modify or 
terminate this opinion. In the event that this advisory opinion 
is modified or terminated, the OIG will not proceed against any 
requester with respect to any action taken in good faith 
reliance upon this advisory opinion, where all of the relevant 
facts were fully, completely, and accurately presented and 
where such action was promptly discontinued upon notification 
of the modification or termination of this advisory opinion. An 
advisory opinion may be rescinded only if the relevant and 
material facts have not been fully, completely, and accurately 
disclosed to the OIG.
            Sincerely,
                                        D. McCarty Thornton
                             Chief Counsel to the Inspector General

                                

Advisory Opinion No. 98-14

    Ladies and Gentlemen:

    We are writing in response to your request for an advisory 
opinion, in which you ask whether an existing pharmaceutical 
restocking program (the ``Drug Program'') and a proposed 
medical supplies restocking program (the ``Supply Program'') 
(collectively, the ``Arrangements'') constitute prohibited 
remuneration under the anti-kickback statute, section 1128B(b) 
of the Social Security Act (the ``Act''), and, if so, whether 
the Arrangements constitute grounds for the imposition of 
sanctions under the anti-kickback statute, section 1128B(b) of 
the Act, the exclusion authority related to kickbacks, section 
1128(b)(7) of the Act, or the civil monetary penalty provision 
for kickbacks, section 1128A(a)(7) of the Act.
    You have certified that all of the information you provided 
in your request, including all supplementary information, is 
true and correct, and constitutes a complete description of the 
material facts regarding the Arrangements. In issuing this 
opinion, we have relied solely on the facts and information you 
presented to us. We have not undertaken any independent 
investigation of such information. This opinion is limited to 
the facts presented. If material facts have not been disclosed, 
this opinion is without force and effect.
    Based on the facts certified in your request for an 
advisory opinion, we conclude that the Arrangements described 
in your advisory opinion request and supplemental submissions 
could constitute prohibited remuneration under the anti-
kickback statute, if the requisite intent to induce referrals 
of Federal health care program business were present, but that 
the OIG will not subject the Drug Program, as described in the 
request and supplemental submissions, to sanctions arising 
under the anti-kickback statute pursuant to sections 1128B(b), 
1128(b)(7), or 1128A(a)(7) of the Act.
    This opinion may not be relied on by any persons other than 
the addressees and is further qualified as set out in Part IV 
below and in 42 C.F.R. Part 1008.
                         I. Factual Background
    The requesters of this advisory opinion are four hospital 
providers located in four counties in the northeast of State X 
(the ``Hospitals''). The first requester is Hospital One 
(``Hospital One''), which operates one hospital in County A, 
State X, and three hospitals in County B, State X. The second 
requester is Hospital Two (``Hospital Two''), which operates 
one hospital in County A, State X, one hospital in County B, 
State X, and one free-standing emergency facility in County C, 
State X. The third requester is Hospital Three (``Hospital 
Three'') located in County D, State X. The final requester is 
Hospital Four (``Hospital Four'') located in County B, State X. 
These Hospitals represent all of the hospital providers in the 
greater [four county] metropolitan emergency medical services 
area (the ``Four County EMS Area'').\1\
---------------------------------------------------------------------------
    \1\ There are other hospitals in the four-county area that are 
geographically distant from the Hospitals and therefore not part of the 
Four County EMS Area.
---------------------------------------------------------------------------
    Each Hospital is a member of at least one of the three 
emergency medical services (``EMS'') councils operating in the 
four-county area (the ``EMS Councils''). The first EMS council 
is Council F (``Council F''), which operates in County A. 
Council F's mission is, among other things, to coordinate the 
various levels of EMS, educational programs, and interaction 
between pre-hospital care providers and other health care 
providers in the county and to encourage the implementation of 
EMS standards and criteria pursuant to local, state, and 
national guidelines. Hospital One and Hospital Two are members 
of Council F. The second EMS council is Council G (``Council 
G''), which operates in Counties B and D. Council G's mission 
includes upgrading emergency medical care in the region; 
serving as a central coordinating body; and implementing and 
monitoring systems of quality assurance for EMS in the region. 
Hospitals One, Two, Three, and Four are all members of Council 
G. The third EMS council is Council H (``Council H''). Council 
H was formed to oversee pre-hospital emergency medical care in 
the county, including promulgating standard, community-wide 
pre-hospital EMS operating protocols. Hospital Two is a member 
of Council H. Each EMS Council has diverse membership, 
including, among others, local physicians, hospital 
representatives, paramedics, EMS technicians, consumer 
representatives, EMS education providers, and local officials.
    The Hospitals participate in a pharmaceutical restocking 
program (the ``Drug Program'') with area ambulance providers in 
connection with emergency medical transports. Typically under 
the Drug Program, a receiving hospital restocks an ambulance 
with the medications used in connection with emergency pre-
hospital services provided by the ambulance provider to the 
transported patient. The EMS units are not charged, and do not 
pay, for restocked items. As part of the exchange, the EMS unit 
must provide documentation of the drugs used during the 
ambulance run. All hospitals in the Four County EMS Area 
participate in the Drug Program; any other hospital located 
within the four-county area may participate. The restocked 
pharmaceuticals are provided to any ambulance provider that 
transports an emergency patient to the hospital.
    Council F, Council G, and Council H have facilitated the 
Drug Program within the four-county area in various ways. The 
EMS Councils' activities have included, for example: initiating 
drug exchange programs; approving policies and protocols that 
govern drug exchange programs; creating and implementing 
protocols for the administration of drugs used during patient 
transport; and coordinating efforts between public and private 
pre-hospital providers, hospital emergency staff, and consumers 
to promote the highest quality medical care for victims of 
sudden illness or injury.
    The Hospitals also propose a limited medical supplies 
restocking program (the ``Supply Program''), pursuant to which 
the Hospitals would restock certain supplies used by ambulance 
providers during emergency pre-hospital transportation. To 
initiate, coordinate, and monitor the Supply Program, the 
Hospitals have established a joint committee, comprised of the 
EMS coordinator or a higher level employee from each Hospital. 
Any hospital located within the four-county area may 
participate. The restocked medical supplies will be provided to 
any ambulance provider that transports an emergency patient to 
a participating hospital.
    The Hospitals want to establish a limited supply exchange 
program targeting specific supplies that they believe will 
enhance efficient coordination and integration between their 
emergency rooms and emergency pre-hospital care providers. To 
this end, the joint committee developed the following list of 
medical supplies to be restocked under the auspices of the 
Supply Program: intravenous solutions; intravenous tubing; 
intravenous catheters and needles; oxygen cannulas and oxygen 
masks; endotracheal tubes; tuberculin, intramuscular and 10 cc 
syringes; blood collection tubes; and linens.\2\
---------------------------------------------------------------------------
    \2\ Linens are included to ensure appropriate compliance with 
sanitization requirements for laundering linens used by hospital and 
ambulance patients.
---------------------------------------------------------------------------
    The Supply Program will allow ambulances to be fully 
stocked with a standard complement of these supplies, making it 
easier, for example, for patients arriving by emergency 
ambulance to be connected to Hospital emergency room systems 
without interruption.
                           II. Legal Analysis
    The anti-kickback statute makes it a criminal offense 
knowingly and willfully to offer, pay, solicit, or receive any 
remuneration to induce referrals of items or services 
reimbursable by any Federal health care program. See section 
1128B(b) of the Act. Where remuneration is paid purposefully to 
induce referrals of items or services for which payment may be 
made by a Federal health care program, the anti-kickback 
statute is violated. By its terms, the statute ascribes 
criminal liability to parties on both sides of an impermissible 
``kickback'' transaction. For purposes of the anti-kickback 
statute, ``remuneration'' includes the transfer of anything of 
value, in cash or in kind, directly or indirectly, covertly or 
overtly.
    The statute has been interpreted to cover any arrangement 
where one purpose of the remuneration was to obtain money for 
the referral of services or to induce further referrals. United 
States v. Kats, 871 F.2d 105 (9th Cir. 1989); United States v. 
Greber, 760 F.2d 68 (3d Cir.), cert. denied, 474 U.S. 988 
(1985). Violation of the statute constitutes a felony 
punishable by a maximum fine of $25,000, imprisonment up to 
five years, or both. Conviction will also lead to automatic 
exclusion from Federal health care programs, including Medicare 
and Medicaid. This Office may also initiate administrative 
proceedings to exclude persons from Federal and state health 
care programs or to impose civil monetary penalties for fraud, 
kickbacks, and other prohibited activities under sections 
1128(b)(7) and 1128A(a)(7) of the Act.\3\
---------------------------------------------------------------------------
    \3\ Because both the criminal and administrative sanctions related 
to the anti-kickback implications of the Arrangements are based on 
violations of the anti-kickback statute, the analysis for purposes of 
this advisory opinion is the same under both.
---------------------------------------------------------------------------
    This Office's concern with the provision of goods and 
services for free or at below-market rates to potential 
referral sources is longstanding and clear: such arrangements 
are suspect and may violate the anti-kickback statute if one 
purpose is to induce referrals of Federal health care program 
business.
    The provision by a hospital of free supplies and 
medications to an ambulance provider fits squarely within the 
meaning of remuneration for purposes of the anti-kickback 
statute. An inference may be drawn that one purpose of such 
remuneration is to induce the ambulance provider to bring 
patients to the hospital. However, the strength of that 
inference may vary with the circumstances of the specific 
arrangement.
    With respect to the Drug Program, the factual circumstances 
presented here are substantially similar to those present in 
the factual circumstances addressed by OIG Advisory Opinions 
98-7 and 98-13. Thus, for the reasons stated in those opinions, 
we conclude that the OIG would not subject the Drug Program, as 
described in the request letter and supplemental submissions, 
to sanctions under section 1128B(b), 1128(b)(7), or 1128A(a)(7) 
of the Act.\4\ As in those opinions, the involvement of the 
entire EMS community in the Drug Program, including hospitals, 
EMS physicians, ambulance providers, paramedics, EMS education 
providers, consumer representatives, and local officials, 
provides adequate assurance that the plan is designed to 
improve and enhance the delivery of EMS in the Four County EMS 
Area for the benefit of the entire community.
---------------------------------------------------------------------------
    \4\ This advisory opinion only relates to the restocking of drugs 
and supplies directly related to the provision of emergency pre-
hospital services. Restocking of drugs or supplies used in connection 
with non-emergency services are outside the scope of this opinion.
---------------------------------------------------------------------------
    While we recognize that the Supply Program may also provide 
a community benefit, we are unable to reach a similar 
conclusion with respect to the application of the anti-kickback 
statute to that program. The Supply Program would be 
implemented under the auspices of a committee formed 
exclusively of Hospital representatives, rather than an EMS 
council or similar group more broadly representative of the EMS 
community at large. The involvement of a broad range of 
representatives of the EMS community provides substantial 
assurance that an ambulance restocking program will operate for 
the benefit of the local community and will not be undertaken 
solely for the benefit of a single provider or group of 
providers.
    We wish to make clear that this opinion does not mean that 
the Supply Program (or similar ambulance restocking programs) 
would violate the anti-kickback statute. Rather, because it 
involves the provision of free goods to potential referral 
sources, the Supply Program might violate the statute if one 
purpose of the Program is to induce Federal health care program 
business. Thus, whether the proposed Supply Program would, in 
fact, be unlawful requires a case-by-case determination of the 
actual intent of the parties based on all relevant facts and 
circumstances. We cannot determine intent based solely on 
documentary submissions; accordingly, a determination of intent 
is beyond the scope of the advisory opinion process. See 62 
Fed. Reg. 7351 (Feb. 19, 1997).
                            III. Conclusion
    The advisory opinion process is a ``means of relating the 
anti-kickback statute to the particular facts of a specific 
arrangement.'' 62 Fed. Reg. 7350, 7351 (Feb. 19, 1997). The 
advisory opinion process permits this Office to protect 
specific arrangements that ``contain[] limitations, 
requirements, or controls that give adequate assurance that 
Federal health care programs cannot be abused.'' Id. In 
evaluating an arrangement's potential to lead to fraud or abuse 
of Federal health care programs, no one fact or element is 
necessarily dispositive. We are further persuaded that, taken 
as a whole, the aspects of the Drug Program described above--
including, but not limited to, the Hospitals' relationships 
with coordinated regional EMS systems, the role of the regional 
EMS councils, and the Program's limitation to emergency medical 
services--create sufficient limitations, requirements, or 
controls so as to give adequate assurance that the Drug Program 
will not lead to program abuse under the anti-kickback 
statute.\5\ The Supply program does not contain similar 
safeguards.
---------------------------------------------------------------------------
    \5\ We express no opinion regarding liability of the requesters 
under the False Claims Act or other legal authorities in connection 
with any improper billing or claims submission directly or indirectly 
related to, or arising from, the Arrangements.
---------------------------------------------------------------------------
    Accordingly, we conclude that while the Arrangements might 
technically violate the anti-kickback statute, if the requisite 
intent to induce referrals were present, the OIG will not 
impose sanctions on the requesters in connection with the Drug 
Program under sections 1128(b)(7) (as it relates to kickbacks) 
or 1128A(a)(7) of the Act, based on the facts certified in the 
requesters' request for an advisory opinion. The OIG cannot 
give a similar assurance that the Supply Program would not be 
subject to sanction if the parties were to have the requisite 
intent to induce referrals of Federal health care program 
business.
                            IV. Limitations
    The limitations applicable to this opinion include the 
following:
    This advisory opinion is issued only to the Hospitals 
listed on the Attached Distribution List, which are the 
requesters of this opinion. This advisory opinion has no 
application, and cannot be relied upon, by any other individual 
or entity.
    This advisory opinion may not be introduced into evidence 
in any matter involving an entity or individual that is not a 
requester to this opinion.
    This advisory opinion is applicable only to the statutory 
provisions specifically noted in the first paragraph of this 
advisory opinion. No opinion is herein expressed or implied 
with respect to the application of any other Federal, state, or 
local statute, rule, regulation, ordinance, or other law that 
may be applicable to the Arrangements.
    This advisory opinion will not bind or obligate any agency 
other than the U.S. Department of Health and Human Services.
    This advisory opinion is limited in scope to the specific 
arrangements described in this letter and has no applicability 
to other arrangements, even those which appear similar in 
nature or scope.
    This opinion is also subject to any additional limitations 
set forth at 42 C.F.R. Part 1008.
    The Office of Inspector General (``OIG'') will not proceed 
against the requesters with respect to any action that is part 
of the Arrangements taken in good faith reliance upon this 
advisory opinion as long as all of the material facts have been 
fully, completely, and accurately presented, and the 
Arrangements in practice comport with the information provided. 
The OIG reserves the right to reconsider the questions and 
issues raised in this advisory opinion and, where the public 
interest requires, rescind, modify or terminate this opinion. 
In the event that this advisory opinion is modified or 
terminated, the OIG will not proceed against any requester with 
respect to any action taken in good faith reliance upon this 
advisory opinion, where all of the relevant facts were fully, 
completely, and accurately presented and where such action was 
promptly discontinued upon notification of the modification or 
termination of this advisory opinion. An advisory opinion may 
be rescinded only if the relevant and material facts have not 
been fully, completely, and accurately disclosed to the OIG.
            Sincerely,
                                        D. McCarty Thornton
                             Chief Counsel to the Inspector General

                                

    Chairman Thomas [presiding.] Inquiries briefly?
    Mr. Stark. Yes. I was just going to say, was there not a 
case, a case you were talking about in Ohio for restocking?
    Mr. Thornton. Yes. The subject of some of the restocking 
opinions have come from Ohio. That is correct.
    Mr. Stark. And where hospitals were offering to restock 
free?
    Mr. Thornton. For free, right. If the hospitals were 
charging fair-market value for what they restocked, that would 
be perfectly legal. That would be perfectly fine.
    Mr. Stark. Is that any different than, you know, offering a 
physician a free tank of gas every time he comes to call on a 
patient in the hospital? It seems to me that you could get into 
the question of whether you are just restocking the driver's 
coffee or whether you are restocking thousands of dollars worth 
of pharmaceutical products. And it would depend on--it would 
seem to me you either force all hospitals to do that or you are 
offering an inducement.
    Now I don't care whether--if it's not an inducement--what 
if you offered the driver of the ambulance frequent flier miles 
for every patient they bring in? So you come to the Little 
Sisters of Mercy Hospital, we'll give you 5,000 free United 
Airline miles. Is that an inducement? Is that legal?
    Mr. Thornton. It would certainly not be--we could not write 
an advisory opinion that it is legal for sure.
    Mr. Stark. Yes. It could be that there are some things that 
are de minimis, but my suspicion is that it was other hospitals 
who complained that it [the restocking] was unfair and/or that 
it was, in fact, an inducement, a commission. I don't care what 
you want to call it. Now, the amount of that might, it might be 
de minimis. I guess that is always a problem.
    But there is no question that the hospital benefits by 
getting business, patients if you will. And therefore, it seems 
to me--and I don't know how many examples the gentlelady would 
like, but this has happened and the question is, is that 
proper. That is the issue.
    Mr. Thornton. And we didn't say it was a violation of the 
anti-kickback statute. The advisory opinion process crafted by 
this Committee, was carefully done. It excluded questions of 
intent. We are not to rule on questions of intent. So when an 
advisory opinion comes in, we don't deal with intent. We are 
asked on these facts, could this ever be a kickback or not.
    OK? And we work with requestors, and oftentimes they will 
make adjustments in their requests so that we can give them a 
favorable result. We have done that three-quarters of the time, 
including some ambulance services and ambulance response 
systems, including a city down in Texas that was putting into 
effect a new EMS system. We worked with them.
    But having intent off the table, the question is, could a 
hospital ever intend to induce ambulance companies to favor 
them by giving away things, well they could. They could.
    Mr. Stark. Of course.
    Mr. Thornton. But under some circumstances, well, many 
circumstances, it could be done legally. And we volunteered 
that advice to the people too. All that has to be done is the 
items have to be paid for, or if every hospital in the locality 
is doing it according to a standard EMS system. That is OK too.
    Mr. Stark. Makes good sense to me. Thank you.
    Mrs. Johnson of Connecticut. I think you did not 
understand----
    Chairman Thomas. The gentlewoman from Connecticut.
    Mrs. Johnson of Connecticut. Thank you. Thank you very 
much, Mr. Chairman.
    I think you did not understand the intent of my line of 
questioning. First of all, when you are 6 years behind on the 
regulations, you frankly don't have time to do a waiver by 
waiver on this particular kind of issue. Where you clearly see 
a pattern--it would be all right if you pay or be all right if 
everybody does it. So it is not an inducement.
    What I was asking you was, do you have the power then, 
either through an exception in this or some kind of power of 
the central government to say, if these two patterns are met, 
don't come to us for a waiver because this is legal.
    Mr. Thornton. Yes. We do.
    Mrs. Johnson of Connecticut. So you create certainty. See, 
you didn't create certainty through your first ruling saying 
this isn't necessarily so. See. And you don't have to prove 
intent on a self-referral. So intent is irrelevant.
    Mr. Thornton. That's right. Everything that we in the 
Inspector General's Office does is on the anti-kickback 
statute. HCFA has total charge of the self-referral statute. 
All of my advisory opinions are under anti-kickback. And we do 
have the authority to make safe harbors, which is exactly what 
you are referring to.
    Mrs. Johnson of Connecticut. But you haven't done that yet, 
have you?
    Mr. Thornton. Not for ambulance restocking.
    Mrs. Johnson of Connecticut. Why not?
    Mr. Thornton. Actually, we are considering a safe harbor 
for that practice resulting from what----
    Mrs. Johnson of Connecticut. This has been going on--this 
has been a big problem for a year and a half. It is not hard to 
see that it is an easy safe harbor if you are all doing it or 
if you are paying. Why didn't you have that done like 6 months 
ago, 9 months ago, a year ago? Why are you letting them hang 
out there?
    Mr. Thornton. We have eight safe harbors just about to come 
out. That is not one of them, but we have identified several 
ways to make arrangements legal and publish them, put it up on 
our Web site.
    Mrs. Johnson of Connecticut. I think my point is made, and 
I hope sometime you will act on it.
    Chairman Thomas. Thank the gentlewoman. I apologize for not 
being here. I was over at a meeting with the Speaker, but I 
have been informed by staff and others that maybe some 
statements were made that, if not gratifying, would at least be 
comforting. I understand, Mr. Thornton, in partial response to 
the gentleman from Louisiana's question in reference to the 
comment I made before we started the program, that when we were 
trying to deal with advisory opinions, you were somewhat 
vociferous about how it would, if not be the end of the world, 
be damn close.
    And my question to you just recently before we started this 
was, if you knew then what you know now, would you have been as 
opposed to the idea of advisory opinions? And you said, well, I 
won't put words in your mouth. What did you say?
    Mr. Thornton. I said, honestly, yes.
    Chairman Thomas. OK. Would it be useful, since you have 
mentioned now several times that you only have the advisory 
opinion power in the area of anti-kickback, if you had advisory 
opinion in the area of self-referral?
    Mr. Thornton. That is actually on the books. And since HCFA 
has responsibility for that section, they have that authority.
    Chairman Thomas. I notice you divided that very neatly. But 
in part, all of the trends of these questions are going in 
exactly the direction that I think I, unfortunately, was 
talking about when I left. And I don't know if we have made 
much progress.
    If you haven't put the regs out and people give horrendous 
examples of the kinds of things they could be punished for, for 
example, parking, meals, et cetera, and you have indicated that 
you are going to be carving out various exceptions for these, 
again trying to figure out where the bright line is, then where 
do you stop? For example, everyone would agree free parking 
doesn't make a whole lot of sense in terms of somehow providing 
a self-referral, an inducement.
    What about picking you up in a limousine and dropping him 
off in a limousine? Does that cross the line?
    Ms. Buto. I am sorry. I didn't quite hear that.
    Chairman Thomas. Well, we are talking about inducements. 
And the problem is, if you catch my drift, I can begin asking 
you examples which are only gradations above the one that you 
feel comfortable with now, saying that is de minimis and we are 
going to go ahead and say, free parking is not an inducement, 
meals are not an inducement.
    Are we talking about meals in the hospital cafeteria? What 
about meals at the nicest restaurant in town? What about, as I 
said, picking up and being dropped off by a limousine?
    The point I am trying to make is, if you start down that 
road with a law which forces you to begin to do that, you 
simply will never keep up with the people who are as at least 
as clever as you are, but who are paid a whole lot more. So 
they will probably burn the midnight oil to stay ahead of you.
    And I do not understand why you just absolutely want to 
stay where you are in a situation where, even if you are able 
to play the fringe arrangements, are you going to require 
hospitals to report any of these kinds of activities?
    Ms. Buto. No.
    Chairman Thomas. You are not going--how do you know they 
are going on then if you don't require them to report them?
    Ms. Buto. What we want to do is, I think what I hear you 
saying you want to do, is to simplify the rules in a way that--
--
    Chairman Thomas. No. I want to change or drop the law, if 
you didn't understand that from my opening statement. I think 
the compensation part you can chase but you can never catch. 
Now, here is the second part: Are you still going to require 
hospitals to submit to you information about the financial 
relationships with physicians?
    Ms. Buto. No. We are not. We are not going to ask hospitals 
or other providers and suppliers to submit information to us. 
We are essentially, saying that we expect them to keep the same 
records on their relationships that they would keep for the IRS 
or the SEC or for Medicare and Medicaid generally that we look 
for in an audit.
    And we are not going to ask them to be submitting this 
information to us. Now many of them want advisory opinions on 
whether something is permissible.
    Chairman Thomas. Yes.
    Ms. Buto. That is fine. They come into us and we will take 
a look at it. But we are not asking for reporting.
    Chairman Thomas. And would that advisory opinion be 
restricted only to that particular relationship, or would it go 
up on the net so that everybody now has a kind of a safe 
harbor?
    Ms. Buto. We want to publicize and make available the 
advisory opinions, just as the Inspector General does, to 
anyone who is interested in these opinions.
    Chairman Thomas. And would that then be a rebuttable 
presumption in terms of them being covered if they argue that 
that is what they are doing? Or do they do it at their own 
risk?
    Ms. Buto. Again, unless we either have a complaint or we do 
an audit and we challenge what they are doing, we are assuming 
that they are complying. We are assuming the providers are 
complying with the statute. Our experience is they are 
complying with the statute. They are all essentially, from the 
standpoint of due diligence, looking at what they are 
responsible for in Medicare and Medicaid and they are following 
those rules.
    Chairman Thomas. One of the difficulties I have is, is even 
in the opening statement of my friend and, obviously, we all 
have our particular views of this. I honestly think the genesis 
of this legislation was exactly the opposite of the statement 
that you just made. That, in fact, these health care 
professionals, by and large, are crooks. And that what you have 
got to do is set up a procedure which allows you to show they 
are crooks.
    And that what you are forced to do, is to examine a series 
of relationships and say, ``yes'' or ``no.''
    The ownership side, I can understand how you can follow 
that. The compensation side I think you will never, ever be 
able to get on top of unless you write so many exceptions that 
it is a nonsense. Or, you tell them, keep accurate records just 
like the IRS because we may pounce at any time.
    That kind of a veiled threat hanging over someone who is 
trying to be creative and save dollars but deliver health care 
the best way they can, is nonsense in today's world, as well as 
the changing relationship of the mix of healthcare delivery 
structures and the pattern of healthcare delivery.
    And I just don't know why we can't get together and talk 
about where we can create a very solid enforcement structure to 
get at fraud and abuse without the kind of harassing and 
worrying structure that this kind of a self-referral law 
produces.
    That, I think, is the bottom line.
    Now, I thank you very much for your testimony. If there are 
no other questions, thanks. And, Mr. Thornton, I look forward 
to you coming before this Committee with me as Chairman in a 
couple of years saying, ``If I knew then what I know now, the 
change that we made in the self-referral laws was a good one,'' 
because we are going to make one.
    Thanks a lot.
    Mr. Thornton. We are ready to help you, sir.
    Chairman Thomas. If we could ask the second panel to come 
forward. Thank you for your patience.
    The next panel consists of Mr. Sanford Teplitzky who has 
immersed himself in this area as a past president of the 
National Health Lawyers Association; Mr. Mitchell Wiet. I will 
only say that he is representing Northwestern University 
Memorial Hospital in Chicago because the gentleman from 
Illinois, Mr. Crane, wishes to provide a more complete personal 
introduction. And he will be here in just a moment.
    And then we have Dr. David Morehead, who is chief executive 
officer of Scott and White, who is a pediatrician, and Dr. 
Bruce Hauser with the American College of Radiology.
    Any written testimony that you will have will be made a 
part of the record. And you can address us in the time you have 
in any way you see fit. And we will start with Mr. Teplitzky 
and move across the line.

STATEMENT OF SANFORD V. TEPLITZKY, PARTNER, OBER, KALER, GRIMES 
    & SHRIVER, AND PAST PRESIDENT, NATIONAL HEALTH LAWYERS 
                          ASSOCIATION

    Mr. Teplitzky. Mr. Chairman, Mr. Stark, and other Members 
of the Subcommittee, my name is Sanford Teplitzky, and I appear 
before you today as a lawyer in private practice who is asked 
to answer questions regarding the self-referral legislation on 
a daily basis.
    Approximately 20 years ago, I was in the general counsel's 
office of what was then known as the Department of Health, 
Education, and Welfare. I actually predate HCFA, which is a 
scary thought to me. But that experience has provided me with a 
perspective on the development, implementation, and enforcement 
of fraud and abuse laws.
    It is why I have been very active in advocating for laws 
that are straight forward and unambiguous, and penalties that 
are severe enough to punish wrongdoers and to deter others who 
might steal from the Federal taxpayer.
    I have been the Chairman of the National Health Lawyers 
Association annual health care fraud and abuse program for 
approximately 10 years and I am a past president of the 
National Health Lawyers Association.
    In our efforts to secure laws that are clear, and 
responsible government action with respect to those laws, we 
advocated strenuously for the advisory-opinion legislation 
which has been the subject of earlier discussion today. And I 
am pleased to see that legislation is bringing us the results, 
the exact results, that we intended at the time. It didn't 
bring about the end of the world. Rather, for the first time 
real and substantive guidance is being provided to the health 
care industry.
    I have clients that both support and oppose the self-
referral legislation. But their problems are identical, they 
don't understand the law. Even those who support the law call 
me with questions about it on a daily basis.
    There are four particular concerns I would like to raise 
with you today in my very brief time. First, the original 
intent of the law has been unmet. It is very clear that the 
framers of the legislation wanted a bright-line rule. The law 
has brought no bright-line rule to this area.
    This is a copy of the proposed regulations issued by HCFA 
under this statute. This is what I have to look at everyday 
when someone calls with a question. The law was effective in 
1995. We are in 1999. There are still no final implementing 
regulations.
    Second, the law and proposed regulations are ambiguous and 
confusing. A document was published by the National Health 
Lawyers Association in cooperation with six law firms with 
extensive experience in this area. This publication consists of 
54 single-spaced pages and addresses questions that either the 
proposed regulations didn't answer or questions that were 
created by the proposed regulations.
    Third, the law is inconsistent with recent government 
initiatives. The development of integrated systems and the 
change in reimbursement systems by the Federal Government 
itself are inconsistent with the concept that physicians and 
other healthcare providers can have no financial relationships 
with each other. In fact, the incentives that the Government 
has created are intended to push providers closer together to 
identify new ways to deliver health care in this country.
    And finally, the current law both duplicates and is 
inconsistent with other Federal and State provisions. The anti-
kickback statute, which was the subject of earlier testimony, 
addresses the issue of financial compensation relationships 
between healthcare entities. Further, many of the States in 
this country have enacted their own self-referral laws, and I 
would suggest to you that each of those laws is different in 
some respects from the Federal self-referral legislation.
    There are provisions that are different. There are 
prohibitions that are different. There are exceptions that are 
different. For example, the Federal self-referral legislation 
has an exception for equipment rentals. The Maryland statute 
does not. So how does the provider determine whether or not the 
relationship is appropriate?
    Going back to the original intent of the statute, we know 
that there were perceived abuses at the time based upon a 
number of studies that indicated that physician involvement 
increased utilization. Those studies did not indicate, however, 
that the increased utilization was wrong; only that there was 
increased utilization.
    There was a concern that the anti-kickback statute was too 
broad and, therefore, could not be understood. To some extent, 
that has changed. This committee and Congress created a civil 
penalty under the anti-kickback statute, and has allowed the 
Inspector General to move in that direction. As I said earlier, 
advisory opinions have also provided much needed guidance.
    With respect to the attempt to identify a bright line, I 
have before me a chart which identifies the path we take as 
private attorneys in answering questions for our clients. It is 
not a bright line. It can't be a bright line.
    When one works with the anti-kickback statute, after awhile 
you tend to ``get it.'' Advisory opinions help you understand 
it. However, I don't ``get'' the self-referral law and I work 
with it almost everyday. And my clients don't get it, even the 
clients that support the law.
    I can't even scratch the number of questions that exist. 
For example, is lithotripsy a designated health service? Is 
cardiac catheterization a designated health service?
    How can a teaching hospital provide critical support to a 
faculty practice plan to ensure the future of academic 
medicine? The answer is that it can't under the way the 
proposed regulations are written. The proposed regulations will 
kill academic medicine in this country.
    And the Chairman has already mentioned the issues of free 
parking and free coffee and the like.
    If the Congress and the Administration want to truly 
develop a bright line, which can be understood by all, the 
current legislation cannot remain unchanged.
    I do not seek to destroy the ability of the Federal 
healthcare programs to protect themselves against fraud and 
abuse. Rather, I advocate for a system of laws which can be 
understood by all so that those who seek to comply can do so, 
and those who choose not to comply, will be consistently and 
severely punished.
    Thank you for allowing me to appear before you today.
    [The prepared statement follows:]

Statement of Sanford V. Teplitsky, Partner, Ober, Kaler, Grimes & 
Shriver, and past President, National Health Lawyers Association

    Mr. Chairman and Members of the Committee, my name is 
Sanford Teplitzky and I appear before you today as a private 
attorney who is asked to answer questions about how to 
interpret and comply with the self-referral legislation on a 
daily basis. More than twenty five years ago, I worked in the 
General Counsel's office in what was then the Department of 
Health, Education & Welfare. That experience has given me a 
perspective on the development, implementation and enforcement 
of laws and administrative policies aimed at protecting the 
federal health care programs and their beneficiaries. During my 
tenure in the government, I was assigned primary responsibility 
for the implementation of the Medicare and Medicaid fraud and 
abuse amendments of 1977. That law significantly expanded both 
the scope and nature of the Medicare and Medicaid anti-kickback 
statute.
    My work with federal and state fraud and abuse legislation 
has continued in private practice. I am the Chair of the Annual 
Health Care Fraud and Abuse Program sponsored by the American 
Health Lawyers Association, formerly the National Health 
Lawyers Association. Additionally, I served as President of the 
National Health Lawyers Association in 1993 and 1994.
    I believe that a majority of health care providers in this 
country strive to comply fully with all applicable laws. In 
this regard, I have continually advocated for laws that are 
straightforward and unambiguous, and for penalties that are 
severe enough to punish the wrongdoers and to deter those who 
would abuse the federal taxpayer. Clarity of the law is crucial 
in my view, and that is why I advocated strenuously for the 
advisory opinion legislation which this Committee and the 
Congress approved as part of HIPAA and the Balanced Budget Act 
of 1997. This legislation has already served to provide 
critical guidance to the industry with respect to the federal 
anti-kickback statute and the self-referral legislation, which 
is the subject of today's hearing. Let me briefly summarize the 
concerns I have with the current self-referral legislation:
    I. The original intent of the law is unmet:

           LTo address the possibility of over utilization or 
        increased costs resulting from physician ownership of ancillary 
        health care providers;
           LThe law was designed to, but has not developed, a 
        ``bright line'';
           LThe law became effective for services furnished on 
        or after January 1, 1995--HCFA did not publish proposed 
        regulations until January, 1998--final regulations may be two 
        additional years;

    II. The law and proposed regulations are ambiguous and 
confusing:

           LThe proposed regulations were 400 double-spaced 
        pages;
           LThe proposed regulations raise a number of 
        questions that were not answered;
           LProviders implementing corporate compliance 
        programs must have answers--it is not sufficient to await 
        enforcement actions by the government or qui tam actions by 
        private litigants;

    III. The law is inconsistent with other government 
initiatives:

           LHCFA and other payors are encouraging the 
        development of integrated delivery systems with physician 
        participation;
           LThe current self-referral law serves as a hurdle to 
        physician participation;
           LThe law generally requires the establishment of a 
        fixed fair market value payment--integrated delivery systems 
        requires incentives to provide more efficient health care 
        services.

    IV. The current law duplicates other federal provisions:

           LThe anti-kickback statute addresses compensation 
        relationships and has been amended to authorize the imposition 
        of civil money penalties;
           LNumerous states have enacted provisions that are 
        different than, and often inconsistent with, the federal anti-
        self-referral law.

    I believe that it is critical for this Subcommittee to 
review the original intent behind the self-referral legislation 
and the perceived abuses that were the subject of the 
legislation. As stated by its sponsors, this legislation was 
intended to prevent physicians from abusing the trust of their 
patients by receiving an economic benefit based upon the 
services they prescribe for their patients.
    In the late 1980s and early 1990s, there was concern in 
Congress and the Administration that the laws in effect at that 
time were insufficient to punish providers who place their 
personal financial gain over the interests of their patients. 
The Medicare and Medicaid anti-kickback statute was viewed as 
overly broad and difficult to enforce, and its penalties were 
limited to criminal fines and jail or exclusion from the 
Medicare and Medicaid programs. Additionally, little guidance 
had been issued by the OIG regarding the types of arrangements 
that would be viewed as violating the anti-kickback statute.
    You may recall the statement of Congressman Stark regarding 
the purpose of the self-referral legislation:

          What is needed is what lawyers call a bright line rule to 
        give providers and physicians unequivocal guidance as to the 
        types of arrangements that are permissible and the types that 
        are prohibited. If the law is clear and the penalties are 
        severe, we can rely on self-enforcement in the great majority 
        of cases.

    Unfortunately, the existing self-referral legislation does 
not establish a bright line rule. In fact, it is now clear to 
me that it may simply not be possible to establish a bright 
line rule in the face of a dynamic regulatory environment. The 
Medicare and Medicaid rules continue to change every year. Both 
the Congress and Federal Government have moved away from 
traditional fee-for-service payment methodologies in favor of 
reimbursement mechanisms that are designed to challenge 
providers to fundamentally change the manner in which health 
care services are provided. Such initiatives include the 
development of prospective payment systems, fee schedules, and 
other initiatives intended to encourage and promote the 
delivery of cost effective high quality health care services 
for Medicare beneficiaries.
    Behind me is a chart that indicates the chronology of the 
development of the self-referral legislation. You will note 
that the original law was enacted in 1989 with an effective 
date of January 1, 1992. Even before that effective date, 
certain amendments were passed in 1990.
    A major amendment to the statute was enacted in 1993 with 
an effective date of January 1, 1995, and again almost 
immediately, in 1994, additional changes to the law were 
enacted. Thus, it is clear that Congress itself has struggled 
with the concept of defining a bright line.
    Furthermore, we now sit here almost six years after the 
passage of the law, and four years after the effective date of 
the law, without definitive guidance from HCFA. I have before 
me a copy of the proposed regulations that were published in 
January of 1998. Additionally, I have a copy of an analysis of 
the proposed regulations that were issued by the American 
Health Lawyers Association. The document was drafted through a 
cooperative effort of at least six different law firms with 
extensive experience in fraud and abuse and self-referral 
issues. The document is 54 pages single-spaced and raises 
numerous questions that were either unanswered by the proposed 
regulations or, in some cases, generated by the proposed 
regulations.
    If we can return for a moment to the original intent of the 
statute, I want to raise a number of particularly troublesome 
issues. As I noted earlier, the original intent of the statute 
was to address situations in which a physician's conflict of 
interest is resolved in favor of the physician's economic 
interests and against the health care interests of the patient. 
However, the original legislation included an exception for 
services provided in the physician's own office. In other 
words, while the law would prohibit the referral of a patient 
by the physician to an outside entity, that physician could 
provide the exact same services within his or her own office 
and be paid for those services. The area in which the potential 
conflict of interest is probably most apparent was immediately 
exempted from the prohibitions of the statute.
    Moreover, it is clear that the legislation has become a 
tool of competition and turf battles. Throughout the years, 
various groups have advocated or opposed, the inclusion, or 
exclusion, of certain designated health services. Are these 
health care groups generally thinking of the health care 
interests of Medicare and Medicaid beneficiaries? I think not. 
Rather, they are assessing their role in the health care 
delivery system and the desire to preclude physicians and 
others from becoming competitors.
    I noted earlier that the legislation, at least in my view, 
resulted from a belief that existing laws could not address the 
abuses sought to be prohibited by this legislation. However, 
even that world has changed. For example, the OIG published 
regulations in 1991 describing business relationships that 
would not be subject to sanctions under the statute. These 
regulations are known as the safe harbor regulations. I 
understand that they are currently working on another set of 
safe harbor regulations.
    Let me return for a moment to the issue of the concept of a 
bright line. I must tell you that having worked with the 
federal anti-kickback statute for many years, you tend to ``get 
it.'' There is a rationale to the statute, and in part due to 
the advisory opinions issued by the OIG over the last two 
years, a recognizable analysis that is applied to all health 
care business transactions in order to determine whether they 
conflict with the anti-kickback statute.
    Unfortunately, the same cannot be said for the self-
referral legislation. I could be asked a question at 9:00 
o'clock in the morning and I will have to fight my way through 
the maze of the proposed regulations. If that same question is 
asked at 1:00 o'clock in the afternoon, I simply can't remember 
the path I took to respond to the question earlier in the day 
and I must go through the exercise again. I am getting older, 
but I do not believe that my age has anything to do with this 
condition. Behind me is a chart of the machinations that are 
required to analyze any fact pattern under the self-referral 
legislation.
    I have appeared on numerous panels with representatives of 
HCFA and the OIG during which this legislation has been 
discussed. Those individuals have been quite honest and candid 
in responding to questions. However, their responses have not 
constituted for the most part, answers. Rather, they respond 
with their own questions, assumptions, and predictions of what 
the final regulations might look like. This is simply 
unacceptable to the great majority of providers who want, need, 
and deserve answers. I cannot provide definitive guidance to my 
clients.
    I cannot even scratch the surface of the types of questions 
I receive on a daily basis regarding this legislation. For 
example, is lithotripsy a designated health service; is cardiac 
catheterization a designated health service?
    How can a teaching hospital provide critical support to 
physicians in a faculty practice plan to ensure the future of 
academic medicine? And, issues that appear as trivial as can a 
hospital provide free parking to physicians.
    If Congress and the Administration truly want to develop a 
bright line which can be understood by all, the current 
legislation cannot remain unchanged. I advocate for a system of 
laws that can readily be understood by all.
    I look forward to your questions. Thank you.

                                

    Chairman Thomas. Thank you very much.
    Mr. White.

STATEMENT OF MITCHELL J. WIET, J.D., VICE PRESIDENT AND GENERAL 
   COUNSEL, NORTHWESTERN MEMORIAL HOSPITAL, CHICAGO, ILLINOIS

    Mr. Wiet. Thank you very much, Chairman Thomas, Ranking 
Minority Member Stark, and other distinguished Members of the 
Subcommittee. I am Mitchell Wiet, vice president and general 
counsel at Northwestern Memorial Hospital. Thank you for the 
opportunity to testify here today.
    Northwestern Memorial Hospital is a 750-bed academic 
medical center located in downtown Chicago and is the primary 
teaching hospital affiliated with Northwestern University 
Medical School. As with many academic medical centers, our 
full-time faculty is organized in a 450-physician, multi-
specialty group practice called the Northwestern Medical 
Faculty Foundation. NMFF, as we call it, is completely 
independent of the hospital.
    My goal today is to do my best to give you a snapshot of 
what it is like on a day-to-day basis for one hospital, albeit, 
a major academic medical center, to try to comply with the 
self-referral laws.
    At Northwestern, we take our patients-first philosophy very 
seriously. We try to provide very high-quality and cost-
effective care to our patients in the most appropriate 
settings. At times, the self-referral laws become insuperable 
obstacles to our efforts to meet the needs of our patients and 
the physicians who care for them.
    Most troublesome in our view is that the self-referral 
prohibitions are absolute. If the law is implicated, an 
exception must apply or the arrangement is illegal. Intent is 
irrelevant. The element of knowledge or scienter plays no role. 
There is no consideration of motive. No room for judgment. No 
margin of error. The law is a strict liability statute, and the 
penalties are severe.
    In my view, that absoluteness is the fatal flaw of the 
current self-referral law and regulations and is also what 
drives what is to me the mind-boggling complexity and volume of 
the rules published to date and those under consideration as 
further proposed rules.
    The self-referral law's motives are good: prevent waste in 
our system by eliminating financial arrangements that put 
physicians' and/or hospitals' self-interests above the patients 
and patient care and lead to health resource utilization with 
questionable medical need.
    In attempting to achieve this goal, however, the law has 
added tremendous costs to the system. The law has resulted in 
organizations incurring significant costs to determine to the 
best of their ability through exhaustive review and scrutiny 
whether common, well-meaning arrangements comply with this law.
    We spend hundreds of thousands of dollars in staff time, in 
outside counsel expenses to comply with this law. Almost 
everyday clinicians and administrators contact me and my staff 
seeking assurance that their plans to improve patient care are 
not in violation of a law they do not understand.
    Please allow me to provide the following example that arose 
last year. This example has been simplified for the purpose of 
illustration of what was at the time an extremely complex 
issue.
    We have a comprehensive breast center with a skyrocketing 
demand for mammography. Current reimbursement for mammography 
from Medicare as well as managed-care payers, has not caught up 
with the extraordinary advances in mammography technology that 
find smaller and smaller tumors.
    Reimbursement also fails to recognize how much more labor-
and resource-intensive this new technology is. Therefore, 
inadequate reimbursement is a reality for hospitals and 
physicians in this area.
    Our patient-care goal in the breast center was to assure 
that we had an adequate number of radiologists so that we could 
meet the growing needs of our patients for mammograms. We were 
looking for a way to support our radiologists in order to 
provide high-quality, ever-increasing demand levels of care to 
our patients.
    We entered into negotiations with the faculty practice 
plan. This entailed inside counsel review, then outside counsel 
consultation, looking at the statutory language, the proposed 
regulations, and legislative history and intent. We had 
memorandums back and forth between their self-referral expert 
and ours for weeks on end.
    I provide this example for two reasons. First, after all 
this work by all these lawyers, we still couldn't agree on how 
to structure a deal to comply with the self-referral law.
    As a result, we have not expanded our mammography services 
to meet the community's needs. In fact, we lost two 
mammographers, and only after 6 months have been able to 
replace them.
    The wait time has increased dramatically in the breast 
center for an initial screening. And we continue to have a 
patient care demand we struggle to meet.
    Second, both the hospital and the group practice spent 
thousands of dollars on outside counsel. This escalated to the 
point where we had dueling lawyers with opposite 
interpretations of what we could or could not do. Both sides 
opinions were supported by contradictory language in the 
proposed regulations, comments, and legislative history.
    Those thousands of dollars collectively would have been 
much better spent on getting the mammography services to our 
patients. And the answer was, nothing was done.
    Am I allowed further time?
    Chairman Thomas. Very briefly.
    Mr. Wiet. Pardon me.
    Chairman Thomas. You can sum it up.
    Mr. Wiet. Very well. Our suggestions. The current self-
referral laws are hopelessly and irremediably unhelpful and 
counterproductive and wasteful. My strong recommendation is 
that what is commonly referred to as Stark II be replaced with 
clearer, simpler, and user-friendly measures. I suggest 
removing the absolute character of these laws and reintroducing 
the elements of intent and scienter.
    The fraud and abuse laws are a good model. Then trust the 
courts and the legal process.
    The ethical principles on which the self-referral laws are 
founded and which they seek to safeguard are not only correct, 
they are critically important, and should be retained, but in a 
far more balanced, much simpler and more practically helpful 
form that will facilitate ready compliance based on bright-line 
guidance.
    Thank you, Mr. Chairman, Members of the Committee for the 
opportunity----
    [The prepared statement follows:]

Statement of Mitchell J. Wiet, Vice President and General Counsel, 
Northwestern Memorial Hospital, Chicago, Illinois

    Chairman Thomas, Ranking Minority Member Stark, Congressman 
Crane and other distinguished Members of the Subcommittee, I am 
Mitchell Wiet, Vice President and General Counsel at 
Northwestern Memorial Hospital. Thank you for the opportunity 
to testify today.
    Northwestern Memorial Hospital (NMH) is a 750 bed academic 
medical center located in downtown Chicago, and is the primary 
teaching hospital affiliated with Northwestern University 
Medical School. As with many academic medical centers, our 
full-time faculty is organized in a 450 physician multi-
specialty group practice, called the Northwestern Medical 
Faculty Foundation (NMFF). NMFF is completely independent of 
NMH. In addition, while a part of (under common control with) 
the Northwestern Memorial corporate system, separately 
incorporated is the Northwestern Memorial Physicians Group, a 
50-physician primary care practice. It is in the context of the 
hospital relationship with these two physician groups, that 
many of the self-referral issues arise.
    My goal today is to give you a snapshot of what it is like 
for one hospital, albeit a major academic medical center, on a 
day-to-day basis to try to comply with these self-referral 
laws. At Northwestern we take our Patients First philosohy very 
seriously. We try to provide the best possible care to our 
patients in the most appropriate settings. At times, the self-
referral laws become insuperable obstacles to our efforts to 
meet the needs of our patients and physicians who care for 
them.
    Every arrangement entered into between a hospital and a 
physician, no matter how large or small, must be, and is, 
analyzed for compliance under the self-referral law. Hospitals 
are burdened in this manner largely because of four factors:
    1. The law applies to all compensation arrangements between health 
care facilities and their physicians;
    2. Designated health services include all inpatient and outpatient 
hospital services;
    3. Notwithstanding the law's breadth and ambiguity, the law is 
absolute in its prohibitions; and
    4. Unhelpful (dizzyingly complex and non-beneficial) exceptions 
which are narrow and apply to few common arrangements.

                     All Compensation Arrangements

    The self-referral law applies to all financial 
arrangements, which include not only ownership or investment 
interests, but also all compensation arrangements. In the 
language of Stark, a compensation arrangement means ``any 
arrangement involving any remuneration, direct or indirect, 
between a physician or a member of a physician's immediate 
family.'' Remuneration means ``any payment, discount, 
forgiveness of debt, or other benefit made directly or 
indirectly, overtly or covertly, in cash or in kind.'' 
Therefore, the transfer of anything of value implicates the 
law. We joke that the provision of free coffee and doughnuts in 
the physicians' lounge may violate the law. But how much 
further can you go before the law applies. Discounted meals? 
Free meals? Discounted parking?

               Inpatient and Outpatient Hospital Services

    Designated health services include all inpatient and 
outpatient hospital services. Therefore, every physician who is 
on staff at a hospital, unless the physician is inactive, 
refers patients to the hospital for inpatient and outpatient 
services. Every one. Therefore, no physician on the medical 
staff of a hospital is exempt from the law's scope--any 
transaction the hospital does with any physician on staff must 
be vigorously scrutinized.

                         Absolute Prohibitions

    Most troublesome to us is that the Stark Law's prohibitions 
are absolute. If the law is implicated, an exception must apply 
or the arrangement is illegal. Intent is irrelevant. The 
element of knowledge or scienter plays no role. There is no 
consideration of motive. No room for judgment. No margin of 
error. The law is a strict liability statute and the penalties 
are severe. In my view, that absoluteness is the fatal flaw of 
the current self-referral law and regulations and is what 
drives the mind numbing complexity and volume of the rules 
published to date.

                               The Result

    The self-referral law's motives are good--prevent waste in 
our system by eliminating financial arrangements that put 
physicians' and/or hospitals' financial self-interests above 
patient care and lead to health resource utilization with 
questionable medical need. In attempting to achieve this goal, 
however, the law has added tremendous costs to the system. The 
law has resulted in organizations' incurring significant costs 
to determine to the best of their ability through exhaustive 
review and scrutiny whether common, well-meaning arrangements 
comply with the law. We spend hundreds of thousands of dollars 
in staff time and outside counsel expenses to comply with the 
law.
    For hospitals and other providers, the law applies to 
anything we do for or with any physician on our staff. Because 
of its absolute prohibition, there is zero tolerance for non-
compliance. Therefore, every day clinicians and administrators 
contact me and my staff seeking assurance that their plans to 
work together with physicians to improve patient care are not 
in violation of a law they do not understand.
    To give you an understanding of the types of arrangements 
that we must analyze on a day-to-day basis, I submit the 
following real life issues that general counsels all over the 
country face and must analyze for compliance and then make core 
decisions about whether the application of the self-referral 
law is triggered by any of the following:
     May we provide physicians the free use of certain 
equipment in providing osteoporosis-screening services to the 
community?
     May we pay for a physician's transportation costs to a 
community event that will promote wellness services that include 
hospital and physician services?
     May we recruit a trauma surgeon to a community in order to 
maintain a Level III trauma designation and then pay the physician a 
per surgery amount?
     May we advertise in our hospital's community newsletter 
that a new physician has joined our medical staff, including his office 
location, telephone number and hours?
     May we pay physicians on an hourly basis for taking time 
away from their practices and attending meetings related to the 
improvement of care in their clinical specialty?
     May we enter into exclusive arrangements with medical 
directors to manage and provide clinical oversight for hospital 
departments?
     May we pay physicians for helping us achieve appropriate 
cost savings in the hospital (commonly called ``gainsharing'')?
    Each and every one of these questions has been asked. All 
of them implicate the self-referral law. Do they comply with 
the self-referral law? In some cases, we can develop arguments 
that they do. However, we struggle to achieve great comfort in 
the strict liability context of the self-referral laws. In 
other cases, even HCFA personnel have indicated that they do 
not know or that there is a difference of opinion. What is 
certain is that we spend a significant amount of time and money 
trying to comply, but often we have no answer as to whether we 
have complied or we have failed. At other times, our review has 
led to the scuttling of initiatives from which the community 
would benefit.
    Please allow me to provide the following example that arose 
last year. This example has been simplified for the purpose of 
illustration of what was at the time an extremely complex 
issue. We have a comprehensive Breast Center with a 
skyrocketing demand for mammography. Current reimbursement for 
mammography, from Medicare as well as managed care payers, has 
not caught up with the extraordinary advances in mammography 
technology that find smaller and smaller tumors. Reimbursement 
also fails to recognize how much more labor and resource 
intensive this new technology is. Therefore, inadequate 
reimbursement is a reality for hospitals and physicians in this 
area.
    Our patient care goal in the Breast Center was to assure 
that we had an adequate number of radiologists so that we could 
meet the growing needs of our patients for mammograms. We were 
looking for a way to support our radiologists in order to 
provide high quality ever increasing demand levels of care to 
our patients. We entered into negotiations with the faculty 
practice plan. This entailed inside counsel review, then 
outside counsel consultation looking at the statutory language, 
proposed regulations, and legislative intent. We had 
memorandums back and forth between outside counsel for both 
parties for weeks on end.
    I provide this example for two reasons. First, after all 
this work by all these lawyers, we still couldn't agree on how 
to structure a deal to comply with the self-referral law. As a 
result, we have not expanded our mammography services to meet 
the community's needs. In fact, we lost two mammographers and 
only after 6 months have been able to replace them. The wait 
time has increased dramatically in the Breast Center for an 
initial screening. And we continue to have a patient care 
demand we struggle to meet.
    Second, both the hospital and the group practice spent 
thousands of dollars on outside counsel. This escalated to the 
point where we had dueling lawyers with opposite 
interpretations of what we could or could not do. Both sides 
opinions were supported by contradictory language in the 
proposed regulations, comments and legislative history. Those 
thousands of dollars collectively would have been much better 
spent on getting the mammography services to our patients and 
the answer was nothing was done. All the costs were spent and 
no resolution of the issues was achieved.
    What is clear is that we need a simple and effective way of 
analyzing arrangements. However, without the ability to 
articulate clearly those arrangements that the law should 
prevent, we as lawyers and our organizations' compliance 
officers, are left without the practically beneficial means to 
advise our clients effectively. The self-referral law is an 
over-broad, unbelievably complex law that results in difficult, 
uncertain and, often, ineffective policing of arrangements. 
Clear, simple guidance will enable us to enforce more 
effectively the law because we will be better equipped to apply 
it.
    Our suggestions for how to simplify? The current self-
referral law and rules are hopelessly and irremediably 
unhelpful, counter-productive and wasteful. My strong 
recommendation is that what is commonly referred to as Stark II 
be replaced with clear, simpler and user-friendly measures. I 
suggest removing the absolute character of this law and 
reintroducing the elements of intent and scienter. The Fraud 
and Abuse laws are a good model. Then, trust the courts and the 
legal process to help produce clearer and simpler bright line 
guidance rather than create an endless morass of rules in an 
attempt to individually address a potentially infinite number 
of exceptions and exceptions to exceptions.
    The ethical principles on which the self-referral laws are 
founded and which they seek to safeguard are not only correct, 
they are critically important and should be retained, but in a 
far more balanced, much simpler and practically helpful form 
that will facilitate ready compliance based on bright line 
guidance.
    Thank you Chairman Thomas and Members of the Subcommittee 
for the opportunity to testify. I am pleased to answer any 
questions that you may have.

                                

    Chairman Thomas. Thank you, Mr. Wiet. Your written 
testimony will be made a part of the record. And now for an ATT 
introduction, that is after-the-testimony introduction.
    The gentleman from Illinois, our colleague, Mr. Crane.
    Mr. Crane. I thank you very much, Mr. Chairman. And it is 
indeed a pleasure to welcome Mitchell Wiet, vice president and 
general counsel of Northwestern Memorial Hospital in Chicago. 
In addition to his duties at Northwestern, Mr. Wiet is a member 
of the graduate legal education practitioner faculty of the 
Health Law Institute of Loyola University, Chicago School of 
Law. He is also a faculty member of the Cook County Graduate 
School of Medicine.
    Northwestern is an urban academic medical center located in 
the heart of downtown Chicago. It is the principal adult care 
teaching affiliate of the Northwestern Medical School.
    As Mr. Wiet can attest to, Northwestern is one of the 
finest medical facilities in the country and is providing the 
best cutting-edge health care for tens of thousands of 
Illinoisans of every income level each year. To that end last 
month, Northwestern opened a state-of-the-art facility that 
surpasses anything we have seen in the Chicago area.
    We are all expecting even greater things from Northwestern 
in the future.
    With Mr. Wiet's professional credentials and Northwestern's 
recognized commitment to providing all-around health care, Mr. 
Wiet is uniquely qualified to comment on today's topic, and I 
am grateful that I got back here in time to hear his testimony. 
And I apologize to all of you for being suddenly moved over 
into the Speaker's office for a quickie meeting.
    But I want to also add one footnote. My dad got his medical 
degree at Northwestern Medical School, and we lived on Superior 
Street. Now, where we lived was an apartment building that has 
long since been razed, but those were good days in Chicago. And 
I remember vividly riding my tricycle through the alley and 
back and forth, up and down the streets.
    But Mr. Wiet, it is certainly good to have you here today. 
Thank you.
    Chairman Thomas. Thank you very much.
    And Dr. Morehead, you may proceed.

STATEMENT OF C. DAVID MOREHEAD, M.D., PRESIDENT, SCOTT & WHITE 
 HEALTH PLAN, TEMPLE, TEXAS, ON BEHALF OF THE AMERICAN MEDICAL 
                       GROUP ASSOCIATION

    Dr. Morehead. Thank you. I am Dr. Dave Morehead. I have 
been a physician for over 35 years, and most of my career has 
been spent at Scott & White. Mr. Chairman, I ask permission to 
submit written testimony to the Committee and permission to 
abbreviate that testimony for my oral presentation.
    Chairman Thomas. Without objection.
    Dr. Morehead. I represent the American Medical Group 
Association, which is the leading advocacy group on behalf of 
the Nation's larger multi-specialty group practices. I work for 
Scott & White, which is a regional medical center located in 
central Texas, composed of a hospital of over 400 beds, over 
500 physicians who practice with the clinic, and a health plan 
of over 165,000 members, twenty thousand of which are Medicare 
enrollees.
    I appreciate very much the opportunity to testify because 
group practices, including my own are uniquely affected by this 
physician self-referral law.
    First of all, although my comments will sound rather harsh, 
I don't want them to be misinterpreted because, as someone who 
has watched the practice of medicine for a long time, I have 
seen, as a result of this statute, the disappearance of some 
imprudent business arrangements which emerged during the 
1980's. The AMGA and I recognize the good that the law has 
accomplished.
    On the other hand, 10 years is a long time. Medicine has 
changed greatly during the past decade and some of the vagaries 
of the law have surfaced. Section 1877 needed to be revised.
    AMGA's two major concerns are the ambiguity of section 1877 
as well as the shifting regulatory interpretations of what the 
law actually means. Specifically, testimony will focus on two 
provisions of the physician self-referral law--the provision 
covering the definition of a group practice, and the 
compensation arrangements.
    First, the definition of group practice. This is very 
important because, the only definition of group practice found 
in the Medicare law is located in section 1877.
    Most of the groups that I know of can meet the statutory 
requirements for group practices as they now stand. But we are 
concerned about the shift in the definition about what group 
practice is. Will we qualify in the future? Let me cite two 
examples.
    In the HCFA rules proposed in January 1998, the definition 
of group practice changed. For example, contracted physicians 
were included as members of the group in the original law, but 
were excluded in the most recent provisions.
    Second, if the 1998 provisions become final, Scott & White 
will be forced as an organization to change the accounting 
methods we employ for our regional clinics. These are examples 
of shifts in the interpretation of what the law means that 
cause group practices great concern.
    The AMGA requests that Congress restrict the ability of 
regulatory agencies to reinterpret the meaning of the law as it 
relates to defining group practice.
    Second, provisions covering compensation arrangements in 
section 1877 cause group practices considerable distress. Our 
group qualifies for the exception to the compensation 
arrangement under the in-house ancillary services provision. 
However, the provision also states that no member of the group 
can be remunerated based on the volume or value of his or her 
referrals.
    Prohibiting remuneration based on volume of referrals 
places all compensation formulas that I know of in great 
jeopardy because it is the physicians that see the most 
patients who order the most tests, i.e., initiate the most 
referrals. They are the heavy hitters who work the hardest and 
who expect and deserve a greater percentage of the net revenue 
at the end of the year.
    In order to attract the best and the brightest to our rural 
community, we must pay competitive salaries. And to do that, we 
must connect compensation to the production of the individual 
physicians. Those who refer the most make the most money--are 
we in violation?
    Let me close with a hypothetical but accurate example. I 
will describe a place that I might be.
    In this scenario, I am practicing in a small rural 
community of 4,000 citizens in west Texas. I grew up in this 
community, and I have a strong sense of obligation to its 
citizens. These are my people.
    As in other parts of rural America, most of my patients are 
elderly and poor. Many live in the local skilled nursing home, 
and a large number suffer with heart disease. The closest major 
hospital and group practice is 75 miles away; I usually send my 
patients there because they provide good care.
    I work 7 days a week and I close my office on Wednesday 
afternoons. Suddenly I have a great idea. What if I could 
convince that group practice 75 miles away to send a 
cardiologist twice a month to use my facilities while I am off 
on Wednesday afternoons and provide care to the frail patients 
who cannot easily travel 75 miles for care.
    I also need to borrow a Holter monitor, a tool which would 
allow me to monitor my patients' heart rates to help the 
cardiologist when he comes.
    There are a number of problems with this arrangement. The 
clinic may or may not be interested in providing a cardiologist 
because they will lose money doing so. They may comply but just 
to help the community. They probably won't be willing to pay 
for my office space, and I cannot afford to purchase the Holter 
monitor.
    The right thing to do is for the large clinic to provide 
both the cardiologist and the monitor and for me to provide my 
office space free of charge. But for the clinic to enter the 
arrangements they will have to hire a group of lawyers who will 
assess the situation and perhaps structure a deal that does not 
violate the self-referral law. The legal work is expensive and 
unnecessary.
    Some have suggested that there is a lot of money in 
medicine but I assure you that there is no more money than is 
necessary. Every single dollar we waste on legal fees, are 
dollars we cannot use to develop patient-care programs.
    American group practices recognize our obligation to comply 
with the law. We obey to the very best of our understanding. 
What we ask, is that the law be clarified so that that we 
understand the rules before we are judged by them.
    Thank you very much for your attention. I will be happy to 
answer questions.
    [The prepared statement follows:]

Statement of C. David Morehead, M.D., President, Scott & White Health 
Plan, Temple, Texas, on behalf of the American Medical Group 
Association

    Chairman Thomas, Mr. Stark and Members of the Subcommittee, 
my name is David Morehead. I am President of the Scott & White 
Health Plan in Temple, Texas. I have spent 35 years in 
medicine, including 28 years with Scott & White. Scott & White 
is a fully integrated multi-specialty group practice of 500 
salaried physicians. Scott & White Hospital is a nonprofit 
hospital of 400 beds located immediately adjacent to the Clinic 
on our main campus in Temple. The Scott & White Health Plan is 
a nonprofit HMO with over 165,000 enrollees, including 20,000 
Medicare beneficiaries enrolled in our Medicare Health Plan.
    I am here today on behalf of the American Medical Group 
Association. AMGA is the leading advocacy group on behalf of 
the nation's larger multi-specialty group practices. Our 
membership is uniquely affected by the physician self-referral 
law (Section 1877 of the Social Security Act) and we appreciate 
the opportunity to submit our views on this law.
    We would note at the outset that this is not the first time 
we have testified before this subcommittee on this issue. Just 
a little over four (4) years ago, this subcommittee held a 
hearing on the self-referral law. In reviewing what we said 
that day, we are struck by the fact that none of the concerns 
we raised on that occasion have been addressed yet. While our 
concerns were more than adequately addressed by provisions 
drafted by this subcommittee, and approved by both the House 
and Senate in the Balanced Budget Act of 1995, as you may 
recall, this legislation was vetoed by the President for other, 
unrelated reasons. Now to make matters worse, new concerns have 
arisen as a result of the proposed rule issued by the Health 
Care Financing Administration on January 9, 1998.
    Our testimony today will focus on those matters that are of 
particular concern to group practices. As we noted at the 
outset, we believe group practices are uniquely impacted by the 
law.

                      Definition of Group Practice

    There is a common misperception that there is a ``group practice'' 
exception under the statute. That is not correct. The important 
distinction to make is that there are several exceptions that are 
specifically designed to accommodate a group practice. They do not 
always protect services provided by group practices. In fact in many 
circumstances they interfere with group practice integration and 
provision of services. Because of those exceptions, the statute has 
contained a definition of ``group practice'' from the very outset. It 
has been a continuing source of confusion.
    Several examples from the preamble to the January 9, 1998 proposed 
rule will illustrate the problem:
     A single shareholder professional corporation may not be a 
``group practice'' even though it may employ many physicians. (63 FR 
1687).
     A group practice must be ``one legal entity'' but can have 
members who are professional corporations or individuals who are 
incorporated (63 FR 1687).
     In the final rule implementing, the first iteration of the 
self-referral law, HCFA stated that independent contractors would count 
as ``members'' of the group. In the new proposed rule, they do not. (63 
FR 1689).
     ``Substantially all'' of the services of group members 
must be furnished through the group and billed under the group's 
billing number. HCFA has defined ``substantially all'' to mean 75% 
based on time spent on ``patient care services.'' (63 FR 1688).
     Overhead expenses of and the income from the practice must 
be distributed ``according to methods that indicate that the practice 
is a unified business.'' In other words, a group's internal accounting 
methods ``must reflect centralized decision making, a pooling of 
expenses and revenues, and a distribution system that is not based on 
each satellite office operating as if it were a separate enterprise.'' 
This requirement is not found anywhere in the statute, but HCFA claims 
it can put it in place anyway because HCFA has the authority to add new 
standards to the group practice definition under the statute. (63 FR 
1690).
    Mr. Chairman, these are just a few examples involving just this one 
issue. We could supply you with many others if you wish.
    As the foregoing examples illustrate, the definition of a group 
practice is something of a moving target. This causes us great 
discomfort. We would like some certainty brought to this process. For 
example, Scott & White has been around for over a hundred years as a 
group practice of physicians servicing the population of central Texas. 
We believe that no reasonable person could ever dispute that we are a 
``group practice'' under the statute. But we are uncertain about our 
status as a group practice under the regulations and in the eyes of 
HCFA.
    We cannot overemphasize enough the importance of this matter. If a 
group fails to meet the ``group practice'' definition, then it is at 
tremendous risk for being found in violation of the self-referral 
prohibition. For many groups, that would be a death knell.
    We urge Congress to address this matter legislatively. 
Specifically, we would request that Congress delete HCFA's authority to 
create additional criteria beyond those that are found in the statute 
for defining what a group practice is.

                       Compensation Arrangements

    In a more general vein, we wish to reiterate a recommendation we 
made four years ago. We strongly urge Congress to amend the self-
referral law to limit its applicability to ownership interests. If this 
were done, the vast majority of group practices in this country could 
provide needed patient care unencumbered by the fear that its legal 
counsel had misinterpreted the statute and the application of the many 
exceptions.
    Both the anti-kickback law and the compensation provisions of the 
self-referral law seek to prohibit payments in exchange for referrals 
and the associated potential for over utilization of services. It is 
unclear how the compensation aspect of the self-referral law provides 
any real benefit over the anti-kickback law. In fact, its existence is 
having the negative effect of impairing legitimate marketplace 
transactions. Deleting the compensation provision, while preserving the 
ownership prohibition, would maintain the law's integrity and remove 
its detrimental effect on the market.
    AMGA recommends that the physician referral statute be clarified by 
eliminating the compensation arrangement provision.
    Analysis of compensation arrangements under the law is a daunting 
task. Currently providers must analyze fourteen different anti-kickback 
safe harbors, and sixteen different self-referral exceptions for every 
ownership, compensation or other financial relationship involving a 
physician or a member of the physicians family. Each of the safe 
harbors in the case of the anti-kickback law and the exceptions in the 
case of the self referral law are technically complex. Some overlap in 
the area of risk-sharing arrangements, with vastly different technical 
requirements.
    The reality of the self referral law is that the rules implementing 
the law have been structured so that the exceptions apply to only very 
narrow classes of arrangements. Since the law is a prohibitory statute, 
and a provider has to disclose any unlawful referral within 60 days 
that the provider ``knew or should have known'' was unlawful, the 
narrowness of HCFA's reading of each exception creates enormous 
potential liability for health care providers, and enormous difficulty 
in providing needed and medically necessary care particularly to under-
served populations.
    In the following text I will describe six areas of the law where 
HCFA has faithfully applied the terms and meaning of the statute, but 
in so doing has undermined the intent of the law.

        Compensation Related to the Volume or Value of Services

    In order for a compensation relationship between parties to a 
practice to qualify for an exception in the law, most of the exceptions 
require that the compensation not be based upon the volume or value of 
referrals. This was believed by most analysts of the law to mean that 
(1) payments cannot vary with referrals; and (2) payments must be fair 
market value for the items or services purchased, with no additional 
mark-up to reflect the value of referrals. The proposed regulations 
added another interpretation of the statute that further interferes 
with our ability to integrate patient services. The new interpretation 
of the statute states that there can be no requirement even within a 
group practice, to refer to the group practice. This interpretation 
will lead to the prohibition of exclusive contracts and non-compete 
restrictions that enable desirable efficiencies and allow for improved 
patient care. The value of multi-specialty organizational arrangements 
for patients is the convenience of one stop healthcare. The exclusivity 
of the arrangements allows groups to maintain a unified patient record, 
and coordinate utilization of services. The result is more 
conservative, evidence-based medicine, better outcomes of patient care, 
and measurably more satisfied patients.

       Referrals to Affiliated Independent Contractor Physicians

    Under the proposed rule a physician in a group practice may not 
refer to an affiliated independent contractor physician unless the 
nonmember physician services are provided ``under the personal 
supervision'' of another member of the group. This means that another 
group practice physician is legally responsible for monitoring the test 
or the designated service, and must be available to assist and 
supervise the physician who is furnishing the service, doubling the 
cost of the professional component of the service. Why two physicians 
are necessary to deal with the service is unfathomable, but required.

         Compensation not Related to Designated Health Services

    The physician ownership and self referral law provides an exception 
for payments by a hospital to a physician for services that are not 
related to designated health services. The regulations, on the other 
hand, indicate that payment by a hospital to purchase a heart valve is 
sufficiently related to hospital services, which are designated health 
services, so that it does not qualify for an exception. The proposed 
regulations indicate that the items or services purchased by the 
hospital must be ``completely'' unrelated to a designated health 
service. Since all hospital services are designated services, it is 
difficult to imagine a legitimate purchase by a hospital that is not 
somehow indirectly related to hospital services.

                    The Discount Mark-Up Prohibition

    In the proposed rule HCFA assumes that any purchase of an item or 
service by a physician at a discount from an entity which provides 
designated health services means that the acquisition was not 
consistent with fair market value. This assumption totally ignores the 
ordinary and customary distinction between doing business at wholesale 
and doing business at retail. If a physician or a group practice is 
able to purchase items at a discount because of the volume of such 
purchases, and the price paid is consistent with what others pay, 
including non-physicians who purchase a comparable quantity of the 
item, then there would appear to be no basis for the conclusion that 
such purchase price terms are not consistent with fair market value. In 
fact, purchasing items at the same price paid by someone else who is 
purchasing fewer items or services would be inconsistent with fair 
market value. Thus, if a group practice were to purchase chemotherapy 
drugs from a pharmacy on price terms consistent with what other 
purchasers pay for comparable quantities of drugs, such as hospitals, 
the price terms are clearly consistent with fair market value.

                     Personal Productivity Bonuses

    In the January 9 rule HCFA has proposed limiting the scope of 
permitted personal productivity bonuses for employees to bonuses which 
are not ``directly related to the volume or value of a physician's own 
referrals.'' HCFA also noted elsewhere that ``directly'' should be 
interpreted as ``directly or indirectly.'' With that in mind virtually 
any bonus would be precluded for employed physicians in certain 
specialties outside of a group practice, such as radiologists and 
pathologists whose entire practice or a substantial majority of it is 
dedicated to the provision of designated health services. Surely HCFA 
can not intend a prohibition that prevents fair compensation for the 
services provided by employed physicians.

 Stark Law Prohibitions Against Providers Offering Fee-for-Service and 
               Managed Care Services in the Same Network

    The prepaid health plan exception under the statute protects all 
services any provider may make available to enrollees of a prepaid 
health plan. But providers are only protected if they have a contract 
directly with the prepaid health plan. Downstream arrangements with 
subcontracting providers are not protected unless they fall within the 
personal services exception. Moreover, a prepaid health plan 
arrangement might taint any fee-for-service relationship involving the 
same providers. HCFA has taken the position that if a provider has a 
contract with a health plan to provide prepaid healthcare services to 
enrollees of the health plan that provider or physician could not refer 
fee-for-service patients to the other providers or physicians within 
the health care delivery system providing services to enrollees because 
of the managed care relationship. If such arrangements are within the 
scope of the physician ownership and self referral statute, and are not 
protected by any exceptions then it is impossible for providers to make 
available both fee-for-service and managed care services within the 
same network of care. This does not make sense from any public policy, 
regulatory, or business point of view. In fact, it restricts a 
patient's choice of care arrangements.
    The physician ownership and self-referral statute is a strict 
liability law that physicians, group practice leaders, attorneys and 
regulators can't figure out. This is an unfair situation because the 
penalties are so severe. But even more unfair, and unrealistic, is that 
it drives up the costs of providing services and, especially in under-
served and difficult to serve areas, may determine if services are 
provided at all.
    I would like to conclude this testimony but describing the actual 
circumstances of a group practice in a rural part of the country. The 
group practice is a community-governed, tax exempt health care 
organization that employs approximately 160 physicians, located in 10 
sites, in two predominantly rural states. Its main campus includes a 
large clinic and hospital, and, from that base, the clinic's 
specialists and sub-specialists work with the few providers located in 
rural and frontier communities often hundreds of miles away to provide 
care to many older patients with chronic conditions who have difficulty 
traveling. The group practice offers approximately 60 outreach clinics, 
involving 9 different specialties, in sites all over this vast, under-
served area. The group practice provides these services because of its 
public mission to serve under-served areas. The group practice loses 
money by offering these outreach services; its direct costs exceed 
direct outreach revenue expenses.
    The physician ownership and self-referral law has made providing 
health care in this difficult situation more difficult by increasing 
the economic costs and legal risks of providing services in those 
areas. It should be simple enough:
     the local clinic or hospital should be able to make space 
available for free to the group practice for outreach clinics, 
recognizing that, because of fluctuating need, clinics by particular 
specialists may be in operation sporadically;
     the group practice should be able to make equipment 
available for free to monitor patients with heart disease or manage 
diabetes, even if those patients are referred to the central campus for 
services that are designated health services;
     the group practice should be able to recruit providers and 
manage part-time practices in these areas without having to fear 
whether they are meeting all of the criteria of the exceptions for 
equipment and space leases and providing personal services.
    Applying the physician ownership and self-referral law to 
these situations is difficult. Lawyers frequently answer with 
``arguably yes and arguably no'' when asked if the law applies. 
The problem of vagueness of application is compounded by the 
fact that the exceptions to the physician ownership and self-
referral law often do not make sense financially. For instance, 
it is apparently illegal under the physician ownership and 
self-referral law to vary the amount of reimbursement by actual 
productivity or the number of patients served at each site, if 
productivity is related to designated health services. In 
difficult to serve areas, setting compensation terms for a year 
at a time, without regard to productivity, can be a formula for 
an economic failure. But that is what the law requires.
    This is what should happen. The clinic administrator or 
sole family practice provider in a town or county with 3,000 
residents, located 200 miles from a hospital with more than 50 
beds, in a town with no significant lab or radiology, and no 
other providers, should be able to call the main campus and 
say, ``We seem to have an outbreak of rashes. Could you please 
run some tests in your lab and send a dermatologist up for a 
day.'' Or, ``We've got at least 10 people out here with heart 
disease and many are frail and in the local skilled nursing 
home. If you could lend us a Holter monitor and send a 
cardiologist out every 3 months, that would be a great 
service.'' The clinic should be able to respond to such simple 
requests without having to do what it currently does--the 
general counsel hires an outside attorney to do an analysis 
under the physician ownership and self-referral laws which 
taeks needed resources from patient care, and then the parties 
sign written agreements with terms that make little economic 
sense. The clinic is obliged to do this because anything less 
not only potentially violates the physician ownership and self-
referral law, but is potentially a violation of the False 
Claims Act.
    In complex situations, involving recruitment of providers 
and the management of rural practices where the group practice 
would like to offer outreach clinics and provide some simple 
monitoring, lab, and diagnostic equipment, the difficulty of 
applying the physician ownership and self-referral laws and the 
additional expense of complying with those laws, may make it 
impossible to do--even though the group practice wants to do 
so, and it would clearly be beneficial to the community.

                               Conclusion

    Mr. Chairman, the group practices of America recognize 
their obligation to comply with the physician ownership and 
self-referral law. We do our best every day to comply with the 
law as we understand it. To its credit the Health Care 
Financing Administration has done the best in drafting 
regulations that comport with the statute that it could have 
under the circumstances. The statute was written with good 
intentions applicable to the perceived situation at the time. 
Since that time the business environment for health care has 
changed, and we have found that the anti-kickback statute 
effectively enables federal prosecution of compensation 
arrangements that are inappropriately intended to induce 
referrals.
    It is only fair, however, that we KNOW WHAT THE LAW MEANS 
AND WHAT THE RULES ARE before we are held accountable for them. 
The original version of this law is now almost ten years old, 
and we still don't know how to apply them to deliver needed 
care in our communities.
    It is too easy to just assign blame for this regulatory 
failure. AMGA would rather live in the solution than live in 
the problem. We believe the solution lies in a further 
legislative effort to (1) delete HCFA's authority to create 
additional criteria beyond those found in the statute for 
defining what a group practice is; and (2) eliminate the 
compensation arrangement provision in current law.
    Thank you for your attention. I'll be happy to try to 
answer any questions you might have.

                                

    Mr. McCrery [presiding]. Dr. Hauser.

  STATEMENT OF J. BRUCE HAUSER, M.D., FACR, MEMBER, BOARD OF 
           CHANCELLORS, AMERICAN COLLEGE OF RADIOLOGY

    Dr. Hauser. Good afternoon. Thank you, Mr. Chairman. My 
name is Bruce Hauser, and I am a practicing radiologist from 
Roanoke, Virginia. I am testifying today on behalf of the 
American College of Radiology, a 30,000-member organization of 
which I am a member of its board of chancellors.
    It is an honor to be with you today, and as we did in 1995, 
we appreciate being invited again to share our views on this 
important matter.
    The American College of Radiology has been a strong 
proponent of prohibiting the practice of self-referral. This 
position is shared by numerous physicians and healthcare 
organizations, including the American Medical Association.
    This strong stance has helped lead to the enactment of the 
self-referral prohibition legislation we are discussing today. 
However, prior to the enactment of this legislation, numerous 
studies, including studies conducted by the General Accounting 
Office, showed the physicians that referred patients to outside 
entities, where they had a financial interest, were much more 
likely to order tests than physicians who did not have such 
investment interests.
    These investigations clearly showed that this type of 
market control leads to increased utilization, higher prices, 
and lower quality while generating large profits. This practice 
also resulted in higher costs for government programs such as 
Medicare and Medicaid, as well as private insurers.
    At the time of its passage in 1993, self-referral 
prohibition was slated to save the Federal Government $350 
million over the next 5 years. In 1995, when Congress was 
considering changes to the self-referral law, the Congressional 
Budget Office estimated that those changes would cost taxpayers 
$400 million over 7 years.
    Obviously, the college continues to believe that self-
referral prohibitions are still necessary, although the delay 
in the implementation of the final rule is troublesome. The ACR 
agrees that HCFA must double its effort to implement the 
regulations. HCFA urgently needs to provide physicians some 
guidance on structuring their financial and referral 
relationships to comply with the statute. In addition, the 
proposed rule has many technical and substantive problems that 
should be addressed.
     However, an imperfect regulatory process does not merit 
weakening the underlying law. As for those in the medical 
community who argue that the current trend toward managed care 
has lessened the need for self-referral prohibitions, we 
respectfully disagree. Although managed-care organizations have 
established varying levels of market influence throughout the 
Nation, over 80 percent of Medicare beneficiaries still do not 
belong to managed-care health plans.
    Most Medicare beneficiaries still receive their medical 
care on a fee-for-service basis. We acknowledge that the 
healthcare system has become more integrated since self-
referral legislation was first enacted in 1989, yet the 
landscape has not shifted so dramatically as to eliminate the 
medical and economic costs of self-referral.
    In conclusion, the ACR believes that the market forces that 
led to Congress enacting self-referral prohibitions have not 
disappeared in the past several years. Furthermore, the college 
finds it troublesome that during a time when the Federal 
Government is devoting millions of dollars to fighting fraud 
and abuse in the Medicare system, it would consider diminishing 
the effect of self-referral prohibition, one of the most 
effective Federal efforts developed to stem fraud and abuse.
    Therefore, the ACR finds no justification for substantially 
modifying restrictions against abuse of self-referral 
arrangements.
    Thank you, Mr. Chairman for the opportunity to present our 
view. I will be happy to answer any questions the Subcommittee 
may have.
    [The prepared statement follows:]

Statement of J. Bruce Hauser, M.D., FACR, Member, Board of Chancellors, 
American College of Radiology

    The American College of Radiology, which represents 30,000 
physician and physicist members, is pleased to present the 
following statement regarding the status of the physician self-
referral prohibitions in the Social Security Act as passed 
under the Omnibus Budget Reconciliation Act of 1993 (OBRA 
1993).
    Historically, the ACR has held that self-referral 
arrangements lead to inappropriate utilization of medical 
services and that the justification for development of these 
arrangements is largely contrived. Since 1985, we have 
advocated the ethical principle that physicians should not have 
a direct or indirect financial interest in facilities to which 
they refer patients. We continue to support legislative and 
regulatory efforts that would eliminate this conflict of 
interest by prohibiting such ownership arrangements in health 
care. This position is shared by numerous physician and health 
care organizations including the American Medical Association 
(AMA).
    Compelling evidence of fraudulent and abusive referrals has 
been recognized and documented by the Inspector General and the 
General Accounting Offices. Moreover, studies from prestigious 
peer-reviewed scientific publications such as the New England 
Journal of Medicine (NEJM)and the Journal of the American 
Medical Association (JAMA) have repeatedly found that where 
referring physician joint ventures exist, the normal economic 
forces of competition do not apply. These investigations 
clearly showed that this type of market control leads to 
increased utilization, higher prices and lower quality, while 
generating large profits.
    The College still believes that the self-referral 
prohibitions that resulted from these studies and 
investigations are still necessary, although the delay in the 
implementation of a final rule is troublesome. The ACR agrees 
that HCFA must double its effort to implement Stark II 
regulations. HCFA urgently needs to provide physicians some 
guidance on structuring their financial and referral 
relationships to comply with the statute. In addition, the 
proposed rule has many technical and substantive problems that 
should be addressed. However, an imperfect regulatory process 
does not merit weakening the underlying law. Furthermore, HCFA 
has pledged to review controversial provisions in the rule and 
modify them where regulatory changes will not compromise the 
congressional intent in protecting against patient or program 
abuse.
    As for those in the medical community who argue that the 
current trend towards managed care has lessened the need for 
self-referral prohibitions, we respectfully disagree. Although 
managed care organizations have established varying levels of 
market influence throughout the nation, over 80 percent of 
Medicare beneficiaries still do not belong to managed care 
health plans--only 16.6 percent enrolled as of 1998. Most 
Medicare beneficiaries still receive their medical care on a 
fee-for-service basis. We acknowledge that the health care 
system has become more integrated since Stark I was enacted in 
1989, yet the landscape has not shifted so dramatically as to 
eliminate the medical and economic costs of self-referral. The 
market forces that led to Congress enacting self-referral 
prohibitions have not disappeared in the past several years. 
Therefore, the ACR finds no justification for substantially 
amending, let alone repealing, restrictions against abusive 
self-referral arrangements.

                               ACR Policy

    The current position of the American College of Radiology is based 
on our members' experience with such financial arrangements. As these 
joint ventures proliferated in the early 1980's, the ACR debated the 
merits and disadvantages of these arrangements. In 1984, our policy-
making council initially adopted the position that radiologists could 
ethically participate in financial arrangements, such as joint 
ventures, in order to provide diagnostic and therapeutic care to 
patients. But our position also warned our members of the potential for 
abuse in financial arrangements that involved referring physicians. 
With that caution, we believed that financial arrangements to fund 
imaging centers and radiation oncology centers could be constructed to 
avoid conflict of interest, fraud, and abuse of patient confidence.
    We found we were wrong. In 1988, our council recognized that it 
needed to reconsider this position. In the four years between 1984 and 
1988, we found that the potential for, and exploitation of patients by 
unethical practices and the flagrant disregard of physicians' ethical 
responsibilities to the patient to be so great and so pervasive, we 
subsequently strengthened our policy.
    Our policy adopted in 1988 and again strengthened in 1992 states:

          The practice of physicians referring patients to health care 
        facilities in which they have a financial interest is not in 
        the best interest of patients. This practice of self-referral 
        may also serve as an improper economic incentive for the 
        provision of unnecessary treatment of services. Even the 
        appearance of such conflicts or incentives can compromise 
        professional integrity. Disclosing referring physicians' 
        investment interests to patients or implementing other 
        affirmative procedures to reduce, but not completely eliminate, 
        the potential for abuse created by self-referral is not 
        sufficient . . . The American College of Radiology believes 
        that radiologists and radiation oncologists should make efforts 
        to restructure the ownership interests in existing imaging or 
        radiation therapy facilities because self-referral may 
        improperly influence the professional judgments of those 
        physicians referring patients to such facilities.

                           AMA Ethical Policy

    The scope of these problems has also been recognized in the AMA's 
Council on Ethical and Judicial Affairs report on physician conflicts 
of interest, as adopted in 1991 and reaffirmed in late 1992. The 
report, which remains part of the AMA's code of ethics, holds that the 
practice of self-referral is ``presumptively inconsistent with 
physicians' fiduciary duty'' to their patients. These ethical 
guidelines state that ``only when a physician can demonstrate both the 
absence of adequate facilities--a plain medical need--and absence of 
alternative financing should referral take place.'' But even when such 
a need may exist, the AMA also recommends that physician-owned 
facilities meet nine additional requirements to ensure that over 
utilization and patient exploitation will not occur.

                                 Costs

    While we support efforts to provide high quality patient care 
through the more cost-effective delivery mechanisms, we must urge 
caution in proposing any modification in the laws which could create 
loop holes for referring physicians' financial involvement in health 
facilities. If facilities currently in operation are allowed to simply 
declare themselves as extensions of group practices or private 
physician offices, the intent of the legislation will have been 
circumvented because referring physicians will continue to self-refer. 
The problem with increased utilization in referring physician owned 
facilities will be simply changed to a problem of increased utilization 
of services within physician's offices.
    Unfortunately, there will always be those who will want to create 
new elaborate kickback schemes and abusive referral arrangements to 
augment their income as the Congress seeks to restrict the growth of 
the federal health programs and the market restricts income from 
private sources. But the passage of the referral prohibitions in the 
Social Security Act has already had a substantial impact in reducing 
over-utilization of radiologic and other designated health services, 
thus saving tax payer as well as private sector dollars.
    It must also be recognized that the costs of modifying, weakening 
or repealing these self-referral prohibitions will be borne by the 
American tax payer. In 1995, when Congress was considering changes to 
the self-referral law, the Congressional Budget Office (CBO) estimated 
that those changes would cost tax payers $400 million over seven years. 
When this was combined with another provision that would have weakened 
the government's ability to prosecute fraud and kickback scams, CBO 
estimated that the overall cost would be $1.1 billion.
    The self-referral ban in Medicare and Medicaid has also had an 
indirect effect of eliminating similar corresponding costs in the 
private sector. In short, we believe that alternate methods for 
controlling the fraudulent and abusive referrals will cost the U.S. 
health care systems and the federal government more.
    We believe that any consideration in modifying these laws should 
not create an incentive or circumstance where services are provided by 
untrained or unskilled physicians, who are either unconcerned with or 
unaware of proper practice standards. In the best interest of patients, 
we should assure access to medical care from physicians qualified to 
provide the service.

                               Conclusion

    The American College of Radiology recognizes that many of these 
abusive referral practices arise from the pressures of the highly 
competitive health care marketplace and we empathize with the desire to 
form legislative managed care arrangements. However, we believe 
strongly that exploitive and unethical practices should not be condoned 
under the guise of competition. These arrangements hamper rather than 
encourage competition and should not be allowed.

                                

    Mr. McCrery. Thank you, Dr. Hauser. And thank all of you 
for your testimony. Being a graduate of the LSU Law School, I 
am not sure what weight should be given to Mr. Teplitzky's 
testimony. He is a Tulane grad. [Laughter.]
    However, I do have a question for you, Mr. Teplitzky. And 
we talked about this a little bit with the HCFA and the 
Inspector General's Office, and that is the burden of proof 
that is required under the self-referral law and the burden of 
proof that is required under criminal statutes.
    Do you have any thoughts on how the self-referral law might 
be modified in terms of the burden of proof required of the 
Government?
    Mr. Teplitzky. Yes, I do, sir. The current self-referral 
law does not consider the issue of intent, which is an 
interesting approach because the law makes it clear to me that 
not all self-referral is bad. There are approximately 14 
exceptions. I understand that additional exceptions are being 
proposed to recognize that, in fact, there are situations when 
the physicians are the people who know best what can be done, 
and what should be done, for their patients.
    The law does not prohibit physician ownership in health 
care entities. It prohibits the referral of Medicare and 
Medicaid patients to those entities. Thus, if a physician in 
good faith develops a high-quality service at a reasonable 
price, every patient in that community can receive that service 
except that physician's own patients.
    I believe that there probably should be some level of 
intent to determine whether there is a potential for abuse.
    Mr. Thornton indicated that of the advisory opinions they 
issued, 24 of them were favorable. It is interesting to note 
that in many of those, the OIG found that the transaction 
described was a technical violation of the law, but 
notwithstanding that violation, because of the safeguards built 
into the transaction, the OIG chose not to impose sanctions.
    They don't--neither HCFA nor the OIG has that same ability 
under the current self-referral law. If it is a technical 
violation of the law, it can't happen, even if it is being done 
for all the right reasons.
    So I believe an intent standard different from a criminal 
statute, i.e., a lesser standard, would be appropriate.
    Mr. McCrery. Perhaps something akin to a negligence 
standard, he should have known that this would be in violation, 
or something like that.
    Mr. Teplitzky. Exactly the same standard that this 
Committee and the Congress enacted as part of HIPAA with 
respect to civil money penalties, ``know or should know.''
    Yes, sir.
    Mr. McCrery. Thank you. Not bad for a Tulane grad. 
[Laughter.]
    Mr. Teplitzky. We never could beat you in football. 
[Laughter.]
    Mr. McCrery. Dr. Morehead, I want to explore with you a 
little bit more of the impact that the self-referral rules have 
had on group practice. Most economists that we talk to, agree 
that physician practices, group practices, are good for the 
consumer, good for the patient, as well as good for 
expenditures in the healthcare system in terms of holding costs 
down.
    Have self-referral laws, in your opinion, undermined the 
formation of group practices?
    Dr. Morehead. Yes, I think so. It has become much more 
complex to make our decisions as a group practice. For example, 
as physicians bond into groups, or as groups grow, the 
complexities increase in order of magnitude. For example, the 
number of arrangements, the number or payers that one must deal 
with, the number of locations where facilities are required, 
and so forth, all of these increase the complexity and cause us 
to have to test each of these decisions against the self-
referral law, the provisions thereof.
    So, I think it has been a deterrent because it is so 
expensive and so consuming of energy and time to make the 
decisions about how we can accomplish something.
    Mr. McCrery. You say in your testimony, the definition of a 
group practice is something of a moving target. What do you 
mean by that? Can you elaborate?
    Dr. Morehead. In the original law, there were certain 
provisions to define a group practice, but the last provision 
was any other criteria that the Secretary should adopt in terms 
of defining a group practice. So with each iteration, 
additional criteria of what constitute a group practice has 
emerged.
    That causes great concern. We can comply today. It causes 
us concern because it, again, is one exception or one rule that 
may be good for a certain situation but it is--makes it 
difficult for the other situations.
    So we would propose that the Secretary's ability to do 
this, that is, to change the definition, be struck from the 
law. We find that burdensome. Just keeping up with it is 
expensive and consuming.
    Mr. McCrery. Thank you. Mr. Stark.
    Mr. Stark. Thank you, Mr. Chairman. Mr. Wiet, I am sorry to 
hear that your hospital has trouble with its legal 
complexities. It seemed to me, I was advised by HCFA that for a 
thousand bucks they could have gotten an advisory opinion that 
would have saved all that high-priced lawyers fees, but they 
can do whatever they choose, I guess.
    It is important to note that Florida Hospital Association 
has endorsed what are referred to as the Stark I and Stark II 
laws. I quote here from their statement for the record on 
behalf of the 230-member hospitals and healthcare systems who 
serve their communities throughout the State: ``The Florida 
Hospital Association urges Congress to maintain the critical 
consumer protections''--I haven't heard anything about consumer 
protections today; just taking care of rich doctors--``provided 
in the Omnibus Budget Reconciliation Act, and in Stark I and 
II.''
    And they go on to suggest that this has been vital in 
Florida. So maybe things operate differently in Illinois, but 
at least that hospital group thinks we should continue the way 
we are going.
    I think it is also important to note that it was suggested 
earlier by my colleague from Connecticut that there was a 
problem with the Visiting Nurses Association. And I would like 
to point out that the Visiting Nurses Association of 
Philadelphia is very supportive, and I am quoting from them, 
over the Stark II position: ``We believe the law is sound 
public policy and we are pleased the proposed rules 
implementing the law were finally published. We are dismayed 
that it is May--as am I--and no final rule has appeared.''
    But it seems that, even though the gentlelady from 
Connecticut may not like it, the Visiting Nurses do.
    Chairman Thomas [presiding]. Of Philadelphia.
    Mr. Stark. Of Philadelphia. And I believe that that is true 
of all of the lobbying groups for the Visiting Nurses 
Association, but I don't have a letter from all of them.
    Further, and I would like to direct this to Dr. Hauser. 
This is something that I heard years ago and I thought that 
people would now understand. There was a reference to the fact 
that without the investment of primary-care physicians into 
diagnostic, electronic diagnostic equipment like MRI's there 
wouldn't ever have been any. That we needed this private 
investment from referring physicians to allow the poor 
underpaid, undercapitalized radiologists to go out and buy MRI 
equipment.
    Now I would ask Dr. Hauser if he knows of any radiologist 
in this country when MRI's came out that wouldn't have had all 
the assistance they need from General Electric Finance Corp. to 
get them an MRI overnight to, either on a lease or low terms or 
any other way.
    Was there any shortage of capital available, Dr. Hauser, to 
your knowledge for diagnostic equipment?
     Dr. Hauser. No, sir. I do not believe so. MRI was 
developed by a radiologist, and radiology was instrumental in 
developing the locations for it and distributing it. And it 
would appear that only after the value of it was finally 
discerned by the public and by the medical community that such 
joint ventures started to become more in fact.
    Mr. Stark. One other question, Doctor. Has it ever come to 
your attention, or would you find it reasonable to assume that 
there is any problem along the North Shore of Chicago for a 
woman to get a high-quality mammogram at a reasonable price. 
Any shortage of that service that you know of?
    Dr. Hauser. I can't speak to the exact nuances of the North 
Shore of Chicago, but----
    Mr. Stark. Evanston, Chicago, you know, around in that 
area.
    Dr. Hauser. I would not think so. I would think that they 
would be readily available, Mr. Stark that is certainly my 
understanding of the problem.
    Mr. Stark. Well, as I say, I don't know where this hearing 
goes. I guess I come back to the question that nobody has 
suggested that beneficiaries are having trouble finding 
services. Eight-four percent of them as you indicated, Dr. 
Hauser, are still getting their service through fee-for-
service.
    The American Medical Association has suggested that it is 
unethical to have an ownership interest. I guess I will just 
close by saying, if somebody wanted to make the distinction 
that a compensation arrangement doesn't have the same benefits 
as an investment, my guess is that they ought to go back and 
either take accounting or economics all over again.
    I can't see the difference between how you receive the 
money. You can call it a salary or a fee or a limited-
partnership distribution or anything else you want, but it 
seems to me that when those fees relate to, as the American 
Medical Association says, a service outside the physician's 
office or outside his practice, that there is always a suspect 
issue there. And we know that it costs the taxpayers more.
    And we have heard no evidence that we get any better 
quality. All we know is that we end up spending more money on 
outrageous legal bills, on stockholder dividends, on high chief 
executive officer profits, and no better medical care. And the 
taxpayers end up paying more.
    And it seems to me that we should urge HCFA, as the 
Chairman has suggested, to get the regulations out in a timely 
fashion, be tough. I think--I still think we ought put a few 
people in jail now and again just to set a good example.
    I don't think we have any trouble understanding 
compensation arrangements. We operate under them here. The 
Chairman makes me pay for parking. I don't know why I have to, 
but I got to have my income taxed for the parking I get, which 
used to be free. I understand it. It is simple. I mean I know 
the numbers. You can do that with your shoes and socks on.
    So we know where we are limited to outside compensation, 
and under what circumstances we can receive it or not. We have 
had a couple of Speakers, on both sides of the aisle, who have 
tried to circumvent those regulations, I think to their dismay.
    So, it works in every profession. And usually the greedy 
people get caught, and I just hope we keep going after those 
physicians who ought to tend to their patients and not worry 
about dipping into the public till for unjust enrichment.
    I appreciate your having this hearing, Mr. Chairman. Thank 
you.
    Chairman Thomas. Thank you very much. Although this may not 
interest many people in this room, the reason you pay for your 
parking is because when your party was in control, the 
gentleman from California, Mr. Matsui, was out looking for ways 
to pay for one of his ideas and the offsetting revenue was to 
charge members for parking.
    So I believe the gentleman might have some concern with his 
colleague from Sacramento. Go travel 80 and visit with him. He 
may let you park for free; then again, he may not.
    Perhaps, also, I did not say consumers, but in my opening 
statement I said Members of the Subcommittee can agree, I hope, 
that the overarching goal is to provide to our seniors the 
proper medical care in the proper setting.
    One of my concerns from the very beginning was that the 
underpinning of this law was based upon some studies whose 
methodology I, to this day, do not understand how they support 
the arguments that were made when the gentleman's party was in 
the majority. And I will just give you an illustration as far 
as I am concerned of how that methodology worked.
    Dr. Hauser, if this law were not in place, would your 
professional job be better off or worse off? That is, would 
there be other people doing what you do now more so, or less 
so?
    Dr. Hauser. I believe that there would be more people doing 
parts of what I do. There are parts that I do that others 
cannot provide.
    Chairman Thomas. So, am I to interpret that to say that if 
the law were not in place, you would not be doing as much as 
you would be doing otherwise, but since the law is in place, 
you are doing more than you would do otherwise?
    Dr. Hauser. That may only be one factor----
    Chairman Thomas. No, no, no. I am just trying to figure it 
out. I mean if you did a straight study of the volume of work 
that you do under the law versus the volume of work that you 
would do if the law wasn't there, you'd do more volume under 
the law as opposed to if the law wasn't there.
    Dr. Hauser. I believe that I do more volume under the law.
    Chairman Thomas. Fine. That was exactly the methodology 
that was used to determine whether or not we should go after 
people. The conclusion is the problem that I have. And the 
conclusion was these people, therefore, did that because they 
wanted to make money.
    You are here, Dr. Hauser, using the same assumptions 
because you are simply motivated by economic self-interest. And 
you are in support of this law because you make bucks with it 
in place. And if it weren't in place, you wouldn't make bucks 
with it. So I can clearly understand why you are in front of 
this Committee, you are fighting to keep your game structured 
to advantage you.
    Now I don't think that is fair, do you?
    I don't think that is a fair analysis of why you are here, 
but that was the analysis of people who spent to find out about 
equipment, and then decided that since they found out about the 
equipment and thought it was a good idea, used it more. There 
was never an attempt to find out whether or not the total cost 
of care increased or decreased utilizing the equipment.
    They never determined whether the diagnosis was more 
accurate more often and, therefore, didn't have to put the 
patient a far more traumatic procedure to determine what the 
appropriate problem was.
    None of that was done in methodology to put this law in 
place. They simply compared volume and drew a conclusion that 
they were crooks. I will not draw the conclusion that you came 
here to testify because if this law stays in place you make 
more money then you would otherwise.
    I don't think that is fair. But that is exactly the 
methodology that was used as outlined to justify this law. And 
I don't think that serves beneficiaries. I don't think that 
serves providers. I don't think we ought to create a war or pit 
providers against beneficiaries. I think, as I said in my 
opening statement, that I hope the Subcommittee members can 
agree that the overarching goal is to provide to our seniors 
the proper medical care in the proper setting.
    And since we became the majority, we have passed very tough 
laws to go after fraud and abuse. And it just seems to me at 
some point we have to re-examine something that is not in place 
that causes real concerns because of the intense structure, as 
brought out by my colleague from Louisiana, and that still 
after all this time does not have final regs in place. And I 
would be willing to offer anyone a bet on when they are in 
place, and how long they would last, how useful they are going 
to be, when you are chasing a bright line that can never stay 
in one place.
    Unfortunately, this law will produce a laser show, and with 
bright lights going off in all directions, or exceptions carved 
out to make it work, at some point I hope people will say, 
``Why don't we quit carving out exceptions, examine the law, 
get the intent right, create advisories off of this so people 
can know what it is that they are supposed to do, and move 
forward with delivering care in the proper context and catching 
people who are crooks.''
    We will catch the crooks. What we ought not to do is put up 
a net that prohibits responsible, reasonable, and appropriate 
delivery of care.
    And Dr. Morehead's example of the west Texas town is right 
on top of something that ought to be allowed that can't be 
because you wanted to, if I wanted to continue the analogy, 
have the advantage slanted your way. I don't think that is 
fair.
    Now, any other members have any questions? I want to thank 
all of you for coming. I will be looking for assistance as we 
begin to look at what is an appropriate response to trying to 
make sure that, at some point, filling whatever gap there is, 
if this law were not on the books, since it can't be enforced. 
No one has been prosecuted. Putting in place something that 
does work, that does get after ownership, and that does make 
sure that people who do want to break the rules willfully will 
be caught.
    Thank you very much.
    The Subcommittee stands adjourned.
    [Whereupon, at 3:40 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of the Alliance for Referral Integrity, Alexandria, VA

    We, the member organizations of the Alliance for Referral 
Integrity (ARI), an ad hoc grouping of concerned organizations 
representing the ``designated health services'' defined by the 
self-referral statute, write to express our opposition to 
dismantling the current law restricting physician self-referral 
under the Medicare and Medicaid programs.
    ARI asks the Committee to stand firm against efforts to 
dismantle or devalue this important statute which seeks to 
eliminate incentives for physicians to over utilize health care 
services for the purpose of personal financial gain.
    ``Self-referral'' occurs when a health care provider refers 
a patient to a facility in which they have a direct or indirect 
financial interest. Physician self-referral is inappropriate 
because physicians who have a financial relationship with such 
facilities earn greater returns as referrals to the ventures 
increase. Providers who invest in health care facilities have 
an incentive to refer more patients to the facility. As a 
result, increased health care costs are incurred by the health 
care system.
    In 1993, when the scope of the Federal physician self-
referral law was expanded, the Congressional Budget Office 
(CBO) projected that the Medicare program would save $350 
million over five years. The CBO estimated that amendments to 
the self-referral law included as part of the proposed Balanced 
Budget Act of 1995 would have cost the Medicare program some 
$400 million over seven years. The cost of dismantling this 
important deterrent to fraud and abuse would be even higher 
today.
    Perhaps even more significant than the budgetary 
implications is the breach of the public trust that would 
result from weakening the self-referral law. Consumers of 
health care services should not need to question whether the 
services they are receiving are being provided due to medical 
necessity or for the personal financial gain of the physician 
referring the service.
    While the statute must be preserved and enhanced, it is 
necessary to highlight the failure of the Health Care Financing 
Administration to issue timely regulations that would provide 
guidance to the health care community on how to comply with the 
intent of the statute. ARI urges the immediate promulgation of 
final regulations relating to the existing ban.
    As an alliance of concerned health care organizations, ARI 
asks the Committee to maintain the prohibition on self-referral 
and preserve the public trust with respect to the delivery of 
quality health care services under the Medicare program.
    Thank you for your consideration of our views on this 
important matter.
      Member Organizations of the Alliance for Referral Integrity
    Alliance for Referral Integrity
    American Clinical Laboratory Association (ACLA)
    American Federation of HomeCare Providers (AFHCP)
    American Orthotic and Prosthetic Association (AOPA)
    American Pharmaceutical Association (APhA)
    American Physical Therapy Association (APTA)
    American Occupational Therapy Association (AOTA)
    American Society for Clinical Laboratory Science (ASCLS)
    National Association of Chain Drug Stores (NACDS)
    National Association for Home Care (NAHC)
    National Community Pharmacists Association (NCPA), formerly known 
as the National Association of Retail Druggists (NARD)
    Opticians Association of America (OAA)

                                

                                     Alliance Imaging, Inc.
                                               Anaheim, CA,
                                                       May 25, 1999
A.L. Singleton
Chief of Staff, Committee on Ways and Means
U.S. House of Representatives
Washington, D.C.

    Dear Mr. Singleton:

    I write on behalf of Alliance Imaging, Inc. with comments for the 
printed record of May 13, 1999 hearing on the Health Care Financing 
Administration (HCFA) implementation of the Medicare self-referral laws 
and its impact on the health care marketplace. I trust you will find 
these very focused and brief comments helpful. Alliance Imaging and its 
subsidiaries collectively operate over 285 mobile and fixed site MRI 
systems, 34 CT systems, and 12 (mobile) lithotripsy systems. My 
comments fall into two categories: (1) The proposed ``Stark II'' 
regulations and the comments in the preamble concerning mobile imaging 
and other mobile services in relation to the ``in-office ancillary 
services'' exception are unsound as a matter of policy and inconsistent 
with Congressional intent. (2) Lithotripsy should be expressly included 
as a ``designated health service'' under Stark II.
                          (1) Mobile Services
    The proposed Stark II regulations risk rendering mobile 
imaging services unavailable to physician groups, which could 
reduce competition and have disruptive, anti-competitive and 
inflationary effects for all payors, not just Medicare. There 
is a Stark II exception for ``in-office'' referral of ancillary 
services within a group practice. However, the proposed 
regulations would preclude ancillary services that are provided 
in a mobile unit parked just outside a group practice's office 
from being considered ``in-office.'' This aspect of the 
proposed regulations represents unsound policy, and is 
inconsistent with Congressional intent that mobile imaging and 
ambulatory facilities be deemed part of a group practice's 
building even if operated on an adjacent parking lot. My 
comments emphasize mobile MRI systems because that is Alliance 
Imaging's largest business segment, although the principles 
apply with equal force to other modalities such as CT scans, 
lithotripsy, and ultrasound.

Unsound Policy

    Mobile diagnostic imaging businesses have brought a number 
of benefits. They make sophisticated diagnostic services 
available where they would not otherwise be available at all; 
because mobile systems can operate in a number of locations, 
more sophisticated equipment can be economically viable than 
would be the case at a fixed site used by a small population; 
and they provide competitive alternatives to in-house systems 
such as those operated by hospitals and large physician groups, 
and independent imaging centers.
    The proposed regulations may have the anti-competitive 
effect of leaving hospitals and independent imaging centers as 
the only viable location for MRI exams. In some circumstances 
it would not be feasible to have a mobile unit make two stops 
in the same community, one at the hospital and another at the 
local physician group, because a certain number of scans must 
be performed in order to make each stop economically viable, 
and there are a number of site preparation tasks and costs 
required, including a pad to support the weight of the trailer 
and equipment, utility hook-ups, securing trained and licensed 
personnel, and the like.
    Another potential anti-competitive effect is that the 
reduced availability of mobile services may enhance the market 
position of an in-house MRI unit in a smaller community 
(irrespective of whether the unit is in a hospital or non-
hospital imaging center). Such in-house systems may not be of 
the same technological quality of a shared mobile unit, because 
they cannot spread their costs over as large population base of 
potential patients. The market may not be large enough to 
justify a competitor's capital investment in a new in-house 
installation. Accordingly, if physician groups cannot contract 
for shared mobile service there may not be meaningful 
competition in communities with an existing in-house MRI unit, 
especially if the in-house unit is at the local hospital.
    Although Medicare may not be terribly concerned about these 
potential effects on competition because it pays for imaging 
services and other diagnostic tests in accordance with the 
physician fee schedule (and in the case of outpatient hospital 
services, under a prospective payment system beginning next 
year), Medicare is a relatively small proportion of total 
volume. Other payors may end up paying more than would have 
been the case, if choice in a community is limited to in-house 
hospital systems and to mobile providers that service 
hospitals. And, if the new Medicare prospective payment system 
for hospital outpatient services sets reimbursement for imaging 
services higher than for the same service under the physician 
fee schedule, the proposed regulations will have the effect of 
driving utilization in favor of higher cost hospital providers, 
and away from lower cost physician providers.\1\
---------------------------------------------------------------------------
    \1\ Given the fact that a service performed in a hospital will 
usually cost more than the same service rendered in a physician's 
office, it is reasonable to believe that prospective payments to 
hospitals for outpatient diagnostic imaging services will be higher 
than the physician fee schedule pays for the same service.
---------------------------------------------------------------------------
    Another unfortunate effect of the proposed regulations 
could be to induce more physician groups to acquire in-house 
MRI systems of their own. While this would tend to counteract 
the competitive concerns, it would spawn two other negative 
consequences.
    First, in a locale in which the size of the population 
indicates that mobile service is more cost effective, if a 
physician group installs an in-house unit it may cut corners on 
the quality of the unit and installation. In contrast, because 
utilization of mobile systems is spread over a larger number of 
users, a higher and more effective level of technology can be 
available at a lower cost per procedure.
    The second and even worse effect from Medicare's standpoint 
is that once a physician group makes an investment in an in-
house unit, it will have a much greater incentive to 
overutilize the unit would than be the case with respect to a 
mobile unit. In this regard, I note that the studies relied 
upon and referred to in the Federal Register preamble to the 
proposed regulations apparently involved situations in which 
the physicians owned the facilities and were put in the 
position of having to recover their investment in an expensive 
fixed site unit.\2\ In contrast, in the mobile imaging business 
mobile providers such as Alliance Imaging typically charge the 
physician group a per procedure price, or per diem rent, so 
that the physician group is not in a position of having to 
generate utilization in order to recover a substantial 
investment that may have been made out of the pockets of the 
individual physicians. Notably, the proposed regulations do not 
preclude physician groups from installing and operating in-
house systems, as long as they meet the definition of a group 
practice and satisfy the requirements with respect to location.
---------------------------------------------------------------------------
    \2\ Federal Register, Friday, January 9, 1998 at page 1661.
---------------------------------------------------------------------------
    I believe the risk of overutilization decreases when MRI 
exams are performed on a mobile system, due to the fact that a 
patient has to adjust his or her schedule to coincide with the 
scheduled day of mobile MRI service. Additionally, MRI patients 
are typically in pain, possibly ``anxious'' or truly 
claustrophobic, and an MRI exam can be time consuming and 
uncomfortable. The risk of overutilization by an ordering 
physician is virtually nonexistent due to the nature of the 
patient's physical symptoms, anxiety or inconvenience.

Legislative History

    The present version of the anti-referral statute describes 
the in-office ancillary service exception as applicable where 
(subject to compliance with other rules such as the definition 
of a group practice) the services are rendered ``in a building 
in which the referring physician (or another physician who is a 
member of the same group practice) furnishes physicians' 
services unrelated to the furnishing of designated health 
services, or . . . in another building which is used by the 
group practice . . . for the centralized provision of the 
group's designated health services . . . '' \3\ The proposed 
regulations take the ``same building'' and ``building'' 
concepts even further by stating that the ``same building'' 
means the same physical structure, with one address, and not 
multiple structures connected by tunnels or walkways.'' \4\ The 
preamble to the proposed regulations is directly hostile to 
mobile imaging and diagnostic testing businesses: ``In 
addition, we believe 'the building' consists of parts of the 
physical structure that are used as office or other commercial 
space. For example, mobile x-ray van that is pulled into the 
garage of the building would not be part of that building.'' 
\5\
---------------------------------------------------------------------------
    \3\ Social Security Act, Section 1877(b)(2), codified at 42 U.S.C. 
Section 1395nn.
    \4\ Federal Register, Friday, January 9, 1998 at page 1723.
    \5\ Id. At page 1695.
---------------------------------------------------------------------------
    This hostility to the mobile diagnostic imaging business 
finds no support in the legislative history of the 1993 
amendments to the anti-referral statute. Furthermore, if one 
goes back to the original adoption of the anti-referral 
legislation, there is no compelling legislative history on that 
point. The original anti-referral legislation was adopted in 
1989.\6\ The law as then enacted applied only to clinical 
laboratory services; consequently, there was no need for the 
legislative history to address the question of mobile imaging 
or similar services.\7\ The law originated in the House of 
Representatives, and in the form that passed the House would 
have applied to a broad spectrum of health services, not just 
clinical laboratory services. The House report on the broader 
version of the bill stated: ``The committee intends that 
services in a building physically connected to the building 
housing the practice, or in the case of services provided by a 
mobile unit, immediately adjacent to the building housing the 
practice, would also be accepted under [the in-office ancillary 
services exception.]'' \8\ In the face of this quite clear 
expression of Congressional intent when the anti-referral law 
was originally adopted in 1989, combined with the absence of 
any contrary intent in the 1993 amendments and legislative 
history relating thereto, I believe the proposed regulations 
and related passage in the Federal Register preamble violate 
Congressional intent to the extent that mobile imaging services 
are rendered ineligible for the in-office ancillary services 
exception.
---------------------------------------------------------------------------
    \6\ Omnibus Budget Reconciliation Act of 1989. Public Law 101-239.
    \7\ See House Conference Report No. 101-386 at page 853.
    \8\ House Report No. 101-247 at page 1039.
---------------------------------------------------------------------------
    Mobile MRI systems are based in large tractor trailers that 
are in effect buildings on wheels, with independent telephone, 
computer, heating and air conditioning systems. Congress never 
intended that they be disqualified from the in-office ancillary 
services exception, and such disqualification would increase 
rather than decrease health care costs.
    Consequently, I urge that a technical correction be made to 
Stark II, to accord with Congress' original intent. This could 
be accomplished simply by amending the definition of ``in-
office ancillary services'' so that section 
1877(b)(2)(A)(ii)(I) of the Social Security Act reads ``in a 
building (or in a mobile unit housing diagnostic or therapeutic 
facilities while it is stationed reasonably proximate to such 
building) in which the referring physician . . . .'' And clause 
(II) reads ``. . . in another building (or in a mobile unit 
housing diagnostic or therapeutic facilities while it is 
stationed reasonably proximate to such building) . . . .'' The 
addition of the clauses in parentheses would be the only change 
necessary to the effect this correction.
             (2) Lithotripsy Should Be Covered By Stark II
    Lithotripsy is not currently included among the list of 
``designated health services'' subject to Stark II. If 
performed in the hospital setting, however, it is included as a 
``hospital service'' and therefore it is in the somewhat 
anomalous position of being covered or not depending on the 
setting. I believe that it should be specifically included as a 
designated health service, so that it would be covered in all 
settings. Although I recognize that lithotripsy does not seem 
prone to overutilization, there are two considerations that 
favor subjecting lithotripsy to Stark II.
    First, in general I believe that Medicare laws and 
regulations should not reflect bias in favor or against 
services being performed in a particular setting--i.e., 
hospital or non-hospital--unless there is a particular reason 
for doing so. In the case of lithotripsy, permitting referring 
physicians to have financial relationships with lithotripsy 
providers that are not-hospital based, while prohibiting the 
same relationship if the provider is a hospital, creates an 
unsound incentive. The choice as to whether a particular 
procedure is performed in a hospital or non-hospital setting 
should be driven by factors such as clinical considerations and 
cost efficiencies, and not by a physician's economic interest.
    Second, by permitting referring physicians to have 
financial relationships with a non-hospital lithotripsy 
provider the current version of Stark II is anticompetitive. 
The physicians who control referral patterns can be locked up 
by those who would engage in financial relationships with the 
physicians. This effectively forecloses other entrants into a 
market.
    You will have noticed that there is a consistent theme to 
my comments on mobile services, and my comments on 
lithotripsy--both encourage development of the law in a way 
that encourages competition. That is the best way to assure the 
highest quality care at the lowest cost.
    I would be happy to answer any questions that you might 
have.
            Very truly yours,
                                           Russell Phillips
                                                    General Counsel

                                

Statement of the American Academy of Family Physicians

    This statement on the Medicare self-referral law and its 
rulemaking is submitted on behalf of the 88,000 members of the 
American Academy of Family Physicians.
    The Academy is concerned that Medicare self-referral laws, 
as written, no longer serve the purpose they were originally 
intended to address, which was to eliminate ``inappropriate'' 
referrals by physicians to health care facilities where they 
had financial interests. In addition, the proposed rulemaking 
to implement the law, as it was published in January, 1998, is 
far too complicated to ever provide the ``bright line'' of 
clarity sought by its sponsor. The Academy believes that 
Medicare self-referral laws are not serving their intended 
purpose and have been superseded by more recently enacted 
federal statutes addressing fraudulent and inappropriate 
referral practices. It is important to note that these newly 
enacted statutes achieve the same ends sought by the Medicare 
self-referral laws without federal mandates on private business 
practices.
    Academy members are family physicians practicing primary 
care. As a group, they practice in perhaps the widest variety 
of settings of any single medical specialty society. These can 
range from school clinics and solo practice to large multi-
specialty groups. Therefore, the range of concerns that family 
physicians have with self-referral laws are numerous and 
complex. This statement contains explanations of the Academy's 
more specific concerns with provisions of the proposed rule.
                               Background
    Medicare self-referral laws were enacted by Congress to 
address reports that some physicians with financial interests 
in health care services facilities were ``inappropriately'' 
referring to those facilities. However, the Medicare self-
referral laws passed in 1989 and amended in 1993, and again in 
1994, are extremely confusing, inconsistent and fail to 
recognize the realities of the current health care delivery 
environment. The Health Care Financing Administration's (HCFA) 
proposed rulemaking would create a great deal of confusion for 
family physicians practicing in an extremely competitive 
environment. It is both so burdensome and so difficult to 
understand that physicians would expend a tremendous effort 
simply trying to determine if they were in compliance. 
Likewise, the proposed rule could cause excessive costs for the 
federal government as it pursued compliance and enforcement 
efforts. The Academy has asked HCFA to withdraw this rule until 
it can be implemented in a clear and consistent manner.
    The Academy requests that Congress reassess whether the 
myriad of health fraud and abuse laws passed and implemented in 
the last decade are already stopping the abusive practices that 
self-referral laws were intended to address.
      Recent Federal Laws and Regulations Addressing Fraud & Abuse
    The Health Insurance Portability and Accountability Act of 
1996 (HIPAA) contained an assortment of provisions to give HCFA 
increased authority and enhanced ability to provide oversight 
of Medicare health care providers. Specifically, HIPAA 
increased funding for Medicare program safeguards. This new 
funding is divided between the Office of the Inspector General 
(OIG) and the Department of Justice (DOJ) to coordinate 
federal, state and local health care law enforcement programs; 
conduct investigations, audits, evaluations and inspections 
relating to the delivery and payment of health care; help 
facilitate enforcement of civil, criminal and administrative 
statutes on health care fraud and abuse; and provide guidance 
to the health care industry on fraudulent health care 
practices.
    HIPAA also established the Medicare Integrity Program 
(MIP), which is intended to ``promote the integrity of the 
Medicare program by entering into contracts'' with private 
entities, among its other responsibilities, to review the 
activities of providers furnishing items and services 
reimbursable under Medicare, including medical and utilization 
review and fraud review.
    More recently, under the Balanced Budget Act of 1997 (BBA 
'97), HCFA now has authority to apply the federal anti-kickback 
statute prohibiting remuneration for referral of Medicare or 
Medicaid patients. In addition, HCFA carriers have established 
computer claims payment edits to alert them to areas of 
overutilization by screening practice patterns.
    These new enforcement tools are already reaping significant 
increases in identification of fraudulent claims and adverse 
actions against those who make them. Just within the first six 
months of HCFA's and DOJ's new authority, nearly 3,000 
individuals and entities were excluded from Medicare and 
Medicaid. That is a 93% increase in program exclusions in the 
first six months of 1997, compared to all of 1996. During this 
same reporting period, the OIG reported $1.2 billion in 
recouped moneys through investigations and an additional $125 
million through disallowing questioned costs. In addition, in 
1998, the OIG reported 215 convictions for criminal activities 
and 1,255 civil settlements.
    All of the enforcement tools outlined above represent more 
than enough authority and resources to address Congress' 
original concern about physician self-referral. It is time to 
revisit the basis upon which self-referral legislation was 
founded, and compare those concerns with the current regulatory 
environment.
    While unnecessary overutilization should be targeted and 
penalties imposed where it exists, unintended underutilization 
is also a very real consequence of the proposed regulation as 
it is written. In fact, underutilization is a far greater 
threat to Congress' intent of assuring access and quality 
health care to all Medicare and Medicaid beneficiaries.
           Concerns With Proposed Rulemaking On Self-Referral
    With regard to the proposed rule, the Academy has concerns 
with the rule's intrusion on compensation arrangements and the 
definition of a group practice. Below are outlined the 
Academy's specific concerns with the proposed regulation. Until 
these concerns are favorably resolved, the Academy must 
reiterate its support for the withdrawal of this regulation in 
its entirety.

1. Definition of ``Direct Supervision''

    Medicare self-referral law contains an exception for ``in office 
ancillary services.'' To qualify, the services must be furnished 
personally by a referring physician or another physician in the same 
group practice, or be furnished by individuals ``directly supervised'' 
by one of these physicians. ``Direct supervision'' is defined as 
supervision by a physician who is present in the office suite and 
immediately available to assist and direct the ``designated service.'' 
The exception does not apply to services performed in a location 
separate and distinct from where the physician conducts his or her own 
everyday activities. The rule will allow for physician time away for 
brief unexpected emergencies and short breaks (lunch).
    AAFP Recommendation: (a) The Academy strongly objects to the 
definition of ``direct supervision'' and suggests it be replaced with 
``general supervision'' or a revised definition of ``direct 
supervision'' such as that recommended by the American College of 
Physicians-American Society of Internal Medicine, which reads as 
follows:

          The physician or group is legally responsible for the 
        services performed by non-physician personnel and for ensuring 
        that such personnel meet licensure and certification 
        requirements, if any, applicable under other provisions of the 
        law. Direct supervision does not require that physicians be 
        physically present when an item or service is provided.

    In a small family physician office of one to three physicians, it 
is likely that activities such as deliveries or surgical assisting, 
combined with scheduled days off or vacations, could lead to periods of 
time when there is no physician in the office. It is extremely 
reasonable to expect that other office personnel, such as nurse 
practitioners and physician assistants would be available to provide 
appropriate services to patients. However, this rule would preclude 
such care being rendered to Medicare and Medicaid patients. Physicians 
often do not provide direct supervision of noninvasive procedures on a 
regular basis, and imposing such a requirement will increase costs 
while limiting patient access during the period when physicians are not 
present. The proposed rule would be particularly problematic in rural 
areas where access to care is already a major concern. In many states, 
medical and nurse practitioner acts enable mid-level providers to 
practice without onsite physician supervision, enabling care to be 
provided in rural communities where it would not otherwise be 
available.
    (b) The Academy strongly recommends, based on the definition 
described above, a shared facility exemption from the self-referral 
prohibitions. It is common practice for several solo practitioners to 
have corporations and share office space, labs, call, etc. This 
exemption would permit two or more physicians in independent practices 
to share ancillary services, enabling them to provide more 
comprehensive patient services, reduce practice overhead (shared space, 
equipment and personnel) and provide high quality care without creating 
increased potential for fraud, abuse or waste. This is a position the 
Academy has long supported in relation to ``shared labs.'' The proposed 
rule would again have the potential to reduce access to patient care 
and increase the cost of care by criminalizing many common and 
legitimate business arrangements.

2. Discounts

    The proposed regulations would create a new exception for discounts 
made to a physician that are passed on either to the patient or to the 
patient's insurer, including Medicare, and that do not ``inure'' to the 
benefit of the referring physician. However, discounts that do ``inure 
to the benefit of the referring physician,'' such as discounts on drugs 
given to patients during their visit, would not qualify for the 
exception, or meet the ``fair market value'' requirement and would be 
considered a self-referral violation. The elimination of many common 
discounting practices could be disruptive for many physician practices, 
compromise effective patient care and reduce compliance with 
medications. The most effective way to ensure that a patient begins a 
drug regimen is to do so during the visit to the physician, and ensure 
that the drug is priced at a cost he or she can afford.
    AAFP Recommendation: Physicians should be able to charge patients 
at least the Average Wholesale Price (AWP) on drugs purchased and 
administered as part of routine care to their patients, regardless of 
the discount they were able to negotiate with their suppliers. If the 
physician has no incentive to purchase wisely, savings will accrue to 
the pharmaceutical manufacturer or distributor, not the patient. AWP is 
standard and published. If physicians have to track actual acquisition 
costs and provide documentation, there is an administrative cost that 
will ultimately discourage physicians from providing medications in 
their offices and again, decrease access to care.

3. Physician Recruitment Exception

    In the regulations, there is an exception for hospitals to 
pay costs associated with a physician's relocation, but it only 
applies when the physician resides outside the geographic area 
and must actually relocate in order to join the hospital staff. 
The physician cannot be required to refer patients to the 
hospital, and the remuneration must not be tied to the volume 
or value of any referrals.
    AAFP Recommendation: It is not clear why similar 
inducements should not be provided to other physicians in the 
area, or residents in order to retain them in the area. We 
recommend a written legal agreement clearly address the 
referral and remuneration issues.

4. Definition of ``Referral''

    The Stark law carefully defines the key term ``referral'' to 
include any ``request by a physician for an item or service for which 
payment may be made under Part B . . .'' and the Preamble to the 
proposed regulation clarifies the definition by adding ``even if the 
physician furnishes (the referred service) personally.'' Therefore, for 
a physician to order a designated health service covered by Part B for 
the physician's own patient from an entity with which the physician has 
a financial relationship, he or she must meet an applicable exception.
    AAFP Recommendation: This provision is often referred to as the 
``group practice exception,'' however, the definition means that a solo 
practitioner who provides ``designated services'' in his or her office 
must meet an exception (e.g., ``in-office ancillary services exception) 
and all of its requirements (e.g., direct supervision definition) to 
avoid a self-referral violation. The rule creates layers of complexity 
for these physicians that seem unreasonable and unnecessary. The 
Academy recommends that HCFA redefine ``referral'' to simplify the 
requirements for physicians who ``refer'' to themselves for ``incident 
to'' and ``in office ancillary services'' (also, see the following 
comments on ``in-office ancillary services).''

5. In-Office Ancillary Services Exception, Site of Service

    The in-office ancillary services exception, as modified by the 
proposed regulations, requires that services be ``furnished . . . in a 
building in which the referring physician furnishes physicians' 
services unrelated to furnishing of designated health services. . . .'' 
The Preamble to the proposed regulations indicates that a service is 
``furnished'' wherever the procedure is actually performed on a 
patient, or in the location in which a patient receives and begins 
using an item. Any item that is given to a patient, but is meant for 
use at home, or outside the physician's office would not be deemed to 
be ``furnished'' in the physician's office, according to the proposed 
rule. This proposed interpretation, if adopted in final form, could 
eliminate completely physician dispensing of covered self-administered 
drugs to Medicare and Medicaid patients, a result never intended by 
Congress. Additionally, durable medical equipment (DME) is excluded 
from in-office ancillary services by statute, further impeding patient 
access to needed products and services.
    Finally, the Preamble proposes that the ``same building'' 
requirement means one physical structure with one address. 
Consequently, physician offices with multiple structures that are 
connected by walk ways or tunnels are specifically excluded from HCFA's 
interpretation in the proposed regulations.
    AAFP Recommendation: Interpretation of the in-office ancillary 
services exception would, if adopted as proposed, cause serious 
disruptions in many ordinary arrangements in family physician offices. 
The Academy requests that HCFA support a legislative remedy to exclude 
outpatient prescription drugs as a designated health service, as well 
as durable medical equipment. Other safeguards to prevent fraud and 
abuse relating to these services have been previously articulated in 
our introductory comments. Their inclusion as designated services will 
result in additional delays in treatment and barriers to access for the 
nation's poor and elderly populations.
    The Academy strongly encourages HCFA to create a more flexible rule 
in lieu of the ``same building'' definition. This definition will 
result in ongoing confusion for physicians, subjective, and thus 
differing, carrier interpretations, and unnecessary dislocation, 
disruptions and excessive cost for physicians attempting to comply.

6. Definition of Group Practice

    The statute defines group practice as two or more physicians 
organized as a professional corporation or association. HCFA indicates 
that both the shareholders in a group practice and the physician 
employees of the group practice will be considered as members of the 
group. The proposed regulation also indicates that a group of 
physicians practicing together will not qualify under the definition of 
group practice unless at least two of the physicians are shareholders, 
thus disqualifying the many group practices consisting of a single 
physician shareholder and one or more employed physicians.
    AAFP Recommendation: The Academy believes that this is an 
artificial differentiation in the definition of group practice, and 
that HCFA should modify the final regulation to define group practice 
to include single shareholder groups with multiple employed physicians 
otherwise meeting the definition. There are numerous single shareholder 
groups, including those established in states with corporate practice 
of medicine acts. A physician corporation with two shareholders, and 
which employs additional physicians, should be treated no differently 
than a single shareholder physician corporation which employs 
additional physicians.
                               Conclusion
    The Academy appreciates this opportunity to provide a 
statement to the Ways and Means Committee Subcommittee on 
Health on the Medicare self-referral laws and proposed 
rulemaking. In summary, we believe that self-referral laws have 
added unnecessarily to the complexity of rules governing 
physician behavior in their business arrangements and trust 
that the Subcommittee will carefully consider all the comments 
received and take appropriate action. The committee's attention 
to our suggestions will be greatly appreciated by the nation's 
family physicians and their 
patients.

                                

Statement of William Rich, III, M.D., American Academy of Ophthalmology 
(AAO)

    Dear Chairman Thomas and other distinguished Members of the 
Subcommittee, on behalf of the American Academy of 
Ophthalmology, I am pleased to provide comment regarding the 
proposed rule on physician referrals to health entities in 
which they have ownership, also known as Stark II. The American 
Academy of Ophthalmology represents over 16,000 eye physicians 
and surgeons nationwide. Over fifty-one percent of most 
ophthalmologists' practices consist of Medicare services. 
Because of the significant impact that these regulations would 
impose on our members, we urge the Subcommittee to take the 
following recommendations into consideration.
    This proposal has been of grave importance to the 
ophthalmic community, as well as the entire physician 
community, for many years. We had hoped that clarity would be 
provided in the publishing of last year's Notice of Proposed 
Rulemaking (NPRM); however, we have found that the number of 
questions relating to ownership and referrals have increased. 
The current law includes untenable obstacles for 
ophthalmologists and their patients. In addition, the proposed 
rule raises uncertainty about some of the basic definitions 
relating to ownership. The NPRM, if implemented to expand upon 
current law would make understanding and enforcing the self-
referral laws virtually impossible. In essence, the law and the 
NPRM undermine their intended purpose merely on the basis of 
confusion. For example, according to the NPRM, a referral 
includes a physician-employee relationship where for example, a 
physician employs an optometrist or optician. Was this 
definition accurate? An employer-employee relationship should 
not be considered a referral.
    Even HCFA isn't sure how to interpret the law. This can be 
seen from the fact that throughout the comment period, HCFA 
staff were unable to interpret the proposed rule, adding to its 
unworkable and often contradictory nature. HCFA was expected in 
the NPRM to offer advisory opinions from physicians, and no 
opinions would serve as applicable to any other situation. HCFA 
does not have the staff time, nor is it efficient for the 
government to impose a law that would require each physician 
and health care entity in the US which might be affected by 
Stark II to seek an opinion. HCFA ultimately realized the 
problems with the NPRM when the proposed rule was rescinded and 
HCFA announced that it was re-evaluating the proposal. 
Congress' perceived intention was to limit blatant self-
referral problems under the Medicare system. Instead, the 
varied interpretations of the Stark II law have led to an 
unworkable law that cannot be enforced by the agency directed 
to oversee it.
    Our concerns, specific to ophthalmology, are two-fold and 
we urge Congress to guide HCFA in reconsidering its actions. 
First, we seek the exclusion of post-cataract eyeglasses and 
contact lenses from the list of designated health services. 
Second, we urge that the definition of direct supervision be 
amended so that patient quality of care and access are not 
needlessly impeded.

                     Exemption of Ophthalmic Goods

    Since the consideration of self-referral legislation began, Rep. 
Stark has repeatedly stated that post-cataract eyeglasses and contact 
lenses should be excluded from the list of designated health services. 
Post-cataract eyewear is a one-time benefit provided by Medicare and 
has a limited reimbursement rate. Ophthalmologists who own optical 
shops are required by law to advise patients of their freedom to buy 
their eyeglasses anywhere they please (FTC). Given the fact that only 
one pair of lenses is available to each beneficiary, the opportunity 
for fraudulent activity is highly unlikely. The chance of beneficiary 
coercion or lack of choice in who provides this optical service is 
addressed by the Federal Trade Commission (57 FR 18822). In addition, 
in a recent informal survey of ophthalmologists who own optical shops, 
we found that post-cataract lenses only account for an average 4% of 
total medical and optical practice income.

                    Definition of Direct Supervision

    The NPRM indicates that a physician must directly supervise an 
employee, providing a service in a medical practice. We understand 
HCFA's desire to maintain consistency across definitions throughout the 
agency's policies; however, the definition of direct supervision makes 
it almost impossible for certain practices to remain in compliance with 
Stark II and will gravely impact patient care. For example, if a post-
cataract patient wanted to buy his or her eyeglasses from the 
physician's optical shop, he or she could only do so when a physician 
is readily available to provide assistance if necessary. This means 
that on days when the physician is in surgery, the Medicare patient 
would be denied service because the physician was not readily 
available. This practice would single-out Medicare patients in a 
potentially embarrassing manner, essentially telling them that because 
they have Medicare they cannot get the same level of care as all other 
patients. The Balanced Budget Act of 1997 included numerous provisions 
that would expand access, choice and quality for Medicare patients. The 
definition of direct supervision, as it reads in the NPRM, would 
prohibit a patient from benefiting from those provisions in the BBA.
    We understand that Medicare defines a physician as a ``doctor of 
medicine or osteopathy . . . doctor of dental surgery or dental 
medicine . . . a doctor of optometry, and a chiropractor'' (Section 
1877, 1861(r)). Because of this, we are very concerned that the 
definition of direct supervision is inconsistent with state scope-of-
practice laws relating to opticians. Opticians generally are permitted 
by state law to fit, grind and dispense eyeglasses without physician 
supervision--direct or indirect. Requiring a physician to be present to 
meet the direct supervision requirement would nullify laws permitting 
opticians to dispense without physician oversight. We agree that in 
certain medical situations, some level of supervision should be 
required, but in the case of opticians, this requirement is over-
reaching and inappropriate.

                               Conclusion

    Mr. Chairman, the current self-referral law is cumbersome and the 
proposed Stark II provisions will make it nearly impossible for a 
physician to know whether or not they are in compliance with federal 
law. Many lawyers have indicated that they are experiencing great 
difficulty in interpreting the regulations and will not know how to 
advise their clients. We believe that the compounding requirements for 
compliance will add to the current over-burdening of work that HCFA is 
experiencing as a result of the Balanced Budget Act of 1997. The 
overlapping requirements surely will increase the number of requests 
for advisory opinions, and the volume of calls to HCFA staff. 
Physicians are intimidated and nervous about these proposed changes and 
they will by-pass their own legal counsel and contact HCFA directly for 
guidance. Already, we have a number of calls seeking information about 
applying for the opinions. In closing, the American Academy of 
Ophthalmology strongly recommends that HCFA: (1) exempt eyeglasses and 
contact lenses from the list of designated health services as a 
prosthetic device on the basis that post-cataract eyeglasses are a very 
limited Medicare benefit and already subject to oversight regarding 
fair business practices; and (2) Revise and clarify the definitions of 
certain terms such as ``Referral'' and ``Direct Supervision.'' Thank 
you for the opportunity to present comment on this important issue. We 
look forward to working with Congress and HCFA staff in any way 
possible. Should you have any questions, please contact Kim Colman, our 
Reimbursement Policy Manager.

                                

Statement of the American Association of Ambulatory Surgery Centers, 
Chicago, Illinois

    The American Association of Ambulatory Surgery Centers 
(AAASC) is a professional medical association of physicians, 
nurses, and administrators who specialize in providing surgical 
procedures in cost-effective outpatient environments, primarily 
in Medicare-certified ambulatory surgery centers (ASCs). In 
fact, a substantial number of our members either own or perform 
surgery in a Medicare-certified ASC. As such, our membership is 
very interested in potential changes to Medicare physician 
self-referral laws, particularly as they would affect ASCs.
    The physician ``self-referral'' provisions were enacted, in 
large part. because several studies suggested that physicians 
who have financial arrangements with entities to which they 
refer patients may increase utilization. However, these studies 
lacked evidence that physician ownership increases utilization 
of ASC services. In fact, a number of studies, including the 
noted Florida Cost Commission Review of physician self-referral 
patterns, examined services provided in the ASC setting and 
concluded that there was no ascertainable abuse with respect to 
the referral of patients by operating surgeons to ASCs in which 
they have an ownership interest.
    As such, when Congress first devised the physician ``self-
referral'' provisions, and subsequently the 1993 amendments, it 
did not include ASC services among the list of designated 
health services. Nonetheless, because of the broad way in which 
the law was written and subsequently interpreted, it 
potentially applies to physician investments in ASCs.
    While Congress clearly did not intend for the physician 
self-referral ban to apply to services performed in the ASC 
setting, the law could be read to apply to certain services 
provided in ASCs. For example, prosthetics, orthotics, and 
prosthetic devices are designated health services. Many common 
implants--e.g., intraocular lenses, prosthetic implants after 
mastectomy procedures, testicular prostheses, and tympanotomy 
tubes in children--are considered prosthetics. Thus, the 
physician-self referral ban could be interpreted to reach 
situations where surgeons implant prosthetics in ASCs which 
they own and to which they refer their patients and for which 
Medicare is not making separate reimbursement because it's a 
component of the facility fee. Likewise, radiology services, 
which also are designated health services, could be interpreted 
to include any procedure which involves imaging, which would 
include a number of endoscopy and arthroscopy procedures.
    AAASC is pleased that HCFA recognized that there is no risk 
of program or patient abuse when a physician refers a patient 
to his or her ASC, and that the Agency is proposing to 
expressly exempt from the physician self-referral proscriptions 
services performed in ASCs. See 63 Fed. Reg At 1666 (Jan. 9, 
1998) and 42 C.F.R. Sec. 411.355(d)(1) (proposed). Nonetheless, 
for the following reasons we urge Congress to codify an express 
exception for ASC services in the statute. First, HCFA's 
proposed regulation remains in proposed form and apparently 
will not be finalized for at least another year. Until then, 
physician investment in ASCs is an uncertain endeavor. 
Physicians who choose to invest in ASCs take a calculated risk 
based on HCFA's stated approval of these arrangements, but 
expose themselves to possible prosecution should HCFA change 
its view of these arrangements or choose not to include the 
express exception in the final regulations. Congress should 
express its approval of physician ownership of ASCs and ensure 
that these arrangements are exempt from the self-referral 
prohibition by including and express exception in the statute.
    Second, if physician self-referral restrictions were to 
prohibit doctor ownership of ASCs, there would be virtually no 
ASCs left. More than two-thirds of the ASCs in the country have 
been developed and owned by physicians to achieve control of 
the surgical environment (lacking in the hospital), convenience 
for their patients, and reduced costs.
    Third, unlike services provided by clinical laboratories 
and diagnostic imaging centers, surgical services performed in 
an ASC are subject to a utilization review by peer review 
organizations; as such, there is a check on in appropriate 
utilization.
    Fourth, the physician operates in the ASC as an extension 
of his or her office, much like an internist might offer in-
office ancillary laboratory or radiology services. The surgeon 
is not a passive investor; a ``referral'' is not really taking 
place.
    Finally, ASCs save the Medicare program hundreds of 
millions of dollars each year. Medicare payments to ASCs for 
outpatient surgical procedures are usually substantially lower 
than payments to hospitals (both on an inpatient and outpatient 
basis). In fact, according to the Medicare Payment Advisory 
Commission (MedPAC), the median payment to a hospital for a 
cataract removal procedure (i.e., CPT code 66984) in 1996 was 
approximately $1,150, while the median payment to an ASC for 
that same procedure was only $903, a savings of $247. Or more 
than 20% (See MedPAC Report to Congress, June 1998). Moreover, 
ASCs have brought the benefits of competition to the entire 
outpatient surgery market: the opening of an ASC in a 
particular area has frequently been followed by a significant 
reduction in the charges of local hospitals for outpatient 
surgery, as well as increased attention on the part of the 
hospitals to quality of care and patient satisfaction.
    AAASC supports clear, unambiguous physician self-referral 
prohibitions that prevent unethical financial relationships and 
reinforce the critical element of trust in the physician-
patient relationship. However, these prohibitions need not and 
should not apply to services provided in the ASC setting. 
Congress should clarify the physician self-referral statute to 
expressly exclude ASCs from it. Specifically, we recommend that 
Congress adopt the language it approved in Sec. 8204(f) of the 
``Balanced Budget Act of 1995,'' H.R. 2491 (vetoed), which 
expressly excluded ASC services from the self-referral law.
    AAASC appreciates the opportunity to present this testimony 
to the Subcommittee. Please do not hesitate to contact 
Washington counsel, Michael Romansky, if you have any questions 
about this matter.

    [Note: Attachment is being retained in the Committee 
files.]

                                

Statement of William W. Tipton, Jr., American Association of 
Orthopaedic Surgeons, Rosemont, Illinois

    Mr. Chairman and members of the Committee, I am William W. 
Tipton, Jr, MD, an orthopaedic surgeon and Executive Vice-
President of the American Association of Orthopaedic Surgeons.
    On behalf of the 15,000 board-certified fellows of the 
Association, thank you for the opportunity to present testimony 
before your Committee on the physician ban on self-referral 
statute, otherwise known as the ``Stark'' provisions.
    Let me begin by saying that the Association shares the 
Committee's concern about fraud and abuse in the Medicare 
program. In addition, we support fully what we understand to be 
the original intent of the ``Stark'' provisions--prevention of 
fraud and the over-utilization of services. Nonetheless, the 
Association believes that the ``Stark'' provisions produced 
several unintended consequences. Specifically, many common in-
office procedures that orthopaedic surgeons provide to their 
patients are now technical violations of Federal law as a 
direct result of these ``Stark'' provisions.
    Unfortunately, the proposed rule published by the Health 
Care Financing Administration (HCFA) in the Federal Register on 
January 9, 1998 did little to correct or clarify the unintended 
consequences of the law. Instead, the proposed rule created 
even more ambiguities to the ``Stark'' provisions.
    We believe that Congressional action is now needed to 
correct this matter, since the self-referral ban is so broad 
that its implementation impedes the normal practice of 
medicine, including that of orthopaedics. Equally, we believe 
the law's prohibition on self-referral is unnecessarily 
burdensome to honest physicians and the patients under their 
care.
    Let me highlight the main problems and areas of confusion 
that we believe the ``Stark'' provisions are causing for 
practicing orthopaedic surgeons. Our concerns cover the 
following issues:
    Definition of a referral
    Durable medical equipment used as part of in-office ancillary care
    Shared facilities
    Shared employees
    Compensation arrangements

                         Definition of Referral

    The most important issue in determining whether or not an 
arrangement is prohibited under the ``Stark'' provisions is identifying 
whether a referral for a designated health service has taken place.
    Under the law, a ``referral'' is defined as: ``the request by a 
physician for an item or service for which payment may be made under 
Part B, including the request for a consultation with another physician 
(and any test or procedure ordered by, or to be performed by (or under 
the supervision of) that other physician--including the request or 
establishment of a plan of care by a physician that includes the 
provision of a designated health service.''
    There has been a great deal of confusion surrounding this issue, 
especially in regard to referrals made among members of the same group 
practice. HCFA's interpretation, as illustrated by its proposed rule, 
is that a referral is subject to the ``Stark'' provisions whenever a 
physician requests any designated health service covered by Medicare, 
even if that physician furnishes the services personally, unless a 
specific exemption is met.
    Instead of a definition that cannot be implemented fairly, we 
believe a reasonable and impartial standard for determining when a 
referral takes place should be adopted, such as the policy covering 
solo practitioners. Under this standard, those activities that a solo 
practitioner performs as an ordinary and essential part of patient care 
are not considered a referral. The Association believes this definition 
could be expanded to cover physicians in any practice or business 
arrangement.

                       Durable Medical Equipment

    Another area of great concern is the continued exclusion of durable 
medical equipment (DME) from the in-office ancillary services 
exception.
    The typical orthopaedic practice uses a wide range of DME, as well 
as orthotics, prosthetics, and other supplies in the office. These 
items are an integral part of orthopaedic practice, yet the use of many 
of these items would constitute a violation of the ``Stark'' 
provisions.
    In its proposed rule, HCFA tried to address this issue by 
specifically carving out an exception for crutches, indicating it 
regards them as different from other DME because a patient often needs 
them immediately after treatment from an injury or an unexpected 
traumatic event. While we are pleased that HCFA recognized that 
crutches are an integral part of patient care, this did not go far 
enough. For example, a walker may be more appropriate than crutches, 
yet walkers are prohibited under the ``Stark'' provisions.
    Mr. Chairman, I would like to share with you the following examples 
that illustrate why the ``Stark'' provisions are problematic in regard 
to DME:

          In the first example, a 70-year-old female twists her foot 
        and is brought to the office in a wheel chair, unable to walk 
        because of pain in the lateral aspect of her foot. X-rays 
        reveal a fracture at the base of the 5th metatarsal. Proper 
        treatment includes a compression wrap to minimize pain and 
        control swelling, a wooden-soled sandal to distribute weight 
        across the uninjured part of the foot to allow limited weight 
        bearing, and either crutches or a walker to aide in independent 
        ambulation. The physician must provide instruction to the 
        patient in proper application of the compression wrap, proper 
        wearing of the sandal, and training in use of the crutch or 
        walker. If crutches are used, the physician may dispense these 
        in his or her office. However, if the physician determines that 
        a walker is more appropriate for this elderly patient, under 
        the ``Stark'' provisions, she must travel to a DME supplier 
        several miles away.
          In the second illustration, a 65-year-old female patient with 
        a wrist fracture that has been placed in a short arm cast comes 
        in for follow up X-rays. The physician finds that the fracture 
        has healed sufficiently that another cast is not required, but 
        a wrist brace or splint is required for a week or two to allow 
        the patient's wrist to become stronger. Under the ``Stark'' 
        provisions, this device may not be dispensed in the physician's 
        office, so the patient is either given a prescription to 
        purchase a splint at a surgical supply store several miles 
        away, or the patient is referred to Occupational Therapy to 
        have an orthosis custom-made, at a much greater cost.
          In the third instance, a 66-year-old male develops severe 
        neck pain with radiation of the pain down one arm with tingling 
        numbness to the fingertips. Examination and review of X-rays 
        assists in the diagnosis of acute cervical radiculitis (pinched 
        nerve). Appropriate treatment is rest, medication, and a 
        cervical collar. Under the ``Stark'' provisions, the physician 
        is unable to dispense this item in his or her office or provide 
        instruction in its use, so the patient must travel several 
        miles to a DME supplier. If the cervical collar is not properly 
        sized or the patient does not receive appropriate instruction, 
        the result will be additional pain to the patient.
          Finally, a 70-year-old male tennis player injures his knee, 
        and examination and treatment reveal a hemarthrosis requiring 
        knee aspiration. However, pain precludes walking and knee 
        motion. Appropriate treatment is the use of crutches and a knee 
        immobilizer splint. The crutches are dispensed in the office; 
        however, under the ``Stark'' provisions, the patient must 
        travel several miles to a DME supplier.
    In the interest of patient safety, convenience and quality care, 
orthopaedists and other physicians should be allowed to give out these 
commonly used items immediately in their offices. Yet, if they did so, 
they would probably be in violation of the ``Stark'' provisions.

                           Shared Facilities

    The next problem I would like to speak about involves shared 
facilities. A shared facility is a practice arrangement in which 
orthopaedic surgeons and other physicians deliver services in a defined 
and separate facility that may contain X-ray equipment, physical 
therapy, a cast application room, and all essential nursing and 
administrative support.
    Under this arrangement, these physicians are not part of a group 
practice, but retain their independence through separate billing 
numbers with insurance carriers. Though separation is maintained 
through different billing numbers, the physicians share the costs of 
the common facility, including rent nursing and office expenses, as 
well as costs and revenue for X-ray and physical therapy services on a 
pre-determined basis.
    A shared facility is the most common type of integrated health care 
delivery arrangement and it behaves exactly like a group practice. Yet, 
it is not covered by the ``group practice'' exemption under the 
``Stark'' provisions.
    Let me cite an example of why this jeopardizes quality patient 
care.
    A Medicare patient comes to a shared facility for an X-ray. Since 
these types of practice arrangements are not exempt under the ``Stark'' 
provisions, the patient cannot be X-rayed in a separate room in the 
common facility, but has to go to a separate facility for the X-ray, 
and then back to the orthopaedist for diagnosis and treatment. 
Likewise, if the patient has a broken bone, and the orthopaedic surgeon 
decides to treat the fracture without surgery, the patient must return 
to the outside facility for another X-ray and then back to the 
orthopaedist to determine if the treatment was successful.
    Mr. Chairman, I am sure you will agree that shuttling patients 
between the X-ray facility and the orthopaedist is not in the best 
interest of the patient, nor is it cost-effective or quality service. 
Yet, if the patient gets his or her X-ray at the orthopaedist's office, 
it may be a violation of the ``Stark'' provisions.

                            Shared Employees

    Mr. Chairman, another problem for orthopaedic surgeons and other 
physicians involves the issue of shared employees.
    Orthopaedic surgeons have developed arrangements with DME 
suppliers, wherein the suppliers rent DME closets in the orthopaedists' 
offices at fair market value (meeting the leasing exemption). The 
technicians who measure for braces or other DME supplies are shared 
employees of the orthopaedists and the suppliers, and the suppliers pay 
for the time the technicians spend measuring braces and supplying the 
DME to patients.
    In this situation, the orthopaedists bill for a Level 1 visit only 
if they see the patient and provide professional services (beyond those 
provided by the technician). Otherwise, the orthopaedist does not bill 
Medicare, and is not in any way involved in a financial arrangement, 
since the billing is done by the vendor and the technician is a part-
time employee of the vendor.
    This type of common practice arrangement contributes to effective 
and convenient patient care, yet it may be a violation of the ``Stark'' 
provisions.

                       Compensation Arrangements

    Mr. Chairman, another problem for orthopaedic surgeons and other 
physicians involves compensation arrangements.
    The ``Stark'' provisions contain a presumption that if a physician 
is receiving a payment of any kind from any other provider of 
designated health services, the physician should not refer the patient 
to that service provider, with some very limited exceptions.
    We believe that these exceptions are not broad enough to include 
the myriad of compensation arrangements that do not pose a risk of 
program or patient abuse. Examples of these arrangements are as 
follows:

          Installment payments over a period of time--An orthopaedic 
        surgeon or group practice sells a ``designated health service'' 
        facility (such as an MRI or physical therapy center), and 
        continues to send patients to the facility. Installment 
        payments are made over a period of time, at a fixed price (fair 
        market value), and not based upon volume of referrals to that 
        sold facility.
          Independent contractors--One day per week, a physical 
        therapist (non-employee, independent contractor) rents space in 
        the office of a physician or group practice. The physician(s) 
        charge rent (at fair market value) to the independent 
        contractor, and refer patients. There is no additional 
        compensation for making such referrals.

    Therefore, we believe a process needs to be established 
whereby compensation arrangement can be evaluated on a case-by-
case basis using clear criteria to determine whether or not 
they are appropriate.
    In conclusion, Mr. Chairman and members of the Committee, 
the American Association of Orthopaedic Surgeons believes that 
the ``Stark'' provisions are unclear and confusing. As a 
result, HCFA has been unable to provide any comprehensive and 
understandable guidelines for complying with it.
    While the Association has not taken a position on the 
repeal of the ``Stark'' provisions, we believe that your 
Committee should at least consider approving the amendments to 
the ``Stark'' provisions which were included in the Balanced 
Budget Act of 1995, which were approved by both the full House 
of Representatives and the Senate, but were never enacted into 
Public Law. Moreover, before any final rule is published by 
HCFA, Congress must make changes in the law so that an undue 
burden is not placed on honest physicians and their patients.
    Mr. Chairman, the Association stands ready to work with 
your Committee to correct these unintended consequences of the 
``Stark'' provisions. Thank you again for the opportunity to 
present testimony to your Committee on this important issue.

                                

Statement of the American Clinical Laboratory Association

    The American Clinical Laboratory Association (``ACLA'') is 
pleased to have this opportunity to submit testimony with 
regard to the Subcommittee's consideration of issues related to 
physician self-referral. ACLA is an association of federally-
regulated independent clinical laboratories located throughout 
the United States. All ACLA members are directly affected by 
the prohibition on physician self-referral contained in Section 
1877 of the Social Security Act. In our statement, we will 
review the basis for the current self-referral prohibition on 
laboratory services, discuss the current status of the self-
referral law as it applies to laboratory services and provide 
ACLA's views on some possible modifications of the law.
    I. Self-Referral of Clinical Laboratory Services Should Continue
                            to be Prohibited
    Congress enacted the prohibition on self-referral for 
laboratory services in 1989, as part of OBRA '89. This was the 
first time Congress had prohibited self-referral on a large 
scale. While Congress did not apply the prohibition to other 
services at that time, it found the record amply demonstrated 
the need for a limitation on self-referral of clinical 
laboratory services.
    When Congress passed the self-referral prohibition on 
laboratory services, it did so based on a number of significant 
studies. In 1989, the Office of Inspector General (``OIG'') 
conducted a study entitled ``Financial Arrangements Between 
Physicians and Health Care Businesses.'' That study concluded 
that physicians who owned or invested in independent clinical 
laboratories ordered 34% more clinical laboratory services than 
did physicians who had no ownership or investment interest in a 
laboratory. Moreover, in testimony before this Subcommittee, 
then-Inspector General Kusserow estimated that this increased 
testing was ``quite troubling'' and a ``cause for concern to 
the Medicare Program.'' Subsequent studies in Florida also 
found increases in clinical laboratory utilization among 
physician-owned facilities. In that study, laboratories that 
were owned by referring physicians performed almost twice as 
many diagnostic tests per patient as similar non-joint venture 
laboratories. Not surprisingly the study also found that the 
higher utilization per patient led to significantly higher 
gross revenues per patient.
    ACLA recognizes that such studies do not specifically show 
that the clinical laboratory services performed at physician 
owned laboratories were unnecessary. Still, on balance, there 
appears little justification for higher utilization of 
laboratory services at physician-owned laboratories than at 
non-physician owned facilities. There is no clinical rationale 
that explains why a patient would need more services when the 
referring physician was an owner of the laboratory performing 
the test than when the physician did not have such an interest. 
Nor is there any clinical reason that physicians with an 
ownership interest in a laboratory should order more services 
than physicians without such an interest. The simplest, and 
most plausible explanation, is that physicians respond to the 
incentives for additional profit by ordering more services.
    It was in response to its concern about such incentives 
that Congress enacted the initial self-referral prohibition on 
laboratory services. Under the original Stark I provision, 
which became effective in January 1992, physicians were 
prohibited from referring their Medicare patients' testing to 
clinical laboratories with which they had an ownership or 
investment interest or a compensation arrangement. Final 
regulations covering the prohibition of self-referral of 
laboratory services have been in effect since August, 1995. 
Thus, unlike other services that were added by OBRA '93, the 
health care system has, for the most part, had time to adapt to 
the self-referral prohibition on laboratory services.
    ACLA continues to believe that a prohibition on self-
referral for clinical laboratory services is crucial to 
controlling unnecessary utilization of clinical laboratory 
services. ACLA believes it would be inadvisable, at this time, 
to eliminate the law's prohibition on self-referral of 
laboratory services, even if changes are made in the list of 
other services covered by the prohibition. Although we 
recognize that managed care is a greater presence in the health 
care market place today than it was when the self-referral law 
was originally passed, the vast majority of services furnished 
to Medicare patients are still paid for on a fee-for-service 
basis and it is to these services that the law primarily 
applies. Thus, ACLA believes the law continues to serve a very 
important role in curbing increased utilization.
    In sum, although ACLA recognizes that some have called for 
removing certain services from the list of ``designated health 
services'' that was added to Section 1877 by OBRA '93, ACLA 
does not believe it would be appropriate to remove clinical 
laboratory services from that list.
             II. Some Lmited Modifications May be Necessary
    ACLA does recognize that the statute as implemented is a 
complex one to interpret and enforce. Therefore, ACLA members 
do recognize that some modification may be necessary to 
ameliorate the technical problems that have been identified and 
to simplify the application and interpretation of Section 1877. 
Some of ACLA's concerns are set out below.
    ACLA recognizes that the compensation provisions have been 
the most difficult to apply for many providers. In the Notice 
of Proposed Rulemaking (``NPRM'') for Stark II, issued in 
January 1998, HCFA proposed a number of provisions to simplify 
the application of the compensation arrangement provisions. 
Among the proposals considered were a de minimis exception and 
a provision to make the self-referral law more consistent with 
the safe harbors provisions interpreting the antikickback law. 
ACLA believes that some modifications in the application of the 
compensation arrangement provisions, including those proposed 
by HCFA in the Stark II NPRM, may be appropriate.
    ACLA also is concerned about the reporting requirements 
that may be adopted to enforce the self-referral provision. 
HCFA stated in the January 1998 NPRM it would develop a new 
reporting form, although it has not yet done so. ACLA believes 
it is very important that any reporting requirements be 
carefully tailored to avoid adding new reporting 
responsibilities to those that already apply to most health 
care providers participating in Medicare.
    ACLA appreciates the opportunity to comment on these 
issues. We would be happy to work with the Subcommittee on 
helping to resolve any of these issues.

                                

Statement of the American College of Cardiology, Bethesda, MD

    The American College of Cardiology (ACC), which represents 
nearly 25,000 cardiovascular specialists, appreciates the 
opportunity to present the following statement regarding the 
Medicare physician ``self-referral'' law, commonly referred to 
as Stark II (enacted as part of the Omnibus Budget 
Reconciliation Act of 1993 [P.L. 103-66]).
    As a professional medical society and educational 
institution, the ACC's mission is to foster optimal 
cardiovascular care and disease prevention through professional 
education, promotion of research, and leadership in the 
development of standards and guidelines and the formulation of 
health policy.
    Over five years ago, Congress was motivated to enact 
legislation with the good intention of preventing abuses in 
physician referral patterns resulting from economic self-
interest. Although the ACC understands the rationale that 
prompted enactment of the law in 1993, we strongly believe the 
vast changes in the health care marketplace that have since 
occurred, including the broad use of specific utilization 
controls and documentation requirements, have rendered the need 
for additional regulatory controls unnecessary and burdensome. 
In addition, before publication of the proposed regulations in 
1998, HCFA and the Office of the Inspector General published 
rules addressing a range of issues, including anti-kickbacks, 
that overlap with the proposed Stark II regulations. 
Furthermore, the ACC believes that the proposed regulations 
implementing the Stark II law contradict congressional intent 
by interpreting the law in such a convoluted, incomprehensible, 
and irrational manner as to render even ethical and necessary 
medical practice arrangements potentially unacceptable.
    For example, the proposed regulations include an overly 
broad definition of what constitutes a ``compensation 
arrangement'' that would thereby trigger a referral 
prohibition. The definition would include any kind of 
``indirect'' remuneration, without qualification or limitation. 
This unrestricted definition would encompass virtually any 
benefit received, on any level, and is much broader than needed 
to combat fraud and abuse. In addition, the definition of 
``radiology services'' under the list of designated health 
services has been vaguely interpreted so that it is not clear 
whether this definition includes certain invasive procedures 
that are not subject to abuse. In fact, the use of these types 
of procedures in daily practice provides unique and essential 
information for the treatment of patients with cardiovascular 
disease and ensures a continuum of care for patients. The 
definition of radiology services also continues to include 
ultrasound, which is not a radiology service, and has not been 
found subject to abuse.
    The ACC thanks the subcommittee for taking steps to examine 
the complexity of the statute and the proposed regulations. We 
believe that congressional interest is only in eliminating true 
fraud and abuse to protect patients and the Medicare program, 
not in exposing physicians and other providers to criminal 
penalties resulting from an ambiguous and unnecessary new set 
of rules. We look forward to working with you to enact any 
meaningful changes to the law.

                                

Statement of the American College of Physicians--American Society of 
Internal Medicine

    The American College of Physicians--American Society of 
Internal Medicine (ACP-ASIM), the nation's largest medical 
specialty society, representing over 116,000 physicians who 
specialize in internal medicine and medical students, 
appreciates the opportunity to submit a statement for the 
record to the Committee on Ways and Means Subcommittee on 
Health on how the Stark I and Stark II physician Self-referral 
laws and their corresponding regulations are having a negative 
impact on the practice of medicine.
    ACP-ASIM is concerned that many of the issues we raised in 
our comments on the Stark I final rule of August 14, 1995, and 
that we hoped would be clarified in the Health Care Financing 
Administration's (HCFA) proposed rule of January 9, 1998, were 
not satisfactorily addressed. Furthermore, several new problems 
have arisen in this proposed rule as well. Our overall 
impression of the rule is that it is confusing, inconsistent, 
and does not reflect the current health care delivery 
environment. For these reasons, we have asked that HCFA rectify 
the concerns discussed in these comments before a final rule is 
published, implemented, and enforced. HCFA's current proposal 
will create serious enforcement and compliance problems and 
generate significant unnecessary financial costs for physicians 
and other entities that attempt to comply, as well as for HCFA, 
the Department of Health and Human Services (HHS) Office of 
Inspector General (OIG), and the Medicare carriers. Ultimately, 
the proposed rule will create unintended access and quality of 
care problems for Medicare and Medicaid beneficiaries 
attempting to receive the following Stark II ``designated 
health services:''
     Clinical laboratory services.
     Physical therapy services.
     Occupational therapy services.
     Radiology services, including magnetic resonance imaging, 
computerized axial tomography scans, and ultrasound services.
     Radiation therapy services and supplies.
     Durable medical equipment and supplies.
     Parenteral and enteral nutrients, equipment, and supplies.
     Prosthetics, orthotics, and prosthetic devices and 
supplies.
     Home health services.
     Outpatient prescription drugs.
     Inpatient and outpatient hospital services.
    The Stark I and II self-referral legislation was enacted by 
Congress in response to reports that certain health care services were 
being ``abused'' by physicians with financial interests or investments 
in entities that provided the service(s). Congress passed legislation 
that prohibited physicians from referring to those entities in which 
they (or an immediate family member) had such an interest or 
investment. Congress subsequently added safeguards and revisions to 
Medicare and Medicaid reimbursement polices involving referral 
activities.

            Alternative Approaches to Reducing Program Abuse

    ACP-ASIM is pleased that Congress called the above hearing to re-
examine the Stark I and II laws, given the fact that HCFA, the Office 
of Inspector General (OIG), and the Department of Justice (DoJ), have 
numerous other tools to target abusive practices. Without changes to 
the Stark laws themselves, any rule proposed by HCFA is likely to 
introduce a degree of regulatory complexity and rigidity that will 
interfere with legitimate arrangements between physicians and health 
care facilities. Other legislative and regulatory approaches can 
instead be used by HCFA to target abusive arrangements.
    The False Claims Act (FCA), enacted over a hundred years ago, 
imposes civil liability on any person or entity who submits a false or 
fraudulent claim for payment to the United States government. The False 
Claims Act also allows an individual who knows about a person or entity 
who is submitting false claims to bring a suit, on behalf of the 
government, and to share in the damages recovered as a result of the 
suit. A person who violates the FCA must repay three times the amount 
of damages suffered by the government plus a mandatory civil monetary 
penalty (CMP) of at least $5,000 and no more than $10,000 per claim.
    The Anti-kickback Statute (enacted in 1972) provides criminal 
penalties for individuals or entities that knowingly and willfully 
offer, pay, solicit, or receive remuneration to induce the furnishing 
of items or services covered by Medicare or State health care programs 
(including Medicaid, and any State program receiving funds under titles 
V or XX of the Act). A CMP of up to $50,000 plus up to three times the 
amount of remuneration offered, paid, solicited or received could be 
levied for each violation of the anti-kickback provisions of title XI 
of the Social Security Act (as amended by the Balanced Budget Act of 
1997--``BBA '97'').
    Furthermore, in the interim between the enactment of the Stark II 
legislation and the publication of the Stark II proposed rule, Congress 
and HCFA have taken numerous steps to reduce abusive self-referral 
practices. The BBA '97, and the Health Insurance Portability and 
Accountability Act of 1996 (HIPAA) are two major legislative efforts 
designed to increase and enhance the scrutiny of providers of health 
care services to Medicare recipients. The BBA '97 increases penalties 
associated with fraud and abuse, revises payment to skilled nursing 
facilities, and improves communication with beneficiaries.
    HIPAA has increased funding for Medicare program safeguards. HIPAA 
funding is divided between the OIG and the DoJ to coordinate federal, 
state and local health care law enforcement programs; conduct 
investigations, audits, evaluations and inspections relating to the 
delivery and payment of health care; help facilitate enforcement of 
civil, criminal and administrative statutes on health care fraud and 
abuse; provide guidance to the health care industry on fraudulent 
health care practices; and establish a national data bank to receive 
and report final adverse actions against health care providers.
    HCFA's contractors were also allocated additional resources to 
educate the provider billing community, including hospitals, 
physicians, home health agencies and laboratories about Medicare 
payment rules and fraudulent activity. This education covers current 
payment policy, documentation requirements and coding changes through 
quarterly bulletins, fraud alerts, seminars and through local medical 
review policy.
    HIPAA also established the Medicare Integrity Program (MIP), which 
is intended to ``promote the integrity of the Medicare program by 
entering into contracts'' with private entities to: (1) review the 
activities of providers furnishing items and services reimbursable 
under Medicare, including medical and utilization review and fraud 
review; (2) audit cost reports; (3) educate providers, beneficiaries, 
and other persons with respect to program integrity and benefit quality 
assurance issues; and (4) develop and periodically update a list of 
items of durable medical equipment which are subject to prior 
authorization.
    In addition, HCFA carriers have established computer claims payment 
edits to alert them to areas of overutilization by screening practice 
patterns. The National Practitioner Data Bank and the National 
Suppliers Clearinghouse were founded to provide information on 
physicians and other health care providers, including information on 
exclusions from plan participation due to fraudulent and abusive 
activities. Finally, inappropriate referrals of Medicare and Medicaid 
patients to outside laboratoires and other designated diagnostic 
facilities are already prohibited under the Federal anti-kickback law.
    The enhancements to the Medicare and Medicaid programs described 
above should help allay Congress' original concern about physician 
self-referral. ACP-ASIM thus strongly supports Congress' revisiting of 
the premises upon which the self-referral legislation was founded and 
comparing those premises to the current regulatory environment to 
determine if there still is a need for the broad regulatory provisions 
of this proposed rule.
    A consequence of the lack of specificity in some sections of the 
Stark II proposed rule is that both the health care industry and 
federal government will have to expend tremendous resources on 
compliance and enforcement activities. Seeking legal counsel or OIG 
advisory opinions will cost physicians an enormous amount of time and 
money to determine if they are in compliance with this proposed rule 
that was intended to give physicians a ``bright line'' to guide their 
business arrangements. Ultimately much of this effort will be wasted 
because the proposed rule is confusing and open to multiple conflicting 
interpretations. ACP-ASIM has obtained seven different legal briefs 
analyzing the proposed rule and many of the legal interpretations 
differ substantially. Furthermore, there is no guarantee that any of 
these interpretations will be the same as the OIG's interpretation.
    Should physicians and providers assume a more conservative approach 
in the delivery of any of the Stark II designated health services as a 
result of the proposed rule, the impact on patient access and the 
quality of health care would certainly suffer. While unnecessary 
overutilization should be targeted and penalties imposed, unintended 
underutilization is a potential consequence of the proposed rule that 
creates a far greater threat to Congress' interest in assuring access 
and quality health care to the Medicare/Medicaid enrollees.

            Issues Unresolved by the Stark II Proposed Rule

    ACP-ASIM has previously asked HCFA to modify the proposed 
regulation to: (1) accommodate a shared facilities exception; (2) 
substitute the definition of ``general supervision'' for ``direct 
supervision'' in the in-office ancillary exception; (3) support 
Congressional legislation to eliminate the group practice compensation 
requirements; and (4) revise the definition of a group practice. We had 
hoped that the Stark II proposed rule would address these issues. The 
proposed rule did little to address ACP-ASIM's concerns, providing no 
mention of shared facilities, making virtually no change in the 
supervision definition, expanding rather than eliminating the 
regulations for group compensation requirements, and adding more 
confusion to the group practice definition. To rectify these problems 
that originated with the Stark I final rule, ACP-ASIM urges legislative 
or regulatory relief to allow the four changes to the Stark II proposed 
self-referral rule described below.

1. Create a shared facility exemption

    ACP-ASIM is extremely disappointed that HCFA did not create 
a separate shared facility exemption in the Stark I final rule, 
published on August 14, 1995, or in the January 9, 1998 
proposed rule. We believe that creating such an exemption is 
within the authority of the Secretary. Furthermore, ACP-ASIM 
disagrees with HCFA's assertion that the risk of program or 
patient abuse associated with a shared facilities exemption 
would be significant--no sufficient data to support this 
conclusion have yet been offered by HCFA. ACP-ASIM urges HCFA 
to reconsider its position on creating a shared facility 
exemption for shared laboratories and other designated health 
services; barring such a change, we feel a legislative remedy 
is clearly indicated.
    ACP-ASIM has repeatedly called for a narrowed shared 
facility exception to the Stark self-referral regulations to 
alleviate the Stark I burden placed on thousands of physicians' 
practices. Many solo practitioners want to continue to share 
equipment, rental space, and personnel in order to control 
their overhead costs while providing a necessary service to 
their patients. The absence of a shared facility arrangement in 
the Stark I regulation has disrupted physician practices. 
Without an exception for in-office facilities shared between 
two or more physicians who are not members of a group, 
physicians are seemingly left with one of two options: form or 
become part of a group practice (which are exempted under the 
Stark laws); or, close their shared facilities. While the lack 
of a shared facility exemption in the Stark I rule adversely 
affected access to clinical laboratory services only, the lack 
of such an exception in the Stark II proposed rule places 
numerous other shared facilities--those that are included on 
the list of designated health services--at risk.
    ACP-ASIM believes that a narrowed shared facilities 
exception will not violate the intent of the self-referral 
statute. HCFA stated in the Stark I final rule that the ``in-
office ancillary'' exception would provide the necessary 
protections for sharing of certain facilities between two or 
more physicians who do not meet the definition of a group 
practice. However, ACP-ASIM continues to believe that a shared 
facility exception is necessary because the current in-office 
ancillary exception is not broad enough for the variety of 
shared facility arrangements that physicians wish to create to 
reduce overhead cost, while providing service to their own 
patients, and that do not pose any threat of patient or program 
abuse.
    ACP-ASIM's position has been supported by legislation that 
passed the Congress in 1995 (but was subsequently vetoed for 
unrelated reasons) and by the HHS Practicing Physicians 
Advisory Council (PPAC). ACP-ASIM urges that this be rectified 
in either a Stark II final rule from HCFA, or through 
legislative remedy. ACP-ASIM supports the following language as 
it appeared in the BBA '95:

          A general exception from the self-referral prohibition would 
        be established for shared in-office ancillary services that are 
        furnished:
          (i) personally by the referring physician who is a shared 
        facility physician or personally by an individual directly 
        employed or under the general supervision of such a physician;
          (ii) by a shared facility in a building in which the 
        referring physician furnishes substantially all of the services 
        of the physician that are unrelated to the furnishing of shared 
        facility services; and
          (iii) to a patient of a shared facility physician; and
          (iv) that is billed by the referring physician or a group 
        practice of which the physician is a member.

2. Change the in-office ancillary services exception governing 
supervision

    The Stark I final rule provided a modest exception for in-office 
ancillary services. A requirement of this exception was that the 
physician had to personally perform or ``directly supervise'' 
laboratory tests ordered under Medicare Part B. The direct supervision 
requirement was interpreted in the Stark I final rule to mean that the 
physician must be ``. . . present in the office suite and immediately 
available to provide assistance and direction throughout the time 
services are being performed.''
    ACP-ASIM believes that HCFA's direct supervision requirement is 
unreasonable and unnecessary. Direct supervision imposes significant 
hardship and unrealistic demands on all physicians with in-house shared 
facilities. If physicians are required to spend their days supervising 
the work of their technicians--trained employees whose performance is 
constantly evaluated--they will be hard pressed to find time to see 
patients and make hospital rounds. Additionally, this requirement is 
unnecessary because physicians already assume legal responsibility for 
all work performed in their shared facilities.
    ACP-ASIM has previously asked HCFA to change the direct supervision 
requirement to a general supervision requirement or that HCFA adopt the 
more flexible definition of direct supervision contained in the 
Clinical Laboratory Improvement Amendments of 1988 (CLIA). This 
definition states that ``. . . the physician or group is legally 
responsible for the services performed by the testing personnel and for 
ensuring that such personnel meet licensure and certification 
requirements, if any, under other provisions of the law.'' The 
physician, or person responsible for overseeing the testing in question 
(e.g., the lab director or general supervisor in the case of the CLIA 
regulations) should be available, but not necessarily on-site, when 
testing occurs, in case testing personnel need assistance.
    The current direct supervision requirement clearly conflicts with 
the intent of the conferee language accompanying the Stark II Self-
Referral provisions in the Omnibus Budget Reconciliation Act of 1993, 
which specified that: ``The conferees intend that the requirement for 
direct supervision by a physician would be met if the lab is in a 
physician's office which is personally supervised by a lab director, or 
a physician, even if the physician is not always on site.'' (emphasis 
added).
    The Stark II proposed rule does not provide any changes in the 
direct supervision definition in the manner requested by ACP-ASIM. It 
does, however, provide for short, emergency and routine absences by the 
physician. The appropriate length of these absences is left to the 
carriers to determine on an individual basis. This modest change in the 
definition of general supervision is inadequate. ACP-ASIM has urged 
HCFA to replace ``direct supervision'' with ``general supervision'' in 
the in-office ancillary services exception language in the Stark II 
final rule. If HCFA decides instead to maintain a ``direct 
supervision'' requirement, then we would seek legislative relief for a 
change in the definition as follows:

          The physician or group is legally responsible for the 
        services performed by non-physician personnel and for ensuring 
        that such personnel meet licensure and certification 
        requirements, if any, applicable under other provisions of the 
        law. Direct supervision does not require that physicians be 
        physically present when an item or service is provided.

    This definition would allow physicians to perform all of 
their professional duties while continuing to be personally 
responsible for the services provided by the laboratory 
personnel.
    We are greatly troubled that after directly quoting 
language from the conferees' report, HCFA went to great length 
to explain why Congress did not really intend to allow the 
physician to be at an alternative site when the tests are being 
performed. The conferees' report is unambiguous; Congress 
clearly intended for the direct supervision requirement to be 
met ``even if the physician is not always on site.''

3. Eliminate the prohibition on referrals based on compensation 
arrangements

    The Stark II proposed rule retains a prohibition on certain 
compensation arrangements and contains a number of new provisions that 
address how a group practice must distribute group costs and revenues. 
Group practices are required to have a method of distributing costs and 
revenue that has been ``previously determined.'' Group practice 
payments to individual group members may not be made on the basis of 
the value or volume of that individual member's referrals. The Stark II 
proposed rule does not allow for the distribution of profits that 
belong to a particular specialty or subspecialty because of concern 
that such specialty profit pools could result in payments for 
referrals. A physician in a group practice may be paid a share of the 
overall profits of the group, or a productivity bonus based on services 
personally performed or services ``incident-to'' the personally 
performed services.
    Physicians in a group practice should be allowed to devise their 
compensation arrangements without unnecessary government intrusion into 
their business practices. The ability to structure compensation 
arrangements within a group by taking into account varying services at 
different sites, along with associated differences in expense 
structure, is vital to any business. The group practice compensation 
requirement, as retained and expanded in the Stark II proposed rule, 
represents an onerous and unnecessary intrusion into the internal 
affairs of physician practices, and is impossible to implement in a 
fair and equitable manner.
    As a practical matter, it is impossible for group practices to 
redistribute income from ancillary services without at least indirectly 
taking into account the volume or value of the referrals made by the 
physicians within that group. The ambiguous language of the Stark II 
proposed rule, however, will cause group practices to question whether 
the distinctions, no matter how well drawn, are appropriate. ACP-ASIM 
urges HCFA to provide clear, bright-line standards if the group 
compensation requirements are retained in the final rule.
    Finally, these prohibitions force physicians to arrange their 
financial affairs differently for the Stark II designated health 
services than for all other health services they provide (which may 
include the designated health services for non-Medicare/Medicaid 
patients). This will increase the administrative burden and costs to 
comply for physicians, and could lead to problems of patient access 
should physicians become overly conservative in their practice patterns 
as a result of the proposed rule's interpretations of group 
compensation arrangements. ACP-ASIM seeks elimination of as much of the 
group practice compensation arrangement prohibitions from the proposed 
regulation as is allowed under the current law and would support a 
legislative repeal of this entire portion of the Stark law.

4. Revise the definition of a group practice

    The definition of ``group practice'' is critical to compliance with 
the Stark in-office ancillary exceptions. Unfortunately, the Stark I 
final regulation poorly defined membership in a group practice. 
Although most group practices consider only those who are owners and/or 
employees of the practice as a group member, the Stark I final 
regulation included all independent contractors, regardless of the 
amount of time that they spent at the practice, as members of a group 
practice. Consequently, many group practices would have difficulty 
meeting HCFA's regulation that ``substantially all'' of the services 
provided by the group be done so by members of that group practice.
    The Stark II proposed rule now appropriately excludes independent 
contractors from the definition of group membership. However, the 
revised definition now creates a new problem--it also proposes to no 
longer allow independent contractors to supervise the provision of 
designated health services under the in-office ancillary services 
exception. ACP-ASIM has asked HCFA to revise this definition in the 
Stark II final rule to allow independent contractors to supervise the 
provision of designated health services under the in-office ancillary 
services exception--but continue to not count the independent 
contractors as true members of the group under the patient-care 
``substantially all'' requirement. If HCFA is unwilling to make this 
change, then we would ask that it be effected with a legislative change 
by Congress.

           New Problems Created by the Stark II Proposed Rule

    The Stark II proposed rule creates several new problems that will 
be a detriment to patient access to timely medical care. ACP-ASIM has 
previously asked HCFA to make the following four changes to the Stark 
II proposed self-referral rule described in detail below to rectify 
these new problems with the proposed regulation: (1) reduce the number 
of Stark II prohibited designated services (under the authority given 
the Secretary to exempt services that do not pose a risk of program or 
patient abuse); (2) do not include prescription drugs administered in 
the physician's office as ``outpatient prescription drugs;'' (3) create 
an exception for durable medical equipment provided in the physician 
office; and (4) eliminate the group practice attestation requirements. 
If HCFA is unwilling to make these changes, then we would ask that 
Congress implement them through legislative changes.

1. Reduce the number of Stark II prohibited designated services

    A number of services covered by the Stark II prohibition 
have not been associated with Medicare program abuse, and offer 
little or no opportunity for overutilization. ACP-ASIM believes 
that their inclusion on the list of designated services is 
disruptive and interferes with patient access to care, 
producing the unintended consequence of underutilization. We 
thus urge that the list of designated health services be 
reduced, thereby increasing access to care. We would 
specifically recommend that all services from the designated 
health services list be exempted, with the exception of 
clinical laboratory services, radiology, physical therapy, and 
occupational therapy.

2. Do not include prescription drugs administered in the 
physician's office as ``outpatient prescription drugs''

    The above recommendation asked HCFA to reduce all Stark II 
designated services to lab, radiology, physical and 
occupational therapy. If this were not administratively or 
legislatively possible, ACP-ASIM would request the exclusion of 
drugs administered in the physician's office from HCFA's 
current definition of outpatient prescription drugs and to 
create an exception for durable medical equipment (DME) 
provided in the physician's office (described in recommendation 
3 below) as well.
    The Stark II proposed rule defines outpatient prescription 
drugs as ``those drugs (including biologicals) that a patient 
can obtain from a pharmacy with a prescription (even if 
patients can only receive the drug under medical supervision), 
and that are furnished to an individual under Medicare Part 
B.'' Erythropoietin (EPO) and other drugs furnished as part of 
a dialysis treatment for an individual who dialyzes at home or 
in a facility are excluded.
    Without further instruction from Congress on what 
constitutes ``outpatient prescription drugs,'' HCFA has assumed 
that Congress intended to include only drugs furnished to 
individuals under the Medicare Part B benefit and to exclude 
drugs furnished by providers under Medicare Part A. HCFA's 
definition includes a variety of prescription drugs given in 
the physician's office which are administered during the 
patient's visit. Such drugs would include treatments for 
cancer, antibiotics, renal therapy, and vaccines. Prohibiting 
the prescription of such drugs in the physician's office would 
clearly create serious patient access problems.

3. Create an exception for durable medical equipment provided 
in the physician office

    Similar to our concerns regarding outpatient prescription drugs 
delivered to the patient in the physician office, the January 9, 1998 
proposed rule prohibits the delivery of DME, which are integral to the 
practice of office-based medicine. Without the ability of physicians to 
provide these essential therapeutic services, patient care will suffer 
as access to care is delayed. These in-office services have not been 
associated with program abuse and offer little or no opportunity for 
overutilization. The inclusion of these services on the designated 
services list is disruptive and interferes with patient access to care, 
producing the unintended consequence of underutilization. ACP-ASIM's 
position has been supported in the 1995 Balanced Budget Conference 
Agreement, the 1995 ``Blue Dog'' Democratic budget alternative (H.R. 
2530) and in President Clinton's FY '97 proposed budget. Furthermore, 
HCFA's inclusion of crutches as an exception under the DME in-office 
ancillary services proposal suggests that HCFA is aware of the problems 
that will be created if patients are denied access to DME in their 
physicians' office.

4. Eliminate the group practice attestation requirements

    ACP-ASIM has urged HCFA to eliminate the group practice attestation 
requirements contained within the proposed rule. These requirements are 
overly burdensome and time consuming. The administration in its 1995 
``Reinventing Health Care Regulations'' initiative, determined that 
similar physician attestation requirements to certify the accuracy of 
hospital diagnosis-related group (DRG) coding were cumbersome and 
resulted in billing delays. Consequently, HCFA eliminated the physician 
attestation requirement in hospitals and instead hold hospitals 
responsible for the accuracy of their diagnoses and procedures. The 
same logic should be adopted for the proposed attestation requirements 
for group practices.

                               Conclusion

    The health care industry continues to be in flux, 
characterized by the variety of ways health care is being 
delivered and financed. Managed care consolidation and 
integration of physician practices are increasingly having an 
impact on accessibility and affordability of health care 
services, as well as methods of payment and operation. By 
accepting substantial financial risks, physicians in these 
types of arrangements have no incentive for overutilization or 
inappropriate referrals.
    Efforts by Congress to maintain and ensure federal health 
care program integrity must take into account the dynamics 
within the health care industry that have an impact upon the 
delivery and quality of patient care. In developing the final 
rule, ASIM urges HCFA to carefully consider these and other 
fundamental changes in the health care marketplace.
    ACP-ASIM believes that the Stark II proposed rule is 
confusing, does not provide appropriate relief within its 
regulatory jurisdiction, does not consider changes in the 
current health care delivery environment, and needs to be 
substantially revised prior to implementation. Without a 
comprehensive re-evaluation of the Statute and the proposed 
rule, serious compliance and oversight problems will be created 
that will likely have a negative impact on patient access to 
health care. We believe this type of intrusive overregulation 
is unnecessary given the changes that have occurred in the 
health care marketplace and programs recently designed and 
instituted within the federal health care programs to ensure 
the integrity of such programs.

                                

Statement of the American Hospital Association

    The American Hospital Association (AHA) represents nearly 
5,000 hospitals and health systems, networks and other 
providers of care. We appreciate this opportunity to submit our 
views on Medicare ``Self -Referral'' laws.
    Physician self-referral is an important issue to hospitals 
and health systems. AHA members believe that getting patients 
the right care in the right setting should guide referrals, not 
financial self-interest.
    AHA members have demonstrated their desire to fully comply 
with Federal health program fraud and abuse statutes by 
adopting comprehensive compliance plans. However, achieving 
full compliance with the myriad of federal and state laws, 
regulations and program instructions is already difficult. The 
voluminous, complex and confusing proposed rule implementing 
the Medicare self-referral law would add to that burden.
    Currently, hospitals, health systems and networks must 
spend significant resources obtaining legal opinions to make 
sure they comply with the requirements of physician self-
referral legislation. The physician self-referral law is a 
strict liability statute, so no provider would dare risk moving 
forward with a transaction or arrangement without legal advice. 
While an advisory opinion process, strongly lobbied for by AHA, 
exists, it cannot always provide the timely response necessary 
in our rapidly changing health care delivery system.
    Hospitals, health systems and networks have a tremendous 
variety of financial relationships and arrangements with 
physicians as they seek to provide high quality, efficient 
health care services. The goal of self-referral legislation 
should be to guard against inappropriate referrals without 
impeding arrangements that will improve the quality of health 
care, increase access and be cost effective.
    Any proposed changes to the physician self-referral law 
should:
     Support current and emerging systems of care.
     Support physicians' ability to collaborate with hospitals 
and health systems.
     Support the delivery of efficient, high quality health 
care and allow physicians to make decisions that are best for their 
patients
     Promote a level playing field that fosters competition 
among providers.
     Simplify compliance.
    Given the great diversity within our health care delivery 
system, finding a simple approach that encompasses these 
principles is difficult.
    AHA recommends reducing the complexity of the law by 
removing provisions that relate to compensation arrangements. 
The existing anti-kickback statute, which allows for both civil 
as well as criminal penalties, can be used to police any 
abusive arrangements. The remaining provisions of the Medicare 
self-referral law would continue to prohibit physician referral 
to entities in which they have an ownership or investment 
interest for certain designated health services.
    This approach would allow the statute to focus on its 
original purpose: a ban on physicians inappropriately referring 
to entities they own. It would also eliminate many pages of the 
voluminous proposed rule. Providers would not have to hire 
attorneys to navigate the maze created by the current law and 
the proposed regulations. The Health Care Financing 
Administration would not have to micromanage health care 
contracts by regulation. The government would retain a powerful 
enforcement tool, the anti-kickback statute. And limited 
provider resources could be used for patient care rather than 
legal opinions.
    This change would also strike a more appropriate balance. 
It would guard against inappropriate referrals while still 
supporting the desire of hospitals, health systems and 
physicians to work together to reduce health care costs, while 
also improving the quality of health care we deliver to our 
patients.
    The AHA commented on HCFA's proposed rule implementing the 
Medicare self-referral law, published on January 9, 1998, and 
would like to reiterate some of our specific comments that 
Congress could also address as part of any legislative changes 
to the statute.

  Physician Ownership of Hospitals That Provide Non-Hospital Services

    The Medicare self-referral law contains an exception for physician 
ownership interests in a hospital if the referring physician is 
authorized to perform services at the hospital and the ownership or 
investment interest is in the hospital itself and not merely in a 
subdivision of the hospital. This exception applies only to designated 
health services that are furnished by the hospital and does not apply 
to designated health services furnished by another health care provider 
the hospital may own (e.g., a hospital-owned home health agency or a 
skilled nursing facility).
    There does not appear to be a rationale for making this distinction 
when the exception allows referral for the designated services listed 
in the Medicare self-referral law provided by the hospital. Such 
disparate treatment imposes an unreasonable barrier for hospitals 
seeking to provide a full continuum of care. The interpretation by HCFA 
appears to contradict the intention of the hospital ownership 
exception.
    Treatment of physicians with financial relationships with 
hospitals, whether contractual or ownership, should not vary unless 
there is a significant public policy reason for doing so. Hospitals and 
their physician owners should not face an artificial impediment to 
providing the full array of health services to patients whether 
directly through the hospital itself, or other hospital-owned 
providers.

        Managed Care and Integrated Health Care Delivery Systems

    The Balanced Budget Act of 1997, created the ``Medicare+Choice'' 
program and authorized provider sponsored organizations (PSOs) to 
directly contract with the Medicare program. Similar to health 
maintenance organizations contracting with Medicare under Sec. 1876, 
those PSOs participating in Medicare+Choice will receive a capitated 
payment from the Medicare program. Therefore, as similar risk-based 
entities, clearly they should be included in the same exception as 
HMO's contracting with Medicare.
    Any arrangement that involves significant risk-sharing such as 
PPOs, PHOs and IPAs should come within the exception. A centerpiece of 
AHA's and its members' vision for reform of the health care delivery 
system is the PSO. These are community-based integrated networks of 
providers that offer a spectrum of care, including at least hospital 
and physician care. As provider-driven organizations, PSOs can uniquely 
respond to the twin demands for control of health care costs and 
delivery of quality services. They can achieve the cost efficiencies 
necessary to hold down health care costs by directly managing both the 
use of services and the cost of providing those services. They put 
clinical decisions in the hands of those most capable of balancing 
efficiency and patient care-local community-based health care 
providers.
    PSOs can take many forms and may be accomplished through various 
organizational structures that represent different degrees of 
integration. Those that are more integrated and have begun entering 
into contracts to accept responsibility for managing utilization will 
share a significant economic interest through common ownership or 
control, or substantial shared financial risk. Such integration should 
lead to better coordination of care among providers and to greater 
efficiency. Depending on the circumstances, a PSO may be paid on a full 
risk or a partial risk basis (e.g. flat capitation, budget target with 
risk corridor, or withholds). A variety of payment methods may be used 
within a PSO. Intrinsic to the design of PSOs is the need to align the 
economic incentives of the providers who constitute the PSO and the 
need for control over where and from whom a patient receives care. In 
the absence of protection through an exception to the self-referral 
prohibition, PSOs will bear the unreasonable risk that arrangements and 
relationships essential to coordination of care and cost control will 
be inhibited. This is particularly significant with the Medicare self-
referral law which imposes a ``bright line'' test.
    Congress should grant an exception to provider organizations 
sharing risk through a variety of means as mentioned above, full 
capitation, partial capitation, withholds and/or bonuses, to cite a few 
examples. Whether these entities contract directly with the Medicare 
program or with the Medicaid program, or health plans that are risk 
contractors under those programs, beneficiaries should be able to 
select community-based delivery systems to coordinate their care. The 
Medicare self-referral law should not create an unnecessary barrier to 
such choices.

                       Physician Incentive Plans

    The Medicare self-referral law provides an exception for personal 
service arrangements between an entity and physicians that meets 
certain requirements. The personal services exception states that the 
compensation paid under a personal services arrangement cannot be 
determined in a manner that takes into account the ``volume or value of 
referrals'' for designated health services or other business between 
the parties. However, this prohibition is qualified for a physician 
incentive plan so long as the requirements for physician incentive 
plans which are applicable to Medicare and Medicaid risk contracting 
arrangements are met. A ``physician incentive plan'(PIP) is defined as 
``any compensation arrangement between an entity and a physician or 
physician group that may directly or indirectly have the effect of 
reducing or limiting services furnished with respect to individuals 
enrolled with the entity.''
    The Proposed Regulation states that the physician incentive plan 
qualification applies only when the entity paying the physician or 
physician group is the kind of entity that enrolls its patients, such 
as HMOs. We believe that this is an overly narrow provision. There 
exist many provider-based organizations contracting with entities that 
enroll beneficiaries, such as Physician Hospital Organizations (PHOs), 
using a variety of managed care payment techniques such as capitation, 
withholds, bonus corridors or per diems, that should also qualify for 
this exception through their use of physician incentive plans.

                    Physician Recruitment Exception

    The Medicare self-referral law includes an exception for 
remuneration provided by a hospital to an individual physician to 
induce the physician to relocate to the geographic area served by the 
hospital in order to be a member of the medical staff of the hospital, 
provided that the physician is not required to refer patients to the 
hospital, the amounts paid under the arrangements are not determined in 
a manner that takes into account the volume or value of referrals, and 
other applicable regulatory requirements are met.
    The current exception for remuneration provided by a hospital to a 
physician to induce the physician to relocate to the hospital's 
geographic area to join the hospital's medical staff should be expanded 
to include physicians who are new to the practice of medicine. They do 
not have a referral base of patients, just as a physician new to a 
geographical area does not bring along patient business. Including new 
physicians in the recruitment exception meets the public policy 
requirement embodied in the existing recruitment exception for 
physicians already practicing medicine, which is limited to those new 
to the hospital's geographic area. That is, they are not recruited for 
their existing referral base. This expansion of the exception would 
provide institutions training physicians or other hospitals in the same 
geographic area where the physician is trained, the same opportunity to 
recruit medical residents in training as hospitals in a different 
geographic area.

                         Indirect Compensation

    The Proposed Rule published by HCFA greatly expands the financial 
relationships affected by the Medicare self-referral law and would have 
consequences beyond the intent of the statute. The example cited by 
HCFA is that of a hospital that has contracted with a group practice 
for the group to furnish physician services and to otherwise staff the 
hospital. The hospital pays the group practice for these services under 
a personal services arrangement. The group practice pays the physicians 
a salary. HCFA takes the position that each physician has been 
indirectly compensated by the hospital and therefore the physicians 
have a compensation arrangement with the hospital. Accordingly, each 
physician in the group practice must also meet an exception.
    This is an overly broad interpretation of the statute. The indirect 
compensation from the hospital to the individual physicians in the 
group practice is not based on their referrals if the hospital contract 
with the group practice meets the personal services exception. Once the 
compensation arrangement between the hospital and the group employing 
the physicians is determined not to be based on the volume or value of 
referrals, the individual physicians employed by the group practice 
should not be required to meet additional exceptions.

                         Reporting Requirements

    The Medicare self-referral law requires entities providing 
Medicare-covered designated health services to report to HCFA the 
covered items and services provided by the entity and the identity of 
physicians or the immediate relatives of physicians with ownership or 
investment interests, or compensation arrangements. The Medicare self-
referral law states that the reporting requirements apply only to 
ownership or investment interests as defined by Section 1877(a)(2)(A) 
and compensation arrangements as defined by Section 1877(a)(2)(B). 
These two sections include only those interests and compensation 
arrangements that fail to meet the Stark exceptions under Section 
1877(c), (d) or (e).
    However, the Proposed Regulations would require entities to report 
all financial relationships, whether or not they meet an exception. The 
Preamble states that the reporting requirement applies to all financial 
relationships the entity ``knows or should know about in the course of 
prudently conducting business.'' We believe this goes well beyond the 
statute and Congressional intent and should not be implemented by HCFA.
    This expansive and somewhat vague reporting requirement would place 
an extraordinary burden on providers without providing any significant 
benefit. Such a reporting requirement would apply to every hospital and 
divert significant resources away from patient care to unnecessary 
administrative overhead. HCFA itself acknowledges that it could be 
``overwhelming and perhaps impossible'' for entities providing 
designated health services to comply with the reporting requirement 
require reporting only for those financial relationships that do not 
meet an exception to the Medicare self-referral law.

          Additional Exceptions For Anti-kickback Safe Harbors

    The Medicare self-referral law should provide an exception for any 
practice that falls into a safe harbor under the anti-kickback statute. 
Financial arrangements meeting the criteria necessary to come within a 
safe harbor are determined to pose no risk to the Medicare and Medicaid 
programs and are therefore immune from prosecution. Consequently, the 
safe harbors are narrow in scope, and arrangements falling outside a 
safe harbor do not necessarily violate the anti-kickback statute. This 
is in sharp contrast to the Medicare self-referral law which 
establishes a ``bright line'' test. Arrangements failing to meet the 
requirements of the Medicare self-referral law automatically result in 
prohibited referrals for designated health services. There is no reason 
protections extended under the anti-kickback statute should not be 
allowed under the physician self-referral statute.

                               Conclusion

    Only one of the changes or clarifications AHA recommends 
relates to the ownership provisions of the Medicare self-
referral law. The other changes or clarifications we seek 
concern compensation arrangements. Thus if Congress would 
modify the self-referral statute by eliminating compensation, 
hospitals would have the flexibility to collaborate with 
physicians, while the anti-kickback statute will serve to 
protect the Medicare program and its beneficiaries from any 
abusive or fraudulent arrangements.
    We look forward to working with members of the Subcommittee 
to improve the Medicare self-referral law in a way that 
provides our members the flexibility necessary to provide 
quality health care to patients in a rapidly changing health 
care delivery system. We also seek a law that will provide 
clear guidance for hospitals and other health care providers.

                                

                               American Medical Association
                                                       May 12, 1999
The Honorable William Thomas,
Chairman, Committee on Ways and Means
Subcommittee on Health
U.S. House of Representatives
Washington, D.C.

    Dear Chairman Thomas:

    On behalf of our 300,000 physicians and medical student members, 
the American Medical Association (AMA) would like to thank you for 
holding tomorrow's hearing to discuss possible changes to the self-
referral statute. As you know, this statute has significant patient 
access implications, and it adversely affects the vast majority of 
physicians.
    We are pleased that you and the Committee are addressing possible 
self-referral changes. While the AMA developed the ethical standards 
relating self-referrals, we believe that the law and the proposed 
regulations go too far. If implemented, they would result in many 
physicians having to completely restructure their practices to ensure 
that Medicare beneficiaries obtain designated health care services from 
other entities. This will inconvenience millions of patients in order 
to meet burdensome regulatory requirements that do not address the 
concerns Congress was originally trying to address in passing these 
laws.
    The self-referral statute and the proposed regulations are so 
complex, as they now stand, that congressional action is needed to 
streamline the statute. Even attorneys specializing in self-referral 
issues and other experts cannot give physicians definitive answers 
concerning the law's implications. In this era of heightened scrutiny 
of physicians by law enforcement agencies, it is especially vital to 
provide physicians with clarity regarding self-referral prohibitions. 
The Health Care Financing Administration (HCFA) has acknowledged the 
complex nature of the statute, but has exacerbated physicians' concerns 
by issuing a 400 page Notice of Proposed Rulemaking (NPRM) on January 
9, 1998 (six years after the statute was enacted) which actually made 
many issues even more confusing. The AMA urges Congress to enact 
changes to the statute before final regulations are promulgated so that 
patients and physicians are not forced into untenable situations.
    The AMA believes that Congress should also reevaluate the self-
referral law in light of the significant changes in the marketplace 
that have occurred since the 1993 expansion of the original self-
referral law (previously applicable just to clinical laboratory 
services). In an era when medical practice configurations and health 
care coverage arrangements are changing at an increasingly rapid rate, 
the overly complex and questionable requirements imposed by the self-
referral law and its lack of clarity create added and substantial 
difficulties for physicians, with only questionable benefits for 
patients.
    The Committee should also consider that physicians are subject to 
severe civil and criminal penalties if they receive any type of 
remuneration for the referral of Medicare-covered services under the 
anti-kickback statute. This is a body of law still being developed in 
the courts, where numerous ``safe harbors'' have been established, and 
where the Office of the Inspector General (OIG) of the Department of 
Health and Human Services has begun to issue advisory opinions. Unlike 
the self-referral law, the anti-kickback statute applies to purposeful 
behavior, and physicians and others must satisfy an intent standard to 
be in violation of the statute. The self-referral law exposes business 
activities that would be considered routine outside of the health care 
environment to high civil monetary penalties and possible additional 
false claims prosecutions.
    The AMA believes that the changes that this Committee approved in 
1995 as part of the Omnibus Budget Reconciliation Act of 1995 are a 
good starting point to ameliorating the unintended consequences of this 
statute. We have attached to this letter our key concerns with the 
statute and the proposed regulations promulgated by HCFA. The AMA 
submitted 29 pages of written comments to HCFA last year, which more 
thoroughly explain our concerns with the proposed regulation. We would 
be happy to share with you and members of the Committee.
    The AMA appreciates your dedication to this and other health care 
related issues. We look forward to working with the Committee to 
examine the market realities and to revising the self-referral statute 
to ensure that inappropriate referrals do not occur, while stopping 
short of imposing significant inconveniences on our patients as a 
result of physicians being required to restructure their practices.
            Respectfully,
                             E. Ratcliffe Anderson, Jr., MD

                                

Key Concerns with Proposed Regulations on Self-Referral

    This document outlines several of the AMA's concerns with 
the self-referral statute and how its implementation as 
proposed would encroach upon the day-to-day activities of 
patients and physicians. For a more complete picture of the 
AMA's concerns, please contact the AMA's Washington Office 
(789-7409) for a copy of our written comments on the Notice of 
Proposed Rulemaking (NPRM) submitted to the Health Care 
Financing Administration (HCFA) on May 11, 1998.
                       Designated Health Services
    The self-referral law applies only to designated health 
services. These are defined in statute as:
     clinical laboratory services;
     physical therapy services;
     occupational therapy services;
     durable medical equipment and supplies;
     parenteral and enteral nutrients, equipment, and supplies;
     prosthetics, orthotics, and prosthetic devices and 
supplies;
     home health services;
     outpatient prescription drugs; and
     inpatient and outpatient hospital services.
    HCFA has interpreted these categories too broadly and has 
drawn illogical distinctions between certain designated health 
services. For instance, under the durable medical equipment 
category, crutches would be exempt, but the designation would 
apply to all other types of durable medical equipment and 
supplies. Intraocular lenses and corrective glasses would be 
considered prosthetic devices even though they could still be 
provided in certain circumstances under an ambulatory surgical 
center exception to the self-referral law. In addition, HCFA 
has construed the physical therapy definition much more broadly 
than intended by Congress. In the NPRM, HCFA stated that 
physical therapy would be any ``assessment or treatment'' 
designed to alleviate pain or disability. This could 
inappropriately subject large areas of physicians' practices to 
self-referral constraints. Some of the situations that would 
result from these arbitrary distinctions that HCFA has made 
between designated health services are the following:
     A Medicare patient who breaks her foot could 
receive crutches in her physician's office at the time of 
diagnosis, but if the physician decides that a walker would be 
more appropriate for the patient, she would have to travel to 
another location to obtain the walker.
     A Medicare patient who has undergone cataract 
surgery and is entitled to Medicare coverage of one pair of 
corrective glasses or contact lenses would not be able to 
purchase those glasses from the physician completing the 
surgery. This is the case, even though the Federal Trade 
Commission (FTC) has stated that an ophthalmologist or 
optometrist must give the patient a copy of the patient's 
prescription immediately following the eye exam so that the 
patient can shop anywhere he chooses but specifically allows 
physicians to dispense if that is the patient's choice. These 
FTC rules have been in place for decades and current 
arrangements have not limited patients' ability to obtain 
corrective glasses or contacts from other locations.
    The AMA strongly supports the 1995 amendments to the self-
referral law which would have clarified that only the following 
areas would be classified as designated health services: 
clinical laboratory tests; parenteral and enteral nutrient, 
equipment, and supplies; magnetic resonance imaging and 
computerized tomography services; and outpatient physical or 
occupational therapy services.

                        Compensation Exceptions

    Under the self-referral law, a compensation relationship between 
the referring physician and the entity providing a designated health 
service can trigger a violation of the statute. Although HCFA has set 
forth several helpful exceptions in the NPRM, the AMA remains troubled 
by several areas of the statute and regulation which are overly broad 
and extremely confusing to physicians.
     The AMA is concerned with HCFA's interpretation of the 
compensation test for group practices. It appears that the NPRM would 
require that profits from designated health services be distributed 
without regard to practice needs or even how revenues were generated. 
This would preclude a group from allocating different expenses to 
different sites or different physicians and considering different 
revenue streams. This section of the NPRM would regulate the internal 
workings of group practices, and would have little or no impact on 
referrals of designated health services.
     The fair market value exception to compensation 
arrangements would be of very limited application as it would apply 
only when compensation or compensation methods of fair market value are 
set in advance, and are not related to the volume or value of referrals 
(either Medicare/Medicaid or outside of the programs) or other business 
between the parties. This exception is so narrow that it would not 
allow anyone to take any type of business relationship into 
consideration when setting up compensation arrangements. Since the 
transaction must be at fair market value in all instances, it is 
unclear why the volume and value of referral language is necessary.
     We believe that the language in the NPRM would incorrectly 
require a physician practice owned or controlled by a hospital to meet 
the ``personal services'' exception for compensation arrangements. If 
the group is owned by, or is a non-profit entity controlled by a 
hospital, and the only financial relationship between the physician and 
group is an employment relationship, then there should be no need for 
the financial arrangement between the group and the hospital to meet 
any other exception, because the relationship is between two hospital-
affiliated entities. The personal services exception should only be 
required for financial relationships between a hospital and a 
physician-owned group.
    In reviewing the legislative history for this section of the 
statute, it is clear that Congress was not as concerned with the 
internal compensation relationships within integrated medical groups, 
but rather with the use of compensation between a physician and an 
entity which was a sham compensation relationship solely for the 
purpose of inducing referrals. The AMA believes that the compensation 
requirements and their exceptions are the most complex portion of this 
statute and are largely redundant of the anti-kickback laws. We 
strongly support the 1995 amendments' elimination of the compensation 
arrangement provisions, which would limit the definition of a financial 
relationship to an ownership interest in debt or equity.
 Supervision of Independent Contractors--Component #1 of the In-Office 
                      Ancillary Services Exception
    The statute states that to qualify for the in-office ancillary 
services exemption, designated health services (other than most durable 
medical equipment and parenteral and enteral nutrients, equipment and 
supplies) that are referred either by a solo practitioner or by a 
member of a group practice must be furnished either by:
    (i) the referring physician;
    (ii) another physician in the same group practice as the referring 
physician; or
    (iii) an individual directly supervised by the referring physician 
or another member of the same group practice. (emphasis added)
    In the NPRM, HCFA states that ``directly supervised'' means that 
the supervising physician must be in the same office suite and 
immediately available (except for very brief absences) to provide 
assistance and direction at the time the services are furnished. While 
this may seem a small inconvenience, it would have the effect of 
forcing physicians to restructure their practices and decreasing the 
facilities' hours of operation for patients, while having no impact on 
the self-referrals for designated health services.
    For instance, physicians who hire independent contractors to work 
as technicians or physical therapists would have to be present in the 
office suite at all times that the independent contractor was seeing 
patients. There are many instances when physicians are operating or 
otherwise seeing patients away from the office, that patients come to a 
practice for follow-up x-rays or lab tests, that the physician does not 
need to see the patient. HCFA's interpretation could lead many 
physicians to inconvenience patients by closing their offices whenever 
they are providing care in other settings to ensure that they are not 
in violation of the self-referral law.
    The AMA supports the 1995 amendment provision stating that general 
supervision requirements would be met if the physician or group is 
legally responsible for the services performed by the individual 
regardless of whether or not the physician is physically present when 
the individual furnishes an item or service.
 Site of Service Requirement--Component #2 of the In-Office Ancillary 
                           Services Exception
    The second component needed to qualify for the in-office 
ancillary services exception is that the designated health 
services must be furnished in either:
    (i) the same building where the referring physician or another 
member of his group practice furnishes physician services unrelated to 
designated health services; or
    (ii) a building used by the group practice for all or some of the 
group's clinical lab services; or
    (iii) a building used by the group practice for the centralized 
provision of the group's designated health services, other than 
clinical lab services. (emphasis added)
    In the NPRM, HCFA has interpreted this site of service 
requirement to mean that the service would not qualify for the 
in-office ancillary services exception if the referring 
physician's building and the second building are connected via 
tunnels or walkways. This interpretation would curtail the 
operations of larger medical complexes where the group practice 
refers a patient for tests in the next building which is 
connected to the physician's office building above or below 
ground or by a walkway, but which is not part of the same 
building.
    In addition, HCFA has stated that it considers 
``furnished'' at the site of service to mean that the service 
must be performed on the patient at that location or that the 
patient must receive and begin using an item in that location. 
With this interpretation, it is possible that covered 
outpatient prescription drugs, such as those used by patients 
undergoing chemotherapy, would not be eligible for the in-
office ancillary exception, as many patients begin to take 
these drugs while they are at home. The AMA believes that 
HCFA's view is contrary to congressional intent, since it would 
make Medicare drugs that in some circumstances may be self-
administered, much more difficult to obtain. Self-referral 
policy should not have the effect of countermanding Medicare 
coverage policy.
    The AMA believes that Congress should address the issues 
surrounding shared facilities, which are the most common way 
for physicians to save resources by sharing overhead for common 
equipment rather than setting up duplicate facilities in the 
same building. For example, physicians often share x-ray 
machines, and other in-office diagnostic equipment with other 
physicians in their office building so they can provide their 
patients with on-site health services, such as EKGs and 
ultrasounds. Under HCFA's current interpretation, shared 
facilities would not be entitled to the in-office ancillary 
services exception.
    The AMA supports the 1995 amendment provisions in this area 
as a starting point and suggests broadening the shared facility 
exception to ensure that physicians referring to an entity 
within the same medical complex would not be in violation of 
the self-referral law.
  Group Practice Definition--Component #3 of the In-Office Ancillary 
                           Services Exception
    Unless a physician is a solo practitioner, the only way to 
qualify for the in-office ancillary services exception is to 
meet the definition of a group practice. The self-referral 
statute states that to qualify as a group practice, the 
practice must consist of two or more physicians legally 
organized as a single partnership, professional corporation, 
foundation, not-for-profit corporation, faculty practice plan, 
or similar association. The AMA believes that Congress should 
clarify that a practice can qualify as a group practice as long 
as the physician owner hires at least one other physician to 
work in her practice as either a partner or an employee.
    If this proposed regulatory definition remains, many 
practice structures will be disrupted. In the medical 
community, more established physicians often bring in younger 
physicians as employees until they are invited to become a 
partner in the practice. HCFA's overly expansive proposed 
interpretation of the statute would micromanage the inner 
workings of physician practices in a manner that is wholly 
unrelated to the provision of designated health services.
    The AMA supports clarifying the statute to ensure that a 
physician practice can qualify as a group practice as long as 
it has at least one physician owner and other physician 
employees.

       Reporting Requirements and Civil Monetary Penalties (CMP)

    The reporting requirements set forth in the NPRM both exceed HCFA's 
statutory authority and would exponentially increase physicians' 
regulatory burdens. The statute requires entities providing Medicare-
covered designated health services to provide HCFA with two types of 
information:
    (i) covered items and services provided by the entity; and
    (ii) the identity of physicians or the immediate relatives of 
physicians, with ownership or investment interests, or compensation 
arrangements
    According to the statute, physicians should not have to 
report ownership or investment interests that qualify under the 
group practice or compensation exception. However, the NPRM 
would require entities to report all financial relationships 
regardless of whether the relationship meets an exception. 
First, the AMA believes that the administrative and 
recordkeeping tasks such broad reporting would entail are 
significant and far outweigh any benefit that may be derived 
from such expansion. Second, the exposure to a $10,000 civil 
monetary penalty per day under the statute for failing to 
submit this information is exorbitant and disproportionate to 
the offense. We urge Congress to eliminate this CMP.
    The AMA supports the 1995 amendments' language which would 
abolish the civil monetary penalties for not reporting this 
information. The existing civil monetary penalty of $15,000 per 
improper designated health service is an extremely effective 
deterrent to physicians violating the self-referral statute, 
and the additional reporting civil monetary penalty is 
unneeded.

                                

Statement of the American Physical Therapy Association, Alexandria, VA

    Mr. Chairman and Subcommittee members, the American 
Physical Therapy Association (APTA) wishes to express its 
continuing support for the elimination of financial incentives 
within the Medicare program that encourage the over utilization 
and inappropriate use of physical therapy services. APTA 
believes that the existing ban, while imperfect, is an 
appropriate mechanism to achieve this goal. APTA wishes to work 
with the Subcommittee to improve the existing statue, but urges 
the Subcommittee not to reverse the progress that has been made 
thus far through the existing ban.
    APTA is the national association representing more than 
73,000 physical therapists, physical therapist assistants, and 
students of physical therapy. APTA shares the desire of the 
American public, political leaders and other health care 
providers to make quality health services more accessible and 
affordable for all Americans.
    Seven years ago, APTA appeared before this Subcommittee to 
testify in support of expanding a ban on physician self-
referral under Medicare to include physical therapy services. 
APTA encourages the Subcommittee not to retreat from this 
important public policy, and to ask that the Subcommittee urge 
the Administration to speed its implementation and strong 
enforcement.
    While APTA is supportive of the intent of the existing ban, 
the Association wishes to express its disappointment with the 
Administration's inability to promulgate final regulations 
relating to the self-referral ban. Regulations are needed to 
enforce the prohibition and aid health care providers in their 
efforts to comply with the existing law.
    In 1993, Congress expanded the ban on physician self-
referral to include physical therapy services. This action was 
based upon strong empirical data illustrating excessive 
utilization associated with self-referral arrangements. Nowhere 
is this better documented than in the 1992 study of the 
California Workers' Compensation program conducted by William 
M. Mercer, Inc.
    This study found that if an injured worker received initial 
treatment from a physician with an ownership interest in 
physical therapy services, that patient received a referral to 
physical therapy 66% of the time. If, on the other hand, the 
injured worker received initial treatment from a physician with 
no ownership interest in physical therapy services, the patient 
was referred to physical therapy 32% of the time or less than 
half of that of the owner frequency.
    In the face of such findings, patients and the public are 
left with much cause for concern. The crucial question is 
whether Medicare beneficiaries should have to wonder whether 
the care they are receiving is based upon medical necessity or 
economic motivation.
    The Mercer study concluded that financial incentives played 
a major role in these decisions. According to the study, the 
added incentive for investing physicians to refer to physical 
therapy generated approximately $233 million per year in 
services delivered for economic rather than clinical reasons. 
These are costs neither our nation's health care system nor our 
nation's Medicare beneficiaries should be asked to bear.

                            Consumer Choice

    The issue of consumer choice is of critical importance. The 
Subcommittee must ask itself the following questions: ``What types of 
choices are available to Medicare beneficiaries today?'' ``What types 
of choices would be available to these beneficiaries without the 
existing ban on physician-self referral?'' ``Prior to the ban, were 
patients given the freedom to choose their physical therapist, or were 
they simply referred to a facility in which their physician maintained 
a financial interest?''
    The existing ban, while imperfect, has provided Medicare 
beneficiaries with enhanced choices regarding the care they receive. 
With the elimination of the financial incentive to refer services to 
external facilities, the physician is free to refer patients based upon 
proximity to the patient and the quality of care provided. Competition 
in the Medicare program, based upon the quality of care provided is a 
positive outcome of the prohibition.

                      Additional Valuable Studies

    Several other studies demonstrate that physician self-referral 
drives up utilization and health care costs. In 1989, the Florida 
legislature mandated that its Health Care Cost Containment Board 
examine the impact of joint ventures in health care on the cost, 
quality, and access to services in Florida. Physical therapy services 
were surveyed in two settings: free-standing physical therapy 
facilities and comprehensive rehabilitation centers that provide 
physical therapy services. The findings were dramatic.
    Joint-ventures that are physician-owned physical therapy facilities 
provided 43% more visits per patient than did nonjoint-venture (or non-
physician owned) physical therapy facilities. Consequently, the 
physician-owned joint-ventures generated approximately 31% more revenue 
per patient than in nonjoint-venture facilities. At comprehensive 
rehabilitation facilities, 35% more physical therapy visits were 
provided per patient in joint-venture facilities than in non-joint-
venture facilities.
    More importantly, the Florida study found that quality of care in 
physician owned joint-venture facilities was lower than in nonjoint-
venture facilities, and that joint-venture facilities did not increase 
access to services. In fact, the nonjoint-venture facilities offered 
increased access to a wider range of clients. Higher quality of care 
and increased access to services are often cited as rationales to 
defend joint-ventures. Clearly these arguments do not hold water in the 
face of objective data.
    Subsequent to the study conducted in the State of Florida, the 
Center for Health Policy Studies located in Columbia, Maryland, 
estimated the impact of physician joint-ventures on medical care costs 
in Florida. Estimates for 1991 were developed based on findings from an 
analysis of Medicare claims data, results from the report by the 
Florida Health Care Cost Containment Board, and from other sources. The 
estimated 1991 cost impact of joint-ventures for physical therapy 
services was $10.9 million. This figure is likely underestimated given 
that only additional costs for users of physical therapy were 
estimated.

                      Direct Physician Supervision

    APTA opposes any attempt to amend the physician supervision 
requirement of non-physician personnel. Current law calls for ``direct 
supervision,'' but recommendations have been made to replace this 
requirement with a ``general supervision'' requirement. The direct 
supervision requirement reduces the incentive for a physician to abuse 
his or her referral power with respect to services provided by non-
physician practitioners under the physician's employment.
    The incentive for a physician to refer to outside facilities in 
which he or she might have an investment interest is not the only 
problem regarding self-referral. In fact, physicians stand to profit 
even more directly by expanding their individual or group practices to 
offer physical therapy or one or more of the various other health 
services to which they control access through their power of referral.
    A study of physician self-referral was presented to Virginia's 
Joint Commission on Health Care in January 1993 by Virginia's Deputy 
Secretary of Health and Human Services. One of the findings was that 
Blue Cross/Blue Shield claims-paid-data indicated 60% of physical 
therapy claims were paid to physician provider numbers. That amounted 
to $8.3 million out of $14 million.
    Additionally, the Of fice of Inspector General found that in almost 
four out of five cases reimbursed as physical therapy in physician's 
offices do not represent true physical therapy services. The studv 
found that $47 million was inasoroPriately paid in 1991.

Removal of Physical Therapy from the List of Designated Health Services

    APTA is opposed to any proposal that would eliminate physical 
therapy from the list of designated health services under the current 
statute. As we have shown today, numerous studies indicate the 
relationship between physicians and referrals to physical therapy 
services in which they have a financial interest leads to increased 
utilization and significantly higher cost to the payer. To remove 
physical therapy from the list of regulated services would allow this 
over utilization to go unchecked, costing the American people and the 
Medicare program many millions of dollars. To eliminate physical 
therapy from the designated health service list would increase Medicare 
costs unnecessarily and create further problems for a system that is 
already struggling.

                Investment in Rehabilitation Facilities

    APTA understands rehabilitative care is a growing segment of the 
health care industry and that physicians would want to invest in or 
possibly own a physical therapy center. The self-referral statute does 
not preclude such investments or ownership. However, we cannot support 
an expansion of the exceptions for physician ownership in hospitals to 
include ownership in other facilities such as surgery centers, 
hospices, nursing homes, dialysis facilities, and Comprehensive 
Outpatient Rehabilitation Facilities (CORFs). The law merely provides 
some reasonable assurances to the consumer that investment or ownership 
interest will not impede a health provider's judgement when referring 
to physical therapy and other health services. Physical a therapists do 
not wish to limit physician's investment opportunities; only to ensure 
that physicians do not misuse their referral powers to such facilities 
in order to increase their own profit.

                         Reporting Requirements

    APTA strongly opposes proposals to eliminate or in any way weaken 
reporting requirements under the current statute. These requirements 
provide information necessary to effectively enforce the law and must 
be maintained. These requirements are reasonable, particularly in light 
of the objective data which demonstrates the existing abuse of referral 
power for financial gain. To eliminate this nortion of the statute is 
to repeal the current ban on physician self-referral.

                        Preemption of State Laws

    APTA firmly opposes the preemption of state laws governing 
physician ownership and referral. The legislatures of at least 30 
states found this problem troubling enough that they passed their own 
prohibitions on self referral. State legislatures addressed the problem 
in numerous and creative ways. Some states, such as California, Nevada, 
Illinois, Maryland, and Georgia, have banned referrals by various 
health care providers to outside entities in which the provider (or 
sometimes a member of his immediate family) has a financial interest, 
or is an investor. Other states, such as Connecticut, Louisiana, and 
Maryland have laws requiring the provider to disclose his financial 
interest in the facilities where his patients are referred. 
Additionally, California and Montana enacted separate bans under its 
Worker's Compensation Program. Texas and Rhode Island enacted anti-
kickback laws stating that a person can neither pay nor accept 
remuneration for securing or soliciting patients. Federal preemption of 
these state laws interferes with the states' ability to enact cost-
saving legislation critical to their budget processes.

               Necessary Improvements to the Existing Ban

    While the ban has been successful in eliminating incentives for 
physicians to refer services to external facilities in which they 
maintain a financial interest, exceptions to the prohibition raise 
doubts about its overall effectiveness. Presently, a physician is 
allowed to refer physical therapy and other health-related services to 
employees of their solo or group practice. This ``backroom'' or captive 
referral is not considered an illegal self-referral due to the ``in-
office ancillary care'' exception of the existing ban. APTA fails to 
understand how this type of referral is in any way different than 
external referrals for identical services, and feels strongly that an 
appropriate change in the statute is needed to remedy this loophole.
    APTA finds it disturbing that in its impact analysis on p. 1717 of 
the Federal Register for the January 9, 1998 proposed regulation 
relating to the ban, the Health Care Financing Administration (HCFA) 
states that the economic impact of the regulations will be minimal 
because this statute contains exceptions that will allow physicians to 
continue to refer to any entity furnishing designated health services 
if certain criteria are met. HCFA states that physicians will 
reconfigure their practices to fit within exceptions. In fact, HCFA 
provides an example of how a practice could be reorganized to meet the 
in-office ancillary group practices exception.
    Physicians that once may have held ownership in an external 
physical therapy clinic to which they referred services for financial 
gain, now merely employ physical therapists and non-physical therapists 
who provide services within their solo or group practice which are then 
billed to Medicare under the physician's provider number.
    In 1997, with the help of this Subcommittee, APTA pushed for 
necessary changes in the manner in which physical therapy services are 
provided in physician practices. Passage of the ``Outpatient Physical 
Therapy Standards Act'' now requires physician practices to meet almost 
all of the same coverage guidelines which physical therapy private 
practices have operated under for some time. Unfortunately, HCFA failed 
to require that a physical therapist provide or supervise services when 
not provided directly by the physician. This means that a physician can 
refer ``physical therapy services'' to any employee, including clerical 
help, and bill those services under his/her physician provider number. 
HCFA has also recently concluded that physician assistants and nurse 
practitioners can refer and provide physical therapy services. APTA 
asks for the Subcommittee's assistance in remedying these concerns.
    While it is hoped that the Outpatient Physical Therapy Standards 
Act will improve the quality of care provided in physician practices, 
APTA feels that it is also necessary to eliminate financial incentives 
that encourage over utilization of physical therapy services in 
physician practices.
    Therefore, APTA proposes that the ban on physician self-referral be 
amended to narrow the ``in-office ancillary care exception.'' 
Specifically, APTA feels that the self-referral restrictions should 
apply with respect to a physician's referral to an employee or 
independent contractor for physical therapy services. To achieve this 
end, APTA urges the Subcommittee to require physical therapy services 
to be billed under Medicare utilizing the provider number of the 
licensed physical therapist that provided the service. In addition, 
physical therapy should be made an excention to the ``in-office 
ancillary care'' exception.
    The impact of this policy would be significant. In addition to 
eliminating the financial incentive for physicians to refer for 
physical therapy services, these proposed changes would place 
responsibility for billing, and ultimately for the quality of care 
provided, in the hands of the practitioner that actually provided the 
service. These changes are necessary, practical, and overdue.

                               Conclusion

    APTA continues to support the current prohibition on physician 
self-referral and encourages the Subcommittee to urge the 
Administration to actively implement and enforce the existing law. APTA 
stands ready to assist the Subcommittee in any manner to ensure 
appropriate delivery of necessary physical therapy services. APTA 
appreciates the opportunity to share its views on this subject.

                                

Statement of the American Society of Clinical Pathologists

    The American Society of Clinical Pathologists (ASCP) is a 
nonprofit medical specialty society organized for educational 
and scientific purposes. Its 75,000 members include board 
certified pathologists, other physicians, clinical scientists 
and certified medical technologists and technicians. These 
professionals recognize the Society as the principal source of 
continuing education in pathology and laboratory medicine, and 
as the leading organization for the certification of laboratory 
personnel.
    ASCP believes the practice of physician self-referral for 
profit is a conflict of interest that threatens the quality and 
cost of patient care. ASCP supports limitations on physician 
referrals to clinical laboratories or other health care 
facilities in which the referring physician or immediate family 
has a financial interest.
    ASCP recognizes the importance of and the complexities 
associated with interpreting Sections 1877 of the Social 
Security Act added by the Omnibus Budget Reconciliation Act of 
1989 (OBRA 89, P.L. 101-508) and revised by the Omnibus Budget 
Reconciliation Act of 1993 (OBRA 93, P.L. 103-66).
    The proposed regulatory interpretation of OBRA 93 (Federal 
Register January 9, 1998) revises the ``members of a group'' 
definition, from its original interpretation (60 FR 41914) of 
the OBRA 89 law. The new interpretation includes only owner and 
employee physicians as ``members of a group,'' thus eliminating 
contractors.
    The January 9, 1998, proposed regulatory interpretation 
gives exception to the referral ban for members of a group 
practice when an in-office ancillary service is performed or 
supervised by a member of the group practice.
    In-office ancillary services ``must be furnished personally 
by the referring physician, a physician who is a member of the 
same group practice as the referring physician, or an 
individual who is directly supervised by the physician or by 
another physician in the group'' (Federal Register January 9, 
1998 pg. 1655).
    If a contractor, potentially a pathologist, is not 
considered a member of the group practice, he or she will 
potentially be in violation of the law as defined by the in-
office ancillary services definition. Meaning, a group practice 
will be in violation of the self-referral ban because a 
pathologist on contract to advise a physician's clinical 
laboratory will be rendering or supervising the service.
    This contractor exclusion presents a problem to the 
practice of pathology and laboratory medicine. ASCP recommends 
maintaining the ``members of a group'' definition to include 
contractors, as noted in the original interpretation (60 FR 
41914) of the OBRA 89 law.
    Thank you for this opportunity to share the views of the 
American Society of Clinical Pathologists.

                                

Statement of the American Society of Echocardiography, Raleigh, NC

    The American Society of Echocardiography (``ASE''), is 
delighted to have this opportunity to submit written testimony 
with regard to the federal prohibition on physician self-
referrals (the ``Stark Law'').
    Our comments with regard to the Stark Law may be summarized 
as follows:
     The Stark Law includes as a designated health 
service ``radiology, including MRI, CAT, and ultrasound.'' 
(Emphasis added). Because echocardiography is cardiac 
ultrasound, the Health Care Financing Administration's (HCFA's) 
proposed rules include echocardiography as a designated health 
service. ASE does not believe that the inclusion of 
echocardiography as a designated health service subject to the 
Stark Law is appropriate. ASE requests the Stark Law be amended 
to delete any reference to ultrasound as a designated health 
service and to narrowly define those radiology services that 
are considered designated health services. We understand that 
this Committee did in fact approve the elimination of 
ultrasound in H.R. 2425, which was incorporated into H.R. 2491 
on October 26, 1995 in the Omnibus Budget Reconciliation Act of 
1995.
     If ultrasound services remain subject to the Stark 
Law, those ultrasound services that are performed by a non-
radiologist as the result of a request for a consultation by 
another physician should be exempted from the scope of the 
statute, just as radiology procedures performed by a 
radiologist as the result of a request for a consultation from 
another physician is considered exempt from the statute.
     Even if echocardiography technical component 
services are included within the scope of the Stark Law, 
professional component services are physicians' personal 
services that should not be included within the scope of the 
statutory prohibition.
    ASE also urges the Committee to adopt the other provisions 
approved in 1995 in H.R. 2425. These provisions would, among 
other things, repeal those sections of the Stark Law that 
preclude physician compensation arrangements with entities to 
which they refer Medicare and Medicaid patients.
I. Echocardiography Is Not A Radiology Service And Therefore Should Not 
                      Be Subject To The Stark Law
    The Stark Law includes as a designated health service 
``radiology services, including magnetic resonance imaging, 
computerized axial tomography scans, and ultrasound services . 
. .'' Social Security Act, Sec. 1877(h)(6)(D) (emphasis added). 
While echocardiography is an ultrasound service, it 
unequivocally is not a radiology service. Echocardiography is a 
service developed primarily by cardiologists, performed 
primarily by cardiologists, provided primarily in the 
cardiology departments of hospitals, billed under cardiology 
CPT codes, and performed for cardiologists' patients.
    Echocardiography involves the use of diagnostic ultrasound 
to evaluate the structure and function of the heart and great 
vessels; however, since the technique requires a detailed 
understanding of the cardiac anatomy and physiology, the 
service is generally provided by cardiac sonographers and 
cardiologists. With regard to cardiac sonographers, it should 
be noted that specialized training is required, and that the 
registration process for cardiac sonographers is a rigorous one 
that includes a formal examination and ongoing CME 
requirements; there is no reciprocity between registration as a 
diagnostic cardiac sonographer and registration in other 
ultrasound modalities.
    In addition, the interpretation of echocardiograms requires 
specialized physician training. The current training guidelines 
of the American College of Cardiology stipulate that to be able 
to interpret transthoracic studies independently, a trainee 
must devote a minimum of five months to echocardiography; 
supervision of an echocardiography laboratory requires an 
additional six months of training; and a large number of 
cardiology training programs provide third and fourth years of 
cardiology training devoted exclusively to echocardiography. 
Review of HCFA data for echocardiographic services indicates 
that the great majority of all echocardiographic studies are 
performed by cardiologists, and review of the Index Medicus 
indicates that over 75% of all medical literature on 
echocardiography were published by cardiologists. In addition, 
the technologic advances in the field have been developed 
almost exclusively by cardiologists.
    ASE also notes that a number of other specialists are 
routinely involved in the performance of ultrasound services, 
and it is clear that a number of such ultrasound services are 
not radiology services. For example, ophthalmic ultrasound 
services are performed exclusively by ophthalmologists and are 
never performed by radiologists; it would therefore stretch 
credulity to categorize these services as ``radiology'' 
services simply because ultrasound is used. We urge Congress to 
clarify this matter by deleting any reference to ultrasound as 
a ``radiology'' service and by specifically defining those 
radiology services subject to the physician self-referral 
limitations or as a service that is subject to the Stark Law in 
any manner.
II. Echocardiography Services Supervised By Cardiologists and Performed 
Pursuant To a Request For A Consultation By Another Physician Should Be 
                 Exempt From The Scope Of The Stark Law
    If the Stark Law remains applicable to echocardiography 
services and other ultrasound services that are routinely 
supervised and interpreted by cardiologists and other non-
radiologists, the exemption provided by Sec. 1877(h)(5)(C) 
should be extended to cardiologists and other non-radiologists 
on the same terms available to radiologists. The Stark Law 
provides that the term ``referral'' does not apply to the 
request by a radiologist for a radiology service where the 
radiology service is performed under the radiologist's 
supervision and is performed pursuant to a request for a 
consultation by another physician. Social Security Act, 
Sec. 1877(h)(5)(C). If the governing statute continues to 
categorize all ultrasound as a ``radiology'' service, 
regardless of whether it is performed by a radiologist, the law 
should be amended to enable a non-radiologist who supervises an 
ultrasound service performed pursuant to a consultation 
requested by another physician to qualify for this exception, 
rather than limiting the exception to ``radiologists.''
    In this regard, it should be noted that general internists 
often request cardiologists who specialize in the 
interpretation of echocardiograms to supervise and interpret 
echocardiographic studies in much the same manner as an 
internist or other non-radiologist might request a radiologist 
to supervise and interpret an MRI, CT, or other radiological 
study. Where a cardiologist supervises the performance of an 
echocardiogram pursuant to a consultation requested by another 
physician, the performance of the study does not raise a 
potential for abuse and should not be considered a ``self-
referral'' within the meaning of the Stark Law.
   III. Professional Services Should Not Be Subject To The Stark Law
    We also note that HCFA has interpreted the term radiology 
services to include both the professional and the technical 
components of ultrasound services. We do not believe that the 
Stark Law was intended to apply where a cardiologist interprets 
an echocardiogram performed on his own patients where the 
echocardiogram is performed at a hospital with which the 
cardiologist has no prohibited financial relationship; yet, 
this would appear to be the result if echocardiography 
professional services were considered ``designated health 
services.'' We urge Congress to clarify this matter in any 
legislation enacted to amend the Stark Law.
                            IV. Other Issues
    The Stark Law is extraordinarily complex and unnecessarily 
confusing insofar as it attempts to regulate physicians' 
compensation relationships with entities to which the refer 
Medicare and Medicaid patients. For example, this legislation 
includes three different formulas that may be applicable to a 
physician's compensation--one that is applicable where the 
physician is also an owner of a group practice, one that is 
applicable to physician employees and one that is applicable to 
physician independent contractors. Each of these formulas is 
ambiguous and they are in some respects internally 
inconsistent--each in its own way. Health care lawyers differ 
among themselves in interpreting these and other important 
terms of this complicated law.
    In our view, the anti-kickback provisions of the Medicare/
Medicaid Fraud and Abuse Law already provide sufficient 
authority for the Government to proceed against physicians who 
have entered into inappropriate compensation relationships with 
entities to which they refer patients. This is especially true 
in light of the efforts that have been made by Congress to 
improve the remedies available to prosecutors and agencies for 
violations of the anti-kickback provisions and by the law 
enforcement officials to improve enforcement efforts. In light 
of these developments, we believe that it would be most 
appropriate for Congress to repeal the compensation-related 
provisions of the Stark Law altogether--an action approved by 
this Committee in 1995.
    If you have any questions regarding ASE's position on this 
matter, please contact ASE's Washington counsel, Diane S. 
Millman, at (202) 756-8021.

                                

                     American Urologocial Association, Inc.
                                              Baltimore, MD
                                                       May 13, 1999
The Honorable William M. Thomas
Chairman, Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C.

    Dear Chairman Thomas:

    The American Urological Association (AUA), representing 9,200 
American urologists, is pleased to have the opportunity to offer its 
views on physician self-referral laws, commonly known as Stark I and 
Stark II. We request that this letter be made part of the 
Subcommittee's record for its May 13 hearing on this subject.
    Physician self-referral legislation was enacted in response to 
concerns that physicians may overutilize certain medical services in 
which they have a financial interest. Studies conducted in the late 
1980s and early in this decade suggested that physician ownership of 
diagnostic services, such as laboratory and x-ray, was associated with 
patterns of higher utilization. The self-referral laws were designed to 
address this situation and clarify which activities would be 
permissible. For a number of reasons discussed below, the AUA feels 
that these laws are now less relevant and need to be substantially 
revised, if not repealed.
    The exponential growth of managed care has dramatically changed the 
medical practice landscape. In an effort to reduce health care 
spending, managed care has selectively contracted for a variety of 
services, such as lab and imaging, thus substantially reducing the 
opportunity for physicians to make financially advantageous referrals. 
In Medicare, the development of the sustainable growth rate and other 
curbs on service volume effectively limit growth that may be fueled by 
ownership and investment.
    The pressures on the medical marketplace have also forced 
physicians, hospitals and other providers of care to seek new, more 
cost effective business arrangements. However, the move to greater 
efficiency has been hampered by the complexity of the Stark statutes 
and the proposed regulations. Instead of providing guidance, the law 
and regulation have confused attorneys, accountants and providers 
alike. It has made it virtually impossible for AUA to help its members 
comply with the law. If market-based solutions to health-care costs are 
to be achieved, then Congress needs to let the market evolve. The 
breadth of the self-referral laws and the resulting confusion over 
their applicability to different situations inhibit the development of 
new, efficient arrangements. This has delayed the cost efficiency 
sought by all parties.

Extracorporeal Shock Wave Lithotripsy (ESWL)

    The law has had unintended consequences on one of the most 
effective and widely used urology services, extracorporeal shock wave 
lithotripsy (ESWL). ESWL is nowhere mentioned in the statute, but is 
caught up in the regulatory web. ESWL is a non-invasive procedure that 
uses shock waves to fragment ureteral and kidney stones. At the time of 
its introduction to the United States in 1984, it offered a welcome 
alternative to invasive surgery, which was the traditional method for 
removing kidney stones. ESWL usually requires no anesthesia, offering 
the advantages over surgery of reduced pain and suffering for patients, 
a rehabilitation time of only 1-2 days, and reduced risk and expense. 
In fact, former HCFA Administrator Gail Wilensky noted in 1991 that 
lithotripsy was one of the few instances in which a new medical 
technology decreased rather than increased health care costs.
    Because many hospitals did not originally have the financial 
resources required to purchase lithotriptors, urologists often pooled 
their own resources to finance the substantial capital costs required 
to obtain and operate a lithotriptor. Physician ownership of 
independent lithotriptors is still common today, and the procedure is 
usually performed on an outpatient basis in either fixed-site or 
mobile-unit facilities serving hospitals and ambulatory surgical 
centers (ASCs). Because lithotripsy services for Medicare beneficiaries 
are usually billed through a hospital outpatient department, ESWL is 
considered by HCFA to be an ``outpatient hospital service,'' causing it 
to fall into the realm of prohibited services under Stark II. 
Therefore, ESWL is covered by the Stark II law simply because of the 
Medicare billing arrangement that HCFA originally recommended.
    If HCFA's proposed rule is finalized as written, urologists with 
ownership interests in lithotriptors will not be able to treat Medicare 
and Medicaid patients at that facility, but will be forced to refer 
these patients to a different facility. This will almost certainly lead 
to disruptions in patient access by forcing patients to travel to 
another lithotriptor not owned by the treating physician. In some 
states there are no lithotriptors not owned by urologists, so patients 
would potentially have to leave the state to receive treatment.
    This is particularly unfair to the elderly population, and it 
interferes with the continuity of care that usually accompanies 
lithotripsy treatment, since the practicing physician is responsible 
for all aspects of treatment, including pre-treatment diagnosis, the 
treatment itself, and post-treatment care.
    Additionally, some non-urologist owned facilities could become 
flooded with Medicare and Medicaid patients, leading to delays in 
service for patients waiting in pain. This could create a two-tiered 
health care system, with non-Medicare patients having the same access 
and convenience as before while Medicare patients suffer because of the 
ban. Also, because capitated arrangements are excepted under Stark II, 
Medicare fee-for-service patients will be affected more than those in 
managed care.
    Even Rep. Pete Stark, primary author of the laws, has indicated 
during debate on the House floor and in written communications to HCFA 
that Congress did not intend for lithotripsy to be covered by the self-
referral law.

Heat therapy treatments for BPH

    An additional concern about the proposed rule on physician self-
referral is the possible chilling effect it may have on new 
technologies that treat benign prostatic hyperplasia (BPH). BPH, or 
enlarged prostate, is a very common disease, which afflicts about 13 
million men over the age of 50 in the United States. There are now 
promising new technologies to treat BPH, such as transurethral 
microwave thermotherapy (TUMT), transurethral needle ablation (TUNA) 
and interstitial laser coagulation (ILC). These therapies use heat to 
destroy enlarged prostate tissue. Similar to ESWL, the equipment needed 
to perform these procedures represents a considerably large capital 
investment, with some heat therapy units costing over $200,000. Many 
physicians are considering whether to purchase the equipment to enhance 
patient care, but it is uncertain if the Stark II proposed rule would 
allow physicians to own this expensive equipment under common 
arrangements.
    Although several urologists in a community could share this 
equipment, it is not clear if this cost-effective arrangement would be 
possible unless the physicians qualified as a group practice. Thus, the 
ability of smaller practices to join together to acquire this equipment 
is constrained by the statute, and the law will have the effect of 
increasing expenditures for this equipment because sharing will be 
virtually impossible.
    TUNA, TUMT and ILC are well suited for the office setting. If 
physicians have ownership interests in the equipment used to perform 
these services in the office, it is our understanding that the in-
office ancillary services exception would exempt these procedures from 
Stark II. However, we are concerned that these procedures--like ESWL--
may end up in the outpatient hospital services category by default if 
insufficient practice expense reimbursements force physicians to 
perform them in an outpatient setting. If such a situation does occur, 
TUNA, TUMT and ILC should be exempt from the definition of outpatient 
hospital services, since they are therapeutic procedures that do not 
pose a risk for overutilization.
    In closing, AUA believes that the federal physician self-referral 
laws have been rendered obsolete by the passage of time and the 
dramatic changes in the medical system. We urge the Subcommittee to 
consider substantial revisions, or repeal of, the self-referral laws 
this year.
            Sincerely,
                                      Lloyd H. Harrison, MD
                         President, American Urological Association

                                

Statement of the Association of American Medical Colleges

    On behalf of over 400 major teaching hospitals and 80,000 
faculty physicians, the Association of American Medical 
Colleges welcomes this opportunity to comment on possible 
changes to the Physician Self-Referral Statute, (section 1877 
of the Social Security Act, 42 USC section 1395nn). The May 13 
hearing held by the Health Subcommittee of the House Ways & 
Means Committee made clear that while the original intent of 
the Physician Self-Referral remains laudable, the law may no 
longer be appropriate to the way in which health care is 
provided. As will be explained below, this is particularly true 
for academic faculty practice plans where transfers of funds 
among various entities of the academic health delivery system 
(comprising the medical school, the faculty practice plan and 
the teaching hospital(s), and other entities such as research 
centers) are essential to support the core missions of 
teaching, research and patient care. The term ``faculty 
practice plan'' describes an academic physician group practice 
arrangement, whereby the group's physicians serve as the full-
or part-time clinical faculty of a medical school.
    Whether it be through a major overhaul of the law, focused 
amendments to the existing legislation, or a regulation, it is 
essential that the academic institutions and faculty physicians 
are not inadvertently harmed by the implementation of the 
Physician Self-Referral Law. The AAMC urges the Subcommittee to 
ensure either that the law is changed to allow faculty practice 
plans to function as they must, or to direct HCFA to create a 
broad exception for practice plans and their organizational 
partners.
    The remainder of these comments: (1) address the structure 
of faculty practice plans; (2) discuss the ways in which funds 
are transferred; and (3) briefly examine further problems 
created by the Self-Referral Law.
                An Exception for Faculty Practice Plans
    The AAMC wishes to ensure that physicians who are members 
of faculty practice plans will not violate the law. The AAMC 
believes that many faculty practice plans may not qualify for 
an existing or proposed exception, even though opportunities 
for program and patient abuse by faculty physicians are 
extremely limited. Due to the complexities of legal structures 
and monetary transfers among clinical departments in the 
practice plan as well as other medical center entities, the 
``group practice exception'' may not be available to many 
faculty practice plans. For instance, in the proposed 
regulation HCFA retains the requirement that to be considered a 
group for purposes of a number of exceptions, there must be 
only one legal entity. In academic settings, it is not uncommon 
to find multiple entities, each of which may be compensating 
the physician and to which the physician may make referrals for 
designated health services. Additionally, many contractual 
relationships exist between the faculty practice plan and other 
parts of what compose the academic health delivery system. 
Regardless of the legal structure, in most instances a full-
time faculty physician's entire practice occurs within the 
scope of the department (e.g., internal medicine or obstetrics/
gynecology) in which the physician practices.

Legal Structure of Faculty Practice Plans

    The AAMC has collected data on the various legal structures of 
faculty practice plans for many years. We find that a majority of 
faculty practice plans (47%) are not separate legal entities, but 
rather ``part of the medical school/university,'' not-for-profit legal 
organization. Other practice plans (38%) are legally structured as 
``separate,'' not-for-profit entities. The remaining medical schools, 
practice plans (15%) are organized legally in a variety of ways, 
including departmental professional corporations (PC's), for-profit 
limited liability partnerships, etc. Financially speaking, it is not 
unusual for there to be multiple fund transfers among the different 
entities that comprise today's integrated academic health delivery 
systems.

Transfers in an Academic Practice

    A further complicating factor in academic health delivery systems 
is that many funds transfers have the potential for creating unintended 
violations of the physician self-referral regulations due to the fact 
that such transfers may be direct or indirect compensation. Also, it is 
likely that referrals will be made for designated health services among 
specialty departments, the teaching hospital and perhaps other delivery 
sites within the system. The majority of medical schools use revenues 
and taxes to ``redistribute'' individual faculty revenues. It is 
typical for all income generated by the faculty to be pooled at the 
departmental (i.e., specialty) level and distributed as follows:
     A dean's tax is paid to support teaching, research and the 
infrastructure expenses. For example, there also may be cross-
subsidization by higher earning departments of lower-earning 
departments. Also, some medical schools will transfer funds to other 
organizations in the delivery system to support their teaching mission. 
This may include funds for a medical library, classroom space or 
special laboratories, for example.
     Faculty compensation. Typically the compensation of an 
academic faculty physician has three components: (1) the base salary is 
for teaching and research and generally is paid according to a 
contractually agreed amount; (2) the clinical supplement is for patient 
care and is usually divided among members of a department on a 
predetermined formula typically not related to productivity; and (3) an 
incentive bonus which generally is based on a predetermined 
productivity formula and is the smallest portion of the physician's 
total compensation. A majority of practice plan income funds components 
2 and 3 of a faculty physician's total compensation.
    In addition to funds transfers, there may be donations of equipment 
from one entity in the academic setting to another with the intent of 
supporting teaching, patient care and research. Such a transfer could 
be considered indirect compensation and thus may violate the Physician 
Self-Referral Law.
                            Incentive Plans
    A further problem with the law is that it does not allow 
for the use of incentive plans that are designed to reward 
desirable behavior such as minimizing the use of tests and 
other costly interventions without compromising the quality of 
care, customer satisfaction, peer evaluation of clinical 
performance, and support of colleagues and patients by promptly 
seeing patients when requested. Each of these behaviors is 
laudable and should be encouraged, even when it is related to 
designated health services. Such compensation plans should be 
allowed by amending the legislation or making provisions in the 
final regulations.
                               Conclusion
    HCFA has acknowledged that faculty practice plans are 
unique organizations that require supportive and special rules 
under the Medicare program. An upcoming Medicare carrier 
instruction (MCM 3060.3D) on the reassignment of physician 
payments under the Medicare program to be published soon by 
HCFA reinforces the proposition that faculty practice plans are 
unique and deserve special treatment. It was created because 
many faculty practice plans were unable to fit into the four 
exceptions already available and is available to any practice 
plan that meets the 9 criteria listed.
    The AAMC believes that among the unintended consequences of 
the Physician Self-Referral Law is the possibility that faculty 
practice plans will violate the law if they continue to 
transfer funds or find other ways in which to support the 
missions of teaching, research and patient care as they always 
have. Also of concern is that at a time when resources are 
diminishing, and all payers seeking to provide better quality, 
more efficient care, there will be no opportunity to reward 
physicians for providing just this type of care. As long as 
what occurs in an academic health delivery system--or 
elsewhere--does not increase the volume or value of referrals, 
or give Medicare or Medicaid beneficiaries care that is 
unnecessary or inappropriate, it should be permitted. The 
government has sufficient and varied enforcement tools to 
protect beneficiaries and to discipline providers who abuse the 
system. Even if major changes are not made to the Physician 
Self-Referral Law, it should not be used to restrict the 
activities of academic practices since they are the places 
providing care that is unavailable elsewhere, training the next 
generation of physicians and other health care practitioners, 
and conducting research that improves the care that is 
available to all.

                                

Statement of the Association of Freestanding Radiation Oncology 
Centers, Laguna Beach, CA

     I. The Association of Freestanding Radiation Oncology Centers
    The Association of Freestanding Radiation Oncology Centers 
(``AFROC'') is an association of over 150 freestanding 
radiation oncology centers located throughout the country. 
Freestanding radiation oncology centers are health care 
facilities organized and operated to provide high quality, 
cost-efficient radiation oncology services to patients in their 
communities outside the hospital setting.
    There are approximately 2,400 radiation oncologists 
practicing in the United States; about half work in 
freestanding facilities. Most freestanding radiation oncology 
facilities are owned by the radiation oncologists who provide 
professional services there. It is estimated that there are 
approximately 300 to 350 freestanding radiation oncology 
centers located throughout the country.
           II. Physician Self-Referral and Radiation Oncology
    While certain provisions of the existing physician self-
referral law undoubtedly require clarification and revision, 
AFROC believes that self-referral restrictions remain critical 
for radiation therapy services.
    Radiation oncologists work strictly on a referral basis. 
The cancer diagnosis is most commonly made by a surgeon, 
internist, or medical oncologist, who sends the patient to a 
radiation oncologist for examination and determination of 
whether radiation is an appropriate treatment. Where a 
referring physician has a financial interest in a radiation 
therapy facility, a serious conflict of interest exists which 
may interfere with the referring physician's judgment 
concerning the most appropriate center for the provision of 
radiation oncology services. A 1992 study in the New England 
Journal of Medicine illustrated the negative effects of this 
conflict of interest. The Journal study found that, where 
referring physicians had an ownership interest in radiation 
therapy facilities, the frequency and costs of treatment were 
40-60% higher than at facilities without referring physician 
ownership. Moreover, personnel of joint-ventured radiation 
therapy facilities were found to spend 18% less time in quality 
control activities than their counterparts at facilities 
without referring physician ownership.
    Current physician self-referral proscriptions are generally 
sufficient to limit the risk of over-utilization of radiation 
oncology services. Radiation oncologists themselves cannot 
engage in self-referral because radiation oncology is entirely 
dependent on referrals from the diagnosing physician, and the 
number of treatments that can be given to a particular area of 
the body is narrowly limited by effectiveness of dose on the 
one hand and tolerance of normal surrounding tissues on the 
other.
    For these reasons, AFROC continues to strongly support 
physician ``self-referral'' restrictions for providers of 
radiation therapy services.
                          III. Recommendations
    Existing Medicare-Medicaid anti-kickback statutes and safe 
harbor guidelines alone are inadequate to deter self-referral 
of radiation oncology services. Voluntary ethical guidelines 
are also insufficient to contain self-referral. Federal 
legislation and regulations explicitly banning self-referral 
for radiation therapy services are needed. Again, while some 
criticisms of Stark II are merited, the prohibition on self-
referral for radiation therapy remains valid and important.
    If Congress does modify the self-referral restrictions, we 
urge Congress to take great care to ensure that such 
modifications do not inadvertently preclude radiation 
oncologists from owning their own facilities. Because a 
radiation oncologist's ownership of his or her own facility 
does not raise the types of conflicts of interest issues raised 
by medical oncologist or surgeon ownership of these facilities, 
radiation oncologists' ownership arrangements are currently 
exempt from the physician self-referral restrictions. This 
exemption should remain intact, with minor technical revisions. 
For example, the current exemption applies only where a 
radiation oncologist supervises the radiation oncology services 
that he or she prescribes and does not, by its terms, apply 
where these services are supervised by a member of the same 
group practice as the referring radiation oncologist. This 
provision should be clarified to enable the supervision to be 
provided by a group practice member.
    We would be delighted to help draft appropriate amendments, 
but believe that the basic self-referral prohibitions should 
remain applicable to radiation oncology services. If you have 
any questions concerning physician self-referral or AFROC, 
please do not hesitate to call AFROC's President, Jeffrey 
Lopez, M.D., at (800) 225-8161.

                                

Statement of the Federation of American Health Systems

    The Self-Referral Statute is an extremely complicated law 
that consumes a great deal of resources to analyze and 
implement both for the government and for providers. It is an 
anachronism in today's health care environment. It was drafted 
to regulate physician relationships in the fee-for-service 
world and makes little sense in the current health care 
environment. Because of its rigidity it cannot be adapted to 
meet the changing shape of current and future health care.
    The Self-Referral Statute has had a marked impact on the 
health care marketplace. It has created an uneven playing field 
between types of providers whose services fall within the 
designated health care services covered by the law and 
providers whose services do not. Furthermore, providers covered 
by the Self-Referral Statute have had to struggle to structure 
their arrangements to qualify for an exception.
    As a result, the Statute has discouraged more innovative 
arrangements that could lead to reduced costs or improved 
quality simply because they cannot fit the exact specifications 
of the exceptions, and therefore are prohibited.
    The Statute has created a great deal of confusion, stemming 
not only from the complexity of the law itself, but also from 
its overlap with other health care statutes, such as the Anti-
Kickback Statute, state laws, etc. Health care providers have 
ended up with two (and sometimes more) different approaches and 
two (and sometimes more) different sets of requirements 
regulating the same conduct or arrangement.
    For example, both the Anti-Kickback Statute and the Self-
Referral Statute regulate financial relationships between 
doctors and hospitals in situations where the doctors are 
making patient referrals to the hospital. However, they take 
two different approaches. The Anti-Kickback Statute starts with 
a presumption that a referral is not problematic unless it is 
determined that the arrangement provides an improper 
inducement. It has safe harbors that grant approval of certain 
arrangements under specified circumstances, but failing to meet 
a safe harbor does not necessarily mean the referral is 
prohibited or subject to penalty.
    On the other hand, the Self-Referral Statute starts with a 
presumption that absolutely prohibits referrals by physicians 
with financial relationships with the hospital, unless the 
parties can fit their arrangements precisely within the 
enumerated exceptions. Therefore, what you find is that for any 
given arrangement, there may be both a safe harbor under the 
Anti-Kickback Statute and an exception under the Self-Referral 
Statute, but there are slightly different criteria set forth in 
each. This is true, for example, with respect to personal 
service arrangements and employment relationships.
    We are concerned that because of the Self-Referral Law's 
presumption prohibiting referrals in all situations which do 
not fit into an exception, numerous standard, non-abusive 
arrangements are prohibited and subject providers--sometimes 
for very technical reasons--to harsh penalties. Unlike the 
Anti-Kickback Statute, the Self-Referral Statute is not intent-
based and providers can violated it unwittingly. There is no 
allowance made for minor, insignificant variations or 
inadvertent noncompliance with the statute's rigid 
requirements, thus potentially subjecting innocent parties to 
devastating civil monetary penalties.
    For example, there are exceptions for leases and personal 
services contracts. These require, among other things, signed, 
written agreements with a term of at least one year. If a 
hospital leases a medical office to a physician for a five year 
term and it expires while the parties are negotiating the 
renewal terms, then the lease no longer complies with the law, 
even if the physician continues to pay fair market rent during 
the period between when the original lease expires and the 
renewal is signed. In such a circumstance, every referral made 
by the physician during that interim period would technically 
be a violation of the Self-Referral Statute and would subject 
the physician and hospital to liability for return of all 
payment received from Medicare for those referrals. In 
addition, civil money penalties of $15,000 for each service 
billed in violation of the Self-Referral Statute would also 
apply, not to mention the potential for a civil and/or criminal 
False Claims Act action, initiated by either a government 
representative or a qui tam relator. This seems to be a very 
harsh result for a minor oversight.
    Similarly, a completely legitimate hospital medical 
director agreement might inadvertently (and unknown to the 
physician) not be signed by the hospital CEO until one month 
after the physician begins to provide services and receive 
payment under the agreement. Technically, the medical director 
agreement would not meet an exception during the first month. 
Any referrals made by the physician that month would violate 
the law, and if the hospital billed for them, substantial 
penalties could be imposed. Certainly these types of 
inadvertent violations do not raise the issues that the Self-
Referral Statute was meant to address and should not be subject 
to the Self-Referral Statute's harsh penalties.
    There are also numerous instances in which parties are 
unable to enter into reasonable, legitimate arrangements, 
simply because no exception is available. If a physician moves 
into a new area six months before the remodeling of the 
physician's permanent office space is scheduled for completion, 
the physician would not be able to enter into a six month 
office lease with a nearby hospital to meet the physician's 
interim needs, even if the lease were legitimate and 
commercially reasonable in every respect, because of the one 
year requirement in the lease exception. Also, physicians (and 
their immediate family members) may not sell supplies or other 
items to a hospital, even on commercially reasonable terms, at 
fair market prices, because there is no exception in the law 
for such arrangements (although there is an exception that 
permits physicians to purchase items).
    The confusion caused by the Self-Referral Statute has been 
compounded by the delay in publication of implementing 
regulations.
                     Specific Proposals for Reform
    In light of these concerns regarding the difficulties of 
analyzing and implementing the Self-Referral Statute, FAHS 
would like to work with the Chairman, Congressman Stark and 
others on the Committee and throughout Congress to consider 
potential reforms. We will discuss some of the issues we are 
exploring below, going from the broadest based reforms to the 
more technical. Several of these proposals were contained in 
the Balanced Budget Act of 1995.
       Repeal Application of Statute to Compensation Arrangements
    The Anti-Kickback Statute provides the government with 
ample firepower to combat improper compensation arrangements. 
Any payment intended to induce the referral of patients for the 
provision of any goods or services reimbursable by a federal 
health care program is a crime under the Anti-Kickback Statute. 
42 U.S.C. 1320a-7b(b).
    In addition, the Balanced Budget Act of 1997 added a civil 
basis for liability, providing for the imposition of 
substantial civil monetary penalties for violations of the 
Anti-Kickback Statute. With the addition of these civil 
penalties, the government can now prove its case under the 
Anti-Kickback Statute by a preponderance of the evidence, thus 
giving enforcement agencies added leverage in enforcing this 
statute against parties to abusive compensation arrangements.
    We know this was a provision included by the Chairman in 
the Balanced Budget Act of 1995 (BBA 95). Given the addition of 
the new civil monetary penalty for violations of the Anti-
Kickback Statute and in light of the common purpose of the 
Self-Referral Statute and the Anti-Kickback Statute--to 
prohibit and penalize improper inducements to make referrals--
we believe there is even greater justification for repealing 
the Self-Referral Statute's application to compensation 
arrangements today than there was during BBA 95.
    In addition, the compensation provisions of the Self-
Referral Statute are clearly the area that has caused the 
greatest amount of confusion in implementation. For example, if 
you look at the proposed rule, you will note that the great 
majority of that voluminous rule relates to tortured 
interpretations of the compensation provisions. Thus, it seems 
that the Self-Referral Statute is much more effective at 
accomplishing its purpose, without creating unnecessary 
complications and confusion for the industry and those who 
regulate it, when it is limited to ownership/investment 
interests.
    To the extent that Congress would repeal the compensation 
provisions, a number of the more specific proposals below would 
no longer be needed.
                     Clarify Reporting Requirements
    There is an urgent need to clarify the reporting 
requirements under the Self-
Referral Statute. HCFA initially interpreted the Self-Referral 
Statute as requiring Medicare providers, such as hospitals, to 
report their financial relationships with physicians only if 
they did not meet an exception under the law. However, in the 
proposed rule, HCFA contemplates a requirement that providers 
be prepared to report all their financial relationships with 
physicians (and their relatives)--whether or not they comply 
with an exception--if the provider ``knows or should know'' 
about the relationship ``in the course of prudently conducting 
business.''
    This requirement would be overwhelming and would require 
providers to devote enormous time, effort and resources into 
tracking hundreds, thousands or even tens of thousands of 
completely lawful, benign relationships with shareholders, 
bondholders, vendors, services providers, employees, landlords, 
tenants, etc., each of whom might be a relative of a physician 
who refers to the provider. Even then, a provider could be 
found in violation of the law for failing to report a single, 
innocuous financial relationship that it was unaware if the 
provider ``should have'' known of the relationship.
    There has been some suggestion by HCFA that it will not 
require reporting of information, and providers need only 
retain on file information to respond to a spot audit, at least 
until a final rule is issued. Unfortunately, providers will 
have problems whether HCFA ultimately requires providers to 
report all of this information, or simply track it, or even 
limits the reporting requirement to non-compliant financial 
relationships.
    A requirement to report all financial relationships with 
physicians (or their relatives) is overwhelming and infeasible 
at worst, and extremely time consuming, burdensome and costly 
at best. On the other hand, a requirement to report to HCFA 
those financial arrangements with physicians (or their 
relatives) that do not meet a Self-Referral Statute exception, 
requires a clarity of understanding about what complies with 
and what violates the Self-Referral Statute that has been 
unachievable, even for the government. In addition, there is an 
inherent unfairness in mandating that people report their own 
violations. Certainly, it is inconsistent with the concept of 
voluntary disclosure, which the health care community believes 
holds great potential to revolutionize and facilitate self-
policing, if a stronger process can be developed. Furthermore, 
providers would rightfully be concerned that reports of non-
compliant arrangements, even those which are only technical 
violations or even beneficial arrangements which just can't fit 
neatly into an existing exception, would then serve as a basis 
for assessing fines and penalties, if not as a beacon 
attracting other investigation and prosecution.
    A much clearer and more rational policy could be 
established if the compensation portion of the Self-Referral 
Statute is repealed, since then entities would be faced with 
the more manageable task of reporting only ownership and 
investment interests (although presumably there should be some 
minimum threshold, such as 5% ownership, to avoid the 
complications involved in reporting every stockholder in a 
publicly traded company).
                             Effective Date
    Change the effective date for ``Stark II'' to one year 
after the regulations become final. It is unfair to enforce the 
Self-Referral Statute before final regulations are issued, 
given the enormous confusion caused by the statute (which HCFA 
itself notes is ambiguous and contains many undefined terms); 
the length of time it has taken to develop and publish proposed 
regulations; the enormous volume of comments submitted in 
response to the draft regulations (because they raise almost as 
many questions as they answer); and the severe penalties 
imposed even for innocent violations of the statute by well-
meaning persons who misinterpreted ambiguities in the law.
    Also, once the regulations are final, providers will need 
time to restructure or unwind arrangements that they believed 
complied with the statute, but which do not meet any exception 
in the regulations as finally published or in the statute as it 
is ultimately interpreted in the final regulations.
                      Fair Market Value Exception
    If the Self-Referral Statute continues to apply to 
compensation arrangements, then a new ``fair market value 
compensation'' exception should be added to the statute. The 
new exception should be designed to protect all compensation 
arrangements for items or services that meet certain minimum 
requirements. The exception should protect any legitimate, 
commercially reasonable compensation arrangement that is set 
forth in a written agreement, signed by the parties, which 
describes the items and services provided, establishes a 
timeframe for the agreement, and provides for compensation that 
is consistent with fair market value contract, without taking 
referrals into account.
    HCFA included such an exception in its proposed rule, 
although one of the requirements included in HCFA's version 
introduces an element of uncertainty that would undermine 
providers' ability to rely on the exception. Specifically, the 
proposed rule requires that the arrangement comply with the 
Anti-Kickback Statute. The Anti-Kickback Statute, as described 
above, is an intent-based statute. Requiring compliance with 
the Anti-Kickback Statute introduces the concept of intent into 
the Self-Referral Statute, thus casting doubt on the exception. 
For example, a hospital could innocently enter into an 
apparently legitimate compensation arrangement with a physician 
that meets all of the other requirements of HCFA's proposed 
exception. However, if the physician (unknown to the hospital) 
has a bad ``intent'' under the Anti-Kickback Statute, then the 
hospital, even if it has no bad intent, and no way of knowing 
that the physician had a bad intent, would be unable to use the 
exception under the Self-Referral Statute.
    Furthermore, until the proposed rule becomes final (which 
will be at least a year from now), physicians and providers 
have no general compensation exception to protect their fair, 
legitimate, and reasonable arrangements that do not meet any of 
the other, specific exceptions. We believe this is such a 
crucial exception that it should be a statutory, rather than a 
regulatory provision, especially in light of the potential 
delay involved in waiting for finalization of the regulation.
    Notwithstanding the potential value of this type of 
exception, it is important to recognize that it is not a 
reasonable alternative to actually repealing the Self-Referral 
Statute's application to compensation arrangements. This 
exception, for example, would not protect legitimate unwritten 
compensation arrangements. Also, providers would continue to 
struggle with one of the most vexing issues under the Self-
Referral Statute -what services and items, which often are not 
covered by written agreement, must be counted as 
``compensation'' to physicians (e.g., free parking, coffee, 
computer or library access, training, etc).
                         Physician Recruitment
    The Physician Recruitment Exception currently requires the 
physician to ``relocate to the geographic area served by the 
hospital.'' However, in certain circumstances, practitioners 
establishing new practices might already be within a hospital's 
geographic area. Hospitals should be permitted to recruit such 
physicians so long as they do not have an existing patient base 
and compensation does not vary based on the volume or value of 
referrals. At a minimum, a hospital should be permitted to 
recruit a resident or fellow who is already in the hospital 
service area, but does not have any private practice and wishes 
to start one in that geographic area. In such cases, there is 
little likelihood of abuse, because the physician, although 
practicing medicine in the area, is in the same position as a 
physician from outside the area in that he or she has no 
existing patients to refer to the hospital.
    The current wording of this exception penalizes entities 
who accept responsibility for training residents and fellows, 
since these residents and fellows cannot subsequently be 
recruited by the hospital that trained them, and can only be 
recruited by more distant hospitals. This creates great 
inefficiency, with hospitals recruiting residents from other, 
distant hospitals, because they cannot recruit local residents, 
even though the local residents might prefer to stay where they 
did their residency. This requirement also has a negative 
impact on smaller towns and more rural areas, because they are 
more likely to find a good match with residents, fellows and 
physicians who have spent time in that town or area and know 
they will like it there.
                      Hospital Ownership Exception
    Clarify that the exception for physician ownership of a 
hospital applies to all designated health services provided by 
the hospital, not just hospital services (i.e., if the hospital 
also owns a clinic, a home health agency, or has a distinct 
part skilled nursing facility, etc., than a physician with an 
ownership interest in the hospital that meets the Self-Referral 
Statute exception may also refer to the hospital for these 
other services). Although the exception in the Self-Referral 
Statute seems to apply to all services provided by a physician-
owned hospital, HCFA has construed it more narrowly in the 
proposed rule, as permitting referrals for hospital services, 
but not other services. There is no policy reason for this 
distinction, and puts physician-owned hospitals at an unfair 
disadvantage.
                           Federal Preemption
    Mandate federal preemption of state law in this area. Not 
only must providers comply with numerous complex federal 
statutes regulating their financial relationships with 
physicians and others, many states have also adopted physician 
self-referral statutes. These state statutes create a set of 
duplicative, overlapping, and confusing requirements that 
substantially increase the time, effort and expense required to 
comply with the law, without providing commensurate benefit to 
the public in protecting against abusive financial 
arrangements.
                   Anti-Kickback Statute Safe Harbors
    Another important reform to the compensation provisions 
would be to establish a statutory exception in the Self-
Referral Statute for arrangements that fall within a safe 
harbor to the Anti-Kickback Statute. Under the Anti-Kickback 
Statute the safe harbors are drawn quite narrowly with the 
understanding that just because you are not in the safe harbor 
does not mean your conduct violates the Anti-Kickback Statute, 
it just means you will not receive safe harbor protection. 
Arrangements that are able to qualify for the safe harbors have 
met a very high standard and therefore deserve protection under 
the Self-Referral Statute as well. This becomes particularly 
important in light of the fact that there are often safe 
harbors under the Anti-Kickback Statute and exceptions under 
the Self-Referral Statute that deal with the same issues and/or 
arrangements, but due to their separate development, and 
interpretation by different agencies (OIG versus HCFA), they 
contain differences which make them hard to reconcile. It would 
also be very beneficial for providers and physicians who are 
trying to respond to the shift to managed care to be able to 
rely on the new shared risk exception under the Anti-Kickback 
Statute for purposes of the Self-Referral Statute also.
               Hospital Inpatient and Outpatient Services
    Hospital inpatient and outpatient services should be 
removed from the list of designated health services. By and 
large, the other designated health services were all identified 
in studies that demonstrated increased utilization when 
physicians had a financial relationship with the provider of 
the service. To our knowledge, no such studies demonstrate a 
correlation for hospital services in general. Moreover, in most 
cases, there is little risk of over-utilization of hospital 
services, which tend to be emergency services, major surgery, 
or similar services of the type that are not generally over-
used.
    Thank you for the opportunity to provide our comments for 
the record. We appreciate the Subcommittee's interest in this 
subject and believe reform is vitally needed in order to 
clarify and better target the rules at true fraud.

                                

Statement of Dwight S. Cenac, Home Care Association of America, 
Jacksonville, FL

    Mr. Chairman and Members of the Committee: Thank you for 
the opportunity to offer written testimony on the critical 
subject of Medicare Self-Referral Laws. My name is Dwight Cenac 
and I am the Chairman of the Board of Home Care Association of 
America (HCAA). HCAA represents several hundred freestanding 
home health agencies across the United States.
    Mr. Chairman, as I did in my recent written testimony 
regarding the Medicare Coverage Decisions and Beneficiary 
Appeals, let me again urge you to schedule hearings (perhaps in 
June) regarding the issue of the Interim Payment System for 
home health care. At last count, over 2000 home health agencies 
have been forced out of business, causing the patients of those 
agencies to be forced into more costly nursing homes, more 
costly emergency rooms, or worse, left at home without 
receiving necessary patient care.
    While the GAO and others are conducting studies pertaining 
to access to home health services, this committee must address 
the fact that the BBA of 1997 has placed an unfunded mandate on 
the states. By the federal government placing a per-beneficiary 
cap on home health care, agencies across the U.S. are filing 
for bankruptcy and discharging their patients. Clearly this was 
not the intent of Congress.
    In addition, due to recent press reports regarding privacy 
issues pertaining to the OASIS data collection effort, it seems 
possible that HCFA will not be able to comply with implementing 
PPS for home health care as mandated on October 1, 2000. It is 
imperative that you ask HCFA Administrator Nancy Ann Min-
DeParle if indeed HCFA will be able to implement PPS for home 
health care on October 1, 2000. It would also be beneficial to 
ask Administrator Min-DeParle how the implementation of PPS for 
skilled nursing is progressing.
    Mr. Chairman, I understand that your primary concern is 
adequate access for doctor-certified Medicare beneficiaries, 
however, it is important to understand that the most recent CBO 
numbers show that home health care has been cut $48 billion 
dollars over 5 years. This is far greater of a cut than 
Congress intended. On behalf of the members of HCAA I urge you 
hold hearings in the very near future on home health issues 
including the viability of a co-pay on home health, the impact 
of the IPS on home health agencies, and the recent data from 
the CBO that $48 billion has been cut from the home health 
benefit.
    It is also frustrating for me to hear from members of 
Congress to say that Congress is powerless over HCFA. It is 
time for Congress to conduct serious oversight hearings on HCFA 
and hold to HCFA accountable for their failures. The MTS 
computer debacle; the IPS for home health care that has forced 
thousands of honorable home health agencies out of business; 
the ill-conceived PPS for skilled nursing; and the privacy 
issue regarding data collection pertaining to OASIS (which is 
so severe, that Vice-President Gore is now involved), are just 
a few examples of a HCFA run amok.
    I would appreciate the opportunity to personally testify 
before this committee on home health issues in the future.
                   I. The Stark Laws Are Not Obsolete
    Mr. Chairman, with all due respect, I find this paragraph 
from your advisory to be humorous:

          The guiding principle for the self-referral laws was to 
        prevent physicians from inappropriately referring patients 
        based on the potential for financial gain. Yet, the health care 
        delivery system has changed profoundly since passage of the 
        first self-referral laws. Since 1989, the health care system 
        has rapidly moved away from the traditional fee-for-service way 
        of delivering medical care. Today, the health care system has 
        moved towards a more coordinated, integrated approach.
    ``Since 1989, the health care system has rapidly moved away from 
the traditional fee-for-service way of delivering medical care.'' Mr. 
Chairman, thousands of Medicare patients have been displaced because 
patients are rapidly moving AWAY from HMO's, and other ``brainchild's'' 
(PHO's PSO's and Medicare-Choice plans) of the Administration and the 
Republican leadership.
    ``A more coordinated, integrated approach?'' Mr. Chairman, that 
sounds strangely familiar to the Clinton big-government plan that 
failed in 1992/1993! If you recall, the Clinton plan was to put our 
nation's health care (\1/7\th of our economy) into the hands of 7 
``regional alliances.'' These alliances would be in charge of 
distributing Medicare dollars to providers for services rendered. Mr. 
Chairman, as a registered Republican, I urge you and your Republican 
colleagues to reject this warmed over version of the Clinton one-size-
fits-all big-government take-over of our health care system!
    Mr. Chairman and Members of this Committee, the question is, have 
HMO's, PHO's and the Medicare-Choice programs been a success The answer 
is ``no.'' Thousands of Medicare beneficiaries have been displaced 
because quite frankly, the profit margin for HMO's was not as great as 
originally predicted. Because of this fact, some HMO's opted not to 
renew their Medicare contracts because HCFA would not allow them to 
make financial adjustments to make the HMO even more profitable. This 
clearly shows me that the primary motive for some HMO's may be PROFIT, 
not patient care! This is the danger of having stockholders holding 
company executives accountable for return on investment!
    Regarding PHO's and PSO's, I have read news accounts here in my 
state of Florida that these ``brainchild's'' are also not profitable, 
that doctor's, hospital's and other entities are having difficulty 
keeping doctors in the programs, and patients are having difficulty 
getting access to specialists It saddens me to hear, ``If we only give 
them more money'' or, ``HCFA hasn't educated beneficiaries well 
enough.'' The truth is that in most cases, Medicare beneficiaries 
prefer the traditional fee-for-service Medicare program Sure, when 
beneficiaries are well, HMO's are very attractive, and yes, they 
provide much needed services (prescription drugs) that are not covered 
by fee-for-service Medicare, but when a Medicare beneficiary is sick, 
seriously sick, the traditional fee-for-service Medicare plan seems to 
be the plan of choice!
    Mr. Chairman, allow me to refer you and your colleagues to an OIG 
``Special Fraud Alert'' entitled, ``Hospital Incentives to 
Physicians.''
    In this OIG Special Fraud Alert, it states,

          The Office of Inspector General has become aware of a variety 
        of hospital incentive programs used to compensate physicians 
        (directly or indirectly) for referring patients to the 
        hospital. These arrangements are implicated by the anti-
        kickback statute because they can constitute remuneration 
        offered to induce, or in return for, the referral of business 
        paid for by Medicare or Medicaid. In addition, they are not 
        protected under the existing ``safe harbor'' regulations.
          These incentive programs can interfere with the physician's 
        judgment of what is the most appropriate care for a patient. 
        They can inflate costs to the Medicare program by causing 
        physicians to overuse inappropriately the services of a 
        particular hospital. The incentives may result in the delivery 
        of inappropriate car to Medicare beneficiaries and Medicaid 
        recipients by inducing the physician to refer patients to the 
        hospital providing financial incentives rather than to another 
        hospital (or non-acute facility) offering the best or more 
        appropriate care for that patient.

    Mr. Chairman and members of the subcommittee, in this 
Special Fraud Alert, there are several examples of potentially 
unlawful activity which are outlined:
     Payment of any sort of incentive by the hospital 
each time a physician refers a patient to the hospital
     The use of free or significantly discounted office 
space or equipment (in facilities usually close to the 
hospital)
     Provision of free or significantly discounted 
billing, nursing, or other staff services
     Guarantees which provide that, if the physician's 
income fails to reach a predetermined level, the hospital will 
supplement the remainder up to a certain amount
     Payment of the cost of a physician's travel and 
expenses for conferences
     Payment for services (which may include 
consultations at the hospital) which require few, if any, 
substantive duties by the physician, or payment for services in 
excess of the fair market value of services rendered
    Mr. Chairman, it is clear that this OIG Special Fraud Alert 
gives significant reasons why the Stark laws (and other laws to 
prevent undue costs to the Medicare program) must remain 
intact. In fact, it is imperative that laws pertaining to 
hospital self-referrals regarding home health care must be 
enforced Hospitals have a ``captive-patient'' when it comes to 
home health referrals. In some cases the hospital discharge 
planner may ``steer'' a relatively healthy Medicare patient 
into the hospital-based home health agency, while allowing the 
sicker, more medically complex home health patient into a 
freestanding agency in the community This helps the hospital 
financially under the severely flawed Interim Payment System 
(IPS) for home health care that was included in the BBA of 
1997.
    Mr. Chairman, an OIG report entitled ``Hospital Stays for 
Medicare Beneficiaries Who are Discharged to Home Health 
Agencies,'' dated August 1998 (OEI-02-94-00321) also discusses 
the self-referral issue. Under the paragraph entitled, 
``Discharge Planning Referral'' it states:

          Medicare requires hospitals to have a discharge planning 
        process that identified patient's post-hospital needs soon 
        after admission and puts in place a plan that will ensure a 
        safe discharge from the hospital. Section 1802 of the Social 
        Security Act seeks to ensure that free choice is guaranteed to 
        all Medicare patients in choosing a post-hospital provider, 
        such as a home health agency. When there is hospital ownership 
        of post-hospital services, it raises concerns about the 
        discharge planning process. First, will patients be given the 
        freedom to choose a post-hospital provider in an environment 
        where the hospital discharge planner works for an organization 
        which also owns post-hospital services? And secondly, in an 
        effort to maximize Medicare reimbursement, will hospitals use 
        the discharge planning process inappropriately to shorten 
        patient hospital stays and transfer patients to post-hospital 
        services they own?

    One topic that the OIG overlooks in this report is the 
influence that the physician has in this important process. 
Doctor's certify the patient for home health services. If a 
doctor has a financial interest in the hospital, if bonuses are 
tied to hospital profit, it may be a strong incentive for the 
doctor to refer patients to the hospital-based home health or 
skilled nursing facility.
    Mr. Chairman and members of this subcommittee, I sincerely 
hope that your intention is to maintain and enforce laws to 
prohibit self-referrals by doctors and hospitals, not to loosen 
such laws. It is my concern that under the guise of Medicare-
Choice, an attempt will be made to loosen self-referral laws. I 
hope that members of this subcommittee make such self-referrals 
laws more clear and strongly enforce 42 CFR 424.22 pertaining 
to hospital self-referrals.
    In conclusion, I deeply appreciate the opportunity to share 
my thoughts with the subcommittee on the critical issue of 
self-referrals. If members of Congress are successful in 
weakening the Stark self-referral laws, you will see the 
results in higher Medicare outlays. I urge you to inform the 
proper authorities to enforce current Stark laws and I urge 
this committee to avoid weakening these appropriate laws.
    Once again, I would welcome the opportunity to personally 
testify before this committee on home health care issues in the 
future.

                                

Statement of the Joint Council of Allergy Asthma and Immunology, 
Palatine, IL

    Mr. Chairman: The Joint Council of Allergy, Asthma and 
Immunology (``JCAAI'') appreciates this opportunity to submit 
testimony on the effect of the proposed rule implementing the 
Stark II law. JCAAI is an organization sponsored by the 
American Academy of Allergy, Asthma and Immunology and the 
American College of Allergy, Asthma and Immunology. Its members 
are over 4,000 physicians board-certified in allergy, asthma 
and immunology. JCAAI members practice in a wide variety of 
arrangements including solo practices, single-specialty groups, 
multi-specialty groups and large university faculty practice 
plans.
          1. Applicability of Law to Pulmonary Function Tests
    JCAAI is concerned that the proposed rule inadvertently 
includes pulmonary function tests or spirometry as a 
``designated health service.'' While pulmonary function tests 
or general diagnostic tests are not defined as designated 
health services by the Physician Referral statute (Stark law), 
physical therapy services are included in such term. HCFA is 
proposing to define ``physical therapy services'' with 
reference to another Medicare regulation which describes the 
types of services which are covered by Medicare in 
comprehensive outpatient rehabilitation facilities (``CORFs''). 
That regulation (42 C.F.R. Sec. 410.100(b)) defines ``physical 
therapy services'' to include:

          Testing and measurement of the function or dysfunction of the 
        neuromuscular, musculoskeletal, cardiovascular, and respiratory 
        systems, (emphasis added).

    Pulmonary function tests are tests for the measurement of 
the function of the respiratory system. However, they have 
nothing to do with physical therapy. Allergists specializing in 
the care of asthma patients frequently perform these tests in 
their office to determine if a patient has asthma and the 
severity of the asthma. The test itself is not therapeutic in 
nature. Nor does it result in a referral of the patient for 
physical therapy.
    We do not believe that Congress intended that pulmonary 
function tests be included in the definition of ``physical 
therapy services.'' In fact, we note that Congress specifically 
deleted the language in the 1993 law which defined designated 
health services to include radiology ``and other diagnostic 
tests.'' That provision now covers only certain types of 
radiology tests including MRIs, CAT scans and ultrasound. There 
is nothing in the law which suggests Congress intended to treat 
pulmonary function tests as a ``designated health service'' for 
purposes of the Stark law.
    We have recommended that HCFA modify the definition of 
``physical therapy services'' to delete the reference to 
respiratory tests in our comments on the Stark II rule and if 
HCFA did not follow this recommendation we would urge Congress 
to so provide through amendments to the statute.
              2. Applicability of Stark II Law to Antigens
    Antigens are prepared by physicians in solution to be used 
by injection to provide immunotherapy to patients with a 
diagnosis of significant allergic reactions. Antigens are 
extracts of pollens or venoms, for example, and are defined in 
the Food Drug and Cosmetic Act as biologicals not drugs. 
Historically, antigens have not been prescribed for preparation 
and provision by pharmacies. We do not believe Congress 
intended to include antigens as outpatient prescription drugs 
and therefore as covered designated health services. There is 
also no evidence of abuse by physicians of utilizing antigens 
and immunotherapy which could justify an extension of this 
definition of outpatient prescription drugs to antigens.
    In the Stark II proposed regulations of January 1998, 
however, HCFA states, in its discussion of the definition of 
``outpatient prescription drugs, that this category of 
designated health services could include antigens covered under 
section 1861(s)(2)(G). HCFA's test for whether a drug or 
biological covered by Medicare on an outpatient basis is 
included in the definition of ``outpatient prescription drugs'' 
is whether the product could be obtained from a pharmacy with a 
prescription.
    Although current practice is for the physician to prepare 
antigens for allergy immunotherapy in the office, we believe is 
likely that in the future they may also be provided through a 
pharmacy under a physician's prescription especially as managed 
care organizations and large integrated health delivery systems 
seek to consolidate the delivery of services.
    In this regard, we note that, in accordance with section 
1861(s)(2)(G), Medicare only covers antigens which are prepared 
by a physician. That provision of the law provides coverage for 
antigens as follows:

          (G) antigens (subject to quantity limitations prescribed in 
        regulations by the Secretary) prepared by a physician, as 
        defined in section 1861(r)(1), for a particular patient, 
        including antigens so prepared which are forwarded to another 
        qualified person (including a rural health clinic) for 
        administration to such patient, from time to time, by or under 
        the supervision of another such physician;

    Thus, even if antigens were available by prescription from 
an institutional pharmacy, they would not be covered by 
Medicare. For this reason, we do not believe the Stark 
prohibitions would apply since the Stark law only prohibits 
referrals ``for which payment otherwise may be made under this 
title. . . .'' Section 1877(a)(1)(A).
    However, it is possible that state Medicaid agencies would 
elect to cover antigens furnished by a pharmacy even though 
they would not be covered by Medicare. HCFA states in the 
commentary to the regulations that a physician has made a 
referral if he or she requests a Medicaid covered designated 
health service that is ``comparable to a service covered under 
Part B of Medicare. . . .'' (January 9 Federal Register at p. 
1692.) However, HCFA also states that the State Plan's 
definition of a service will take precedence even if the 
definition will encompass services that are not covered under 
Medicare. (January 9 Federal Register at p. 1673.) These 
statements seem inconsistent. It is unclear how HCFA would 
treat antigens furnished by a pharmacy which are covered under 
a state plan.
    In order to promote consistency in the application of the 
Stark law to Medicare and Medicaid and to avoid confusion, we 
believe the policy with respect to Medicaid should conform to 
Medicare. Thus, since antigens would not be covered by Medicare 
if provided by a pharmacy, we believe they should not be 
treated as a designated health service for Medicaid purposes 
even if provided by a pharmacy.
    We have therefore requested that HCFA either establish an 
exception in the regulatory definition of ``outpatient 
prescription drugs'' for antigens covered under Section 
1861(a)(2)(G) or clarify in the commentary to the final Stark 
II regulation that even if antigens were to become available 
from pharmacies under a physician prescription, they would not 
be considered designated health services for purposes of the 
Stark law because they would not be covered by Medicare Part B.
    Further, with respect to Medicaid, we have asked that HCFA 
clarify that if a Medicaid agency were to cover antigens 
furnished through a pharmacy, this would not be considered a 
``designated health service'' because it is not comparable to a 
service covered by Medicare.
    Without this change in the regulation or clarification, 
there is likely to be confusion as to whether antigens are a 
designated health service for purposes of both Medicare and 
Medicaid.
    If these changes are not adopted by HCFA, we would urge 
that Congress specifically include such clarifications in 
Medicare legislation this year.
                    3. Definition of Group Practice
    We are also concerned about the definition of group 
practice and its implications for the ways that physicians in 
groups deal with compensation. HCFA's proposed definition of 
group practice fundamentally alters the basic way that 
physicians in group practice organize themselves economically. 
The new ``unified business test'' which is not found in the 
statute, puts at risk many longstanding and legitimate 
practices. Its purpose seems to be to prevent practices from 
qualifying as groups under Stark if they treat different 
specialties, departments or office sites as separate cost 
centers. There is nothing in the law or legislative history 
which suggests that Congress believed a group was not a ``true 
group'' simply because expenses are allocated by department or 
by physician.
    Moreover, it is unclear from the commentary to the proposed 
rule which types of compensation methodologies are permitted 
and which are prohibited. Although the statute clearly permits 
productivity bonuses, HCFA appears to have interpreted it in a 
way which renders it almost meaningless. The agency's position 
is that designated health services which are personally 
performed by the physician must be treated as profits of the 
entire group. We do not believe Congress intended that 
physicians could not be compensated for services they perform 
personally.
    Further, we do not believe the law requires that, in order 
to meet the definition of group practice, group practice 
revenue cannot be distributed based on cost centers or 
departments. We urge that HCFA carefully consider the 
disruptive effects these aspects of the proposed rule will have 
on legitimate and longstanding group practice arrangements.
    If HCFA finalizes the proposed rule without change, we 
would urge Congress to pass legislation eliminating the unified 
business test recommended by HCFA and clarifying permitted 
payment methodologies as we have recommended.

                                

Statement of the Medical Group Management Association

                              Introduction

    Mr. Chairman and Members of the Subcommittee, the Medical 
Group Management Association (MGMA) is pleased to submit this 
statement regarding the Medicare self-referral law and its 
regulations. MGMA members confront the complexities and 
ambiguities surrounding the Medicare self-referral law and its 
accompanying regulations on a daily basis.
    MGMA is the oldest and largest organization representing 
physician group practices with more than 8,300 health care 
organizations nationwide in which over 209,000 physicians 
practice medicine. MGMA's membership reflects the full 
diversity of physician organizational structures today, 
including world-renowned tax-exempt integrated delivery 
systems, taxable multi-specialty clinics, small single 
specialty practices, hospital-based clinics, academic practice 
plans, integrated delivery systems, management service 
organizations, and physician practice management companies.
    While physicians understand that they must comply with the 
self-referral statute, it is the medical practice managers who 
most often are responsible for the unenviable task of trying to 
understand the complexities of the law to ensure proper 
compliance. In fact, many small and medium practices, which 
comprise a vast majority of overall group practices, do not 
have a formally designated compliance officer. Therefore, in 
addition to the responsibility of managing the day-to-day 
business of the group practice, practice managers are 
responsible for monitoring activities that may involve the 
self-referral law.
    MGMA supports fully the intent behind the self-referral 
law--to prevent physicians from ordering unnecessary ancillary 
services in order to profit from the Medicare and Medicaid 
programs. However, the self-referral law has gone far beyond 
its original intent and it now interferes with the delivery of 
efficient, quality health care. At this time, the law and its 
proposed regulations are so confusing and complex, it is 
virtually impossible to conclusively determine whether certain 
ancillary service arrangements are or are not in violation of 
the self-referral law.
    During the Medicare reform debate of 1995, your 
Subcommittee addressed several concerns which would be of value 
to MGMA members (e.g., limiting the number of designated 
services, removing the compensation arrangement prohibition in 
the definition of financial relationship, etc.). At this time, 
MGMA believes that by focusing on the following proposals, 
Congress would provide tremendous relief to a broad set of 
providers in a variety of health care settings. This would 
enable physician group practices, clinics, hospitals, and other 
providers to provide care in the most efficient manner 
possible.
     MGMA requests that Congress remove the 
``compensation arrangement'' prohibition of the law. This will 
enable group practices, clinics, hospitals, and other providers 
that exist in the constantly evolving health care marketplace 
to provide care in the most efficient manner possible.
     MGMA requests that Congress clarify the definition 
of ``group practice'' to allow for the diversity and 
flexibility of physician group practices as they grow and 
change to meet the needs of the evolving health care 
marketplace.

``Compensation Arrangement''

    MGMA believes that Congress should remove the 
``compensation arrangement'' provision in the ``financial 
relationship'' definition of the physician self-referral law.
    Section 1877 of the Social Security Act prohibits certain 
referrals where a physician has a financial relationship with 
the entity to which a patient is referred. ``Financial 
relationship'' is defined as either ``an ownership or 
investment in the entity'' or a ``compensation arrangement.'' 
When applied to the practice of medicine for medical groups, 
the inclusion of this prohibition as it relates to compensation 
arrangements is extremely confusing and unworkable. The broad 
sweep of this definition precludes many business activities 
which are essential to the successful operation of 
multifaceted, integrated health care organizations.
    Under the self-referral statute, it is often unclear 
whether a compensation relationship, either by employment or 
contract, is directly or indirectly related to a physician's 
referral. As medicine evolves and entities move to integrate 
and create diverse health care delivery systems, various 
complex financial interrelationships occur, raising many 
questions regarding the self-referral law's applicability. The 
statute becomes an impediment to innovation causing routine 
transactions to be questioned in terms of their potential 
indirect relationships throughout the integrated system.
    The compensation exceptions have two major requirements:
    A. The compensation arrangement must not directly or indirectly 
relate to the volume or value of referrals or other business generated 
between the parties; and
    B. The compensation arrangement must meet a fair market value test.
    The difficulty posed by the physician self-referral statute 
is that it is virtually impossible to meet the first 
requirement because it forces one to prove a negative. This 
makes it extremely difficult to determine with certainty 
whether or not a compensation arrangement complies with the 
law.
    Example 1: A hospital-based practice has multiple financial 
relationships (e.g., leases, medical director fees, physician practice 
income guarantees, shared use of equipment). Does the compensation 
generated through these complex interrelationships have an indirect 
relationship to referrals? Often, the answer is ``yes.'' Theoretically, 
ancillary revenue would be indirectly used in various compensation 
situations resulting in numerous technical violations of the physician 
self-referral law. In addition, in many cases it is impossible to 
determine fair market value. For example, the shared use of diagnostic 
equipment. How can a fair market value be assigned to segments of 
shared ancillary services? Again, in the absence of a method to measure 
``fair market'' value, it is impossible to know for certain if the 
arrangement complies with the statute.
    Example 2: In the case of a hospital employed physician, a hospital 
wants to pay a physician more than the physician's professional service 
collections during the first year of employment. The hospital will do 
so in order to compensate the physician at a level which is competitive 
with the local marketplace. Under this example, the hospital must use 
funds from other sources. How can one prove that this money was not 
directly or indirectly derived from hospital inpatient or outpatient 
services ordered by that same physician? Even if the physician's salary 
meets a fair market value measure of other physicians in the area, it 
is impossible to know for certain if the arrangement complies with the 
law.
    Example 3: Group A is a primary care physician group practice which 
provides certain specialized nuclear medicine testing. Group B is an 
unrelated cardiology group practice. Group A contracts with Group B to 
provide the professional interpretation of the nuclear tests which the 
Group A physicians order and Group B's physicians come to Group A's 
facility on a regular basis to provide these services. In addition, 
there are referrals back and forth between the two groups which are 
unrelated to this particular contract.
    Group A pays Group B based on the number of tests 
interpreted on a flat fee per test basis. Under this scenario, 
if a test is ordered by a Group A physician, the compensation 
arrangement likely will qualify for the personal services 
exception to the compensation arrangement prohibition in the 
physician self referral law. However, if the Group B specialist 
orders an additional test that he thinks is necessary for a 
Group A patient and interprets that test result under this 
contract, the exception likely would not apply because now the 
payment for the interpretation does relate directly to the 
Group B specialist's own referral.
    In order to address this potential violation of the 
statute, Group A may enter into a fixed fee per month 
compensation arrangement not based on the number of 
interpretations provided by Group B. However, given that there 
are other referral relationships between the two practices 
which may include other designated services, how can Group A be 
certain that even this fixed fee payment contract does not 
reflect indirectly the volume of value of additional referrals 
for other designated services?
    One may take this example a step further to highlight the 
complexities and inequities in the statute. If Group B is a radiology 
practice and Group A first refers a patient to Group B for a 
consultation, and the radiologist then orders an additional test, that 
order is not a considered a ``referral'' according to the physician 
self-referral law. In fact, the payment arrangement would not be 
acceptable in the case of the cardiologist, but it would be permissible 
in the case of the radiologist.

                      Definition of Group Practice

    MGMA requests that Congress clarify the definition of 
``group practice'' to allow for the diversity and flexibility 
of physician group practices as they grow and change to meet 
the needs of the evolving health care marketplace.
    The physician self-referral law is the only place in the 
entire Medicare statute in which the term ``group practice'' is 
defined. Thus, it is very important that the definition be 
clear. The law must assure a uniform application to the broad 
spectrum of physician group practices that exist today; it 
should not impede the ongoing evolution of group practices in 
an ever-changing marketplace. The definition of ``group 
practice'' should contain only those elements necessary to give 
effect to the other provisions of the self-referral law in 
which the term is used.
    The compensation test in the statute and the newly defined 
unified business test in HCFA's proposed self-referral rule 
illustrate the problems with the current definition of group 
practice. These restrictive provisions go well beyond the 
intent of addressing abusive referrals in the Medicare and 
Medicaid programs. Simply put, they dictate how group practices 
must operate as businesses. MGMA knows of no other federal law 
which dictates how businesses, small or large, must distribute 
revenue and account for overall income and expenses in order to 
meet a government--rather than a market--definition of what 
constitutes that particular type of business entity.
    Compensation Test: The compensation test within the definition of 
group practice highlights the inequity with which the statute and 
proposed regulations treat physicians practicing in different settings. 
For example, using the law's ``in-office ancillary exception,'' a 
single specialty group of internists would be able to retain 100% of 
the compensation derived from designated health services. The same 
physicians practicing in a multi-specialty setting, however, would be 
required to bring those same revenues up to the level of the entire 
group and share them as ``profits'' with all members of the multi-
specialty practice. In this example, no referral patterns have changed, 
only the type of group where the services are delivered.
    Other Standards: The law authorizes the Secretary to add by 
regulation and without limitation, any other standards to the 
definition of ``group practice,'' above and beyond those detailed in 
the legislation. This open-ended delegation defeats any kind of 
regulatory certainty for group practices and invites regulatory 
intrusion into the basic structure and operation of thousands of 
private practices throughout the country.
    Under the proposed regulations issued in January of 1998, for 
example, HCFA would require groups to operate as ``unified 
businesses.'' The exact meaning of this standard is far from clear. It 
is a standard that Congress did not believe was necessary when 
considering the legislation. It exists nowhere else in Medicare law or 
regulation. There is nothing in the statute to suggest that Congress 
considered a practice to be any less of a group practice simply because 
certain expenses are allocated to different sites or departments, or 
indeed to individual physicians, or where physicians in certain 
departments or sites enjoy autonomy over certain aspects of their 
practices. As groups become larger, more sophisticated, and more 
diverse in their mix of locations, specialties, and capabilities, there 
is a greater need to allocate and apportion both direct and indirect 
costs to the separate areas of the practice in which the costs are 
incurred, and similarly to allocate revenue streams to various 
components of the practice in which those revenues are generated. 
Otherwise, certain specialties would be placed at a tremendous 
disadvantage when joining multi-specialty practices as compared to 
their peers in solo or single specialty practices.
    These narrow, inflexible provisions in the group practice 
definition penalize physicians practicing in certain types of 
group practices. As a result, physicians in large integrated 
practices are at a disadvantage to physicians practicing in 
single site and/or single specialty practices. In addition, 
physicians in group practices generally are at a disadvantage 
to solo practitioners who provide the same routine ancillary 
services in the office setting.
    Example: A multi-specialty, multiple location practice with family 
practitioners, general internists, and several sub-specialties of 
internal medicine provides various ancillary services covered by the 
statute. At one office location are the family practitioners who 
practice primarily in the office setting and rely heavily on routine in 
office lab and x-ray. Across town are the sub-specialists who are 
heavily geared toward hospital inpatient services and use only very 
specialized diagnostic equipment that relates specifically to the sub-
specialty.
    Under the compensation test and unified business test, the family 
practitioners at one practice location must pool their ancillary 
revenues and divide them with the members at all practice locations, 
regardless of specialty and utilization of services. In addition, under 
the unified business test, they must allocate income and expenses at 
the group level, not at a specific practice location. This would hold 
true for each specialty operating at the three practice sites.
    Again, as described above, the bias in the law is illustrated by 
the fact that, if these separate locations were three separate single 
specialty practices, the physicians would be permitted to retain the 
very same ancillary revenues within each site and/or specialty. In 
other words, members of a single specialty group with one office would 
retain 100% of their ancillary revenues while the same members in a 
multi-specialty group with multiple offices would have to distribute 
the very same revenues to the various physicians at different practice 
sites. In addition, the individual locations could not allocate overall 
operating income and expensed at the site which they practice. These 
must be allocated at the overall group level. This prevents the group 
from controlling expenses by operating each site as its own profit and 
loss center. Again to further illustrate the inequity of the law, if 
these physicians were solo practitioners, each could retain 100% of the 
ancillary revenues for the services they provided in their own office 
and allocate overall income and expenses to fit their business and 
investment needs.

                               Conclusion

    The physician self-referral law is a maze that group 
practices must navigate on a daily basis. MGMA recognizes the 
importance of eradicating the health care system of fraud and 
abuse. However, while the intentions behind the self-referral 
law are commendable, it has created unintended consequences. 
The self-referral law shackles group practices and often 
prevents them from meeting patients' needs. As a result of the 
law, group practices cannot evolve and integrate in a manner 
which would enable them to provide patients with the most 
convenient, high quality care. Furthermore, group practices 
spend an inordinate amount of time and money trying to decipher 
the complexities and ambiguities of the self-referral law, 
while they should be focusing their efforts on providing care.
    Today, the health care marketplace is more complex than 
ever. This is due not only to the integration of the health 
care system but also to the numerous rules and regulations that 
govern the delivery of health care. Physician group practices 
are a vital component of this complex health care system. 
However, it has become increasingly more difficult for group 
practices to provide efficient, high quality health care.
    MGMA urges Congress to make these legislative changes to 
the self-referral law. Specifically, MGMA requests Congress 
clarify the definition of ``group practice'' and remove the 
``compensation arrangement'' provision of the law. These 
changes would provide significant relief for all providers who 
must comply with the self-referral law and the patients they 
serve.
    MGMA looks forward to working with Congress to addresses 
this important health care issue. If you should have any 
questions, please contact Aaron Krupp, Government Affairs 
Representative.

                                

Statement of the National Coalition for Quality Diagnostic 
Imaging Services, Houston, TX

    The National Coalition for Quality Diagnostic Imaging 
Services (``NCQDIS'') is delighted to have this opportunity to 
submit this written testimony with regard to the prohibition on 
physician self-referrals set forth in Sec. 1877 of the Social 
Security Act (the ``Stark Law''). NCQDIS is an association of 
both public and private companies dedicated to the conduct of 
high quality diagnostic imaging services in outpatient 
settings.
    NCQDIS applauds the objectives of the Stark Law and firmly 
believes that physicians' decisions regarding the facilities to 
which they refer should be driven by considerations of quality, 
patient convenience, and cost efficiency, and should not be 
influenced by financial incentives. However, we do have a 
number of concerns regarding the potential impact of this 
complex law on diagnostic imaging centers' legitimate financial 
relationships with radiologists and other physicians.
    More specifically, NCQDIS believes that Congress should 
consider a new exception for certain public companies with less 
than $75 million in shareholders equity and clarification of a 
number of other provisions of the exception for public 
companies. In addition, NCQDIS believes that Congress should 
clarify the definition of ``referral'' as that term applies to 
a radiologist's request for radiology services; clarify the 
impact of the Stark Law on diagnostic imaging services 
supervised or interpreted by non-radiologists; modify the 
medical supervision requirements that must be met under the in-
office ancillary services exception; modify the in-office 
ancillary service exception to make this exception more readily 
available to clinics that utilize mobile units for the 
provision of diagnostic imaging services to their patients; and 
modify the compensation provisions in the personal services 
exception. Each of these issues is discussed at further length 
below.
                I. Publicly Traded Securities Exception
    The Stark Law provides no exception for public companies 
with less than $75 million in shareholder equity. Yet, such 
companies do not have access to sufficient information 
concerning the identity of their shareholders to assure 
compliance with the Stark Law. For example, it is impossible 
for a public company of any size to assure that no family 
member of a referring physician purchases its stock. A public 
company's inability to provide absolute assurances of its 
compliance with the Stark Law may affect its ability to obtain 
capital and may interfere with audit and other financial and 
other disclosure obligations. Moreover, it is unclear how such 
a company can comply with the reporting requirements set forth 
in the proposed regulations issued by the Health Care Financing 
Administration in January, 1998 (the Proposed Regulations), 
especially reporting requirements applicable to financial 
relationships that are eligible for an exception.
                     II. Designated Health Services
A. Exclusion of Radiology Services Requested By a Radiologist 
Pursuant To a Request For a Consultation By Another Physician

    The Stark Law excludes from the definition of a ``referral'' a 
request by a radiologist for the provision of radiology services ``if 
such services are furnished by (or under the supervision of) such . . . 
radiologist . . . pursuant to a consultation requested by another 
physician.'' Social Security Act Sec. 1877(h)(5)(C). NCQDIS believes 
that this exclusion is intended to exempt from the scope of the Stark 
Law radiology services provided by a diagnostic imaging center where 
such services are performed pursuant to a referral by a physician who 
has no financial relationship with the diagnostic imaging center, even 
where the referral is made to the center itself and not to a particular 
radiologist. We also believe that this exception applies where the 
services are performed by a diagnostic imaging center and then 
interpreted by the radiologist who is an independent contractor for the 
center. Finally, we believe that this exception is applicable where the 
interpretive report is communicated to the referring physician, even 
where the radiologist himself does not explicitly ``request'' the 
performance of the study or bill for a ``consultation.'' We request 
that Congress modify the language of Sec. 1877(h)(5)(C) to reflect this 
understanding of the intent underlying this important exception.
    Also, if the Stark Law is to be extended to imaging services that 
are routinely supervised and interpreted by cardiologists, 
neurologists, and other non-radiologists on the grounds that such 
services are nonetheless ``radiology'' services, the exemption provided 
by Sec. 1877(h)(5)(C) should be extended to non-radiologists on the 
same terms as are available for radiologists. As HCFA notes in the 
preamble to the Proposed Regulations, the Stark Law provides that the 
term ``referral'' does not apply to the request by a radiologist for a 
radiology service where the radiology service is performed under the 
radiologist's supervision and is performed pursuant to a request for a 
consultation by another physician. Social Security Act, 
Sec. 1877(h)(5)(C). While the Proposed Regulations provide that a 
number of imaging services that are routinely performed or interpreted 
by non-radiologists (e.g., echocardiography services) as ``radiology'' 
services, they do not enable non-radiologists who supervise such 
services to qualify for the exception that would be applicable if the 
imaging service were supervised by a radiologist.
    In this regard, it should be noted that referring physicians often 
request non-radiologists who specialize in the interpretation of 
various diagnostic studies to supervise and interpret those studies in 
much the same manner as an internist or other non-radiologist might 
request a radiologist to supervise and interpret an MRI, CT, or other 
radiological study. Where a non-radiologist specialist supervises the 
performance of a diagnostic study pursuant to a consultation requested 
by another physician, the performance of the study does not raise a 
potential for abuse and should not be considered a ``self-referral'' 
within the meaning of the Stark Law.

B. Definition of Radiology Services Included As Designated Health 
Services

    The Proposed Regulations have resulted in considerable 
confusion regarding the meaning of the term ``radiology 
services'' as used in the Stark Law. For example, confusion has 
arisen regarding whether invasive radiology procedures are 
included within the scope of the Stark Law, whether the Stark 
Law applies where an imaging procedure is performed primarily 
by non-radiologists, and where the use of an imaging modality 
is incidental to a surgical procedure. Accordingly, we request 
that Congress more precisely define those ``radiology'' 
services that are subject to the Stark Law.
    In this regard, it should be noted that, under the Proposed 
Regulations, HCFA is proposing to include the professional 
component of radiology services as a ``designated heath 
service.'' We urge Congress HCFA to clarify that professional 
services were not intended to be included within the scope of 
the Stark Law.
                 III. Medical Supervision Requirements
    Order to be exempt from the Stark Law under the in-office 
ancillary services exception, a radiology service must be 
performed under the ``direct supervision'' of a ``group 
practice member.'' The Proposed Regulations would define 
``direct supervision'' to require that a group practice member 
be on site and available during the performance of the service 
but would preclude a physician engaged by the group as an 
independent contractor for the interpretation of the study from 
providing such supervision, since independent contractors are 
not considered ``group practice members'' for Stark Law 
purposes.
    We believe that this language should be modified to delete 
the term ``direct supervision'' and to substitute ``clinically 
appropriate level of supervision'' and that the language should 
be further amended to clarify that the supervision can be 
provided by an independent contractor. In final rules published 
on October 31, 1997 HCFA categorized diagnostic tests into 
three categories, based on the level of medical supervision 
that is considered clinically necessary. It would be 
inappropriate and extremely confusing for HCFA to impose 
supervision requirements under the Stark Law that are 
potentially in conflict with the supervision requirements 
imposed for Medicare coverage purposes.
    Also, while we understand that HCFA excluded independent 
contractors from the definition of ``group practice member'' in 
order to make it easier for some groups to meet the ``75% 
test'' (i.e., the requirement that at least 75% of the services 
of group practice members be provided through the group), this 
modification would also preclude independent contractors from 
supervising designated health services provided to the group's 
patients. Thus, for example, a radiologist who is engaged by a 
group practice as an independent contractor to interpret 
radiological studies would not be permitted to supervise the 
performance of those studies. In our view, this result simply 
makes no sense and, for this reason, we would suggest that the 
Stark Law be modified to allow independent contractors to be 
considered group practice members for the purposes of the 
``direct supervision'' requirement of the in-office ancillary 
services exception. regardless of how they are treated for the 
purposes of the 75% test.
        IV. Location Requirements Under Group Practice Exception
    The Preamble to the Proposed Regulations exception suggests 
that services provided by a mobile unit will not be considered 
to be provided at the same location as a physician's office, 
for the purposes of meeting the location requirements of the 
in-office ancillary services exception. This interpretation 
will make it significantly more difficult for group practices 
to qualify for this exception. Mobile units provide needed 
access to costly services in rural and medically underserved 
areas, and mobile units often provide these services in close 
proximity to the medical group whose patients are being 
treated. We do not believe that there is any reason to preclude 
services that are performed for a group's patients in a mobile 
unit in the group's parking facilities from being considered 
part of the group's office for the purposes of the ``location'' 
requirements of the in-office ancillary services exception, and 
we respectfully request that Congress modify the language of 
the Stark Law to ensure that mobile units brought into an area 
to provide needed services to physicians patients be treated as 
part of the physician's office for the purposes of the ``in 
office ancillary services'' exception.
                 V. The ``Personal Services'' Exception
    The Proposed Regulations require that, in order to meet the 
requirements of the personal services independent contractor 
exception, payment to independent contractors must be 
determined in advance. This requirement may have to be met in 
order for radiologist to be retained on an independent 
contractor basis to interpret studies performed for a 
diagnostic imaging centers.
    Unlike the language used in the new proposed ``fair market 
value'' exception--which requires only that the formula for 
determining compensation be determined in advance--the language 
used in the independent contractor exception appears to require 
that actual (presumably aggregate) compensation be determined 
in advance. Interpreted in this manner, the Proposed 
Regulations would appear to preclude physicians engaged as 
independent contractors from providing interpretations of 
radiological studies on a fee schedule, percentage of revenues, 
or other productivity basis, since aggregate compensation 
cannot be determined in advance under such productivity-based 
formulas.
    The legislative history of the Stark Law specifically 
suggests that Congress intended to allow independent 
contractors to be paid on a fee schedule basis, and we would 
suggest that the Stark Law be modified to allow independent 
contractors to be paid on the basis of fee schedules, 
percentage of revenue formulas and other productivity-based 
methods. Unless this modification is made, it may prove 
difficult, if not impossible, for diagnostic imaging centers 
and hospitals to obtain high quality interpretations of 
diagnostic studies on a cost efficient basis.

           *       *       *       *       *       *       *

    If you have any questions regarding this testimony, please 
do not hesitate to contact NCQDIS counsel, Diane Millman at 
(202) 756-8021.

                                

Statement of James W. McLane, NovaCare, Inc., King of Prussia, PA

    On behalf of NovaCare, Inc., a leading national provider of 
rehabilitation and human resource management services, we 
commend the Subcommittee on Health for providing an opportunity 
to comment on the Medicare ``self-referral'' laws. We are 
particularly focused on the implementation of Section 13562 of 
the Omnibus Budget Reconciliation Act of 1993 (Public Law 103-
66) and Section 152 of the Social Security Amendments of 1994 
(Public Law 103-432). These laws held the promise that the 
Health Care Financing Administration would implement a 
regulatory environment that would assure fair competition in 
the delivery of designated health services including physical 
and occupational therapy services. Unfortunately, delays in 
implementation, haphazard attention to enforcement and changing 
market conditions have undermined confidence that fair 
competitive systems in the provision of physical therapy and 
occupational therapy will be assured by public policy.
    We call to the committee's attention three specific issues:
     There is a continued need for government to establish fair 
guidance to prevent unwarranted self-referrals and to assure 
competitive delivery of physical and occupational therapy services:
     The changing health market environment does not alter the 
need for government to establish fair guidance preventing unwarranted 
self-referral of patients. Furthermore, we believe Congress must 
consider tightening the statute which currently exempts certain 
physician owned ancillary services. We believe the limited exemptions 
permitted under the law have become a loophole for physicians to self-
refer in securing physical and occupational therapy services. Given the 
vagueness of the statute and the lack of meaningful enforcement, the 
exemption is being abused.
    As Dennis Weissman wrote in the preface to the Washington G-2 
report's manuscript, Federal Limits on Physician Referrals:

          . . . a bright line between what is legal and what is not -
        that's what health care providers were promised when the 
        federal government was concerned over fraudulent or abusive 
        over-utilization of medical services reimbursable under its 
        health care programs began curbing referrals by physicians to 
        entities with which they have a financial relationship . . . . 
        But the bright line promised by the Stark law never 
        materialized. Instead the statutory prohibitions and the 
        exceptions have lead to much uncertainty, confusion and 
        frustration among affected providers over how to structure 
        their business arrangements in order to comply with federal 
        requirements.'' \1\
---------------------------------------------------------------------------
    \1\ Dennis W. Weissman, Publisher & President, Washington G-2 
Reports; Preface, Federal Limits on Physician Referrals--How the Stark 
Law Affects Your Business Arrangements.

    Fairness and the balance of cost and quality of care 
continue to be necessary goals of health public policy. We are 
experiencing critical periods of changes where there have been 
major dislocations, especially in the health care services 
ancillary sector because of the radical changes enacted as part 
of the Balanced Budget Act of 1997. Within the therapy sector, 
the BBA altered acute hospital discharge practices, imposed new 
payment systems on skilled nursing facilities, home health 
agencies and rehabilitation hospitals, and capped outpatient 
Part B therapy services. The labor market for professional 
therapists is in free-fall, with salaries dropping over 25% for 
those professionals successful in finding jobs. The lack of 
realistic rules for competition has added to the market chaos. 
We are experiencing the worst of all worlds -lack of clarity, 
incentives for manipulation, avoidance of the self-referral 
requirements, and indifference about enforcement.
    The failure to promulgate rules decisively and to enforce 
those rules has created an environment of ``opportunistic 
venturing,'' eroding the intent of Congress. Absent final 
regulations, providers such as NovaCare whose reputations for 
compliance and integrity are paramount in the values by which 
the company operates are cautious in execution. Unfortunately, 
those who are prepared to cross the line are taking full 
advantage of the delayed implementation.
    We strongly urge the committee to press the Health Care 
Financing Administration to promulgate the appropriate self-
referral rules and to provide meaningfully enforcement of the 
law.
     Government must curb abuses of the in-office 
ancillary exception.
    There is a need to assure a level playing field in 
interpreting the in-office ancillary exception. In a number of 
markets where we provide outpatient rehabilitation, we are 
witnessing widespread disregard of the exemption restrictions 
and flagrant violations of the intent of the self-referral law. 
The litanies of abuses are astonishing. For instance, we have 
heard of doctors restricting referrals to their own exclusive 
relationships, of invitations to our existing staffs to leave 
our employment and create split fee relationships with 
physician practices, and of ``dummy'' relationships that abuse 
``incident to'' relationships to bill non-qualified services as 
professional therapy.
    The statute is very clear in stating that the referring 
physician, a member of his/her medical group, or an individual 
directly supervised by the referring physician or another 
qualified group member, must perform services, such as physical 
therapy and occupational therapy, personally. The direct 
supervision is scoffed at by many physicians. While HCFA has 
recently promulgated strict interpretations for supervision of 
PTs and OTs, it has proposed through program memorandums 
stringent interpretations of CPT4 code instructions. 
Unfortunately, the enforcement focus has been focused 
myopically at the provision of outpatient therapy services in 
the outpatient clinic and nursing home settings and has ignored 
the requirements for physician based services.
    The law is specific that the services must be furnished in 
a building in which the physician and/or his/her medical group 
provide physician services unrelated to designated health 
services. This additional exception for in-office ancillary 
services was viewed as a way to facilitate group practices. 
Unfortunately, we periodically learn of relationships that are 
at best creative and at worst violate the location requirement. 
In some markets, we are observing physicians purchasing 
existing CORFs and outpatient therapy clinics and running them 
as if they meet the medical group exemption.
    Both the statute and regulations are explicit in defining 
bonafide employment relationships. We support the HCFA 
interpretation for leased employees such as occur under a 
contractual relationship with a professional employee 
organization (PEO) or a temporary staffing agency. 
Unfortunately, we encounter relationships that are far less 
structured and appear to be nothing more than physicians 
providing billing camouflage for therapy services. In the most 
questionable form, the physician is employing individuals who 
are not qualified under state practice acts to perform therapy 
services. Attached is a summary of 2 recent court decisions in 
Pennsylvania where the courts concluded that in-office 
ancillary service exceptions provided the physician the 
opportunity to use unlicensed personnel.
     Relaxed enforcement creates potential for abuse of 
therapy services in physician offices.
    Implementation of Section 4541 of the BBA of 1997 has 
created an illusion that HCFA no longer has a concern about 
over-utilization of Part B therapy services in physician 
offices because the arbitrary therapy cap creates a limit on 
program liability.
    As data which we have shared with the committee shows, the 
impact of the cap is most severe on individuals with the most 
acute rehabilitation needs. These are not the individuals who 
are seen in physician offices. In fact, the relaxation of 
utilization criteria for physician services will have 
significant cost as the per capita billings for the types of 
rehabilitation required by beneficiaries being served in 
physician settings fall well below the mean of total per capita 
expenditures for Part B rehabilitation services. While there 
has been modest statutory direction to establish a level 
playing field for the provision of physical and occupational 
therapy, enforcement is non-existent.
                               Conclusion
    The failure to have rules promulgated in a timely manner 
and uneven enforcement of existing rules leaves an unfair 
advantage and an unsettled market environment. HCFA's delay in 
issuing the rules and enforcing the law exacerbates competitive 
forces. Rehabilitation agencies are besieged with new 
requirements and stringent enforcement. HCFA is so focused on 
select issues affecting the delivery of rehabilitation services 
that it is ignoring some of the most important issues.
    Putting appropriate self-referral rules in place and 
assuring that they are properly implemented and monitored must 
become a priority for the Congress and the Health Care 
Financing Administration.
    [Attachments are being retained in the Committee files.]

                                

Statement of the Outpatient Ophthalmic Surgery Society, Bellevue, WA

    The Outpatient Ophthalmic Surgery Society (OOSS), an 
organization composed of approximately 600 ophthalmologists 
dedicated to providing high-quality ophthalmic surgical care in 
various outpatient settings, is delighted to present testimony 
to the House Ways & Means Subcommittee on Health regarding 
physician ownership and referral laws. Over three hundred of 
OOSS members own and operate ambulatory surgery centers that 
serve Medicare patients undergoing cataract surgery, and are 
therefore both familiar with, and qualified to comment on, 
physician self-referral restrictions in these settings.
                       Ambulatory Surgery Centers
    For purposes of Medicare reimbursement, an ambulatory 
surgery center (ASC) is defined as a distinct facility that 
provides exclusively outpatient surgical services, and meets 
certain Medicare conditions of participation.
    ASCs have proliferated since the 1980s. At the end of 1983, 
there were 239 Medicare certified-ASCs. Today, there are nearly 
2,500 ASCs. The number of procedures performed in the ASC 
setting has grown, too. In 1996, more than 1.5 million Medicare 
allowed services were performed in the ASC setting. Nearly 50% 
of those procedures were ophthalmic services. Congress and the 
Health Care Financing Administration (HCFA) have helped promote 
ASC industry growth, recognizing that ASCs provide a patient-
friendly, high-quality, low-cost alternative to hospital-based 
surgery.
    ASCs save the Medicare program hundreds of millions of 
dollars each year. Medicare payments to ASCs for outpatient 
surgical procedures are usually substantially lower than 
payments to hospitals (both on an inpatient and outpatient 
basis). In fact, according to the Medicare Payment Advisory 
Commission (MedPAC), the median payment to a hospital for a 
cataract removal procedure (i.e., CPT code 66984) in 1996 was 
approximately $1,150, while the median payment to an ASC for 
that same procedure was only $903, a savings of $247, or more 
than 20% (See MedPAC Report to Congress, June 1998). Moreover, 
ASCs have brought the benefits of competition to the entire 
outpatient surgery market: the opening of an ASC in a 
particular area has frequently been followed by a significant 
reduction in the charges of local hospitals for outpatient 
surgery, as well as increased attention on the part of the 
hospitals to quality of care and patient satisfaction.
    OOSS supports clear, unambiguous physician self-referral 
prohibitions that prevent unethical financial relationships and 
reinforce the critical element of trust in the physician-
patient relationship. However, these prohibitions need not and 
should not apply to services provided in the ASC setting. As 
discussed above, ASCs save the Medicare program hundreds of 
millions of dollars. Moreover, a number of studies, including a 
noted Florida Cost Commission Review of physician self-referral 
patterns, examined services provided in the ASC setting and 
concluded that there was no ascertainable abuse with respect to 
the referral of patients by operating surgeons to ASCs in which 
they have an ownership interest. Indeed, the Office of the 
Inspector General has issued a proposed safe harbor which 
explicitly protects the physician investment in the ASC, and 
HCFA has proposed that physician investments in ASCs be 
specifically exempt from the self-referral proscription. 
Specifically, HCFA said the following in the preamble to its 
proposed regulation regarding the physician self-referral law: 
``The Secretary has determined . . . that referrals for . . . 
[designated health] services furnished in an ambulatory 
surgical center . . . do not pose a risk of Medicare program or 
patient abuse.'' (63 Fed. Reg. at 1666, Jan. 9, 1998).
    Why is the ASC different from other ventures with regard to 
which fraud and abuse is more likely to occur? There are 
several reasons. First, more than two-thirds of the ASCs in the 
country have been developed and owned by physicians to maximize 
patient safety and optimize clinical results through control of 
the surgical environment, which oftentimes is lacking in the 
hospital. Indeed, if physician self-referral restrictions were 
to prohibit doctor ownership of ASCs, there would be virtually 
no ASCs left. Second, unlike services provided by clinical 
laboratories and diagnostic imaging centers, surgical services 
performed in an ASC are subject to a utilization review by peer 
review organizations; as such, there is a check on 
inappropriate utilization. Finally, the physician operates in 
the ASC as an extension of his or her office, much like an 
internist might offer in-office ancillary laboratory or 
radiology services. The surgeon is not a passive investor; a 
``referral'' is not really taking place. Moreover, unlike in 
situations involving in-office laboratory or radiology 
services, where the physician performs little of the ancillary 
work, in cases of surgery, the physician him or herself is 
actually performing the work for which the patient was sent to 
the surgery center.
    While Congress clearly did not intend for the physician 
self-referral ban to apply to services performed in the ASC 
setting, the law could be read to apply to certain services 
provided in ASCs. For example, prosthetics, orthotics, and 
prosthetic devices are designated health services. Many common 
implants--e.g., intraocular lenses--are considered prosthetics. 
Thus, the physician-self referral ban could be interpreted to 
reach situations where surgeons implant prosthetics in ASCs 
which they own and to which they ``refer'' their patients and 
for which Medicare is not making separate reimbursement because 
it's a component of the facility fee.
    OOSS is pleased that HCFA recognized that there is no risk 
of program or patient abuse when a physician refers a patient 
to his or her ASC, and that the Agency is proposing to 
expressly exempt from the physician self-referral proscriptions 
services performed in ASCs. See 63 Fed. Reg. At 1666 (Jan. 9, 
1998) and 42 C.F.R. Sec. 411.355(d)(1) (proposed). Nonetheless, 
we urge Congress to codify this exception in the statute. 
HCFA's proposed regulation remains in proposed form and 
apparently will not be finalized for at least another year. 
Until then, physician investment in ASCs is an uncertain 
endeavor. Physicians who choose to invest in ASCs take a 
calculated risk based on HCFA's stated approval of these 
arrangements, but expose themselves to possible prosecution 
should HCFA change its view of these arrangements or choose not 
to include the express exception in the final regulations. 
Congress should express its approval of physician ownership of 
ASCs and ensure that these arrangements are exempt from the 
self-referral prohibition by including an express exception in 
the statute. Specifically, we recommend that Congress adopt the 
language it approved in Sec. 8204(f) of the ``Balanced Budget 
Act of 1995,'' H.R.2491 (vetoed), which expressly excluded ASC 
services from the self-referral law.
            Intraocular Lens, Eyeglasses and Contact Lenses
    In devising the original self-referral statute, and its 
subsequent 1993 amendments, Congress set forth a list services 
to which the self-referral prohibition applies. This list of 
``designated health services'' includes, among other things, 
``prosthetics, orthotics, and prosthetic devices and 
supplies.'' HCFA has interpreted the term ``prosthetic 
devices'' to include eyeglasses and contact lenses furnished 
subsequent to cataract surgery. (63 Fed. Reg. at 1722, Jan. 9, 
1998). HCFA has defined ``prosthetic devices'' in this way 
because Sec. 1861(s)(8) of the Social Security Act defines the 
term ``prosthetic devices,'' for coverage purposes, as 
``including one pair of conventional eyeglasses or contact 
lenses furnished subsequent to each cataract surgery with 
insertion of an intraocular lens.''
    Congress should amend the statute to expressly exclude 
eyeglasses and contact lenses furnished subsequent to cataract 
surgery from the definition of ``prosthetic devices.'' There is 
no incentive to overutilize or abuse this post-cataract surgery 
benefit since (1) one pair of conventional eyeglasses or 
contact lenses has been acknowledged by HCFA to be medically 
necessary under such circumstances, (2) Medicare payment for 
post-cataract eyeglasses or contact lenses is on a reasonable 
charge basis, and (3) Medicare covers only one pair of 
eyeglasses or contact lenses, and only when following cataract 
surgery. Moreover, there is no evidence of which we are aware 
that a physician is more likely to order eyeglasses or contact 
lenses because he or she operates an optical shop. These 
optical dispensaries exist for the convenience of the patient 
and as a modest source of revenue to the owner-physicians. They 
are generally operated as an integral part of the physician's 
private practice. Furthermore, patients are certainly aware of 
the myriad of alternative sources of eyeglasses and contact 
lenses from national chains to local opticians.
    OOSS also urges Congress to exempt intraocular lenses 
(IOLs) from the definition of prosthetic devices. While HCFA 
did not propose to include IOLs in this definition of 
prosthetic devices in its proposed regulation, there remains 
ambiguity as to whether the statute likewise includes IOLs. 
Intraocular lenses replace the natural lens of the eye that is 
removed during cataract surgery. As cataract surgeons, OOSS 
members know--perhaps better than anyone--the extraordinary 
benefits that have resulted from the development and refinement 
of this cutting-edge technology. Instead of the thick ``Coke 
bottle'' glasses with which cataract patients once had to 
contend, patients who receive an IOL during cataract surgery 
often have vision that is better than what they had as 
teenagers. Moreover, IOL technology has dramatically reduced 
the trauma and complications associated with the cataract 
procedure itself; recent developments have made it possible to 
perform cataract surgery through an incision so small that it 
can be closed without even a single stitch. And research now 
underway will likely make it possible to implant lenses with 
multiple focal lengths, further reducing the need for 
eyeglasses in the post-cataract patient. Over one million 
Medicare beneficiaries receive this remarkable vision-restoring 
procedure each year.
    IOLs should not be considered a prosthetic device. Rather 
IOLs should be considered a component of ASC facility services, 
especially for physician self-referral purposes. The 
implementing regulations for ASC services (42 C.F.R. 
Sec. 416.61) include IOLs in the definition of ASC facility 
services. Thus, IOLs implanted in ASCs are covered as a 
component of ASC ``facility services'' and are distinguishable 
from other ``prosthetic devices,'' under the governing statute 
and implementing regulations.
    Moreover, reimbursement for IOLs is made through the ASC 
facility payment, and pre-set by Congress at $150. As noted 
above, ``[t]he Secretary found no risk of abuse when payment 
for . . . services was included in the ambulatory surgical 
center payment rate . . . .'' (63 Fed. Reg. at 1666, Jan. 9, 
1998).
    Finally, any application of the physician ``self-referral'' 
provision to IOLs implanted in ASCs could have a substantial, 
devastating impact on ASCs, the Medicare beneficiaries they 
serve, and the Medicare program. Virtually all cataract 
procedures are performed for Medicare patients and require the 
implantation of an IOL. Cataract facility services performed in 
ASCs are provided at substantially lower cost than in hospital 
outpatient departments. Therefore, applying the physician 
``self-referral'' provisions to IOLs implanted in ASCs would 
likely jeopardize the financial viability of ASCs throughout 
the country and result in a significant increase in Medicare 
outlays for cataract facility services. This result is neither 
intended by Congress nor required by the express terms of the 
physician ``self-referral'' provisions.
    OOSS strongly recommends that Congress clarify the statute 
to expressly provide that the implantation of an intraocular 
lens during cataract surgery does not represent the provision 
of a designated health service (i.e., ``prosthetic devices''), 
triggering Stark referral restrictions, and to provide that 
``eyeglasses or contact lenses'' also are not subject to the 
physician self-referral ban. Specifically, OOSS suggests that 
Congress accomplish this objective in one of two ways:
     Delete ``prosthetics, orthotics, and prosthetic 
devices and supplies'' as a designated health service, as 
Congress did in Sec.  8202 of the ``Balanced Budget Act of 
1995,'' H.R.2491 (vetoed), or
     Amend Sec. 1877(h)(6)(H) of the Social Security 
Act to read ``prosthetics, orthotics and prosthetic devices and 
supplies, other than an intraocular lens inserted during or 
subsequent to cataract surgery, eyeglasses, or contact 
lenses.''
    The latter approach was suggested by Congressman Stark in a 
proposed bill that he introduced in 1995.
                           Direct Supervision
    Finally, OOSS urges Congress to amend the section of the 
in-office ancillary services exception to clarify the meaning 
of ``direct supervision. Section 1877(b)(2) provides a general 
exception to both ownership and compensation arrangements for 
certain services (i.e., in-office ancillary services, subject 
to certain exceptions) that are, among other things, furnished 
personally by the referring physician, personally by a 
physician who is a member of the same group practice as the 
referring physician, or personally by individuals who are 
directly supervised by the physician or by another physician in 
the group practice. HCFA proposed to define the ``direct 
supervision'' criterion to require that the supervising 
physician be on site and immediately available when a 
designated health service is provided (although brief absences 
are permitted). See 63 Fed. Reg. at 1684 (Jan. 9, 1998) and 
Sec. 411.351 (proposed).
    HCFA's proposed definition of the ``direct supervision'' 
criterion would impose unnecessary burdens on Medicare 
beneficiaries in certain instances. For example, in the 
situation where an ophthalmologist and optometrist are in 
practice together, and jointly own and operate an optical shop 
within their office, the ophthalmologist would not be able to 
refer Medicare beneficiaries to that optical shop for Medicare-
covered post-cataract surgery eyeglasses unless the physician 
personally fitted the glasses or was on site and immediately 
available when the optometrist fitted the glasses. On days when 
the ophthalmologist performed surgery, he or she could not be 
considered to be ``immediately available'' to the optometrist, 
and thus could not offer his or her patients the convenience of 
purchasing post-cataract surgery eyeglasses from the optical 
shop within his or her office.
    This limitation discriminates against Medicare 
beneficiaries and Medicaid enrollees. Private pay patients 
would be permitted to purchase eyeglasses right in the 
physician's office while Medicare beneficiaries and Medicaid 
enrollees would be forced to purchase eyeglasses from another 
location.
    Moreover, it is unnecessarily restrictive. Optometrists, or 
optometrists in conjunction with opticians are generally 
permitted by state law to fit, grind, and dispense eyeglasses 
without physician supervision. Requiring direct supervision 
from an ophthalmologist in this instance serves no medical 
purpose.
    Furthermore, HCFA's interpretation of the statute appears 
to be inconsistent with Congressional intent. The Conferees to 
the amendments to the Stark legislation enacted in 1993 stated 
as follows:

          The Conferees intend that the requirement that direct 
        supervision . . . by a physician would be met if the lab is in 
        a physician's office which is personally supervised by a lab 
        director, or a physician, even if the physician is not always 
        on site. Cong. Rec. at H6003 (Aug. 4, 1993) (emphasis added).

    OOSS urges Congress to amend this section of the statute to 
clarify that the supervising physician need not be on site at 
all times. Specifically, Congress should replace 
Sec. 1877(b)(2)(A) with the following:
    ``(A) that are furnished personally by the referring physician, 
personally by a physician who is a member of the same group practice as 
the referring physician, or personally by individuals who are under the 
general supervision of the physician or of another physician in the 
group practice, and.''
    Additionally, Congress should add at the end of 
Sec. 1877(h) the following new paragraph:

          ``(7) General Supervision.--An individual is considered to be 
        under the `general supervision' of a physician if the physician 
        (or group practice of which the physician is a member) is 
        legally responsible for the services performed by the 
        individual and for ensuring that the individual meets licensure 
        and certification requirements, if any, applicable under other 
        provisions of law, regardless of whether or not the physician 
        is physically present when the individual furnishes an item or 
        service.''

    The amendments suggested above were included the ``Balanced Budget 
Act of 1995,'' H.R. 2491 (vetoed), as Sec. 8204(a)(1).
    The Outpatient Ophthalmic Surgery Society appreciates the 
opportunity to present this testimony to the Subcommittee. Please do 
not hesitate to contact Washington counsel, Michael Romansky at (202) 
756-8069, if you have any questions about this matter.

                                

                                              Premier, Inc.
                                                       May 27, 1999
The Honorable William M. Thomas
Chairman, Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C.

    Dear Chairman Thomas:

    On behalf of the Premier, Inc., I am submitting the following 
statement for the record of the hearing held May 13 on the ``Medicare 
Self-Referral Law'' before the Health Subcommittee of the Committee on 
Ways and Means.
    Premier, Inc., represents over 220 owner hospitals and hospital 
systems that own or operate 700 healthcare institutions and have 
purchasing affiliations with another 1,200. Premier owners operate 
hospitals, HMOs and PPOs, skilled nursing facilities, rehabilitation 
facilities, home health agencies, and physician practices. We 
appreciate the opportunity to urge your support to make the federal 
physician self-referral prohibition laws more reflective of today's 
healthcare market place.
    Hospitals and physicians are changing the way in which they 
organize themselves and their approach to healthcare delivery. The 
impetus of this change comes from private and government initiatives 
that challenge us to deliver high quality care at the lowest possible 
cost. Integration of service delivery, a central component of health 
system change, promotes the coordination of care in a manner that is 
both cost effective and a higher quality.
    Hospitals are concerned about the adverse consequences of 
physicians choosing to refer solely based on financial self-interest. 
However, the laws against self-referral have created substantial 
obstacles to hospital and physician integration. The current physician 
self-referral law (Stark II) and the related proposed implementation 
rules are far too complex and confusing. The proposed rule published 
January 9, 1998 by HCFA took five years to write and drew 13,000 
comment letters. HCFA does not expect the final rule to be published 
until 2000. Even though HCFA is working to address the concerns raised 
in the comment letters, we believe a more reasonable approach is to 
simplify the law.
    A fundamental problem is that the law is built on precise 
exceptions to a general prohibition of any referral by a doctor to an 
entity with which he or she has a ``financial relationship.'' 
Regardless of intent, an arrangement can be deemed illegal if it does 
not fit into an exception. One way to minimize the complexity of the 
self-referral law would be the elimination of the compensation 
restrictions. This provision is unnecessary in that it essentially 
duplicates the relevant provisions of the Federal Medicare and Medicaid 
anti-kickback law. The anti-kickback statute addresses compensation 
relationships and has been amended to authorize the imposition of civil 
money penalties. Hospital fraud and abuse compliance programs provide a 
more appropriate method of checking any potential abuses.
    Thank you for the opportunity to share our perspectives on the 
physician self-referral prohibition law. The result of the compensation 
provision is confusion and the loss of hospital and physician 
opportunities to advance the integration of delivery that benefits our 
patients.
            Sincerely,
                                             James L. Scott
                                                          President

                                

       Society of Cardiovascular & Interventional Radiology
                                                Fairfax, VA
                                                       May 27, 1999
The Honorable Bill Thomas
Chairman, Subcommittee on Health
House Ways and Means Committee
Washington, D.C.

    Dear Mr. Chairman:

    The Society of Cardiovascular & Interventional Radiology (SCVIR), 
which represents more than 3,200 physicians who specialize in the field 
of minimally invasive or interventional procedures, requests that the 
following statement be entered into the record for the May 13, 1999, 
hearing regarding the physician self-referral prohibitions included in 
the Social Security Act.
    SCVIR supports the elimination of financial incentives within the 
Medicare program that encourage the over-utilization of medical 
services. The provision of medically unnecessary and inappropriate care 
that results from over-utilization compromises the public's perception 
of the medical profession as well as the physician decision-making 
process in rendering medical care to patients. Providing appropriate 
medical care should be of foremost concern to all physicians. Financial 
incentives that compromise the treatment decisions of physicians should 
be discouraged and eliminated. The physician self-referral ban was 
intended to accomplish that objective and for that reason SCVIR 
continues to support some restrictions on physician self-referrals.
    The physician self-referral ban was also intended to provide 
clarity to the health care profession by establishing ``bright lines'' 
to guide physician and provider conduct and financial relationships. 
This laudable goal has yet to be achieved due to the failure of the 
Health Care Financing Administration (HCFA) to implement timely and 
readily understood regulations that would provide insight into areas 
that may be confusing or unclear under the statute. The failure to 
promulgate a final rule has generated considerable uncertainty for 
physicians and others who seek guidance on how to structure ownership 
or compensation arrangements that do not violate the statute.
    SCVIR would urge the Subcommittee to direct HCFA to issue final 
rules to implement the physician self-referral ban for designated 
health services as soon as possible. By so doing, HCFA will greatly 
assist physicians and providers in understanding how to structure 
relationships that comply with the law. Allowing over five years to 
elapse between passage of the prohibitions and implementation of the 
statute is clearly unacceptable where the penalties for non-compliance 
can be severe.
    SCVIR also suggests that the Subcommittee revisit the statute to 
review the efficacy of its provisions. While supporting restrictions on 
physician self-referrals to entities in which the physician has a 
financial relationship, SCVIR believes that the statute should take 
into account intent or distinguish between truly minor violations and 
the abuse that contributed to the adoption of the statute in this first 
place. While many physicians are frustrated by the labyrinth of the 
exceptions that must be navigated to determine compliance, the original 
purpose of the statute was to ensure that physicians provide high 
quality medical care unmotivated by ownership or compensation 
arrangements. The statute also protects the taxpayer dollar. SCVIR 
believes that the original purpose and need for the statute should not 
forgotten in the frustration over HCFA's inability to develop clear and 
understandable regulations.
    Thank you for taking the time to consider our views and for 
providing the opportunity to submit this statement.
            Sincerely,
                                     Matthew A. Mauro, M.D.
                                                   President, SCVIR

                                

Statement of the Stark Law Coalition

    This testimony is submitted by the Stark Law Coalition (the 
``Coalition'') and sets forth the Coalition's recommendations 
with regard to possible amendments of Sec. 1877 of the Social 
Security Act, as amended (``the Stark Law''). The Stark Law 
Coalition is a Coalition of medical groups and physician 
practice management companies (``PPMCs'') that have coalesced 
around issues of common concern that are raised by the Stark 
Law. Members of the Coalition include a number of clinics, 
physician practice management companies and physician practices 
in a number of medical specialty areas.
                1. Publicly-Traded Securities Exception
The Stark Law should be modified to exempt publicly-traded companies 
with less that $75 million in stockholder equity or to authorize PPMCs 
to sell shares to referring physicians in de minimus amounts.

    Approximately 10% of all physicians actively practicing in 
the United States have their practices managed by a physician 
practice management company (``PPMC''). Many PPMCs acquire the 
non-medical assets of physician practices and then provide 
those assets back to the practices under long term management 
contracts. Many such PPMCs do not have $75 million in 
shareholder equity and therefore are not eligible for an 
exception to the Stark Law.
    These PPMCs typically pay for the non-medical assets of 
such practices with a combination of cash, notes and stock of 
the PPMC. If stock issued to a physician in connection with 
such a PPMC transaction does not meet the Stark Law's publicly-
traded securities exception, then the physician-stockholder is 
prohibited under the Stark Law from referring Medicare/Medicaid 
patients to the PPMC for designated health services.
    In addition, if PPMC stock issued to a physician does not 
meet the publicly-traded securities exception, then that 
physician may be prohibited from referring Medicare/Medicaid 
patients for designated health services to physicians in other 
groups affiliated with the PPMC, particularly if the group that 
receives the referral pays a percentage of revenues to the PPMC 
as a management fee. Under such arrangements, each referral to 
the affiliated group generates revenue for the PPMC under the 
management agreement, which, in turn may increase the value of 
the PPMC stock owned by the referring physician. The publicly-
traded securities exception, when applicable, would appear to 
protect such cross-referrals among physicians or groups 
affiliated with a PPMC. Where stock is actively and publicly 
traded on a recognized stock exchange, it generally does not 
provide significant inducement for referrals. We believe that 
the current exception should be extended to companies with less 
than $75 million in shareholder equity, where the company's 
stock is actively and publicly traded on a recognized stock 
exchange, regardless of the amount of shareholder equity.
    In addition, to qualify for the publicly-traded securities 
exception under Sec. 1877(c)(1), the physician's (or immediate 
family member's) investment must be an ownership interest 
(whether through debt, equity or other means) ``which may be 
purchased on terms generally available to the public.'' The 
Proposed Regulations also indicate that ownership in investment 
securities are only protected if ``at the time they were 
obtained [they] could be purchased on the open market.'' 
Section 411.356(a). Taken together these provisions would deny 
the public company exception to a physician who acquired shares 
through the exercise of options or who acquired stock before 
the company became public. Neither of these results are 
necessary to preserve the integrity of the self-referral law.
    We believe that a physician (or immediate family member) 
holding up to 5% of any publicly-traded security (and any 
investment instrument, such as a stock option, from which that 
publicly-traded security is derived) should qualify for the 
publicly-traded securities exception regardless of whether the 
securities were acquired before the company became public 
(assuming the other requirements of the publicly-traded 
security exception are met), as long as neither the amount of 
securities so obtained, nor any distribution made with respect 
to such securities, is based on the volume or value of 
designated health services referred by the physician (or 
immediate family member) to the company or its affiliates. We 
select a 5% threshold because that is the standard used by the 
SEC for public reporting of ``control'' interests. Less than a 
5% interest is considered to be a ``drop in the bucket''--a 
non-control interest--and any referrals by a less than 5% 
physician-owner should similarly be viewed as having an 
inconsequential impact on the profitability of a publicly-
traded company (and hence on the physician-owner's incentive to 
refer to that company).
               2. In-Office Ancillary Services Exception
(a) The Stark Law's definition of ``group practice'' should be 
liberalized to preclude HCFA from unnecessarily interfering in the 
compensation formulas adopted by physician groups.

    Under the in-office ancillary services exception 
(Sec. 1877(b)(2)) a physician may refer Medicare/Medicaid 
patients for certain designated health services to a group 
practice in which the physician has a financial relationship. 
However, in the Proposed Regulations, HCFA has interpreted the 
Stark Law in a number of ways that interfere unnecessarily with 
physician compensation formulas within groups, even where the 
compensation is unrelated to referrals for designated health 
services.
    First, the Proposed Regulations would add the following new 
``unified business'' requirement to the definition of a ``group 
practice:''

          The overhead expenses of and the income from the practice are 
        distributed according to methods that indicate that the 
        practice is a unified business. That is, the methods must 
        reflect centralized decision making, a pooling of expenses and 
        revenues, and a distribution system that is not based on each 
        satellite office operating as if it were separate enterprise.

    This is a new requirement promulgated by the Secretary 
under the purported authority of Sec. 1877(b)(4)(A)(vi). It is 
unclear under this new definitional provision when a practice 
will be considered to be a ``unified business.'' In particular, 
what does it mean to have a ``distribution system'' based on 
``each satellite office operating as separate enterprise?'' 
This language could be interpreted broadly to disqualify any 
medical group that employs profit center accounting on an 
office specific basis, from receiving Medicare/Medicaid 
referrals for designated health services from its physician-
owners. Many medical groups employ profit center accounting on 
an office specific basis. These groups are nonetheless bona 
fide group practices.
    Second, HCFA has proposed the following new condition to 
qualify as a ``group practice:''

          The overhead expenses of and income from the practice are 
        distributed according to methods that are determined prior to 
        the time period during which the group has earned the income or 
        incurred the cost.'' Proposed Regulation Sec. 411.351, Group 
        Practice Definition, Section (3).

    This new provision appears to permit changes in 
compensation methodologies, but only if the change is effective 
for income and expenses incurred after the date the change is 
implemented. This new ``prior to incurrence'' requirement will 
therefore limit the ability of groups to make retroactive 
adjustments in compensation methodologies, even if such 
adjustments do not result in distribution of funds based on the 
volume or value of referrals for Medicare/Medicaid designated 
health services.
    Third, a physician may spend a significant amount of time 
supervising the provision of designated health services that 
are provided ``incident to'' that physician's services, for his 
or her own patients. The statutory language of the in-office 
ancillary services exception, on its face, would appear to 
authorize the payment of productivity bonuses based in part on 
such ``incident-to'' services. Yet, the Proposed Regulations 
would appear to preclude a group practice from taking these 
services into account in determining the physician's 
productivity bonus, if the ``incident to'' services are 
provided for a physician's own patients.
    Finally, we are concerned about implications in the 
preamble to the Proposed Regulations that suggest that payment 
to a physician-employee may be ``related to the volume or value 
of referrals'' even if compensation is fixed, if the 
continuation of the payment arrangement depends on the 
physician's explicit or implicit commitment to refer payments 
to the entity. This reading of the statute would enable law 
enforcement officials to look behind even the most reasonable 
payment arrangements to examine the underlying intent of the 
parties. While such an approach may be warranted under the 
anti-kickback provisions, it is not warranted under the Stark 
Law, which is not an intent-based statute.
    We believe that medical groups should have flexibility to 
utilize cost center or profit center accounting and to adjust 
compensation methodologies prospectively or retroactively, as 
necessary, to assure equitable distributions among group 
members. We further believe that group practices should be free 
to pay group practice members productivity bonuses based on 
designated health services personally performed by those 
physicians or performed ``incident to'' those physicians' 
services. Where no physician member of a physician group 
receives compensation based on the volume or value of 
designated health services that he refers to the group but does 
not perform or supervise, the Stark Law should not apply. We 
request that Congress clarify the statutory language to make 
this clear.

(b) Congress should repeal the requirement for ``direct 
supervision'' of designated health services under the in-office 
ancillary services exception.

    The Stark Law requires that designated health services be 
furnished by ``individuals who are directly supervised by the 
physician or by another physician in the group practice.'' 42 
U.S.C. Sec. 1395nn(B)(2)(A)(i). The Proposed Regulations 
interpret this language to require that the supervising 
physician be on site and immediately available when a 
designated health service is provided (although brief absences 
are permitted).
    The Stark Law makes reference to the need for a physician 
to ``directly supervise'' a person who performs a designated 
health service. Congress may have intended ``direct 
supervision'' in this context to be interpreted in the same 
manner that that term is interpreted for coverage purposes. 
However, enshrining in legislation a coverage standard that may 
have existed at the time the Stark Law was enacted means that 
if coverage standards change, inevitably inconsistencies will 
develop between the standards for Stark and for coverage. 
Indeed, this has already occurred as a result of regulations 
finalized in the Federal Register on October 31, 1997,\1\ in 
which HCFA established three levels of supervision for 
diagnostic tests, most of which are designated health services. 
Under these regulations, codified at 42 C.F.R. Sec. 410.32, a 
diagnostic test may require general supervision (which does not 
require a physician's presence on-site); direct supervision 
(which does require a physician's presence on-site and which, 
unlike the definition of ``direct supervision'' in the Proposed 
Regulations, does not provide any allowance for ``brief 
absences''); or personal supervision (which requires that the 
physician not only be on-site but in the room where the 
diagnostic test is being performed). In light of the foregoing, 
we recommend that Congress delete the direct supervision 
requirement in the in-office ancillary services exception to 
the Stark Law and instead require that the services meet the 
coverage requirements of the Medicare program or, in the case 
of a Medicaid patient, the Medicaid program.
---------------------------------------------------------------------------
    \1\ 62 Fed. Reg. 59047 at 59057-59070.

(c) The Stark Law should be modified to enable independent 
---------------------------------------------------------------------------
contractors to supervise designated health services.

    Historically, many group practices have contracted with 
specialists, such as radiologists, to supervise and interpret 
more complex diagnostic tests which are commonly rendered (for 
efficiency and patient convenience) within a group practice. 
For example, an ob/gyn group may retain a radiologist on an 
independent contractor basis to supervise and interpret fetal 
ultrasounds performed on women with high-risk pregnancies. Such 
arrangements are fully consistent with Medicare's coverage 
rules for physician office-based diagnostic and therapeutic 
services. Yet, under the Proposed Regulations, a radiologist 
retained as an independent contractor by a group practice would 
not be able to supervise a group's in-office imaging services, 
since designated health services must be supervised by group 
practice members and independent contractors do not qualify as 
group practice members. To address this anomalous result, we 
recommend that the statutory language be amended to clarify 
that independent contractors may supervise the provision of 
designated health services, under the in-office ancillary 
services exception.
                       3. Compensation Provisions
(a) The compensation provisions of the Stark Law should be repealed.

    Our comments thus far have related to amendments that we 
believe are necessary to address problems with the provisions 
of the Stark Law that apply to ownership interests. However 
with respect to those provisions of the law which apply to 
compensation relationships we urge outright repeal, as Congress 
has previously voted to do. We strongly urge Congress to vote 
again to repeal the compensation provisions as it did once 
before in the Balanced Budget Act of 1995.
    The provisions of Stark that apply to compensation have 
created a regulatory nightmare both for the provider community 
and HCFA in applying them in everyday business dealings. While 
the law contains a number of exceptions, they are by and large 
narrow and fall far short of permitting parties to enter into 
an array of perfectly legitimate transactions that are 
unobjectionable under the fraud and abuse statutes. Unlike that 
statute which is intent based, the Stark Law is completely 
arbitrary in the sense that if there is no specific exception 
that protects the compensation relationship, no referrals are 
permitted. The bona fides of the parties or the benefit to the 
community are irrelevant. These provisions have resulted in 
substantial barriers to the clinical and financial integration 
of the health care delivery system. For example, if a hospital 
recruits a physician to a medically underserved community, the 
recruitment payments to the physician may be protected by an 
exception. However, if the physician is already in a community, 
such as a resident graduating from a training program in that 
community, the recruitment payments would not be protected and 
the physician might be unable to serve the Medicare and 
Medicaid patients of that community.
    The original impetus for the Stark Law were studies which 
purported to show a relationship between physician ownership 
interests in clinical laboratories and imaging centers and 
increased levels in numbers of tests ordered. There have never 
been any studies linking compensation with increased numbers of 
tests. Indeed, this may be one reason why states that have 
adopted their own self-referral laws have generally limited 
them to ownership relationships. Repeal of the compensation 
provisions would greatly aid the provider community in freeing 
it from the arbitrariness of the Stark Law but would not lead 
to abuse. In light of the legal tools available to prosecutors 
and governmental agencies, and in light of the increased 
resources dedicated to enforcement of the anti-kickback 
provisions of the Medicare/Medicaid Fraud and Abuse Law, the 
compensation provisions of the Stark Law are not necessary to 
guard against obscure financial arrangements between providers 
and referring physicians.

(b) Compensation Exception Reforms

    In the event that the compensation provisions of the Stark 
Law are not repealed, the members of the coalition urge that 
the compensation exceptions be reformed to expand the rural 
exception to include compensation and to create a statutory 
fair market value exception.

    (1) The rural exception should be expanded to include 
compensation relationships. The same considerations that led 
Congress to provide an exception to the ownership prohibition 
for investment interests in entities located in and serving 
primarily a rural population, support an extension of the 
exception to compensation relationships. In many instances 
health care providers and physicians, particularly group 
practices, may wish to share services that may include 
designated health services to achieve efficiencies and 
economies of scale but, for tax and other considerations, do 
not want to do so through a separate legal entity. The Stark 
Law currently would likely be interpreted by HCFA as precluding 
such arrangements if they involved the provision of designated 
health services. As long as such arrangements are consistent 
with the fraud and abuse laws, they should be permitted in 
order to facilitate the delivery of cost-effective care in 
rural communities.

    (2) Congress should create an exception to the compensation 
prohibition for all ``fair market value'' transactions. As 
discussed above, the major difficulty with the compensation 
prohibition is that it covers all arrangements whether they 
pose a risk of overutilization or not. Only those transactions 
for which Congress saw fit to provide an exception are 
protected. While the Law includes eight exceptions specific to 
compensation, they are limited and narrowly drawn. The 
inevitable consequence of legislating in this manner is that 
many appropriate and beneficial transactions may be prohibited 
because they do not fit into one of these exceptions. HCFA has 
recognized this problem with the Stark Law by proposing a 
generic ``fair market value'' exception. The members of the 
coalition support the creation of such an exception and urge 
Congress to specifically provide for such an exception in the 
law itself to eliminate any ambiguities concerning the 
Secretary's authority to create such a wide ranging exception.
                     4. Designated Health Services
(a) The definition of ``designated health services'' should be amended 
to exclude eyeglasses and contact lenses from the term ``prosthetic 
devices'' as that term is used in the Stark Law

    Under the Proposed Regulations, ``prosthetic device'' is 
defined to include ``one pair of conventional eyeglasses or 
contact lenses furnished subsequent to each cataract surgery 
with insertion of an intraocular lens.'' 42 C.F.R. Sec.  
411.351 (definition of prosthetic device). There is no 
incentive to overutilize or abuse this post-cataract surgery 
benefit since one pair of conventional eyeglasses or contact 
lenses has been acknowledged by HCFA to be medically necessary. 
We therefore urge Congress to revise the definition of 
``prosthetic device,'' as that term is used under the Stark Law 
to exclude eyeglasses and contact lenses.

(b) Congress should clarify the radiology services subject to 
the Stark Law.

    A number of significant issues have arisen with respect to 
the definition of ``radiology services'' as designated health 
services. The Proposed Regulations would define the term 
``radiology'' expansively to include the professional component 
and the technical component of virtually all imaging services. 
Accordingly, we request that Congress amend the statute to 
narrowly limit the radiology services subject the physician 
self-referral prohibition, to exclude the professional 
component of radiology services as a designated heath service, 
and to exclude imaging services that are interpreted by 
nonradiologists (e.g., A and B scans interpreted by 
ophthalmologists or echocardiograms interpreted by 
cardiologists).
    In this regard, we note that, in general, the Stark Law was 
not intended to, and does not, prohibit physicians from 
benefiting from the fruits of their own labor (except that 
productivity bonuses to group practice members may not be based 
on the volume or value of Medicare/Medicaid designated health 
services referred by the physician).

(c) Drugs furnished ``incident-to'' physician services should 
be excluded from the definition of ``outpatient prescription 
drugs'' under the Stark Law

    The Proposed Regulations include chemotherapeutic agents 
and other drugs administered ``incident to'' physicians' 
services within the definition of ``outpatient prescription 
drugs'' subject to the Stark Law. However, such drugs are 
covered by the Medicare program only as a component of a 
physician's service, and physicians' services were never 
intended to be included within the Stark Law prohibition. 
Moreover, the administration of chemotherapeutic drugs is not a 
service that is subject to abuse, since it is highly unlikely 
that a physician would administer such drugs unnecessarily. In 
fact, the administration of chemotherapy in physicians' office 
settings is significantly less costly to the Medicare program 
than the administration of such drugs in hospital settings, and 
for this reason it would be contrary to sound public policy to 
subject physicians who provide this service in their offices to 
significant regulatory constraints. For these reasons, we 
request that Congress exclude drugs furnished ``incident to'' 
physicians' services from the scope of the Stark Law.
                     5. Definition Of ``Referral''
The Proposed Regulations should not preclude cross-referrals for 
designated health services among physician-owners of a PPMC.

    In the Proposed Regulations, HCFA suggests defining a prohibited 
``ownership interest'' to include direct or indirect ownership ``no 
matter how many levels removed from a direct interest.'' HCFA also 
proposes to define a prohibited ``indirect compensation relationship'' 
to include ``any payment to a physician that passes from an entity that 
provides for the furnishing of designated health services, no matter 
how many intervening 'levels' the payment passes through or how often 
it changes form.'' In addition, the Stark Law's definitional language 
specifically provides that the term ``referral'' includes a ``request 
by a physician for a consultation with another physician (and any test 
or procedure ordered by, or to be performed by (or under the 
supervision) of that other physician), . . .''
    The combination of these definitional provisions may be interpreted 
to prohibit certain physician cross-referral arrangements within PPMCs. 
Generally, physician-owned PPMCs acquire a number of physician 
practices within a targeted geographic area; generally, too, the 
purchase price for each physician practice's assets is comprised of 
some combination of PPMC stock, notes, and cash. The practices, each of 
which may remain legally separate, then enter into long-term management 
contracts with the PPMC, under which the PPMC is often compensated for 
its management services on the basis of a percentage of each practice's 
revenues or net operating income.
    In order to succeed in their business objectives, a PPMC must 
increase the productivity and efficiency of the practices it manages. 
Often, this can be accomplished by consolidating the provision of 
services and unifying operations among the practices to the extent 
possible. The Stark Law may impede the consolidation of services by 
precluding certain cross-referrals among the affiliated practices. For 
example, the Stark Law may be interpreted to prohibit an internist 
whose practice is managed by a PPMC from referring a Medicare/Medicaid 
patient to a cardiologist whose practice is likewise managed by the 
same PPMC, if both of the physicians have an ownership interest in the 
PPMC and if the PPMC's management fee is determined based in part on a 
percentage of the cardiologist' revenues. In this event, the 
internist's referral of a patient to the cardiologist may generate 
income from designated health services which is shared with the PPMC by 
way of a percentage-based management fee paid by the cardiologist to 
the PPMC. It could be argued that, because the PPMC's value is likely 
to grow as the result of such revenues, the internist in this example 
is indirectly receiving compensation from his or her referrals to the 
cardiologist for Medicare/Medicaid designated health services and that 
the entire arrangement is prohibited under the Stark Law.
    In order to simplify the administration of the Stark Law and in 
order to ensure that legitimate business arrangements among physicians 
whose practices are managed by a PPMC are not impeded, we would 
recommend that the Stark Law be amended to make it clear that an 
ownership interest in an entity that does not directly provide 
designated health services will not be treated as an indirect 
compensation relationship under the Stark Law.
               6. Clarification of Prepaid Plan Exception
    The prepaid plan exception is an exception to both 
ownership and compensation. However, the scope of the 
exception, particularly as it applies to ``downstream'' 
contractual arrangements between physicians who have accepted 
financial risk and entities with which the physician may 
contract for services, is unclear. In the proposed regulations, 
HCFA has attempted to clarify that the exception does protect 
downstream arrangements. Nonetheless, we urge Congress to 
consider amending the exception to specifically provide that 
any and all arrangements entered into by entities that have 
assumed financial risk to obtain services for their managed 
care patients will be protected. For example, it should be 
clear that a physician group which has accepted full risk for 
all services required by an HMO's enrollees, including hospital 
services, may negotiate for discounts from a hospital with 
respect to such enrollees in return for referring all such 
enrollees to the hospital. Group practices and other entities 
assuming risk under HMO arrangements need to have certainty 
that their contractual arrangements do not run afoul of the 
Stark Law.
      7. Disclosure In Lieu of Prohibition On Physician Ownership
    We also believe that the time has come for Congress to 
consider substituting a comprehensive disclosure requirement 
for the Stark Law's prohibition on physician ownership. Where a 
physician discloses his ownership interest in an entity to 
which he refers and also provides a list of alternative 
providers, the patient's health care choices are maximized, ad 
market forces will ensure the quality of the services provided. 
Such an approach is likely to prove far more effective than the 
Stark Law's complex regulatory scheme in ensuring that 
physician financial interests do not increase the cost or 
adversely affect the quality of health care services rendered 
to Medicare and Medicaid patients.
              8. Retroactive Application of the Stark Law
    Finally, we urge Congress to amend the Stark Law to 
preclude its enforcement prior to the issuance of final 
implementing regulations by HCFA. In light of the harshness of 
the sanctions that may be imposed under the Stark Law and the 
ambiguity of the statutory language, it would be manifestly 
unjust for HCFA to enforce this statute before adopting legally 
binding regulations.
                       9. Reporting Requirements
Congress should limit the reporting requirements imposed under 
the Stark Law to unprotected financial relationships.

    Section 1877(f) of the Stark Law requires that each entity 
that provides Medicare-covered services report to the Secretary 
the entity's ownership, investment and compensation 
arrangements with physicians and their immediate family 
members. Under the Proposed Regulations, HCFA would require 
that an entity report this information annually. HCFA indicates 
it is leaning towards requiring the entity to report all 
ownership and compensation arrangements with physicians 
regardless of whether those arrangements are protected by an 
exception. While it is highly questionable whether HCFA has the 
authority under the current statutory language to impose this 
requirement, we urge Congress to clarify this matter by 
amending the Stark Law's reporting requirements to clarify that 
the obligation to report financial relationships pertains only 
to those arrangements that are not protected by a statutory 
exception.
              10. Group Practice Attestation Requirements
Since the group practice attestation requirement provides no 
useful information to HCFA, increases the burdens of reporting 
and does not materially increase the array of sanctions which 
can be brought to bear against those who submit claims in 
violation of the Stark Law, the requirement should be 
eliminated.

    Section 411.360 of the Stark I final regulations (42 C.F.R. 
Sec. 411.360) contains a requirement that an entity which 
believes it qualifies as a group practice, or, in the case of a 
new entity believes it will qualify as a group practice, must 
annually submit to its carrier a written attestation that the 
entity meets or will meet the requirements to qualify as a 
group practice as set forth in Sec.  411.351. The regulation 
also requires that the attestation be signed by an authorized 
representative of the group who is knowledgeable about the 
group. The Proposed Regulations retain the physician 
attestation requirement with only a few modifications. As 
revised, the Proposed Regulations would require that the 
attestation contain a statement that the information furnished 
in the attestation is true and accurate to the best of the 
representative's ``knowledge and belief.'' In addition, the 
Proposed Regulations also recite that any person filing a false 
statement may be subject to criminal and/civil penalties. In 
light of the all too evident ambiguities in the statutory and 
regulatory language involved, we request Congress to direct 
HCFA to refrain from implementing the group practice 
attestation requirement.
    The foregoing are the principal issues of concern for 
members of the Coalition. If you require any further 
information regarding the matters addressed in this testimony, 
or if we can be of further assistance, please contact the 
Coalition's Washington counsel, Diane S. Millman.

                                

Statement of Waldheger  Coyne, A Legal Professional 
Association, Cleveland, OH

    Waldheger  Coyne submits this statement as a 
physician-focused law firm which represents several thousand 
physicians and their professional practices. Our physician 
clientele ranges from solo practitioners to large multi-
specialty clinics to regionally dispersed physician networks. 
Our attorneysare frequently asked to answer questions about how 
to interpret and comply with the self-referral law.
    We believe that the self-referral law is unfair in its 
application, is not an effective means to eliminate or reduce 
fraud and waste in the health care system, and chills 
development and innovation in health care delivery.
    The self-referral law is unfair in its application because 
it is a strict liability statute. The law does not attempt to 
determine whether a particular relationship is abusive, but 
instead creates classes of ``acceptable'' and ``unacceptable.'' 
The illogical result is that an ``acceptable'' relationship 
under the statute could be abusive, and an unacceptable 
relationship under the statute could be non-abusive. For 
example, a three physician group practice can purchase and 
operate an x-ray machine and overutilize without ever running 
afoul of the self-referral law. Three independent physicians, 
however, who create a new joint venture entity to purchase and 
operate an x-ray machine for their patients, would violate the 
law even if they did not overutilize. Contrast this arbitrary 
standard with the intent-based standards imposed by the Anti-
Kickback Statute and False Claims Act under which specific 
activities are evaluated by analyzing the intent of the 
parties. Additionally, by failing to include an element of 
intent in the statute, a planning opportunity is created for 
ill-intentioned actors to work around the law and create an 
abusive relationship which is acceptable under the law.
    The self-referral law is not an effective means to 
eliminate or reduce fraud and waste in the health care system 
because it does not directly target abusive or wasteful 
behavior, but instead generalizes certain classes of 
relationships. The False Claims Act targets false and 
fraudulent billing. The Anti-Kickback Statute targets kickbacks 
and other abusive payment arrangements. While not perfect, 
these laws are rational, and a plausible rationale explains 
their application. The self-referral law, on the other hand, 
generally prohibits a class of relationships on the theory that 
abusive behavior will be eliminated. By not focusing on 
specific abusive or wasteful behavior, the self-referral law 
fails to effectively curb that type of behavior.
    The self-referral law chills development and innovation in 
health care delivery by restricting and discouraging the people 
in the best position to improve the health care system--
physicians--from pursuing many opportunities. Physicians are 
faced with extensive civil monetary penalties and exclusion 
from federal payment programs for violating the self-referral 
law. Accordingly, rather than pursuing new ventures which could 
ultimately improve the health care system, such as a joint 
venture with a hospital to bring a new service to patients, 
physicians often-times elect to maintain the status quo and the 
system suffers.
    In short, we believe that the self-referral law is 
unnecessary. Other federal and state laws are better suited to 
correcting abuses and waste within the system without unfairly 
treating physicians and unnecessarily chilling the industry.

                                

```