51012 Federal Register / Vol. 72, No. 171 / Wednesday, September 5, 2007 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 411 and 424 

[CMS–1810–F] 

RIN 0938–AK67 

Medicare Program; Physicians’ 

Referrals to Health Care Entities With 

Which They Have Financial 

Relationships (Phase III) 

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS. 

ACTION: Final rule. 

SUMMARY: This final rule is the third 

phase (Phase III) of a final rulemaking 

amending our regulations regarding the 

physician self-referral prohibition in 

section 1877 of the Social Security Act 

(the Act). Specifically, this rule 

finalizes, and responds to public 

comments regarding, the Phase II 

interim final rule with comment period 

published on March 26, 2004, which set 

forth the self-referral prohibition and 

applicable definitions, interpreted 

various statutory exceptions to the 

prohibition, and created additional 

regulatory exceptions for arrangements 

that do not pose a risk of program or 

patient abuse (69 FR 16054). 

In general, in response to public 

comments, in this Phase III final rule, 

we have reduced the regulatory burden 

on the health care industry through the 

interpretation of statutory exceptions 

and modification of the exceptions that 

were created using the Secretary’s 

discretionary authority under section 

1877(b)(4) of the Act to promulgate 

exceptions for financial relationships 

that pose no risk of program or patient 

abuse. 

DATES: Effective date: This final rule is 

effective on December 4, 2007. 

FOR FURTHER INFORMATION CONTACT: 

Joanne Sinsheimer, (410) 786–4620. Lisa 

Ohrin, (410) 786–4565. 

SUPPLEMENTARY INFORMATION: To help 

readers locate information in this final 

rule, we are providing the following 

Table of Contents. 

I. Background 

II. General Comments 

A. General 

B. Compliance With the Anti-Kickback 

Statute 

III. Definitions—§ 411.351 

A. Employee 

B. Entity 

C. Fair Market Value 

D. ‘‘Incident to’’ Services 

E. Physician in the Group Practice 

F. Radiology and Certain Other Imaging 

Services and Radiation Therapy 

G. Referral 

H. Rural Area 

IV. Group Practice—§ 411.352 

V. Prohibition on Certain Referrals by 

Physicians and Limitations on Billing— 

§ 411.353 

VI. Financial Relationship, Compensation, 

and Ownership or Investment Interest— 

§ 411.354 

A. Ownership 

B. Compensation 

C. Special Rules on Compensation 

VII. General Exceptions to the Referral 

Prohibition Related to Both Ownership/ 

Investment and Compensation— 

§ 411.355 

A. Physician Services 

B. In-office Ancillary Services 

C. Services Furnished by an Organization 

(or Its Contractors or Subcontractors) to 

Enrollees 

D. Reserved 

E. Academic Medical Centers 

F. Implants Furnished by an Ambulatory 

Surgical Center 

G. EPO and Other Dialysis-Related Drugs 

Furnished in or by an End-Stage Renal 

Dialysis Facility 

H. Preventive Screening Tests, 

Immunizations, and Vaccines 

I. Eyeglasses and Contact Lenses Following 

Cataract Surgery 

J. Intra-family Rural Referrals 

VIII. Exceptions to the Referral Prohibition 

Related to Ownership or Investment 

Interests—§ 411.356 

A. Publicly-traded Securities and Mutual 

Funds 

B. Hospitals Located in Puerto Rico 

C. Rural Providers 

D. Ownership Interest in a Whole Hospital 

IX. Exceptions to the Referral Prohibition 

Related to Compensation 

Arrangements—§ 411.357 

A. Rental of Office Space 

B. Rental of Equipment 

C. Bona Fide Employment Relationships 

D. Personal Service Arrangements 

E. Physician Recruitment 

F. Isolated Transactions 

G. Remuneration Unrelated to Designated 

Health Services 

H. Group Practice Arrangements with a 

Hospital 

I. Payments by a Physician 

J. Charitable Donations by a Physician 

K. Nonmonetary Compensation 

L. Fair Market Value Compensation 

M. Medical Staff Incidental Benefits 

N. Risk-sharing Arrangements 

O. Compliance Training 

P. Indirect Compensation Arrangements 

Q. Referral Services 

R. Obstetrical Malpractice Insurance 

Subsidies 

S. Professional Courtesy 

T. Retention Payments in Underserved 

Areas 

U. Community-Wide Health Information 

Systems 

X. Reporting Requirements—§ 411.361 

XI. Miscellaneous (Other) 

XII. Provisions of the Final Rule 

XIII. Technical Corrections 

XIV. Collection of Information Requirements 

XV. Regulatory Impact Analysis 

A. Overall Impact 

B. Anticipated Effects 

C. Alternatives Considered Regulation Text 

I. Background 

Section 1877 of the Social Security 

Act (the Act), also known as the 

physician self-referral law: (1) Prohibits 

a physician from making referrals for 

certain ‘‘designated health services’’ 

(DHS) payable by Medicare to an entity 

with which he or she (or an immediate 

family member) has a financial 

relationship (ownership or 

compensation), unless an exception 

applies; and (2) prohibits the entity from 

filing claims with Medicare (or billing 

another individual, entity, or third party 

payer) for those referred services. The 

statute establishes a number of specific 

exceptions and grants the Secretary the 

authority to create regulatory exceptions 

for financial relationships that pose no 

risk of program or patient abuse. The 

current version of section 1877 of the 

Act, which applies to referrals for 11 

DHS, has been in effect and subject to 

enforcement since January 1, 1995. 

This is Phase III of a final rulemaking 

under section 1877 of the Act. Proposed 

regulations were published in the 

Federal Register on January 9, 1998 (63 

FR 1659). Phase I of the final 

rulemaking was published in the 

Federal Register on January 4, 2001 (66 

FR 856) (‘‘Phase I’’) as a final rule with 

comment period, and Phase II of the 

final rulemaking was published in the 

Federal Register on March 26, 2004 (69 

FR 16054) (‘‘Phase II’’) as an interim 

final rule with comment period. Due to 

a printing error, a portion of the Phase 

II preamble was omitted from the March 

26, 2004 Federal Register publication. 

That portion of the preamble, which 

addressed reporting requirements and 

sanctions, was published on April 6, 

2004 (69 FR 17933). 

Except for two provisions, the 

regulations published in Phase I became 

effective on January 4, 2002. We delayed 

the effective date of § 424.22(d), relating 

to home health services until April 6, 

2001 (66 FR 8771.) We also delayed the 

effective date of the final sentence of 

§ 411.354(d)(1) relating to the definition 

of ‘‘set in advance’’ until the publication 

of Phase II; ultimately, it never became 

effective. The regulations in Phase II 

became effective on July 26, 2004. 

Phase I Covered— 

• Sections 1877(a) and 1877(b) of the 

Act (the general prohibition against 

physician self-referral and the 

exceptions applicable to both ownership 

and compensation arrangements); 


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• The statutory definitions at section 

1877(h) of the Act; 

• Certain additional regulatory 

definitions; and 

• A number of new regulatory 

exceptions promulgated using the 

Secretary’s authority under section 

1877(b)(4) of the Act. 

Phase II Covered—

• All provisions of section 1877 of the 

Act; 

• Additional regulatory definitions; 

• Additional new regulatory 

exceptions issued pursuant to the 

Secretary’s authority under section 

1877(b)(4) of the Act; and 

• Responses to the public comments 

on the January 1998 proposed rule and 

the Phase I regulations. 

This Phase III final rule responds to 

comments on Phase II and, thus, 

addresses the entire regulatory scheme. 

In developing Phase III of this 

rulemaking, we have carefully 

considered the history and structure of 

section 1877 of the Act, as well as the 

comments to the Phase II interim final 

rule. As with Phase I and Phase II, we 

believe that Phase III of this rulemaking 

addresses many of the industry’s 

primary concerns, is consistent with the 

statute’s goals and directives, and 

protects beneficiaries of Federal health 

care programs. In particular, we have 

attempted to preserve the core statutory 

prohibition, while providing sufficient 

flexibility to minimize the impact of the 

rule on many common business 

arrangements. We have endeavored to 

simplify the rules and provide 

additional guidance in response to 

comments, as well as to reduce any 

undue burden on the regulated 

community by modifying exceptions 

created using the Secretary’s authority 

under section 1877(b)(4) of the Act to 

promulgate additional exceptions 

regarding financial relationships that 

pose no risk of program or patient 

abuse. As we did in Phase II, in 

evaluating our regulatory options, we 

have applied the same criteria that we 

discussed in detail in the Phase I rule 

(66 FR 859–863, 69 FR 16056.) 

The reasons for dividing the 

rulemaking into Phases I and II are 

explained in Phase I (66 FR 859–860). 

The reason for this Phase III final rule 

is explained in Phase II (69 FR 16055–

16056) and in this preamble. Phases I, 

II, and III of this rulemaking are 

intended to be read together as a unified 

whole. Phase I contains a legislative and 

regulatory history of the physician selfreferral law, which is not repeated here 

(66 FR 857–859). Unless otherwise 

expressly noted, to the extent the 

preamble in Phase III uses different 

language to describe a concept 

addressed in Phase I or Phase II, our 

intent is to elucidate that discussion, 

not to change its scope or meaning. For 

clarity and ease of access for the general 

public to the entire set of physician selfreferral regulations, we are republishing 

in its entirety in this Phase III final rule 

the regulatory text for §§ 411.350 

through 411.361 (omitting §§ 411.370 

through 411.389 relating to advisory 

opinions, which were the subject of a 

separate rulemaking and remain 

unchanged, except for a technical 

correction to § 411.370 discussed below 

in section XIII). Please note that, for ease 

of reference, the regulatory text for 

§ 411.357 includes paragraphs (v) and 

(w) relating to the exceptions for 

arrangements involving donations of 

electronic prescribing and electronic 

health records technology, respectively. 

Those two exceptions were proposed 

and finalized in a separate rulemaking 

(70 FR 59182, 71 FR 45140.) 

This Phase III preamble is generally 

organized to track the statute and 

current regulations. We first address the 

definitions (although certain key 

definitions, such as ‘‘isolated 

transaction,’’ are addressed in the 

discussions of the exceptions to which 

they mainly relate), then the general 

prohibition, then the exceptions. 

Summary discussions are intended to 

aid the reader in understanding the 

regulations. More detailed discussions 

of particular points are included in the 

responses to public comments for each 

topic. 

II. General Comments 

A. General 

Comment: We received numerous 

comments regarding both ownership 

and compensation arrangements in 

which the commenter requested 

confirmation that the particular 

arrangement described in the comment 

met the requirements of an exception 

and, thus, did not violate section 1877 

of the Act. 

Response: In this final rule, we 

provide guidance with respect to the 

provisions of Phase I and Phase II. 

When possible, we respond to 

commenters’ specific inquiries 

regarding compliance with the 

physician self-referral law. However, 

several of the inquiries failed to provide 

sufficient facts to enable us to evaluate 

or respond to the inquiry. Moreover, we 

consider several other inquiries to be in 

the nature of a request for a binding 

opinion, which, as provided in 

§ 411.386, can be made only through the 

issuance of a formal advisory opinion. 

B. Compliance With the Anti-Kickback 

Statute 

Comment: Numerous commenters 

objected to the inclusion of the 

requirement that arrangements must not 

violate the Federal anti-kickback statute 

(section 1128B(b) of the Act; 42 U.S.C. 

1320a–7b(b), hereinafter referred to as 

the anti-kickback statute), which 

appears in the regulatory exceptions 

created pursuant to the Secretary’s 

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

Act. According to the commenters, the 

condition is unnecessary and undercuts 

our efforts to create ‘‘bright lines.’’

Response: We disagree with the 

commenters for the reasons set forth in 

Phase I (66 FR 863) and Phase II (69 FR 

16108). Wherever possible, we have 

attempted to create bright-line rules. 

However, given the limitations on our 

regulatory authority under section 

1877(b)(4) of the Act, inclusion of the 

anti-kickback statute condition is 

necessary to ensure that the exceptions 

promulgated under that authority do not 

pose a risk of program or patient abuse. 

Moreover, because parties’ arrangements 

must not violate the anti-kickback 

statute irrespective of whether they 

satisfy the other requirements of an 

exception, any additional burden 

associated with the requirement is 

minimal. 

Comment: Two commenters suggested 

that the exceptions under the physician 

self-referral law and safe harbors under 

the anti-kickback statute should more 

closely parallel each other. The first 

commenter stated that, without parallel 

safe harbors under the anti-kickback 

statute and exceptions to the physician 

self-referral law, the physician selfreferral law exceptions will be 

underutilized and ineffective. The 

second commenter suggested that an 

arrangement that meets an exception 

under the physician self-referral law 

should be deemed to be within a safe 

harbor under the anti-kickback statute. 

Response: We addressed the issue 

raised by the first commenter in Phase 

II (69 FR 16115). As explained in detail 

there, we do not believe it is feasible to 

except financial relationships solely 

because they fit in an anti-kickback 

statute safe harbor. The second 

commenter’s suggestion is outside the 

scope of this rulemaking and our 

authority. We note that several of the 

regulatory exceptions under the 

physician self-referral law do, in fact, 

correspond to safe harbors issued by the 

Office of Inspector General (OIG). For 

example, the exceptions for the 

donation of electronic prescribing items 

and services (§ 411.357(v)) and 

electronic health records software and 


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information technology and training 

services (§ 411.357(w)) correspond to 

safe harbors issued by the OIG. In 

addition, the exceptions for referral 

services and obstetrical malpractice 

insurance subsidies in § 411.357(q) and 

(r), respectively, mirror anti-kickback 

statute safe harbors. 

Comment: One commenter asserted 

that the exceptions in § 411.357(q) and 

(r) that cross-reference safe harbors 

relating to referral services and 

obstetrical malpractice insurance 

subsidies, respectively, are too narrow. 

The commenter stated that any 

arrangement that has received a 

favorable advisory opinion from the 

OIG, even if the agreement in question 

does not fall within a safe harbor, 

should be permitted under the selfreferral law. 

Response: Under section 1877(b)(4) of 

the Act, we may issue additional 

exceptions (that is, exceptions not 

specified in the statute) only where 

doing so would create no risk of 

program or patient abuse. As noted 

above, it is not feasible to except 

financial relationships under section 

1877 of the Act solely because they fit 

in an anti-kickback statute safe harbor, 

nor would it be feasible or appropriate 

to do so because an arrangement is the 

subject of a favorable OIG advisory 

opinion on a different statute. As we 

explained in Phase II, in some instances, 

it is appropriate for us to refer to the 

criteria in an anti-kickback safe harbor 

when creating an exception under the 

physician self-referral law (69 FR 

16115). 

III. Definitions—§ 411.351 

We received public comments only on 

the specific definitions set out below. In 

addition to technical changes to several 

definitions, we are adding definitions 

for ‘‘downstream contractor,’’

‘‘physician organization,’’ and ‘‘rural 

area’’ and modifying the definitions of 

‘‘fair market value,’’ and ‘‘ ‘incident to’

services.’’ The new definitions of 

‘‘downstream contractor’’ and 

‘‘physician organization’’ are discussed 

in sections IX.D and VI.B, respectively, 

below, together with the relevant 

provisions to which they apply. 

A. Employee 

We are making no changes to the 

definition of ‘‘employee’’ in this Phase 

III final rule. 

Comment: One commenter asked us 

to clarify that, in order to qualify as an 

employee of a group practice, a group 

practice must exercise control over the 

employee; that is, the group practice 

must supply the equipment, personnel, 

and support necessary for the individual 

to provide the service, and the group 

practice must control how the work is 

done and have hiring and firing 

authority over the individual providing 

services. The commenter asked for 

clarification on this issue out of concern 

regarding arrangements in which a 

group practice ‘‘hires’’ an individual as 

a part-time employee of the group 

practice but, in reality, exercises no 

control over the individual. 

Response: As set forth in section 

1877(h)(2) of the Act and the definition 

of ‘‘employee’’ at § 411.351, an 

individual is considered an ‘‘employee’’

for purposes of the physician selfreferral prohibition if the individual is 

considered an employee under the 

common law rules applicable to 

determining the employer-employee 

relationship, as applied for purposes of 

section 3121(d)(2) of the Internal 

Revenue Code of 1986. We agree with 

the commenter that the actual conduct 

of the relationship is determinative. To 

determine whether an employeremployee relationship exists, the 

various factors, including those 

regarding supervision, used by the 

Internal Revenue Service (IRS) to 

determine employee status apply. 

Whereas the receipt of a W–2 from an 

entity and the written terms of the 

arrangement are relevant, neither 

controls whether an individual meets 

the definition of ‘‘employee’’ for 

purposes of the physician self-referral 

law; rather, the focus is on the actual 

relationship between the parties. 

B. Entity 

We are making no substantive 

changes to the definition of ‘‘entity’’ in 

this Phase III final rule. 

Comment: One commenter objected to 

certain language in the definition of 

‘‘entity’’ specifying that, in general, a 

person or entity is considered to be 

‘‘furnishing DHS’’ if CMS makes 

payment to that person or entity, either 

directly, upon assignment on the 

patient’s behalf, or upon reassignment 

in certain cases. According to the 

commenter, some arrangements are 

structured so that referring physicians 

own entities that lease space, 

equipment, staff, or management 

services to entities that furnish DHS, 

and, in turn, submit claims to Medicare. 

The commenter suggested that ‘‘entity 

furnishing DHS’’ should be expanded to 

include entities that derive a substantial 

amount of their revenues from the 

provision of services to entities 

furnishing DHS. 

Response: We note that, after the close 

of the Phase II comment period, the 

Medicare Payment Advisory 

Commission (MedPAC), in its March 

2005 Report to Congress, recommended 

that the Secretary ‘‘should expand the 

definition of physician ownership in the 

physician self-referral law to include 

interests in an entity that derives a 

substantial proportion of its revenue 

from a provider of designated health 

services.’’ Specifically, MedPAC wrote: 

Physician ownership of entities that 

provide services and equipment to imaging 

centers and other providers creates financial 

incentives for physicians to refer patients to 

these providers, which could lead to higher 

use of services. Prohibiting these 

arrangements should help ensure that 

referrals are based on clinical, rather than 

financial, considerations. It would also help 

ensure that competition among health care 

facilities is based on quality and cost, rather 

than financial arrangements with entities 

owned by physicians who refer patients to 

the facility. 

(See http://www.medpac.gov/ 

publications/congressional_reports/ 

Mar05_EntireReport.pdf, at page 170.) 

We agree with the commenter that 

arrangements structured so that 

referring physicians own leasing, 

staffing, and similar entities that furnish 

items and services to entities furnishing 

DHS (also referred to herein as ‘‘DHS 

entities’’), but do not submit claims 

raise significant concerns under the 

fraud and abuse laws and would appear 

contrary to the plain intent of the 

physician self-referral law. These 

structures are particularly problematic 

because referrals by physician-owners of 

leasing, staffing, and similar entities to 

a contracting DHS entity can 

significantly increase the physicianowned entity’s profits and investor 

returns, creating incentives for 

overutilization and corrupting medical 

decision-making. We intend to study 

further the types of arrangements 

described by the commenter and 

MedPAC, as well as other types of 

arrangements, to determine the best 

approach for addressing them in order 

to protect against program and patient 

abuse. We would make any change to 

address this issue, whether through the 

definition of ‘‘entity’’ or otherwise, in a 

separate rulemaking that is subject to 

public comment. 

We note that the arrangements 

described by MedPAC remain subject to 

the physician self-referral prohibition. 

In most instances, these structures will 

constitute indirect compensation 

arrangements with DHS entities under 

§ 411.354(b) that must satisfy the 

requirements of the indirect 

compensation arrangements exception 

in § 411.357(p). We intend to monitor 

these arrangements closely for 

compliance with the physician selfreferral law. These arrangements appear 


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highly suspect under the anti-kickback 

statute; participants in such 

arrangements should closely scrutinize 

the arrangements for compliance with 

that statute also. Importantly, we note 

that the indirect compensation 

arrangements exception in § 411.357(p) 

includes a requirement that the 

arrangement not violate the antikickback statute. 

C. Fair Market Value 

In Phase II, we created a ‘‘safe harbor’’

provision in the definition of ‘‘fair 

market value’’ at § 411.351 for hourly 

payments to physicians for their 

personal services. The safe harbor 

consisted of two methodologies for 

calculating hourly rates that would be 

deemed ‘‘fair market value’’ for 

purposes of section 1877 of the Act. The 

first methodology requires that the 

hourly payment be less than or equal to 

the average hourly rate for emergency 

room physician services in the relevant 

physician market, provided there are at 

least three hospitals providing 

emergency room services in the market. 

The second methodology requires 

averaging the 50th percentile national 

compensation level for physicians in the 

same specialty, using at least four of six 

specified salary surveys, and dividing 

the result by 2,000 hours to establish an 

hourly rate. If the relevant physician 

specialty does not appear in one of the 

recognized surveys, the parties must use 

the survey’s reported compensation for 

general practice in order to be within 

the safe harbor. We emphasized that use 

of the safe harbor was entirely voluntary 

and that parties may establish fair 

market value through other methods. 

We received a large number of 

comments questioning the new safe 

harbor. 

Comment: Several commenters 

disliked the compensation survey 

methodology. In general, the 

commenters believed that the 

methodology was too prescriptive, and 

they urged more flexibility. Commenters 

noted that at least one of the listed 

surveys no longer exists, and that 

another is out of date. Another 

commenter stated that many of the 

survey companies will not sell their 

surveys to hospitals that do not 

participate in the surveys. According to 

the commenters, the available surveys 

are expensive. Another commenter 

asserted that other surveys, including 

the American Medical Group 

Association survey and Modern 

Healthcare’s annual compilation of 

surveys, provide similar information at 

less expense. Several commenters 

objected to the use of national averages, 

because the national average masks 

significant regional differences in 

physician compensation. 

Some commenters suggested that the 

compensation survey methodology be 

modified in other respects. One 

commenter urged us to expand the fair 

market value safe harbor to 

compensation that falls within the 25th 

to the 75th percentile of physician 

compensation. Commenters suggested 

that providers be able to use fewer than 

four surveys (for example, averaging the 

50th percentile of any two surveys). 

Several commenters suggested that, 

where specialty-specific data is 

unavailable, providers should be able to 

use data from a similar specialty, rather 

than from general practitioners. 

According to the commenters, the 

compensation of physicians in one type 

of specialty is more similar to the 

compensation of physicians in other 

specialties than to the compensation of 

general practitioners. One commenter 

asked whether a contract could include 

a cost of living annual adjustment. 

Response: We share the commenters’

concerns regarding the availability of 

the surveys identified in the safe harbor. 

We are aware that several of the surveys 

are no longer available (or may not be 

readily available to all DHS entities and 

physicians), making it impractical to 

utilize the safe harbor. In addition, it 

may be infeasible to obtain information 

regarding hourly rates for emergency 

room physicians at competitor 

hospitals. Therefore, we are not 

retaining the safe harbor within the 

definition of ‘‘fair market value’’ at 

§ 411.351. We emphasize, however, that 

we will continue to scrutinize the fair 

market value of arrangements as fair 

market value is an essential element of 

many exceptions. 

Reference to multiple, objective, 

independently published salary surveys 

remains a prudent practice for 

evaluating fair market value. Ultimately, 

the appropriate method for determining 

fair market value for purposes of the 

physician self-referral law will depend 

on the nature of the transaction, its 

location, and other factors. As we 

explained in Phase II, although a good 

faith reliance on an independent 

valuation (such as an appraisal) may be 

relevant to a party’s intent, it does not 

establish the ultimate issue of the 

accuracy of the valuation figure itself 

(69 FR 16107). Our views regarding fair 

market value are discussed further in 

Phase I (66 FR 944) and Phase II (69 FR 

16107). 

Because we are eliminating the safe 

harbor, it is unnecessary to address the 

commenters’ specific suggestions for 

identifying permissible surveys and 

expanding the range of acceptable 

physician compensation. With respect 

to the inquiry regarding cost of living 

adjustments, we note that contracts for 

physician services may include an 

annual salary adjustment, provided that 

the resulting compensation is fair 

market value and otherwise complies 

with an exception. 

Comment: A large number of 

nephrologists and groups representing 

nephrologists complained that the 

application of the safe harbor to their 

compensation for medical director 

duties at renal dialysis centers is 

inappropriate, especially given that the 

physician self-referral prohibition does 

not apply to dialysis services for which 

payment is made under the ESRD 

composite rate. According to the 

commenters, the hourly rate under the 

safe harbor would not adequately 

compensate dialysis facility medical 

directors for the full array of their skills 

and services. Several commenters 

expressed concern that, notwithstanding 

the voluntary nature of the safe harbor, 

the methodology would become the 

preferred valuation methodology to the 

detriment of physicians. 

Response: For the reasons noted in 

the preceding response, we have 

eliminated the fair market value safe 

harbor in this Phase III final rule. With 

respect to existing arrangements, 

nothing in the physician self-referral 

regulations required use or application 

of the fair market value safe harbor; it 

was a wholly voluntary provision. 

Moreover, a physician’s compensation 

arrangement with a dialysis facility 

implicates section 1877 of the Act only 

to the extent that the arrangement 

creates a direct or indirect financial 

arrangement with an entity that 

furnishes DHS, such as a dialysis 

facility that furnishes DHS not covered 

by the ESRD composite rate or a 

hospital that provides dialysis (66 FR 

923–924). 

Comment: A number of commenters 

complained that the fair market value 

safe harbor methodology based on local 

hourly rates for emergency room 

physician services creates significant 

risk under the antitrust laws. 

Response: We have eliminated the fair 

market value safe harbor for payments 

to physicians. 

Comment: Two commenters asked us 

to comment on other valuation 

methodologies. 

Response: Nothing precludes parties 

from calculating fair market value using 

any commercially reasonable 

methodology that is appropriate under 

the circumstances and otherwise fits the 

definition at section 1877(h) of the Act 

and § 411.351. Ultimately, fair market 

value is determined based on facts and 


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circumstances. The appropriate method 

will depend on the nature of the 

transaction, its location, and other 

factors. Because the statute covers a 

broad range of transactions, we cannot 

comment definitively on particular 

valuation methodologies. We refer the 

commenter to previous discussions in 

Phase I and Phase II regarding valuation 

methodologies (66 FR 944–945, 69 FR 

16107). 

Comment: One commenter wanted 

confirmation that a fair market value 

hourly rate could be used to compensate 

physicians for both administrative and 

clinical work. Another commenter 

asked whether the rate could be used to 

determine an annual salary. 

Response: A fair market value hourly 

rate may be used to compensate 

physicians for both administrative and 

clinical work, provided that the rate 

paid for clinical work is fair market 

value for the clinical work performed 

and the rate paid for administrative 

work is fair market value for the 

administrative work performed. We note 

that the fair market value of 

administrative services may differ from 

the fair market value of clinical services. 

A fair market value hourly rate may be 

used to determine an annual salary, 

provided that the multiplier used to 

calculate the annual salary accurately 

reflects the number of hours actually 

worked by the physician. 

D. ‘‘Incident to’’ Services 

Under section 1877 of the Act, group 

practices are permitted to pay profit 

shares and productivity bonuses to their 

physicians in ways that other DHS 

entities cannot. Unlike other DHS 

entities, the statute permits group 

practices to pay a physician in the group 

a share of the overall profits of the 

group, or a productivity bonus based on 

services personally performed or 

services ‘‘incident to’’ such personally 

performed services, provided that the 

profit share or bonus is not determined 

in any manner that is directly related to 

the volume or value of the physician’s 

referrals. At § 411.351, we define 

‘‘incident to’’ services to mean those 

services that meet the requirements of 

section 1861(s)(2)(A) of the Act, the 

‘‘incident to’’ billing rule in § 410.26, 

and the relevant manual provisions, as 

those provisions may be amended or 

replaced from time to time, all of which 

set forth coverage criteria for ‘‘services 

and supplies’’ furnished ‘‘incident to’’ a 

physician’s professional service. 

In the calendar year (CY) 2002 

physician fee schedule final rule 

published on November 1, 2001 (66 FR 

55246), we amended our ‘‘incident to’’

billing regulation in § 410.26 to provide 

that ‘‘incident to’’ services and supplies 

means those services and supplies that 

are included in section 1861(s)(2)(A) of 

the Act and that are not specifically 

listed in the Act as a separate benefit. In 

the CY 2003 physician fee schedule 

final rule (67 FR 79966), we clarified 

that only those services that do not have 

their own separate and independently 

listed benefit category may be billed as 

‘‘incident to’’ a physician service, 

except as otherwise expressly permitted 

by statute (for example, physical 

therapy services to the extent authorized 

under section 1862(a)(20) of the Act) (67 

FR 79994). Consequently, diagnostic xray tests, diagnostic laboratory tests, and 

other diagnostic tests, all of which 

comprise a single benefit category under 

section 1861(s)(3) of the Act, may not be 

billed as ‘‘incident to’’ services under 

section 1861(s)(2)(A) of the Act. Thus, 

under section 1877 of the Act, a group 

practice physician may not receive a 

productivity bonus if the bonus is 

calculated based on such diagnostic 

tests, unless the physician personally 

performed the tests. Moreover, the 

bonus cannot be related directly to the 

volume or value of DHS referrals. We 

discuss the treatment of ‘‘incident to’’

services in further detail in section IV 

below. 

Given our intent to conform the 

physician self-referral regulations as 

much as possible to existing Medicare 

coverage and payment rules, we did not 

intend in Phase I or Phase II to 

distinguish between ‘‘services’’ and 

‘‘supplies’’ furnished ‘‘incident to’’ a 

physician’s professional services. 

Accordingly, as discussed in more detail 

in section IV of this preamble, we are 

revising the definition of ‘‘ ‘incident to’

services’’ at § 411.351 to clarify that the 

term includes both services and 

supplies (such as drugs) that meet the 

applicable requirements set forth in 

section 1861(s)(2)(A) of the Act, § 410.26 

of our regulations, and relevant manual 

provisions. We are also making a minor 

revision to make clear that the 

definition covers the terms ‘‘ ‘incident 

to’ services’’ and ‘‘services ‘incident 

to’ ’’ for purposes of these regulations. 

Comment: A commenter asserted that 

our interpretation in the CY 2003 

physician fee schedule final rule as to 

what services qualify as ‘‘incident to’’

services (67 FR 79993–79994) is 

inconsistent with a previous 

interpretation we made in the CY 2002 

physician fee schedule final rule (66 FR 

55268). The commenter contends that 

‘‘incident to’’ services may include 

separately listed and independent 

services, such as diagnostic tests. The 

commenter contends that our 

application of the ‘‘incident to’’ billing 

rules in the physician self-referral 

context effectively prohibits group 

practice physicians from receiving a 

share of the group’s overall profits or a 

productivity bonus based on diagnostic 

tests that were directly supervised by 

the physician or a member of his or her 

group practice. The commenter 

requested that we amend the definition 

of ‘‘incident to’’ at § 411.351 to cover 

any services, including services that are 

listed separately and independently 

(such as diagnostic tests), that are 

directly supervised by the physician or 

a physician in the group practice, 

provided that they meet all of the other 

requirements under the ‘‘incident to’’

billing rules. According to the 

commenter, this interpretation appears 

consistent with the Congress’ intent 

under section 1877 of the Act to favor 

group practice physicians with respect 

to the distribution of profits and 

productivity bonuses. 

Response: We are not amending the 

definition of ‘‘incident to’’ services at 

§ 411.351 as suggested by the 

commenter. We believe it would be 

confusing to define ‘‘incident to’’

services differently for physician selfreferral purposes than for billing 

purposes. As we stated in Phase I, we 

intend to interpret the physician selfreferral law in a manner that conforms 

to existing Medicare coverage and 

payment rules (66 FR 859). We 

specifically noted in Phase I (66 FR 909) 

and in the Phase II definition of 

‘‘incident to services’’ (69 FR 16128) 

that the ‘‘incident to’’ services on which 

group practice physicians could be 

compensated must comply with existing 

billing requirements as they may be 

amended from time to time. 

We do not believe that our ‘‘incident 

to’’ billing rule in § 410.26 is 

inconsistent with the language of 

section 1877(h)(4)(B)(i) of the Act. 

Although ‘‘incident to’’ services are 

referrals for purposes of section 1877 of 

the Act, we believe that the Congress 

intended that these services nonetheless 

may be considered when calculating a 

physician’s productivity bonus. For 

those services that are appropriately 

billed ‘‘incident to’’ under current 

Medicare rules, the group practice 

physician to whose personally 

performed services the ‘‘incident to’’

services are incidental (that is, the 

ordering physician) may be paid a 

productivity bonus or profit share 

consistent with the special rules for 

such compensation set forth in 

§ 411.352(i). 

As we discussed in the CY 2003 

physician fee schedule final rule, we 

interpret § 410.26(a)(7) literally; that is, 

‘‘incident to’’ services and supplies 


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covered under section 1861(s)(2)(A) of 

the Act means services and supplies not 

having their own independent and 

separately listed statutory benefit 

category (67 FR 79994.) The commenter 

provided the example of diagnostic tests 

performed under the direct supervision 

of a physician and meeting the 

requirements under the ‘‘incident to’’

billing rules. Regardless of the physical 

possibility of diagnostic tests being 

performed under the direct supervision 

of a physician and meeting the 

requirements of certain billing rules, 

because these services have an 

independent and separately listed 

statutory benefit category (section 

1861(s)(3) of the Act), they cannot be 

billed as ‘‘incident to’’ a physician 

service. (We note that we are deleting 

§ 411.355(a)(3) because it is redundant 

and incorrectly suggests that diagnostic 

tests may be billed as ‘‘incident to’’

services.) 

E. Physician in the Group Practice 

We are modifying the definition of 

‘‘physician in the group practice’’ to 

clarify that an independent contractor 

physician must furnish patient care 

services for the group under a 

contractual arrangement directly with 

the group practice. 

Comment: A commenter asked that 

the definition of ‘‘physician in the group 

practice’’ be revised to delete the 

condition that a physician who is an 

independent contractor of a group 

practice is considered to be in the group 

practice only when he or she is 

performing services on the group 

practice’s premises. The commenter 

noted that section 952 of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) (Pub. 

L. 108–173) revised the reassignment 

provisions in section 1842(b)(6) of the 

Act to permit independent contractor 

physicians to reassign their claims to a 

group practice for services performed 

off-premises (§ 424.80(b)(2)). 

Response: Section 1842(b)(6) of the 

Act generally prohibits Part B payment 

to any person or entity other than the 

beneficiary who received the service or 

the physician or other supplier who 

furnished the service. This section of 

the Act also enumerates specific 

exceptions, known as the reassignment 

exceptions, to this general rule. Prior to 

section 952 of the MMA, we were 

prohibited from making payment to an 

entity that received reassigned 

payments from a contractor physician or 

other contractor supplier, unless the 

physician or other supplier performed 

the service at issue on the premises of 

the entity billing for the service. Section 

952 of the MMA amended section 

1842(b)(6) of the Act, so that we are 

allowed to make payment to an entity 

that has received reassigned payments 

pursuant to a contractual arrangement, 

provided that the contractual 

arrangement meets the program integrity 

and other safeguards that the Secretary 

may determine are appropriate. Thus, 

although section 1842(b)(6) of the Act 

grants us general authority to honor 

certain reassignments made pursuant to 

a contractual arrangement, it does not 

require us to honor those we believe are 

potentially abusive. We note that 

section 952 of the MMA does not apply 

exclusively to arrangements with group 

practices, and, therefore, retains 

meaning in the context of reassignments 

between other parties. For these reasons, 

we do not believe that section 952 of the 

MMA requires us to change our 

definition of ‘‘physician in the group 

practice’’ so that an independent 

contractor physician qualifies as a 

‘‘physician in the group practice’’

irrespective of whether he or she is 

performing services on or off the group 

practice’s premises. We draw attention 

to § 424.80(a), which, in implementing 

section 952 of the MMA, we amended 

to state that nothing in § 424.80 relieves 

a party’s obligations under certain other 

rules, including the physician selfreferral rules. 

We continue to believe that it is 

appropriate to consider an independent 

contractor physician a ‘‘physician in the 

group practice’’ only when he or she is 

performing services in the group 

practice’s facilities and, thus, has a clear 

and meaningful nexus with the group’s 

medical practice. The term ‘‘physician 

in the group practice’’ is central to the 

definition of a group practice and 

significant for purposes of two 

important exceptions in section 1877 of 

the Act: The physician services 

exception and the in-office ancillary 

services exception. These exceptions 

enable physicians to make referrals for 

DHS within their group practices 

provided that certain requirements are 

satisfied. Accordingly, the strong nexus 

with a group practice created by the 

requirement that an independent 

contractor physician practice in a group 

practice’s facilities ensures that the 

physician is truly practicing ‘‘in the 

group.’’

Comment: Two commenters 

expressed the need for clarification of 

the requirements for qualification as a 

‘‘physician in the group practice.’’

These commenters asserted that a 

‘‘physician in the group practice’’ is 

permitted to furnish only supervision 

services (which are not separately 

reimbursed by Medicare), and that any 

services for which a group practice 

actually bills Medicare must be 

provided by a member of the group. The 

commenters requested that we confirm 

their interpretation of the rules 

regarding billing for services of 

physicians in a group practice and 

members of a group practice. In the 

alternative, the commenters suggested 

that we require that any separatelybillable services furnished by a 

‘‘physician in the group practice’’ be 

provided in the same building where 

the group practice provides its full range 

of services, thus prohibiting a 

‘‘physician in the group practice’’ from 

providing services in a centralized 

building. According to the commenters, 

this change would ensure that 

independent contractor physicians have 

a sufficient nexus to the group practice 

to justify the group’s utilization of the 

in-office ancillary services exception. 

Response: The commenters are 

mistaken that, as defined at § 411.351, a 

‘‘physician in the group practice’’ (who 

can be either a member of the group or 

an independent contractor) may furnish 

only non-billable supervision services. 

The definition makes clear that a 

‘‘physician in the group practice’’ can 

include an independent contractor who 

is ‘‘furnishing patient care services.’’

‘‘Patient care services’’ is defined at 

§ 411.351 to encompass a broad range of 

billable and non-billable services. 

In order to qualify as a ‘‘group 

practice’’ under § 411.352, only 

members of the group practice (and not 

independent contractor physicians in 

the group practice) are required to 

furnish ‘‘substantially the full range of 

patient care services that the physician 

routinely furnishes, including medical 

care, consultation, diagnosis, and 

treatment, through the joint use of 

shared office space, facilities, 

equipment and personnel.’’ In other 

words, an independent contractor 

‘‘physician in the group practice’’ may 

furnish billable services, and may 

furnish services—in the group practice’s 

facilities—that comprise less than the 

full range of the patient care services 

that he or she usually furnishes. This 

enables a group practice to hire, on a 

contract basis, a specialist or other 

physician without jeopardizing the 

group’s ability to qualify as a group 

practice and utilize the in-office 

ancillary services exception, even if the 

contracted physician works for several 

physician practices or facilities. We note 

that qualifying as a group practice is not 

in and of itself sufficient to comply with 

the physician self-referral rules, and that 

use of the in-office ancillary services 

exception requires compliance with all 

of the conditions of that exception. 


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Under our regulations, an 

independent contractor physician is a 

‘‘physician in the group practice’’ only 

when he or she is performing services 

in the group practice’s facilities. We are 

concerned about reports that some 

group practices purport to rely on the 

in-office ancillary services exception in 

§ 411.355(b) when they: (1) Nominally 

comply with the centralized building 

requirements in § 411.355(b)(2)(ii) and 

(b)(2)(iii); (2) contract with independent 

contractor physicians to furnish or 

supervise services in the centralized 

building as ‘‘physicians in the group 

practice’’; (3) accept reassignment of the 

right to payment from those physicians; 

and (4) realize profits based on the 

services they refer to the independent 

contractor ‘‘physicians in the group 

practice’’ stationed in the centralized 

building. In the physician fee schedule 

proposed rule for CY 2007, we proposed 

changes to our reassignment rules and 

to the definition of ‘‘centralized 

building’’ to address potentially abusive 

arrangements (71 FR 48981, 49054–

49057). We are reviewing the public 

comments to our proposal and intend to 

issue a final rulemaking on this subject. 

Comment: One commenter noted that 

the definition of ‘‘member of the group’’

at § 411.351 specifically excludes leased 

employees who do not meet the 

definition of an ‘‘employee’’ at 

§ 411.351. The commenter questioned 

whether a leased employee who does 

not meet the definition of an employee 

may nevertheless meet the definition of 

a ‘‘physician in the group practice.’’ The 

commenter noted that an independent 

contractor physician may be a 

‘‘physician in the group practice’’ and 

asserted that there does not appear to be 

any distinction between an independent 

contractor and a leased employee who 

does not meet the definition of an 

‘‘employee’’ that would justify 

excluding the latter type of individual 

from being a ‘‘physician in the group 

practice.’’

Response: The definition of 

‘‘physician in the group practice’’

clearly encompasses only members (that 

is, owners and employees) and 

independent contractors. We are not 

persuaded to include other types of 

employment relationships (such as 

arrangements involving a group practice 

‘‘leasing’’ or borrowing a physician who 

is an employee or contractor of some 

other entity. In order to fit within the 

definition of ‘‘physician in the group 

practice,’’ an independent contractor 

must have ‘‘a contractual arrangement 

with the group practice.’’ We interpret 

this to require that the contractual 

arrangement be directly between the 

group practice and the independent 

contractor physician, and not between 

the group practice and another entity, 

such as a staffing company. We are 

expressly incorporating this 

interpretation into the regulations by 

modifying the definition of ‘‘physician 

in the group practice’’ at § 411.351. 

Group practices receive favorable 

treatment under the physician selfreferral law with respect to physician 

compensation. Accordingly, we believe 

that, in order to qualify as a group 

practice and receive such favorable 

treatment, the group practice’s 

physicians must have a strong and 

meaningful nexus to the group practice. 

An independent contractor in direct 

contractual privity with a group practice 

has such a nexus; employees leased 

from other entities do not. We believe 

this justifies excluding a leased 

employee from being a ‘‘physician in 

the group practice,’’ contrary to the 

commenter’s assertion that there is no 

distinction between an independent 

contractor and a leased employee. 

Moreover, we are concerned about 

potentially abusive arrangements, such 

as a situation in which a physician is 

employed by (and receives one W–2 

from) a staffing company that leases the 

physician to numerous group practices, 

none of which has to enter into an 

individual contract with the physician 

but all of which can consider the 

physician a ‘‘physician in the group 

practice’’ with the attendant benefits of 

such categorization. 

F. Radiology and Certain Other Imaging 

Services and Radiation Therapy 

In Phase II, we defined ‘‘radiology and 

certain other imaging services’’ to 

exclude radiology procedures that are 

integral to the performance of a 

nonradiological medical procedure and 

performed during the nonradiological 

procedure, or immediately following the 

nonradiological procedure when 

necessary to confirm placement of an 

item placed during the nonradiological 

procedure (69 FR 16103). We declined 

to include nuclear medicine in the DHS 

category of ‘‘radiology and certain other 

imaging services,’’ but stated that we 

would continue to study the issue. One 

commenter stated that it disagreed with 

our decision. Based on this comment 

and further study, in the CY 2006 

physician fee schedule proposed rule, 

we proposed to include diagnostic 

nuclear medicine services within the 

meaning of ‘‘radiology and certain other 

imaging services,’’ and to include 

therapeutic nuclear medicine services 

within the meaning of ‘‘radiation 

therapy and supplies’’ (70 FR 45854–

45856). We adopted our proposal in the 

CY 2006 physician fee schedule final 

rule (70 FR 70283–70289), effective 

January 1, 2007. 

We are making no changes to the 

definition of ‘‘radiology and certain 

other imaging services’’ in this Phase III 

final rule. 

Comment: One commenter noted that, 

in Phase II, we specifically declined to 

exclude ophthalmic A-scans and Bscans from the definition of ‘‘radiology 

and certain other imaging services’’ (69 

FR 16103). The commenter disagreed 

with our conclusion, particularly with 

respect to A-scans. The commenter 

stated that the applicable standard of 

care dictates that A-scans are integral to 

cataract and other refractive surgeries 

and that they are not diagnostic in 

nature because they guide how surgery 

will be performed, not whether surgery 

will be performed. According to the 

commenter, although the scan is not 

done during the operation, it is an 

integral part of the surgery and raises 

little risk of abuse or overutilization 

because it will be done only if cataract 

surgery has already been prescribed. 

Response: An A-scan involves the 

transmission of high-frequency sound 

waves through the eye and the 

measurement of their reflection from 

ocular structures. An A-scan provides a 

one-dimensional picture, most 

commonly used to measure the eye 

length and provide the data needed to 

calculate the power of the optical 

correction of the intraocular lens 

implant for cataract surgery. A B-scan, 

which is a two-dimensional cross 

section view of the eye, is used if the 

view inside the eye is obstructed by 

blood, an extremely dense cataract, or 

other cloudy media. 

The definition of ‘‘radiology and 

certain other imaging services’’ at 

§ 411.351 does not include radiology 

procedures that are integral to the 

performance of a nonradiological 

medical procedure and performed: (1) 

During the nonradiological medical 

procedure, or (2) immediately following 

the nonradiological medical procedure 

when necessary to confirm placement of 

an item placed during the 

nonradiological medical procedure. The 

commenter correctly states that often an 

A-scan (and a B-scan, as appropriate) is 

a pre-operative procedure performed 

prior to cataract surgery (which is a 

scheduled elective surgery). These scans 

are not performed during or just after 

cataract surgery. A-scans and B-scans 

are included in the definition of 

‘‘radiology and certain other imaging 

services’’ because, even though they are 

integral to the performance of a 

nonradiological medical procedure, they 

are not performed during the 

nonradiological medical procedure or 


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immediately following it to confirm 

placement of an item placed during the 

nonradiological medical procedure. 

However, in the CY 2008 Outpatient 

Prospective Payment System notice of 

proposed rulemaking, we proposed to 

exclude from the definition of 

‘‘radiology and certain other imaging 

services’’ at § 411.351 radiology 

procedures that are ‘‘covered ancillary 

services’’, as defined at § 416.164(b) of 

this chapter for purposes of the revised 

ASC payment system. The term 

‘‘covered ancillary services’’ includes 

certain radiology services that are 

integral to, and performed on the same 

day as, a covered ambulatory surgical 

procedure. 

Comment: One commenter stated that 

it welcomed the exclusion from the 

definition of ‘‘radiology and certain 

other imaging services’’ of radiology 

services performed immediately after 

nonradiology services. The commenter 

asserted that it is standard protocol to 

order a CT scan in the aftermath of 

prostate brachytherapy in order to 

ensure that the radioisotopes have been 

placed properly. The commenter 

asserted that, although some may prefer 

to perform this service immediately 

after the procedure, it is better from a 

clinical standpoint to wait several 

weeks because the additional time 

allows for the prostate to become less 

swollen, thereby enabling the physician 

to determine more accurately whether 

the seeds were placed correctly. 

Therefore, the commenter suggested that 

we expand the exclusion from the 

definition to also include a CT scan 

taken within 6 weeks after the prostate 

brachytherapy to confirm proper 

placement of the isotopes. 

Response: We decline to adopt the 

commenter’s proposal. As we stated in 

Phase I, where the radiology procedure 

is performed after the nonradiology 

procedure (as opposed to radiology 

procedures integral to and performed 

during a nonradiological procedure), 

referring physicians have discretion in 

choosing the entity that provides the 

radiology service independent of the 

entity providing the nonradiology 

procedure (66 FR 929). In Phase II, we 

excluded from the definition of 

‘‘radiology and certain other imaging 

services’’ radiology procedures 

performed immediately after the 

nonradiology procedure in order to 

confirm placement of an item because 

we believed there would be no risk of 

program or patient abuse by doing so 

(69 FR 16103). Where a radiology 

procedure is not performed immediately 

after the nonradiology procedure to 

confirm placement of an item, we 

believe there is a risk that the referring 

physician may direct referrals to an 

entity with which he or she has a 

financial interest, the very conduct 

addressed by the statute. As we noted in 

Phase II, depending on the facts and 

circumstances, exceptions, such as the 

in-office ancillary services exception in 

§ 411.355(b) or the rural provider 

exception in § 411.356(c)(1), may apply 

to referrals for radiology services 

furnished before or after the 

nonradiology procedure (69 FR 16103). 

We note also that, depending on the 

facts and circumstances, CT scans or 

other imaging ordered in the aftermath 

of prostate brachytherapy may qualify as 

‘‘necessary and integral’’ ancillary 

services so as to come within the 

consultation exclusion from the 

definition of ‘‘referral.’’ We question 

whether a CT scan or other imaging 

performed as late as 6 weeks after the 

brachytherapy would be ‘‘necessary and 

integral’’ to the brachytherapy, but 

decline to say that such a CT scan or 

other imaging could never be ‘‘necessary 

and integral’’ to the original procedure 

(and, thus, not be considered a 

‘‘referral’’ for purposes of the physician 

self-referral law); rather, the specific 

facts and circumstances control. 

G. Referral 

Section 1877(h)(5)(c) of the Act 

defines ‘‘referral’’ as a request by a 

physician for an item or service for 

which payment may be made under 

Medicare Part B, including a request for 

a consultation and any DHS ordered or 

performed by the consulting physician 

or under the supervision of the 

consulting physician, and the request or 

establishment of a plan of care by a 

physician that includes the furnishing 

of DHS, with certain exceptions for a 

small subset of services provided or 

ordered by pathologists, diagnostic 

radiologists, and radiation oncologists 

in accordance with a consultation 

requested by another physician. 

In Phase I, we defined ‘‘referral’’ to 

exclude services personally performed 

by a physician who ordered the 

services, but to include DHS provided 

by the physician’s employees or 

contractors or by other members of the 

physician’s group practice (66 FR 871–

872). In Phase II, we confirmed that a 

‘‘referral’’ includes services performed 

by others ‘‘incident to’’ the physician’s 

services (69 FR 16063). Phase II also 

clarified that the definition of ‘‘referral’’

excludes referrals for necessary and 

integral DHS ordered and appropriately 

supervised by a radiation oncologist 

pursuant to a consultation (69 FR 

16065). 

We received several comments 

addressing the issue of services 

performed by a physician’s employees 

that are ‘‘incident to’’ the physician’s 

personally-performed services. Other 

comments addressed the exclusions 

from the definition of ‘‘referral’’ for 

certain DHS requested by radiologists, 

pathologists, and radiation oncologists 

pursuant to a consultation. We are 

making no changes to the definition of 

‘‘referral’’ in this Phase III final rule. 

Comment: Several commenters 

requested clarification of the statement 

in Phase II regarding whether there is a 

‘‘referral’’ when antigens are prepared 

and furnished by a physician, or 

whether there is a ‘‘referral’’ when a 

physician refills an implantable pump 

(69 FR 16063). The response in Phase II 

appeared, in the commenters’ view, to 

indicate that, if a physician personally 

prepares and furnishes antigens or 

personally refills an implanted pump 

for a patient, there is no ‘‘referral’’ for 

purposes of the physician self-referral 

statute. From this statement, the 

commenter concluded that the 

physician could bill for these DHS 

without consideration as to whether the 

referrals satisfy the requirements of an 

exception. 

Response: In Phase II, we stated that 

the definition of ‘‘referral’’ excludes 

services personally performed or 

provided by the referring physician, but 

specifically includes any services 

performed or provided by anyone else 

(69 FR 16063). This interpretation is 

codified in the definition of ‘‘referral’’ at 

§ 411.351. It is possible for a physician 

to order and personally furnish antigens 

to a patient and to order a refill for, and 

personally refill, an implantable pump. 

In such instances, there would be no 

‘‘referral’’ for a designated health 

service, and no exception is needed. 

We note that the furnishing of durable 

medical equipment (DME) and supplies 

by a referring physician requires a 

different analysis than the mere refilling 

of an implantable pump. There are few, 

if any, situations in which a referring 

physician would personally furnish 

DME and supplies to a patient, because 

doing so would require that the 

physician himself or herself be enrolled 

in Medicare as a DME supplier and 

personally perform all of the duties of 

a supplier as set forth in the supplier 

standards in § 424.57(c). 

DME suppliers are entities that 

provide services under the specific Part 

B benefit for the provision of medical 

equipment and supplies for use in the 

patient’s home. These entities must be 

enrolled with the appropriate Medicare 

contractor as a DME supplier and must 

meet all of the professional supplier 

standards and quality standards that we 

require through regulations and 


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administrative or program instructions. 

The enrollment requirements and 

professional supplier standards are not 

waived in those situations in which a 

physician furnishes DME directly to the 

patient. The services to be personally 

performed by the physician would 

include, but not be limited to, the 

following, as appropriate—

• Personally fit the item for the 

beneficiary; 

• Provide necessary information and 

instructions concerning use of the DME; 

• Advise the beneficiary that he or 

she may either rent or purchase 

inexpensive or routinely purchased 

DME; 

• Explain the purchase option for 

capped rental DME; 

• Explain all warranties; 

• (Usually) deliver the DME to the 

beneficiary at home; and 

• Explain to the beneficiary at the 

time of delivery how to contact the 

physician in his or her capacity as a 

DME supplier by telephone. 

A referring physician claiming to 

provide DME personally would need to 

maintain adequate documentation to 

establish that the physician personally 

performed these and other required 

DME supplier activities. All of these 

supplier requirements would need to be 

satisfied in order for a physician to be 

considered to be providing personally 

DME items and supplies. This is true for 

all DME furnished by a physician, 

including, for example, continuous 

positive airway pressure (CPAP) 

equipment. We believe that it is highly 

unlikely that a referring physician 

would meet the criteria for personally 

performed services when dispensing 

CPAP or other DME equipment. Thus, 

the dispensing of CPAP equipment by a 

physician would almost always 

constitute a ‘‘referral’’ for purposes of 

the physician self-referral statute, as 

would the dispensing of CPAP 

equipment by anyone else affiliated 

with the referring physician, such as a 

nurse or physician assistant. We note 

that CPAP equipment is DME that does 

not qualify for the in-office ancillary 

services exception. 

Comment: One commenter suggested 

that a ‘‘referral’’ should not include 

‘‘incident to’’ services requested by a 

physician and performed by an 

employee or contractor, unless the 

services are performed by an employee 

or contractor who is licensed to provide 

the services without physician 

supervision and who could otherwise 

bill separately for the services. The 

commenter also requested that we 

provide further education to physicians 

on how these ‘‘incident to’’ services 

would fit into the in-office ancillary 

services exception. 

Response: The commenter provided 

no support for its suggestion, nor did 

the commenter explain why the inoffice ancillary services exception does 

not provide adequate protection under 

the circumstances described. We 

decline to change our interpretation of 

‘‘referral’’ as requested by the 

commenter. As we stated in Phase II: 

We are adhering to our original 

determination that ‘‘incident to’’ services 

performed by others, as well as services 

performed by a physician’s employees, are 

referrals within the meaning of section 1877 

of the Act. * * * As a practical matter, 

although ‘‘incident to’’ services and 

employee services are included in the 

definition of ‘‘referrals’’ for purposes of 

section 1877 of the Act, many of those 

referrals will fit in the in-office ancillary 

services [exception] or another exception. 

(69 FR 16063.) We continue to conclude 

that requests for DHS performed by a 

physician’s employees or independent 

contractors are ‘‘referrals’’ within the 

meaning of the physician self-referral 

prohibition, although these referrals 

may satisfy the requirements of an 

exception, including the in-office 

ancillary services exception in 

§ 411.355(b). 

Comment: Several commenters 

pointed out that, although we stated in 

Phase II that we were expanding the 

consultation exclusion to protect 

ancillary services that were necessary 

and integral to the provision of radiation 

therapy, the regulation text did not 

include any language to that effect (69 

FR 16065). One commenter requested 

that the regulatory definition be 

amended to conform to the preamble 

discussion. Another commenter 

complained that the expansion of the 

consultation exclusion to include 

ancillary services that are necessary and 

integral to radiation oncology would 

increase utilization and Federal health 

care program costs and defeat the 

purposes of section 1877 of the Act. 

Two commenters, one representing 

brachytherapy providers, requested that 

interventional radiologists be permitted 

to provide diagnostic imaging services 

that are necessary and integral to their 

procedures. 

Response: In Phase II, we intended to 

revise the definition of ‘‘referral’’ at 

§ 411.351 to exclude from the definition 

ancillary services that are necessary and 

integral to the provision of radiation 

therapy, but inadvertently neglected to 

amend the regulatory text. In the CY 

2006 physician fee schedule final rule 

published November 21, 2005, we made 

a technical correction that modified the 

language in paragraph (2) of the 

definition of ‘‘referral’’ at § 411.351 to 

clarify that ancillary services necessary 

for and integral to the provision of 

radiation therapy are also protected by 

the consultation provision (70 FR 

70330). We believe that the clarification 

was necessary to effectuate the statutory 

exclusion, and that it is sufficiently 

narrow to prevent abuse. No additional 

change is needed. 

We do not believe that it is 

appropriate to exclude from the 

definition of ‘‘referral’’ ancillary testing 

necessary and integral to interventional 

radiology procedures performed as a 

result of a consultation. Interventional 

radiologists perform minimally invasive 

procedures using imaging for guidance. 

Examples of these procedures include 

angiography, angioplasty, biopsy, 

stenting, cryotherapy, and embolization. 

Because it is our understanding that 

interventional radiology is surgical in 

nature, we believe that any necessary 

and integral services would be ancillary 

to a surgical procedure, rather than to a 

radiology procedure. Thus, the 

consultation provision would not apply. 

Depending on the facts and 

circumstances, diagnostic imaging 

services performed by interventional 

radiologists may fit within the exclusion 

from the definition of ‘‘radiology and 

certain other imaging services’’ for 

radiology procedures that are integral to 

the performance of a nonradiological 

medical procedure and performed 

during the procedure or immediately 

following the procedure to confirm 

placement of an item placed during the 

procedure. 

Comment: One commenter asked us 

to clarify whether the consultation 

exclusion for radiation oncologists in 

the definition of ‘‘referral’’ at § 411.351 

protects radiation oncology services 

personally performed by the radiation 

oncologist or by a radiation oncologist 

in the same group practice. The 

commenter noted that Phase II 

expanded the consultation exclusion 

from the definition of ‘‘referral’’ to 

permit radiation therapy requested by a 

radiation oncologist to be performed by 

or under the supervision of the radiation 

oncologist, or under the supervision of 

a radiation oncologist in the same group 

practice (69 FR 16131). The commenter 

stated that, read literally, the exclusion 

from the definition of ‘‘referral,’’ as 

amended, would allow a radiation 

oncologist in the consulting radiation 

oncologist’s group practice to supervise 

the radiation therapy, but not to perform 

it. 

Response: The commenters’ reading 

of the definition of ‘‘referral’’ at 

§ 411.351 is correct. The consultation 

exclusion for radiation oncologists in 


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the definition of ‘‘referral’’ protects only 

radiation oncology services personally 

performed or supervised by the 

radiation oncologist or services 

supervised by a radiation oncologist in 

the same group practice. Requests by a 

pathologist for clinical diagnostic 

laboratory tests and pathological 

examination services and requests by a 

radiologist for diagnostic radiology 

services are treated similarly. 

Comment: Several commenters asked 

that we expand the consultation 

provision to include ‘‘walk-in’’ patients 

(that is, patients who are seen by a 

physician without having been referred 

to that physician by another physician), 

as well as patients referred by other 

physicians. According to the 

commenters, there is no reason these 

patients are more likely to receive 

unnecessary treatment. 

Response: We decline to make the 

change suggested by the commenters. 

We believe that walk-in patients for 

pathology, radiology, and radiation 

oncology are not common. Moreover, 

the fact that a patient ‘‘walks in’’ to a 

physician’s office (whether a 

pathologist, radiologist, radiation 

oncologist, or other type of physician) is 

not determinative under the physician 

self-referral law with respect to DHS 

referrals made by the physician whose 

services are sought by the walk-in 

patient. Thus, even if a patient initially 

self-refers to a pathologist, radiologist, 

or radiation oncologist, subsequent 

orders of items or services by the 

pathologist, radiologist, or radiation 

oncologist are referrals of DHS. 

Moreover, these referrals are subject to 

potential overutilization or other abuse. 

As we noted in Phase I (66 FR 874), 

the Congress regarded the specialists 

excepted under the definition of 

‘‘consultation’’ as physicians who were 

not initiating a referral for services, but 

merely implementing the request of 

another physician who has already 

determined that the patient is likely to 

need the specialist’s services. In these 

situations, the Congress indicated its 

belief that overutilization would not be 

likely. As we noted in Phase II (69 FR 

16064), the statutory consultation 

exception ‘‘creates a narrow exception 

for a small subset of services provided 

or ordered by certain specialists in 

accordance with a consultation 

requested by another physician.’’ The 

additional protection against 

overutilization of diagnostic radiology, 

pathology, and radiation therapy 

services implicit when a radiologist, 

pathologist, or radiation oncologist 

merely implements a determination 

made by another physician that the 

patient is likely to need the specialist’s 

services (and those services meet the 

requirements of a consultation) are not 

present in the case of a patient who 

‘‘walks in’’ for these services. 

We are mindful that services provided 

to walk-in patients will not meet the 

definition of ‘‘consultation,’’ and any 

subsequent DHS will, therefore, be the 

subject of a referral by the pathologist, 

radiologist, or radiation oncologist. 

Depending on the circumstances, these 

referrals may satisfy the requirements of 

an exception to the prohibition on 

physician self-referral. As noted in 

Phase II in response to similar concerns 

about self-referred patients (69 FR 

16066), changes made to the in-office 

ancillary services exception in Phase II 

should, in many circumstances, enable 

DHS referrals for self-referred patients to 

fit in that exception. 

Comment: Several commenters 

requested that we clarify that the 

consultation exclusion covers the 

technical component of DHS ordered by 

hospital-based pathologists and 

radiologists pursuant to a consultation. 

Another commenter suggested that DHS 

ordered by anesthesiologists pursuant to 

a consultation should also be excluded 

from the definition of a referral. 

Response: We have previously 

considered the first issue and continue 

to believe that, where a physician orders 

the technical component of a designated 

health service (for example, an x-ray) 

and someone other than the physician 

performs the technical component, there 

is a referral to which section 1877 of the 

Act applies (66 FR 871, 69 FR 16063). 

However, the commenters are correct 

with respect to the technical component 

of a designated health service ordered 

by a hospital-based pathologist, 

radiologist, or radiation oncologist, if 

the requirements of the consultation 

exclusion otherwise apply. Specifically, 

the technical components of DHS 

ordered by these types of physicians 

pursuant to a consultation are subject to 

the consultation exclusion from the 

definition of a ‘‘referral’’ at § 411.351. 

With respect to extending the 

consultation provision to DHS ordered 

by anesthesiologists, we note that the 

statutory exception is limited to 

pathologists, radiologists, and radiation 

oncologists who meet certain criteria. 

We do not have the authority to extend 

the statutory consultation exception in 

the definition of ‘‘referral’’ to specialists 

other than those enumerated by the 

Congress. Moreover, we are not 

persuaded that any special regulatory 

exception is warranted for DHS referrals 

made by an anesthesiologist to an entity 

with which he or she (or his or her 

immediate family member) has a 

financial relationship. Depending on the 

circumstances, anesthesiologist referrals 

for DHS may qualify for an existing 

exception, including, for example, the 

exception for personal service 

arrangements or the exception for bona 

fide employment relationships. 

Comment: One commenter asked that 

the consultation exclusion from the 

definition of ‘‘referral,’’ which, 

according to the commenter, protects 

tests performed by other pathologists, 

radiologists, or radiation oncologists in 

the same group practice, be expanded to 

protect services furnished by physicians 

who are employees of the same entity, 

such as a hospital. The commenter gave 

the example of a hospital-employed 

radiologist who receives an order for 

diagnostic services and subsequently 

directs a second radiologist employed 

by the same hospital to perform the 

services. According to the commenter, 

there is no possibility of abuse in this 

situation, and the change is necessary to 

permit hospital-employed pathologists, 

radiologists, and radiation oncologists to 

provide coverage for each other. 

Response: We do not agree that an 

expansion of the consultation exception 

is warranted. Where physicians have a 

common hospital employer that bills for 

the technical components of a test (that 

is, the hospital is the DHS entity), the 

hospital and the referring physicians 

may avail themselves of the exception 

for bona fide employment relationships 

in § 411.357(c). With respect to any 

professional component of the services 

that are DHS, the hospital should be 

able to bill pursuant to a reassignment 

(which would make the hospital the 

DHS entity), and the arrangement could 

be structured to satisfy the requirements 

of the exception for bona fide 

employment relationships. 

H. Rural Area 

The term ‘‘rural area’’ is used 

throughout the physician self-referral 

regulations. For ease of reference and to 

simplify the regulations, we are moving 

the definition to § 411.351. For 

physician self-referral purposes, we are 

defining ‘‘rural area’’ as an area that is 

not an urban area as defined at 

§ 412.62(f)(1)(ii). The definition is 

consistent with the definition in the 

statutory exception for rural providers at 

section 1877(d)(2) of the Act. 

IV. Group Practice—§ 411.352 

The determination of which 

organizations qualify as group practices 

for purposes of section 1877 of the Act 

is critical for several exceptions, 

including the in-office ancillary services 

exception. In addition, section 1877 of 

the Act allows group practices more 

flexibility in compensating physicians 


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(for example, only group practice 

physicians may be compensated in a 

manner that takes into account services 

furnished ‘‘incident to’’ a physician’s 

personally performed services). 

Phase I addressed the requirements 

for qualification as a group practice 

under section 1877(h)(4) of the Act. 

(The regulatory requirements appear in 

§ 411.352.) Most commenters 

commended the changes made in Phase 

I. In Phase II, we made several minor 

changes to § 411.352. 

This Phase III final rule makes one 

minor change to § 411.352 to reflect 

more closely the statutory scheme and 

our original intent in the Phase I final 

regulation that the ‘‘incident to’’

services need not themselves be 

personally performed by the referring 

physician: we are changing the 

parenthetical language in § 411.352(i)(1) 

to permit a physician in the group to be 

paid a productivity bonus based on 

services that he or she has personally 

performed, or services ‘‘incident to’’

such personally performed services or 

both. 

Comment: One commenter asked for 

confirmation that a separate corporation 

that is formed by a hospital and that has 

as its primary purpose being a physician 

group and employing physicians would 

meet the single legal entity requirement 

even if the physicians are divided into 

different divisions based on specialty. 

Response: A separate corporation 

formed by a hospital to employ 

physicians can constitute a single legal 

entity, provided that the specialty 

divisions are not separate legal entities 

and the arrangement otherwise satisfies 

the requirements of § 411.352. 

Comment: One commenter asked that 

we clarify that a medical foundation 

qualifies as a group practice. 

Response: For the reasons noted in 

Phase I (66 FR 902–903) and Phase II (69 

FR 16077), including those discussed 

below, we do not believe it is feasible 

to make a blanket determination that all 

medical foundations qualify as group 

practices. Moreover, we see no need to 

revisit the requirements for qualification 

as a group practice under § 411.352 or 

the discussion in Phase II regarding 

whether a foundation can meet those 

requirements. 

The commenter has failed to convince 

us that many typical foundation-model 

practice arrangements satisfy the 

requirements for qualification as a group 

practice. Section 1877(h)(4)(A) of the 

Act defines ‘‘group practice’’ to include, 

inter alia, two or more physicians 

legally organized as a foundation. In one 

common variation of a foundationmodel arrangement, it is the foundation, 

and not the physicians, that owns the 

medical practice; thus, the physicians 

are not legally organized as a 

‘‘foundation’’ as that term is used in 

section 1877(h)(4)(A) of the Act. Instead, 

the foundation owns and operates all 

elements of the practice. However, 

because it cannot provide physician 

services, the foundation employs or 

contracts with physicians to furnish 

patient care services (66 FR 902.) In 

States in which a foundation (or other 

corporation) may provide physician 

services, a medical foundation may be a 

group practice if all of the group 

practice requirements are satisfied. 

As we noted in Phase II, if a particular 

foundation-model arrangement meets 

the single legal entity test (and has at 

least two physician employees), it may 

qualify as a group practice under 

§ 411.352 and use the in-office ancillary 

services exception in § 411.355(b), 

provided that all other requirements of 

§ 411.352 and the in-office ancillary 

services exception are met (69 FR 

16077). 

Comment: Two commenters inquired 

about the application of the indirect 

compensation arrangements exception 

and personal service arrangements 

exception to foundation-model 

practices. One commenter questioned 

whether foundation-model structures 

create indirect compensation 

arrangements between referring 

physicians and the DHS entity that 

owns the foundation, thus implicating 

the indirect compensation arrangements 

exception requirements. 

Response: With respect to the 

application of the indirect 

compensation arrangements exception 

and personal service arrangements 

exception to arrangements involving 

medical foundations, we reiterate that 

an arrangement need not satisfy the 

requirements of a specific exception to 

comply with the physician self-referral 

rules. An entity may rely on any 

exception that an arrangement satisfies 

(66 FR 916, 919; 69 FR 16086.) With the 

new ‘‘stand in the shoes’’ provision 

(discussed below in section VI.B), many 

arrangements involving foundationmodel structures may be deemed to be 

direct compensation arrangements and 

potentially qualify for the personal 

service arrangements exception. 

Whether a particular arrangement 

constitutes an indirect compensation 

arrangement pursuant to § 411.354(c) 

will continue to depend on the specific 

facts and circumstances of the 

arrangement. 

Comment: One commenter asserted 

that a ‘‘typical’’ medical foundation 

arrangement is structured as follows: a 

nonprofit medical foundation owns and 

operates a nonprofit health care clinic 

and contracts with a medical group 

(organized as a professional corporation) 

to provide the professional services of 

the group’s employed physicians at the 

foundation’s clinic. The medical 

foundation pays the group aggregate 

compensation that is then divided 

among the group’s physicians. The 

commenter inquired whether the 

medical group can qualify as a group 

practice within the meaning of the 

physician self-referral rules if the 

medical foundation bills and collects for 

the professional services of the medical 

group using a provider number assigned 

to the foundation. 

Response: As we observed in Phase II 

(69 FR 16077), foundation-model 

physician practices exist in a variety of 

forms, depending on jurisdiction and 

other factors; therefore, it is difficult to 

generalize about these arrangements. 

Nothing in the physician self-referral 

regulations precludes a foundationmodel physician practice from 

qualifying as a ‘‘group practice’’ if it can 

satisfy every element of the 

requirements in § 411.352. 

The fact that a medical foundation 

bills and collects for the professional 

services of the physicians in the medical 

group who provide services at the 

foundation’s clinic using a billing 

number assigned to the foundation 

rather than a billing number assigned to 

the group does not necessarily 

disqualify the medical group from 

satisfying the requirements of § 411.352. 

However, the fact that professional 

services of members of the medical 

practice are billed by the foundation 

using a billing number assigned to the 

foundation pursuant to a reassignment 

may affect the ability of the medical 

practice to satisfy the ‘‘substantially all’’

test in § 411.352(d), which requires that 

substantially all (that is, at least 75 

percent) of the patient care services of 

the physicians who are members of the 

group practice (for example, owners or 

employees) are provided through the 

group and are billed under a billing 

number assigned to the group and 

amounts so received are treated as 

receipts of the group. Where 

professional services are provided to a 

foundation clinic pursuant to a services 

contract between the group practice and 

the foundation, a group practice may 

count such services as services the 

physician provides through the group. 

For further explanation of the 

‘‘substantially all’’ test, see 66 FR 904–

905 and 69 FR 16079. 

We note that, if a foundation-model 

practice qualifies as a group practice 

under § 411.352, the practice may be 

able to use the physician services or inoffice ancillary services exceptions for 


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DHS referrals where the group practice 

is the entity furnishing the DHS (that is, 

where the DHS are billed under the 

group practice’s billing number, not the 

foundation’s billing number). Referrals 

of DHS billed by the foundation would 

not qualify for these exceptions. 

Comment: One commenter asserted 

that faculty practice plans should be 

entitled to the same treatment as group 

practices with respect to methodologies 

for compensating the plan physicians. 

According to the commenter, the 

inclusion of faculty practice plans as 

entities eligible under the statutory 

definition of ‘‘group practice’’ in section 

1877(h)(4)(A) of the Act evidences the 

Congress’s intent that faculty practice 

plans be treated as group practices. The 

commenters asserted that the failure to 

include faculty practice plans as group 

practices disadvantages physicians in 

academic practice. 

Response: Nothing in the regulations 

prevents a faculty practice plan from 

qualifying as a group practice if it can 

satisfy the conditions in § 411.352 (66 

FR 917). If these conditions are satisfied, 

the faculty practice plan may avail itself 

of the physician services exception in 

§ 411.355(a) and the in-office ancillary 

services exception in § 411.355(b) for 

DHS referrals within the faculty practice 

plan, as well as the special rule for 

productivity bonuses and profit shares 

in § 411.352(i). We note that neither the 

physician services exception, nor the inoffice ancillary services exception, 

would protect referrals by faculty 

practice plan physicians to other 

components of an academic medical 

center, such as the affiliated hospital. In 

such circumstances, the academic 

medical center services exception may 

be useful. 

Comment: One commenter asked for 

clarification of the unified business test 

requirement that a group practice have 

centralized decision-making by a body 

representative of the group practice and 

its application to a nonprofit 

corporation. Under IRS rules, a majority 

of the board of a tax-exempt, nonprofit 

corporation must be composed of 

disinterested representatives of the 

community. The commenter suggested 

that, in these situations, the individuals 

that are representative of the group 

practice should not have to constitute a 

majority of the board. 

Response: The regulations in 

§ 411.352(f)(1)(i) require that the 

decision-making body be representative 

of the group practice and that the 

decision-making body, not the group 

practice, maintain effective control over 

the group’s assets and liabilities. 

Nothing in the regulations requires that 

a majority of the decision-making body 

be physicians (although this might be a 

reasonable and prudent way to ensure 

fair representation). In Phase II, we 

noted that ‘‘there must be substantial 

‘group level’ management and 

operation,’’ but did not prescribe any 

particular process (69 FR 16080). 

Nothing in the regulations would 

preclude a tax-exempt, nonprofit group 

practice with a majority of its board 

composed of disinterested 

representatives of the community from 

satisfying the requirements of 

§ 411.352(f)(1)(i) if the board maintains 

effective control over the group’s assets 

and liabilities and is representative of 

the group practice. 

Comment: Several commenters 

requested confirmation that a group 

practice can compensate its members 

(including employed physicians) and 

‘‘physicians in the group practice’’ by 

directly taking into account the volume 

and value of items and services that are 

provided ‘‘incident to’’ the physicians’

professional services. Commenters 

questioned the interplay between 

language in § 411.352(g) that prohibits 

group members from receiving any 

compensation based directly or 

indirectly on the volume or value of 

referrals by the physician and the 

special rule for productivity bonuses 

and profit shares in § 411.352(i), which 

provides: 

A physician in a group practice may be 

paid a share of overall profits of the group, 

or a productivity bonus based on services 

that he or she has personally performed 

(including services ‘‘incident to’’ those 

personally performed services as defined [at] 

§ 411.351), provided that the share or bonus 

is not determined in any manner that is 

directly related to the volume or value of 

referrals of DHS by the physician. 

Response: The ‘‘volume or value of 

referrals’’ provision in § 411.352(g) 

(section 1877(h)(4)(A)(iv) of the Act) 

describes a ban, for purposes of the 

group practice definition, on 

compensating members of the group 

practice in any way that relates directly 

or indirectly to the volume or value of 

their DHS referrals. Notwithstanding 

this restriction, the ‘‘special rule’’ in 

§ 411.352(i) (section 1877(h)(4)(B)(i) of 

the Act) permits group practices to 

compensate their physicians using 

profit shares and productivity bonuses 

that indirectly relate to DHS referrals 

without jeopardizing their ability to 

qualify as a group practice. 

Specifically, in order to qualify as a 

group practice, a physician practice may 

not compensate a physician who is a 

member of the practice directly or 

indirectly based on the volume or value 

of referrals by the physician. However, 

under the special rule for profit shares 

and productivity bonuses, a group 

practice may pay a physician in the 

group practice a share of overall profits 

of the group provided that the share is 

not determined in any manner that is 

directly related to the volume or value 

of referrals of DHS by the physician. A 

group practice may also pay a physician 

in the group practice a productivity 

bonus based on services that the 

physician has personally performed or 

services ‘‘incident to’’ such personally 

performed services, or both, provided 

that the bonus is not determined in any 

manner that is directly related to the 

volume or value of referrals of DHS by 

the physician. 

With respect to productivity bonuses 

based on ‘‘incident to’’ services, we 

stated in Phase I (66 FR 909) our view 

that group practice physicians can 

receive compensation directly related to 

the physician’s personal productivity 

and to services incident to the 

physician’s personally performed 

services. We noted that the services 

would have to comply with the 

requirements of section 1861(s)(2)(A) of 

the Act and section 2050 of the Carriers 

Manual (now section 60.1 of the CMS 

Internet–only Manual, publication 100–

02, Medicare Benefit Policy Manual, 

Chapter 15 (Covered Medical and Other 

Health Services)) or other HHS rules 

and regulations affecting ‘‘incident to’’

billing. That is, the services would have 

to be directly supervised by the 

physician under the ‘‘incident to’’

billing rules (the physician must be 

present in the office suite and 

immediately available). We believe that 

this heightened supervision requirement 

provides some assurance that the 

‘‘incident to’’ DHS would not be the 

primary incentive for a self-referral. In 

Phase II, we reaffirmed this 

interpretation and indicated that we 

were revising the regulations to make 

clear that productivity bonuses can be 

based directly on ‘‘incident to’’ services 

that are incidental to a physician’s 

personally performed services (69 FR 

16080). 

Based on comments to the Phase II 

rule, we believe additional regulatory 

text refinement is warranted. 

Accordingly, we have revised 

§ 411.352(i) to read: 

A physician in the group practice may be 

paid a share of overall profits of the group, 

provided that the share is not determined in 

any manner that is directly related to the 

volume or value of referrals of DHS by the 

physician. A physician in the group may be 

paid a productivity bonus based on services 

that he or she has personally performed (or 

services ‘‘incident to’’ such personally 

performed services), provided that the bonus 

is not determined in any manner that is 


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directly related to the volume or value of 

referrals of DHS by the physician (except that 

the bonus may directly relate to the volume 

or value of DHS referrals by the physician if 

the referrals are for services ‘‘incident to’’ the 

physician’s personally performed services). 

The revised regulatory text makes clear 

that productivity bonuses can be based 

directly on ‘‘incident to’’ services that 

are incidental to the physician’s 

personally performed services, even if 

those ‘‘incident to’’ services are 

otherwise DHS referrals (for example, 

physical therapy or outpatient 

prescription drugs). The productivity 

bonus cannot be directly related to any 

other DHS referrals, such as diagnostic 

tests or hospital admissions. We note 

that in Phase II (69 FR 16080), we also 

indicated that overall profit shares 

could relate directly to ‘‘incident to’’

services. Upon further reflection, we 

have concluded that this interpretation 

is inconsistent with the clear statutory 

language, which includes ‘‘incident to’’

services only in the context of 

productivity bonuses, and with our 

Phase I interpretation (66 FR 908–909). 

Thus, we are withdrawing our statement 

in Phase II at 69 FR 16080 with respect 

to overall profit shares and ‘‘incident 

to’’ services. Because an overall profit 

share under § 411.352(i)(2) means the 

aggregation of profits derived from DHS 

of the group as a whole or of a 

component of at least five physicians, 

an overall profit share will necessarily 

include profits from DHS that are billed 

as ‘‘incident to’’ services (66 FR 

876,909). Under this Phase III final rule, 

profits must be allocated in a manner 

that does not relate directly to DHS 

referrals, including any DHS that is 

billed as an ‘‘incident to’’ service. We 

note that the regulations provide a 

number of methods that satisfy this 

requirement. 

Comment: One commenter requested 

clarification that ‘‘incident to’’ drugs 

may be factored directly into 

productivity bonuses, given that 

§ 411.352(i) speaks only of ‘‘services’’

and not ‘‘items.’’

Response: A physician in a group 

practice may be paid a productivity 

bonus based on services and supplies 

furnished ‘‘incident to’’ a physician’s 

personally performed services. We 

defined ‘‘ ‘incident to’ services’’ at 

§ 411.351 to mean those services that 

meet the requirements of section 

1861(s)(2)(A) of the Act and § 410.26 of 

our regulations, both of which set forth 

coverage criteria for ‘‘services and 

supplies’’ furnished incident to a 

physician’s professional services. Given 

our intent to conform the physician selfreferral regulations as much as possible 

to existing Medicare coverage and 

payment rules, we did not intend in 

Phase I or Phase II to distinguish 

between ‘‘services’’ and ‘‘supplies’’

furnished incident to a physician’s 

professional services. Accordingly, we 

are revising the definition of ‘‘ ‘incident 

to’ services’’ at § 411.351 to clarify that 

the term includes both services and 

supplies (such as drugs) that meet the 

applicable requirements set forth in 

section 1877(h)(4)(B)(i) of the Act and 

§ 410.26 of our regulations. 

Comment: One commenter stated that 

many group practices, in order to avoid 

taxes, do not allocate ‘‘profits’’ to their 

members, but distribute ‘‘bonuses.’’ The 

commenter asked if the group practice 

has complied with § 411.352(i) if it 

calculates its ‘‘bonuses’’ in a manner 

that complies with the profit-sharing 

requirements. 

Response: A group practice may 

compensate physicians with overall 

profit shares or productivity bonuses, or 

some combination of the two, provided 

that the allocation methodology 

complies with § 411.352(i)(2) or (i)(3), 

respectively. Whether the 

characterization of funds distributed to 

physicians as ‘‘bonuses’’ rather than 

‘‘profits’’ meets IRS rules is outside the 

scope of this rulemaking. 

Comment: A commenter requested 

that the minimum size of a group 

practice component for purposes of 

profit-sharing under § 411.352(i)(2) be 

fewer than the current requirement of at 

least five physicians where the grouping 

constitutes an identifiable specialty or 

practice focus within the group practice. 

According to the commenter, one of 

every four orthopedic groups has two or 

three physicians, and many larger 

groups have subspecialties of fewer than 

five members. 

Response: We stated in Phase I (66 FR 

908) and Phase II (69 FR 16080–16081) 

that we saw no reason to reduce the 

minimum number of physicians in a 

component for profit-sharing purposes. 

We maintain this position. Our concern 

remains that smaller components 

increase the risk of overutilization of 

DHS and other abuse by strengthening 

the ties between an individual 

physician’s compensation and his or her 

referrals. Setting the minimum number 

of physicians in a group practice 

component at five reduces the 

likelihood that a physician will be 

directly compensated for his or her own 

referrals. 

V. Prohibition on Certain Referrals by 

Physicians and Limitations on Billing—

§ 411.353 

Section 411.353 sets out the basic 

prohibition on physician self-referral 

under section 1877 of the Act. Two 

provisions, § 411.353(e) and 

§ 411.353(f), address the potentially 

harsh results from inadvertent 

violations of the prohibition. Section 

411.353(e), which was added in Phase I, 

provides that payment may be made to 

an entity that submits a claim to 

Medicare for DHS if the entity did not 

have actual knowledge of, and did not 

act in reckless disregard or deliberate 

ignorance of, the identity of the 

physician who referred the DHS to the 

entity, provided that the claim 

otherwise complies with all applicable 

Federal laws and regulations. Section 

411.353(f), which was added in Phase II, 

permits DHS entities to submit claims 

and receive payment for DHS furnished 

during certain instances of temporary 

noncompliance. Specifically, 

§ 411.353(f) permits DHS entities to 

submit claims and receive payment for 

such claims if: (1) The arrangement had 

been in full compliance with an 

applicable exception for at least 180 

consecutive calendar days immediately 

preceding the date on which the 

financial relationship became 

noncompliant; (2) the financial 

relationship fell out of compliance for 

reasons beyond the entity’s control and 

the entity promptly moved to address 

the noncompliance; and (3) the financial 

relationship does not violate the antikickback statute and complies with all 

applicable Federal and State laws, rules, 

and regulations. Section 411.353(f) 

applies only to DHS furnished during 

the time it takes the entity to rectify the 

noncompliance, which must not exceed 

90 consecutive calendar days following 

the date on which the financial 

relationship became noncompliant. We 

specified that an entity could not use 

the exception in § 411.353(f) more than 

once every 3-years with respect to the 

same referring physician, and the 

provision could not be used if the 

exception with which the financial 

relationship previously complied was 

either § 411.357(k) or (m) (regarding 

nonmonetary compensation and 

medical staff incidental benefits, 

respectively). In general, commenters 

welcomed the protections of 

§ 411.353(e) and (f), but asked that they 

be broadened. We are making no 

substantive changes to § 411.353(e) or (f) 

in this Phase III final rule. 

Comment: Some commenters asked 

for clarification regarding how long a 

DHS entity would be precluded from 

submitting claims for DHS referred by a 

physician with whom the DHS entity 

had a financial relationship that failed 

to comply with an exception and for 

which § 411.353(f) or § 411.357(f) either 

may not be applicable or may not 


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provide what the commenters believed 

would be sufficient protection. 

Response: The statute provides no 

explicit limitation on the billing and 

claims submission prohibition. We are 

addressing this issue in another 

rulemaking. 

Comment: Some commenters objected 

to our decision not to extend to referring 

physicians the protection of § 411.353(e) 

(regarding payments made to an entity 

that does not have knowledge of the 

identity of the physician who made the 

referral for DHS). The commenters 

acknowledged that a referring physician 

would not be subject to sanction under 

section 1877 of the Act unless the 

physician knowingly caused an 

improper claim or bill to be submitted 

(or knowingly engaged in a 

circumvention scheme). The 

commenters were concerned, however, 

that the referring physician who had no 

such intent could nevertheless be 

subject to liability under the civil False 

Claims Act, 31 U.S.C. 3729. 

Response: Liability under the civil 

False Claims Act requires that the 

violator act knowingly. Only a 

physician who knowingly causes the 

submission of a bill or claim for a 

service for which payment may not be 

made under section 1877 of the Act 

would be subject to sanction under the 

civil False Claims Act for such conduct. 

Similarly, as the commenters’ observe, a 

referring physician would not be subject 

to sanction under section 1877(g) of the 

Act unless the physician knowingly 

causes an improper claim or bill to be 

submitted (or knowingly engages in a 

circumvention scheme). Accordingly, 

we are not expanding the provision as 

suggested by the commenters. 

Comment: Several commenters asked 

that we extend for a longer period of 

time the 90-day window in 

§ 411.353(f)(2), which permits a 

physician and DHS entity that are 

parties to an arrangement that no longer 

satisfies the requirements of an 

exception to refer and submit claims, 

respectively, for DHS. Some 

commenters asked that the window run 

from the date of noncompliance until 30 

or 90 days after the date on which the 

noncompliance was discovered. 

Commenters asserted that the other 

requirements of the exception, namely 

that the arrangement had to have been 

in compliance with an exception for at 

least 180-consecutive calendar days 

immediately preceding the date on 

which the financial relationship became 

noncompliant and that the 

noncompliance was due to actions 

beyond the control of the DHS entity, 

were sufficient to protect against 

possible program or patient abuse. One 

commenter suggested that the expanded 

noncompliance window be conditioned 

on the good faith of the DHS entity and 

the immateriality or inadvertence of the 

noncompliance. One commenter 

acknowledged that starting the window 

from the time of discovery of the 

noncompliance may provide an 

incentive for hospitals and physicians to 

remain ignorant about noncompliant 

arrangements, but stated that this 

‘‘minor’’ risk could be mitigated by a 

condition that would negate the use of 

the exception if that behavior exists. 

Another commenter recommended that, 

in a situation in which an arrangement 

is out of compliance, but the physician 

is unable to make referrals due to a 

disability, active military duty, or some 

other reason, the time for correcting the 

noncompliance be tolled until the point 

at which the physician is again 

reasonably able to make referrals. 

Response: We disagree with the 

commenters that proposed a ‘‘discoverybased’’ rule, as well as with the 

commenter that recommended that the 

period in which noncompliance must be 

corrected be tolled during the time in 

which (for whatever reason) referrals are 

not being made. Section 1877 of the Act 

is intended to deter inappropriate 

financial relationships through a strict 

liability regime. A discovery-based rule 

is contrary to the statutory scheme. 

Moreover, such a rule creates a perverse 

incentive not to diligently monitor and 

enforce compliance. Tolling the time 

period for rectifying the noncompliance 

while a physician is unable to make 

referrals due to disability, military duty, 

or another reason is not necessary 

because it is not likely that the parties 

would violate the physician self-referral 

statute if no referrals are being made. 

The commenters’ suggestions would 

create substantial enforcement problems 

because it may be difficult to establish 

the date on which the noncompliance 

was discovered. Imposing standards 

regarding the materiality of the 

noncompliance or the good faith of the 

parties would present similar 

enforcement difficulties and would be 

contrary to the statutory scheme. 

Finally, we do not believe that 

extending the noncompliance window 

in § 411.353(f)(2) beyond the current 90- 

days is either warranted or necessary. 

Parties to an arrangement should 

monitor the continued compliance of 

the arrangement with the conditions of 

an applicable exception. We note, 

however, as discussed below at section 

IX.D, that we are establishing a 6-month 

holdover provision for personal service 

arrangements that otherwise meet the 

requirements in § 411.357(d). We 

believe that this provision, along with 

the holdover provisions already 

available in the exceptions for the rental 

of office space and equipment in 

§ 411.357(a) and (b), should provide 

adequate relief to parties to 

arrangements of these types that would 

otherwise temporarily fall out of 

compliance with the physician selfreferral law. 

Comment: A hospital trade 

association asked that we delete the 

requirement in § 411.353(f)(1)(ii) that 

the noncompliance be due to reasons 

beyond the entity’s control. Several 

commenters sought clarification as to 

what actions were beyond the control of 

the DHS entity. Two commenters asked 

whether a physician’s failure to sign 

promptly a written contract that the 

hospital had sent in a timely manner 

and that otherwise complied with the 

personal service arrangements exception 

would be considered beyond the 

hospital’s control. One commenter 

asked whether, in evaluating the failure 

to continue to satisfy the requirements 

of an exception, it made a difference 

that the hospital needed the services 

immediately, such as for on-call 

coverage. Specifically, the commenter 

gave the example of the provision of 

needed on-call coverage services prior 

to the formal execution of a written 

agreement for those services. Another 

commenter suggested that we clarify 

that an arrangement is eligible for the 

temporary noncompliance exception if 

it falls out of compliance with an 

exception due to the actions of a third 

party, such as the actions of the 

government through a change in the 

regulations or the removal of a Health 

Professional Shortage Area (HPSA) 

designation of an area for purposes of 

the physician retention exception. 

Response: We discussed in detail the 

application of the temporary 

noncompliance exception in Phase II 

(69 FR 16057.) We are not repeating that 

explanation here. With respect to the 

inquiry regarding on-call coverage for 

which there is an immediate need, we 

reiterate that the DHS entity may avail 

itself of the temporary noncompliance 

exception only when the arrangement 

was in full compliance with an 

exception to the physician self-referral 

law under § 411.355, § 411.356, or 

§ 411.357 prior to the temporary 

noncompliance. In the example 

provided by the commenter, the 

arrangement was never in compliance 

with the law, and therefore the 

temporary noncompliance exception 

would be unavailable to the DHS entity. 

With respect to the second commenter’s 

example regarding noncompliance 

occurring due to loss of a HPSA 

designation, as we noted in Phase II, 


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such noncompliance would be 

considered beyond the entity’s control 

(69 FR 16057). With respect to other 

instances of noncompliance caused by 

third parties, a determination of 

whether such noncompliance was 

beyond the entity’s control would have 

to be made on a case-by-case basis. 

Finally, we do not believe it necessary 

or practical to give specific guidance on 

documentation of the steps taken to 

rectify temporary noncompliance. 

Entities should maintain adequate and 

contemporaneous documentation of all 

financial relationships with referring 

physicians, including—

• The terms of each arrangement; 

• Whether and how an arrangement 

fell out of compliance with an 

exception; 

• The reasons for the arrangement 

falling out of compliance; 

• Steps taken to bring the 

arrangement into compliance; 

• Relevant dates; and 

• Similar information. 

Comment: Two commenters 

recommended eliminating the 

requirement in § 411.353(f) that the 

arrangement must have been in 

compliance with an applicable 

exception for 180 consecutive calendar 

days immediately preceding the date on 

which the financial relationship became 

noncompliant. According to the 

commenter, the program is adequately 

protected by the requirement that the 

noncompliance had to occur for reasons 

beyond the entity’s control. 

Response: For the reasons noted in 

Phase II, we are retaining the 

requirement that the arrangement must 

have been in compliance with an 

exception under § 411.355, § 411.356, or 

§ 411.357 for 180 consecutive calendar 

days (69 FR 16057). We continue to 

believe that the requirement is 

necessary to ensure that the temporary 

noncompliance exception is not subject 

to abuse. 

Comment: A commenter 

recommended that enforcement officials 

exercise their discretion by declining to 

pursue minor and technical violations. 

Another commenter stated that we 

should consider adding an exception 

that would permit physicians to refer for 

DHS and DHS entities to submit and 

receive payment for DHS claims if, in 

our sole discretion, there was no abuse. 

The commenter suggested that such an 

exception should be available only after: 

(1) receipt by the entity of a favorable 

advisory opinion; or (2) a voluntary 

disclosure by the entity or upon audit or 

investigation by the government. 

Response: The physician self-referral 

law is a strict liability statute, and we 

therefore do not have authority to waive 

the nonpayment sanction under the 

statute for ‘‘minor’’ and ‘‘technical’’

violations, or violations stemming from 

non-abusive arrangements. We lack the 

statutory authority to promulgate the 

exception suggested by the commenter, 

but we are open to creating additional 

regulatory exceptions that pose no risk 

of program or patient abuse. 

VI. Financial Relationship, 

Compensation, and Ownership or 

Investment Interest—§ 411.354 

Section 411.354 defines the financial 

arrangements that are subject to the 

statutory prohibition. The section 

defines direct and indirect ownership 

and investment interests, and direct and 

indirect compensation arrangements. 

The section also establishes a number of 

rules governing various aspects of 

compensation arrangements. 

In Phase I, we established a three-part, 

‘‘bright line’’ test for defining an 

‘‘indirect compensation arrangement’’

that incorporates a knowledge element. 

To satisfy the knowledge element, a 

DHS entity must have actual knowledge 

of, or act in reckless disregard or 

deliberate ignorance of, the fact that the 

referring physician receives aggregate 

compensation that varies with or 

otherwise reflects the volume or value 

of referrals or other business generated 

for the DHS entity. Phase I established 

a corresponding new exception for 

indirect compensation arrangements. By 

(1) defining the universe of ‘‘indirect 

compensation arrangements’’ that 

potentially trigger disallowance of 

claims and penalties, and (2) creating an 

exception for the subset of ‘‘indirect 

compensation arrangements’’ that 

would not trigger disallowance or 

penalties, we structured the treatment of 

indirect compensation arrangements 

under section 1877 of the Act to parallel 

closely the treatment of direct 

compensation arrangements. 

Phase I also established several 

special rules applicable to certain key 

requirements in the various definitions 

and exceptions related to compensation 

arrangements, including when an 

arrangement was ‘‘set in advance’’ and 

whether time-based or unit-based 

compensation methodologies took into 

account ‘‘the volume or value’’ of 

referrals or ‘‘other business generated 

between the parties.’’ Finally, Phase I 

established that, in some limited 

instances, it is permissible for an 

employer, managed care organization, or 

entity with which a physician contracts 

to require a physician to refer to a 

particular DHS entity as part of certain 

compensation arrangements. 

Phase II addressed concerns raised by 

commenters regarding the Phase I 

definitions of the various types of 

financial relationships. The 

modifications set forth in Phase II 

included—

• Clarifying the meaning of direct and 

indirect ownership and affirming that, 

absent unusual circumstances, common 

ownership of an entity does not create 

an ownership interest by one common 

investor in another (69 FR 16061); 

• Clarifying the relationship between 

the ‘‘indirect compensation 

arrangement’’ definition and the 

‘‘volume or value’’ and ‘‘other business 

generated’’ standards (69 FR 16061); 

• Revising the definition of ‘‘referring 

physician’’ at § 411.351 to provide that 

a referring physician is treated as 

‘‘standing in the shoes’’ of his or her 

wholly-owned professional corporation 

(PC) (69 FR 16125). 

We also solicited comments on 

whether to permit a physician to ‘‘stand 

in the shoes’’ of a group practice of 

which he or she is a member (69 FR 

16060). (Our response to comments on 

this issue is set forth in detail below in 

section VI.B of this preamble.) 

In response to Phase II, we received 

comments regarding aspects of the 

ownership provisions. Most comments, 

however, related to various aspects of 

the ‘‘indirect compensation 

arrangement’’ definition and the related 

exception. 

We are making two substantive and 

several minor changes to § 411.354. 

First, we are revising the regulation text 

in § 411.354(b)(3)(v) to provide that an 

ownership or investment interest does 

not include a security interest in the 

equipment of a hospital held by a 

physician who both sold the equipment 

to the hospital and financed its 

purchase through a loan to the hospital. 

(However, such transactions will create 

compensation arrangements.) Second, 

we are amending the regulations in 

§ 411.354(c) to add a ‘‘stand in the 

shoes’’ provision under which referring 

physicians will be treated as ‘‘standing 

in the shoes’’ of their group practices 

(and certain other physician 

organizations) for purposes of applying 

the rules that describe direct and 

indirect compensation arrangements in 

§ 411.354. As explained in greater detail 

below in response to comments, this 

change will reduce the risk of fraud and 

abuse by closing an unintended 

loophole in the definition of ‘‘indirect 

compensation arrangement’’ (by 

deeming more arrangements to be direct 

compensation arrangements) and will 

ease compliance by simplifying the 

analysis of many arrangements. This 

revised approach is conceptually an 

extension of the Phase II rule that 

treated referring physicians as standing 


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in the shoes of their professional 

corporations. 

In addition, we are making nonsubstantive changes to clarify that we do 

not interpret ‘‘otherwise reflects’’ and 

‘‘takes into account’’ (with respect to 

referrals and as these terms are used in 

certain exceptions) as having separate 

and different meanings. That is, the 

terms were used interchangeably in 

Phase II, and we have made conforming 

changes for consistency. Other changes 

are discussed below. 

A. Ownership 

Comment: One commenter stated that 

secured loans should not automatically 

create an ownership or investment 

interest in the entity granting the 

security interest (absent other indicia of 

ownership such as voting or other 

governance rights, profit participation, 

etc.). For example, a contract for a 

physician’s sale of equipment to a 

hospital on an installment payment 

basis will commonly include a security 

interest in the equipment in case of 

nonpayment. According to the 

commenter, under the Phase II rule, 

such a security interest would create an 

ownership interest in part of a hospital, 

and thus create a prohibited financial 

relationship (69 FR 16063). The 

commenter believed that this 

interpretation is at odds with our 

indication in Phase II that a one-time 

sale using installment payments that are 

protected by a security interest could be 

eligible for the isolated transactions 

exception in § 411.357(f). The 

commenter asserted that this type of 

arrangement should instead be viewed 

as a compensation arrangement, 

potentially qualifying for the isolated 

transactions exception. The commenter 

referenced our Phase II remarks with 

respect to the types of transactions that 

qualify for the protection of the 

exception for isolated transactions at 

§ 411.357(f) (69 FR 16098). 

Response: In Phase II, we indicated 

that loans or bonds secured by, or 

otherwise linked to, a particular piece of 

equipment or the revenue of a 

department or other discrete hospital 

operations would be considered an 

ownership interest in part of a hospital 

(69 FR 16063). We also stated that a onetime sale of property (which could be 

equipment), using installment payments 

that are appropriately secured, for 

example by a security interest taken in 

the property, could qualify for the 

isolated transactions exception in 

§ 411.357(f) if all other requirements of 

the exception are satisfied (69 FR 

16098). After reconsidering the issue, 

we do not believe that the Congress 

intended a security interest taken by a 

physician in equipment sold to a 

hospital and financed by a loan from the 

physician to the hospital to create an 

ownership or investment interest in the 

hospital’s property or a portion of the 

hospital’s property (subject to a contrary 

provision in the security instrument or 

agreement of the parties). Instead, such 

a transaction is more appropriately 

analyzed as a compensation 

arrangement that must satisfy the 

requirements of an applicable exception 

if the physician-seller refers DHS to the 

hospital-purchaser. We have modified 

§ 411.354(b)(3), accordingly. We 

continue to believe that loans or bonds 

secured by, or otherwise linked to, the 

revenue of a department or other 

discrete hospital operations would be 

considered an ownership interest in a 

part of a hospital. Such interests would 

not qualify for protection under the 

whole hospital exception in 

§ 411.356(c)(3). 

Comment: A commenter objected to 

the treatment of bonds as an ownership 

interest in § 411.354(b)(1) and suggested 

that there should be an exception for 

bonds issued by a tax-exempt entity that 

has a non-participatory interest. For 

example, an ownership interest should 

not include a bond issued by a taxexempt entity if interest is not 

calculated on the earnings of the 

institution. 

Response: Section 1877 of the Act 

includes as a ‘‘financial relationship’’

both ownership and investment 

interests, except for those specifically 

excluded under sections 1877(c) and (d) 

of the Act. Section 1877 of the Act 

provides that ownership or investment 

interests can be through equity, debt, or 

other means. Because bonds are an 

investment interest based on debt, the 

purchase of bonds (regardless of 

whether the issuing entity is taxexempt) creates an ownership or 

investment interest for purposes of the 

physician self-referral law. 

Comment: One commenter stated that 

some physicians were interpreting 

improperly the language in the Phase I 

preamble regarding the exclusion of any 

interest in a retirement plan from the 

definition of ‘‘ownership or investment 

interest’’ in § 411.354(b)(3). According 

to the commenter, some physicians are 

using retirement plans to purchase DHS 

entities to which they refer patients for 

DHS. The commenter requested 

clarification of our position. 

Response: We agree with the 

commenter that the purchase of 

ownership interests in DHS entities by 

physicians through their retirement 

funds is inconsistent with the statutory 

intent. In addition to the information 

provided by this commenter, we have 

heard anecdotally that some physicians 

are purchasing ownership interests in 

DHS entities through their retirement 

plans. In the CY 2008 Physician Fee 

Schedule notice of proposed rulemaking 

(72 FR 38122), we proposed revisions to 

§ 411.354(b)(3) to address the issue of 

ownership in a retirement plan. We may 

finalize that proposal, or a similar 

change to the regulation, in a future 

rulemaking. We caution that, depending 

on the facts, arrangements involving a 

DHS entity owned through a physician’s 

retirement plan may be part of an 

indirect compensation arrangement 

between the referring physician and the 

DHS entity (pursuant to § 411.354(c)) 

that would need to satisfy the 

requirements of the exception in 

§ 411.357(p) for indirect compensation 

arrangements. In many cases, the 

referring physician would receive 

compensation from the retirement plan 

that takes into account the referrals to 

the DHS entity owned by the retirement 

plan. The arrangements described by the 

commenter are also problematic under 

the anti-kickback statute. 

Comment: A commenter asked 

whether a guaranty of a loan constitutes 

an ownership interest in the debtor and, 

if so, what exception would be 

available. 

Response: A guaranty does not create 

an ownership interest, but a guaranty 

usually creates a compensation 

arrangement between the guarantor and 

the debtor. 

B. Compensation 

Phase II discussed at some length the 

definition of an indirect compensation 

arrangement. Some commenters on the 

Phase II rule requested further 

clarification, particularly regarding—

• The treatment of an indirect 

compensation arrangement; 

• The relationship between the 

definition of ‘‘indirect compensation 

arrangement’’ and the exception for 

indirect compensation arrangements; 

and 

• The relationship between the 

exception for indirect compensation 

arrangements and other exceptions. 

Many commenters sought clarification 

regarding the application of the indirect 

compensation arrangement definition in 

the context of financial arrangements in 

which a group practice was interposed 

between the entity furnishing DHS and 

the referring physician. According to 

some commenters, in most of these 

arrangements, there would not appear to 

be an indirect compensation 

arrangement within the meaning of the 

regulation, because the physician’s 

compensation from the group practice 

would likely be based on his or her 


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productivity in the group practice, and 

not tied to referrals to the DHS entity 

with which the group practice has a 

financial arrangement. Other 

commenters stated that they continued 

to find the definition difficult to 

understand and apply. 

In Phase II, we specifically solicited 

comments with respect to whether we 

should permit physicians to ‘‘stand in 

the shoes’’ of their group practices for 

purposes of determining whether they 

have a direct or indirect compensation 

arrangement with a DHS entity (69 FR 

16060). This Phase III final rule includes 

new provisions in § 411.351 and 

§ 411.354 that address compensation 

arrangements in which a group practice 

(or other ‘‘physician organization,’’ as 

newly defined at § 411.351) is directly 

linked to the physician in a chain of 

financial relationships between the 

referring physician and a DHS entity. 

Under the Phase I and II regulations, 

such arrangements did not fit in the 

definition of a direct compensation 

arrangement (66 FR 868, 69 FR 16059–

16060); rather such arrangements would 

have been analyzed under the as 

‘‘indirect compensation arrangements’’

under § 411.354(c)(2). If an arrangement 

meets the definition of an ‘‘indirect 

compensation arrangement,’’ it must 

comply with the exception for indirect 

compensation arrangements at 

§ 411.357(p) if the physician refers DHS 

to the entity. 

This approach creates two issues. 

First, industry representatives have 

claimed that resorting to the indirect 

compensation arrangements definition 

and exception adds an unnecessary step 

when determining compliance with the 

physician self-referral prohibition. 

These parties believe that it would be 

easier, more efficient, and consistent 

with the purposes of the physician selfreferral law to examine the relationship 

between the hospital and the group 

practice for compliance with a 

physician self-referral exception. They 

urge that a referring physician should 

‘‘stand in the shoes’’ of his or her group 

practice, which acts on behalf of its 

physician members and contractors. 

This would, in turn, enable the parties 

to analyze the arrangement between the 

DHS entity and the group practice (for 

example, a lease of office space, 

personal service arrangement, or fair 

market value arrangement) under the 

various direct compensation 

arrangements exceptions, without using 

the indirect compensation arrangements 

definition or exception. We agree. 

Second, we are concerned about 

reports that parties may be construing 

the definition of an indirect 

compensation arrangement too 

narrowly, resulting in determinations 

that arrangements that involve financial 

incentives for referring physicians fall 

outside the ambit of the physician selfreferral law. In particular, we are 

concerned that arrangements between 

DHS entities and group practices are 

often viewed as outside the application 

of the statute. The new ‘‘stand in the 

shoes’’ provisions should close this 

unintended loophole by treating 

compensation arrangements between 

DHS entities and group practices as if 

the arrangements are with the group’s 

referring physicians. This approach 

incorporates a commonsense 

understanding of the relationship 

between group practices and their 

physicians. Thus, if a DHS entity leases 

office space to a group practice, the 

lease will be deemed to be a direct 

compensation arrangement with each 

physician in the group practice, and the 

lease will need to fit in the exception for 

rental of office space in § 411.357(a) if 

the DHS entity wants to submit claims 

for DHS referrals from those physicians. 

For purposes of the ‘‘stand in the shoes’’

provision, we are including in the 

definition of ‘‘physician organizations,’’

in whose shoes the referring physician 

will stand, the referring physician’s 

professional corporation, physician 

practice, or group practice. 

Specifically, under the new provision, 

a physician is deemed to have a direct 

compensation arrangement with an 

entity furnishing DHS if the only 

intervening entity between the 

physician and the DHS entity is his or 

her physician organization. In addition, 

for purposes of the definition of 

‘‘indirect compensation arrangement,’’ a 

physician will be deemed to stand in 

the shoes of the physician organization 

with which he or she has a direct 

financial relationship (that is, the 

physician organization with which he or 

she is directly linked). When a 

physician stands in the shoes of his or 

her physician organization, he or she 

will be deemed to have the same 

compensation arrangement (with the 

same parties and on the same terms) as 

the physician organization has with the 

DHS entity. We have included language 

in the regulations in § 411.354(c)(3)(i) to 

make clear that ‘‘parties’’ refers to the 

physician organization and all of its 

physician members, employees, and 

independent contractors. In the 

preceding example, the arrangement for 

the rental of office space would need to 

satisfy all of the requirements of the 

exception in § 411.357(a), including, for 

example, the requirement that the rental 

charges not take into account the 

volume or value of referrals or other 

business generated between the parties. 

The ‘‘parties’’ to the arrangement would 

be the hospital and the group practice, 

including all members, employees, and 

independent contractors of the group 

practice. Thus, if the lease arrangement 

takes into account referrals or other 

business generated by the group practice 

(or any of its physicians) the 

arrangement will not be protected. 

We are mindful that many existing 

arrangements involving relationships 

with an interposed physician 

organization between the DHS entity 

and the referring physician, like the one 

discussed in the example above, may 

have been properly structured to 

comply with the indirect compensation 

arrangements exception in § 411.357(p). 

It is not our intent to require that those 

arrangements be reexamined and 

revised to comply with a direct 

compensation arrangements exception. 

Except as provided below, as of the 

effective date of this Phase III final rule, 

all compensation arrangements must be 

analyzed under the ‘‘stand in the shoes’’

provisions in § 411.354 to determine 

what type of compensation arrangement 

exists (direct or indirect) and what 

corresponding exceptions might be 

available. However, arrangements that 

were entered into prior to the 

publication date of this Phase III final 

rule and that satisfied the requirements 

of the indirect compensation 

arrangements exception in § 411.357(p) 

on the date of the publication of this 

Phase III final rule need not be amended 

during the original term of the 

arrangement or the current renewal term 

(that is, the renewal term the 

arrangement is in on the date of 

publication of this Phase III final rule) 

to comply with the requirements of 

another exception. Those arrangements 

may continue to use the exception in 

§ 411.357(p) during the original or 

current renewal term of the agreement 

as if the ‘‘stand in the shoes’’ doctrine 

does not apply. 

We are not making any changes at this 

time to the treatment of arrangements 

that, after application of the ‘‘stand in 

the shoes’’ provision, still do not meet 

the definition of a direct compensation 

arrangement. Those arrangements will 

continue to require analysis under the 

indirect compensation arrangements 

definition. In other words, arrangements 

involving an intervening entity other 

than a physician organization (for 

example, a chain that runs DHS entity 

to management company to referring 

physician) or involving more than one 

intervening entity (for example, a chain 

that runs DHS entity to management 

company to group practice to referring 

physician) would continue to be 


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analyzed under the Phase I and II rules 

for indirect compensation arrangements 

and the indirect compensation 

arrangements exception. Although we 

remain concerned that arrangements 

that interpose such entities are subject 

to abuse, we believe that we would 

benefit from additional public input on 

the best way to apply a ‘‘stand in the 

shoes’’ rule to these indirect 

relationships. We note that an 

arrangement that may not qualify as 

either a direct or an indirect 

compensation arrangement for purposes 

of the physician self-referral statute may 

still be suspect under the anti-kickback 

statute. 

We believe that this new provision 

will address the concerns raised in the 

comments, including comments 

discussed below in section VI.B, as well 

as simplify compliance with the 

physician self-referral regulations 

generally. Our responses to specific 

comments are discussed below. 

Comment: A number of commenters 

requested further clarification, for 

purposes of the indirect compensation 

arrangement definition, regarding the 

circumstances under which 

compensation received by a physician 

may ‘‘otherwise reflect’’ the volume or 

value of the physician’s referrals to an 

entity furnishing DHS. Specifically, 

these comments addressed situations in 

which the physician has a direct 

financial relationship with an 

‘‘intervening entity’’ that, in turn, has a 

direct relationship with the DHS entity 

to which the physician refers patients 

for DHS. Several commenters believed 

that payments by a hospital to a group 

practice for the recruitment of a 

physician should not implicate the 

general prohibition with respect to 

referrals made by physicians in the 

group other than the recruited 

physician, provided that the physicians 

in the group are not compensated based 

on the volume or value of their referrals 

to the hospital making the recruitment 

payment. Another commenter stated 

that, if we interpret the ‘‘otherwise 

reflect’’ language to mean that a fixed 

payment may ‘‘reflect’’ the volume or 

value of referrals if that payment 

exceeds fair market value, we should 

state that clearly. However, the 

commenter noted that such an 

interpretation would be very 

problematic, because the volume and 

value standard is critical to many of the 

statutory and regulatory exceptions. 

Response: First, in Phase II, we clearly 

stated that fixed compensation (that is, 

one lump payment or several individual 

payments aggregated together) can take 

into account or otherwise reflect the 

volume or value of referrals (for 

example, if the payment exceeds the fair 

market value for the items or services 

provided) (69 FR 16059). Whether the 

compensation does, in fact, take into 

account or otherwise reflect the volume 

or value of referrals will require a caseby-case determination based on the facts 

and circumstances. 

Many of the commenters’ concerns 

regarding indirect compensation 

arrangements involving payments to 

group practices will become moot, given 

our decision to adopt a ‘‘stand in the 

shoes’’ policy, as described above. Many 

arrangements will need to satisfy a 

direct exception, and the group 

practice’s method of compensating a 

physician will be irrelevant for purposes 

of determining compliance with an 

exception. 

Comment: Several commenters 

described financial arrangements 

between DHS entities and group 

practices that did not meet the 

definition of an indirect compensation 

arrangement. The commenters requested 

confirmation that, if there is no direct or 

indirect financial relationship (as 

defined in the regulations) between a 

DHS entity and a physician, section 

1877 of the Act is not implicated. 

Response: Section 1877 of the Act 

prohibits only referrals from a physician 

to entities furnishing DHS with which 

the physician (or an immediate family 

member) has a financial relationship as 

defined at § 411.354. 

We believe that the commenters’

inquiries are addressed by the 

modifications we are making in this 

Phase III final rule regarding the 

treatment of certain compensation 

arrangements between entities 

furnishing DHS, group practices, and 

physicians in those group practices. 

Specifically, as discussed above, we are 

adding new provisions in § 411.354 to 

treat a physician as ‘‘standing in the 

shoes’’ of his or her group practice or 

physician organization. Conceptually, 

this new provision has the effect of 

treating many compensation 

arrangements that previously would 

have been treated as indirect 

compensation arrangements as direct 

compensation arrangements and 

requiring them to satisfy the 

requirements of an exception for direct 

compensation arrangements. It also has 

the effect of treating some arrangements 

that may not previously have met the 

definition of either a ‘‘direct 

compensation arrangement’’ or an 

‘‘indirect compensation arrangement’’ as 

a direct compensation arrangement for 

which an exception is needed. As many 

commenters to Phase II recognized, 

indirect compensation arrangements are 

clearly subject to the physician selfreferral prohibition. 

Comment: One commenter sought 

clarification concerning the interplay 

between the use of the ‘‘volume or 

value’’ standard in the definition of an 

indirect compensation arrangement and 

the exception for indirect compensation 

arrangements. Specifically, the 

commenter asked how any indirect 

compensation arrangement could satisfy 

the exception’s requirement that the 

arrangement not take into account the 

volume or value of referrals ‘‘in any 

manner,’’ given that, by definition, the 

compensation must vary with, or 

otherwise reflect, the volume or value of 

referrals. 

Response: In Phase II, we responded 

to a similar comment. In that rule (69 FR 

16069), we stated: 

For purposes of determining whether an 

indirect compensation arrangement exists 

under the definition at § 411.354(c), the 

inquiry is whether the aggregate 

compensation to the referring physician 

reflects the volume or value of DHS referrals 

or other business generated by the referring 

physician, even if individual time-based or 

unit-of-service based payments would 

otherwise be permissible (that is, the 

payments are fair market value at inception 

and do not vary over the term of the 

agreement). In short, many time-based or 

unit-of-service based fee arrangements will 

involve aggregate compensation that varies 

based on volume or value of services and 

thus will be ‘‘indirect compensation 

arrangements’’ under § 411.354(c). However, 

in determining whether these arrangements 

fit into the indirect compensation 

arrangements exception at § 411.357(p), 

which does not include an aggregate 

requirement, the relevant inquiry is whether 

the individual payments are fair market value 

not taking into account the volume or value 

of referrals or other business generated by the 

referring physician (and do not change after 

inception). In other words, the issue is 

whether the time-based or unit-of-service 

based fee is fair market value and not inflated 

to compensate for the generation of business. 

In short, the definition looks to the 

aggregate compensation (that is, 

compensation that combines each 

individual payment under the 

arrangement), whereas the exception 

looks at individual payments without 

aggregating them. 

Comment: One commenter asked that 

we clarify that the conversion of a direct 

compensation arrangement that does not 

meet a direct compensation 

arrangements exception into an indirect 

compensation arrangement that meets 

the indirect compensation arrangements 

exception is not a prohibited 

circumvention scheme. 

Response: We are unclear about the 

exact nature of the arrangements 

described by the commenter. If an 


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arrangement between a referring 

physician (or immediate family 

member) and a DHS entity meets the 

definition of an ‘‘indirect compensation 

arrangement’’ and, in fact, satisfies the 

requirements of the indirect 

compensation arrangements exception 

in § 411.357(p), referrals made between 

the referring physician (or immediate 

family member) and the DHS entity are 

not prohibited. The arrangement must 

satisfy the exception in operation, not 

just on the face of the documentation. 

Efforts to circumvent improperly the 

statute in any form may evidence 

improper intent for purposes of the 

physician self-referral statute, which 

may be relevant to enforcement actions 

for civil monetary penalties and false 

claims if the financial arrangement does 

not satisfy the requirements of an 

exception. Moreover, such efforts are 

also relevant in analyzing the intent of 

the arrangement for purposes of the 

anti-kickback statute. We note that the 

indirect compensation arrangements 

exception includes a condition that the 

arrangement not violate the antikickback statute. In addition, 

arrangements that interpose a leasing or 

other entity between the DHS entity and 

the referring physician may involve 

illegal kickbacks, even if they do not 

come within the definition of an 

indirect compensation arrangement. 

Comment: A hospital association 

asserted that some hospitals collect 

information regarding physicians’

financial relationships for purposes of 

monitoring conflicts of interest and 

suggested that we not use such 

information in determining whether a 

DHS entity satisfies the knowledge 

criteria in § 411.354(c)(2)(iii) for 

purposes of the indirect compensation 

arrangements definition. 

Response: Any information in the 

possession of a hospital may be relevant 

in assessing whether the hospital knew 

or had reason to know of an indirect 

financial relationship involving a 

referring physician. 

Comment: A commenter requested 

clarification of the example in Phase II 

regarding an indirect financial 

relationship involving a physician who 

has an ownership interest in a hospital 

that contracts for services with a clinical 

laboratory to which the physician refers 

(69 FR 16060). The commenter 

questioned our analysis, asserting that 

the hospital would not be receiving 

compensation that would vary with the 

volume or value of referrals, because the 

hospital would be paying for services 

furnished. The commenter requested 

further clarification. 

Response: As we stated in Phase II, 

the arrangement referenced by the 

commenter normally would not create 

an indirect compensation arrangement. 

Absent unusual circumstances, the 

hospital would not receive aggregate 

compensation that reflects the volume 

or value of referrals because the hospital 

would not be receiving any 

compensation from the clinical 

laboratory (assuming the contracted 

charges for the laboratory services are at 

fair market value) (69 FR 16060). 

However, if the laboratory charged the 

hospital less than fair market value for 

its services (resulting in remuneration to 

the hospital), the arrangement could 

meet the definition of an indirect 

compensation arrangement between the 

referring physician and the laboratory 

(depending on the facts and 

circumstances). The arrangement would 

not satisfy the requirements of the 

indirect compensation arrangements 

exception because payments for the 

laboratory services were not at fair 

market value. 

C. Special Rules on Compensation 

Section 411.354(d) sets forth rules 

regarding several key terms, including 

‘‘set in advance,’’ ‘‘the volume and 

value of referrals,’’ and ‘‘other business 

generated between the parties.’’ These 

terms are used in many of the 

compensation arrangements exceptions. 

In addition, § 411.354(d)(4) provides 

that, in certain circumstances, it is 

permissible for a physician’s 

compensation from an employer, or 

under a managed care or other contract, 

to be conditioned on referrals to 

particular entities, notwithstanding the 

general ban in many exceptions on 

compensation that takes into account 

the volume or value of referrals. 

In Phase I, we provided that 

compensation would be considered ‘‘set 

in advance’’ if the aggregate 

compensation or a time-based or perunit of service-based amount is set in 

advance in the initial agreement in 

sufficient detail so that it can be 

effectively verified (66 FR 959). In Phase 

II, we modified the special rule to 

provide that compensation would also 

be considered ‘‘set in advance’’ if the 

specific formula for calculating the 

compensation is set out in an agreement 

between the parties before the 

furnishing of the items or services, and 

the formula is set forth in sufficient 

detail so that it can be effectively 

verified and is not changed during the 

course of the agreement in any manner 

that reflects (or takes into account) the 

volume or value of referrals or other 

business generated. The principal 

impetus for deeming formula-based 

compensation to be ‘‘set in advance’’

came from comments from associations 

representing physicians that urged us to 

accommodate common percentage 

compensation arrangements. This Phase 

III final rule retains flexibility for 

utilizing unit-based and percentagebased compensation formulae for 

arrangements. 

In Phase I, we stated that unit-based 

compensation would be deemed not to 

take into account ‘‘the volume or value 

of referrals’’ if the compensation is fair 

market value and does not vary during 

the course of the arrangement in any 

manner that takes into account DHS 

referrals (66 FR 876). Similarly, in Phase 

I, we stated that unit-based 

compensation would be deemed not to 

take into account ‘‘other business 

generated between the parties’’ if the 

compensation is fair market value and 

does not vary during the course of the 

arrangement in any manner that takes 

into account other business generated 

by the referring physician, including 

private pay health care services (66 FR 

877). We made no changes in Phase II 

with respect to either the ‘‘volume or 

value’’ or ‘‘other business generated’’

deeming provisions. 

The Phase I special rules on 

compensation permitted entities 

furnishing DHS to condition physician 

compensation in certain circumstances 

on the physician’s compliance with 

referral restrictions, if certain conditions 

were satisfied. Phase II clarified that the 

required referral provision applies to 

employment, managed care, and 

personal service arrangements only, and 

set forth new requirements specifying 

that: (1) the required referrals must 

relate solely to the physician services 

covered by the arrangement; and (2) the 

referral requirement must be reasonably 

necessary to effectuate the legitimate 

purpose of the compensation 

arrangement (69 FR 16069). In this 

Phase III final rule, we are amending the 

regulatory text in § 411.354(d)(4) to 

include expressly contracts for personal 

services. 

Comment: Two commenters sought 

clarification that percentage-based 

compensation arrangements, the 

methodologies of which were fixed at 

the outset of the contract and did not 

vary during the term of the agreement, 

would satisfy the ‘‘set in advance’’

standard in § 411.354(d)(1) and be 

deemed not to take into account the 

‘‘volume or value’’ of referrals or ‘‘other 

business generated between the parties’’

pursuant to § 411.354(d)(2) and (d)(3), 

respectively. One commenter requested 

that the text of § 411.354(d)(2) and (d)(3) 

be revised to reference percentage-based 

compensation specifically. Another 

commenter asked if compensation based 

on a percentage of collections satisfied 


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the requirements of the regulation, and 

another commenter asked about 

compensation that includes a 

percentage of the net revenues of a 

business unit for which the physician is 

responsible. 

Response: To satisfy the requirements 

of many compensation arrangements 

exceptions, compensation must be ‘‘set 

in advance,’’ consistent with fair market 

value, and not take into account the 

volume or value of referrals or other 

business generated by the referring 

physician. 

The first two commenters are correct 

that, under the Phase II special rule in 

§ 411.354(d), percentage-based 

compensation arrangements can be 

considered ‘‘set in advance’’ if the 

methodology is fixed at the outset of the 

contract with sufficient specificity and 

not changed during the course of the 

agreement in a manner that reflects 

referral volumes or other business 

generated. 

With respect to the comments about 

percentage of collections and percentage 

of revenues compensation 

methodologies, such methodologies may 

be able to meet the ‘‘set in advance’’

test, depending on the facts. However, 

such compensation arrangements must 

also meet the other terms of a relevant 

exception, such as the terms excluding 

compensation that takes into account 

the volume or value of referrals or other 

business generated between the parties. 

This would involve, among other things, 

testing the arrangements against the 

deeming provisions in § 411.354(d)(2) 

and § 411.354(d)(3) related to ‘‘volume 

or value of referrals’’ and ‘‘other 

business generated between the 

parties’’; these deeming provisions 

apply only to unit-based compensation 

and require that unit-based 

compensation be fair market value and 

unrelated to referrals. We cannot 

determine based on the facts provided 

whether the arrangements would 

comply with an exception. We are not 

persuaded that § 411.354(d)(2)and (d)(3) 

should be revised to reference 

specifically percentage-based 

compensation arrangements. 

Comment: Three commenters objected 

to § 411.354(d)(4), which provides that a 

physician’s compensation from an 

employer or under a managed care or 

other contract may be conditioned on 

referrals to particular entities in certain 

circumstances. Two of the commenters 

also objected to our response to a 

comment in Phase II that stated that a 

hospital may require its employees to 

refer patients to its home health agency 

if the requirements in § 411.354(d)(4) 

are satisfied (69 FR 16089). According to 

all three commenters, § 411.354(d)(4) 

conflicts with section 4321 of the 

Balanced Budget Act of 1997 (BBA 

1997), which amended section 

1861(ee)(2) of the Act, and which relates 

to hospitals’ obligations under the 

discharge planning process to patients 

in need of home health services. Section 

1861(ee)(2) of the Act requires the 

Secretary to develop guidelines and 

standards for the discharge planning 

process in order to ensure a timely and 

smooth transition to the most 

appropriate type of setting for postdischarge care. Section 4321 of BBA 

1997 amended section 1861(ee)(2) of the 

Act to require, among other things, that 

the discharge plan advise the patient of 

participating home health agencies that 

serve the area in which the patient 

resides and that it identify any home 

health agency to which the patient is 

referred in which the hospital has a 

disclosable financial interest. 

One commenter stated that allowing 

an entity to condition employment on 

an agreement to refer patients to a 

particular provider may implicate the 

Federal anti-kickback statute, and may 

encourage a violation of Federal and 

State antitrust laws or State unfair trade 

practices laws. The commenter 

suggested that we delete § 411.354(d)(4). 

Response: Section 411.354(d)(4) does 

not conflict with the requirements of 

section 1861(ee)(2) of the Act, as 

amended by section 4321 of BBA 1997. 

Under section 4321 of BBA 1997, as part 

of the discharge plan, a hospital is 

required to provide a patient needing 

home health services or skilled nursing 

facility services a list of local home 

health agencies or skilled nursing 

facilities, as appropriate. If, after being 

provided the list, the patient expresses 

a choice as to the particular provider 

from which he or she wishes to receive 

treatment, the hospital and the patient’s 

treating physician are required to honor 

that choice. Nothing in 

§ 411.354(d)(4)(iv) permits a physician 

and the employing or contracting entity 

to override a patient’s choice of 

provider. To the contrary, 

§ 411.354(d)(4)(iv) affirmatively requires 

that the arrangement between the 

physician and the entity honor a 

patient’s choice. Section 

411.354(d)(4)(iv) requires that the 

arrangement must provide that the 

physician is not obligated to refer to a 

particular provider, practitioner, or 

supplier if: the patient expresses a 

preference for a different provider, 

practitioner, or supplier; the patient’s 

insurer determines the provider, 

practitioner, or supplier; or the referral 

is not in the patient’s best medical 

interests in the physician’s judgment. 

Section 411.354(d)(4)(v) further 

provides that the requirement to make 

referrals to a particular provider, 

practitioner, or supplier must relate 

solely to the physician’s services 

covered by the scope of his or her 

employment or contract. 

Whether an arrangement implicates 

the anti-kickback statute is a matter for 

the Department of Justice (DOJ) and the 

OIG. Arrangements that include referral 

requirements may implicate the antikickback statute and should be closely 

scrutinized to ensure that no purpose of 

the compensation is to induce or reward 

referrals. An arrangement that fully 

complies with the requirements of 

§ 411.354(d)(4), however, does not 

necessarily raise concerns under Federal 

and State antitrust or unfair trade 

practices statutes. Accordingly, we are 

not persuaded that the potential for 

implication of the anti-kickback statute 

or the Federal and State antitrust laws 

noted by the commenters warrants 

withdrawal of § 411.354(d)(4). 

Comment: Commenters asked 

whether an agreement between an entity 

furnishing DHS and a referring 

physician could be amended during the 

first year of the agreement and still 

satisfy the ‘‘set in advance’’

requirement. According to one 

commenter, the definition of ‘‘set in 

advance’’ implies that an amendment is 

permissible, provided that the 

amendment is not related to the volume 

or value of referrals or other business 

generated between the parties. 

According to the commenter, the 

implication is that any number of 

amendments for other, bona fide 

reasons is permissible. 

Response: The commenter is correct 

that amendments are permissible under 

the ‘‘set in advance’’ definition if they 

are made for bona fide reasons 

unrelated to the volume or value of 

referrals or other business generated 

between the parties. However, parties 

must still satisfy all requirements of an 

exception, including any requirements 

bearing on amendments of agreements. 

(See discussion in section IX.A below.) 

VII. General Exceptions to the Referral 

Prohibition Related to Both Ownership 

and Compensation—§ 411.355 

A. Physician Services 

Section 1877(b)(1) of the Act specifies 

that the general prohibition does not 

apply to physician services (as defined 

in section 1861(q) of the Act) that are 

furnished: (1) Personally by another 

physician in the same group practice as 

the referring physician; or (2) under the 

supervision of another physician in the 

same group practice as the referring 

physician. In Phase I, we interpreted the 


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exception to apply to referrals to, or 

physician services supervised by, a 

‘‘member of the group practice’’ or an 

independent contractor who qualifies as 

a ‘‘physician in the group practice’’ as 

defined at § 411.351 (69 FR 879). We 

made no changes to this exception in 

Phase II. In this Phase III final rule, we 

are making no substantive modifications 

to this exception; however, we are 

deleting § 411.355(a)(3), which 

incorrectly suggests that diagnostic tests 

are ‘‘incident to’’ services. As we 

clarified in the CY 2003 Physician Fee 

Schedule final rule published December 

31, 2002, any diagnostic service that has 

its own benefit category cannot be billed 

as an ‘‘incident to’’ service (67 FR 

79994). In addition, § 411.355(a)(3) is 

repetitive of § 411.355(a)(2) and, 

therefore, is unnecessary. 

Comment: One commenter suggested 

that we amend the physician services 

exception by deleting from § 411.355(a) 

‘‘physician in the same group practice’’

(as defined at § 411.351) from among the 

types of physicians who can be the 

‘‘referring physician.’’ According to the 

commenter, this change would clarify 

that referrals within a group practice to 

independent contractor pathologists 

who perform services for the group in 

off-site ‘‘pod labs’’ are impermissible 

under the physician services exception. 

According to the commenter, the 

development of the concept of 

‘‘physician in the group practice’’ was 

not intended to allow group practices 

simply to refer to independent 

contractors for whose services the group 

could then bill on reassignment. 

Response: The physician services 

exception in section 1877(b)(1) of the 

Act and § 411.355(a) enables group 

practice physicians to make referrals 

within their group practices for 

physician services that are DHS and that 

are performed or supervised by either a 

member of the group practice or by a 

‘‘physician in the group practice.’’ A 

‘‘physician in the group practice’’ is 

considered to be in the group practice 

only when he or she is performing 

services in the group practice’s 

facilities. Accordingly, although 

professional services performed by a 

member of the group practice may be 

provided on or off the group practice’s 

site for purposes of this exception, 

professional services performed by an 

independent contractor physician must 

be performed in the group practice’s 

facilities. Thus, the exception is not 

applicable to services provided by 

independent contractors in off-site 

locations that are not group facilities. 

However, we do not believe that it is 

appropriate to ban group practices from 

referring to any independent contractor 

physician. We appreciate the 

commenter’s concerns regarding 

independent contractor pathologists 

who perform services for the group 

practice in off-site ‘‘pod labs’’ and 

continue to study the issue. At this time, 

we decline to make the change to the 

physician services exception requested 

by the commenter. We note that, in 

addition to physician self-referral 

considerations, the provision of off-site 

services by group practices raises 

significant concerns under the antikickback statute. 

B. In-office Ancillary Services 

The in-office ancillary services 

exception is one of the most important 

exceptions to the physician self-referral 

prohibition. Generally, it permits a 

physician or group practice to order and 

provide DHS, other than most durable 

medical equipment (DME), in the office 

of the physician or group practice, 

provided that the DHS is truly ancillary 

to the medical services furnished by the 

group practice. The statutory exception 

has four main components—

• The nature of the DHS; 

• The personnel who perform or 

supervise the DHS; 

• The location where the DHS are 

provided; and 

• The manner in which the DHS are 

billed. 

The Phase I rule interpreted the 

statutory provision by permitting great 

flexibility in the provision of ancillary 

services in the ‘‘same building’’ (as 

defined at § 411.351) where a physician 

or a group practice routinely provides 

the full range of their medical services, 

while limiting the availability of the 

‘‘centralized building’’ (as defined at 

§ 411.351) option to premises that are 

used on an exclusive and full-time 

basis. With respect to the other 

requirements, the Phase I rule clarified 

the types of DHS that could be provided 

under the exception and relaxed the 

supervision requirements by 

incorporating the Medicare coverage 

and payment supervision rules and 

permitting independent contractor 

physicians to provide supervision on a 

group practice’s premises. 

In response to public comments 

urging a more ‘‘bright-line’’ test, Phase 

II revised the criteria for determining 

when services are furnished in the 

‘‘same building’’ where the physician or 

group furnishes the full range of their 

medical services. Under the revised 

location requirement, DHS qualify for 

the exception if they are furnished in 

the ‘‘same building’’ in which—

• The referring physician or his or her 

group practice has an office that is 

normally open to patients at least 35 

hours per week, and the referring 

physician or one or more members of 

the referring physician’s group practice 

regularly practices medicine and 

furnishes physician services to patients 

in that office at least 30 hours per week; 

or 

• The referring physician or his or her 

group practice has an office that is 

normally open to patients at least 8 hour 

per week, the referring physician 

regularly practices medicine and 

furnishes physician services to patients 

in that office at least 6 hours per week, 

and the patient receiving the DHS 

usually receives physician services from 

the referring physician or members of 

the referring physician’s group practice 

at this location; or 

• The referring physician or his or her 

group practice has an office that is 

normally open to patients at least 8 

hours per week, the referring physician 

or one or more members of the referring 

physician’s group practice regularly 

practices medicine and furnishes 

physician services to patients at least 6 

hours per week, and the referring 

physician is present and orders the DHS 

during a patient visit on the premises or 

a member of the referring physician’s 

group practice is present while the DHS 

are furnished. 

In each of the three alternative tests, 

the minimum hourly requirement for 

furnishing physician services must 

include some physician services that are 

unrelated to the furnishing of DHS 

payable by Medicare, any other Federal 

health care payer, or a private payer, 

even though the physician services may 

lead to the ordering of DHS. 

We received numerous comments on 

aspects of the in-office ancillary services 

exception. We are making no 

substantive changes to the in-office 

ancillary services exception. We 

respond to issues of concern to the 

commenters below. 

We also received a large number of 

comments from physical and 

occupational therapists and groups 

representing physical and occupational 

therapists objecting to the in-office 

ancillary services exception, asserting 

that the exception has a detrimental 

effect on their practice. The in-office 

ancillary exception is a statutory 

exception and we have no discretion to 

eliminate the exception as requested by 

these commenters. However, we may 

propose additional changes to the 

exception in a future rulemaking. 

Comment: Several commenters 

requested further guidance regarding the 

amount of physician services that would 

be considered unrelated to the 

furnishing of DHS for purposes of 

satisfying the requirement that at least 


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‘‘some’’ physician services furnished in 

the same ‘‘building’’ are unrelated to the 

furnishing of DHS. 

Response: For the reasons previously 

set forth in Phase II, we decline to 

provide a quantitative measure of 

‘‘some’’ non-DHS (69 FR 16073). The 

critical factor is that the premises are 

used for the regular provision of the 

group practice’s physician services, 

even if on a part-time basis, with respect 

to the requirements in § 411.355(b)(2)(i). 

In evaluating whether ‘‘some’’ physician 

services unrelated to DHS are performed 

in the building, we will take into 

account the nature of the group’s overall 

practice (for example, the specialties of 

the group’s physicians) and the referring 

physician’s full range of practice. 

Creating a satellite office that appears to 

satisfy the ‘‘same building’’

requirements, but in fact is merely a 

sham arrangement, will result in claims 

denial. For example, renting office space 

part-time in a freestanding imaging 

facility purportedly to provide 

physician services unrelated to DHS at 

the facility location would be 

considered a sham if few or no such 

services were actually contemplated or 

provided. In addition, a part-time 

arrangement cannot meet the 

centralized building test. As we have 

noted in other contexts, the operation of 

an arrangement, not its form on paper, 

is determinative. Thus, for purposes of 

the in-office ancillary services 

exception, all of the conditions related 

to supervision, location, and billing 

must be strictly satisfied with respect to 

each claim for DHS submitted to the 

Medicare program. 

Comment: A physician professional 

association requested clarification 

regarding whether the requirements 

relating to the quantity and type of 

physician services necessary to satisfy 

the ‘‘same building’’ requirement can be 

met by including services provided to 

patients physically present in remote 

locations via telemedicine. Specifically, 

the commenter requested ‘‘additional 

guidance * * * for practitioners with 

offices in rural locations in which they 

may not be physically present but 

nonetheless provide the requisite 

amount and types of care.’’

Response: We assume that the 

comment pertains to the situation in 

which a patient is present in one 

location and a physician, who is present 

in another location during an 

appointment with the patient, orders an 

item or service that he or she wishes to 

be furnished in the office in which the 

patient is located. We do not consider 

the ordering physician to be located in 

the rural office with the patient for 

purposes of satisfying any of the ‘‘same 

building’’ tests in § 411.355(b)(2)(i). 

Rather, the physician’s time spent 

performing telemedicine services is 

counted for purposes of the ‘‘same 

building’’ requirement as time spent in 

the location where the physician is 

physically present. However, there are 

three alternate methods for meeting the 

‘‘same building’’ test that provide 

considerable flexibility, even in 

situations where physicians provide 

some services via telemedicine. For 

example, in the case of a referring 

physician who is a member of a group 

practice, time spent by other physician 

members of the group at the patient’s 

location would count toward the ‘‘same 

building’’ requirement. 

Comment: A commenter stated that it 

appreciated Phase II’s added flexibility 

of the three alternative tests for 

determining whether services furnished 

in the ‘‘same building’’ meet the 

requirements of the in-office ancillary 

services exception. The commenter 

stated, however, that it was concerned 

that requiring physician presence, either 

by the referring physician when 

ordering, or by a member of the group 

practice when furnished, may be too 

onerous for some group practices. 

According to the commenter, it may be 

difficult for a group practice to 

distinguish its operations as clearly 

meeting one test or another, as well as 

to track and document its compliance 

with the alternative tests. 

Response: We believe that it should 

not be difficult for a group to 

distinguish and document the nature of 

the services furnished by the physicians 

at its various locations. To the extent 

that some additional complexity was 

added by Phase II, it is a necessary 

consequence of allowing additional 

flexibility through the three alternative 

tests. 

Comment: One commenter asked for 

further guidance on physicians who 

provide DHS to their patients in a 

shared space in the same building. 

Specifically, the commenter asked 

whether the physicians could use 

simultaneously the facilities (for 

example, an imaging suite, clinical 

laboratory, or physical therapy office) 

and simply share the costs and 

administration of the DHS without 

having to separately lease the facilities 

for specific blocks of time determined in 

advance. 

Response: A physician sharing a DHS 

facility in the same building must 

control the facility and the staffing (for 

example, the supervision of the 

services) at the time the designated 

health service is furnished to the 

patient. To satisfy the in-office ancillary 

services exception, an arrangement must 

meet all of the requirements of 

§ 411.355(b), not merely on paper, but in 

operation. As a practical matter, this 

likely necessitates a block lease 

arrangement for the space and 

equipment used to provide the 

designated health service. Shared 

facility arrangements must be carefully 

structured and operated (for example, 

with respect to billing and supervision 

of the staff members who provide DHS 

in the facility). We note that common 

per-use fee arrangements are unlikely to 

satisfy the supervision requirements of 

the in-office ancillary services exception 

and may implicate the anti-kickback 

statute. 

Comment: Several commenters 

strongly criticized the centralized 

building prong of the in-office ancillary 

services exception. They requested that 

the rule be changed to require, in 

addition to full-time use of the facility, 

that the arrangement meet a 

‘‘commercially reasonable’’ test. 

According to the commenters, the Phase 

II rule permits numerous abusive 

arrangements that are designed solely to 

permit group practices and physicians 

to refer and bill for DHS that section 

1877 of the Act would otherwise 

prohibit. Commenters objected to group 

practices developing satellite DHS 

facilities, sometimes in different states, 

specifically to capture ancillary income. 

Several commenters identified 

‘‘condominium’’ pathology laboratories 

that rent space to urology groups as the 

types of abusive arrangements that are 

proliferating. On the other hand, one 

commenter complained that the 

requirement that the centralized 

building be occupied exclusively by the 

group practice is too restrictive. 

Response: Section 1877 of the Act 

permits group practices to furnish DHS 

in a centralized building. However, we 

recognize that part-time, shared, off-site 

facilities are readily subject to abuse. To 

address this obvious potential for abuse, 

the Phase I final rule included the 

requirement that a centralized building 

be used on an exclusive basis (66 FR 

881). In the CY 2007 update to the 

physician fee schedule, we proposed 

additional requirements for the 

centralized building test (71 FR 49056–

49057). We will address those proposals 

in a separate rulemaking. In the 

meantime, we caution parties to 

arrangements such as those described by 

the commenters that, as with shared 

facilities in the same building, off-site 

arrangements must fully comply with 

the in-office ancillary services exception 

in operation, not only on paper. In other 

words, compliance is required with 

respect to every DHS claim filed. 

‘‘Condominium’’ arrangements are 


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particularly vulnerable to noncompliance, and staff and operations at 

the off-site facility should be closely 

monitored. For example, a supervising 

physician who is an independent 

contractor of a group practice must be 

in the group practice’s specific premises 

at the specific time a designated health 

service is furnished (and supervised) for 

a group practice patient. Moreover, 

these arrangements raise substantial 

concerns under the anti-kickback 

statute. 

Comment: Several commenters 

commended us for the flexibility 

provided by the in-office ancillary 

services exception. A number of other 

commenters complained that the 

exception effectively vitiated the 

prohibition on physician self-referral. 

Response: The in-office ancillary 

services exception allows a physician to 

provide DHS to his or her own patients, 

which may appear to undercut the 

purpose of the physician self-referral 

prohibition. Nevertheless, the statutory 

exception evidences intent by the 

Congress to permit a physician to 

furnish DHS to his or her own patients 

if certain conditions are met. We are 

considering whether certain types of 

arrangements, such as those involving 

in-office pathology labs and 

sophisticated imaging equipment, 

should continue to be eligible for 

protection under the in-office ancillary 

services exception. 

Comment: One commenter requested 

that we confirm that compliance with 

the in-office ancillary services exception 

is not necessary if an arrangement 

complies with the rural provider 

exception in § 411.356(c)(1). 

Response: Compliance with the inoffice ancillary services exception is not 

necessary with respect to referrals from 

owners or investors if an ownership or 

investment interest complies with the 

rural provider exception in 

§ 411.356(c)(1). As a reminder, the rural 

provider exception protects ownership 

and investment interests only; it does 

not protect compensation arrangements. 

Thus, if the group practice submits 

claims for DHS referred by employed or 

contracted physicians, an exception, 

such as the in-office ancillary services 

exception, must apply. 

Comment: A commenter suggested 

that, where group practices or 

physicians in the same building share 

DHS facilities, the in-office ancillary 

services exception should be restricted 

to clinical laboratory and imaging 

services that are necessary on an urgent 

basis. 

Response: Without further review, we 

do not believe that it is appropriate or 

feasible to restrict the in-office ancillary 

services exception as suggested by the 

commenter. We will continue to 

monitor the situation to determine 

whether to propose additional 

restrictions to safeguard against program 

or patient abuse. 

Comment: One commenter requested 

that we confirm that a hospitalemployed physician would be treated 

the same as any other sole practitioner 

for purposes of satisfying the in-office 

ancillary services exception (that is, 

whether any non-group practice 

physician meeting the same 

requirements of personal supervision or 

personal performance and location may 

fit within the exception). The 

commenter asserted that when the facts 

are the same (that is, supervision, 

location, and other requirements are 

satisfied), it should not matter whether 

the employer is a group practice or a 

hospital. The commenter believed that 

hospitals in States that prohibit the 

corporate practice of medicine are 

disadvantaged because they cannot set 

up a group practice to employ the 

physician (who, presumably, could 

utilize the in-office ancillary services 

exception). 

Response: As set forth in section 

1877(b)(2) of the Act, the in-office 

ancillary services exception applies 

only to certain DHS furnished by a 

physician or group practice; it does not 

apply to inpatient or outpatient hospital 

services billed by a hospital employer. 

In order to utilize the in-office ancillary 

services exception, a hospital-employed 

physician, such as the one described by 

the commenter, must meet all of the 

requirements set forth in § 411.355(b). If 

a hospital-employed physician’s 

referred DHS are billed by the hospital 

employer, the in-office ancillary 

services exception would not apply. The 

hospital would be the entity furnishing 

the DHS (not the physician or a group 

practice), and the hospital-employed 

physician would not meet the billing 

requirement in § 411.355(b)(3). We are 

not persuaded to create a similar 

exception for hospital-employed 

physicians. We see no disadvantage as 

described by the commenter. Hospitals 

may use other exceptions, including the 

exception for bona fide employment 

relationships, to protect legitimate 

arrangements with referring physicians. 

Comment: One commenter requested 

clarification that the in-office ancillary 

services exception did not override our 

policies on reassignment and purchased 

diagnostic tests. Another commenter 

requested clarification that the rules on 

purchased diagnostic tests and 

purchased test interpretations were not 

altered by our implementation of 

section 952 of the MMA. 

Response: The physician self-referral 

rules do not supersede Medicare 

payment and billing rules and policies, 

including rules on reassignment, 

supervision, or purchased diagnostic 

tests; however, the physician selfreferral rules do affect their application. 

For example, following enactment of 

section 952 of the MMA, we amended 

§ 424.80 of our regulations to provide 

that an independent contractor 

physician may reassign to an entity his 

or her right to bill Medicare, regardless 

of whether the services were performed 

on the premises of the entity (as 

required prior to section 952 of the 

MMA) or off the premises of the entity. 

However, where the independent 

contractor physician who wishes to 

reassign to a DHS entity with which he 

or she has a financial relationship, it is 

not enough that the rules on 

reassignment are met. Rather, the rules 

on physician self-referral must also be 

satisfied. For example, where an 

independent contractor physician 

wishes to reassign his or her right to 

receive Medicare payment for DHS to a 

group practice to which he or she will 

refer DHS, an exception such as the 

physician services exception or the inoffice ancillary services exception must 

be met. The services performed by the 

independent contractor in this example 

must be performed in the group 

practice’s facilities (see the definition of 

‘‘physician in the group’’ at § 411.351). 

Conversely, the fact that an 

arrangement complies with the 

physician self-referral rules does not 

negate the relevancy of other rules, such 

as the rules on reassignment and 

purchased diagnostic tests. For example, 

where an independent contractor 

physician furnishes DHS in a 

centralized building of a group practice 

and the other requirements of the inoffice ancillary services exception are 

satisfied, the anti-markup rules would 

nonetheless apply if the service at issue 

is a diagnostic test of the type that is 

covered under the provision at § 414.50 

and the physician and the group have 

effected a valid reassignment (including 

completing the 855–R). 

We are amending § 411.350 to state 

clearly that nothing in the physician 

self-referral rules alters a party’s 

obligation to comply with—

• The rules regarding reassignment of 

claims (§ 424.80); 

• The rules regarding purchased 

diagnostic tests (§ 414.50); 

• The rules regarding payment for 

services and supplies ‘‘incident to’’ a 

physician’s professional services 

(§ 410.26); or 

• Any other applicable Medicare 

laws, rules, or regulations. 


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We note that § 424.80 states that 

nothing in that section alters a party’s 

obligation to comply with the physician 

self-referral statute and other 

authorities. 

Comment: Commenters asked 

whether, in order to satisfy the 

requirements of the in-office ancillary 

services exception, a physician who is 

an independent contractor with a group 

practice must perform DHS supervision 

services on the premises of the group 

practice, regardless of coverage policies. 

Response: For purposes of compliance 

with the physician self-referral rules, 

independent contractor physicians are 

‘‘physicians in the group practice’’ only 

when performing services on the group 

practice’s premises, regardless of 

whether reassignment or coverage rules 

would allow an independent contractor 

physician to perform services off the 

premises of the billing entity. Therefore, 

in order to satisfy the requirements of 

the exception, an independent 

contractor must supervise services on 

the premises of the group practice. 

Comment: Section 1877(b)(2)(B) of the 

Act and § 411.355(b)(3) require that, in 

order for the in-office ancillary services 

exception to apply, the services must be 

billed by one of the following: The 

physician performing or supervising the 

service; the group practice of which the 

performing or supervising physician is a 

member under a billing number 

assigned to the group practice; the group 

practice if the supervising physician is 

a ‘‘physician in the group practice’’

under a billing number assigned to the 

group practice; or by an entity that is 

wholly-owned by the physician or the 

group practice under the entity’s own 

billing number or under a billing 

number assigned to the physician or 

group practice. Two commenters asked 

for clarification that the billing 

requirement in the in-office ancillary 

services exception in § 411.355(b)(3) can 

be satisfied by an entity (that is, a billing 

entity) that is wholly-owned by the 

group members in their individual 

capacities (as opposed to being owned 

by the group practice), but structured to 

mirror the group practice (for example, 

ownership of the billing entity is 

contingent on membership in the group 

practice). According to the commenters, 

the separate structure is common to 

avoid tax liability. 

Response: We disagree with the 

commenters. Section 1877(b)(2)(B) of 

the Act and the corresponding 

regulations in § 411.355(b)(3)(iv) require 

that the supervising physician, the 

referring physician, or the group 

practice must wholly own the billing 

entity. The arrangement described by 

the commenters would not satisfy this 

requirement. The regulations make clear 

that claims submitted by a whollyowned entity must be submitted under 

a billing number assigned to the entity 

or under a billing number assigned to 

the physician or group practice. 

Moreover, the arrangement may not 

comply with our rules on reassignment. 

Under our longstanding policy, only 

individuals may reassign benefits. If the 

commenter is, in effect, asking whether 

a physician member or a ‘‘physician in 

the group practice’’ is allowed to 

reassign benefits to the group, which 

would then reassign benefits to the 

billing entity, we do not believe that the 

arrangement would comply with our 

rules on reassignment. Nothing in the 

regulations prohibits the use of an 

independent billing company in an 

administrative capacity to process and 

submit claims on behalf of billing 

physicians or group practices under 

billing numbers assigned to them. 

C. Services Furnished by an 

Organization (or Its Contractors or 

Subcontractors) to Enrollees 

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

an exception for services provided 

pursuant to certain Medicare managed 

care arrangements. In Phase I, we 

interpreted the provision broadly and 

updated the references to covered 

managed care plans in light of changes 

to the Medicare program. In Phase II, we 

again expanded the exception, which 

appears at § 411.355(c), to include 

Medicaid managed care plans. This 

Phase III final rule makes no changes to 

Phase II. 

Comment: Comments submitted on 

behalf of Alaskan tribal health 

organizations requested that we create 

an exception for referrals made by 

physicians under compensation 

arrangements with tribal health care 

providers. According to the commenter, 

the native tribal organizations have 

assumed much of the responsibility for 

carrying out the programs of the Indian 

Health Service. In discharging that 

responsibility, the tribes have developed 

a comprehensive, integrated health care 

system that utilizes primary, secondary, 

and tertiary caregivers and clinics 

staffed by employees, independent 

contracting practitioners, Federal 

employees, and commissioned officers. 

The commenter asserted that, because of 

limited funds, utilization of services is 

carefully monitored and strictly 

controlled, giving them many 

characteristics of managed care 

organizations. According to the 

commenter, services are prioritized so 

that only certain services are covered, 

and firm policies exist requiring prior 

authorization for non-emergent care and 

notice for emergency care at non-tribal 

or Indian Health Service facilities. The 

commenter stated that the tribal health 

care providers have three principal 

types of compensation arrangements. 

First, and most frequently, the providers 

have physician employees. Second, the 

providers have personal service 

arrangements with physicians. Third, 

the providers enter into agreements with 

the Indian Health Service under which 

Federal employees are assigned to work 

for a specific tribal health program, and 

under which the providers are 

responsible for the costs of such 

employees. The commenter asserts that 

monitoring and reviewing the myriad 

compensation arrangements with 

physicians in the Alaska tribal health 

network consumes scarce time and 

financial resources. In light of the 

system’s integration and strong elements 

of managed care, the commenter urged 

that referrals in the network be 

protected. 

Response: We agree that many of the 

arrangements between the Indian Health 

Service and various Indian nations have 

many of the characteristics of managed 

care. However, when Medicare services 

are furnished, the exception in 

§ 411.355(c) for services furnished to 

enrollees of a prepaid health plan would 

not apply. We decline to create an 

exception at this time to address the 

commenter’s concerns for two reasons. 

First, we question whether we have the 

legal authority to expand the exception 

in § 411.355(c) or to create a new 

exception without first proposing such 

an expansion or new exception through 

a notice of proposed rulemaking. 

Second, the commenter has not 

supplied us with an adequate 

explanation thus far as to why existing 

exceptions such as those for bona fide 

employment relationships (§ 411.357(c)) 

or personal service arrangements 

(§ 411.357(d)) would be insufficient to 

protect the arrangements at issue. The 

commenter appears to recognize that 

these exceptions are available, but states 

that monitoring and reviewing the 

compensation arrangements consumes 

scarce time and financial resources. We 

believe, however, that the parties should 

be able to design model structures for 

the compensation arrangements, which 

would be applicable for existing and 

newly hired physicians. Monitoring and 

reviewing for compliance is necessary 

and prudent to ensure compliance with 

the physician self-referral law, other 

fraud and abuse laws, and other 

Medicare rules and regulations. 


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D. Reserved 

There is no regulation at § 411.355(d). 

Section 411.355(d) continues to be 

‘‘reserved’’ in this Phase III final rule. 

E. Academic Medical Centers 

In Phase I, we created a new 

exception for payments to faculty of 

academic medical centers that meet 

certain conditions that ensure that the 

arrangements pose no risk of fraud or 

abuse (66 FR 916). The exception 

required that the referring physician: (1) 

Is a bona fide employee of a component 

of an academic medical center on a fulltime or substantial part-time basis; (2) is 

licensed to practice medicine in the 

State(s) in which he or she practices 

medicine; (3) has a bona fide faculty 

appointment at the affiliated medical 

school; and (4) provides either 

substantial academic or substantial 

clinical teaching services for which the 

referring physician receives 

compensation as part of his or her 

employment relationship with the 

academic medical center. In addition, 

the exception required the total 

compensation paid to the referring 

physician for the previous 12-month 

period from all academic medical center 

components to be set in advance, in the 

aggregate not exceed fair market value 

for the services provided, and not be 

determined in a manner that takes into 

account the volume or value of any 

referrals or other business generated 

within the academic medical center. 

Phase II made several changes to 

broaden the applicability of the 

academic medical centers exception. We 

expanded the definition of an academic 

medical center to allow hospitals or 

health systems that sponsor four or 

more medical education programs to 

qualify as a component of an academic 

medical center. We revised the 

exception to include not-for-profit 

supporting organizations (whose 

primary purpose is supporting the 

teaching mission of the academic 

medical center) as a potential 

component of an academic medical 

center. We revised the regulatory text to 

make clear that the majority of 

physicians on the medical staff must be 

on the faculty of an affiliated medical 

school and that the aggregation of 

faculty from any affiliated medical 

school is permitted. We expanded the 

exception modestly to cover DHS 

referrals within an academic medical 

center if the money the academic 

medical center pays to the referring 

physician for research is used for 

teaching services in addition to bona 

fide research (if consistent with the 

terms and conditions of the grant). To 

guard against fraud and abuse, we 

declined to extend the protection of the 

exception to DHS referrals to an 

academic medical center if the academic 

medical center pays the referring 

physician for research and the research 

funds are used for indigent care or 

community service. Finally, we 

modified the requirement that the 

relationship among the components of 

the academic medical center be set out 

in a written agreement; the revised 

provision allows the relationship to be 

memorialized in multiple writings. 

In Phase II, we also added a ‘‘safe 

harbor’’ provision that deems any 

referring physician who spends at least 

20 percent of his or her professional 

time or, in the alternative, 8 hours per 

week providing academic services or 

clinical teaching services to be 

compliant with the requirement in 

§ 411.355(e)(1)(i)(D) that the physician 

provide ‘‘substantial academic services 

or clinical teaching services.’’ We also 

deleted the requirement, formerly in 

§ 411.355(e)(2)(ii), that the faculty 

practice plan (or plans) be organized as 

a tax-exempt organization under either 

section 501(c)(3) or (c)(4) of the Internal 

Revenue Code. 

In Phase II, we made clarifications to 

the academic medical centers exception, 

including: (1) that the referring 

physician may be on the faculty of the 

affiliated medical school or the 

accredited academic hospital; (2) that an 

academic medical center may have more 

than one affiliated faculty practice plan 

(and that the faculty practice plans may 

be affiliated with other components 

such as the teaching hospital, the 

medical school, or the accredited 

academic hospital); (3) that a hospital or 

health system under § 411.355(e)(2)(i) 

may be the same hospital that meets the 

‘‘affiliated hospital’’ requirement in 

§ 411.355(e)(2)(iii); and (4) that the 

substantial services test may be met 

through either academic services or 

clinical teaching services, or a 

combination of both. We declined to 

extend the protection of the exception to 

services referred by a physician who is 

not an employee of a component of an 

academic medical center, where the 

referring physician does not provide 

substantial academic services or clinical 

teaching services (as may be the case 

with volunteer and primary care 

physicians), or where the referring 

physician does not meet the other 

requirements in § 411.355(e)(1)(i). 

This Phase III final rule adopts the 

Phase II rule with minor clarifications. 

For example, for purposes of 

determining whether the majority of 

physicians on the medical staff consists 

of faculty members, the affiliated 

hospital must include or exclude all 

physicians holding the same class of 

privileges at the affiliated hospital. 

Comment: One commenter asked us 

to clarify that the academic medical 

centers exception protects payments to 

physicians for the provision of indigent 

care or community service. The 

commenter sought an explanation of our 

statement in Phase II that payments to 

referring physicians for indigent care or 

community service may be structured to 

fit other exceptions. (69 FR 16110–

16111.) 

Response: Nothing in § 411.355(e) 

prohibits academic medical centers 

from compensating faculty members for 

the provision of indigent care or 

community service, provided that the 

funds do not derive from research 

funding (see § 411.355(e)(1)(iii)(C)); the 

total compensation paid to the referring 

physician is fair market value and 

satisfies the other requirements of 

§ 411.355(e)(1)(ii); and the physician 

also performs the requisite clinical 

teaching or academic services under 

§ 411.355(e)(1)(i)(D). The Phase II 

language referenced by the commenter 

was in response to a suggestion that we 

revise the definition of ‘‘academic 

medical center’’ at § 411.355(e)(1)(iii). 

Section 411.355(e)(1)(iii) provided that, 

to qualify as an academic medical center 

for purposes of the exception, all 

research grant money paid to a referring 

physician must be used solely to 

support bona fide research. The Phase II 

comment suggested that we revise the 

provision to include the use of research 

money for teaching, indigent care, and 

community service (as opposed to for 

bona fide research only). (69 FR 16110–

16111.) We agreed in part with the 

commenter and revised the provision in 

§ 411.355(e)(1)(iii) to require that any 

money paid to a referring physician for 

research must be used solely to support 

bona fide research or teaching, which 

are core academic medical center 

functions. However, we declined to 

extend the provision to cover the use of 

research money for indigent care and 

community service, explaining that 

research grants can be subject to 

potential abuse. (66 FR 917.) We note 

that the academic medical center 

exception is available for DHS furnished 

by academic medical centers that pay 

physicians to provide indigent care and 

community service, provided that all 

other provisions of the exception are 

met and the money used for the 

payments does not come from research 

grant funds. If an academic medical 

center pays a physician using research 

funds and the payments are used for 

purposes other than bona fide research 

or teaching, the academic medical 


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center would not satisfy the conditions 

of § 411.355(e)(1)(iii), and the exception 

would be unavailable for any DHS 

furnished by the academic medical 

center. 

Comment: A commenter stated that 

the requirement in § 411.355(e)(1)(ii) 

that the total compensation paid by all 

components of an academic medical 

center to the referring physician be ‘‘set 

in advance’’ was unnecessary. 

According to the commenter, the flows 

of money within an academic medical 

center support the missions of patient 

care, education, and research, which are 

the core of any academic medical 

center. The commenter asserted that the 

other criteria for meeting the exception 

provide adequate assurances that abuses 

will not occur. Because the exception is 

available only to bona fide employees of 

an academic medical center component, 

the criteria for compensation should 

mirror those for the exception for bona 

fide employment arrangements, which 

does not require that compensation be 

set in advance. 

Response: The commenter 

misunderstands the purpose of the 

academic medical centers exception. It 

is designed to protect compensation 

received by the physician from all 

components of the center, not only the 

component with which he or she has an 

employment relationship. Therefore, 

although the employment exception 

may protect the compensation the 

physician receives from the component 

that employs the physician, it does not 

protect the physician’s aggregate 

compensation. We disagree with the 

commenter that the ‘‘set in advance’’

requirement for aggregate compensation 

from all components of the academic 

medical center is unnecessary. We 

believe that it is appropriate to treat 

physician compensation under the 

academic medical center exception the 

same as compensation for independent 

contractor physicians under the 

exception for personal service 

arrangements. (69 FR 16066.) 

Comment: One commenter asked that 

we clarify that the condition in 

§ 411.355(e)(1)(ii), which requires that 

the total compensation to referring 

physicians be set in advance, does not 

require that the actual amount of the 

compensation be set in advance. The 

commenter also asked that we confirm 

its understanding that our use of ‘‘total’’

compensation was intended to reflect 

that faculty physicians in an academic 

medical center setting may be paid by 

more than one component of the 

academic medical center and that each 

such payment arrangement must meet 

each of the requirements of the 

exception, namely that the 

compensation be set in advance, not 

exceed fair market value for the services 

provided, and that it not take into 

account the volume or value of referrals 

or other business generated by the 

referring physician within the academic 

medical center. 

Response: The commenter is correct 

that the actual dollar amount of the 

referring faculty physician’s 

compensation need not be set in 

advance. It is sufficient if the 

contribution of each component of the 

academic medical center to the 

aggregate compensation uses a 

methodology that qualifies under 

§ 411.354(d). The commenter is also 

correct that, where a physician is paid 

by more than one component of the 

academic medical center, each such 

payment arrangement must not take into 

account the volume or value of referrals 

or other business generated by the 

referring physician within the academic 

medical center. The commenter is 

incorrect, however, that the exception 

requires that compensation paid by each 

component must satisfy a fair market 

value test. Rather, § 411.355(e)(1)(ii) 

states that the aggregate (that is, the total 

from all components) compensation 

cannot exceed fair market value for the 

services provided. We have clarified the 

language of § 411.355(e)(1)(ii). 

Comment: An association of medical 

schools asserted that, due to the 

numerous and complex criteria of the 

academic medical center exception, we 

should provide advisory opinions to 

entities that submit a request for a 

definitive opinion as to whether they 

meet those criteria. 

Response: We believe that the criteria 

set forth in the academic medical 

centers exception are clear and that 

most entities should be able to 

determine whether they qualify as an 

academic medical center. We believe 

that an advisory opinion, although 

appropriate in some circumstances, 

would normally not be needed. In 

addition, institutions that do not satisfy 

the definition of an academic medical 

center may be able to comply with one 

or more of the other physician 

compensation arrangements exceptions. 

Comment: A commenter asked for 

clarification regarding 

§ 411.355(e)(2)(iii), which defines an 

academic medical center to include an 

affiliated hospital in which, among 

other things, ‘‘a majority of the 

physicians on the medical staff consists 

of physicians who are faculty 

members.’’ The regulation provides that 

any faculty member ‘‘may’’ be counted 

for purposes of this requirement, 

including courtesy and volunteer 

faculty. The commenter sought 

confirmation that an affiliated hospital 

may exclude courtesy staff when 

determining whether the majority of the 

physicians on its medical staff are 

faculty members of the affiliated 

medical school. 

Response: An affiliated hospital may 

exclude courtesy staff when 

determining whether the majority of the 

physicians on its medical staff are 

faculty members of the affiliated 

medical school or on the faculty of the 

educational programs at the accredited 

affiliated hospital. We are modifying 

§ 411.355(e)(2)(iii) to clarify that, if a 

hospital elects to include or exclude a 

physician holding a particular class of 

privileges (for example physicians 

holding courtesy privileges), the 

hospital must include or exclude, 

respectively, all individual physicians 

with the same class of privileges at the 

affiliated hospital when determining 

whether the majority of the physicians 

on its medical staff are faculty members 

of the affiliated medical school or are on 

the faculty of the educational programs 

at the accredited academic hospital. 

Comment: One commenter stated that 

the requirement in § 411.355(e)(2)(iii) 

that faculty members order the majority 

of hospital admissions is difficult for 

many accredited hospitals to control 

and, effectively, renders most 

community hospitals ineligible for the 

academic medical center exception. 

According to the commenter, 

community hospitals that sponsor four 

or more approved education programs 

(and which potentially could constitute 

an academic medical center) frequently 

provide substantial services unrelated to 

those training programs, particularly if 

there are few other hospitals serving 

that area. 

Response: We believe that the 

requirement that faculty members order 

the majority of admissions is a good 

measurement of a hospital being 

sufficiently integrated into an academic 

medical center. As we noted in Phase II, 

it is important to ensure that the 

relationship between the components is 

sufficiently focused on the academic 

medical center’s core mission (69 FR 

16109). The tests for affiliated hospital 

faculty and admissions set forth in 

§ 411.355(e)(2)(iii) are strong indicators 

of that core relationship. The academic 

medical centers exception is designed to 

supplement—not supplant—other 

exceptions, such as the exception for 

bona fide employment relationships in 

§ 411.357(c) and the exception for 

personal service arrangements in 

§ 411.357(d). To the extent that a 

hospital or other entity cannot take 

advantage of the academic medical 

centers exception, it should be able to 


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structure its legitimate compensation 

arrangements with physicians to meet 

another exception. 

Comment: One commenter stated that 

a newly-affiliated hospital might not 

qualify as an academic medical center 

because it fails to meet ‘‘the two 

majority tests’’ in § 411.355(e)(2)(iii) 

(that is, the majority of physicians on 

the medical staff are faculty members 

and the majority of admissions are made 

by faculty members). According to the 

commenter, the hospital may execute an 

academic affiliation agreement under 

which it increases the number of 

physicians on its medical staff who are 

faculty members so that it meets the 

requirement that a majority of its 

medical staff are faculty members, but 

the hospital would not immediately 

meet the requirement that a majority of 

admissions are made by the faculty (as 

the new faculty will begin admitting 

only upon execution of the agreement). 

The commenter requested guidance that 

would clarify when a hospital could 

rely on the academic medical centers 

exception in such circumstances. 

Response: We disagree that the 

regulation is unclear as to when a 

compensation arrangement between a 

physician and a newly-affiliated 

hospital will satisfy the academic 

medical centers exception. We believe 

that the regulation is clear that all 

conditions must be met at the time the 

referral is made. To the extent that the 

commenter is suggesting that we allow 

a transition period during which the 

two majority tests would not apply or 

would be relaxed, we decline to do so. 

If an arrangement does not meet the 

academic medical centers exception, 

another exception may be available. 

Comment: Two commenters asked for 

clarification regarding the applicability 

of § 411.357(p), the indirect 

compensation arrangements exception, 

in the academic medical center setting. 

One of the commenters asserted that 

many academic medical centers have 

organizational structures that enable 

them to satisfy the requirements of the 

exception for indirect compensation 

arrangements, citing the situation where 

a referring physician does not have a 

direct financial relationship with an 

affiliated hospital. For example, a 

hospital component of an academic 

medical center could be an organization 

separate and distinct from the university 

that operates the faculty practice plan as 

a wholly-owned division of the 

university in connection with the 

university’s school of medicine. 

According to the commenter, any 

financial arrangements between the 

hospital and the university with respect 

to the physicians in the faculty practice 

plan would be indirect. Moreover, if the 

physicians were salaried employees of 

the university, with no compensation 

paid from the hospital to the physicians, 

there would be no direct or indirect 

compensation arrangement within the 

meaning of the definition at 

§ 411.354(c)(2) if the physician’s 

compensation did not vary with or 

otherwise reflect the physician’s 

referrals to the hospital. According to 

the commenter, even if this arrangement 

were construed as being an ‘‘indirect 

compensation arrangement’’ (which the 

commenter did not believe was the 

case), it would qualify for the exception 

for indirect compensation arrangements 

in § 411.357(p) if the physician’s 

compensation were fair market value 

and not determined in any manner that 

takes into account the volume or value 

of referrals or other business generated 

by the physician for the hospital. The 

second commenter simply asked that we 

confirm that the exception for indirect 

compensation arrangements applies in 

the academic medical center setting. 

Response: The definition of ‘‘indirect 

compensation arrangement’’ at 

§ 411.354(c)(2) and the exception for 

indirect compensation arrangements in 

§ 411.357(p) are potentially applicable 

to arrangements involving academic 

medical centers and physicians. As we 

have stated previously and in this Phase 

III final rule, parties generally may 

utilize any exception that the 

arrangement between them satisfies. If 

the academic medical centers exception 

applies to the DHS referrals at issue, it 

would not be necessary for another 

exception to apply. With respect to the 

situation described by the commenter, 

as discussed above, we have revised 

§ 411.354 to clarify the application of 

the indirect compensation definition at 

§ 411.354(c)(2) and the indirect 

compensation arrangements exception 

in § 411.357(p). 

F. Implants Furnished by an 

Ambulatory Surgical Center 

In Phase I, we established a new 

exception in § 411.355(f) for implants 

furnished by an ambulatory surgical 

center (ASC) when acting as an entity 

furnishing DHS. The new exception was 

intended to allow a physician-owner of 

an ASC that is not in a rural area (and 

thus not covered by the rural provider 

exception) to order and perform 

surgeries that implant DME, prosthetics, 

or prosthetic devices that are not 

reimbursed as part of the composite 

ASC payment rate. The new exception 

was necessary because many 

implantable items are DHS but are not 

bundled in the ASC composite rate. 

Without the exception, an ASC (which 

is often owned by one or more 

physicians) would become a DHS entity 

when it furnishes the implant. We did 

not make any changes to § 411.355(f) in 

Phase II, nor are we making any in this 

Phase III final rule. 

Comment: One commenter referenced 

the discussion in Phase II where we 

noted that the exception in § 411.355(f) 

applies only when the implant is billed 

by the ASC and that, when the 

physician submits the claim for the 

implant, the physician is the entity 

furnishing DHS (69 FR16111). The 

commenter asked whether the exception 

in § 411.355(f) applies if the ASC 

furnishes and submits the claim for the 

implant procedure, but the physician 

furnishes and submits the claim for the 

device. 

Response: The exception does not 

apply in the situation described by the 

commenter. Under Medicare payment 

policy (section 10.3–10.4 of the CMS 

Internet-only Manual, publication 100–

04, Claims Processing Manual, Chapter 

14 (ambulatory surgical centers)), 

whenever an implant is performed 

during an ASC procedure, the provider/ 

supplier (that is, the ASC) must bill for 

the implanted item. We did not mean to 

imply that any individual or entity other 

than the ASC may bill for an item 

implanted during an ASC procedure. 

G. EPO and Other Dialysis-Related 

Drugs Furnished in or by an End-Stage 

Renal Disease Facility 

Phase I created a new exception in 

§ 411.355(g) for epoetin (EPO) and 

certain other dialysis-related outpatient 

prescription drugs furnished in or by an 

end-stage renal dialysis (ESRD) facility. 

The drugs that may qualify for this 

exception were initially identified by 

CPT and HCPCS codes in Phase I (66 

FR963–964), and updates to that list 

appear on our Web site and in annual 

updates published in the Federal 

Register. There were no changes to 

§ 411.355(g) in Phase II, nor are we 

making any in this Phase III final rule. 

Comment: A commenter wrote that 

the list of ESRD drugs in § 411.355(g) 

was incomplete. The commenter asked 

that the exception be expanded to 

include all drugs furnished as part of a 

dialysis treatment, whether in a home or 

at a facility. Alternatively, the 

commenter asked that the exception 

include by reference our Single Drug 

Pricer file. [The Single Drug Pricer file 

is a drug-pricing file used prior to 

January 1, 2004 that contains the 

allowable price for each drug covered 

‘‘incident to’’ a physician’s service. This 

includes the allowable price for drugs 

furnished by independent dialysis 

facilities that are separately billable 


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from the composite rate and for clotting 

factors to inpatients.] The commenter 

voiced concern that a dialysis center 

with physician-owners or other 

financial relationships with physicians 

would not be able to deliver the same 

convenient, quality care that could be 

provided by a center without these 

relationships. 

Response: We believe that the list of 

ESRD drugs, as updated annually, is 

complete and that we are acting within 

the constraints of the statute. Section 

1877(h)(6) of the Act specifically 

includes outpatient prescription drugs 

as DHS. However, we established a 

broad exception in § 411.355(g) using 

our authority under section 1877(b)(4) 

of the Act, which allows the Secretary 

to establish an exception if there is no 

risk of program or patient abuse. We 

intend for the exception to include 

drugs that have to be administered at 

the time of dialysis ‘‘that are required 

for the efficacy of dialysis.’’ (69 FR 

16117.) For the reasons stated in Phase 

II, we believe that we cannot further 

expand the list as suggested by the 

commenter without creating a risk of 

program or patient abuse (69 FR 16117–

16118). Although we do not want to 

burden Medicare beneficiaries 

unnecessarily by making them go 

elsewhere for intravenous drugs, the 

Congress prohibited physician selfreferrals for outpatient prescription 

drugs, and we are concerned that 

expanding the list of drugs subject to 

this exception may lead physicians to 

order intravenous administration of a 

drug when oral administration is as 

effective, or to not choose the most costeffective appropriate drug. 

To the extent that individuals or 

organizations believe that specific drugs 

should qualify for the exception because 

they are required for the efficacy of 

dialysis and must be administered at the 

time of dialysis, they may contact us. 

We also note that the list of drugs that 

qualify for this exception is updated 

annually in the Physician Fee Schedule, 

and comments on the list are accepted 

upon publication of the proposed rule 

for the Physician Fee Schedule. We note 

that the Single Drug Pricer file is no 

longer in use. 

H. Preventive Screening Tests, 

Immunizations, and Vaccines 

In Phase I, we created a new 

regulatory exception for certain 

preventive screening tests, 

immunizations and vaccines furnished 

under circumstances that do not pose a 

risk of abuse (66 FR 923). The exception 

requires that: (1) The preventive 

screening tests, immunizations, and 

vaccines are subject to CMS-mandated 

frequency limits; (2) the arrangement 

does not violate the anti-kickback 

statute; (3) the arrangement does not 

violate any Federal or State law or 

regulation governing billing or claims 

submission; and (4) the preventive 

screening tests, immunizations, and 

vaccines are covered by Medicare and 

listed as eligible for this exception on 

the list of CPT/HCPCS codes. Phase I 

included a listing of the CPT and 

HCPCS codes for screening tests that 

qualify for the exception if all of the 

other requirements of the exception are 

satisfied. 

In Phase II, we made no major 

changes to the exception (69 FR 16116). 

We did, however, decline to expand the 

exception to protect referrals for 

diagnostic Pap smears or mammography 

tests, as we were unpersuaded that these 

types of referrals would not pose a risk 

of program or patient abuse. We 

clarified in Phase II that we recognized 

that some of the vaccines covered under 

the exception may be paid by Medicare 

using a different reimbursement system 

than the fee schedule required under the 

exception. To avoid confusion we 

deleted the requirement that the 

preventive screening tests, 

immunizations, or vaccines be 

reimbursed by Medicare under a fee 

schedule. 

We received no comments to Phase II 

regarding § 411.355(h) and are making 

no changes in this Phase III final rule. 

I. Eyeglasses and Contact Lenses 

Following Cataract Surgery 

In Phase I, we created a new 

regulatory exception for eyeglasses and 

contact lenses following cataract surgery 

(66 FR 923). The exception requires 

that: (1) The eyeglasses or contact lenses 

are provided in accordance with 

Medicare coverage and payment 

policies (§ 410.36(a)(2)(ii) and § 414.228, 

respectively); (2) the arrangement does 

not violate the anti-kickback statute; and 

(3) the arrangement does not violate any 

Federal or State law or regulation 

governing billing or claims submission. 

Phase II made no changes to 

§ 411.355(i) (nor were any comments 

received on Phase I). We received no 

comments to Phase II regarding this 

exception. We are not making any 

changes to § 411.355(i) in this Phase III 

final rule. 

J. Intra-Family Rural Referrals 

Phase II created a new exception in 

§ 411.355(j) for certain referrals from a 

referring physician to his or her 

immediate family member or to a DHS 

entity with which the physician’s 

immediate family member has a 

financial relationship. The exception 

requires that the patient being referred 

reside in a rural area and that there is 

no other person or entity available to 

furnish the referred DHS in a timely 

manner, in light of the patient’s 

condition, either: (1) At the patient’s 

residence (in the case of home health 

services or other DHS required to be 

furnished in the patient’s home); or (2) 

within 25 miles of the patient’s 

residence (in the case of services 

furnished outside the patient’s home). 

In addition, the exception requires that 

the referring physician make reasonable 

inquiries as to the availability of other 

persons or entities and that the financial 

relationship does not violate the antikickback statute or any other Federal or 

State law or regulation governing billing 

and claims submission. We are making 

one modification to § 411.355(j) in this 

Phase III final rule. Specifically, we are 

modifying the exception to include an 

alternative distance test based on 

transportation time from the 

beneficiary’s residence. 

Comment: One commenter stated that, 

notwithstanding the exception in 

§ 411.355(j), the prohibition on intrafamily referrals leads to unfair results, 

especially where one of the family 

members is a general practitioner or 

surgeon and the other is a pathologist or 

a radiologist, and the pathologist or 

radiologist is part of a group of 

physicians that provides services for 

local hospital inpatients and 

outpatients. The commenter asserted 

that, in these circumstances, the general 

practitioner or surgeon is unable to refer 

hospital patients for pathology or 

radiology services to the family 

member’s group practice. In addition, 

the commenter stated that a physician 

should not be prohibited from referring 

patients to a member of his or her 

immediate family (for example, a 

brother or sister) if the referring 

physician receives no economic benefit 

from the referral. The commenter 

suggested that we accept an attestation 

from the referring physician that he or 

she receives no economic benefit from 

referrals to the family member. 

Another commenter asserted that 

CMS should revise the intra-family rural 

referral exception (or modify the 

definition of ‘‘referral’’) to allow a 

physician to make referrals to an 

immediate family member (or his or her 

employer) provided that the immediate 

family member has an excepted 

financial arrangement under which the 

family member does not receive 

remuneration that takes into account the 

volume or value or referrals or other 

business generated by the family 

member. 


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Response: Section 1877(a) of the Act 

prohibits referrals for DHS to entities in 

cases in which a physician ‘‘or an 

immediate family member of such 

physician’’ has a financial relationship 

with the entity, unless an exception 

applies. The law does not authorize a 

case-by-case inquiry into whether the 

referring physician actually benefits 

from referrals to entities with which an 

immediate family member has a 

financial relationship. 

We recognize the commenters’

concerns, but section 1877(b)(4) of the 

Act allows us to create an exception 

only if there is no risk of program or 

patient abuse. We are not expanding the 

exception in § 411.355(j) in the manner 

recommended by the commenters 

because we do not believe that it would 

be consistent with congressional intent, 

nor do we believe that we could do so 

without creating a risk of program or 

patient abuse. 

Comment: One commenter asked that 

we modify § 411.355(j) to include 

patients in any medically underserved 

area or Healthcare Professional Shortage 

Area (HPSA). The commenter also 

requested that we modify the exception 

to permit a referring physician to refer 

to an immediate family member (or to 

an entity furnishing DHS with which 

the immediate family member has a 

financial relationship) after the referring 

physician determined, following 

reasonable inquiry, that there was no 

other available person or entity to 

furnish the referred DHS. 

Response: The definition of rural is 

sufficiently broad to encompass many 

HPSAs and medically underserved 

areas, and we do not believe that the 

change suggested by the commenter 

regarding HPSAs and medically 

underserved areas is necessary. With 

respect to the commenter’s second 

inquiry, we have reconsidered 

§ 411.355(j) as it pertains to the 

availability of services in a rural area. 

We believe that a test that takes into 

account distance, posted speed limits, 

and weather conditions would be an 

appropriate alternative to a test that 

considers only whether a provider is a 

specific distance from a patient’s home. 

Therefore, we are modifying § 411.355(j) 

to permit parties to utilize an alternative 

test that allows a physician to refer a 

patient to an immediate family member 

(or to a DHS entity with which the 

immediate family member has a 

financial relationship) for DHS if the 

DHS cannot be provided otherwise 

within 45 minutes transportation time 

from the patient’s home at the time the 

referral for the DHS is made. We are 

making no changes to the 25-mile rule 

in § 411.355(j). Referring physicians are 

free to choose either of the tests (that is, 

25 miles from the beneficiary’s 

residence or 45 minutes transportation 

time from the beneficiary’s residence) 

when determining whether a DHS 

referral may be made to an immediate 

family member under § 411.355(j). 

However, whichever test the physician 

chooses must be applied both for 

purposes of § 411.355 (j)(1)(ii) 

(determining distance or transportation 

time from available services) and 

§ 411.355(j)(2) (the physician’s 

reasonable inquiry as to the availability 

of persons or entities to provide the 

needed DHS). 

The new alternative test requires a 

case-by-case analysis of the conditions 

that exist at the time of the referral for 

the DHS. Although a bright-line test 

may be preferred by many physicians, 

we do not believe that such a test 

always provides sufficient flexibility to 

ensure that our beneficiaries receive 

needed DHS in a timely manner and in 

a location that is convenient to the 

beneficiary. The modification to 

§ 411.355(j) would permit some intrafamily referrals when the distance to the 

closest non-family member physician 

(or entity) is less than 25 miles from the 

beneficiary’s residence. 

We note that, when the new 

alternative test is utilized, because 

compliance will be determined on a 

case-by-case basis, an intra-family 

referral that is permitted at one time (for 

example, in the winter months when 

snow covers mountain roads and limits 

access) may not be permitted at a 

different time (for example, in the 

summer months when roads are clear 

and a non-family member physician (or 

entity) is available to provide the 

needed DHS within 45 minutes 

transportation time from the 

beneficiary’s residence). Physicians 

utilizing the 45 minutes transportation 

time test should maintain 

documentation of the information used 

in determining the transportation time. 

Resources including websites that 

provide detailed mileage and drive time 

(such as Mapquest or MapBlast) and 

published weather reports (either online 

or in print, for example, in the 

newspaper) should be consulted when 

determining a beneficiary’s 

transportation time from his or her 

residence to the location of the available 

DHS. 

Comment: One commenter noted that 

we stated in Phase II that the exception 

‘‘does not take into account the quality 

of other available DHS entities’’ and that 

other laws exist to address quality 

issues. The commenter asserted that this 

statement suggests that the physician 

would not be able to refer to an 

immediate family member if there is 

another entity furnishing DHS within 25 

miles of the patient’s residence, even if 

that entity does not participate in the 

patient’s health plan or has lesser 

qualifications (for example, no board 

certification). The commenter requested 

that we clarify what we meant by this 

statement. 

Response: For the reasons noted in 

Phase II, we do not believe that it is 

feasible to craft an objective, qualitative 

measure in the exception for intrafamily rural referrals as suggested by the 

commenter. As we stated in Phase II, 

this exception ‘‘looks to timely 

availability of DHS, [but] it does not 

take into account the quality of other 

available DHS entities’’ (69 FR 16084). 

However, in a situation such as that 

described by the commenter in which 

the only entity that can furnish the DHS 

needed by a beneficiary within 25 miles 

of or 45 minutes transportation time 

from the beneficiary’s home does not 

participate in Medicare, the entity 

should be treated as if it does not exist. 

In other words, the beneficiary 

constructively cannot obtain needed 

DHS within 25 miles of or 45 minutes 

transportation time from his or her 

home. 

Comment: We received two comments 

concerning urban hospitals that have 

exclusive arrangements with a radiology 

group practice for performing the 

professional component of radiology 

services. The commenters were 

concerned that a physician in the 

community would not be able to refer 

patients to the hospital for radiology 

services when the physician’s 

immediate family member is a member 

of the group practice with the exclusive 

arrangement. 

The first commenter asserted that the 

prohibition on referring Medicare 

patients to immediate family members 

is a severe hardship for the patients of 

physicians with immediate family 

members who are radiologists, radiation 

therapists, or pathologists, and that 

many such family situations exist. The 

commenter noted that a physician could 

refer a patient to an immediate family 

member for other types of physician 

services without implicating the 

physician self-referral rules and, 

therefore, it is difficult to understand 

why radiologists, radiation therapists, 

and pathologists are treated differently. 

This commenter recommended that we 

either not consider the professional 

component of a service to be a 

designated health service, or allow 

referrals if the physician’s immediate 

family member personally performs the 

DHS. 


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The second commenter suggested that 

we modify the definition of ‘‘radiology 

and certain other imaging services’’ to 

permit referrals in the situation 

described above, or that we modify the 

definition of ‘‘referral’’ so that the 

referral in this situation would be 

deemed a referral to the hospital rather 

than to the group practice in which the 

immediate family member practices. 

The commenter offered what it 

considered to be program safeguards 

that could be included in a new 

exception or a modification of an 

existing exception or definition. 

Response: We note that the comments 

pertained to situations in which the 

patient would not be located in a rural 

area and, thus, the exception in 

§ 411.355(j) for intra-family referrals 

would not be applicable. We decline to 

adopt either of the suggestions offered 

by the first commenter. 

We do not believe that it would be 

consistent with congressional intent to 

include as DHS only the technical 

component, and not the professional 

component, of radiology, radiation 

therapy, or pathology services. The 

physician self-referral rules treat 

radiology, radiation therapy, and 

pathology services differently than other 

physician services because section 

1877(h)(6) of the Act specifically 

includes these services, which have a 

significant professional component, as 

DHS, whereas other physician services 

specifically are not subject to the 

physician self-referral prohibition. 

We are not modifying the exception 

for intra-family rural referrals because 

we are authorized under section 

1877(b)(4) of the Act to create regulatory 

exceptions only where doing so would 

pose no risk of program or patient 

abuse, and we do not believe that the 

fact that the family member would 

personally perform the services, by 

itself, would remove all risk of abuse. 

For the same reasons, we do not believe 

that it is appropriate to modify the 

definition of ‘‘referral’’ as requested by 

the commenter. Where the requirements 

of the exception for intra-family rural 

referrals cannot be satisfied, the parties 

to the arrangement can take certain 

actions to avoid any potential problems 

arising from intra-family referrals. For 

example, where the referral to the group 

practice comes from a physician whose 

immediate family member is a 

physician in the group practice, the 

group practice could forward the 

referral to a physician outside the group 

to perform the service and bill for it. 

Alternatively, the group practice could 

have one of the physicians in the group 

practice (other than the family member) 

perform the service and bill for it 

directly (instead of reassigning his or 

her right to bill to the group practice). 

VIII. Exceptions to the Referral 

Prohibition Related to Ownership or 

Investment Interests—§ 411.356 

A. Publicly-Traded Securities and 

Mutual Funds 

Section 1877(c) of the Act creates an 

exception for ownership in certain 

publicly-traded securities and mutual 

funds that may own DHS entities to 

which the physician may refer patients. 

As we explained in the 1998 proposed 

rule, ‘‘we believe that the purpose of 

this exception is to allow physicians or 

family members to acquire stock in large 

companies if the transaction does not 

particularly favor the physicians over 

other purchasers’’ (63 FR 1698). To 

qualify for the exception in section 

1877(c)(1) of the Act: 

(1) The securities must be securities 

that may be purchased on terms 

generally available to the public; 

(2) The securities must (i) be listed on 

the New York Stock Exchange, the 

American Stock Exchange, or any 

regional exchange in which quotations 

are published on a daily basis, or (ii) be 

foreign securities listed on a recognized 

foreign, national, or regional exchange, 

or (iii) be traded under the automated 

inter-dealer quotation system operated 

by the National Association of 

Securities Dealers; and 

(3) The securities must be in a 

corporation that had shareholder equity 

exceeding $75 million at the end of the 

corporation’s most recent fiscal year or 

on average during the previous three 

fiscal years. 

In addition, section 1877(c)(2) of the 

Act permits ownership of investments 

in mutual funds with total assets 

exceeding $75 million at the end of the 

most recent fiscal year or the average of 

the last three fiscal years. Investment 

securities include shares or bonds, 

debentures, notes, or other debt 

instruments. 

In Phase II, we interpreted the 

statutory provision in section 1877(c)(1) 

of the Act, which requires that the 

investment securities be those that ‘‘may 

be purchased on terms generally 

available to the public,’’ to mean that 

the ownership interest must be in 

securities that are generally available to 

the public at the time of the DHS 

referral (69 FR 16081). We are making 

no changes in this Phase III final rule to 

§ 411.356(a) (regarding publicly-traded 

securities) or § 411.356(b) (regarding 

mutual funds). 

Comment: One commenter supported 

our clarification that the investment 

interest must be available to the public 

at the time the referral is made and not 

at the time the interest is acquired. 

However, the commenter was concerned 

that it will be difficult for either the 

physician or the entity furnishing DHS 

to determine if the entity is in 

compliance. 

Response: We disagree. The inquiry 

turns on objective facts that are readily 

ascertainable to the physician or the 

entity furnishing DHS. 

B. Hospitals Located in Puerto Rico 

Section 1877(d)(1) of the Act provides 

that an ownership or investment interest 

in a hospital located in Puerto Rico is 

not considered a financial relationship 

within the meaning of section 1877 of 

the Act. In the January 1998 proposed 

rule, we proposed to incorporate this 

exception into our regulations at 

§ 411.356(c)(2) (63 FR 1667). We 

received no comments to § 411.356(c)(2) 

and made no changes in Phase I to the 

exception. Phase II similarly made no 

changes to the exception (69 FR 16082). 

We received no comments on Phase II 

regarding § 411.356(c)(2) and are making 

no changes to the exception in this 

Phase III final rule. 

C. Rural Providers 

Section 1877(d)(2) of the Act provides 

an exception for ownership or 

investment interests in entities that 

furnish DHS in a rural area if 

substantially all of the DHS are 

furnished to individuals residing in a 

rural area. Section 507 of the MMA 

amended section 1877(d)(2) of the Act 

to specify that, for the 18-month period 

beginning on December 8,2003, the rural 

provider exception was not available for 

specialty hospitals. Section 507 of the 

MMA defined the term ‘‘specialty 

hospital’’ in new section 1877(h)(7) of 

the Act. The moratorium expired on 

June 7, 2005. 

In the January 1998 proposed rule, we 

defined a ‘‘rural provider’’ as an entity 

that furnishes at least 75 percent of its 

total DHS to residents of a rural area. 

Consistent with the statute, the 

proposed rule provided that, although 

the DHS entity (that is, the ‘‘rural 

provider’’) need not be located in a rural 

area, the exception applied only in the 

case of DHS furnished in a rural area. 

The proposed rule would have defined 

rural area as an area that is not 

considered to be an urban area pursuant 

to § 412.62(f)(1)(ii) (that is, an area 

outside of a Metropolitan Statistical 

Area (MSA)). 

Phase II adopted the January 1998 

proposed rule without change. This 

Phase III final rule makes no substantive 

changes to § 411.356(c)(1). 


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Comment: One commenter asked for 

confirmation that, if an entity furnishing 

DHS qualified for the rural ownership 

exception in § 411.356(c), the 

arrangement did not also have to meet 

the in-office ancillary services exception 

in § 411.355(b). 

Response: The commenter is correct 

with respect to the referring physician’s 

ownership or investment interest. Any 

compensation arrangement would have 

to meet a compensation arrangements 

exception, such as the in-office ancillary 

services exception in § 411.355(b). We 

address this issue more fully in section 

VI.B of this preamble. 

Comment: A commenter complained 

that it was difficult to determine if a 

specific location qualified as ‘‘rural’’ for 

purposes of the exception. The 

commenter suggested that we provide a 

list of rural zip codes on our Web site. 

Another commenter asked that we 

clarify the definition of ‘‘rural.’’ The 

commenter recommended that we 

provide our own definition of ‘‘rural’’

rather than cross-referencing to other 

statutes. The commenter also requested 

confirmation that the definition of rural 

does not include Micropolitan 

Statistical Areas. 

Response: We decline to create a list 

of all zip codes in counties that are 

considered rural for physician selfreferral purposes because the amount of 

resources that would be required to 

create and update a list of zip codes is 

significantly greater than the effort 

required for health care entities with 

physician ownership to determine 

whether they are furnishing DHS in a 

rural area to patients who reside in a 

rural area. However, we explain below 

how a health care entity would 

determine whether a particular location 

is in a rural area. 

For physician self-referral purposes, a 

location is in a rural area if it is not 

located in a MSA. This test differs from 

the rural/urban test that a hospital uses 

for wage index purposes. To determine 

whether an entity is furnishing DHS in 

a rural area for physician self-referral 

purposes, see the current list of MSAs 

on the Web site of the Office of 

Management and Budget (OMB). This 

list, which includes the constituent 

cities and counties of each MSA, 

currently may be accessed at 

(www.whitehouse.gov/omb) by typing in 

‘‘update of statistical area definitions,’’

and by then locating the list entitled 

‘‘Metropolitan Statistical Areas.’’ We 

also will provide a link to the OMB Web 

site on our physician self-referral Web 

site. 

A Micropolitan Statistical Area is an 

area containing a single urbanized core 

population of at least 10,000 but less 

than 50,000. (65 FR 82230, 82233.) 

Micropolitan Statistical Areas are not 

within MSAs; thus, for purposes of the 

physician self-referral rules, 

Micropolitan Statistical Areas are not 

considered urban and are, therefore, 

rural areas. 

The rural provider exception in 

section 1877(d)(2) of the Act applies to 

rural areas as defined in section 

1886(d)(2)(D) of the Act (regarding the 

computation of urban and rural 

standardized amounts under the 

inpatient hospital prospective payment 

system). The non-codified material 

following section 1886(d)(2)(D) of the 

Act states that ‘‘the term ‘urban area’

means an area within a [MSA] (as 

defined by [OMB]) or within such 

similar area as the Secretary has 

recognized under subsection (a) by 

regulation * * *.’’ In Phase II, we 

defined a ‘‘rural area’’ as ‘‘an area that 

is not an urban area pursuant to 

§ 412.62(f)(1)(ii) of this chapter,’’ that is, 

an area outside a MSA (69 FR 16082–

16083). Although we no longer use 

MSAs to determine urban areas for 

purposes of the inpatient hospital 

prospective payment system, we decline 

to adopt a categorization other than 

MSAs for physician self-referral 

purposes. 

Comment: A commenter stated that 

DHS entities serving patients located in 

rural areas that subsequently are 

classified as urban should continue to 

receive some protection. The 

commenter related a situation in which 

an existing hospital/physician joint 

venture owned a MRI machine. The 

county in which the joint venture 

served patients previously was not a 

constituent county in a MSA and thus 

was considered to be located in a rural 

area for physician self-referral purposes. 

However, the county was later 

reclassified as a constituent county of a 

MSA and physician-investor referrals to 

the joint venture would now violate the 

physician self-referral provisions. The 

commenter stated that it was no longer 

able to satisfy the rural provider 

ownership exception, despite the fact 

that the area was designated as 

medically underserved and the only 

other MRI machine was located 30 miles 

away. The commenter requested that we 

adopt alternative criteria for the 

exception in § 411.356(c)(1) that would 

address the situation, such as location 

in a medically underserved area in 

which the nearest DHS entity (except for 

the one owned by the physician) is at 

least 30 miles away. 

Response: The rural provider 

ownership exception is statutory. A 

physician who invests in an entity 

furnishing DHS in a rural area takes a 

risk that the area will subsequently be 

classified as an urban area. 

Section 1877(b)(4) of the Act allows 

us to create an exception only if there 

is no risk of program or patient abuse. 

We do not believe that an across-theboard exception for a medically 

underserved area in which the nearest 

DHS entity (except for the one owned by 

the physician) is at least 30 miles away 

is appropriate because we cannot 

determine that, even with this 

restriction, there would be no risk of 

program or patient abuse. Physician 

ownership of DHS entities is at the heart 

of the physician self-referral law and is 

precisely the conduct at which the 

statute is aimed. The Congress provided 

limited exceptions for ownership of 

DHS entities, expressly carving out a 

rural provider exception with a very 

specific definition of ‘‘rural.’’

D. Ownership Interest in a Whole 

Hospital 

Section 1877(d)(3) of the Act provides 

that, with respect to DHS provided by 

a hospital, an ownership or investment 

interest in a hospital (and not merely in 

a subdivision of the hospital) is not a 

financial relationship within the 

meaning of section 1877 of the Act if the 

referring physician is authorized to 

perform services at the hospital. Section 

507 of the MMA amended section 

1877(d)(3) of the Act to provide that, 

effective for the 18-month period 

beginning on December 8, 2003, the 

ownership or investment interest must 

not be in a specialty hospital. Section 

507 defined the term ‘‘specialty 

hospital’’ in a new subsection 1877(h)(7) 

of the Act. The moratorium expired on 

June 7, 2005. 

The January 1998 proposed rule 

interpreted the requirement that the 

DHS be ‘‘provided by the hospital’’ to 

mean that the services had to be 

furnished by the hospital and not by 

another hospital-owned entity, such as 

a skilled nursing facility or a home 

health agency (63 FR 1698). We stated 

that the exception protects only services 

provided by an entity that is a 

‘‘hospital’’ under the Medicare 

conditions of participation and that the 

referring physician must be authorized 

to perform services at the hospital to 

which he or she wishes to refer. In 

addition, the interest must be in the 

whole hospital, not in a part or 

department of the hospital. We further 

explained that a physician can have an 

ownership or investment interest in a 

hospital by virtue of holding an interest 

in an organization (such as a health 

system) that owns a chain of hospitals 

that includes the particular hospital, 

because the statute does not require the 


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physician to have a direct ownership or 

investment interest in the hospital. (63 

FR 1713.) 

The Phase I final rule adopted the 

proposed rule with incidental 

conforming changes. Phase II made no 

changes other than conforming 

amendments to incorporate the 

provisions of section 507 of the MMA. 

This Phase III final rule makes no 

changes to § 411.356(c)(3). We discuss 

issues related to the moratorium in 

section XI, below. 

Comment: Two commenters objected 

to our decision to limit the protection of 

§ 411.356(c)(3) to referrals to the 

hospital, rather than extending the 

protection to separately-licensed 

subsidiary providers or suppliers, such 

as a hospital’s wholly-owned home 

health agency, skilled nursing facility, 

or durable medical equipment supplier. 

According to one commenter, the 

requirement that services be provided 

directly by the hospital is not found in 

the language of the statute and does not 

serve a public policy purpose. The 

second commenter stated that, if a 

physician owns an interest in the whole 

hospital, the exception should apply to 

referrals for all services provided by the 

hospital and its affiliates or subsidiaries 

because the nexus between a 

physician’s referrals and his or her 

return on investment is extremely 

limited or non-existent, thereby causing 

little or no risk of program or patient 

abuse. 

Response: For the reasons stated in 

Phase II, we believe that our 

interpretation of the statute is faithful to 

its language and purpose (69 FR 16084–

81605). As we explained in Phase II, we 

believe that the better reading of the 

statute is that the Congress intended to 

protect ownership and investment 

interests in a hospital with respect to 

services furnished by the hospital. 

Therefore, we decline to modify the 

exception. Further, we do not believe 

that the Congress intended to create a 

blanket exemption for physician 

ownership in for-profit hospital 

conglomerates, which would, in our 

view, intensify rather than diminish the 

incentive to refer due to increased profit 

opportunities. 

Comment: One commenter stated that, 

whereas CMS has some legitimate 

concerns that expanding the exception 

in § 411.356(c)(3) to cover all services 

provided by a hospital and its affiliates 

or subsidiaries could result in an 

overbroad exception, we should 

consider that the definition of an 

ownership interest is very broad and 

includes a security interest. Thus, a 

physician’s security interest ‘‘in a 

hospital,’’ even if extremely attenuated, 

could result in a prohibition on referrals 

to other entities owned by the hospital. 

Therefore, if we decline to expand the 

exception to cover ownership in 

providers owned by a hospital, we 

should consider allowing the exception 

to cover ownership in providers owned 

by a hospital where such ownership 

derives only from a security interest in 

the hospital. 

Response: It is unclear whether the 

commenter is referring to a security 

interest in equipment sold to a hospital 

or a security interest in the hospital 

itself. As noted in section VI.A of this 

Phase III final rule, we are clarifying 

that a security interest in equipment 

sold to a hospital by a physician and 

financed through a loan to the hospital 

by the physician is not an ownership 

interest in the hospital, but rather a 

compensation arrangement. A security 

interest in the hospital itself is an 

ownership interest in the hospital (and 

an indirect ownership interest in any 

subsidiary owned by the hospital). We 

decline to expand the exception to 

protect the referrals of a physician who 

has, by virtue of a security interest in 

the hospital, an ownership interest in 

DHS entities owned by a hospital. 

IX. Exceptions to the Referral 

Prohibition Related to Compensation 

Arrangements—§ 411.357 

A. Rental of Office Space and 

Equipment 

Sections 1877(e)(1)(A) and (e)(1)(B) of 

the Act set forth exceptions for certain 

lease arrangements for space and 

equipment that meet six specific 

criteria: 

(i) The lease is in writing, signed by 

the parties, and specifies the space or 

equipment covered by the lease; 

(ii) The space or equipment rented or 

leased does not exceed what is 

reasonable and necessary for the 

legitimate business purposes of the lease 

or rental (except that space leases may 

include appropriately prorated 

payments for common areas), and, when 

used by the lessee, is done so 

exclusively; 

(iii) The rental or lease term is at least 

1 year; 

(iv) The rental charges over the term 

of the lease are set in advance, 

consistent with fair market value, and 

not determined in a manner that takes 

into account the volume or value of any 

referrals or other business generated 

between the parties; 

(v) The lease would be commercially 

reasonable even if there were no 

referrals between the parties; and 

(vi) The lease meets other 

requirements set forth by the Secretary 

to protect against program or patient 

abuse. 

‘‘Fair market value’’ is defined at 

section 1877(h)(3) of the Act as the 

value of rental property for general 

commercial purposes (not taking into 

account the property’s intended use). 

For rentals or leases where the lessor is 

a potential source of patient referrals to 

the lessee, fair market value means 

general commercial value not taking 

into account intended use or the 

additional value the prospective lessee 

or lessor would attribute to the 

proximity or convenience to the lessor. 

The August 1995 final rule established 

§ 411.357(a) and (b) (exceptions for the 

rental of office space and rental of 

equipment, respectively), which tracked 

the statutory language, including the 

definition of ‘‘fair market value.’’

In the January 1998 proposed rule, we 

proposed several clarifications to the 

statutory provisions. Leases could be 

terminated for cause within the initial 1- 

year period, provided that the parties 

did not enter into another lease until 

after the expiration of the original term 

(63 FR 1713). Any renewal of a lease 

would have to be for at least 1 year, 

thereby precluding holdover month-tomonth leases (63 FR 1713). Subleases 

would be prohibited unless the sublease 

itself satisfied the conditions of the 

exception (63 FR 1714). Capital leases 

would not qualify for the exceptions (63 

FR 1714). ‘‘Per click’’ (for example, peruse or per-service) equipment rental 

payments would qualify for the 

equipment rental exception, unless the 

payments were for the use of the 

equipment on patients referred by the 

lessor-physician (63 FR 1714). 

Phase II adopted the provisions of the 

January 1998 proposed rule, with 

several changes (69 FR 16085). 

Specifically—

• Leases or rental agreements may be 

terminated with or without cause during 

the term of the agreement as long as no 

further agreement is entered into 

between the parties within the first year 

of the original lease term. (Any new 

lease would need to satisfy the 

requirements of an exception on its own 

terms (§ 411.357(a)(2) for space leases or 

§ 411.357(b)(3) for equipment leases.) 

• Month-to-month holdover leases for 

up to 6 months, immediately following 

the expiration of an agreement of at least 

1 year that met the conditions of a rental 

exception, will continue to satisfy the 

requirements of the exception if the 

holdover is on the same terms and 

conditions as the immediately 

preceding lease (§ 411.357(a)(7) for 

space leases or § 411.357(b)(6) for 

equipment leases). 


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• All leases or rental agreements, 

whether operating or capital, are eligible 

for the lease exceptions if they meet the 

applicable criteria. 

• A lease (or sublease) is considered 

to satisfy the ‘‘exclusive use test’’

provided that the lessee (or sublessee) 

does not share the rented space or 

equipment with the lessor during the 

time it is rented or used by the lessee 

(or sublessee) (§ 411.357(a)(3) for space 

leases or § 411.357(b)(2) for equipment 

leases). (We note that a subleasing 

arrangement could create a separate 

indirect compensation arrangement 

between the lessor and a sublessee that 

would need to be evaluated under the 

indirect compensation rules.) 

• ‘‘Per-click’’ rental payments are 

permitted for DHS referred by the 

referring physician provided that the 

payments are fair market value and do 

not take into account the volume or 

value of referrals or other business 

generated by the referring physician, as 

those concepts are defined at § 411.351 

and § 411.354. 

We are making no substantive 

changes to § 411.357(a) or (b). 

Comment: Two commenters sought 

clarification as to whether lease 

agreements between physicians and 

entities furnishing DHS may be 

amended prior to the stated termination 

of the agreement. The commenters 

asked about several different scenarios 

involving amendments to lease 

agreements prior to their expiration, 

specifically: 

(1) Whether the parties to an 

agreement may amend an agreement 

during or after the first year of a multiyear agreement if the amendment is not 

related to the volume or value of 

referrals or other business generated 

between the parties; 

(2) Whether an amended agreement 

must continue for an additional term of 

at least 1 year following the amendment 

even if the termination date of the 

original agreement would occur in less 

than 1 year; 

(3) Whether a ‘‘without cause’’

termination clause in a multi-year 

agreement is permissible and whether 

the parties could simply amend an 

agreement they wish to change, rather 

than go through the formality of 

terminating the original agreement and 

entering into a new agreement; and 

(4) Whether there is a limit on the 

number of amendments that may be 

made in the first year of an agreement. 

Response: In order to satisfy the 

requirements of § 411.357(a) and (b), 

rental charges for the rental of office 

space and equipment must be set in 

advance, consistent with fair market 

value, and not determined in a manner 

that takes into account the volume or 

value of referrals or other business 

generated between the parties. In 

addition to these and other 

requirements, the written agreement 

must provide for at least a 1-year term. 

An amended lease agreement must 

comply with these four criteria, as well 

as the remaining conditions of the 

exception. Changes to the rental charges 

(including changes to the methodology 

for calculating the rental charges) and 

changes to certain other terms that are 

material to the rental charges (for 

example, a change to the amount of 

space rented) may jeopardize 

compliance with one or more of these 

four criteria, and thus, § 411.357(a) or 

(b). 

Because rental charges, including the 

methodology used to calculate rental 

charges, must be ‘‘set in advance,’’ as 

defined at § 411.354(d)(1), parties may 

not change the rental charges at any 

time during the term of the agreement. 

Parties wishing to change the rental 

charges must terminate the agreement 

and enter into a new agreement with 

different rental charges and/or other 

terms; however, the new agreement may 

be entered into only after the first year 

of the original lease term (regardless of 

the length of the original term). In 

addition, the new lease must be for a 

term of at least 1 year and must comply 

with all other criteria in the relevant 

rental exception. As we stated in Phase 

II (69 FR 16085), leases or rental 

agreements may provide for termination 

with or without cause. 

Parties may amend a lease agreement 

multiple times during or after the first 

year of its term, provided that the rental 

charges are not changed and all other 

requirements of the exception are 

satisfied. However, changes to terms 

that are material to the rental charges, 

such as the amount of space leased, may 

cause the rental charges to fall out of 

compliance with the fair market value 

and ‘‘volume and value of referrals’’

requirements. For example, if the 

original rental charges were $5,000 per 

month for 200 square feet of space and 

the amended lease added 100 square 

feet of space but did not require 

additional payment beyond the original 

monthly payment of $5,000, the rental 

charges under the new agreement likely 

would not be consistent with fair market 

value and may take into account the 

volume or value of referrals or other 

business generated between the parties. 

An amended agreement need not 

continue for an additional 1 year 

following its amendment if the original 

termination date of the agreement 

would occur sooner. Rather, because the 

exceptions in § 411.357(a) and (b) 

require a term of 1 year from the 

inception of the lease or rental 

agreement, the amended agreement may 

terminate upon the original expiration 

date, provided that the original term of 

the agreement is at least 1 year. As we 

noted above, rental charges may not be 

amended. 

If the parties merely wish to end an 

arrangement prior to the original 

termination of the written agreement, as 

we stated in Phase II, they may 

terminate without cause at any time 

(subject to the terms of the agreement, 

of course), provided that the parties do 

not enter into a new lease agreement 

within the first year of the original term 

and any new agreement complies with 

an exception (69 FR 16085–16086). As 

we also stated (69 FR 16085), leases and 

rental agreements may provide for 

termination with or without cause. 

Comment: One commenter asked for 

clarification regarding the termination 

of a lease. The commenter wanted 

confirmation that the prohibition on 

entering into a new lease agreement in 

§ 411.357(a)(2) applied only to a new 

lease for the same office space. 

According to the commenter, the parties 

should not be prohibited from entering 

into a personal service arrangement or 

even a lease agreement for different 

office space. 

Response: The commenter is correct 

that the prohibition on entering into a 

new lease applies to only a new lease 

for all or part of the same office space. 

The parties are not prohibited from 

entering into a personal service 

arrangement or a lease agreement for 

completely different office space. 

Comment: One commenter described 

a ‘‘time-share’’ leasing arrangement 

under which a physician or group 

practice pays the lessor for the right to 

use office space exclusively on a turnkey basis, including support personnel, 

waiting area, furnishings, and 

equipment, during a schedule of time 

intervals for a fair market value rate per 

interval of time or in the aggregate. The 

commenter suggested that, although this 

arrangement may qualify under the 

exceptions for the rental of space and 

equipment, it would be addressed more 

appropriately in the fair market value 

exception (§ 411.357(l)) or payments by 

a physician exception (§ 411.357(i)). The 

commenter urged us to clarify that such 

‘‘time-share’’ arrangements may qualify 

under § 411.357(l) or (i). 

Response: We disagree with the 

commenter. As we stated in Phase II, we 

decline to permit space leases to be 

eligible for the fair market value 

exception in § 411.357(l) (69 FR 16086). 

Similarly, we are not persuaded that 


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§ 411.357(i) should protect space leases 

(69 FR 16099). 

Comment: A number of commenters 

sought clarification regarding the 

application of § 411.357(a)(3) and (b)(2) 

to office-sharing arrangements in which 

several physicians and/or groups share 

facilities and some limited equipment 

without exclusivity. According to these 

commenters, sharing of facilities is 

extremely common for physicians and 

may not readily fit into the leasing 

exceptions. 

Response: Irrespective of whether the 

office-sharing arrangements described 

by the commenters are common, both 

the statute and our regulations require 

that the lessee have exclusive use of the 

leased space or equipment when the 

lessee uses the space or equipment. In 

effect, § 411.357(a)(3) and (b)(4) require 

that space and equipment leases be for 

established blocks of time. 

Comment: One commenter asked that 

we clarify that a sublessor and sublessee 

may share common areas. Another 

commenter requested guidance with 

respect to what is meant by ‘‘common 

areas’’ for the purposes of the exception. 

One commenter questioned whether the 

ability to share ‘‘common space’’

permitted parties to share actual office 

space (for example, exam rooms) if the 

arrangement is at fair market value. 

Response: As we stated in Phase II, 

common areas may be shared if the rent 

is appropriately prorated (69 FR 16086). 

By common areas, we mean foyers, 

central waiting rooms, break rooms, 

vending areas, etc., to the extent that the 

areas are, in fact, used by the sublessee. 

(That is, the sublessee cannot pay rent 

for a break room that it will never use). 

Common areas do not include exam 

rooms. Common areas that contain 

certain limited equipment may be 

shared, such as hallways used by nonphysician staff to weigh patients or 

draw fluid samples. Permissible 

equipment in shared common areas is 

limited to the type that is not usually 

separately leased (for example, scales). 

Non-exclusive arrangements, other than 

for common space (as described above), 

do not satisfy the requirements of 

§ 411.357(a)(3) and (b)(2). 

Comment: Several commenters 

expressed concern about the language in 

§ 411.357(a)(3) and (b)(2) prohibiting a 

lessee from sharing space or equipment 

with a lessor or any person or entity 

related to the lessor. The commenters 

requested guidance on specific shared 

leasing arrangements, including 

whether the physician self-referral law 

prohibits the subleasing of space or 

equipment by a physician from a 

physician employed by or a group 

owned by a hospital. 

Response: To prevent parties from 

circumventing the exclusive use 

requirement, we modified the space and 

equipment rental exceptions in Phase II 

(69 FR 16086) to preclude the sharing of 

rented office space or equipment with 

the lessor or any person or entity related 

to the lessor, including group practices, 

group practice physicians, or other 

entities owned or operated by the lessor. 

Determining whether a lessee is sharing 

space or equipment with a person or 

entity related to the lessor will require 

a case-by-case review of the facts. 

Nothing in § 411.357(a)(3) or (b)(2) 

prohibits physicians from subleasing 

space or equipment from a hospital, a 

hospital-owned group, or physicians 

employed by a hospital, provided that 

the sublessee has exclusive use of the 

space or equipment that is the subject of 

the sublease and all other requirements 

of the exception(s) are satisfied. 

Comment: One commenter asked how 

tenant improvements should be 

addressed for purposes of compliance 

with the exception for the rental of 

office space. Specifically, the 

commenter asked whether the costs of 

any capital improvements should be 

allocated over the useful life of the 

improvements or be passed on in their 

entirety to the physician lessee who 

requested the improvements during the 

term of his or her lease. 

Response: For accounting purposes, 

tenant improvements should be 

accounted for in accordance with 

generally accepted accounting practices. 

For purposes of determining the fair 

market value for rental charges, whether 

the costs of capital improvements 

should be allocated over the useful life 

of the improvements or be passed on in 

their entirety to the physician lessee 

who requested them will depend upon 

the facts and circumstances of the 

particular case. Specifically, if a lessor 

provides improvements for the benefit 

of a physician lessee that are unlikely to 

be chargeable to a subsequent tenant, 

the lessor should allocate the entire cost 

of these improvements to the lessee for 

whose unique benefit they are made. 

Improvements that the lessor reasonably 

expects would be chargeable to 

subsequent lessees may be allocated 

over their expected useful life. 

Comment: A number of commenters 

welcomed the flexibility provided by 

§ 411.357(a)(7) and (b)(6) with regard to 

lessees who hold over upon the 

expiration of space and equipment 

leases. The commenters requested 

confirmation that lessors could enforce 

leases that imposed higher fees during 

holdover tenancies, provided that the 

provisions were contained in the 

written lease at the time of initial or 

renewal execution of the lease. One 

commenter asked that the holdover 

grace period be extended indefinitely, 

provided that, during the holdover 

period, the lessor continually was taking 

steps to evict the lessee. 

Response: We agree that lessors can 

charge a holdover rental premium, 

provided that the amount of the 

premium was set in advance in the lease 

agreement (or in any subsequent 

renewal) at the time of its execution and 

the rental rate (including the premium) 

remains consistent with fair market 

value and does not take into account the 

volume or value of referrals or other 

business generated between the parties. 

We decline to permit the holdover grace 

period to last for the length of time that 

the landlord is taking steps to evict the 

tenant as suggested by the commenter. 

We believe that the 6-month holdover 

period permitted in the regulations is 

sufficient. 

B. Rental of Equipment 

The exception in § 411.357(b) and the 

comments we received in response to 

Phase II are discussed above in section 

IX.A in conjunction with the exception 

in § 411.357(a) for the rental of office 

space. 

C. Bona Fide Employment Relationships 

Section 1877(e)(2) of the Act sets forth 

an exception for payments made by an 

employer to a physician (or immediate 

family member of the physician) with 

whom the employer has a bona fide 

employment relationship, if certain 

conditions are met. The August 1995 

final rule incorporated the provisions of 

section 1877(e)(2) of the Act into our 

regulations in § 411.357(c) without 

change (60 FR 41975, 41981). The 

January 1998 proposed rule proposed to 

prohibit productivity bonuses paid to 

employed physicians based on DHS 

personally performed by the referring 

physician. 

Phase II adopted the January 1998 

proposed rule without the limitation on 

productivity bonuses given the Phase I 

determination that personally 

performed DHS are not referrals for 

purposes of section 1877 of the Act (69 

FR 16087). We also declined to expand 

the definition of employee at § 411.351 

in Phase II to include leased employees 

as defined by State law (69 FR 16087). 

We received no comments concerning 

the exception in § 411.357(c) for bona 

fide employment relationships and we 

are making no changes. 

D. Personal Service Arrangements 

Section 1877(e)(3) of the Act 

establishes an exception for personal 

service arrangements that satisfy certain 


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requirements. The August 1995 final 

rule incorporated the personal service 

arrangements exception into the 

regulations in § 411.357(d). The January 

1998 proposed rule would have retained 

the exception and proposed technical 

corrections and some additional 

interpretations (63 FR 1701). 

Phase II adopted the January 1998 

proposed rule with several 

modifications. In Phase II, we qualified 

the requirement in § 411.357(d)(1)(iv) 

that the term of an arrangement must be 

for at least 1 year to permit an 

arrangement to be terminated during the 

initial term with or without cause, 

provided that the parties do not enter 

into the same or substantially the same 

arrangement during the first year of the 

original term of the agreement (69 FR 

16090). In Phase II, we modified the 

regulation to allow cross-referencing to 

a master list of contracts, in addition to 

the existing option of incorporation of 

multiple agreements by reference. We 

also added a requirement that a master 

list (or lists) be made available for 

inspection by the Secretary upon 

request (69 FR 16091). In Phase II, we 

declined to extend the exception 

beyond contracts between DHS entities 

and physicians or group practices. In 

addition, we declined to modify the 

exception to allow physicians to hire 

independent contractors or use whollyowned companies to perform services 

they have contracted to provide, due to 

the potential for abuse (69 FR 16090). 

Phase II also made minor changes to 

the physician incentive plan exception 

but did not expand significantly the 

exception. We clarified that the 

exception applies to downstream 

subcontractor arrangements related to 

health plan enrollees (69 FR 16090). 

This Phase III final rule makes minor 

modifications to the personal service 

arrangements exception, including the 

addition of a provision in 

§ 411.357(d)(1)(vii) to permit a holdover 

personal service arrangement similar to 

the holdover provisions in the 

exceptions for the rental of office space 

and equipment. We modified 

§ 411.352(d)(2) to refer consistently to 

‘‘downstream contractor,’’ a term for 

which we added a definition at 

§ 411.351, as noted above. 

Comment: One commenter asked how 

long the master list kept by an entity 

must include a record of a personal 

service agreement between the DHS 

entity and a referring physician. At 

some point, an expired agreement 

becomes irrelevant, according to the 

commenter. The commenter suggested 5 

years after termination or expiration as 

the appropriate retention period. 

Another commenter asked for 

clarification as to whether the master 

list needs to include personal service 

agreements between the DHS entity and 

the physician that involved ‘‘similar or 

related’’ transactions, as opposed to all 

compensation and ownership 

arrangements between the parties. The 

commenter also asserted that the master 

list should have to include 

arrangements between the identical 

parties only, and not, for instance, 

contracts with the physician’s family 

members. 

Response: We note that the exception 

permits, but does not require, the use of 

a master list. Parties seeking protection 

under this exception must have a 

written agreement that covers all of the 

services to be furnished to the entity by 

the physician (or an immediate family 

member of the physician) or group 

practice. A master list may be used to 

meet this requirement. The master list 

must include all personal service 

arrangements with any physician, 

family member, or group practice. The 

condition in the exception requiring 

that the arrangement cover all services 

is not limited to ‘‘similar or related’’

services between the entity and the 

physician, but covers all services. This 

requirement is a bright-line rule that 

promotes transparency and is not 

dependent on subjective determinations 

of similarity or relatedness. Moreover, 

personal service arrangements with a 

physician’s immediate family members 

must be included on the master list 

because section 1877(d) of the Act treats 

a financial relationship with an 

immediate family member of a 

physician the same as a financial 

relationship with the physician. 

Comment: Two comments involved 

physician incentive payments 

referenced in § 411.357(d)(2). One 

commenter asked that we define a 

‘‘downstream contractor’’ as used in 

§ 411.357(d). A second commenter 

asked that the physician incentive plan 

exception be expanded to permit 

hospitals to pay physicians on a 

capitated or risk-sharing basis for 

services to hospital patients who are not 

enrolled in a managed care plan. 

Response: We are revising the 

definition of ‘‘physician incentive plan’’

at § 411.351 to reference newly defined 

‘‘downstream contractor.’’ As defined at 

§ 411.351, and for purposes of 

§ 411.357(d)(2), a ‘‘downstream 

contractor’’ means both a ‘‘first tier 

contractor’’ as defined at 

§ 1001.952(t)(2)(iii) and a ‘‘downstream 

contractor’’ as defined at 

§ 1001.952(t)(2)(i). Therefore, for 

physician self-referral purposes, a 

downstream contractor includes both an 

individual or entity that has a contract 

directly with an eligible managed care 

organization to provide or arrange for 

items and services (that is, a first tier 

contractor) and an individual or entity 

that has a subcontract directly or 

indirectly with a first tier contractor for 

the provision of or arrangement for 

items or services that are covered by an 

agreement between an eligible managed 

care organization and the first tier 

contractor. We also note that, in 

§ 411.357(d)(2), we used the terms 

‘‘downstream contractor’’ and 

‘‘downstream subcontractor’’

interchangeably. We have revised 

§ 411.357(d)(2) to use only the term 

‘‘downstream contractor’’. 

The commenter wants DHS entities to 

be allowed to provide incentives to 

physicians for their services in 

connection with fee-for-service patients 

provided that the incentives ‘‘fit the 

general structure of the [personal service 

arrangements] exception (for example, 

no payment to reduce medically 

necessary services).’’ We are not 

persuaded to make such a change. In the 

exception for personal service 

arrangements, the Congress included a 

statutory provision permitting certain 

physician incentive plan payments 

(structured to protect patient care) that 

would otherwise run afoul of the 

general restriction on compensation 

determined in a manner that takes into 

account the volume or value of referrals 

or other business generated between 

parties. This provision facilitates certain 

managed care arrangements that 

conceptually compensate physicians 

based on limiting the volume of care 

provided or ordered by a ‘‘gatekeeper’’

physician. The exception proposed by 

the commenter, for similar payments 

related to fee-for-service patients, would 

pose a risk of program or patient abuse. 

(For example, see section 1128A(b)(1) of 

the Act, which authorizes civil 

monetary penalties for payments made 

by hospitals to physicians to reduce or 

limit services to hospital patients.) 

However, as we discussed in Phase II, 

compensation related to patient 

satisfaction goals or other quality 

measures unrelated to the volume or 

value of business generated by the 

referring physician and unrelated to 

reducing or limiting services would be 

permitted under the personal service 

arrangements exception, provided that 

all requirements of the exception are 

satisfied (for example, compensation to 

reward physicians for providing 

appropriate preventive care services 

where the arrangement is structured to 

satisfy the requirements of the 

exception) (69 FR 16091). 

CMS is working on two 

demonstration projects that concern 


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hospital incentives paid to physicians in 

connection with the provision of high 

quality care, as authorized under section 

646 of the Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (MMA) and section 5007 of the 

Deficit Reduction Act of 2005 (DRA). In 

addition, section 5001(b) of the DRA 

requires CMS to propose a 

demonstration for FY 2009 that would 

provide incentives to hospitals for the 

provision of high quality care. This will 

be a ‘‘rewards sharing’’ demonstration 

under which hospitals will share money 

with physicians based on quality of care 

rather than on reducing or limiting 

medically necessary services. 

Comment: Several commenters raised 

issues regarding the exceptions for 

personal service arrangements and 

indirect compensation arrangements as 

they are applied to relationships 

involving a DHS entity, a group 

practice, and the physicians employed 

by the group practice who refer patients 

to the DHS entity. One commenter 

requested confirmation that, if a 

hospital contracts with a group practice 

for the provision of services, the 

relevant analysis is whether the 

arrangement meets the indirect 

compensation arrangements exception 

in order to ensure that referrals from 

individual physician-employees in the 

group practice are protected. One 

commenter asked for clarification that 

the personal service arrangements 

exception does not apply to most 

medical foundations because they 

typically contract with a group practice 

which, in turn, employs or contracts 

with physicians. Another commenter 

asserted that, if the personal service 

arrangements exception would protect 

an arrangement directly between a DHS 

entity and a physician, it should also be 

applicable to and protect an 

arrangement pursuant to which the 

physician has an indirect relationship 

with the DHS entity. Finally, one 

commenter asked for clarification that 

compliance with either the personal 

service arrangements or indirect 

compensation arrangements exception 

is sufficient to protect a compensation 

arrangement. 

Response: As discussed in section 

VI.B, we now consider a physician to 

‘‘stand in the shoes’’ of his or her group 

practice or physician organization. In 

the hypothetical situations posed by the 

first two commenters, the referring 

physician would stand in the shoes of 

the group practice that employs the 

physician and be considered to have a 

direct relationship with the hospital or 

the medical foundation, respectively, on 

the same terms as the hospital’s or 

medical foundation’s arrangement with 

the group practice. Thus, in the first 

hypothetical situation, the financial 

relationship between the hospital and 

the physician (who is standing in the 

shoes of the group practice) must meet 

an exception in order for the physician 

to be able to refer patients to the 

hospital. However, if the hospital 

contracts with a medical foundation 

which, in turn, contracts with the group 

practice which employs the physician 

(who stands in the shoes of the group 

practice), compliance with the indirect 

compensation arrangements exception 

would still be necessary for the 

physician to refer patients to the 

hospital (assuming that the arrangement 

meets the definition of an indirect 

compensation arrangement at 

§ 411.354(c)(2)). The chain of financial 

relationships would be hospital—

foundation—group practice—physician. 

However, if the physician makes a 

referral to the medical foundation’s 

clinic (as opposed to a hospital with 

which the medical foundation contracts) 

for DHS furnished by the clinic, then 

the relationship between the physician 

(standing in the shoes of his or her 

group practice) and the medical 

foundation’s clinic would be deemed to 

be a direct relationship (that is, medical 

foundation clinic—physician standing 

in the shoes of his or her group). 

As we noted in Phase II, the exception 

for personal service arrangements would 

apply to payments made by a nonprofit 

medical foundation under a contract 

with an individual physician to provide 

health care services (69 FR 16077, citing 

H. R. Conf. Report No. 103–213 at 814 

(1993)). Upon the effective date of this 

final rule, when the group practice 

physician stands in the shoes of the 

group practice with which the medical 

foundation has contracted, the medical 

foundation may apply the personal 

service arrangements exception to the 

arrangement between it and the group 

practice in order to protect referrals 

from the physician. 

Finally, as we discussed in Phase I, 

where more than one exception can 

apply to a financial relationship, the 

relationship needs to satisfy the 

requirements of only one of the 

applicable exceptions (66 FR 916). 

Comment: One commenter asked that 

we revise the exception in 

§ 411.357(d)(1) to permit a holdover 

personal service arrangement on terms 

similar to those specified in the 

equipment and space lease context. 

Response: We agree and have 

modified the regulation accordingly by 

adding a new provision in 

§ 411.357(d)(1)(vii). 

Comment: One commenter asked for 

clarification regarding when and on 

what terms a contract for personal 

services can be amended. 

Response: A personal service contract 

can be amended in the same manner as 

an office space or equipment lease as 

noted above in section IX.A. 

E. Physician Recruitment 

Section 1877(e)(5) of the Act excepts 

remuneration provided by a hospital to 

a physician to induce the physician to 

relocate to the geographic area served by 

the hospital in order to be a member of 

the hospital’s medical staff. To qualify 

for the protection of the exception, the 

following requirements must be 

satisfied—

• The physician is not required to 

refer patients to the hospital; 

• The amount of remuneration under 

the arrangement is not determined in a 

manner that takes into account (directly 

or indirectly) the volume or value of any 

referrals by the referring physician; and 

• The arrangement meets any other 

requirements imposed by the Secretary 

to protect against program or patient 

abuse. 

The August 1995 final rule 

incorporated the provisions of section 

1877(e)(5) of the Act into our 

regulations in § 411.357(e), with the 

additional requirements that the 

arrangement and its terms be in writing 

and signed by both parties, and that the 

physician not be precluded from 

establishing staff privileges at another 

hospital or referring to another entity. 

The January 1998 proposed rule would 

have made minor editorial changes. 

Based on public comments, Phase II 

substantially modified the rule (69 FR 

16094–16095) in the following 

respects—

• A physician must relocate his or her 

practice, rather than his or her 

residence. To be eligible for the 

exception, a physician must be new to 

the hospital’s medical staff and relocate 

to the geographic area served by the 

hospital (defined as the lowest number 

of contiguous postal zip codes from 

which the hospital draws at least 75 

percent of its inpatients). 

• Relocation of a physician’s practice 

to the geographic area served by the 

hospital must involve either: (1) 

Relocating the physician’s office a 

minimum of 25 miles; or (2) establishing 

that at least 75 percent of the 

physician’s revenues from services 

provided by the physician to patients 

(including services to hospital 

inpatients) are derived from services 

provided to new patients. 

• Residents and physicians who have 

been in medical practice less than 1 year 

will not be considered to have an 

established practice and will, therefore, 


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be eligible for compensation under the 

physician recruitment exception 

regardless of whether the physician 

actually moves his or her practice 

location. 

• Federally qualified health centers 

may make recruitment payments to 

physicians on the same basis as 

hospitals. 

• Recruitment payments made 

through existing group practices (rather 

than directly to the recruited physician) 

are permitted under certain conditions. 

(These conditions are designed to 

ensure that any remuneration in 

connection with recruiting a new 

physician that flows from the hospital 

through an existing group is 

remuneration for the benefit of the 

recruited physician and does not inure 

to the benefit of the group.) 

We received a substantial number of 

comments regarding the physician 

recruitment exception. We are making 

several changes to the exception in 

response to the comments, and are 

clarifying our interpretation of certain 

provisions as requested by commenters. 

Because the exception in § 411.357(e) 

applies to federally qualified health 

centers and (now) rural health clinics in 

the same manner as it applies to 

hospitals, references to ‘‘hospital’’

below also implicitly include federally 

qualified health centers and rural health 

clinics. 

Amendments to the text of 

§ 411.357(e) include—

• Permitting rural health clinics to 

utilize the exception; 

• Deeming the geographic area served 

by a hospital to be the area comprised 

of all of the contiguous zip codes from 

which the hospital’s inpatients are 

drawn when the hospital draws fewer 

than 75 percent of its inpatients from 

contiguous zip codes; 

• Permitting a hospital located in a 

rural area to determine the ‘‘geographic 

area served by the hospital’’ using an 

alternative test that encompasses the 

lowest number of contiguous (or in 

some cases, noncontiguous) zip codes 

from which the hospital draws at least 

90 percent of its inpatients; 

• Permitting a more generous income 

guarantee under certain circumstances 

in the case of a physician who is 

recruited to replace a deceased, retiring 

or relocating physician; 

• Permitting group practices to 

impose certain practice restrictions; 

• Permitting rural hospitals to recruit 

physicians into an area outside of the 

hospital’s geographic service area if it is 

determined through a CMS advisory 

opinion that the area has a 

demonstrated need for the recruited 

physician; 

• Exempting from the relocation 

requirement a physician who, for the 2 

years immediately prior to the 

recruitment arrangement, was employed 

on a full-time basis by a Federal or State 

bureau of prisons (or similar entity 

operating correctional facilities), the 

Department of Defense or Department of 

Veterans Affairs, or facilities of the 

Indian Health Service, provided that the 

physician did not maintain a separate 

private practice in addition to such fulltime employment; 

• Exempting from the relocation 

requirement those physicians whom the 

Secretary has deemed in an advisory 

opinion not to have an established 

medical practice comprised of a 

significant number of patients who are 

or could become patients of the 

recruiting hospital; 

• Clarifying that a physician must 

relocate his or her practice from outside 

the geographic service area to a location 

inside the service area and either: (1) 

Move his or her medical practice at least 

25 miles; or (2) have a new medical 

practice that derives at least 75 percent 

of its revenues from professional 

services furnished to patients (including 

hospital inpatients) not seen or treated 

by the physician at his or her prior 

medical practice site during the 

preceding 3 years, measured on an 

annual basis (fiscal or calendar year); 

and 

• Clarifying that § 411.357(e)(4)(iii) 

pertains to any type of income 

guarantee. 

Comment: Many commenters 

requested clarification as to the effect of 

Phase II on pre-existing recruitment 

arrangements that did not meet the 

Phase II requirements. Commenters 

urged us to grandfather any pre-existing 

recruitment arrangements. 

Response: We posted guidance 

regarding pre-existing physician 

recruitment agreements on July 14, 2004 

on the physician self-referral website in 

the form of a question and answer 

(www.cms.hhs.gov/ 

physicianselfreferral). We are still not 

persuaded that we should grandfather 

pre-existing arrangements. Thus, any 

arrangement that was in effect as of July 

26, 2004, should have been amended to 

comply with Phase II, whether the 

arrangement was in a payout period or 

in a forgiveness period. 

Comment: Two commenters 

questioned the need for the requirement 

in § 411.357(e)(1) that the recruited 

physician not already be on the medical 

staff. One commenter said it was 

unnecessary in light of the relocation 

requirement. The other commenter 

stated that the requirement should not 

apply to physicians who are not active 

or who are on the hospital’s courtesy 

staff only. 

Response: We disagree with the first 

commenter. Section 1877(e)(5) of the 

Act states that the recruited physician 

must ‘‘relocate * * * in order to be a 

member of the medical staff of the 

hospital.’’ This language makes clear 

that the recruited physician cannot 

already be a member of the hospital’s 

medical staff. We believe that the 

relocation requirement is insufficient to 

establish that a physician who is already 

a member of the hospital’s active staff 

needs an incentive to move his or her 

practice. We are not persuaded that 

permitting recruitment of physicians 

who are not on a hospital’s ‘‘active’’

medical staff, but who hold some type 

of medical staff privileges (for example, 

courtesy privileges), poses no risk of 

program or patient abuse. Moreover, 

defining ‘‘active’’ privileges is difficult, 

as many hospitals use different 

terminology to refer to different types of 

medical staff privileges. 

Comment: One commenter objected to 

the conditions in § 411.357(e)(1)(iii) and 

(e)(4)(v) that the remuneration not 

directly or indirectly take into account 

the volume or value of actual or 

anticipated referrals or other business 

generated by the recruit or the physician 

practice, if it received any payments. 

According to the commenter, hospital 

recruitment arrangements always 

anticipate referrals to the hospital. 

Response: We recognize that parties to 

a physician recruitment arrangement 

may anticipate some referrals by the 

recruited physician. In this context, the 

‘‘volume and value’’ condition prohibits 

the amount of assistance payable to the 

physician or the group practice from 

taking into account, in any manner, the 

volume or value of past or anticipated 

referrals to the hospital. The 

unconditional payment of actual 

moving expenses, for example, would 

not take into account the volume or 

value of referrals. 

Comment: One commenter asserted 

that a Mississippi statute prohibits 

physician employees of county- or cityowned hospitals from having any 

contractual relationship with the 

hospital other than an employment 

contract. Because of this restriction, 

these hospitals that recruit physicians as 

employees are unable to enter into a 

recruitment agreement that is separate 

and distinct from the employment 

agreement between the hospital and the 

recruit. The commenter requested that, 

in order to avoid placing community 

hospitals in a position where they have 

to choose between obeying State law or 

our physician self-referral regulations, 

we delete the word ‘‘separate’’ from the 


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phrase ‘‘except as referrals may be 

restricted under a separate employment 

or services contract’’ in 

§ 411.357(e)(1)(iv). 

Response: The commenter 

misunderstands the purpose of the 

quoted language in § 411.357(e)(1)(iv). 

This language appears in, and pertains 

to, the physician recruitment exception, 

not the employment exception (which 

would apply if the hospital was to 

employ the recruited physician directly 

and all requirements of the exception 

were satisfied). The purpose of the 

physician recruitment exception is to 

allow hospitals, subject to certain 

conditions, to provide remuneration 

directly or indirectly to physicians in 

order to induce them to relocate their 

medical practices to the hospital’s 

geographic service area. The exception 

contemplates that recruited physicians 

will either practice on their own or as 

part of a physician practice. The 

exception does not contemplate that the 

recruited physicians will be employees 

of the recruiting hospitals, although 

nothing in the exception specifically 

precludes this result if all requirements 

of the exception are satisfied. Section 

411.357(e)(1)(iv) provides that, as a 

condition of compliance with the 

recruitment exception, the recruited 

physician must be allowed to establish 

staff privileges at any other hospital(s) 

and to refer business to any other 

entities, except to the extent that 

referrals may be restricted under a 

separate employment, managed care, or 

services contract that complies with 

§ 411.354(d)(4). The ‘‘separate 

employment contract’’ contemplated in 

the regulation would be between the 

recruited physician and, for example, a 

group practice that employs the 

physician recruited by a hospital. Where 

a hospital wishes to recruit a physician 

as an employee, it need comply only 

with the requirements of the exception 

in § 411.357(c) for bona fide 

employment relationships, and, if it 

wishes to restrict the ability of the 

physician-employee to refer patients to 

other entities, with the requirements in 

§ 411.354(d)(4) (special rule on 

compensation). Neither the employment 

exception nor the special rule on 

compensation requires the employing 

hospital to set forth referral restrictions 

in an agreement separate and distinct 

from the underlying employment 

contract. 

Comment: Several commenters 

objected to the explanatory language in 

the Phase II preamble that appeared to 

condone credentialing restrictions 

aimed at restricting a recruited 

physician from competing with the 

recruiting hospital (69 FR 16095). Two 

commenters were concerned that such 

language lends itself to ‘‘economic 

credentialing’’ and objected to what 

they characterized as an inconsistent 

interpretation of what would be 

considered an inappropriate practice 

restriction on physicians. One 

commenter asked for examples of what 

we mean by ‘‘reasonable credentialing 

restrictions.’’

Response: The preamble discussion 

referenced by the commenters was 

primarily concerned with clarifying that 

recruited physicians cannot be 

prohibited from establishing staff 

privileges at other hospitals and from 

referring to other hospitals, even if such 

hospitals are competitors of the hospital 

that recruits the physician. We also 

intended to convey that the exception 

does not prevent hospitals from 

imposing reasonable credentialing 

restrictions on physicians when they 

compete with the recruiting hospital. 

Such restrictions must not take into 

account the volume or value of referrals. 

We take no position as to the 

application of any other State or Federal 

law or regulation pertaining to such 

credentialing restrictions. We merely 

intended to clarify that the physician 

self-referral law and our regulations do 

not prohibit reasonable credentialing 

restrictions that do not take into account 

in any way the volume or value of 

referrals or other business generated by 

the physician. 

Comment: Some commenters asked 

that § 411.357(e) be expanded to protect 

recruitment of mid-level non-physician 

practitioners into a hospital’s service 

area, including into an existing group 

practice. Other commenters asked that 

§ 411.357(e)(5) be expanded to protect 

rural health clinics. 

Response: Section 1877(e)(5) of the 

Act limits the recruitment exception to 

physicians, and, under section 

1877(b)(4) of the Act, we cannot create 

a new exception unless there is no risk 

of program or patient abuse. 

The physician recruitment exception 

in § 411.357(e) applies only to payments 

made directly (or, in some 

circumstances, passed through) to a 

recruited physician. Recruitment 

payments made by a hospital directly to 

a non-physician practitioner would not 

implicate the physician self-referral law, 

unless the non-physician practitioner 

serves as a conduit for physician 

referrals or is an immediate family 

member of a referring physician. 

Payments made by a hospital to 

subsidize a physician practice’s costs of 

recruiting and employing non-physician 

practitioners would create a 

compensation arrangement between the 

hospital and the physician practice for 

which no exception would apply. These 

kinds of subsidy arrangements pose a 

substantial risk of fraud and abuse. 

We are, however, persuaded to 

modify the exception to include rural 

health clinics, subject to the same 

conditions that apply to recruiting 

hospitals. We do not believe that such 

an expansion poses a risk of program or 

patient abuse. We have amended the 

regulation text accordingly. 

Comment: A number of commenters 

objected to the condition in 

§ 411.357(e)(1) that a hospital may 

recruit physicians only into the 

‘‘geographic area served by the 

hospital,’’ which is defined at 

§ 411.357(e)(2) as the lowest number of 

contiguous zip codes from which the 

hospital draws at least 75 percent of its 

inpatients. Commenters noted that this 

condition prevents hospitals from 

recruiting physicians into outlying parts 

of their service areas where there is 

likely to be greater need. Some 

commenters asserted that this condition 

hurts rural hospitals, and that it is very 

difficult for federally qualified health 

centers to satisfy the condition. Still 

other commenters stated that the 

restriction was unnecessary in light of 

the requirement that the physician 

relocate at least 25 miles or establish a 

practice with 75 percent of revenues 

derived from professional services 

provided to patients not seen or treated 

by the physician within the preceding 3 

years. Although most of these 

commenters requested that we eliminate 

this condition, some commenters 

suggested that, in the event the 

geographic restriction is retained, we 

should revise the regulation. Suggested 

revisions included: expanding the 

geographic area served by the hospital 

to 90 percent of zip codes from which 

the recruiting hospital draws its 

inpatients; making the 75 percent of 

inpatients/least number of zip codes 

requirement a minimum service area; 

permitting case-by-case determinations 

for good cause; and allowing a hospital 

to use any methodology permitted by 

the State in which it is located to 

determine the hospital’s service area. 

Response: We are not persuaded to 

eliminate the requirement that a 

recruited physician establish his or her 

medical practice within the geographic 

area served by the hospital; however, we 

are persuaded by some of the 

commenters that suggested an 

expansion of the definition of 

‘‘geographic area served by the 

hospital.’’ With respect to a hospital 

located in a rural area, the ‘‘geographic 

area served by the hospital’’ may be the 

area composed of the lowest number of 

contiguous zip codes from which the 


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hospital draws at least 90 percent of its 

inpatients. If the hospital draws fewer 

than 90 percent of its inpatients from all 

of the contiguous zip codes from which 

it draws inpatients, the ‘‘geographic area 

served by the hospital’’ may include 

noncontiguous zip codes, beginning 

with the noncontiguous zip code in 

which the highest percentage of the 

hospital’s inpatients resides, and 

continuing to add noncontiguous zip 

codes in decreasing order of percentage 

of inpatients. A rural hospital will 

continue to have the option of 

determining the ‘‘geographic area served 

by the hospital’’ using the 

methodologies applicable to all 

hospitals. We believe that this 

expansion will address much of the 

concern that Phase II did not permit 

recruiting into outlying portions of a 

rural hospital’s service area. We are also 

modifying the regulation by adding a 

new provision in § 411.357(e)(5) to 

permit rural health clinics, rural 

hospitals, and federally qualified health 

centers located in rural areas to recruit 

a physician into an area outside the 

entity’s geographic service area if it is 

determined by the Secretary in an 

advisory opinion issued under section 

1877(g)(6) of the Act that the area has a 

demonstrated need for the recruited 

physician. 

Comment: Some commenters asked 

for clarification regarding what they 

perceive as an inconsistency between 

the regulation text and the preamble 

language in Phase II regarding whether 

a recruited physician must relocate his 

or her practice from outside the 

geographic area served by the hospital 

(as defined in the regulation) into the 

area, or whether the physician may 

simply relocate his or her practice 

within the geographic service area as 

long as the physician either: (1) Moves 

the site of his or her practice a 

minimum of 25 miles; or (2) derives at 

least 75 percent of the relocated 

practice’s revenues from services 

provided by the physician to new 

patients. 

Response: With respect to the 

commenters’ concern regarding what 

they perceive as an inconsistency 

between the regulation text and the 

preamble language in Phase II, we 

confirm that the final regulation 

requires that the recruited physician 

relocate his or her medical practice from 

outside the ‘‘geographic area served by 

the hospital’’ (as defined in the 

regulation) into the area, and that the 

recruited physician must also either: (1) 

move the site of his or her practice a 

minimum of 25 miles; or (2) derive at 

least 75 percent of his or her practice’s 

revenues from services provided by the 

physician to new patients. To the extent 

that the Phase II preamble discussion 

inadvertently suggested a different 

interpretation, we are clarifying our 

intent here. Our interpretation here is 

consistent with the regulatory text in 

Phase II. We are making additional 

conforming changes in the regulatory 

text in § 411.357(e)(2)(iv) for greater 

clarity. 

Comment: Commenters raised a 

number of specific questions concerning 

the use of zip codes for purposes of 

determining the geographic area served 

by a hospital, including: 

(1) What is the appropriate geographic 

service area if the zip codes contiguous 

to the hospital account for only 69 

percent of the hospital’s inpatients? 

Specifically, the commenter asked what 

a hospital should consider to be its 

geographic service area if the contiguous 

zip codes proximate to the hospital 

account for only 69 percent of the 

hospital’s inpatients and, due to the 

national reputation of the hospital and 

its medical staff, the remainder of the 

hospital’s inpatients are drawn from 

distant, noncontiguous zip codes. 

(2) What if there is a zip code ‘‘hole’’

in the contiguous area (with the 

geographic service area resembling a 

donut)? May a hospital recruit a 

physician to establish his or her medical 

practice location in the zip code that 

forms the hole? 

(3) What if multiple configurations of 

zip codes will satisfy the 75 percent 

requirement? 

(4) How often can a hospital 

determine its service area and what, if 

anything, must a hospital do if the 

service area changes after a physician is 

recruited by the hospital? 

(5) If a health system has two 

hospitals, is the geographic service area 

determined at the hospital or system 

level? 

Response: Phase II defined 

‘‘geographic area served by the hospital’’

at § 411.357(e)(2) as the area composed 

of the lowest number of contiguous zip 

codes from which the hospital draws at 

least 75 percent of its inpatients. As 

noted above, in this Phase III final rule, 

we are amending § 411.357(e) to permit 

a hospital located in a rural area to 

determine its geographic service area 

using noncontiguous zip codes if the 

hospital draws fewer than 90 percent of 

its inpatients from all of the contiguous 

zip codes from which it draws 

inpatients. Other than as determined 

using our new rule for hospitals located 

in rural areas, the geographic area 

served by the hospital must be 

comprised of contiguous zip codes. We 

are clarifying that ‘‘contiguous zip 

codes’’ does not mean only zip codes 

that are contiguous to the zip code in 

which the hospital is located. It is our 

intention that ‘‘contiguous zip codes’’

means zip codes that are next to (or 

contiguous to) each other. A hospital 

should look at its inpatient data to 

determine where patients live and then 

calculate the lowest number of zip 

codes that touch at least one other zip 

code in which the inpatients reside. Our 

specific responses are as follows. 

(1) We do not expect that many 

hospitals would be in the situation 

described by the commenter. However, 

to the extent that this situation exists, 

the hospital would be prohibited from 

relying on the recruitment exception 

because, under the Phase II definition of 

‘‘geographic area served by the 

hospital,’’ the contiguous zip codes from 

which the hospital draws inpatients 

would not meet either the ‘‘at least 75 

percent of inpatients’’ test (applicable to 

all hospitals) or, under this Phase III 

final rule, the ‘‘at least 90 percent of 

inpatients’’ test (the optional test for 

hospitals located in rural areas). In order 

to avoid this result, we are modifying 

§ 411.357(e) to deem a hospital’s 

geographic service area as comprising 

all of the contiguous zip codes from 

which the hospital’s inpatients are 

drawn when the hospital draws fewer 

than 75 percent of its inpatients from 

those contiguous zip codes (or 90 

percent in the case of the new optional 

test for hospitals located in rural areas). 

Using the commenter’s example, the 

hospital would be permitted to recruit 

into the zip codes from which it draws 

the 69 percent of its inpatients. 

(2) Provided that the ‘‘hole’’ zip code 

is surrounded by contiguous zip codes 

as described by the commenter, if no 

people reside in the ‘‘hole’’ zip code, the 

hospital may recruit a physician to 

establish a practice into the ‘‘hole’’ zip 

code. For example, a ‘‘hole’’ zip code 

might be one assigned to a large office 

building or commercial district. We 

have modified the regulation 

accordingly. 

(3) If multiple configurations 

containing the same number of zip 

codes permit the hospital to meet the 

applicable percent of inpatients 

threshold (that is, 75 percent for all 

hospitals or 90 percent for hospitals 

located in rural areas), the hospital is 

free to use any of the configurations. 

(4) A hospital may use any 

configuration that satisfies the lowest 

number of zip codes/applicable percent 

of inpatients test on the date it enters 

into the recruitment arrangement (that 

is, the date on which all parties have 

signed the written recruitment 

agreement). In some cases, this may 

result in the use of a different 


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geographic service area for different 

recruitment arrangements. 

(5) The determination of the 

geographic area served by a hospital is 

applied at the hospital level rather than 

at the hospital system level. Therefore, 

the service area is hospital-specific, not 

system-specific. 

Comment: One commenter asked 

whether, for purposes of § 411.357(e)(3), 

a ‘‘residency’’ includes all training, 

including post-residency fellowships. 

Response: For purposes of 

§ 411.357(e)(3), a residency includes all 

training, including post-residency 

fellowships. 

Comment: Section 411.357(e)(3) 

specifies that the relocation requirement 

does not apply to residents and 

physicians who have been in practice 1 

year or less, provided that the resident 

or physician establishes his practice in 

the geographic area served by the 

hospital. One commenter requested that 

we expand this provision to include 

other physicians who do not have a 

private medical practice, such as 

physicians on active military duty who 

are ending their military careers; 

physicians who live in, but have never 

practiced medicine in, the geographic 

area served by the hospital; and 

physicians who are employed by the 

Department of Veterans Affairs, Native 

American Hospital System, or a staff 

model HMO. According to the 

commenter, such physicians do not 

have an established medical practice 

that is capable of being relocated 

because virtually none of their patients 

could be treated by the recruited 

physician (or another physician) in the 

recruited physician’s new medical 

practice and virtually none of the 

patients could become patients of the 

recruiting hospital. 

Response: The recruitment exception 

in § 411.357(e) excepts certain 

remuneration that is intended to induce 

a physician ‘‘to relocate his or her 

medical practice’’ to the geographic area 

served by the hospital. In Phase II, we 

stated that residents and physicians 

who have been in practice 1 year or less 

would not be considered to have an 

established medical practice to relocate 

and that recruitment arrangements 

involving such physicians could qualify 

for the recruitment exception regardless 

of whether or not the physician actually 

moves his or her practice location, 

provided that all other conditions of the 

exception are satisfied (69 FR 16094–

16095). We agree that some of the 

physicians identified by the commenter 

have practices that are incapable of 

being relocated due to unique 

restrictions that effectively prevent the 

recruited physician’s patients from 

receiving medical care furnished by 

either the recruiting hospital or the 

recruited physician’s new medical 

practice. Thus, we are expanding 

§ 411.357(e)(3) to provide that, as long 

as the recruited physician establishes 

his or her medical practice in the 

geographic area served by the hospital, 

the relocation requirement will not 

apply if, for at least 2 years immediately 

prior to the recruitment arrangement, 

the recruited physician was employed 

on a full-time basis by one of the 

following—

• A Federal or State bureau of prisons 

or similar entity (operating correctional 

facilities) to serve exclusively a prison 

population; 

• The Department of Defense or 

Department of Veterans Affairs to serve 

active or veteran military personnel and 

their families; or 

• Facilities of the Indian Health 

Service to serve patients who receive 

medical care exclusively through the 

Indian Health Service. 

Also, the physician must not have 

maintained an independent private 

practice in addition to his or her fulltime employment with one of the above 

entities. We believe that the 2-year 

employment restriction is necessary to 

prevent program abuse. Because 

physicians often see patients less than 

once a year, we believe that an 

experienced physician may have an 

established medical practice that is 

capable of being relocated even when 

the physician has not practiced in that 

location for a period of time. Thus, for 

example, we believe that the exception’s 

relocation requirement should apply in 

the case of a physician who left private 

practice in the hospital’s geographic 

service area to become a full-time 

employee of the Indian Health Service 

for 1 year only. 

In addition, to accommodate those 

rare instances in which a hospital 

should be permitted to provide 

recruitment assistance to a physician 

whose practice cannot be relocated for 

reasons other than those stated above, 

we are modifying the exception to 

provide that the relocation requirement 

will not apply if the Secretary has 

deemed in an advisory opinion issued 

under section 1877(g)(6) of the Act that 

the physician does not have an 

established medical practice that serves 

or could serve a significant number of 

patients who are or could become 

patients of the recruiting hospital. 

Comment: One commenter asked for 

clarification with respect to the 

signatories to the recruitment contract. 

The commenter was concerned that 

§ 411.357(e)(4)(i), which requires that 

the recruitment agreement be signed 

also by the party to whom the payments 

are directly made, could be interpreted 

to require that the hospital, the 

physician practice, and the recruited 

physician all had to sign one document. 

The commenter asserted that this would 

be unnecessary and would add 

unnecessarily to the transaction costs. 

The commenter suggested that we 

require a written agreement between the 

hospital and either: (1) The recruit; or 

(2) the physician practice to which the 

payments will be made. The commenter 

suggested, alternatively, that it should 

be acceptable to limit the contracting 

parties to the hospital and the physician 

practice receiving the recruitment 

assistance and require the recruited 

physician to sign a one-page 

acknowledgement agreeing to be bound 

by the terms and conditions set forth in 

the recruitment agreement signed by the 

hospital and the physician practice. 

Response: The exception requires a 

written agreement signed by all parties, 

including the recruiting hospital, the 

recruited physician, and the physician 

practice that the physician will be 

joining, if any. Nothing in the 

regulations precludes execution of the 

agreement in counterparts. This 

requirement is necessary to safeguard 

against program and patient abuse, and 

we are not persuaded that it creates any 

undue burden. 

Comment: Two commenters asked 

whether a hospital could require a 

group practice that was receiving 

recruitment assistance to guarantee 

repayment of any monies advanced to 

the group on behalf of the recruited 

physician if the physician did not fulfill 

his or her community service 

requirement. 

Response: Nothing in this rule 

precludes a hospital from requiring a 

physician practice to repay any monies 

advanced to the group on behalf of the 

recruited physician if the physician 

does not fulfill his or her community 

service requirement. However, if 

requiring the physician practice to 

guarantee repayment on behalf of the 

recruited physician is used to shield the 

recruited physician from any real 

liability for failure to fulfill his or her 

community service obligation under a 

recruitment agreement, the parties 

would be at significant risk of 

noncompliance with the fraud and 

abuse laws, particularly if the recruiting 

hospital failed to collect amounts owed 

by the physician practice making the 

guarantee. Any such arrangement 

should be carefully scrutinized under 

the fraud and abuse laws (including the 

physician self-referral law and the antikickback statute) for other implications, 

such as problematic relationships 


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between the group practice and the 

recruited physician or additional, 

unexcepted remuneration from the 

hospital to the group practice or the 

recruited physician. 

Section 411.357(e)(4) excepts 

remuneration provided by a hospital to 

a physician: (1) Indirectly through 

payments to a physician practice; or (2) 

directly to a physician who joins a 

physician practice. To the extent that a 

physician practice guarantees the 

obligations of the recruited physician, 

and indemnifies the recruited physician 

against repayment of those obligations, 

the indemnification would create a 

remunerative relationship between the 

physician practice and the recruited 

physician (and potentially between the 

physician practice and the hospital) that 

could implicate the fraud and abuse 

laws, including the physician selfreferral law and the anti-kickback 

statute. 

Comment: A number of commenters 

requested clarification regarding the 

applicability of § 411.357(e)(4)(ii) to 

situations in which a group practice, 

through which a hospital makes indirect 

recruitment payments to a recruited 

physician, employs the recruited 

physician. The commenters requested 

clarification that the group practice 

could deduct from the amount passed 

through to the physician in salary, the 

group practice’s actual costs attributable 

to recruiting the physician. Examples of 

such costs include headhunter fees, 

travel expenses and moving expenses 

associated with the recruitment, and 

employee benefits, taxes and 

professional fees attributable to hiring 

the recruited physician. The 

commenters pointed out that 

§ 411.357(e)(4)(iii) specifically 

permitted such adjustments in the case 

of an income guarantee. 

Response: Under § 411.357(e)(4)(iii), 

the costs allocated by a group practice 

that employs the recruited physician 

under an income guarantee may include 

the group’s actual additional 

incremental costs attributable to the 

recruited physician. Depending on the 

circumstances, these costs may include 

those noted by the commenters. This 

provision was included in 

§ 411.357(e)(4)(iii) in Phase II (69 FR 

16096–16097). 

Comment: A commenter requested 

clarification regarding the types of 

expenses that qualify as recruiting 

expenses. The commenter suggested 

that the following should qualify as 

covered expenses: Headhunter fees; air 

fare, hotel, meals, and other costs 

associated with visits by the recruited 

physician and his or her family to the 

relevant geographic area; moving 

expenses; telephone calls; and the cost 

of tail malpractice insurance covering 

the physician’s prior practice. Another 

commenter asked whether a hospital 

could pay a physician or a group 

practice for time spent recruiting a 

physician into the hospital’s service 

area, and whether our answer depends 

on if the recruited physician joined the 

recruiting physician’s or group’s 

practice or an unrelated medical 

practice. 

Response: We understand the first 

commenter to be asking about the 

language in § 411.357(e)(4)(ii) that refers 

to ‘‘actual costs incurred by the * * * 

physician practice in recruiting the new 

physician * * *.’’ This language 

describes only costs incurred in the 

recruiting of the physician and does not 

include costs incurred after the 

physician is recruited and has joined 

the group. Depending on the 

circumstances, these costs incurred in 

recruiting could include the actual costs 

of headhunter fees; air fare, hotel, meals, 

and other costs associated with visits by 

the recruited physician and his or her 

family to the relevant geographic area; 

moving expenses; telephone calls; and 

tail malpractice insurance covering the 

physician’s prior practice. 

With respect to the second 

commenter’s questions, if a hospital 

pays a physician or group for time spent 

recruiting a physician, as opposed to the 

expenses discussed above, such 

compensation would have to meet all of 

the requirements of a compensation 

exception (other than the recruitment 

exception). It would not matter whether 

the recruited physician actually joined 

the compensated physician’s practice. 

Comment: Several commenters 

requested clarification regarding what 

types of income guarantees trigger the 

application of § 411.357(e)(4)(iii). 

Several commenters claimed that 

revenue guarantees are not considered 

income guarantees. 

Response: Any income guarantee, 

whether gross income, net income, 

revenues, or some variation, involves a 

potential cost to the guarantor hospital 

and a benefit to the recipient physician. 

Any such guarantee triggers the 

application of § 411.357(e)(4)(iii). We 

have modified the provision to clarify 

that § 411.357(e)(4)(iii) applies to any 

type of income guarantee. 

Comment: Many commenters objected 

to the condition in § 411.357(e)(4)(iii) 

that a group practice cannot allocate 

more than its actual, additional 

incremental costs attributable to the 

recruited physician under an income 

guarantee. According to the 

commenters, the limitation will prevent 

groups from recruiting new physicians 

using hospital funding, and is 

unreasonable. The commenters 

requested that we revise the regulation 

to permit other reasonable methods of 

allocating overhead costs, such as pro 

rata or per capita. The commenters 

noted that § 411.352 permits group 

practices to use such allocation methods 

for distributing certain group practice 

revenues. A number of commenters 

stated that the rule was particularly 

unfair when the new physician was 

merely replacing a deceased, retiring, or 

relocating group physician, because 

there was no real benefit to the 

remaining physicians from a 

replacement physician who merely 

‘‘takes over’’ the overhead costs of the 

deceased, retired, or relocated 

physician. 

Response: We agree that, in the 

limited situation in which the recruited 

physician is replacing a deceased, 

retiring, or relocating physician in an 

underserved area, a physician practice 

may, for purposes of an income 

guarantee, allocate to the recruited 

physician a per capita allocation of the 

practice’s aggregate overhead and other 

expenses, not to exceed 20 percent of 

the practice’s aggregate costs. In the 

alternative, the practice may allocate the 

actual additional incremental costs 

attributable to the recruited physician as 

provided for in Phase II (69 FR 16096–

16097). This additional flexibility 

should assist hospitals that seek to 

replace needed physicians in their 

communities. In all other cases, the 

group may allocate to the recruited 

physician only the actual additional 

incremental expenses attributable to the 

recruited physician. 

Contrary to the commenter, we 

perceive no unfairness. Physician 

practices that use their own funds to 

recruit physicians to join them are free 

to use any cost allocation method when 

compensating the recruited physicians 

(subject to any conditions necessary to 

satisfy the requirements of an applicable 

physician self-referral exception, such 

as the exception for bona fide 

employment relationships or the inoffice ancillary services exception). In 

the case of a hospital-subsidized income 

guarantee, a restriction on the allocation 

of costs becomes necessary to prevent 

physician practices from 

inappropriately shifting overhead costs 

to the hospital to which the physician 

practice refers. If a hospital were to 

subsidize costs that are not genuinely 

attributable to the recruited physician, 

the hospital would confer remuneration 

on the physician practice for which no 

exception would apply and which could 

reflect referrals. This would pose a 

substantial risk of program abuse under 


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the physician self-referral law, as well 

as under the anti-kickback statute. We 

believe that permitting broader 

overhead allocation in the limited way 

described above will provide 

appropriate assistance in underserved 

areas, where a deceased, retired, or 

relocated physician might create a 

deficit in available care for patients, 

without the risk of increased program or 

patient abuse. We are modifying the 

regulation in § 411.357(e)(4)(iii) 

accordingly. 

Comment: One commenter asked 

whether the income guarantee 

requirements in § 411.357(e)(4)(iii) with 

respect to ‘‘actual additional 

incremental costs’’ apply to a recruited 

physician who leases space and 

equipment from and is co-located with 

(rather than a member of or a physician 

in) a group practice. 

Response: The requirements of 

§ 411.357(e)(4)(iii) apply only in the 

case of income guarantees provided by 

a hospital when a physician joins a 

physician practice. For purposes of the 

recruitment exception, a physician has 

not ‘‘joined’’ a physician practice unless 

he or she has become a ‘‘physician in 

the group practice’’ or a ‘‘member of the 

group’’ (or the equivalent, in the case of 

a physician who joins a practice that is 

not a ‘‘group practice’’ as defined at 

§ 411.352). In the case of a physician 

who joins a physician practice, except 

as provided in new § 411.357(e)(4)(iii), 

the physician practice may not allocate 

costs under the income guarantee that 

exceed the actual additional 

incremental costs attributable to the 

recruited physician. In the case of a 

physician who merely co-locates with a 

physician practice (for example, by 

leasing office space from a group 

practice), none of the provisions of 

§ 411.357(e)(4) would apply. Rather, the 

arrangement must satisfy the 

requirements of the recruitment 

exception without reference to 

§ 411.357(e)(4), or satisfy the 

requirements of another exception. The 

recruitment exception would not protect 

any remuneration provided by the 

hospital to the physician practice 

indirectly through payments made to 

the recruited physician. For example, 

the exception would not protect an 

arrangement in which a recruited 

physician uses funds from a hospital 

(including amounts pursuant to an 

income guarantee) to pay inflated rental 

payments to a group practice. Nor, for 

example, would it protect any 

arrangement in which a hospital uses a 

recruitment arrangement with a 

recruited physician who co-locates with 

a physician practice to provide 

remuneration indirectly to the physician 

practice (for example, by arranging for 

the recruited physician to co-locate 

with, but not join, the existing physician 

practice and to pay that practice inflated 

amounts for rent or services). We are 

aware of no circumstances in which it 

would be appropriate for a physician 

practice to be a party to an income 

guarantee made by a hospital to a 

recruited physician who is not joining 

the practice. 

We caution that the physician 

practice and the physician may not 

improperly shift costs to the hospital 

making the income guarantee. We note 

that any lease or contract between the 

recruited physician and the physician 

practice would create a financial 

relationship that would require an 

exception, such as the exception for the 

rental of office space in § 411.357(a), if 

the recruited physician refers DHS to 

the physician practice. Moreover, such 

lease would potentially create an 

indirect compensation arrangement 

between the hospital and the physician 

practice’s physicians who refer DHS to 

the hospital (the chain links the hospital 

to the recruited physician (via the 

income guarantee) to the physician 

practice (via the lease) to the referring 

physicians (via ownership or 

employment)). Such arrangement would 

need to satisfy the requirements of the 

indirect compensation arrangements 

exception in § 411.357(p), and should 

also be closely scrutinized under the 

anti-kickback statute. 

Comment: One commenter asked for 

confirmation that § 411.357(e)(4)(iv) 

requires that the physician practice keep 

records of its actual costs and the 

amount passed through to the recruited 

physician, and that a physician 

practice’s failure to keep the records 

would not, by itself, subject the hospital 

to sanction. 

Response: Section 411.357(e)(4)(iv) 

requires that records of costs be 

maintained for at least 5 years and made 

available to the Secretary upon request. 

Because the recruiting hospital is the 

DHS entity seeking payment from 

Medicare in the scenario presented, it is 

the hospital’s responsibility to maintain 

the necessary records. The commenter is 

correct that the physician practice’s 

failure to keep records would not 

subject the hospital to sanction under 

the physician self-referral provisions. 

However, the hospital’s failure to keep 

full, complete and accurate records of 

the actual costs it has subsidized and 

the amounts passed through to the 

physician it has recruited would 

preclude protection under the physician 

recruitment exception. Hospitals should 

take appropriate steps to ensure that 

their funds, intended for the benefit of 

recruited physicians, are appropriately 

handled by the physician practices that 

receive them. 

Comment: We received many 

comments concerning the requirement 

in § 411.357(e)(4)(vi) that a physician 

practice may not impose additional 

practice restrictions on the recruited 

physician other than conditions related 

to quality of care. Commenters 

(including hospital associations) that 

addressed the issue of the allowability 

of non-compete agreements were 

uniformly opposed to prohibitions on 

them. They also stated that the 

restriction limited the utility of the 

exception and was contrary to State 

laws permitting such restrictions. 

Several commenters suggested that 

§ 411.357(e)(4)(vi) be revised to prohibit 

only restrictions that prohibit the 

physician from practicing in the 

hospital’s geographic service area. The 

commenters asserted that non-compete 

agreements are a standard business 

practice between physician groups and 

physicians. They stated that, without 

the ability to enter into non-compete 

agreements, physician practices would 

be less likely to take on new physicians 

and, as a result, hospitals may be unable 

to attract new physicians, and certain 

health care needs of the surrounding 

communities could go unmet. Other 

commenters questioned whether the 

following were permitted—

• Restrictions on moonlighting; 

• Prohibitions on soliciting patients 

and/or employees of the physician 

practice; 

• Requiring that the recruited 

physician treat Medicaid and indigent 

patients; 

• Requiring that a recruited physician 

not use confidential or proprietary 

information of the physician practice; 

• Requiring the recruited physician to 

repay losses of his or her practice that 

are absorbed by the physician practice 

in excess of any hospital recruitment 

payments; and 

• Requiring the recruited physician to 

pay a predetermined amount of 

reasonable damages (that is, liquidated 

damages) if the physician leaves the 

physician practice and remains in the 

community. 

Response: We indicated in Phase II 

that we considered a non-compete 

clause to be a practice restriction and 

not a condition related to quality of care 

(69 FR 16096–16097). Although we did 

not list other examples of such practice 

restrictions, we intended to include 

only such restrictions placed on the 

recruited physician by a physician 

practice that would have a substantial 

effect on the recruited physician’s 

ability to remain and practice medicine 


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in the hospital’s geographic service area 

after leaving the physician practice or 

group practice. We do not consider the 

restrictions, prohibitions, and 

requirements that are specifically 

mentioned in the bulleted points above 

as falling into the category of having a 

substantial effect on the recruited 

physician’s ability to remain in the 

hospital’s geographic service area. (We 

note that we may consider a liquidated 

damages clause requiring a significant 

or unreasonable payment by the 

physician leaving the physician practice 

to have a substantial effect on the 

recruited physician’s ability to remain 

in the recruiting hospital’s geographic 

service area.) Our purpose in 

prohibiting practice restrictions such as 

non-compete clauses was to avoid 

frustrating the purpose of the exception. 

That is, we intended to discourage 

physician practices that recruit 

physicians using hospital funding from 

making it difficult for a recruited 

physician to remain in the community 

and fulfill his or her commitments 

under the recruitment agreement with 

the hospital. Allowing a physician to 

remain in the community not only 

furthers the health care needs of the 

community, but also obviates the need 

for the hospital to enter into a new 

recruitment agreement to replace the 

physician. 

Upon review of the comments, 

however, we are persuaded that 

categorically prohibiting physician 

practices from imposing non-compete 

provisions may have the unintended 

effect of making it more difficult for 

hospitals to recruit physicians. We are 

concerned that physician practices and 

individual physicians may be unable or 

reluctant to hire additional physicians, 

regardless of the receipt of financial 

assistance from hospitals, unless they 

are able to impose a limited, reasonable 

non-compete clause. Therefore, we are 

amending § 411.357(e)(4)(vi) to state 

that physicians and physician practices, 

may not impose on the recruited 

physician any practice restrictions that 

unreasonably restrict the recruited 

physician’s ability to practice medicine 

in the geographic area served by the 

hospital. Although we are not per se 

conditioning payment for DHS on 

compliance with State and local laws 

regarding non-compete agreements, we 

believe that any practice restrictions or 

conditions that do not comply with 

applicable State and local law run a 

significant risk of being considered 

unreasonable. (Nothing in 

§ 411.357(e)(4)(vi) should be construed, 

however, as prohibiting a hospital that 

provides financial assistance to the 

hiring physician practice from entering 

into an agreement with the practice that 

prohibits the hiring physician practice 

from imposing a non-compete 

agreement or other practice restriction.) 

Comment: Several commenters asked 

whether money paid to a group practice 

under a physician recruitment 

arrangement constitutes indirect 

compensation within the meaning of 

§ 411.354(c)(2). Other commenters asked 

why physician recruitment 

arrangements could not qualify for the 

fair market value exception in 

§ 411.357(l). 

Response: With respect to the first 

comment, as discussed in Phase II (69 

FR 16097), the provisions of 

§ 411.357(e)(4) related to pass-through 

hospital recruitment payments establish 

an exception applicable to the 

compensation arrangement created 

between the hospital and the recruited 

physician (and to the compensation 

arrangement between the hospital and 

the existing physician practice) (69 FR 

16097). With respect to the second 

comment, physician recruitment 

arrangements cannot qualify for the fair 

market value compensation exception 

for the reasons explained in Phase II (69 

FR 16096). Our position with respect to 

the application of the fair market value 

compensation exception to recruitment 

arrangements has not changed. 

Comment: A commenter requested 

that we amend the physician 

recruitment exception to provide that 

the requirements in § 411.357(e)(4) do 

not apply in the case of remuneration 

involving the recruitment of a faculty 

physician to a nonprofit faculty practice 

plan affiliated with the hospital. The 

commenter stated that the Phase II 

preamble was clear that physician 

recruitment activities conducted in 

compliance with the academic medical 

centers exception do not need to comply 

with the physician recruitment 

exception. The commenter also stated, 

however, that an academic medical 

center may choose not to structure its 

compensation arrangements to fit within 

the academic medical centers exception, 

either because the indirect 

compensation rules apply or because 

another exception or exceptions are 

available for the compensation 

arrangements. The commenter theorized 

that our concerns with hospital 

payments for the recruitment of a 

physician who joins an existing 

physician practice arise from the 

potential incidental benefit that such 

arrangements may confer on the existing 

physician practice and its ownerphysicians (who may have existing 

referral relationships with the hospital). 

However, the commenter asserted that, 

where a nonprofit hospital provides 

remuneration to recruit a needed faculty 

physician to an affiliated nonprofit 

faculty practice plan, it is unlikely that 

any improper incidental benefit would 

be conferred on any physician group. 

Response: To the extent that a 

hospital, including one affiliated with 

an academic medical center, wishes to 

provide remuneration to a physician for 

recruitment purposes, the arrangement, 

depending on the facts and 

circumstances, may be structured to 

satisfy one or more exceptions, such as 

the exception for bona fide employment 

relationships in § 411.357(c), the 

academic medical centers exception in 

§ 411.355(e), or the physician 

recruitment exception in § 411.357(e). 

Where the only exception potentially 

applicable is the physician recruitment 

exception (because some remuneration 

would be paid to another physician or 

to a physician practice), the 

arrangement must satisfy all of the 

requirements of § 411.357(e)(4). We are 

not persuaded that any additional 

protection under the physician selfreferral statute for a nonprofit hospital’s 

recruitment of faculty physicians is 

necessary or appropriate. We believe 

that the potential for program and 

patient abuse in the form of anticompetitive behavior or over-utilization 

exists whether the DHS entity is a forprofit or nonprofit entity. 

F. Isolated Transactions 

Section 1877(e)(6) of the Act provides 

that an isolated transaction, such as a 

one-time sale of property or a medical 

practice, is not considered to be a 

compensation arrangement for purposes 

of the prohibition on physician referrals 

if the following conditions are met—

• The amount of remuneration for the 

transaction is consistent with fair 

market value and is not determined, 

directly or indirectly, in a manner that 

takes into account the volume or value 

of referrals; 

• The remuneration is provided in 

accordance with an agreement that 

would be commercially reasonable even 

if no referrals were made to the entity; 

and 

• The transaction meets any other 

requirements that the Secretary may 

impose by regulation as needed to 

protect against program or patient 

abuse. 

Phase II incorporated the provisions 

of section 1877(e)(6) of the Act into our 

regulations in § 411.357(f), with a 

requirement that there be no additional 

transactions between the parties for 6 

months after the isolated transaction, 

except for transactions that are 

specifically permitted under another 


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exception (69 FR 16098). Phase II set 

forth definitions of ‘‘transaction’’ and 

‘‘isolated transaction’’ at § 411.351. 

Phase II provided that installment 

payments could qualify as isolated 

transactions, as long as the total 

aggregate payment is: (1) set before the 

first payment is made; and (2) does not 

take into account, directly or indirectly, 

referrals or other business generated by 

the referring physician (69 FR 16098). 

Additionally, the payments must be 

immediately negotiable or guaranteed 

by a third party, secured by a negotiable 

promissory note, or subject to a similar 

mechanism to ensure payment even in 

the event of default by the purchaser or 

obligated party. Phase II also clarified 

that post-closing adjustments that are 

commercially reasonable and not 

dependent on referrals or other business 

generated by the referring physician will 

be permitted if made within 6-months of 

the date of a purchase or sale 

transaction (69 FR 16098). We are 

making no changes to the isolated 

transactions exception in this Phase III 

final rule. 

Comment: Two commenters raised 

questions regarding the requirement in 

the definition of isolated transaction at 

§ 411.351 that the payments be 

immediately negotiable or secured by a 

negotiable promissory note, among 

other options. According to one 

commenter, a promissory note is 

immediately negotiable if the note so 

states, although as a practical matter, 

there may not be a market for the note. 

The other commenter claimed that 

promissory notes are typically 

immediately negotiable only in the 

event of default, and that requiring 

immediate negotiability is inconsistent 

with installment payments. One of the 

commenters also pointed out that a 

promissory note does not necessarily 

secure the underlying debt; rather, it can 

serve as security for a different 

obligation. Both commenters sought 

clarification of the ‘‘immediately 

negotiable’’ note requirement. 

Response: We have carefully 

considered the commenters’ questions 

and assertions. The critical element 

with respect to installment payments is 

that a mechanism is in place to ensure 

payment (even in the event of default by 

the purchaser or obligated party). The 

regulation provides for several options 

to accomplish this: (1) Immediately 

negotiable payments or payments that 

are guaranteed by a third party; (2) 

payments that are secured by a 

negotiable promissory note; or (3) 

payments that are subject to a 

mechanism similar to (1) and (2) that 

ensures payment in the event of default. 

The regulation at § 411.351 does not 

require that a promissory note be 

immediately negotiable. Installment 

payments need only be secured by a 

negotiable promissory note if that is the 

mechanism chosen by the parties to 

ensure payment in the event of default. 

The parties are free to choose one of the 

other options to satisfy the requirements 

for installment loans in isolated 

transactions. Whether a promissory note 

is negotiable is governed by the State’s 

version of the Uniform Commercial 

Code or other applicable State law. 

Comment: One commenter asked for 

clarification concerning separate 

transactions involving related parties, 

such as a hospital’s purchase of a group 

practice and the purchase of an office 

building that is owned by some of the 

group practice physicians through a 

separate limited liability company. The 

commenter believed that such 

transactions are not unusual but would 

not appear to qualify for the exception. 

Response: The commenter’s example 

appears to describe two isolated 

transactions between different parties 

that would each need to satisfy the 

requirements of the isolated transactions 

exception: a transaction between the 

hospital and the group practice, and a 

transaction between the hospital and the 

limited liability company. These 

arrangements could qualify for the 

exception, provided that they are 

structured with separate payments for 

each transaction and all other 

conditions of the exception are satisfied. 

Comment: Two commenters asked for 

clarification regarding post-closing 

adjustments. One commenter stated that 

the 6-month limit on post-closing 

adjustments is too brief. The commenter 

asserted that, as a practical matter, it 

would encourage recalcitrant parties to 

‘‘hold out’’ to increase their bargaining 

leverage. The commenter interpreted the 

exception as not precluding post-closing 

adjustments after 6 months, but 

precluding only other isolated 

transactions. The commenter suggested 

that the commercial reasonableness test 

provided sufficient protections. The 

commenter also requested clarification 

that an adjustment based on a breach of 

a warranty will not be considered a 

post-closing adjustment. The second 

commenter asked that post-closing 

adjustments be permitted for 24 months. 

According to the commenter, many 

purchase and sale agreements provide 

for warranties, representations, and 

indemnities to continue in effect for at 

least one complete audit cycle (that is, 

1 fiscal year plus additional months, as 

needed, to complete the audit) to enable 

the buyer’s auditors to fully examine 

financial statements. 

Response: The exception for isolated 

transactions permits commercially 

reasonable post-closing adjustments 

within the first 6 months following an 

isolated transaction, provided that the 

adjustments do not take into account 

(directly or indirectly) the volume or 

value of referrals or other business 

generated by the referring physician(s). 

After 6 months, any post-closing 

adjustment would be treated as a 

separate, additional transaction that 

would need to satisfy the requirements 

of an exception. Claims based on breach 

of warranty are not considered postclosing adjustments or new transactions; 

rather, they are considered part of the 

original transaction and, therefore, may 

occur at any time without jeopardizing 

compliance with the exception in 

§ 411.357(f). 

Comment: Several commenters were 

concerned with the interplay between 

the definition of ‘‘ownership,’’ which 

includes, for example, a security interest 

in property sold to an entity furnishing 

DHS, and the definition of the term 

‘‘isolated transaction’’ at § 411.351, 

which permits installment payments 

only if the instruments are secured or 

guaranteed by a third party. According 

to the commenter, as a practical matter, 

the result is that a hospital has few 

options if it wants to purchase a 

physician’s equipment or practice using 

installment payments. Another 

commenter asked whether a guarantee 

from an entity furnishing DHS made to 

a physician would create an ownership 

interest in the entity. The commenters 

sought clarification as to how the 

exception would apply to these 

transactions. 

Response: Hospitals and physicians 

can use other arrangements and 

methods (that is, other than installment 

payments made from the hospital to the 

physician) to secure legal obligations 

arising from transactions between them. 

However, we note that, as discussed in 

section VI.A, we do not consider a 

security interest in equipment sold by a 

physician to a hospital and financed 

through a loan from the physician to the 

hospital to be an ownership interest in 

the hospital or a portion of the hospital. 

Where a physician extends a loan to an 

entity and is granted a security interest 

by the entity in the equipment sold by 

the physician to the entity, the 

arrangement creates a compensation 

arrangement (subject to a contrary 

provision in the security instrument or 

agreement of the parties). In response to 

the second comment, a guarantee does 

not create an ownership interest in the 

entity providing the guarantee. 


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G. Remuneration Unrelated to 

Designated Health Services 

Under section 1877(e)(4) of the Act, 

remuneration provided by a hospital to 

a physician that does not relate to the 

furnishing of DHS does not constitute a 

prohibited compensation arrangement. 

The exception does not apply to 

remuneration from a hospital to a 

member of a physician’s immediate 

family, nor does it apply to 

remuneration from entities other than 

hospitals. 

Under Phase II, the exception is 

available only if the remuneration is 

wholly unrelated to the provision of 

DHS (69 FR 16093). Phase II provided 

that, for purposes of the exception, any 

item, service, or cost that could be 

allocated in whole or in part to 

Medicare or Medicaid under applicable 

cost reporting principles is considered 

to be related directly or indirectly to the 

provision of DHS. In addition, 

remuneration is considered related to 

DHS for purposes of this exception if it 

is furnished, directly or indirectly, 

explicitly or implicitly, in a selective, 

targeted, preferential, or conditional 

manner to medical staff or other 

physicians in a position to make or 

influence referrals. The exception does 

not apply to any other remuneration 

that is related in any manner to the 

provision of DHS. This Phase III final 

rule makes no changes to Phase II. 

Comment: Numerous commenters, 

including several hospital trade 

associations, strongly objected to 

§ 411.357(g) as set forth in Phase II. 

According to the commenters, the 

regulation is inconsistent with the 

statutory language and congressional 

intent. Some of the commenters argued 

that the Congress intended that 

hospitals could provide any amount of 

remuneration to physicians provided 

that it was not directly related to the 

provision of DHS services. The 

commenters uniformly urged us to 

reconsider the position we took in Phase 

II in this regard. 

Response: As we discussed in Phase 

II, § 411.357(g) is consistent with the 

statutory scheme and congressional 

intent (69 FR 16093–16094). We do not 

believe that the Congress intended that 

a hospital could provide any 

remuneration it chooses to physicians 

provided that the amount of 

remuneration is not directly related to 

the provision of DHS services. Bona fide 

compensation relationships related in 

any way to the furnishing of DHS 

should be structured to fit in another 

exception. 

Comment: Two commenters asked us 

to provide additional examples of 

arrangements that would qualify under 

the exception in § 411.357(g). Another 

commenter asked for clarification 

regarding what would constitute an 

improper targeted, preferential, or 

selective process for distributing a 

benefit. The commenter asked, for 

example, if a hospital could waive the 

entry fee for its charity golf tournament 

for the entire medical staff and still 

qualify for the exception. 

Response: The determination of 

whether an arrangement is unrelated to 

the furnishing of DHS will require a 

detailed review of the facts and 

circumstances surrounding the 

arrangement. The examples provided in 

Phase II are suitably illustrative (69 FR 

16093–16094). Parties seeking guidance 

on particular transactions may submit a 

request for an advisory opinion. 

Waiving an entry fee would be a 

targeted benefit if applied to the medical 

staff and not to all other participants. 

However, the arrangement between the 

hospital and a particular physician 

could fit into the exception in 

§ 411.357(k) if the value of the total 

nonmonetary compensation to the 

physician during a calendar year is not 

greater than $300 (as adjusted by the 

CPI–U). 

Comment: One commenter requested 

confirmation that, where there are no 

explicit cost reporting guidelines or 

requirements with respect to the 

allowability of an item, it is sufficient to 

apply a good faith reading of general 

Medicare cost principles. 

Response: We understand the 

commenter’s concern to be situations in 

which a hospital does not know and 

could not reasonably be expected to 

know whether a particular item, service, 

or cost could be allocated in whole or 

part to Medicare or Medicaid under cost 

reporting principles, as required by 

§ 411.357(g)(1). In such a situation, we 

would not consider the item, service, or 

cost to relate to the furnishing of DHS 

under § 411.357(g)(1). However, it is not 

sufficient to satisfy § 411.357(g)(1) alone 

in order to qualify for protection under 

the exception. Sections 411.357(g)(2) 

and (g)(3) set forth additional grounds 

for determining that remuneration 

relates to the furnishing of DHS. 

Specifically, remuneration also relates 

to the furnishing of DHS if either: (1) It 

is furnished directly or indirectly, 

explicitly or implicitly, in a selective, 

targeted, preferential, or conditional 

manner to medical staff or other persons 

in a position to make or influence 

referrals; or (2) otherwise takes into 

account the volume or value of referrals 

or other business generated by the 

referring physician. 

Comment: One commenter expressed 

concern that the exception in 

§ 411.357(g) was narrowed so much 

under Phase II that it does not allow 

hospitals to provide assistance with 

malpractice insurance premiums. 

Response: As discussed below in 

section IX.R, assistance with 

malpractice insurance premiums may be 

structured to satisfy the requirements of 

other exceptions, such as the fair market 

value compensation exception 

(§ 411.357(l)), the exception for bona 

fide employment relationships 

(§ 411.357(c)), the exception for 

personal service arrangements 

(§ 411.357(d)), or the exception for 

obstetrical malpractice insurance 

subsidies (§ 411.357(r)). We note that 

the January 1998 proposed rule clearly 

stated that this exception would not 

protect malpractice insurance premium 

subsidies (63 FR 1702). 

H. Group Practice Arrangements With a 

Hospital 

Section 1877(e)(7) of the Act provides 

that an arrangement between a hospital 

and a group practice under which DHS 

are furnished by the group practice but 

are billed by the hospital does not 

constitute a compensation arrangement 

for purposes of the prohibition on 

referrals if certain conditions are met. 

The August 1995 final rule incorporated 

the provisions of section 1877(e)(7) of 

the Act into our regulations in 

§ 411.357(h) (60 FR 41920, 41975). In 

the January 1998 proposed rule, we 

proposed revising § 411.357(h) to make 

several minor changes and to apply the 

provision to all DHS, not just clinical 

laboratory services (63 FR 1669–1670, 

1702–1703). The changes included 

clarifying that the exception protects 

only arrangements that have continued 

in effect, without interruption, since 

December 19, 1989; interpreting the 

regulatory language to allow changes to 

the arrangement over time with respect 

to the services covered by the 

arrangement or the physicians providing 

those services; and clarifying that at 

least 75 percent of the DHS covered 

under the arrangement must be 

furnished to patients of the hospital by 

the group practice under the 

arrangement (63 FR 1702–1703). 

Phase II adopted § 411.357(h) as 

proposed (69 FR 16099). We received no 

comments on this exception and are 

making no changes in this Phase III final 

rule. 

I. Payments by a Physician 

Section 1877(e)(8) of the Act creates 

an exception for certain payments that 

a physician makes to a laboratory in 

exchange for clinical laboratory services 


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or to an entity as compensation for other 

items or services that are furnished at a 

price that is consistent with fair market 

value. 

Phase II implemented section 

1877(e)(8) of the Act in § 411.357(i) by 

making two clarifications (69 FR 16099). 

The first made the exception applicable 

to payments by a physician’s immediate 

family members, as well as to payments 

by a physician. The second clarified that 

the exception does not apply to items or 

services for which there is another 

potentially applicable exception in 

§ 411.355 through § 411.357. This Phase 

III final rule makes no change to this 

exception. However, we are amending 

the exception for fair market value 

compensation in § 411.357(l) to provide 

that that exception covers compensation 

from a physician, provided that all other 

conditions of the exception are satisfied. 

We note that the fair market value 

compensation exception does not 

protect office space lease arrangements; 

arrangements for the rental of office 

space must satisfy the requirements of 

the exception in § 411.357(a). 

Comment: Two commenters objected 

to the provision in § 411.357(i)(2) that 

the exception applies only to items and 

services that are not specifically 

excepted by another exception in 

§ 411.355 through § 411.357. According 

to the commenters, the restriction leaves 

many legitimate purchases of items or 

services by a physician from a DHS 

entity without an available exception. 

The first commenter gave the example 

of the lease of space on a non-exclusive 

basis to a physician. The commenters 

also noted that the statement in Phase 

II that the fair market value 

compensation exception was available 

is incorrect because that exception only 

protects payments to a physician from a 

DHS entity (69 FR 16099). The second 

commenter suggested that we either 

delete language in § 411.357(i) that 

indicates that the fair market value 

compensation exception is available, or 

that we allow the payments by a 

physician exception in § 411.357(i) to be 

generally available (rather than available 

only when another potential exception 

does not apply), except with respect to 

space rental arrangements. 

Response: We continue to believe, as 

we stated in Phase II, that our policy of 

not allowing items and services 

addressed by another exception to be 

covered in this exception is consistent 

with the overall statutory scheme and 

purpose, and is necessary to prevent the 

exception from negating the statute (69 

FR 16099). To that end, we are 

amending the text of the exception for 

fair market value compensation in 

§ 411.357(l) to permit application of that 

exception to arrangements involving fair 

market value compensation to 

physicians from DHS entities, as well as 

to arrangements involving fair market 

value compensation to DHS entities 

from physicians. We believe that this 

approach is consistent with the 

statutory scheme and intent. 

The expansion of the applicability of 

the fair market value compensation 

exception to compensation paid to DHS 

entities by physicians will require 

parties to use the exception in 

§ 411.357(l), rather than the exception in 

§ 411.357(i), when payments by a 

physician to a hospital are, for example, 

for equipment leases of less than 1 year. 

Upon further consideration, we believe 

that the required application of the fair 

market value compensation exception, 

which contains conditions not found in 

the less transparent exception for 

payments by a physician to a hospital, 

further reduces the risk of program 

abuse. As discussed below in section 

IX.L, we have amended the text of the 

exception for fair market value 

compensation in § 411.357(l) to exclude 

arrangements for the rental of office 

space. The only exception applicable to 

arrangements for the rental of office 

space is § 411.357(a). 

J. Charitable Donations by a Physician 

Using our authority under section 

1877(b)(4) of the Act, in Phase II, we 

established an exception in § 411.357(j) 

for bona fide charitable donations made 

by a physician (or his or her immediate 

family member) to an entity furnishing 

DHS. To qualify for the exception, 

donations must be made to an 

organization exempt from taxation 

under the Internal Revenue Code (or to 

an exempt supporting organization, 

such as a hospital foundation). The 

exception provided that the donation 

may not be solicited or made in any 

manner that reflects the volume or value 

of referrals or other business generated 

between the parties. As with all 

regulatory exceptions promulgated 

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

protected arrangement must not violate 

the anti-kickback statute or billing or 

claims submission rules. This Phase III 

final rule clarifies that the donation may 

not be solicited or offered in any 

manner that reflects the volume or value 

of referrals. 

Comment: A hospital association 

objected to the requirement in 

§ 411.357(j)(2) that the donation cannot 

be made in a manner that takes into 

account referrals or other business 

generated between the physician and 

the entity furnishing DHS. According to 

the commenter, a hospital cannot 

control how the donor makes the 

payment. The commenter asked that the 

exception be conditioned only upon the 

manner in which the charitable 

donations are solicited, rather than the 

manner in which they are both solicited 

and made. 

Response: We disagree that only the 

manner of the solicitation should be 

relevant for this exception. We agree, 

however, that the phrase ‘‘nor made, in 

any manner’’ might be interpreted as 

implying that, irrespective of whether 

the entity had knowledge of an 

improper purpose of the donation, the 

donation is outside the protection of the 

exception simply if the physician 

intended that the donation was in 

exchange for future or past referrals or 

other business generated between the 

parties. Accordingly, we have amended 

§ 411.357(j) to provide that the entity 

may not solicit the donation, nor may 

the physician offer the donation, in any 

manner that takes into account the 

volume or value of referrals or other 

business generated between the 

physician and the entity. 

Comment: Two commenters asked for 

further guidance regarding acceptable 

fundraising efforts directed at medical 

staff. One of the commenters 

emphasized that such efforts are very 

important to hospitals. 

Response: We recognize the 

importance of fundraising to nonprofit 

health care entities and the crucial role 

often played by medical staff in 

fundraising. The regulation is 

sufficiently clear that it permits 

solicitations of the medical staff 

provided that neither the solicitation 

nor the offer of a contribution from the 

physician takes into account the volume 

or value of referrals or other business 

generated between the physician and 

the hospital. 

Comment: Two commenters asserted 

that the purpose of the law is to regulate 

payments to physicians from entities 

furnishing DHS, not contributions from 

the physicians to the entities. One of the 

commenters suggested that we define 

remuneration to exclude charitable 

donations from physicians. 

Response: We disagree with the 

commenters. All financial relationships 

between a DHS entity and a physician 

who refers Medicare patients to the 

entity for DHS must comply with the 

physician self-referral provisions. 

Contributions from a physician to a 

hospital are remuneration and must 

comply with an exception. Moreover, 

some ostensible charitable donations 

have been abusive. The current 

regulation adequately protects 

legitimate fundraising while imposing 

minimal restrictions. 


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K. Nonmonetary Compensation 

In Phase I, using our authority under 

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

established a new regulatory exception 

to protect nonmonetary compensation 

provided to physicians up to $300 per 

year. Phase II provided that 

nonmonetary compensation that does 

not exceed $300 per year does not create 

a compensation arrangement if—

• The compensation is not 

determined in any manner that takes 

into account the volume or value of 

referrals or other business generated by 

the referring physician; 

• The compensation is not solicited 

by the physician or the physician’s 

practice; and 

• The compensation arrangement 

does not violate the anti-kickback 

statute or other Federal or State law. 

In addition, Phase II provided that the 

limit on the nonmonetary compensation 

would be adjusted for inflation to the 

nearest whole dollar effective January 1 

of each calendar year using the increase 

in the Consumer Price Index-Urban All 

Items (CPI–U) for the 12-month period 

that ends the previous September 30. 

The nonmonetary compensation limit 

increased to $308 for CY–2005, $322 for 

CY–2006, and $329 for CY–2007. We 

display the increase in the CPI–U and 

these new limits on the physician selfreferral Web site at http:// 

www.cms.hhs.gov/ 

PhysicianSelfReferral/10_CPIU_Updates.asp. 

This Phase III final rule makes two 

substantive changes to § 411.357(k): (1) 

The revised exception allows physicians 

to repay certain excess nonmonetary 

compensation within the same calendar 

year to preserve compliance with the 

exception; and (2) the revised exception 

allows entities, without regard to the 

dollar limitation in § 411.357(k)(1), to 

provide one medical staff appreciation 

function (such as a holiday party) for 

the entire medical staff per year. We are 

also clarifying that the aggregate limit in 

§ 411.357(k)(1) is to be calculated on a 

calendar year basis. 

Comment: Several commenters asked 

for clarification regarding the treatment 

under § 411.357(k) of specific activities. 

Two commenters believed that meals 

and reimbursement to physicians on a 

DHS entity’s board should not count 

against the monetary limit, provided 

that the compensation is consistent with 

that provided to other non-physician 

board members. Other commenters 

asked that meals or other remuneration 

given to staff members for activities in 

connection with hospital business 

should not be subject to the limit. 

Examples provided by commenters 

included off-site meetings of the 

medical staff due to space constraints, 

assistance in recruiting, hospital 

leadership meetings, and other business 

meetings. 

Response: We previously addressed 

the issues raised by these commenters 

in Phase II (69 FR 16113–16114). There, 

we said that, ‘‘[w]hether a remunerative 

arrangement between specific parties 

would fit in an exception would depend 

on the particular facts and 

circumstances. For example, some 

dinners and meetings might fit in the 

exception for nonmonetary 

compensation [in] § 411.357(k) or the 

exception for fair market value 

compensation [in] § 411.357(l); others 

would not. Nothing in the statute 

precludes modest meals in connection 

with services provided by or to Boards 

of Trustees, Boards of Directors, or 

hospital administrators, and many of 

these activities can easily fit in an 

exception’’ (69 FR 16114). We also 

noted that our regulations do not 

address every possible relationship 

between physicians and DHS entities of 

the type addressed by the commenter, 

nor could they. In some cases, 

relationships clearly will not involve a 

transfer of remuneration and thus will 

not trigger section 1877 of the Act. In 

others, an activity might involve the 

transfer of remuneration, and there may 

be no readily apparent exception. We 

expect that questions of the kind posed 

by the commenter will arise with some 

frequency. Parties may submit advisory 

opinion requests about specific 

arrangements according to § 411.370 (69 

FR 16114). 

Comment: One commenter sought 

clarification as to whether the dollar 

limit on nonmonetary compensation 

applied to the legal entity providing the 

compensation (such as a parent health 

system) or to the DHS entity. The 

commenter noted that some large 

systems could be hurt if the agency 

imposed aggregate limits, and suggested 

that the limit should be on each DHS 

provider. 

Response: The limit applies to each 

DHS entity, and not to a parent health 

system. Remuneration provided by a 

parent health system to a referring 

physician could create an indirect 

compensation arrangement between the 

referring physician and the entity 

furnishing the DHS (for example, if the 

referring physician has a compensation 

relationship with the parent health 

system, which has an ownership 

interest in the DHS entity). 

Comment: Two commenters asked 

that the cap be raised. One suggested 

$500 and the other $600. 

Response: We believe that the limit 

($329 in CY–2007) is appropriate. As 

explained above and in Phase II, we 

have indexed the amount so that it will 

increase to account for inflation (69 FR 

16112). 

Comment: One commenter stated that 

inadvertently exceeding the yearly 

dollar limit on nonmonetary 

compensation could lead to disastrous 

and uncertain results. The commenter 

asserted that the harsh result should be 

mitigated by permitting the excessive 

payment to be cured by the physician’s 

repayment of the excess. The 

commenter stated that errors can occur 

through, among other things, 

erroneously valuing a benefit, not 

properly accounting for a benefit, or not 

being aware of a family relationship 

between a physician and another person 

(including another physician). Another 

commenter asserted that, by their 

nature, gifts of nonmonetary 

compensation are very difficult to 

account for in traditional accounting 

systems. Tracking of such benefits is 

usually a manual process, based on the 

submission of reports from department 

heads and other members of hospital 

management. In addition, once the 

hospital becomes aware of a benefit 

provided to physicians, it is sometimes 

faced with difficult questions of how to 

value the benefit and allocate it among 

the physicians. 

Response: Hospitals and other DHS 

entities that wish to use the exception 

for nonmonetary compensation should 

take steps to ensure the implementation 

of effective compliance systems, 

including appropriate tracking and 

valuation mechanisms. DHS entities 

should not provide benefits to 

physicians about which the entities are 

unaware or for which they are unable to 

account. However, we are persuaded to 

mitigate the potentially serious 

consequences of exceeding the 

nonmonetary compensation limits 

where the violation is inadvertent and 

the value of the overage is limited. 

Therefore, we are adding new 

subparagraph (3) to § 411.357(k) to 

provide some protection against 

inadvertent violations. Under this new 

provision, nonmonetary compensation 

will be deemed to be within the limit set 

forth in § 411.357(k)(1) if the entity has 

inadvertently exceeded the limit by no 

more than 50 percent during a calendar 

year and the physician repays the excess 

compensation within the earlier of: (1) 

The end of the calendar year in which 

the excess nonmonetary compensation 

was received; or (2) 180 days from the 

date the excess nonmonetary 

compensation was received. For 

example, if an entity gave nonmonetary 


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compensation with a value of $250 to a 

physician on April 15 and then 

inadvertently made another gift, this 

time valued at $200, to the physician on 

August 15, the total nonmonetary 

compensation to the physician is $450, 

which is less than 150 percent of the 

amount allowed ($329 × 150 percent = 

$493.50). If the physician repays the 

excess of $121 ($450 ¥ $329 = $121) by 

December 31, the entity continues to 

satisfy the requirements of the 

exception. An entity will not be allowed 

to use this new provision more than 

once every 3 calendar years with respect 

to the same physician. With respect to 

DHS referrals made by a physician after 

his or her receipt of excess nonmonetary 

compensation, any billing or claims 

submission by the entity for such 

referrals will not violate the prohibition 

in section 1877(a)(1)(B) of the Act, 

provided that the deeming provision set 

forth in § 411.357(k)(3) and the 

remaining conditions of the 

nonmonetary compensation exception 

are satisfied. Once a DHS entity 

becomes aware that it has provided to 

a physician excess nonmonetary 

compensation that could qualify for the 

deeming provision, it would be prudent 

for the DHS entity to delay any billing 

and claims submission for the 

physician’s DHS referrals until after the 

physician has returned the nonmonetary 

compensation in accordance with 

§ 411.357(k)(3). 

Comment: One commenter stated that 

its physician relations department had 

routinely arranged occasional small 

services for physicians as tokens of 

appreciation. Events included free 

haircuts, manicures, massages, golf 

tournaments, and tickets to plays and 

sporting events. The commenter 

requested clarification concerning 

whether the cap on nonmonetary 

compensation applied to the hospital’s 

cost of the item or the fair market value 

of the item to the physician. The 

commenter suggested that the exception 

exclude one-time annual events 

provided that the event is open to the 

entire medical staff or a specialty, the 

fair market value of the event is less 

than $200 per attendee, and that there 

are no more than three such events per 

year. In addition, the commenter 

believed that hospitals should be 

permitted to give any staff member a 

token of appreciation annually if the fair 

market value does not exceed $100 and 

the provision of the gift is not tied to 

referrals or other business generated 

between the parties. 

Response: We believe that the limit on 

nonmonetary compensation per 

calendar year period is sufficient to 

provide for tokens of appreciation. We 

note that we do not agree that all of the 

items listed by the commenter are 

‘‘small.’’ The cap under the 

nonmonetary compensation exception 

applies to the fair market value of the 

item, which is the amount the physician 

would have paid if he or she had 

purchased the item or service in a fair 

market value transaction. However, we 

believe that allowing one annual, local 

social event for the entire medical staff 

would not create a risk of program or 

patient abuse. (This is in addition to the 

nonmonetary compensation permitted 

under § 411.357(k).) Accordingly, we are 

modifying the exception in § 411.357(k) 

to permit hospitals and other entities 

with formal medical staffs to provide 

one local medical staff appreciation 

event per year open generally to all 

medical staff (that is, all physicians and 

other medical practitioners who order 

hospital services for patients). The 

entity’s cost per medical staff member 

for such event will not be counted 

against the limit set forth in 

§ 411.357(k)(1) (as adjusted under 

§ 411.357(k)(2)). However, any gifts or 

gratuities provided in connection with 

the medical staff appreciation event 

(such as door prizes) would be subject 

to the limit in § 411.357(k)(1) (as 

adjusted under § 411.357(k)(2)). 

L. Fair Market Value Compensation 

In Phase I, we finalized an exception 

for fair market value compensation 

arrangements that was originally 

proposed in the January 1998 proposed 

rule (66 FR 917–919). The exception, 

which was promulgated using our 

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

Act, protects compensation from a DHS 

entity to a physician, an immediate 

family member of a physician, or a 

group of physicians for the provision of 

items or services by the physician or 

group to the DHS entity, provided that, 

generally—

• The arrangement is set out in a 

writing that is signed by the parties and 

describes the items or services; 

• The writing sets out the timeframe 

for the arrangement, subject to some 

restrictions; 

• The writing specifies the 

compensation, which must be set in 

advance, consistent with fair market 

value, and not determined in a manner 

that takes into account the volume or 

value of any referrals or other business 

generated by the referring physician; 

• The arrangement is commercially 

reasonable and furthers the legitimate 

business purposes of the parties; and 

• The arrangement does not violate 

the anti-kickback statute or involve the 

counseling or promotion of any business 

arrangement that violates Federal or 

State law. Phase II made no substantive 

changes to § 411.357(l). This Phase III 

final rule makes one substantive and 

one clarifying change to § 411.357(l). 

Specifically, and as discussed at section 

IX.I, we are amending the exception to 

provide that it may apply to 

compensation provided to a physician 

from an entity and to compensation 

provided to an entity from a physician. 

We are also clarifying that the exception 

is not applicable to leases for office 

space; rather, such lease arrangements 

must comply with § 411.357(a). 

Comment: One commenter objected to 

our position that physician recruitment 

is not a service to the hospital and, 

therefore, cannot qualify under 

§ 411.357(l), the fair market value 

compensation exception. 

Response: We disagree with the 

commenter for the reasons stated in 

Phase II (69 FR 16096). There, we said 

that ‘‘the physician’s relocation is not 

properly viewed as a benefit to the 

hospital, except as a potential source of 

DHS referrals—a consideration that is 

antithetical to the premise of the 

statute.’’ Money spent on recruitment of 

physicians who will not be employed by 

the hospital offering the recruitment 

incentives is essentially a contribution 

made for the benefit of the community 

and not a payment for services provided 

to the hospital. Therefore, recruitment 

incentives offered by hospitals must be 

structured to satisfy the requirements of 

the recruitment exception or another 

exception, such as the exception for 

bona fide employment relationships or 

obstetrical malpractice insurance 

subsidies. 

Comment: One commenter objected to 

our position that a lease of office space 

cannot qualify for the fair market value 

compensation exception in § 411.357(l) 

because it is not an ‘‘item.’’ The 

commenter noted that elsewhere in 

Phase II, we stated that a space lease is 

an item or service when a physician is 

the lessee (69 FR 16111). 

Response: In Phase II, we explained 

that we could not expand the exception 

to be as comprehensive as the 

commenters advocated without posing a 

risk of fraud or abuse (69 FR 16111–

16112). We do not believe that the lease 

of office space is an ‘‘item or service.’’

Moreover, because space leases have 

been subject to abuse, we believe that 

the use of the fair market value 

compensation exception for space leases 

may pose a risk of program or patient 

abuse. Therefore, a space lease must 

qualify under the exception for the 

rental of office space in § 411.357(a), 

which contains more restrictive 

conditions. We have modified the 


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regulatory text in § 411.357(l) 

accordingly. 

Comment: The same commenter 

asked us to provide bright-line guidance 

as to what is fair market value. The 

commenter recommended that there be 

a rebuttable presumption that a 

transaction is fair market value. 

Response: The statute and regulations 

provide a definition of fair market value 

for purposes of section 1877 of the Act. 

The parties to a transaction or an 

arrangement are in the best position to 

ensure that the remuneration is at fair 

market value and to document it 

contemporaneously. If questioned by 

the government, the burden would be 

on the parties to explain how the 

transaction meets the fair market value 

compensation exception requirements. 

We are not adopting the suggestion that 

a transaction be presumed to be fair 

market value. 

M. Medical Staff Incidental Benefits 

In Phase I, we established a new 

exception in § 411.357(m) for medical 

staff incidental benefits (66 FR 920–

922). This exception is limited to 

benefits, such as parking, cafeteria 

meals, and lab coats, that are 

customarily provided by a hospital to 

members of its medical staff and that are 

incidental to services being provided by 

the medical staff at the hospital. 

In Phase II, we clarified that the 

exception is not intended to cover the 

provision of tangential, off-site benefits, 

such as restaurant dinners or theater 

tickets, which must comply with the 

exception for nonmonetary 

compensation in § 411.357(k) (69 FR 

16112–16113). We also made other 

clarifications in § 411.357(m)(1) and 

(m)(2), and stated in § 411.357(m)(8) 

that certain institutional entities (such 

as long-term care facilities), federally 

qualified health centers, and other 

health care clinics, that have bona fide 

medical staffs are permitted to provide 

incidental benefits to those staffs on the 

same terms and conditions that apply to 

hospitals under the exception (69 FR 

16112–16114). Phase II also provided 

that the $25 limit on the value of each 

medical staff incidental benefit would 

be adjusted in the same manner as the 

limit on nonmonetary compensation in 

§ 411.357(k). The limit for each medical 

staff incidental benefit for purposes of 

§ 411.357(m) increased to $26 for CY 

2005, $27 for CY 2006, and $28 for CY 

2007. 

We are making no substantive 

changes to this exception in this Phase 

III final rule. 

Comment: One commenter requested 

the elimination of the ‘‘on campus’’

requirement in § 411.357(m). According 

to the commenter, the limitation is not 

necessary because the exception already 

requires the physician to be on rounds 

or otherwise engaged in services or 

activities that benefit the hospital or its 

patients. Alternatively, the commenter 

suggested that we define campus as a 

hospital and all facilities owned or 

operated by the hospital. 

Response: We disagree with the 

commenter. The ‘‘on campus’’

limitation is integral to the exception 

and an important safeguard against 

program and patient abuse. A hospital’s 

campus includes all facilities operated 

by a hospital except for facilities that 

have been leased for non-hospital 

purposes and are not used exclusively 

by the hospital. 

Comment: One commenter requested 

clarification as to whether a hospital 

may provide a physician with a device 

that is used to access patients who are 

at home or at work or personnel who are 

in locations other than the hospital 

campus. 

Response: A hospital may not provide 

a device used to access patients who are 

at home or at work or personnel who are 

in locations other than the hospital 

campus under this exception. A hospital 

can provide a physician with a device 

that is used to access patients and 

personnel on the hospital’s campus, 

even if the physician is not on the 

campus. In Phase II, we indicated that 

the exception (as revised in that 

rulemaking) covers dedicated pagers or 

two-way radios used to facilitate instant 

communication with physicians in 

emergency or other urgent patient care 

situations when they are away from the 

hospital campus (69 FR 16113). A 

physician may use the dedicated pager 

or two-way radio: (1) to contact the 

physician’s patients (who are hospital 

patients) only when the patients are on 

the hospital’s campus; or (2) to contact 

personnel only when the personnel are 

on the hospital campus. We note that 

some arrangements involving health 

information technology used for 

patients or personnel who are not on the 

hospital campus may qualify under the 

exception in § 411.357(u) for 

community-wide health information 

systems or the exceptions in 

§ 411.357(v) and (w) for arrangements 

involving the provision of electronic 

prescribing technology and electronic 

health records technology, respectively. 

Comment: One commenter noted that, 

whereas § 411.357(m) specifically 

provides that mere identification of 

medical staff on a hospital website or in 

hospital advertising is covered by the 

exception, the preamble to Phase II 

states that advertising or promoting a 

physician’s private practice would not 

satisfy the requirements of the exception 

(69 FR 16113). The commenter asserted 

that it is unclear whether hospital 

physician referral services would be 

considered advertising or promotion of 

the physician. The commenter 

requested clarification that a hospital’s 

physician referral service could qualify 

for the exception in § 411.357(m). 

Response: A hospital’s physician 

referral service may be considered a 

medical staff incidental benefit and 

qualify for the exception if all of the 

requirements of § 411.357(m) are 

satisfied. Whether a hospital’s physician 

referral service would constitute 

advertising or promotion of a physician 

or his or her private practice would 

depend on the nature of the particular 

referral service; however, many typical 

referral services constitute advertising 

or promotional activity. We note that 

hospital referral services sometimes 

involve payments by physicians to the 

hospital that operates the referral 

service. These payments, which are 

often assessed based on the costs of 

operating the referral service, would 

need to satisfy the requirements of an 

exception. Moreover, these payments 

also potentially implicate the antikickback statute. The payments could be 

structured to satisfy the exception in 

§ 411.357(q) for referral services, which 

protects remuneration that satisfies all 

of the conditions of the safe harbor for 

referral services in § 1001.952(f). 

N. Risk-Sharing Arrangements 

In Phase I, we created a new 

exception for remuneration made 

pursuant to a bona fide ‘‘risk-sharing 

arrangement,’’ out of concern about the 

impact of the January 1998 proposed 

rule on commercial and employerprovided managed care arrangements 

(66 FR 912). The risk-sharing 

arrangements exception in § 411.357(n) 

applies to compensation (including, but 

not limited to, withholds, bonuses, and 

risk pools) between a managed care 

organization or an independent 

physician association and a physician 

(either directly or indirectly through a 

subcontractor) for services provided to 

enrollees of a health plan, provided that 

the arrangement does not violate the 

anti-kickback statute or any laws or 

regulations governing billing or claims 

submission. In Phase II, we responded 

to several comments on the new risksharing arrangements exception in 

§ 411.357(n) but made no changes to the 

exception (69 FR 16114). We received 

no comments on this exception and are 

making no changes to § 411.357(n) in 

this Phase III final rule. 


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O. Compliance Training 

In the Phase I rulemaking, we 

exercised our authority under section 

1877(b)(4) of the Act to create an 

exception for compliance training 

provided by a hospital to physicians 

who practice in the hospital’s local 

community or service area (66 FR 915, 

921). In Phase II, we modified the 

exception to include compliance 

training provided to a physician or a 

physician’s office staff by any DHS 

entity and explicitly included training 

addressing the requirements of any 

Federal, State or local law governing the 

activities of the party receiving the 

training (69 FR 16114–16115). The 

Phase II exception excludes any 

programs for which continuing medical 

education (CME) credit is available. 

This Phase III final rule amends 

§ 411.357(o) to permit compliance 

training programs that involve CME 

credit, provided that compliance 

training predominates. 

Comment: Several commenters 

objected that, under Phase II, 

§ 411.357(o) does not protect any 

compliance training that also qualifies 

for CME credit. According to the 

commenters, provided that the 

compliance training program qualifies 

under the exception, it should not 

matter whether a physician receives 

CME credit. 

Response: We agree that, if a program 

offers CME credit for compliance 

training, such compliance training 

should nonetheless be able to satisfy the 

requirements of § 411.357(o). However, 

we are concerned that the exception not 

be used to protect CME programs that 

are only incidentally about or related to 

compliance training. For the reasons set 

forth in Phase I and Phase II, we are not 

prepared to except generally from the 

physician self-referral law CME 

programs funded by DHS entities. 

Programs offering CME credit, when 

provided to a referring physician, have 

substantial value to the physician, who 

is required to obtain such CME credit 

for State licensure purposes. We are also 

not prepared to except CME programs 

merely because they contain a 

compliance training component. 

Instead, we are revising the exception in 

§ 411.357(o) to cover all training 

programs of which compliance training 

is the primary purpose, including any 

genuine compliance training program 

that happens to qualify for CME credit. 

The revised exception does not protect 

traditional CME content under the guise 

of ‘‘compliance training.’’ The exception 

may not be used for other programs that 

are not compliance training programs, 

regardless of whether such programs 

may also provide CME. 

Comment: A commenter requested 

clarification that internet-based 

compliance training can qualify as local 

training. The commenter also noted that 

many small- and medium-sized 

communities lack the resources to 

provide specialized compliance training 

and should be permitted to provide 

reimbursement for a physician’s 

reasonable out-of-pocket expenses to 

obtain training outside of the local 

community. 

Response: Section 411.357(o) protects 

compliance training provided by an 

entity to a physician (or to the 

physician’s immediate family member 

or office staff) who practices in the 

entity’s local community or service area, 

provided that the training is held in the 

local community or service area. With 

respect to on-line compliance training, 

if the physician (or the physician’s 

immediate family member or office 

staff) accesses the on-line training while 

in a location that is in the entity’s local 

community or service area, the 

compliance training would qualify for 

the exception in § 411.357(o), provided 

that all other requirements of the 

exception are satisfied. We disagree that 

an entity should be permitted to 

reimburse out-of-pocket expenses (such 

as travel expenses) for physicians to 

obtain training outside of the entity’s 

local community or service area. We are 

not persuaded that permitting payment 

of such expenses does not create a risk 

of program or patient abuse. 

P. Indirect Compensation Arrangements 

In Phase I, we established a new 

exception for indirect compensation 

arrangements using our authority under 

section 1877(b)(4) of the Act (66 FR 

865). Indirect compensation 

arrangements qualify for the exception if 

the following conditions are satisfied: 

• The compensation received by the 

referring physician (or immediate family 

member) from the person or entity in 

the chain of financial relationships with 

which the referring physician (or 

immediate family member) has the 

direct financial relationship is fair 

market value for the items or services 

provided under the arrangement and 

does not take into account the volume 

or value of referrals or other business 

generated by the referring physician for 

the entity furnishing the DHS; 

• The compensation arrangement 

between the person or entity in the 

chain with which the referring 

physician (or immediate family 

member) has the direct financial 

relationship is set out in writing, signed 

by the parties, and specifies the items or 

services covered by the arrangement (in 

the case of a bona fide employment 

relationship, the arrangement need not 

be set out in a written contract, but it 

must be for identifiable services and be 

commercially reasonable even if no 

referrals are made to the employer); and 

• The compensation arrangement 

does not violate the anti-kickback 

statute or any laws or regulations 

governing billing or claims submission. 

(66 FR 867.) 

Phase II made no substantive changes 

to the indirect compensation 

arrangements exception. This Phase III 

final rule similarly makes no changes to 

the exception. 

We received a number of comments 

regarding § 411.357(p), the indirect 

compensation arrangements exception. 

Some commenters questioned how the 

indirect compensation arrangements 

exception applies in circumstances 

involving a compensation arrangement 

between a DHS entity and a group 

practice that employs or contracts with 

referring physicians. As discussed in 

section VI.B, we have revised 

§ 411.354(c), which specifically 

addresses direct and indirect 

compensation arrangements between 

DHS entities and physicians. Under the 

revised rule, the relationship between 

the physician and his or her physician 

organization (as defined in this Phase III 

final rule at § 411.351) is disregarded 

and the physician ‘‘stands in the shoes’’

of his or her physician organization. The 

effect of this new provision is that many 

arrangements that would have 

constituted indirect compensation 

arrangements if analyzed under Phase I 

and Phase II are now deemed to be 

direct compensation arrangements, and 

the indirect compensation arrangements 

exception cannot be used. Moreover, 

under this Phase III final rule, many 

arrangements that may not have met the 

definition of an ‘‘indirect compensation 

arrangement’’ under the Phase I and 

Phase II analysis will constitute direct 

compensation arrangements that must 

satisfy the requirements of an exception 

in order for the physician to make DHS 

referrals to the entity furnishing DHS. 

As discussed above in section VI, the 

‘‘stand in the shoes’’ provisions in 

§ 411.354(c) are applicable as of the 

effective date of this Phase III final rule. 

However, arrangements that satisfied 

the Phase II definition of ‘‘indirect 

compensation arrangement’’ and the 

requirements of § 411.357(p) as of the 

publication date of this final rule need 

not be amended during the original or 

current renewal term of the arrangement 

to comply with the Phase III final 

regulations. 


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Comment: One commenter stated that 

the indirect compensation arrangements 

exception was difficult to apply because 

the DHS entity had no ready ability to 

monitor or assess the basis of payment 

being made by the intervening entity to 

the physician. The commenter 

suggested that we expand the exception 

by adding an alternative whereby the 

arrangement would be protected if: (1) 

The direct payment made by the DHS 

entity to the intervening entity complies 

with an exception; (2) the physician 

provides a written representation that 

his or her compensation from the 

intervening entity is not based on 

referrals; and (3) the DHS entity has no 

actual knowledge of the falsity of the 

representation. Another commenter 

stated that the exception was unfair to 

hospitals and other DHS entities 

because compliance turns on the 

physician’s compensation arrangement 

with the intervening entity, and 

hospitals have no control over those 

compensation arrangements. 

Response: We believe that the new 

‘‘stand in the shoes’’ provision will 

substantially address the commenters’

concerns. Under that provision, many 

arrangements will use direct 

compensation arrangements exceptions 

(for example, personal service 

arrangements, fair market value 

compensation, office space rental, or 

equipment rental) rather than the 

indirect compensation arrangements 

exception in § 411.357(p). We perceive 

no unfairness to DHS entities, because 

the definition of an ‘‘indirect 

compensation arrangement’’ includes a 

knowledge element. 

Comment: Several commenters 

requested confirmation that, if there 

exists an indirect compensation 

arrangement involving a hospital and a 

physician in the group practice and the 

arrangement qualifies for the indirect 

compensation arrangements exception, 

the direct compensation arrangement 

between the hospital and the group 

practice would not also have to satisfy 

the requirements of a direct 

compensation arrangements exception, 

such as those for the rental of office 

space or personal service arrangements. 

The commenters noted that the indirect 

compensation arrangements exception 

was considerably more flexible because, 

for example, the arrangement could be 

amended at any time. 

Other commenters wanted 

clarification that, in an identical 

situation (that is, a chain of financial 

relationships involving a hospital and a 

group practice and the group practice’s 

physicians), referrals by the physicians 

to the hospital would be protected, 

provided that the financial relationship 

between the hospital and the group 

practice complied with one of the direct 

compensation arrangements exceptions. 

One commenter requested confirmation 

that, whenever a direct or indirect 

compensation arrangements exception 

is applicable, the parties would be 

protected from the referral prohibition 

provided that they complied with any 

one of the potentially applicable 

exceptions. 

Response: As noted above, the new 

‘‘stand in the shoes’’ provision should 

address many of these commenters’

concerns. Under this final rule, 

physicians ‘‘stand in the shoes’’ of 

physician organizations, including 

group practices. This means that, in the 

case of a chain of financial relationships 

involving a hospital, a group practice, 

and the group practice’s physicians, the 

physicians ‘‘stand in the shoes’’ of their 

group and the financial relationship at 

issue is the direct relationship between 

the hospital and the group practice. The 

direct relationship could satisfy the 

requirements of any applicable direct 

compensation arrangements exception. 

The indirect compensation 

arrangements exception would not 

apply. 

Where, after applying the ‘‘stand in 

the shoes’’ provision, an arrangement 

still meets the definition of an indirect 

compensation arrangement in 

§ 411.354(c)(2) (for example, a chain of 

financial relationships involving a 

hospital, a leasing company, and a 

physician), the only available exception 

is the indirect compensation 

arrangements exception. As we 

explained in Phase I and Phase II, 

indirect compensation arrangements 

cannot fit in any of the direct 

compensation arrangements exceptions; 

the only available exception for an 

arrangement that meets the definition of 

an ‘‘indirect compensation 

arrangement’’ is the indirect 

compensation arrangements exception 

(66 FR 866–867, 69 FR 16060–16061). 

To satisfy the requirements of the 

indirect compensation arrangements 

exception, it is not necessary for each 

link in the chain of financial 

relationships to also satisfy the 

requirements of a separate exception. 

Consistent with the statutory scheme, 

the only financial relationship that 

triggers liability under section 1877 of 

the Act is the financial relationship 

between the DHS entity and the 

referring physician. (66 FR 864.) 

Comment: Two commenters asked for 

confirmation that a contract based on a 

percentage of collections can satisfy the 

requirement in the indirect 

compensation arrangements exception 

that the compensation be fair market 

value and not determined in any 

manner that takes into account the 

volume or value of referrals or other 

business generated by the referring 

physician for the DHS entity. The 

commenter gave the example of a 

hospital contracting for outpatient 

radiology with a joint venture owned by 

the hospital and physicians, and basing 

payment on a percentage of collections. 

This commenter stated that, because the 

hospital is billing and collecting 

payment for the services, it is the entity 

furnishing DHS for purposes of the 

physician self-referral law. This 

commenter noted that, in Phase II, we 

acknowledged that the position we took 

in Phase I on percentage compensation 

arrangements was overly restrictive and 

that we amended § 411.354(d)(1) to 

permit percentage compensation 

arrangements under certain conditions 

(69 FR 16068). The commenter stated 

that, if the percentage compensation 

arrangement is at fair market value and 

is not inflated to compensate for the 

generation of business, the parties 

should be entitled to rely on the indirect 

compensation arrangements exception 

for the transaction described. 

Response: The discussion in Phase II 

regarding percentage compensation 

arrangements and the modification to 

§ 411.354(d)(1) pertained to the ‘‘set in 

advance’’ requirement that is contained 

in certain exceptions, but not in the 

indirect compensation arrangements 

exception. The joint venture 

relationship between the hospital and 

the physicians creates an indirect 

compensation arrangement between the 

hospital and the physicians that must 

satisfy the requirements of an exception. 

A percentage contract as described by 

the commenter will cause the 

arrangement to fall outside the indirect 

compensation arrangements exception if 

the return to the physician from the 

radiology joint venture takes into 

account in any manner the physician’s 

referrals to the hospital (whether or not 

these referrals involve services provided 

by the joint venture). Moreover, a 

second indirect compensation 

arrangement exists between the hospital 

and the physicians, created by virtue of 

the ownership interest that does not 

meet an ownership exception (which, 

thus, creates a compensation 

arrangement), in the chain of 

relationships that runs: hospital—

radiology venture—physicians. This 

arrangement would also need to satisfy 

the requirements of the indirect 

compensation arrangements exception. 

With respect to the second indirect 

compensation arrangement, the inquiry 

would be whether the compensation 


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under the percentage contract between 

the hospital and the radiology venture 

(the compensation arrangement nearest 

the referring physician) is fair market 

value not taking into account in any 

manner the volume or value of referrals 

or other business generated by the 

referring physician. We note that the 

indirect compensation arrangements 

exception requires that the 

compensation ‘‘received’’ by the 

referring physician (or immediate family 

member) is fair market value for services 

and items provided. A compensation 

arrangement based on a percentage of 

collections may not, depending on how 

the actual collections progress, result in 

fair market value received by the 

referring physician (or immediate family 

member). 

Comment: Two commenters requested 

clarification regarding the potential 

application of the indirect 

compensation arrangements exception 

to medical foundations. One of the 

commenters noted that, whereas the 

agency had suggested that the personal 

service arrangements exception was 

available, most medical foundations 

contract with a physician group, thereby 

creating an indirect financial 

relationship between the foundation 

and the physicians. The commenter 

asked whether a group: (1) That 

received a percentage of collections 

from the foundation; (2) in which the 

physicians were both employees and 

shareholders; and (3) that compensated 

physicians based on RVUs and quality 

measures, would qualify under the 

indirect compensation arrangements 

exception. 

Response: The new stand in the shoes 

provision should address the 

commenters’ concerns. Physicians will 

stand in the shoes of their group 

practices. Thus, in the example given by 

the commenter, the arrangement 

between the medical foundation (as 

DHS entity) and the referring physicians 

would be treated as a direct 

compensation arrangement (rather than 

an indirect compensation arrangement) 

and the personal service arrangements 

exception would apply, provided that 

all conditions of the exception are 

satisfied. In section VI.C, we addressed 

the treatment of percentage 

compensation in exceptions, such as the 

personal service arrangements 

exception, that include the ‘‘set in 

advance’’ requirement. (If, by way of 

example, the hospital were to contract 

with a medical foundation for services 

provided to the hospital by the 

physician group with which the 

foundation contracts, the arrangement 

created between the hospital and the 

group physicians would be an indirect 

compensation arrangement that would 

need to satisfy the requirements of the 

indirect compensation arrangements 

exception. The physicians would stand 

in the shoes of their group practice, but 

not in the shoes of the foundation.) 

Comment: One commenter asked 

whether a DHS entity that intentionally 

restructures an unprotected direct 

compensation arrangement to form a 

protected indirect compensation 

arrangement is engaging in a prohibited 

circumvention scheme under section 

1877(g)(4) of the Act. The commenter 

described a situation in which a 

hospital elects to contract with an 

intervening entity for the medical 

director services of a physician rather 

than contract with the physician 

directly. 

Response: Under the physician selfreferral law, all financial relationships 

between DHS entities and referring 

physicians must be structured to satisfy 

the requirements of an exception. 

Restructuring an arrangement that does 

not meet a direct compensation 

arrangements exception so that it 

complies with the indirect 

compensation arrangements exception 

is not per se prohibited. Whether the 

restructuring of an arrangement 

constitutes a prohibited circumvention 

scheme under section 1877(g)(4) of the 

Act would depend on the specific facts 

and circumstances. The commenter has 

not clearly identified a set of specific 

circumstances sufficient for us to judge 

whether a circumvention scheme exists. 

Q. Referral Services 

In the Phase I rulemaking, we 

solicited comments on creating 

exceptions to the physician self-referral 

prohibition for arrangements that fit 

squarely in an anti-kickback statute 

‘‘safe harbor’’ in § 1001.952 (66 FR 863). 

In Phase II, we created two new 

compensation exceptions for 

arrangements that fit in the antikickback safe harbors for referral 

services (§ 411.357(q)) and obstetrical 

malpractice insurance subsidies 

(§ 411.357(r)) (69 FR 16115). We 

received no comments on § 411.357(q) 

and this Phase III final rule makes no 

changes to the exception in § 411.355(q) 

for referral services. 

R. Obstetrical Malpractice Insurance 

Subsidies 

As discussed above in section IX.Q, 

we created a new exception in Phase II 

for compensation arrangements that fit 

in the anti-kickback safe harbor for 

obstetrical malpractice insurance 

subsidies (§ 411.357(r)) (69 FR 16115). 

This Phase III final rule makes no 

changes to the exception in § 411.357(r). 

Comment: One commenter suggested 

that we permit the fair market value 

compensation exception in § 411.357(l) 

to be used for additional malpractice 

insurance assistance for medical staff. 

Response: We see no reason why the 

fair market value compensation 

exception in § 411.357(l) cannot be used 

to offer medical staff assistance with 

malpractice insurance, provided that the 

value of the assistance is fair market 

value for services actually provided by 

the staff and the other requirements of 

the exception are satisfied. 

Comment: Several commenters 

complained that the exception for 

malpractice insurance subsidies is too 

narrow and the limitation to health 

professional shortage areas (HPSAs) 

should be expanded to include all 

specialties and hospitals. One 

commenter urged us to revise the 

exception to include non-HPSA areas 

where at least 50 percent of the 

deliveries come from patients who 

reside in a HPSA. The commenters 

urged us to consult with the OIG and to 

develop a broader exception. Another 

commenter suggested that hospitals 

should be permitted to provide 

assistance if there is a community need. 

Response: The exception in 

§ 411.357(r) is one of several exceptions 

that allow DHS entities to provide 

assistance with malpractice insurance. 

Other exceptions that permit DHS 

entities to provide such assistance are 

the fair market value compensation 

exception (as discussed above in 

response to the previous comment) in 

§ 411.357(l), the exception for bona fide 

employment relationships in 

§ 411.357(c), and the exception for 

personal service arrangements in 

§ 411.357(d) (provided that the value of 

the assistance is commensurate with the 

value of actual services furnished to the 

hospital by the physician). These 

exceptions allow any DHS entity to 

provide assistance with malpractice 

insurance, without regard to the 

specialty of the physician or the area in 

which the physician practices. The 

exception in § 411.357(r), on the other 

hand, is intended to mirror the antikickback safe harbor for malpractice 

insurance in § 1001.952(o). The OIG has 

not issued any guidance of general 

application that is broader than this 

exception and safe harbor. Finally, apart 

from the availability of other exceptions, 

we do not believe that it is advisable to 

relax the criteria of § 411.357(r) where a 

‘‘community need’’ is present, because 

‘‘community need’’ is too ambiguous a 

standard and does not, by itself, 

eliminate the potential for program or 

patient abuse. We note that, in the CY 

2008 Physician Fee Schedule notice of 


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proposed rulemaking, we proposed to 

amend the exception in § 411.357(r) to 

remove the incorporation of the safe 

harbor for malpractice insurance in 

§ 1001.952(o) and to include more 

flexible criteria. 

Comment: One commenter asserted 

that we did not have the authority to 

create exceptions that were limited to 

specific geographic areas, for example, 

limiting the malpractice insurance 

subsidies exception to physician 

practices in HPSAs. 

Response: Section 1877(b)(4) of the 

Act allows us to create additional 

exceptions to the general prohibition on 

physician self-referral where doing so 

would not result in a risk of program or 

patient abuse. It does not require us, 

where we exercise such authority, to 

make the additional exceptions 

available to all types of entities and 

physicians, or make them applicable in 

all areas. The Congress and CMS have 

long recognized the special needs and 

character of rural, urban, and 

underserved areas. Malpractice 

insurance availability in HPSAs poses 

specific concerns not present in other 

areas and supports a targeted exception. 

S. Professional Courtesy 

In Phase II, we established a new 

compensation arrangements exception 

(§ 411.357(s)) for professional courtesy 

provided to a physician or his or her 

immediate family members (69 FR 

16116). We defined ‘‘professional 

courtesy’’ at § 411.351 as the provision 

of free or discounted health care items 

or services to a physician or his or her 

immediate family members or office 

staff. To qualify for the new exception, 

the arrangement must meet the 

following conditions (69 FR 16116)—

• The professional courtesy is offered 

to all physicians on the entitys bona fide 

medical staff or in the entitys local 

community without regard to the 

volume or value of referrals or other 

business generated between the parties; 

• The health care items and services 

provided are of a type routinely 

provided by the entity; 

• The entity’s professional courtesy 

policy is set out in writing and 

approved in advance by the governing 

body of the health care entity; 

• The professional courtesy is not 

offered to any physician (or immediate 

family member) who is a Federal health 

care program beneficiary, unless there 

has been a good faith showing of 

financial need; 

• If the professional courtesy involves 

any complete or partial waiver of any 

coinsurance obligation, the insurer is 

informed in writing of the reduction so 

that the insurer is aware of the 

arrangement; and 

• The professional courtesy 

arrangement does not violate the antikickback statute or any billing or claims 

submission laws or regulations. 

This Phase III final rule makes one 

substantive change to § 411.357(s), 

deleting the requirement that an entity 

notify an insurer when the professional 

courtesy involves the whole or partial 

reduction of any coinsurance obligation. 

We have also modified the exception to 

make clear our intent that § 411.357(s) 

applies only to hospitals and other 

providers with formal medical staffs. 

Comment: A commenter noted that 

one of the conditions of the exception 

is that the arrangement does not violate 

the anti-kickback statute. The 

commenter questioned whether, given 

the 1994 OIG Special Fraud Alert, 

clinical laboratories would be 

prohibited from offering professional 

courtesy, notwithstanding that the 

actual language of § 411.357(s) does not 

exclude any specific type of entity or 

services and, therefore, appears 

applicable to clinical laboratory 

services. The commenter stated that, 

unlike the situation in which one 

physician extends professional courtesy 

to another physician, when a laboratory 

offers professional courtesy to a 

physician, it does not expect the same 

in return, a fact that makes kickback 

issues more significant. The commenter 

suggested that we clarify that the 1994 

OIG Special Fraud Alert continues to be 

applicable to the provision of 

professional courtesy by all laboratories, 

including hospital outreach laboratories. 

The commenter also stated that, to the 

extent that the exception permits a 

hospital to offer professional courtesy 

only to physicians on its medical staff, 

instead of to all physicians in its local 

community or service area, the 

exception creates an inducement for 

referrals to the hospital. 

Response: Nothing in these 

regulations affects in any respect the 

application of the OIG’s guidance 

regarding the anti-kickback statute. We 

conclude from the comment that some 

clarification may be helpful with respect 

to the scope of the exception. The 

exception was promulgated in response 

to comments requesting an exception for 

providers that offer certain professional 

courtesy to physicians and their family 

members. We are clarifying the 

regulatory language to state specifically 

that the professional courtesy exception 

applies only to DHS entities with formal 

medical staffs. The exception does not 

apply to suppliers, such as laboratories 

or DME companies. The traditional 

reasons for professional courtesy 

provided by entities with medical staffs 

do not pertain to suppliers and such 

‘‘courtesy’’ offered by suppliers would 

pose a risk of program abuse. 

We believe that the exception 

contains sufficient safeguards to protect 

against abuse. In particular, we note 

that: 

• Professional courtesy must be 

extended to all members of the bona 

fide medical staff (or in such entity’s 

local community or service area) 

without regard to the volume or value 

of referrals (thus prohibiting expensive 

courtesy for high-referring physicians 

and only less costly courtesy for lowreferring physicians); 

• The entity’s professional courtesy 

policy must be set out in writing and 

approved in advance by the entity’s 

governing body; and 

• The arrangement must not violate 

the anti-kickback statute. 

Based on a comment received in 

response to Phase II, we are concerned 

that the current § 411.357(s)(3) may be 

misinterpreted as meaning that the 

requirements of the exception apply 

only if an entity, in fact, has a written 

policy regarding professional courtesy 

(that is, if an entity’s policy is not 

reduced to writing, the entity need not 

comply with the requirements of the 

exception at all). Therefore, we are 

amending § 411.357(s)(3) to clarify that, 

as a prerequisite to extending 

professional courtesy, the entity must 

have a written policy that is approved 

by the entity’s governing body. 

Comment: Two commenters objected 

to limits placed on physicians extending 

professional courtesy. One commenter 

requested that we revise the regulation 

so as not to prohibit the longstanding 

practice of professional courtesy, 

including physician-to-physician 

professional courtesy. Another 

commenter approved of the exception 

generally, but objected to the restriction 

requiring the courtesy to be extended 

either to the entire medical staff or to all 

physicians in the community. This 

commenter requested that a hospital be 

able to extend the courtesy on the same 

terms as medical staff incidental 

benefits; that is, for example, to 

members of the medical staff practicing 

in the same specialty rather than to the 

entire medical staff. 

Response: With respect to the first 

comment, physician-to-physician 

professional courtesy is unlikely to need 

a separate exception, unless the 

recipient physician is a source of DHS 

referrals to the physician (or physician 

practice) extending the courtesy. We 

believe the more typical situation would 

involve a group practice offering 

professional courtesy to its physicians 


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and their families. The in-office 

ancillary services exception would be 

available in such situations. Moreover, 

for purposes of the professional courtesy 

exception, we consider a group or other 

physician practice to be an entity with 

a formal medical staff that could use the 

exception, if all of the requirements of 

the exception were satisfied. 

Second, we do not agree that a 

hospital, or other entity with a formal 

medical staff, should be allowed under 

the exception to extend professional 

courtesy only to certain members of its 

medical staff. The selective provision of 

professional courtesy to a physician 

gives rise to an inference that the 

recipient of the courtesy may have been 

chosen in a manner that took into 

account the volume or value of referrals 

from the recipient (or his or her family 

member or employer-physician) to the 

physician providing the professional 

courtesy or other business generated 

between the parties. 

Comment: One commenter sought 

clarification as to the applicability of the 

exception to DHS entities that did not 

have medical staffs. 

Response: The exception would not 

apply to such entities, for the reasons 

noted above. We are clarifying the 

regulatory text in § 411.357(s). 

Comment: One commenter asked for 

clarification as to which Federal health 

care programs are referred to in 

§ 411.357(s)(4) and how to document 

financial need. 

Response: For purposes of the 

exception, the Federal health care 

programs are all Federal health care 

programs as defined at section 1128B(e) 

of the Act (69 FR 16115–16116). The 

determination and documentation of 

financial need should be reasonable, 

consistent, and contemporaneous. 

Comment: Two commenters objected 

to the requirement that a hospital notify 

the insurer if any coinsurance obligation 

is waived in whole or in part. According 

to the commenters, the requirement is 

unreasonable and serves no purpose. 

The commenters requested that the 

condition be deleted. 

Response: We agree that, in order to 

eliminate the risk of program or patient 

abuse, our standard under section 

1877(b)(4) of the Act, we do not have to 

require a hospital or other DHS entity to 

notify a private insurer if it intends to 

waive in whole, or in part, any 

coinsurance obligation of the insurer’s 

beneficiary. We are deleting the 

notification provision. Nonetheless, we 

believe that it would be a prudent 

practice for DHS entities to provide 

such notification; in fact, insurers may 

require such notification. 

T. Retention Payments in Underserved 

Areas 

In Phase II, in accordance with our 

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

Act, we created a new exception for 

retention payments made to a physician 

by a hospital or federally qualified 

health center located in a HPSA 

(regardless of whether the HPSA is 

specifically designated for the 

physician’s particular specialty) (69 FR 

16097). In order to qualify for the 

exception under Phase II, the following 

conditions must be met—

• The physician must have a bona 

fide firm, written recruitment offer from 

a hospital or federally qualified health 

center that is not related to the hospital 

or the federally qualified health center 

making the payment, and the offer 

specifies the remuneration being 

offered; 

• The offer must require the 

physician to move the location of his or 

her practice at least 25 miles and 

outside of the geographic area served by 

the hospital or federally qualified health 

center making the retention payment; 

• The retention payment must be 

limited to the lower of: (1) The amount 

obtained by subtracting the physician’s 

current income from physician and 

related services from the income the 

physician would receive from 

comparable physician and related 

services in the bona fide recruitment 

offer (provided that the respective 

incomes are determined using a 

reasonable and consistent methodology 

and that they are calculated uniformly 

over no more than a 24-month period); 

or (2) the reasonable costs the hospital 

or federally qualified health center 

would otherwise have to expend to 

recruit a new physician to the 

geographic area served by the hospital 

or federally qualified health center in 

order to join the medical staff of the 

hospital or federally qualified health 

center to replace the retained physician; 

• Any retention payment must be 

subject to the same obligations and 

restrictions, if any, on repayment or 

forgiveness of indebtedness as the bona 

fide recruitment offer; 

• The amount and terms of the 

retention payment may not be altered 

during the term of the arrangement in 

any manner that takes into account the 

volume or value of referrals or other 

business generated by the physician; 

• The requirements of 

§ 411.357(e)(1)(i)–(iv), relating to 

physician recruitment arrangements, 

must be satisfied; and 

• The arrangement must not violate 

the anti-kickback statute or any Federal 

or State law or regulation governing 

billing or claims submission. 

The exception in § 411.357(t) requires 

that retention payments be made 

directly from the hospital or federally 

qualified health center to the retained 

physician. A hospital or federally 

qualified health center may not enter 

into a retention payment arrangement 

with a physician more frequently than 

once every 5 years. Also, Phase II 

provided for approval of retention 

payments to physicians practicing in 

other underserved areas (or to 

physicians serving underserved patient 

populations), as determined on a case 

by case basis through an advisory 

opinion. 

As discussed below, we are modifying 

§ 411.357(t) in several respects, 

including expanding the exception by 

permitting (under certain 

circumstances) retention payments in 

the absence of a written recruitment 

offer, by adding flexibility for retention 

payments to physicians who serve 

underserved areas and populations, and 

by allowing rural health clinics to make 

retention payments. In addition, 

retention payments may be made on the 

basis of a written offer of employment 

as well as a bona fide firm, written 

recruitment offer. 

Comment: A commenter that is the 

only hospital providing labor and 

delivery services for its county and the 

100,000 people who reside in its service 

area requested modifications to the 

exception. The commenter believed that 

the exception should not be limited to 

retention payments in HPSAs or other 

underserved areas. According to the 

commenter, in 2003, the five 

obstetricians who were delivering 

babies at the hospital received an offer 

from an academic medical center 

located 30 miles away. Under the terms 

of the offer, the academic medical center 

would have provided through its 

captive insurance company malpractice 

insurance that was much less expensive 

than the insurance the obstetricians 

then carried. The commenter stated that 

the academic medical center required 

that the obstetricians perform their 

deliveries in a community hospital in a 

neighboring county with which the 

academic medical center was affiliated. 

The commenter wrote that its attorneys 

advised the hospital that the physician 

self-referral regulations prohibited it 

from countering the academic medical 

center’s offer because the commenter’s 

hospital is not located in a HPSA. The 

commenter proposed two alternative 

modifications to the retention 

exception: (1) Permit tax-exempt 

organizations to make retention 

payments if the payments would not 

constitute an improper private benefit or 

an excess benefit transaction under 


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applicable IRS principles; or (2) replace 

the HPSA requirement in both the 

retention exception and the obstetrical 

malpractice insurance subsidies 

exception with a super-majority board 

approval requirement. 

Response: We intend for the retention 

payments exception to be limited to 

those areas in which there is a 

demonstrated shortage of physicians, 

and where special efforts are often 

necessary to attract and maintain 

physicians. As noted below, we are 

expanding the exception to permit 

retention payments where the 

physician’s current medical practice is 

in a rural area or HPSA, or where at 

least 75 percent of the physician’s 

patients either reside in a medically 

underserved area or are members of a 

medically underserved population. 

With respect to the suggested 

modifications to the exception, we 

believe that they are too broad and 

subject to abuse. Compliance with the 

IRS excess benefit and private benefit 

rules, or securing a super-majority vote 

of the governing board, does not ensure 

that the physician is needed or cannot 

easily be replaced. Neither proposed 

modification necessarily would prevent 

retention payments from being abused 

to reward high referring physicians. 

Comment: A number of commenters 

requested that we eliminate the 

requirement in § 411.357(t)(1)(iii) of a 

written offer. According to the 

commenters, many offers are not in 

writing until agreement is imminent, at 

which point it is too late for the hospital 

to retain the physician. Other 

commenters believed that the 

requirement for a written offer 

encourages physicians both to solicit 

offers, and to engage in insincere 

negotiations with others. One 

commenter believed that an entity 

should be able to offer retention 

payments provided it has a good faith 

belief that a physician may be recruited 

by another entity. 

Response: We are revising § 411.357(t) 

to permit a hospital, rural health clinic, 

or federally qualified health center to 

offer assistance to a physician who does 

not have a bona fide written offer of 

recruitment or employment if the 

physician certifies in writing to the 

hospital, rural health clinic, or federally 

qualified health center that, among 

other things, he or she has a bona fide 

opportunity for future employment by a 

hospital, academic medical center, or 

physician organization that would 

require relocation of his or her medical 

practice at least 25 miles to a location 

outside of the geographic area served by 

the hospital, rural health clinic, or 

federally qualified health center. 

Revised § 411.357(t) also requires the 

physician to certify in writing: details 

regarding the steps taken by the 

physician to effectuate the employment 

opportunity; details of the physician’s 

employment opportunity, including the 

identity and location of the physician’s 

future employer and/or employment 

location, and the physician’s anticipated 

income and benefits (or a range for 

income and benefits); that the future 

employer is not related to the hospital, 

rural health clinic, or federally qualified 

health center making the payment; the 

date on which the physician anticipates 

relocating his or her medical practice; 

and information sufficient for the 

hospital, rural health clinic, or federally 

qualified health center to verify the 

information included in the written 

certification. The hospital, rural health 

clinic, or federally qualified health 

center must take reasonable steps to 

verify the information in the 

certification. 

In circumstances in which the 

retained physician provides a written 

certification to the hospital (or rural 

health clinic or federally qualified 

health center) rather than a bona fide 

written offer of recruitment or 

employment, the retention payment 

may not exceed the lower of the 

following: (1) an amount equal to 25 

percent of the physician’s current 

annual income (averaged over the 

previous 24 months) using a reasonable 

and consistent methodology that is 

calculated uniformly; or (2) the 

reasonable costs the hospital would 

otherwise have to expend to recruit a 

new physician to the geographic area 

served by the hospital in order to join 

the medical staff of the hospital to 

replace the retained physician. Where 

the physician has a written offer, the 

hospital may match the written offer, as 

provided in § 411.357(t)(1). (We note 

that the exception for retention 

payments applies to federally qualified 

health centers and rural health clinics in 

the same manner as it applies to 

hospitals.) 

Comment: Several commenters asked 

that we broaden the exception to allow 

facilities in any medically underserved 

area to offer retention payments. Two 

commenters asked for clarification 

regarding whether the entity paying the 

retention payment must be located in an 

area of demonstrated need or whether 

the physician’s patients must live in the 

area of demonstrated need. The 

commenters stated that the latter should 

be the test. For example, a hospital 

should be permitted to offer retention 

payments to keep a physician in an 

outreach area that is underserved. 

Another commenter urged that the 

exception be made available to rural 

health clinics. 

Response: We agree generally with the 

comments and are expanding the 

exception in § 411.357(t) to permit 

retention payments that otherwise 

satisfy all of the conditions of the 

exception when: (1) the physician’s 

current medical practice is located in a 

rural area, a HPSA, or an area of 

demonstrated need as determined by the 

Secretary in an advisory opinion issued 

under section 1877(g)(6) of the Act; or 

(2) at least 75 percent of the physician’s 

patients either reside in a medically 

underserved area or are members of a 

medically underserved population. The 

location of the hospital in a HPSA is no 

longer a requirement of the exception. A 

retention payment may be made to a 

physician whose current medical 

practice is located in a HPSA, regardless 

of whether the HPSA has been 

designated for physicians in the 

retained physician’s specialty. Further, 

we are also permitting retention 

payments to be made by rural health 

clinics under the same terms and 

conditions that apply to hospitals and 

federally qualified health centers. The 

purpose of this exception is to retain the 

physician’s practice in a rural or 

underserved area. 

Comment: Two commenters 

questioned why the exception requires 

a retention payment to be contingent on 

an offer from a hospital. According to 

the commenters, any offer of 

employment, including an offer from a 

group practice, should be sufficient. 

Response: We agree and have 

modified the regulatory text in 

§ 411.357(t)(1) to allow retention 

payments if a physician has a written 

offer from a hospital, academic medical 

center, or physician organization (as 

defined in this Phase III final rule at 

§ 411.351) that is not related to the 

hospital, rural health clinic, or federally 

qualified health center making the 

retention payment. We have included a 

similar provision in new § 411.357(t)(2) 

related to the certification of an 

employment opportunity for which no 

written offer has been received. 

Comment: In light of the prohibition 

against entering into a retention 

payment arrangement with the same 

physician more frequently than once 

every 5 years, several commenters 

objected to the provision requiring that 

retention payments be limited to the 

difference between the compensation 

set forth in the recruitment offer and the 

physician’s current annual income 

averaged over a 24-month period. 

According to the commenters, the net 

effect is to make the retention payment 

offer non-competitive. Another 


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commenter asked whether an offer that 

is for a smaller amount than the 

difference over a 24-month period 

would qualify for the exception. 

Response: We are not persuaded to 

revise the regulation to permit the 

hospital, rural health clinic, or federally 

qualified health center to make a 

retention payment that would match the 

physician’s compensation specified in 

the recruitment offer (or offer of 

employment), irrespective of the period 

of the recruitment offer. Under our 

present rule, we allow entities to make 

a retention payment that takes into 

account the difference between what the 

physician earns in his or her current 

position and what the physician would 

earn if he or she accepted the 

recruitment offer, for a period of up to 

24 months. For example, if a physician’s 

monthly total compensation package in 

his or her current position is $13,000, 

and he or she has a bona fide written 

recruitment offer that would, over the 

next 36 months, provide the physician 

with total monthly compensation of 

$15,000, we would allow an entity to 

make a retention payment of up to 

$48,000 (24 months (the maximum 

number of months permitted) × $2000). 

We believe that allowing a retention 

payment that takes into account the 

difference between what the physician 

earns in his or her current position and 

what the physician would earn if he or 

she accepted the recruitment offer (or 

offer of employment) may create a 

potential for abuse if that payment is 

calculated over a period greater than 24 

months. An entity is always free to offer 

a lesser amount. For clarity, we have 

amended the language in 

§ 411.357(t)(1)(iv) that stated the 

retention payment ‘‘is limited to the 

lower of’’ to ‘‘does not exceed the lower 

of.’’

Comment: A hospital trade 

association objected to the provisions 

limiting the total retention payment to 

an existing physician to the costs of 

recruiting a new physician. The 

commenter believed that the restriction 

would require hospitals to limit their 

retention offers to the costs of a newly 

practicing physician. The commenter 

contended that hospitals should be 

permitted to take into account the 

physician’s experience, training, and 

length of service in the area. Other 

commenters asked for confirmation that, 

in determining the costs of a 

replacement, a hospital could include 

all costs, both direct and indirect. 

Response: We did not intend to limit 

the amount of a retention payment to 

the amount that it would cost to recruit 

a newly practicing physician in the 

same specialty to the same geographic 

area. Hospitals, rural health clinics, and 

federally qualified health centers may 

take into account experience, training, 

and length of service in the area. Both 

direct and indirect costs of a 

replacement can be included, provided 

that they are actual costs. 

Comment: Two commenters asked 

whether a hospital could make retention 

payments to a group practice, rather 

than to the physician directly. One of 

these commenters noted that the 

physician recruitment exception in 

§ 411.357(e) permits remuneration to be 

paid to the group on behalf of the 

physician. 

Response: We do not believe that it is 

appropriate for the payment to be made 

to the group practice because the 

hospital, rural health clinic, or federally 

qualified health center should not be 

subsidizing expenses of the group 

practice through the retention payment. 

The purpose of the retention payment 

exception is to allow hospitals, rural 

health clinics, and federally qualified 

health centers to retain the physician 

receiving the retention payment in the 

facility’s service area. We note that a 

written or other offer of employment by 

a local group practice with whom the 

physician is affiliated would not qualify 

for this exception. We note further that 

the commenter misunderstands the 

recruitment exception, which does not 

protect remuneration provided to a 

group practice. It protects remuneration 

provided directly or indirectly to a 

recruited physician, some part of which 

may pass through a group practice 

subject to specific conditions. 

Comment: Several commenters 

complained that the exception did not 

permit hospitals to provide malpractice 

insurance assistance to physicians on 

their medical staffs facing exorbitant 

increases in their premiums. 

Response: As noted in section IX.R of 

this preamble (in response to a comment 

on the exception for obstetrical 

malpractice insurance subsidies), there 

are several exceptions available to 

entities that wish to provide assistance 

with malpractice insurance. Moreover, 

we do not believe it is accurate to say 

that the retention payment exception 

does not permit assistance for 

malpractice insurance premiums. 

Remuneration in the form of a retention 

payment paid by an entity to a 

physician may be applied by the 

physician to malpractice insurance 

premiums. 

Comment: One commenter questioned 

whether an arrangement that fully 

complies with the retention payments 

exception in § 411.357(t) at the time that 

it is entered into will be considered out 

of compliance if the HPSA designation 

is lost before the arrangement expires. 

Specifically, the commenter wanted to 

know whether a retention payment 

arrangement would be out of 

compliance after all payments have 

been made, but the physician remains 

under a community service obligation at 

the time of the HPSA redesignation. 

Response: We have amended 

§ 411.357(t)(3) to permit the payment of 

a retention payment to a physician 

whose current medical practice is in a 

rural area or a HPSA, or to a physician 

when 75 percent of his or her patients 

reside in a medically underserved area 

or are members of a medically 

underserved population. It is likely that 

a retention payment made by a hospital 

to a physician whose practice location 

was within an area that formerly was 

designated as a HPSA would satisfy one 

of the new, more flexible requirements 

in § 411.357(t)(3). Retention payments 

may be made only if the arrangement 

meets the conditions of the amended 

exception; however, a retention 

agreement may remain in compliance 

despite a continuing community service 

obligation (provided no additional 

retention payments are made) even if 

the HPSA designation was changed. We 

note that, under Phase II, the entire 

geographic area served by the hospital 

need not be located in a HPSA. 

Comment: One commenter asked for 

clarification of the term ‘‘relocation 

requirement’’ in the Phase II regulation 

text in § 411.357(t)(2). According to the 

commenter, it is unclear from this 

provision as to whether the Secretary 

has the authority to waive the 

requirement that the physician receive a 

bona fide written offer from a facility to 

which the physician intends to relocate, 

or whether the Secretary has the 

authority to waive the requirement that 

the bona fide written offer would 

require the physician to relocate his 

practice at least 25 miles from its 

present location and outside the 

geographic area served by the entity that 

would make the retention payment, or 

both. 

Response: The term ‘‘relocation 

requirement’’ refers to the requirement 

that the bona fide written offer requires 

the physician to relocate his or her 

practice at least 25 miles from its 

present location to a location outside 

the geographic area served by the 

hospital that would make the retention 

payment. 

Comment: One commenter stated that 

the advisory opinion alternative in the 

exception in § 411.357(t)(2) is 

unworkable because the process takes 

too long and has an uncertain result. 

The commenter asserted that a 

physician would not delay his or her 


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decision to relocate his or her practice 

pending the receipt of a favorable 

advisory opinion. Moreover, according 

to the commenter, the availability of an 

advisory opinion has limited utility 

because only the relocation requirement 

in § 411.357(t)(1) may be waived by the 

Secretary. The commenter suggested 

that CMS should be given more latitude 

through the advisory opinion process to 

approve retention payment agreements. 

Response: The advisory opinion 

process is the vehicle for CMS to use in 

determining whether the relocation 

requirement in this exception will be 

waived for a particular retention 

payment arrangement. We believe that 

the modifications to § 411.357(t) may 

alleviate many of the commenter’s 

concerns regarding a hospital’s ability to 

offer a retention payment to a physician 

in a manner timely enough to affect the 

physician’s decision to relocate out of 

the hospital’s geographic service area. 

With respect to the commenter’s 

suggestion that CMS be given more 

latitude to approve retention payment 

agreements, we are not convinced that 

additional changes to this exception 

would pose no risk of program abuse. 

U. Community-Wide Health Information 

System 

In Phase II, using our authority under 

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

a new exception for community-wide 

health information systems (69 FR 

16113). If certain conditions are met, 

§ 411.357(u) permits compensation in 

the form of items or services of 

information technology provided by an 

entity to a physician that allow access 

to, and sharing of, electronic health care 

records and any complementary drug 

information systems, general health 

information, medical alerts, and related 

information for patients served by 

community providers and practitioners, 

in order to enhance the community’s 

overall health. We are making no 

changes to this exception. 

Comment: We received 13 comments 

regarding the community-wide health 

information system exception, all of 

which supported the new exception in 

§ 411.357(u). Several commenters 

recommended further clarification of 

the definition of a ‘‘community’’ and of 

‘‘community-wide health information 

system.’’ Several commenters 

recommended that hospitals be allowed 

to provide to physicians items and 

services needed for non-clinical 

functions. Commenters also raised 

questions about patient access and 

whether physicians may be charged to 

use a system. Several commenters 

suggested that hospitals be able to 

provide access to health information to 

physicians only, rather than all 

residents of the community. Two 

commenters urged that ‘‘maximum 

flexibility’’ be allowed. A few 

commenters recommended that 

interoperability should be encouraged. 

Response: Subsequent to the receipt 

of the public comments, on October 11, 

2005, we published a notice of proposed 

rulemaking creating an exception for 

electronic prescribing technology as 

required by section 101 of the MMA (70 

FR 59182). In addition, in that same 

notice, using our authority under 

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

proposed an exception for electronic 

health records software and information 

technology and training services. After 

taking into account public comments, 

on August 8, 2006, we published a final 

rule promulgating these two exceptions 

(71 FR 45140). The exception for 

electronic prescribing items and 

services appears in § 411.357(v) and the 

exception for electronic health records 

software and information technology 

and training services appears in 

§ 411.357(w). We are republishing both 

exceptions with nonsubstantive 

technical changes in this Phase III final 

rule. In addition to requiring 

compliance with criteria designed to 

safeguard against program and patient 

abuse, both exceptions provide that 

neither the donor nor any person on the 

donor’s behalf may take any action to 

limit or restrict the use, compatibility or 

interoperability of the items or services. 

The electronic health records exception 

in § 411.357(w) requires interoperability 

at the time the remuneration is provided 

to the physician. Neither exception 

requires community-wide application. 

At this time, we are not making any 

changes to, or issuing any further 

guidance concerning, the communitywide health information systems 

exception while we observe how the 

new exceptions for electronic 

prescribing and electronic health 

records technology in § 411.357 (v) and 

(w), respectively, are received. We are 

continuing to consider the issues that 

commenters raised and, if appropriate, 

we will issue clarifications and changes 

in a future rulemaking. 

X. Reporting Requirements—§ 411.361 

Section 1877(f) of the Act sets forth 

certain reporting requirements for all 

entities providing covered items or 

services for which payment may be 

made under Medicare. The required 

information must be provided in a form, 

manner, and at such times that the 

Secretary specifies. Section 1877(g)(5) of 

the Act provides that any person who is 

required, but fails, to meet one of these 

reporting requirements is subject to a 

civil money penalty of not more than 

$10,000 for each day for which 

reporting is required to have been made. 

Section 411.361 of our regulations, as 

modified in Phase II, states that the 

information that we may require to be 

furnished can include the following—

(1) The name and Unique Physician 

Identification Number (UPIN) of each 

physician who has a financial 

relationship with the entity; 

(2) The name and UPIN of each 

physician with an immediate family 

member (as defined at § 411.351) who 

has a financial relationship with the 

entity; 

(3) The covered items and services 

provided by the entity; and 

(4) With respect to each physician 

identified under (1) and (2), the nature 

of the financial relationship (including 

the extent and/or value of the 

ownership or investment interest or the 

compensation arrangement). 

In Phase II, we—

• Specifically excluded from the 

definition of ‘‘reportable financial 

relationships’’ ownership or investment 

interests in publicly-traded securities 

and mutual funds if such interests 

satisfy the requirements of the 

exceptions in § 411.356(a) or (b), 

respectively. This exclusion from the 

definition of reportable financial 

relationships for publicly-traded 

securities and mutual funds is limited to 

shareholder information; contractual 

arrangements concerning these 

ownership or investment interests are 

reportable financial relationships. 

• Modified § 411.361(c)(4) to specify 

that the information required to be 

reported is only that information that 

the entity knows or should know in the 

course of prudently conducting 

business, including, but not limited to, 

records that the entity is already 

required to retain to comply with IRS 

and Securities and Exchange 

Commission rules and other rules under 

the Medicare and Medicaid programs. 

We are making no substantive 

changes to § 411.361 in this Phase III 

final rule. However, we are revising 

§ 411.361(c) to account for the transition 

from the UPIN to the National Provider 

Identifier (NPI). 

Comment: One commenter sought 

clarification of our statement in Phase II 

that, to the extent we are obligated 

under the Freedom of Information Act 

(FOIA), 5 U.S.C. 552, to disclose records 

we have received pursuant to the 

physician self-referral reporting 

requirements, we cannot maintain the 

records as confidential (69 FR 17934). 

The commenter believes that most such 

records will be exempt from disclosure 

under Exemption 4 of the FOIA, 5 


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U.S.C. 552(b)(4), as they will involve 

confidential business information. 

Response: The commenter is correct 

that Exemption 4 of the FOIA protects 

confidential business information from 

required disclosure. Moreover, the 

Trade Secrets Act, 18 U.S.C. 1905, 

prohibits Federal agencies from 

disclosing confidential business 

information, absent a law or regulation 

permitting such disclosure. We agree 

that much of the information that we 

may receive pursuant to our reporting 

requirements under the physician selfreferral regulations will be exempt from 

disclosure under the FOIA and 

prohibited from disclosure by the Trade 

Secrets Act. However, when we receive 

a FOIA request for information reported 

to us, we must evaluate whether the 

particular information is exempt or 

prohibited from disclosure. (Generally, 

information that is exempt from 

disclosure under the FOIA is also 

prohibited from disclosure by the Trade 

Secrets Act.) We cannot state 

categorically, however, that all 

information that we receive will be 

confidential business information 

within the meaning of the FOIA and the 

Trade Secrets Act. 

Comment: A commenter suggested 

that we exclude from the definition of 

‘‘reportable financial relationship’’

compensation arrangements that qualify 

under any of the following exceptions: 

Medical staff incidental benefits 

(§ 411.357(m)); nonmonetary 

compensation (§ 411.357(k)); 

professional courtesy (§ 411.357(s)); or 

referral services (§ 411.357(q)). 

According to the commenter, treating 

these compensation arrangements as 

‘‘reportable financial relationships’’

would require a hospital to furnish the 

required information for virtually all 

physicians on its medical staff (and 

perhaps for others as well), which 

would create an unnecessary burden for 

the hospital. Another commenter 

asserted that an entity’s obligation 

under our reporting requirements is 

staggering because of the breadth of the 

physician self-referral statute. 

According to this commenter, the most 

acute burdens relate to the requirement 

in § 411.361(c)(2) to maintain records of 

financial relationships with family 

members of physicians. The commenter 

further asserted that most DHS entities 

do not have a means to catalog all such 

financial relationships, as they have no 

reason to create records of transactions 

that are at fair market value. The 

commenter suggested that various types 

of financial relationships involving 

immediate family members of 

physicians (such as charitable donations 

by family members or fair market value 

lease arrangements) be excepted from 

the reporting requirements. A third 

commenter also expressed concern that 

the inclusion of financial relationships 

with immediate family members of 

physicians imposed a substantial 

burden on DHS entities. This 

commenter suggested that if basic 

information, such as the UPIN of each 

physician who has a reportable financial 

arrangement with the entity, the covered 

items or services provided by the entity, 

and the nature of the financial 

arrangement for each such physician is 

provided, CMS could verify that 

exceptions are met and it would not be 

necessary in many cases for the entity 

to report information pertaining to 

immediate family members who have 

financial relationships with the DHS 

entities. Where such information is 

needed from the immediate family 

members of physicians, the commenter 

asserted that 30 days is an unreasonable 

amount of time in which to provide the 

information, and suggested that 

extensions of at least 90 days should be 

available. 

Response: We decline to adopt the 

commenters’ suggestions for the reasons 

stated in Phase II (69 FR 17934). There, 

we stated that we are concerned that an 

entity could decide that one or more of 

its financial relationships falls within an 

exception, fail to retain data concerning 

those financial relationships, and 

thereby prevent the government from 

reviewing the arrangements to 

determine if they qualify for an 

exception. In particular, we disagree 

that, where the financial relationship 

that triggers the physician self-referral 

statute is between an immediate family 

member of a physician and the DHS 

entity, it is not necessary for the entity 

to maintain information concerning the 

financial relationship and to report it 

upon our direction to do so. We fail to 

see how reporting information 

pertaining only to physicians who have 

financial relationships provides us with 

assurance that financial relationships 

concerning immediate family members 

meet one or more of the exceptions. 

Section 411.361(e) provides that 

entities must be given at least 30 days 

to provide the required information. 

Where we agree that the nature or scope 

of the request for information is such 

that the information cannot reasonably 

be furnished within 30 days, we will 

extend the time for supplying the 

information. 

Comment: A commenter requested 

that we create an exception to the 

reporting requirements for the situation 

in which a DHS entity seeks to obtain 

the required information but was denied 

access to it, such as where a physician 

has a reportable financial relationship 

solely by virtue of the hospital’s 

financial arrangement with an 

immediate family member. 

Response: We fail to see the basis for 

the commenter’s concern. An entity that 

has a financial relationship with a 

physician or an immediate family 

member of the physician should have its 

own records of the details of such 

relationship. 

XI. Miscellaneous (Other) 

A. Specialty Hospital Moratorium 

Section 507(a) of the MMA amended 

the hospital and rural provider 

ownership exceptions to the physician 

self-referral prohibition. Section 507 of 

the MMA specified that, for the 18- 

month period beginning on December 8, 

2003 and ending on June 7, 2005, 

physician ownership and investment 

interests in ‘‘specialty hospitals’’ would 

not qualify for the whole hospital 

exception. Section 507 of the MMA 

further specified that, for the same 18- 

month period, the exception for 

physician ownership or investment 

interests in rural providers would not 

apply in the case of specialty hospitals 

located in rural areas. For purposes of 

section 507 of the MMA only, a 

‘‘specialty hospital’’ was defined as a 

hospital in one of the 50 States or the 

District of Columbia that is primarily or 

exclusively engaged in the care and 

treatment of one of the following: (1) 

Patients with a cardiac condition; (2) 

patients with an orthopedic condition; 

(3) patients receiving a surgical 

procedure; or (4) patients receiving any 

other specialized category of services 

that the Secretary designates as being 

inconsistent with the purpose of 

permitting physician ownership and 

investment interests in a hospital. The 

term ‘‘specialty hospital’’ did not 

include any hospital determined by the 

Secretary to be in operation or ‘‘under 

development’’ as of November 18, 2003, 

and ‘‘for which the number of physician 

investors at any time on or after such 

date is no greater than the number of 

such investors as of such date.’’

Phase II modified the hospital 

ownership exception to reflect the MMA 

moratorium provisions. We received 

several comments on Phase II regarding 

the implementation of the 18-month 

moratorium on referrals of Medicare 

patients to specialty hospitals by 

physician investors. 

Comment: One commenter suggested 

that, during the 18-month moratorium, 

any entity applying to receive a 

Medicare provider agreement as a 

hospital should be required to submit, 

as part of the application process, the 


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information required under 

§ 411.361(c)(1) through (c)(4). 

Response: The commenter’s 

suggestion is moot as the moratorium 

ended on June 7, 2005. However, as we 

noted in the Secretary’s August 8, 2006 

final Report to Congress on specialty 

hospitals, which was required by 

section 5006 of the DRA, we are 

exploring changes to the enrollment 

form for hospitals (the CMS–855A) to 

capture information regarding whether 

an applicant hospital is, or is projected 

to be, a specialty hospital. 

Comment: A commenter noted that 

Phase II defined a specialty hospital as 

a hospital that is primarily or 

exclusively engaged in the care and 

treatment of patients with a cardiac 

condition, patients with an orthopedic 

condition, or patients receiving a 

surgical procedure, but that no clear 

guidance exists as to what ‘‘primarily 

engaged in’’ means. 

Response: For purposes of 

implementing the 18-month moratorium 

imposed by section 507 of the MMA, we 

considered a hospital to be ‘‘primarily 

engaged’’ in the care and treatment of 

cardiac, orthopedic, or surgical patients 

if 45 percent of the hospital’s Medicare 

cases were (or were projected to be) in 

Major Diagnostic Category (MDC) 5, 

Diseases and Disorders of the 

Circulatory System (cardiac), MDC 8, 

Diseases and Disorders of the 

Musculoskeletal System and Connective 

Tissue (orthopedic), or were surgical in 

nature (surgical). As noted in response 

to the previous comment, we are 

exploring changes to the CMS–855A to 

enable us better to determine whether 

an applicant hospital is a specialty 

hospital. We may define ‘‘primarily 

engaged’’ for that purpose. 

Comment: A commenter noted that, in 

Phase II, we defined specialty hospital 

for purposes of the 18-month 

moratorium to exclude a hospital for 

which the number of physician 

investors at any time on or after 

November 18, 2003 is no greater than 

the number of investors as of such date. 

The commenter stated that this 

requirement unfairly restricted any 

group practice that had invested in a 

specialty hospital prior to November 18, 

2003 from increasing the number of its 

physician owners. It suggested that we 

interpret section 507 of the MMA to 

mean that there is no increase in 

physician investors, notwithstanding an 

increase in the number of physician 

equity owners in a group practice, if the 

group practice owned its interest in the 

specialty hospital prior to November 18, 

2003 and the group was not formed for 

the purpose of investing in the hospital. 

Response: For purposes of 

implementing the 18-month 

moratorium, we considered there to be 

an increase in the number of physician 

investors in a specialty hospital if a 

group practice that had an investment 

interest in a specialty hospital increased 

the number of physician equity owners 

in the group at any time on or after 

November 18, 2003 (and there was no 

corresponding decrease in the specialty 

hospital’s investors). The suggested 

interpretation by the commenter does 

not comport with the plain language of 

section 507 of the MMA. 

B. Physician Certification Requirements 

for Home Health Services—§ 424.22 

Section 903 of the Omnibus 

Reconciliation Act of 1980 amended 

sections 1814(a) and 1835(a) of the Act 

to require the Secretary to issue 

regulations prohibiting a physician from 

certifying the need for home health 

services, or establishing and reviewing 

home health plans of treatment if the 

physician had a ‘‘significant ownership 

interest in, or a significant financial or 

contractual relationship with, a home 

health agency.’’ In October 1982, we 

published a rule (47 FR 47388) 

interpreting the prohibition to apply to 

physicians having, among other things: 

(1) a direct or indirect ownership 

interest of 5 percent or more in a home 

health agency; or (2) direct or indirect 

business transactions with the home 

health agency that totaled more than 

$25,000 or 5 percent of the agency’s 

operating expenses, whichever was less. 

The 1982 regulatory provision, which 

was ultimately codified in § 424.22(d), 

was superseded by the physician selfreferral prohibition when the 

prohibition became applicable in 1995 

to physician referrals for home health 

services. 

In Phase I, we amended the home 

health certification requirement in 

§ 424.22(d) to provide that a physician 

may not certify the need for home 

health services or establish or review a 

plan of treatment if his or her ‘‘financial 

relationship’’ (as defined in the 

physician self-referral regulations) with 

the home health agency did not satisfy 

the requirements of an exception under 

the physician self-referral law. In Phase 

II, we republished § 424.22(d) without 

change, and we received no comments 

on this provision. This Phase III final 

rule makes no substantive change to 

§ 424.22(d), although we are revising the 

provision to reference more explicitly 

the regulatory exceptions. 

XII. Provisions of the Final Rule 

A summary of the major changes to 

the regulations in this Phase III final 

rule are discussed below. No major 

regulatory changes were made to 

§ 411.352 (Group Practices), § 411.353 

(Prohibition on Certain Referrals by 

Physicians and Limitations on Billing), 

or § 411.356 (Exceptions to the Referral 

Prohibition Related to Ownership or 

Investment Interests). However, certain 

provisions of these sections were 

clarified in this preamble. 

Three definitions are added at 

§ 411.351 (‘‘downstream contractor,’’

‘‘physician organization,’’ and ‘‘rural 

area’’). Also, in the definition of ‘‘fair 

market value,’’ we are not retaining the 

safe harbor regarding hourly payments 

for a physician’s personal services. 

Section 411.354 defines ‘‘financial 

relationships’’ for purposes of the 

physician self-referral law. A new 

provision was added in 

§ 411.354(b)(3)(v) which specifies that 

an ownership interest in an entity [the 

whole hospital or a subdivision (that is, 

portion) of the hospital] does not 

include a security interest taken by a 

physician in equipment sold to the 

entity and financed with a loan by the 

physician to the entity. However, the 

security interest is a compensation 

arrangement. 

A new ‘‘stand in the shoes’’ provision 

was added to § 411.354(c)(2) under 

which a physician is deemed to ‘‘stand 

in the shoes’’ of his or her physician 

organization (defined at § 411.351 as a 

‘‘physician (including a professional 

corporation of which the physician is 

the sole owner), a physician practice, or 

a group practice that complies with the 

requirements of § 411.352.’’ A physician 

who stands in the shoes of his or her 

physician organization is deemed to 

have the same compensation 

arrangements with the DHS entity that 

the physician organization has with the 

DHS entity. As a result, many 

compensation arrangements that were 

analyzed under Phase II as indirect 

compensation arrangements are now 

analyzed as direct compensation 

arrangements that must comply with an 

applicable exception for direct 

compensation arrangements. 

The Phase III changes to the general 

exceptions in § 411.355 for both 

ownership/investment interests and 

compensation arrangements are 

concentrated in the exceptions for 

academic medical centers and intrafamily rural referrals in § 411.355(e) and 

(j), respectively. With respect to the 

academic medical centers exception, we 

clarified that the total compensation 

from each academic medical center 

component to a faculty physician must 

be set in advance and not determined in 

a manner that takes into account the 

volume or value of the physician’s 


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referrals or other business generated by 

the referring physician within the 

academic medical center. In addition, 

when determining whether the majority 

of physicians on the medical staff of a 

hospital affiliated with an academic 

medical center consists of faculty 

members, the affiliated hospital must 

include or exclude all individual 

physicians holding the same class of 

privileges at the affiliated hospital. 

We amended the exception for intrafamily rural referrals to include an 

alternative test to determine whether a 

physician may refer a patient to an 

immediate family member for DHS. 

Specifically, if, in light of the patient’s 

condition, no other person or entity is 

available to furnish the DHS in a timely 

manner within 45 minutes 

transportation time from the patient’s 

home, a physician is not prohibited 

from making a referral for the DHS to an 

immediate family member or to an 

entity with which the immediate family 

member has a financial relationship, 

provided that all other conditions of the 

exception are satisfied. The Phase II 25- 

mile test remains an option for 

complying with the exception. 

Section 411.357 sets out the 

exceptions for various compensation 

arrangements. The revisions to the 

exceptions for physician recruitment in 

§ 411.357(e) and retention payments in 

underserved areas in § 411.357(t) are 

significant. 

The physician recruitment exception 

protects certain remuneration that is 

provided by a hospital to a physician as 

an inducement for the physician to 

relocate his or her medical practice into 

the ‘‘geographic area served by the 

hospital,’’ which we defined in Phase II 

as the lowest number of contiguous zip 

codes from which the hospital draws at 

least 75 percent of its inpatients. Under 

the revised definition of ‘‘geographic 

area served by the hospital,’’ a hospital 

that draws fewer than 75 percent of its 

inpatients from all of the contiguous zip 

codes from which it draws inpatients 

may recruit a physician into the 

geographic area composed of all of the 

contiguous zip codes from which it 

draws its inpatients, provided that all 

other requirements of the exception are 

satisfied. In addition, the revised 

definition sets forth a special optional 

rule for rural hospitals under which a 

rural hospital may determine its 

geographic service area using the lowest 

number of contiguous zip codes from 

which the hospital draws at least 90 

percent of its inpatients or, if the 

hospital draws fewer than 90 percent of 

its inpatients from all of the contiguous 

zip codes from which it draws 

inpatients, its service area may include 

certain noncontiguous zip codes. A 

rural hospital may also recruit 

physicians to an area outside the 

geographic area served by the hospital if 

the Secretary has determined in an 

advisory opinion that the area into 

which the physician is to be recruited 

has a demonstrated need for the 

recruited physician, provided that all 

other requirements of the exception are 

satisfied. 

In the case of an income guarantee 

provided by a hospital to a physician 

who relocates his or her practice into a 

rural area or HPSA and joins a 

physician practice to replace a 

physician who retired, died, or 

relocated (from the service area) during 

the previous 12-month period, the costs 

allocated by the physician practice to 

the recruited physician may be either: 

(1) the actual additional incremental 

costs attributable to the recruited 

physician; or (2) the lower of a per 

capita allocation or 20 percent of the 

practice’s aggregate costs. 

This Phase III final rule also clarifies 

that a physician must move his or her 

medical practice from a location outside 

of the geographic area served by the 

hospital to a location within the 

geographic area served by the hospital. 

In addition, we have revised the 

exception to provide that the relocation 

requirement will not apply to a 

physician who: (1) for at least 2 years 

immediately preceding the recruitment 

arrangement, was employed on a fulltime basis by a Federal or State bureau 

of prisons (or similar entity operating 

correctional facilities), the Department 

of Defense or Veterans Affairs, or 

facilities of the Indian Health Service, 

provided that he or she had no private 

medical practice during the same time 

period; or (2) the Secretary has 

determined in an advisory opinion not 

to have an established medical practice 

that serves a significant number of 

patients who are or could become 

patients of the recruiting hospital. In the 

case of recruitment assistance provided 

by a hospital to a physician who joins 

a physician practice, we have revised 

the exception to prohibit the physician 

practice from imposing on the recruited 

physician any practice restrictions that 

unreasonably restrict the recruited 

physician’s ability to practice medicine 

in the geographic area served by the 

hospital. Finally, the exception in 

§ 411.357(e) is now applicable to a rural 

health clinic in the same manner as it 

applies to a hospital (or federally 

qualified health center). 

We have expanded the exception in 

§ 411.357(t) for retention payments in 

underserved areas to permit a hospital 

to make a payment to retain a physician 

on its medical staff even if the physician 

does not have a bona fide firm, written 

recruitment offer, provided that the 

physician certifies in writing that, 

among other things, he or she has a 

bona fide opportunity for future 

employment that would require the 

physician to move his or her medical 

practice at least 25 miles to a location 

outside the geographic area served by 

the hospital, and certain other 

conditions are satisfied. We have also 

expanded the retention payments 

exception to permit retention payments 

in the case of a physician with a bona 

fide firm, written offer of employment 

from, or a bona fide opportunity for 

future employment with, an academic 

medical center or physician 

organization. Also, we have expanded 

the exception to permit a hospital to 

make a retention payment to a physician 

whose current medical practice is not 

located in a HPSA. Under the revised 

exception, a retention payment may be 

made to a physician whose current 

medical practice is located in a rural 

area or an area with demonstrated need 

for the physician, as determined by the 

Secretary in an advisory opinion. 

Changes to the remaining exceptions 

found in § 411.357 include—

• Under the personal service 

arrangements exception in § 411.357(d), 

allowing a ‘‘holdover’’ personal service 

arrangement on terms similar to those in 

the exceptions for the rental of office 

space and equipment; 

• Under the nonmonetary 

compensation exception in § 411.357(k), 

in certain circumstances, upon 

repayment of nonmonetary 

compensation in excess of the 

applicable limit, deeming the 

nonmonetary compensation to be within 

the limit, and allowing an entity with a 

formal medical staff to hold one local 

medical staff appreciation event per 

year; 

• Under the exception for charitable 

donations by a physician in § 411.357(j), 

clarifying that the donation may neither 

be solicited nor offered in any manner 

that takes into account the volume or 

value of referrals or other business 

generated between the physician and 

the entity; 

• Under the professional courtesy 

exception in § 411.357(s), eliminating 

the requirement that the entity offering 

the professional courtesy inform the 

insurer in writing of the reduction of 

any coinsurance obligation on the part 

of the recipient of the professional 

courtesy, and clarifying that the 

exception is applicable only to entities 

that have formal medical staffs; 

• Under the fair market value 

compensation exception in § 411.357(l), 


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clarifying that the exception is 

applicable to both compensation 

provided to a physician from an entity 

and compensation provided to an entity 

from a physician; and, 

• Under the compliance training 

exception in § 411.357(o), permitting the 

provision of training programs for 

which CME is available, provided that 

the primary purpose of the program is 

compliance training. 

XIII. Technical Corrections 

1. Web site Change 

Because the address of the physician 

self-referral Web site has changed, we 

are correcting the references to our Web 

site in the definition of ‘‘List of CPT/ 

HCPCS Codes’’ at § 411.351, the 

‘‘nonmonetary compensation’’

exception in § 411.357(k), and the 

‘‘medical staff incidental benefits’’

exception in § 411.357(m). 

[REG TEXT—Change] 

2. Typographical Error 

We are correcting typographical and 

other errors that appeared in Phase II. 

For example, we are removing a 

typographical error (‘‘sbull’’) in 

§ 411.355(a)(2). In addition, we are 

correcting § 411.357(m)(1) to state that 

medical staff incidental benefits must be 

‘‘offered’’ to all members of the medical 

staff. In Phase II, we intended to change 

‘‘offered’’ to ‘‘provided’’ only in 

§ 411.357(m)(2), but the change was 

inadvertently made to paragraph (m)(1) 

as well. 

3. CMS Manuals 

Because CMS has begun re-numbering 

and posting its manuals on the Internet, 

we are correcting the citations to the 

manuals in § 411.351 (the definitions of 

entity, locum tenens physician, 

parenteral and enteral nutrients, 

equipments and supplies, and physician 

in the group practice). 

4. Nonmonetary Compensation 

We are revising the section heading of 

§ 411.357(k) to remove the reference to 

‘‘up to $300.’’ This change will make the 

section heading consistent with the 

provisions of § 411.357(k). 

5. Simplification of Regulatory Text 

We made several non-substantive 

grammatical and editorial revisions to 

the regulatory text. For example, we 

revised the introductory language in 

§ 411.355(g) concerning EPO and other 

dialysis related drugs to make it easier 

to read. We also substituted 

‘‘nonmonetary’’ for ‘‘non-monetary’’

throughout the regulations. A similar 

change is being made to § 424.22 to 

simplify language concerning home 

health services. We have simplified 

references in the recruitment exception 

to a recruited physician joining a 

‘‘physician or physician practice.’’

Because ‘‘joining a physician’’ is 

necessarily synonymous with ‘‘joining a 

physician practice,’’ we have simplified 

the regulation text so that it now refers 

only to ‘‘joining a physician practice.’’

6. Statutory References 

Under the definition of ‘‘Does not 

violate the anti-kickback statute’’ at 

§ 411.351, the statutory references to the 

anti-kickback statute have been 

corrected from sections 1128(a)(7) and 

1128a(b)(7) of the Act to sections 

1128A(a)(7) and 1128(b)(7) of the Act, 

respectively. 

7. References to the Reassignment Rules 

In the definition of ‘‘physician in the 

group practice,’’ we updated the 

reference to the reassignment rules from 

§ 424.80(b)(3) to § 424.80(b)(2). We also 

updated the reference to the 

reassignment rules in the in-office 

ancillary services exception in 

§ 411.355(b)(3)(v) from § 424.80(b)(6) to 

§ 424.80(b)(5). 

8. National Provider Identifier 

We revised the Reporting 

Requirements provision in § 411.361(c) 

to account for the transition from the 

Unique Physician Identification Number 

(UPIN) to the National Provider 

Identifier (NPI) by inserting the 

following phrase: ‘‘and/or the national 

provider identifier (NPI).’’ Specific 

references to the NPI are found in 

§ 411.361(c)(1) and (c)(2). 

9. Advisory Opinions 

We are revising § 411.370(a) to 

remove the sunset provision that had 

formerly applied to our authority to 

issue advisory opinions because section 

543 of the Medicare, Medicaid, and 

SCHIP Benefits and Improvement 

Protection Act of 2000, Pub. L. 106–554, 

extended the time period indefinitely 

for our authority to issue advisory 

opinions. 

XIV. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995, we are required to provide 30- 

day notice in the Federal Register and 

solicit public comment before a 

collection of information requirement is 

submitted to the Office of Management 

and Budget (OMB) for review and 

approval. In order to fairly evaluate 

whether an information collection 

should be approved by OMB, section 

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

Reduction Act of 1995 requires that we 

solicit comment on the following 

issues—

• The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency. 

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

Therefore, we previously solicited 

public comment on each of these issues 

for the following sections of the 

regulation that contain information 

collection requirements. 

Group Practice (§ 411.352) 

The burden associated with § 411.352 

was discussed in detail in both Phase I 

and Phase II (66 FR 949 and 69 FR 

16118–16119, respectively). Section 

411.352 sets out the requirements that 

must be met in order to qualify as a 

group practice. Section 411.352(d) 

provides that substantially all of the 

patient care services of the physicians 

who are members of the group must be 

furnished and billed through the group 

practice. The burden associated with 

this requirement is the time and effort 

necessary to collect, document, and 

maintain the information outlined in 

§ 411.352(d). We believe that the 

documentation requirements in this 

section are usual and customary 

business practices. The burden 

associated with this requirement, 

therefore, is not subject to the PRA as 

stated in 5 CFR 1320.3(b)(2) because the 

time, effort, and financial resources 

necessary to comply with a collection of 

information that would be incurred by 

persons in the normal course of their 

activities are considered to be usual and 

customary business practices and are 

not subject to the PRA. In addition, the 

burden is not subject to the PRA under 

5 CFR 1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Section 411.352(i) addresses the 

special rule for productivity bonuses 

and profit shares. The burden associated 

with the requirements in this section is 

the time and effort associated with 

collecting and maintaining the 

information listed under § 411.352(i)(2) 

and (i)(3). The burden associated with 

the recordkeeping requirements in 

§ 411.352(i) is not subject to the PRA, as 

stated in 5 CFR 1320.3(b)(2). In 

addition, the burden is not subject to the 

PRA under 5 CFR 1320.4(a) to the extent 


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that the information is collected during 

the conduct of a criminal or civil action, 

or during the conduct of an 

administrative action, investigation or 

audit. 

Financial Relationship, Compensation, 

and Ownership or Investment Interest 

(§ 411.354) 

Both Phase I (66 FR 949) and Phase 

II (69 FR 16119) contain detailed 

discussions of the information 

collection requirements in § 411.354. 

Section 411.354(d)(4) permits a 

physician’s compensation from a bona 

fide employer or under a managed care 

or other contract to be conditioned on 

the physician’s referrals to a particular 

provider, practitioner, or supplier if, 

among other things, the requirement to 

make referrals is set forth in a written 

agreement signed by the parties. 

Specifically, the burden associated with 

this requirement in 

§ 411.354(d)(4)(iv)(A) is the time and 

effort necessary to set forth the required 

referrals provision in a written 

agreement signed by both parties. The 

burden associated with this requirement 

is not subject to the PRA as stated in 5 

CFR 1320.3(b)(2). In addition, the 

burden is not subject to the PRA under 

5 CFR 1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

General Exceptions to the Referral 

Prohibition Related to Both Ownership/ 

Investment and Compensation 

(§ 411.355) 

The burden associated with § 411.355 

was discussed in detail in both Phase I 

(66 FR 949) and Phase II (69 FR 16119). 

Section 411.355(e) addresses the 

exception for services provided by an 

academic medical center. Essentially, 

§ 411.355(e)(1)(iii)(B) states that the 

relationship of the components of the 

academic medical center must be set 

forth in written agreement(s) or other 

written document(s) that have been 

adopted by the governing body of each 

component. If the academic medical 

center is one legal entity, this 

requirement will be satisfied if transfers 

of funds between components of the 

academic medical center are reflected in 

the routine financial reports covering 

the components. The burden associated 

with these requirements is not subject to 

the PRA, as stated in 5 CFR 1320.3(b)(2). 

In addition, the burden is not subject to 

the PRA under 5 CFR 1320.4(a) to the 

extent that the information is collected 

during the conduct of a criminal or civil 

action, or during the conduct of an 

administrative action, investigation or 

audit. 

Exceptions to the Referral Prohibition 

Related to Compensation Arrangements 

(§ 411.357) 

Section 411.357(a) addresses the 

rental of office space. Under 

§ 411.357(a)(1), the rental or lease 

agreement associated with payments for 

the use of office space made by a lessee 

to a lessor must be set out in writing, 

signed by the parties, and specify the 

premises covered. The burden 

associated with these requirements is 

the time and effort necessary to draft, 

sign, and maintain the written 

agreement. The burden associated with 

this requirement is not subject to the 

PRA as stated in 5 CFR 1320.3(b)(2). In 

addition, the burden is not subject to the 

PRA under 5 CFR 1320.4(a) to the extent 

that the information is collected during 

the conduct of a criminal or civil action, 

or during the conduct of an 

administrative action, investigation or 

audit. 

Section 411.357(b) requires that the 

payments made by a lessee to a lessor 

for the use of equipment meet certain 

conditions. Specifically, § 411.357(b)(1) 

requires that a rental or lease agreement 

be set out in writing, signed by the 

parties, and specify the equipment 

covered by the agreement. The burden 

associated with this requirement is the 

time and effort associated with drafting, 

signing, and maintaining the written 

agreement. The burden associated with 

this requirement is not subject to the 

PRA as stated in 5 CFR 1320.3(b)(2). In 

addition, the burden is not subject to the 

PRA under 5 CFR 1320.4(a) to the extent 

that the information is collected during 

the conduct of a criminal or civil action, 

or during the conduct of an 

administrative action, investigation or 

audit. 

Section 411.357(d) addresses personal 

service arrangements. Section 

411.357(d)(1)(i) requires that each 

personal service arrangement be set out 

in writing, signed by the parties, and 

specify the services covered by the 

arrangement. In addition, 

§ 411.357(d)(1)(ii) requires that the 

written agreement cover all of the 

services to be furnished by the 

physician or his or her immediate 

family member, or both. This 

requirement is satisfied if all separate 

arrangements with the physician and 

his or her immediate family member 

incorporate each other by reference or 

cross-reference a master list of contracts. 

The burden associated with both 

§ 411.357(d)(1)(i) and (ii) is not subject 

to the PRA as stated under 5 CFR 

1320.3(b)(2). In addition, the burden is 

not subject to the PRA under 5 CFR 

1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Section 411.357(e) addresses 

physician recruitment. Specifically, 

§ 411.357(e)(1)(i) requires that all 

arrangements for remuneration provided 

by a hospital to recruit a physician that 

is intended to induce the physician to 

relocate his or her medical practice to 

the geographic area served by the 

hospital in order to become a member 

of the hospital’s medical staff must be 

set out in writing and signed by both 

parties. In addition, § 411.357(e)(4)(i) 

provides that, in the case of certain 

recruitment arrangements in which the 

recruited physician joins a physician 

practice, the written agreement must be 

signed by the hospital, the recruited 

physician, and the physician practice. 

The burden associated with these 

requirements is the time and effort 

associated with drafting, signing, and 

maintaining the written agreement. The 

burden associated with this requirement 

is not subject to the PRA as stated under 

5 CFR 1320.3(b)(2). In addition, the 

burden is not subject to the PRA under 

5 CFR 1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Section 411.357(e)(4)(iv) imposes a 

recordkeeping requirement. Records of 

the actual costs and the passed through 

amounts must be maintained for a 

period of at least 5 years and made 

available to the Secretary upon request. 

The burden associated with this 

requirement is the time and effort 

associated with maintaining the 

required documentation. The burden 

associated with this collection is not 

subject to the PRA as it meets the 

requirements set forth in 5 CFR 

1320.3(b)(2). In addition, the burden is 

not subject to the PRA under 5 CFR 

1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Section 411.357(l)(1) requires that all 

arrangements pertaining to fair market 

value compensation be set forth in 

writing. In addition, the written 

agreement must be signed by the parties 

and must cover identifiable items or 

services that are the subject of the 

arrangement. The burden associated 

with this requirement is the time and 

effort necessary to draft, sign, and 

maintain the written agreement. The 

burden associated with these 


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requirements is not subject to the PRA 

as it meets the requirements set forth in 

5 CFR 1320.3(b)(2). In addition, the 

burden is not subject to the PRA under 

5 CFR 1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Section 411.357(p) sets forth an 

exception for indirect compensation 

arrangements. The exception requires 

the arrangement to be set out in a 

writing that is signed by the parties and 

specifies the services covered by the 

arrangement. The burden associated 

with this requirement is the time and 

effort necessary to draft, sign, and 

maintain the written agreement. The 

burden associated with these 

requirements is not subject to the PRA 

as it meets the requirements set forth in 

5 CFR 1320.3(b)(2). In addition, the 

burden is not subject to the PRA under 

5 CFR 1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Section 411.357(q) sets forth an 

exception for remuneration that meets 

all of the conditions set forth in the 

voluntary anti-kickback safe harbor at 

§ 1001.952(f). Under § 1001.952(f), the 

referral service must make certain 

standard disclosures to each person 

seeking a referral and must maintain a 

written record certifying each 

disclosure. The burden associated with 

this requirement is the time and effort 

necessary to draft, sign, and maintain 

the disclosures. The burden associated 

with these requirements is not subject to 

the PRA as it meets the requirements set 

forth in 5 CFR 1320.3(b)(2). In addition, 

the burden is not subject to the PRA 

under 5 CFR 1320.4(a) to the extent that 

the information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Section 411.357(r) sets forth an 

exception for obstetrical malpractice 

insurance subsidies that satisfy all of the 

conditions set forth in the voluntary 

anti-kickback safe harbor at 

§ 1001.952(o). Under § 1001.952(o)(1), 

such subsidies must be made in 

accordance with a written agreement. 

The burden associated with this 

requirement is the time and effort 

necessary to draft, sign, and maintain 

the agreement. Under § 1001.952(o)(2), 

the physician receiving the subsidy 

must certify that for the initial coverage 

period, he or she has a reasonable basis 

for believing that at least 75 percent of 

his or her obstetrical patients will either 

reside in a HPSA or medically 

underserved area, or be part of a 

medically underserved population, and 

the physician must make a similar 

certification for subsequent coverage 

periods. The burden associated with the 

requirement for a written agreement is 

not subject to the PRA as it meets the 

requirements set forth in 5 CFR 

1320.3(b)(2). In addition, the burden is 

not subject to the PRA under 5 CFR 

1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. The 

burden associated with the physician 

certification requirement is considered 

to be a usual and customary business 

practice and, as set forth in 5 CFR 

1320.3(b)(2), is not subject to the PRA. 

In addition, the burden is not subject to 

the PRA under 5 CFR 1320.4(a) to the 

extent that information is collected 

during conduct of a criminal or civil 

action, or during the conduct of an 

administrative action, investigation or 

audit. 

Section 411.357(s) addresses 

professional courtesy. Specifically, 

§ 411.357(s)(3) requires that an entity 

have a written policy approved by the 

entity’s governing body in order to 

extend professional courtesy. The 

burden associated with this requirement 

is the time and effort associated with 

drafting and maintaining the written 

policy. The burden associated with this 

requirement is not subject to the PRA as 

stated under 5 CFR 1320.3(b)(2). In 

addition, the burden is not subject to the 

PRA under 5 CFR 1320.4(a) to the extent 

that the information is collected during 

the conduct of a criminal or civil action, 

or during the conduct of an 

administrative action, investigation or 

audit. 

Section 411.357(t), under this Phase 

III final rule, protects payments made by 

a hospital to a physician on its medical 

staff to retain the physician’s medical 

practice in an underserved area if 

certain conditions are satisfied. The 

exception requires, among other things, 

that the physician: (1) have a bona fide 

firm written recruitment offer (or offer 

of employment) from an unrelated 

hospital (which includes a rural health 

clinic or federally qualified health 

center), academic medical center, or 

physician organization that specifies, 

among other things, the remuneration 

being offered; or (2) provide a written 

certification of a verifiable employment 

opportunity. Both options require 

documentation that the new 

employment would require the 

physician to move the location of his or 

her medical practice at least 25 miles 

and outside of the geographic area 

served by the hospital, rural health 

clinic, or federally qualified health 

center making the retention payment. 

The burden associated with this 

requirement is considered to be a usual 

and customary business practice and, as 

set forth in 5 CFR 1320.3(b)(2), is not 

subject to the PRA. In addition, the 

burden is not subject to the PRA under 

5 CFR 1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Section 411.357(v) sets forth an 

exception for certain arrangements 

involving the donation of nonmonetary 

remuneration consisting of electronic 

prescribing items and services necessary 

and used solely to receive and transmit 

electronic prescription information. 

Section 411.357(v)(7) requires that such 

arrangements be set forth in a written 

agreement that is signed by all parties, 

specifies the items or services being 

provided and the donor’s cost of the 

items and services, and covers all of the 

electronic prescribing items and 

services to be provided by the donor. 

This requirement is met if all separate 

agreements between the donor and the 

physician incorporate each other by 

reference or if they cross-reference a 

master list of agreements that is 

maintained and updated centrally and is 

available for review by the Secretary 

upon request. The burden associated 

with these requirements is the time and 

effort associated with drafting, signing, 

and maintaining the necessary 

documentation. The burden associated 

with these requirements is not subject to 

the PRA as stated under 5 CFR 

1320.3(b)(2). In addition, the burden is 

not subject to the PRA under 5 CFR 

1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Section 411.357(w) addresses certain 

arrangements involving the donation of 

nonmonetary remuneration consisting 

of electronic health records software 

and information technology and training 

services necessary and used 

predominantly to create, maintain, 

transmit, or receive electronic health 

records. Specifically, § 411.357(w)(7) 

requires that the arrangement be set 

forth in a written agreement that is 

signed by the parties and that specifies 

the items and services being provided, 

the donor’s cost of the items, and the 

amount of the physician’s contribution. 

The agreement must cover all of the 

electronic health records items and 

services to be provided by the donor. 

The burden associated with these 


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requirements is the time and effort 

associated with drafting, signing, and 

maintaining the necessary 

documentation. The burden associated 

with these requirements is not subject to 

the PRA as stated under 5 CFR 

1320.3(b)(2). In addition, the burden is 

not subject to the PRA under 5 CFR 

1320.4(a) to the extent that the 

information is collected during the 

conduct of a criminal or civil action, or 

during the conduct of an administrative 

action, investigation or audit. 

Reporting Requirements (§ 411.361) 

The burden associated with this 

section was discussed in detail in Phase 

II (69 FR 16054). The burden associated 

with the requirements in this section is 

not subject to the PRA as stated under 

both 5 CFR 1320.3(b)(2) and 5 CFR 

1320.4(a). However, this section does 

contain requirements that are not 

exempt from the PRA. As stated in 

Phase II, we quantified the burden 

associated with the reporting 

requirements in § 411.361(c) through (e) 

(69 FR 16119–16121). While these 

requirements are subject to the PRA, 

they are currently approved under OMB 

control number 0938–0846, with an 

expiration date of November 30, 2007. 

We have submitted a copy of this final 

rule to OMB for its review of the 

aforementioned information collection 

requirements. 

XV. Regulatory Impact Statement 

A. Overall Impact 

We have examined the impact of 

Phase III of this rulemaking as required 

by Executive Order 12866 (September 

1993, Regulatory Planning and Review), 

the Regulatory Flexibility Act (RFA) 

(September 19, 1980, Pub. L. 96–354), 

section 1102(b) of the Social Security 

Act, the Unfunded Mandates Reform 

Act of 1995 (Pub. L. 104–4), and 

Executive Order 13132. 

Executive Order 12866 (as amended 

by Executive Order 13258, which 

merely reassigns responsibility of 

duties) directs agencies to assess all 

costs and benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

($100 million or more in any 1 year). 

While we cannot specify in advance 

the aggregate economic impact of this 

rule, we do not believe that the impact 

will approach $100 million or more 

annually. This Phase III final rule does 

not unsettle existing financial 

relationships or create further 

restrictions on financial relationships 

between physicians and health care 

facilities. Indeed, physicians and DHS 

entities have been complying with the 

requirements set forth in the physician 

self-referral prohibition for many years, 

specifically in regard to clinical 

laboratory services since 1992 and to 

referrals for all other DHS since 1995. 

Under Phase I, the physician selfreferral prohibition was interpreted 

narrowly while the exceptions were 

interpreted broadly. Phase I also 

established additional regulatory 

exceptions for legitimate arrangements 

that would otherwise violate the 

prohibition. Phase I covered the 

following—

• Sections 1877(a) and 1877(b) of the 

Act (the general prohibition and the 

exceptions applicable to both ownership 

and compensation arrangements); 

• The statutory definitions at section 

1877(h) of the Act; 

• Certain additional regulatory 

definitions; and 

• New regulatory exceptions 

promulgated using the Secretary’s 

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

Act for certain arrangements involving 

the following—

• Academic medical centers; 

• Implants furnished by an 

ambulatory surgery center; 

• EPO and certain dialysis-related 

outpatient prescription drugs; 

• Preventive screening tests, 

immunizations, and vaccines; 

• Eyeglasses and contact lenses after 

cataract surgery; 

• Nonmonetary compensation up to 

$300; 

• Fair market value compensation; 

• Medical staff incidental benefits; 

• Risk-sharing arrangements; 

• Compliance training; and 

• Indirect compensation 

arrangements. 

Phase II was issued as an interim final 

rule with comment period on March 26, 

2004. Under Phase II, we clarified 

certain regulatory definitions, 

broadened certain established 

exceptions, and created additional 

regulatory exceptions. Phase II also 

addressed the public comments 

provided on the Phase I regulations. 

Phase II covered the following—

• All provisions of section 1877 of the 

Act (namely, the exceptions for 

ownership and investment interests and 

the exceptions for various compensation 

arrangements); 

• Additional regulatory definitions; 

and 

• Additional new regulatory 

exceptions promulgated using the 

Secretary’s authority under section 

1877(b)(4) of the Act for certain 

arrangements involving the following—

• Temporary noncompliance with an 

applicable exception; 

• Intra-family rural referrals; 

• Charitable donations by a 

physician; 

• Referral services; 

• Obstetrical malpractice insurance 

subsidies; 

• Professional courtesy; 

• Retention payments in underserved 

areas; and 

• Community-wide health 

information systems. 

This Phase III final rule primarily 

clarifies aspects of Phase I and Phase II 

based on public comments and, again, 

like Phase I and Phase II, increases the 

flexibility of the rule’s application by 

expanding the breadth of the exceptions 

while continuing to protect against 

program and patient abuse. Phase III 

covers all of the provisions in section 

1877 of the Act except those related to 

advisory opinions and civil monetary 

penalties. Among other things, this 

Phase III final rule—

• Eliminates the proposed safe harbor 

within the fair market value definition 

for physician compensation; 

• Adds three new regulatory 

definitions; 

• Considers a physician to ‘‘stand in 

the shoes’’ of a physician organization 

of which he or she is a member; 

• Adds an alternative 45-minute 

transportation time test to the intrafamily rural referrals exception; 

• Adds a holdover provision in the 

exception for personal service 

arrangements on terms similar to those 

in the space and equipment lease 

contexts; 

• Expands the geographic area into 

which a rural hospital may recruit a 

physician; 

• With respect to a physician who is 

recruited to join another physician or 

practice in a rural area or HPSA to 

replace another physician who retired, 

died, or relocated within the previous 

12-month period, permits the allocation 

of costs by the physician or practice to 

the recruited physician not to exceed 

either (A) the actual additional 

incremental costs attributable to the 

recruited physician, or (B) the lower of 

a per capita allocation or 20 percent of 

the practice’s aggregate costs; 

• Allows practice restrictions that do 

not unreasonably restrict the recruited 

physician from practicing in the 

geographic area served by the hospital; 

• Expands the nonmonetary 

compensation exception to allow 

entities to avoid what would otherwise 

be noncompliance with the exception in 


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certain circumstances, and to allow an 

entity with a formal medical staff to 

provide one local medical staff 

appreciation event per year; and 

• Adds a written certification option 

as an alternative to the requirement for 

a bona fide written offer under the 

exception for retention payments in 

underserved areas. 

This Phase III final rule generally does 

not require existing financial 

relationships to be restructured; it 

merely further clarifies the language of 

Phase I and Phase II, and provides 

additional flexibility under the 

regulatory exceptions to enable parties 

to adjust noncompliant arrangements. 

Wherever possible, this Phase III final 

rule attempts to accommodate legitimate 

financial relationships while reducing 

the regulatory burden and continuing to 

protect against program and patient 

abuse. For these reasons, we conclude 

that this is not a major rule with an 

economically significant effect of $100 

million in any 1 year. 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of the RFA, 

small entities include small businesses, 

nonprofit organizations, and small 

governmental jurisdictions. Most 

hospitals and most other providers and 

suppliers are small entities, either by 

nonprofit status or by having revenues 

of $6 million to $29 million in any 1 

year. Currently, there are approximately 

1.1 million physicians, other health care 

practitioners, and medical suppliers that 

receive Medicare payment (http:// 

www.cms.hhs.gov/CapMarketUpdates/ 

Downloads/2006CMSstat.pdf). 

For purposes of the RFA, according to 

the latest numbers from the Small 

Business Administration’s North 

American Industrial Classification 

System, approximately 100 percent of 

offices of physicians in the United 

States are considered small businesses 

according to the Small Business 

Administration’s size standards with 

total revenues of $9 million or less and 

are considered small entities. 

Individuals and States are not included 

in the definition of a small entity. We 

determined that this Phase III final rule 

does not have a significant impact on 

small businesses because it does not 

increase regulatory burden, but rather 

reduces it. As noted above, this Phase III 

final rule generally does not require 

existing financial relationships to be 

restructured; it provides clarifications of 

the provisions found in Phase I and 

Phase II and provides additional 

flexibility under the regulatory 

exceptions to enable parties to adjust 

noncompliant arrangements. Overall, 

this Phase III final rule is very 

accommodating to legitimate financial 

relationships while reducing the 

regulatory burden and continuing to 

protect against program and patient 

abuse. 

In addition, section 1102(b) of the Act 

requires us to prepare a regulatory 

impact analysis if a rule may have a 

significant impact on the operations of 

a substantial number of small rural 

hospitals. This analysis must conform to 

the provisions of section 604 of the 

RFA. For purposes of section 1102(b) of 

the Act, we define a small rural hospital 

as a hospital that is located outside of 

a Metropolitan Statistical Area and has 

fewer than 100 beds. The impact of this 

rule on small rural hospitals is minimal. 

In fact, several provisions of the rule 

benefit small rural hospitals by giving 

them more flexibility to maintain 

operations and remain competitive in an 

increasingly global health care market. 

Several provisions of this Phase III 

final rule benefit rural hospitals and 

rural health clinics. For example, the 

rule modifies the physician recruitment 

exception with respect to a hospital 

located in a rural area by expanding the 

geographic area into which a rural 

hospital may recruit a physician. Under 

the revised exception, a rural hospital 

may recruit a physician into an area 

composed of the lowest number of 

contiguous zip codes (and in some 

circumstances, noncontiguous zip 

codes) from which the hospital draws at 

least 90 percent of its inpatients. In 

addition, we have modified the 

recruitment exception to permit a 

hospital to offer a more generous 

income guarantee to a physician who is 

recruited into a rural area or HPSA to 

replace a physician who retired, 

relocated, or died within the previous 

12 months. The exception for physician 

recruitment is also expanded to include 

rural health clinics. Small rural 

hospitals also benefit under this rule 

from the significant expansion of their 

ability to offer retention payments to 

physicians. In summary, this Phase III 

final rule does not have a substantial 

negative impact on the operations of a 

substantial number of small rural 

hospitals. 

Section 202 of the Unfunded 

Mandates Reform Act of 1995 also 

requires that agencies assess anticipated 

costs and benefits before issuing any 

rule whose mandates require spending 

in any 1 year of $100 million in 1995 

dollars, updated annually for inflation. 

That threshold level is currently 

approximately $120 million. As 

discussed above, the revisions made to 

the Phase I and Phase II rules by this 

Phase III final rule will have an 

insignificant financial impact. As such, 

there are no anticipated expenditures 

under this rule that would result in 

expenditures to State, local or tribal 

governments, in the aggregate, or to the 

private sector, that would rise above the 

$120 million threshold. 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

We do not anticipate that this Phase III 

final rule will have a substantial effect 

on State or local governments, nor do 

we believe that this final rule preempts 

State law or draws Federalism issues 

into question. 

We are not preparing analyses for 

either the RFA or section 1102(b) of the 

Act because, for the reasons identified 

above, we have determined, and we 

certify, that this Phase III final rule will 

not have a significant economic impact 

on a substantial number of small entities 

or a significant impact on the operations 

of a substantial number of small rural 

hospitals. For the benefit of the public, 

we discuss below the anticipated effects 

of the rule and the alternative regulatory 

options we considered. 

B. Anticipated Effects 

This Phase III final rule primarily 

affects physicians and health care 

entities that furnish certain items and 

services (‘‘designated health services’’) 

to Medicare beneficiaries. We believe 

that this Phase III final rule addresses 

many of the industry’s primary concerns 

with the existing regulatory scheme, is 

consistent with the statute’s goals and 

directives, and protects beneficiaries of 

Federal health care programs. In 

particular, we have attempted to 

preserve the core statutory prohibition 

while providing sufficient flexibility to 

minimize the impact of the rule on 

many common business arrangements. 

For the reasons stated above, we do not 

anticipate that this rule will have a 

significant economic impact on a 

substantial number of small entities. 

Nevertheless, we wish to inform the 

public of what we regard as the major 

effects of this rulemaking. We discuss 

below some of the possible economic 

effects upon physicians and DHS 

entities. We also briefly discuss the 

effects of the rules on the Medicare and 

Medicaid programs as well as Medicare 

beneficiaries. 

1. Effects on Physicians 

A physician can have a financial 

relationship with an entity either 

through an ownership or investment 


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interest in the entity, or through a 

compensation arrangement with the 

entity. Financial relationships include 

both direct and indirect ownership and 

investment interests and direct and 

indirect compensation arrangements. A 

physician who has (or whose immediate 

family member has) a financial 

relationship with an entity that does not 

qualify for an exception is prohibited 

under section 1877 of the Act from 

referring Medicare patients to that entity 

for the provision of DHS. The primary 

statutory sanctions for violating the 

physician self-referral prohibition are 

nonpayment of claims for DHS 

furnished as the result of a prohibited 

referral and the corresponding 

obligation to refund any amounts 

collected on those claims. These 

sanctions target the entities that furnish 

DHS, including physician group 

practices. Referring physicians may be 

sanctioned with the imposition of civil 

monetary penalties (CMPs) only for 

knowing violations of the statutory 

prohibition. Nevertheless, although 

referring physicians are not the primary 

targets of the sanctions for violating the 

statute, their financial relationships 

with DHS entities must comply with the 

statute and implementing regulations. 

Accordingly, this Phase III final rule 

may affect a physician’s or group 

practice’s decision to enter into a 

particular financial relationship and the 

manner in which the arrangement is 

structured. 

We have made every effort in Phase 

I, Phase II, and Phase III of this 

rulemaking to address the concerns of 

physicians and physician group 

practices while remaining faithful to the 

statute. We discuss below the major 

provisions of this rule that affect 

physicians. 

Two major changes under this Phase 

III final rule directly affect physicians. 

In Phase II, we clarified that a referring 

physician may be treated as ‘‘standing 

in the shoes’’ of his or her whollyowned PC and we solicited comments 

on whether to permit a physician to 

‘‘stand in the shoes’’ of a group practice 

of which he or she is a member. In this 

final rule, we are adopting a broader 

‘‘stand in the shoes’’ provision than the 

provision proposed in Phase II. 

Essentially, a physician is deemed to 

stand in the shoes of his or her 

‘‘physician organization,’’ which is 

defined to include a physician practice 

or group practice as well as a 

professional corporation of which the 

physician is the sole owner. A physician 

who stands in the shoes of a physician 

organization is deemed to have the same 

compensation arrangements (with the 

same parties and on the same terms) as 

the physician organization. For 

physicians, this will require some 

compensation arrangements to comply 

with an exception for direct 

compensation arrangements, rather than 

the indirect compensation arrangements 

exception. In general, the new stand in 

the shoes provision will ease 

compliance by simplifying the analysis 

of arrangements in which a physician 

organization is interposed between the 

referring physician and the entity 

furnishing DHS. 

The second major change relates to 

revisions to the physician recruitment 

exception. For hospitals located in rural 

areas, we have expanded the geographic 

area into which they may recruit a 

physician. Under the revised exception, 

a rural hospital may recruit a physician 

into an area composed of the lowest 

number of contiguous zip codes (and in 

some circumstances, noncontiguous zip 

codes) from which the hospital draws at 

least 90 percent of its inpatients. In 

addition, we have modified the 

recruitment exception to permit a 

hospital to offer a more generous 

income guarantee to a physician who is 

recruited into a rural area or HPSA to 

replace a physician who retired, 

relocated, or died within the previous 

12 months. This change will make it 

easier for such physicians and physician 

practices to recruit new physicians. 

This Phase III final rule also allows a 

physician practice to impose on a 

recruited physician practice restrictions 

that do not unreasonably restrict the 

ability of the recruited physician to 

practice in the geographic area served 

by the recruiting hospital. Allowing 

certain kinds of practice restrictions 

makes it more likely that physician 

practices will take on new physicians 

and, as a result, hospitals will be able 

to attract new physicians and satisfy 

what would otherwise be unmet health 

care needs of their communities. 

Beyond the adoption of the more 

expansive ‘‘stand in the shoes’’

provision, and the revisions to the 

physician recruitment exception, the 

effect of the remaining changes on 

physicians under the Phase III final rule 

are relatively minor. Some of these 

changes include—

• Not retaining the safe harbor within 

the fair market value definition for 

hourly payments to physicians; 

• Clarifying that group practices can 

compensate members, employed 

physicians, and other physicians in the 

group by directly taking into account 

the volume and value of items and 

services that are provided ‘‘incident to’’

the physicians’ professional services, in 

certain circumstances; and 

• Expanding the exception for 

retention payments in underserved 

areas to permit retention payments to be 

made in the case of a physician who 

does not have a bona fide written offer 

of recruitment or employment, provided 

that the physician certifies that he or 

she has a bona fide opportunity for 

future employment and the arrangement 

satisfies all other conditions of the 

exception. 

All of these changes ease the burden 

and cost of complying with the statutory 

prohibition by creating or implementing 

clear rules in such a way that the parties 

can determine more easily and with 

greater certainty whether their financial 

relationships comply with an exception. 

In addition, by expanding some 

definitions and exceptions, a greater 

number of legitimate arrangements can 

comply with the statute. 

2. Effects on Other Health Care 

Providers and Suppliers 

As we stated above, the physician 

self-referral rules affect entities that 

furnish DHS by preventing them from 

receiving payment for services that they 

furnish as a result of a physician’s 

prohibited referral. Entities may also be 

subject to other sanctions, including 

fines and exclusion from Federal health 

care programs, if they knowingly submit 

a claim in violation of the prohibition. 

While all physicians and DHS entities 

are subject to this rule, we lack the data 

to determine the number of entities 

whose financial relationships with 

physicians must be terminated or 

revised to comply with this Phase III 

final rule. However, we believe that the 

number will be fewer than we had 

anticipated in the prior physician selfreferral rules for two reasons—

• First, hospitals and other DHS 

entities were required to restructure any 

non-compliant financial arrangements 

after Phase I and Phase II became 

effective (January 4, 2002 and July 26, 

2004, respectively); and 

• Second, this Phase III final rule 

does not adopt any changes that 

significantly narrow existing exceptions, 

or which would require termination or 

substantial modification of existing 

arrangements. As with Phase I and 

Phase II, we have interpreted the 

prohibition narrowly and the exceptions 

broadly under Phase III. 

We have made every effort in Phase 

I, Phase II, and in Phase III of this 

rulemaking to address the concerns of 

health care providers and suppliers 

while remaining faithful to the statute. 

We discuss below the major provisions 

of this rule that affect health care 

providers and suppliers. 


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This Phase III final rule makes two 

substantive changes to the nonmonetary 

compensation exception that affect 

health care providers and suppliers: (1) 

The revised exception allows physicians 

to repay certain excess nonmonetary 

compensation within the same calendar 

year in which the excess compensation 

was received, thereby preserving 

compliance with the exception; and (2) 

entities are allowed, without regard to 

the nonmonetary compensation limit, to 

provide one local medical staff 

appreciation event per year for the 

entire medical staff (such as a holiday 

party). 

The Phase III final rule also—

• Revises the exception for charitable 

donations by a physician to clarify that 

the donation may neither be solicited 

nor offered in any manner that takes 

into account the volume or value of 

referrals; 

• Revises the exception for 

compliance training programs to permit 

entities to provide compliance training 

programs for which CME is available, 

provided that compliance training is the 

primary purpose of the program; and 

• Allows a hospital, rural health 

clinic, or federally qualified health 

center to make a retention payment to 

a physician if the hospital receives a 

written certification from the physician, 

in lieu of documentation of a written 

offer, that he or she has a bona fide 

opportunity for future employment that 

would require the physician to relocate 

his or her medical practice at least 25 

miles and outside of the geographic area 

served by the entity. 

Again, to the extent that expanded 

exceptions permit additional legitimate 

arrangements to comply with the law, 

Phase III reduces the potential costs of 

restructuring such arrangements, and 

the consequences of noncompliance 

may be avoided entirely. 

3. Effects on the Medicare and Medicaid 

Programs 

Section 1877 of the Act was enacted 

to address over-utilization, anticompetitive behavior, and other 

program abuses that occur when 

physicians have financial relationships 

with certain entities to which they refer 

Medicare or Medicaid patients. 

Physician financial arrangements may 

have some anti-competitive effects to 

the extent that those relationships 

discourage other providers from 

entering a market in which patients are 

primarily referred to physician-owned 

entities or DHS entities that maintain 

generous compensation arrangements 

with physicians. Anti-competitive 

behavior can increase program costs if 

the DHS entities with which physicians 

have financial relationships are favored 

over other, more cost-efficient providers 

or providers that furnish higher quality 

care. Over-utilization increases program 

costs because it causes Medicare (or 

Medicaid) to pay for more items or 

services than are medically necessary. 

We expect this Phase III final rule to 

generate savings to the program by 

minimizing anti-competitive business 

arrangements as well as over-utilization 

or other program abuse, similar to the 

effects of Phase I and Phase II. For 

example, we declined to eliminate the 

requirement in many exceptions that the 

arrangement at issue comply with the 

anti-kickback statute. We believe this 

requirement is necessary to protect the 

Medicare and Medicaid programs by 

preventing individuals or entities with 

fraudulent intent from paying for 

referrals. 

Phase III continues to balance the risk 

of program and patient abuse with the 

need to support legitimate business 

arrangements. For example, we are not 

excluding DHS ordered by 

anesthesiologists pursuant to a 

consultation from the definition of a 

referral under Phase III, because we are 

not satisfied that this modification poses 

no risk of program or patient abuse. 

While we cannot gauge with certainty 

the extent of these savings to the 

programs at this time, this Phase III final 

rule reflects our continued efforts to 

prohibit arrangements that have the 

potential to increase utilization 

improperly or promote anti-competitive 

behavior. 

4. Effects on Beneficiaries 

We have sought to ensure that this 

rule will not adversely impact the 

medical care of Federal health care 

program beneficiaries. In most cases, 

this Phase III final rule should not 

require substantial changes in delivery 

arrangements. This Phase III final rule 

makes no significant changes that have 

the potential to impede patient access to 

health care facilities and services. In 

fact, as noted above under the ‘‘Effects 

on the Medicare and Medicaid 

Programs,’’ we believe that this final 

rule will help minimize anticompetitive behavior that can affect 

where a beneficiary receives health care 

services and possibly the quality of the 

services furnished. We believe the 

protections included under this Phase 

III final rule will minimize the number 

of medically unnecessary tests 

performed on, and items or services 

ordered for, Federal health care program 

beneficiaries. 

C. Alternatives Considered 

After reviewing the voluminous 

number of comments we received, we 

considered in Phase I and Phase II many 

alternatives to accommodate the 

practical problems that commenters 

raised. As noted throughout the Phase 

III preamble, we have considered 

alternatives raised in comments 

received on Phase II. We have modified 

the regulations to accommodate those 

alternatives that comport with the 

statutory language and intent. 

For example, we received many 

comments suggesting that we revise our 

restrictions on retention payments to 

physicians in underserved areas in 

§ 411.357(t). Under Phase II, this 

exception protected retention payments 

made only: (1) By a hospital whose 

geographic service area was located in a 

HPSA; and (2) to a physician with a 

firm, written recruitment offer from an 

unrelated hospital or federally qualified 

health center (provided that certain 

other conditions were satisfied). Some 

commenters requested that we broaden 

the exception to permit retention 

payments when the recruitment offer is 

made by any entity, including a group 

practice. In addition, a number of 

commenters requested that we eliminate 

the requirement for a written offer; they 

suggested that the exception be revised 

to permit a retention payment made on 

the basis of a ‘‘good faith belief’’ that the 

physician may be recruited by another 

entity. 

After reviewing the comments, we 

decided to permit retention payments 

made in the case of a bona fide written 

recruitment offer from or written offer of 

employment with a hospital, academic 

medical center, or physician 

organization (which is defined to 

include a physician or group practice). 

We considered broadening the 

exception to permit retention payments 

made in the case of a recruitment or 

employment offer from any DHS entity, 

but rejected that alternative as 

unnecessarily broad and potentially 

subject to abuse. 

In addition, after reviewing the 

comments, we recognized that it is 

commonplace for hospitals to become 

cognizant of a verbal offer received by 

a physician and that, in order to ensure 

that hospitals can compete fairly, we 

should permit hospitals to act based 

upon a written certification provided by 

the physician. We considered the ‘‘good 

faith belief’’ standard suggested by the 

commenters, but rejected it because it 

would be too difficult to enforce and 

would be subject to abuse. Instead, we 

added a new option in § 411.357(t)(2) to 

permit retention payments in the 


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absence of a written offer where a 

physician provides a written 

certification stating that the physician 

has a bona fide opportunity for future 

employment with a hospital, academic 

medical center, or physician 

organization that would require 

relocation of his or her medical practice 

at least 25 miles and outside the 

geographic area served by the hospital. 

The physician’s certification must detail 

the opportunity presented (such as 

income and benefits), the steps taken by 

the physician to effectuate the 

employment opportunity, and other 

information sufficient for the hospital to 

verify the offer. We believe that our 

changes to the retention payments 

exception strike an appropriate balance 

between the industry’s need for greater 

flexibility in making retention payments 

and our need to protect the Medicare 

and Medicaid programs from abuse 

while ensuring access to care in 

underserved areas. 

Many commenters to both the Phase 

I and Phase II rules requested 

clarification of the definition of 

‘‘indirect compensation arrangement.’’

In Phase II, we clarified that a referring 

physician may be treated as ‘‘standing 

in the shoes’’ of his or her whollyowned PC when the only intervening 

entity between the referring physician 

and the DHS entity is his or her PC. 

Phase II did not make any changes with 

respect to the issue of indirect 

compensation arrangements that are 

created when a group practice is the 

only intervening entity between a DHS 

entity and the referring physician. 

However, we did solicit comments in 

Phase II on whether to permit a 

physician to ‘‘stand in the shoes’’ of a 

group practice of which he or she is a 

member. Since the publication of the 

Phase II interim final rule and in light 

of the comments we have received, we 

have concluded that it is in the best 

program integrity interests of the 

Medicare and Medicaid programs to 

adopt a broader ‘‘stand in the shoes’’

provision. In this Phase III final rule, we 

have modified the regulations to deem 

a direct compensation arrangement to 

exist when the only intervening entity 

between a referring physician and a 

DHS entity is a group practice or other 

physician organization. This will 

require some compensation 

arrangements to be analyzed for 

compliance with an exception for direct 

compensation arrangements, rather than 

the exception for indirect compensation 

arrangements exception. 

We considered defining a ‘‘physician 

organization’’ to include entities other 

than a physician, physician practice, or 

group practice, but we have rejected that 

alternative because we are concerned 

about the potential for abuse and believe 

that such an expansion of the ‘‘stand in 

the shoes’’ doctrine would benefit from 

additional public comment. 

We considered a number of 

alternatives suggested by commenters 

regarding the recruitment exception. 

The Phase II rule modified the 

physician recruitment exception to 

allow hospitals to recruit physicians 

into the geographic area served by the 

hospital, provided that certain 

conditions are satisfied. We defined 

‘‘geographic area served by the hospital’’

to be the area composed of the lowest 

number of contiguous zip codes from 

which the hospital draws at least 75 

percent of its inpatients. Several 

commenters objected to the restriction 

on recruiting only into the ‘‘geographic 

area served by the hospital,’’ stating that 

the definition of that term prevents 

hospitals from recruiting physicians 

into outlying parts of their service area, 

where there is likely to be greater need. 

Additionally, some commenters pointed 

out that the restriction hurt rural 

hospitals and was very difficult for 

federally qualified health centers to 

satisfy. 

Based on the comments we received, 

we revised the exception to permit a 

rural hospital to recruit a physician into 

an area composed of the lowest number 

of contiguous zip codes (and in some 

circumstances, noncontiguous zip 

codes) from which the hospital draws at 

least 90 percent of its inpatients. We 

considered expanding the definition of 

‘‘geographic area served by the hospital’’

to permit all hospitals to recruit 

physicians into a broader geographic 

area, but we rejected that alternative on 

the grounds that, in many cases, such 

recruitment arrangements would not be 

necessary to ensure access to care and 

may be abusive. 

As these examples demonstrate, our 

approach in this Phase III final rule is 

to address as many of the industry’s 

concerns as possible. As noted 

throughout this preamble, we 

considered a variety of suggestions and 

alternatives, selecting only those that 

are consistent with the statute’s goals 

and directives and that will protect 

Federal health care program 

beneficiaries’ access to services. 

In accordance with the provisions of 

Executive Order 12866, this regulation 

was reviewed by the Office of 

Management and Budget. 

List of Subjects 

42 CFR Part 411 

Kidney diseases, Medicare, Physician 

referral, Reporting and recordkeeping 

requirements. 

42 CFR Part 424 

Emergency medical services, Health 

facilities, Health professions, Medicare, 

Reporting and recordkeeping 

requirements. 

■ For the reasons set forth in the 

preamble, the Centers for Medicare & 

Medicaid Services amends 42 CFR 

Chapter IV as follows: 

PART 411—EXCLUSIONS FROM 

MEDICARE AND LIMITATIONS ON 

MEDICARE PAYMENT 

■ 1. The authority citation for part 411 

continues to read as follows: 

Authority: Secs. 1102, 1860 D–1 through 

1860D–42, 1871, and 1877 of the Social 

Security Act (42 U.S.C. 1302, 1395w–101 

through 1395w–152, 1395hh, and 1395nn). 

Subpart J—Financial Relationships 

Between Physicians and Entities 

Furnishing Designated Health Services 

■ 2. Section 411.350 is revised to read 

as follows: 

§ 411.350 Scope of subpart. 

(a) This subpart implements section 

1877 of the Act, which generally 

prohibits a physician from making a 

referral under Medicare for designated 

health services to an entity with which 

the physician or a member of the 

physician’s immediate family has a 

financial relationship. 

(b) This subpart does not provide for 

exceptions or immunity from civil or 

criminal prosecution or other sanctions 

applicable under any State laws or 

under Federal law other than section 

1877 of the Act. For example, although 

a particular arrangement involving a 

physician’s financial relationship with 

an entity may not prohibit the physician 

from making referrals to the entity 

under this subpart, the arrangement may 

nevertheless violate another provision 

of the Act or other laws administered by 

HHS, the Federal Trade Commission, 

the Securities and Exchange 

Commission, the Internal Revenue 

Service, or any other Federal or State 

agency. 

(c) This subpart requires, with some 

exceptions, that certain entities 

furnishing covered services under 

Medicare report information concerning 

ownership, investment, or 

compensation arrangements in the form, 

in the manner, and at the times 

specified by CMS. 


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(d) This subpart does not alter an 

individual’s or entity’s obligations 

under—

(1) The rules regarding reassignment 

of claims (§ 424.80); 

(2) The rules regarding purchased 

diagnostic tests (§ 414.50); 

(3) The rules regarding payment for 

services and supplies incident to a 

physician’s professional services 

(§ 410.26); or 

(4) Any other applicable Medicare 

laws, rules, or regulations. 

■ 3. Section 411.351 is revised to read 

as follows—

§ 411.351 Definitions. 

As used in this subpart, unless the 

context indicates otherwise: 

Centralized building means all or part 

of a building, including, for purposes of 

this subpart only, a mobile vehicle, van, 

or trailer that is owned or leased on a 

full-time basis (that is, 24 hours per day, 

7 days per week, for a term of not less 

than 6 months) by a group practice and 

that is used exclusively by the group 

practice. Space in a building or a mobile 

vehicle, van, or trailer that is shared by 

more than one group practice, by a 

group practice and one or more solo 

practitioners, or by a group practice and 

another provider or supplier (for 

example, a diagnostic imaging facility) 

is not a centralized building for 

purposes of this subpart. This provision 

does not preclude a group practice from 

providing services to other providers or 

suppliers (for example, purchased 

diagnostic tests) in the group practice’s 

centralized building. A group practice 

may have more than one centralized 

building. 

Clinical laboratory services means the 

biological, microbiological, serological, 

chemical, immunohematological, 

hematological, biophysical, cytological, 

pathological, or other examination of 

materials derived from the human body 

for the purpose of providing information 

for the diagnosis, prevention, or 

treatment of any disease or impairment 

of, or the assessment of the health of, 

human beings, including procedures to 

determine, measure, or otherwise 

describe the presence or absence of 

various substances or organisms in the 

body, as specifically identified by the 

List of CPT/HCPCS Codes. All services 

so identified on the List of CPT/HCPCS 

Codes are clinical laboratory services for 

purposes of this subpart. Any service 

not specifically identified as a clinical 

laboratory service on the List of CPT/ 

HCPCS Codes is not a clinical laboratory 

service for purposes of this subpart. 

Consultation means a professional 

service furnished to a patient by a 

physician if the following conditions are 

satisfied: 

(1) The physician’s opinion or advice 

regarding evaluation or management or 

both of a specific medical problem is 

requested by another physician. 

(2) The request and need for the 

consultation are documented in the 

patient’s medical record. 

(3) After the consultation is provided, 

the physician prepares a written report 

of his or her findings, which is provided 

to the physician who requested the 

consultation. 

(4) With respect to radiation therapy 

services provided by a radiation 

oncologist, a course of radiation 

treatments over a period of time will be 

considered to be pursuant to a 

consultation, provided that the radiation 

oncologist communicates with the 

referring physician on a regular basis 

about the patient’s course of treatment 

and progress. 

Designated health services (DHS) 

means any of the following services 

(other than those provided as emergency 

physician services furnished outside of 

the U.S.), as they are defined in this 

section: 

(1)(i) Clinical laboratory services. 

(ii) Physical therapy, occupational 

therapy, and speech-language pathology 

services. 

(iii) Radiology and certain other 

imaging services. 

(iv) Radiation therapy services and 

supplies. 

(v) Durable medical equipment and 

supplies. 

(vi) Parenteral and enteral nutrients, 

equipment, and supplies. 

(vii) Prosthetics, orthotics, and 

prosthetic devices and supplies. 

(viii) Home health services. 

(ix) Outpatient prescription drugs. 

(x) Inpatient and outpatient hospital 

services. 

(2) Except as otherwise noted in this 

subpart, the term ‘‘designated health 

services’’ or DHS means only DHS 

payable, in whole or in part, by 

Medicare. DHS do not include services 

that are reimbursed by Medicare as part 

of a composite rate (for example, 

ambulatory surgical center services or 

SNF Part A payments), except to the 

extent the services listed in paragraphs 

(1)(i) through (1)(x) of this definition are 

themselves payable through a composite 

rate (for example, all services provided 

as home health services or inpatient and 

outpatient hospital services are DHS). 

Does not violate the anti-kickback 

statute, as used in this subpart only, 

means that the particular arrangement—

(1)(i) Meets a safe harbor under the 

anti-kickback statute, as set forth at 

§ 1001.952 of this title, ‘‘Exceptions’’; 

(ii) Has been specifically approved by 

the OIG in a favorable advisory opinion 

issued to a party to the particular 

arrangement (for example, the entity 

furnishing DHS) with respect to the 

particular arrangement (and not a 

similar arrangement), provided that the 

arrangement is conducted in accordance 

with the facts certified by the requesting 

party and the opinion is otherwise 

issued in accordance with part 1008 of 

this title, ‘‘Advisory Opinions by the 

OIG’’; or 

(iii) Does not violate the anti-kickback 

provisions in section 1128B(b) of the 

Act. 

(2) For purposes of this definition, a 

favorable advisory opinion means an 

opinion in which the OIG opines that—

(i) The party’s specific arrangement 

does not implicate the anti-kickback 

statute, does not constitute prohibited 

remuneration, or fits in a safe harbor 

under § 1001.952 of this title; or 

(ii) The party will not be subject to 

any OIG sanctions arising under the 

anti-kickback statute (for example, 

under sections 1128A(a)(7) and 

1128(b)(7) of the Act) in connection 

with the party’s specific arrangement. 

Downstream contractor means a ‘‘first 

tier contractor’’ as defined at 

§ 1001.952(t)(2)(iii) or a ‘‘downstream 

contractor’’ as defined at 

§ 1001.952(t)(2)(i). 

Durable medical equipment (DME) 

and supplies has the meaning given in 

section 1861(n) of the Act and § 414.202 

of this chapter. 

Electronic health record means a 

repository of consumer health status 

information in computer processable 

form used for clinical diagnosis and 

treatment for a broad array of clinical 

conditions. 

Employee means any individual who, 

under the common law rules that apply 

in determining the employer-employee 

relationship (as applied for purposes of 

section 3121(d)(2) of the Internal 

Revenue Code of 1986), is considered to 

be employed by, or an employee of, an 

entity. (Application of these common 

law rules is discussed in 20 CFR 

404.1007 and 26 CFR 31.3121(d)–1(c).) 

Entity means—

(1) A physician’s sole practice or a 

practice of multiple physicians or any 

other person, sole proprietorship, public 

or private agency or trust, corporation, 

partnership, limited liability company, 

foundation, nonprofit corporation, or 

unincorporated association that 

furnishes DHS. An entity does not 

include the referring physician himself 

or herself, but does include his or her 

medical practice. A person or entity is 

considered to be furnishing DHS if it—


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(i) Is the person or entity to which 

CMS makes payment for the DHS, 

directly or upon assignment on the 

patient’s behalf; or 

(ii) Is the person or entity to which 

the right to payment for the DHS has 

been reassigned in accordance with 

§ 424.80(b)(1) (employer) or (b)(2) 

(payment under a contractual 

arrangement) of this chapter (other than 

a health care delivery system that is a 

health plan (as defined at § 1001.952(l) 

of this title), and other than any 

managed care organization (MCO), 

provider-sponsored organization (PSO), 

or independent practice association 

(IPA) with which a health plan contracts 

for services provided to plan enrollees). 

(2) A health plan, MCO, PSO, or IPA 

that employs a supplier or operates a 

facility that could accept reassignment 

from a supplier under § 424.80(b)(1) and 

(b)(2) of this chapter, with respect to any 

DHS provided by that supplier. 

(3) For purposes of this subpart, 

‘‘entity’’ does not include a physician’s 

practice when it bills Medicare for a 

diagnostic test in accordance with 

§ 414.50 of this chapter (Physician 

billing for purchased diagnostic tests) 

and section 30.2.9 of the CMS Internetonly Manual, publication 100–04, 

Claims Processing Manual, Chapter 1 

(general billing requirements), as 

amended or replaced from time to time. 

Fair market value means the value in 

arm’s-length transactions, consistent 

with the general market value. ‘‘General 

market value’’ means the price that an 

asset would bring as the result of bona 

fide bargaining between well-informed 

buyers and sellers who are not 

otherwise in a position to generate 

business for the other party, or the 

compensation that would be included in 

a service agreement as the result of bona 

fide bargaining between well-informed 

parties to the agreement who are not 

otherwise in a position to generate 

business for the other party, on the date 

of acquisition of the asset or at the time 

of the service agreement. Usually, the 

fair market price is the price at which 

bona fide sales have been consummated 

for assets of like type, quality, and 

quantity in a particular market at the 

time of acquisition, or the compensation 

that has been included in bona fide 

service agreements with comparable 

terms at the time of the agreement, 

where the price or compensation has 

not been determined in any manner that 

takes into account the volume or value 

of anticipated or actual referrals. With 

respect to rentals and leases described 

in § 411.357(a), (b), and (l) (as to 

equipment leases only), ‘‘fair market 

value’’ means the value of rental 

property for general commercial 

purposes (not taking into account its 

intended use). In the case of a lease of 

space, this value may not be adjusted to 

reflect the additional value the 

prospective lessee or lessor would 

attribute to the proximity or 

convenience to the lessor when the 

lessor is a potential source of patient 

referrals to the lessee. For purposes of 

this definition, a rental payment does 

not take into account intended use if it 

takes into account costs incurred by the 

lessor in developing or upgrading the 

property or maintaining the property or 

its improvements. 

Home health services means the 

services described in section 1861(m) of 

the Act and part 409, subpart E of this 

chapter. 

Hospital means any entity that 

qualifies as a ‘‘hospital’’ under section 

1861(e) of the Act, as a ‘‘psychiatric 

hospital’’ under section 1861(f) of the 

Act, or as a ‘‘critical access hospital’’

under section 1861(mm)(1) of the Act, 

and refers to any separate legally 

organized operating entity plus any 

subsidiary, related entity, or other 

entities that perform services for the 

hospital’s patients and for which the 

hospital bills. However, a ‘‘hospital’’

does not include entities that perform 

services for hospital patients ‘‘under 

arrangements’’ with the hospital. 

HPSA means, for purposes of this 

subpart, an area designated as a health 

professional shortage area under section 

332(a)(1)(A) of the Public Health Service 

Act for primary medical care 

professionals (in accordance with the 

criteria specified in part 5 of this title). 

Immediate family member or member 

of a physician’s immediate family 

means husband or wife; birth or 

adoptive parent, child, or sibling; 

stepparent, stepchild, stepbrother, or 

stepsister; father-in-law, mother-in-law, 

son-in-law, daughter-in-law, brother-inlaw, or sister-in-law; grandparent or 

grandchild; and spouse of a grandparent 

or grandchild. 

‘‘Incident to’’ services or services 

‘‘incident to’’ means those services and 

supplies that meet the requirements of 

section 1861(s)(2)(A) of the Act, § 410.26 

of this chapter, and sections 60, 60.1, 

60.2, and 60.3 of the CMS Internet-only 

Manual, publication 100–02, Medicare 

Benefit Policy Manual, Chapter 15 

(covered medical and other health 

services), as amended or replaced from 

time to time. 

Inpatient hospital services means 

those services defined in section 1861(b) 

of the Act and § 409.10(a) and (b) of this 

chapter and include inpatient 

psychiatric hospital services listed in 

section 1861(c) of the Act and inpatient 

critical access hospital services, as 

defined in section 1861(mm)(2) of the 

Act. ‘‘Inpatient hospital services’’ do not 

include emergency inpatient services 

provided by a hospital located outside 

of the U.S. and covered under the 

authority in section 1814(f)(2) of the Act 

and part 424, subpart H of this chapter, 

or emergency inpatient services 

provided by a nonparticipating hospital 

within the U.S., as authorized by section 

1814(d) of the Act and described in part 

424, subpart G of this chapter. 

‘‘Inpatient hospital services’’ also do not 

include dialysis furnished by a hospital 

that is not certified to provide end-stage 

renal dialysis (ESRD) services under 

subpart U of part 405 of this chapter. 

‘‘Inpatient hospital services’’ include 

services that are furnished either by the 

hospital directly or under arrangements 

made by the hospital with others. 

‘‘Inpatient hospital services’’ do not 

include professional services performed 

by physicians, physician assistants, 

nurse practitioners, clinical nurse 

specialists, certified nurse midwives, 

and certified registered nurse 

anesthetists and qualified psychologists 

if Medicare reimburses the services 

independently and not as part of the 

inpatient hospital service (even if they 

are billed by a hospital under an 

assignment or reassignment). 

Interoperable means able to 

communicate and exchange data 

accurately, effectively, securely, and 

consistently with different information 

technology systems, software 

applications, and networks, in various 

settings; and exchange data such that 

the clinical or operational purpose and 

meaning of the data are preserved and 

unaltered. 

Laboratory means an entity furnishing 

biological, microbiological, serological, 

chemical, immunohematological, 

hematological, biophysical, cytological, 

pathological, or other examination of 

materials derived from the human body 

for the purpose of providing information 

for the diagnosis, prevention, or 

treatment of any disease or impairment 

of, or the assessment of the health of, 

human beings. These examinations also 

include procedures to determine, 

measure, or otherwise describe the 

presence or absence of various 

substances or organisms in the body. 

Entities only collecting or preparing 

specimens (or both) or only serving as 

a mailing service and not performing 

testing are not considered laboratories. 

List of CPT/HCPCS Codes means the 

list of CPT and HCPCS codes that 

identifies those items and services that 

are DHS under section 1877 of the Act 

or that may qualify for certain 

exceptions under section 1877 of the 

Act. It is updated annually, as published 


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51082 Federal Register / Vol. 72, No. 171 / Wednesday, September 5, 2007 / Rules and Regulations 

in the Federal Register, and is posted on 

the CMS Web site at http:// 

www.cms.hhs.gov/ 

PhysicianSelfReferral/ 

11_List_of_Codes.asp#TopOfPage. 

Locum tenens physician means a 

physician who substitutes (that is, 

‘‘stands in the shoes’’) in exigent 

circumstances for a physician, in 

accordance with applicable 

reassignment rules and regulations, 

including section 30.2.11 of the CMS 

Internet-only Manual, publication 100–

04, Claims Processing Manual, Chapter 

1 (general billing requirements), as 

amended or replaced from time to time. 

Member of the group or member of a 

group practice means, for purposes of 

this subpart, a direct or indirect 

physician owner of a group practice 

(including a physician whose interest is 

held by his or her individual 

professional corporation or by another 

entity), a physician employee of the 

group practice (including a physician 

employed by his or her individual 

professional corporation that has an 

equity interest in the group practice), a 

locum tenens physician (as defined in 

this section), or an on-call physician 

while the physician is providing on-call 

services for members of the group 

practice. A physician is a member of the 

group during the time he or she 

furnishes ‘‘patient care services’’ to the 

group as defined in this section. An 

independent contractor or a leased 

employee is not a member of the group 

(unless the leased employee meets the 

definition of an ‘‘employee’’ under this 

§ 411.351). 

Outpatient hospital services means 

the therapeutic, diagnostic, and partial 

hospitalization services listed under 

sections 1861(s)(2)(B) and (s)(2)(C) of 

the Act; outpatient services furnished by 

a psychiatric hospital, as defined in 

section 1861(f) of the Act; and 

outpatient critical access hospital 

services, as defined in section 

1861(mm)(3) of the Act. ‘‘Outpatient 

hospital services’’ do not include 

emergency services furnished by 

nonparticipating hospitals and covered 

under the conditions described in 

section 1835(b) of the Act and subpart 

G of part 424 of this chapter. 

‘‘Outpatient hospital services’’ include 

services that are furnished either by the 

hospital directly or under arrangements 

made by the hospital with others. 

‘‘Outpatient hospital services’’ do not 

include professional services performed 

by physicians, physician assistants, 

nurse practitioners, clinical nurse 

specialists, certified nurse midwives, 

certified registered nurse anesthetists, 

and qualified psychologists if Medicare 

reimburses the services independently 

and not as part of the outpatient 

hospital service (even if they are billed 

by a hospital under an assignment or 

reassignment). 

Outpatient prescription drugs means 

all drugs covered by Medicare Part B or 

Part D. 

Parenteral and enteral nutrients, 

equipment, and supplies means the 

following services (including all HCPCS 

level 2 codes for these services): 

(1) Parenteral nutrients, equipment, 

and supplies, meaning those items and 

supplies needed to provide nutriment to 

a patient with permanent, severe 

pathology of the alimentary tract that 

does not allow absorption of sufficient 

nutrients to maintain strength 

commensurate with the patient’s general 

condition, as described in section 108.2 

of the National Coverage Determinations 

Manual, as amended or replaced from 

time to time; and 

(2) Enteral nutrients, equipment, and 

supplies, meaning items and supplies 

needed to provide enteral nutrition to a 

patient with a functioning 

gastrointestinal tract who, due to 

pathology to or nonfunction of the 

structures that normally permit food to 

reach the digestive tract, cannot 

maintain weight and strength 

commensurate with his or her general 

condition, as described in section 108.2 

of the National Coverage Determinations 

Manual, as amended or replaced from 

time to time. 

Patient care services means any 

task(s) performed by a physician in the 

group practice that address the medical 

needs of specific patients or patients in 

general, regardless of whether they 

involve direct patient encounters or 

generally benefit a particular practice. 

Patient care services can include, for 

example, the services of physicians who 

do not directly treat patients, such as 

time spent by a physician consulting 

with other physicians or reviewing 

laboratory tests, or time spent training 

staff members, arranging for equipment, 

or performing administrative or 

management tasks. 

Physical therapy, occupational 

therapy, and speech-language pathology 

services means those particular services 

so identified on the List of CPT/HCPCS 

Codes. All services so identified on the 

List of CPT/HCPCS Codes are physical 

therapy, occupational therapy, and 

speech-language pathology services for 

purposes of this subpart. Any service 

not specifically identified as physical 

therapy, occupational therapy or 

speech-language pathology on the List 

of CPT/HCPCS Codes is not a physical 

therapy, occupational therapy, or 

speech-language pathology service for 

purposes of this subpart. The list of 

codes identifying physical therapy, 

occupational therapy, and speechlanguage pathology services for 

purposes of this regulation includes the 

following: 

(1) Physical therapy services, meaning 

those outpatient physical therapy 

services (including speech-language 

pathology services) described in section 

1861(p) of the Act that are covered 

under Medicare Part A or Part B, 

regardless of who provides them, if the 

services include—

(i) Assessments, function tests, and 

measurements of strength, balance, 

endurance, range of motion, and 

activities of daily living; 

(ii) Therapeutic exercises, massage, 

and use of physical medicine 

modalities, assistive devices, and 

adaptive equipment; 

(iii) Establishment of a maintenance 

therapy program for an individual 

whose restoration potential has been 

reached; however, maintenance therapy 

itself is not covered as part of these 

services; or 

(iv) Speech-language pathology 

services that are for the diagnosis and 

treatment of speech, language, and 

cognitive disorders that include 

swallowing and other oral-motor 

dysfunctions. 

(2) Occupational therapy services, 

meaning those services described in 

section 1861(g) of the Act that are 

covered under Medicare Part A or Part 

B, regardless of who provides them, if 

the services include—

(i) Teaching of compensatory 

techniques to permit an individual with 

a physical or cognitive impairment or 

limitation to engage in daily activities; 

(ii) Evaluation of an individual’s level 

of independent functioning; 

(iii) Selection and teaching of taskoriented therapeutic activities to restore 

sensory-integrative function; or 

(iv) Assessment of an individual’s 

vocational potential, except when the 

assessment is related solely to 

vocational rehabilitation. 

Physician means a doctor of medicine 

or osteopathy, a doctor of dental surgery 

or dental medicine, a doctor of podiatric 

medicine, a doctor of optometry, or a 

chiropractor, as defined in section 

1861(r) of the Act. 

Physician in the group practice means 

a member of the group practice, as well 

as an independent contractor physician 

during the time the independent 

contractor is furnishing patient care 

services (as defined in this section) for 

the group practice under a contractual 

arrangement directly with the group 

practice to provide services to the group 

practice’s patients in the group 

practice’s facilities. The contract must 


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contain the same restrictions on 

compensation that apply to members of 

the group practice under § 411.352(g) (or 

the contract must satisfy the 

requirements of the personal service 

arrangements exception in § 411.357(d)), 

and the independent contractor’s 

arrangement with the group practice 

must comply with the reassignment 

rules in § 424.80(b)(2) of this chapter 

(see also section 30.2.11 of the CMS 

Internet-only Manual, publication 100- 

04, Claims Processing Manual, Chapter 

1 (general billing requirements), as 

amended or replaced from time to time). 

Referrals from an independent 

contractor who is a physician in the 

group practice are subject to the 

prohibition on referrals in § 411.353(a), 

and the group practice is subject to the 

limitation on billing for those referrals 

in § 411.353(b). 

Physician incentive plan means any 

compensation arrangement between an 

entity (or downstream contractor) and a 

physician or physician group that may 

directly or indirectly have the effect of 

reducing or limiting services furnished 

with respect to individuals enrolled 

with the entity. 

Physician organization means a 

physician (including a professional 

corporation of which the physician is 

the sole owner), a physician practice, or 

a group practice that complies with the 

requirements of § 411.352. 

Plan of care means the establishment 

by a physician of a course of diagnosis 

or treatment (or both) for a particular 

patient, including the ordering of 

services. 

Professional courtesy means the 

provision of free or discounted health 

care items or services to a physician or 

his or her immediate family members or 

office staff. 

Prosthetics, Orthotics, and Prosthetic 

Devices and Supplies means the 

following services (including all HCPCS 

level 2 codes for these items and 

services that are covered by Medicare): 

(1) Orthotics, meaning leg, arm, back, 

and neck braces, as listed in section 

1861(s)(9) of the Act. 

(2) Prosthetics, meaning artificial legs, 

arms, and eyes, as described in section 

1861(s)(9) of the Act. 

(3) Prosthetic devices, meaning 

devices (other than a dental device) 

listed in section 1861(s)(8) of the Act 

that replace all or part of an internal 

body organ, including colostomy bags, 

and one pair of conventional eyeglasses 

or contact lenses furnished subsequent 

to each cataract surgery with insertion 

of an intraocular lens. 

(4) Prosthetic supplies, meaning 

supplies that are necessary for the 

effective use of a prosthetic device 

(including supplies directly related to 

colostomy care). 

Radiation therapy services and 

supplies means those particular services 

and supplies, including (effective 

January 1, 2007) therapeutic nuclear 

medicine services and supplies, so 

identified on the List of CPT/HCPCS 

Codes. All services and supplies so 

identified on the List of CPT/HCPCS 

Codes are radiation therapy services and 

supplies for purposes of this subpart. 

Any service or supply not specifically 

identified as radiation therapy services 

or supplies on the List of CPT/HCPCS 

Codes is not a radiation therapy service 

or supply for purposes of this subpart. 

The list of codes identifying radiation 

therapy services and supplies is based 

on section 1861(s)(4) of the Act and 

§ 410.35 of this chapter. 

Radiology and certain other imaging 

services means those particular services 

so identified on the List of CPT/HCPCS 

Codes. All services so identified on the 

List of CPT/HCPCS Codes are radiology 

and certain other imaging services for 

purposes of this subpart. Any service 

not specifically identified as radiology 

and certain other imaging services on 

the List of CPT/HCPCS Codes is not a 

radiology or certain other imaging 

service for purposes of this subpart. The 

list of codes identifying radiology and 

certain other imaging services includes 

the professional and technical 

components of any diagnostic test or 

procedure using x-rays, ultrasound, 

computerized axial tomography, 

magnetic resonance imaging, nuclear 

medicine (effective January 1, 2007), or 

other imaging services. All codes 

identified as radiology and certain other 

imaging services are covered under 

section 1861(s)(3) of the Act and 

§ 410.32 and § 410.34 of this chapter, 

but do not include—

(1) X-ray, fluoroscopy, or ultrasound 

procedures that require the insertion of 

a needle, catheter, tube, or probe 

through the skin or into a body orifice; 

and 

(2) Radiology procedures that are 

integral to the performance of a 

nonradiological medical procedure and 

performed)—

(i) During the nonradiological medical 

procedure; or 

(ii) Immediately following the 

nonradiological medical procedure 

when necessary to confirm placement of 

an item placed during the 

nonradiological medical procedure. 

Referral—

(1) Means either of the following: 

(i) Except as provided in paragraph (2) 

of this definition, the request by a 

physician for, or ordering of, or the 

certifying or recertifying of the need for, 

any designated health service for which 

payment may be made under Medicare 

Part B, including a request for a 

consultation with another physician and 

any test or procedure ordered by or to 

be performed by (or under the 

supervision of) that other physician, but 

not including any designated health 

service personally performed or 

provided by the referring physician. A 

designated health service is not 

personally performed or provided by the 

referring physician if it is performed or 

provided by any other person, 

including, but not limited to, the 

referring physician’s employees, 

independent contractors, or group 

practice members. 

(ii) Except as provided in paragraph 

(2) of this definition, a request by a 

physician that includes the provision of 

any designated health service for which 

payment may be made under Medicare, 

the establishment of a plan of care by a 

physician that includes the provision of 

such a designated health service, or the 

certifying or recertifying of the need for 

such a designated health service, but not 

including any designated health service 

personally performed or provided by the 

referring physician. A designated health 

service is not personally performed or 

provided by the referring physician if it 

is performed or provided by any other 

person including, but not limited to, the 

referring physician’s employees, 

independent contractors, or group 

practice members. 

(2) Does not include a request by a 

pathologist for clinical diagnostic 

laboratory tests and pathological 

examination services, by a radiologist 

for diagnostic radiology services, and by 

a radiation oncologist for radiation 

therapy or ancillary services necessary 

for, and integral to, the provision of 

radiation therapy, if—

(i) The request results from a 

consultation initiated by another 

physician (whether the request for a 

consultation was made to a particular 

physician or to an entity with which the 

physician is affiliated); and 

(ii) The tests or services are furnished 

by or under the supervision of the 

pathologist, radiologist, or radiation 

oncologist, or under the supervision of 

a pathologist, radiologist, or radiation 

oncologist, respectively, in the same 

group practice as the pathologist, 

radiologist, or radiation oncologist. 

(3) Can be in any form, including, but 

not limited to, written, oral, or 

electronic. 

Referring physician means a 

physician who makes a referral as 

defined in this section or who directs 

another person or entity to make a 

referral or who controls referrals made 


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by another person or entity. A referring 

physician and the professional 

corporation of which he or she is a sole 

owner are the same for purposes of this 

subpart. 

Remuneration means any payment or 

other benefit made directly or 

indirectly, overtly or covertly, in cash or 

in kind, except that the following are 

not considered remuneration for 

purposes of this section: 

(1) The forgiveness of amounts owed 

for inaccurate tests or procedures, 

mistakenly performed tests or 

procedures, or the correction of minor 

billing errors. 

(2) The furnishing of items, devices, 

or supplies (not including surgical 

items, devices, or supplies) that are used 

solely to collect, transport, process, or 

store specimens for the entity furnishing 

the items, devices, or supplies or are 

used solely to order or communicate the 

results of tests or procedures for the 

entity. 

(3) A payment made by an insurer or 

a self-insured plan (or a subcontractor of 

the insurer or self-insured plan) to a 

physician to satisfy a claim, submitted 

on a fee-for-service basis, for the 

furnishing of health services by that 

physician to an individual who is 

covered by a policy with the insurer or 

by the self-insured plan, if—

(i) The health services are not 

furnished, and the payment is not made, 

under a contract or other arrangement 

between the insurer or the self-insured 

plan (or a subcontractor of the insurer 

or self-insured plan) and the physician; 

(ii) The payment is made to the 

physician on behalf of the covered 

individual and would otherwise be 

made directly to the individual; and 

(iii) The amount of the payment is set 

in advance, does not exceed fair market 

value, and is not determined in a 

manner that takes into account directly 

or indirectly the volume or value of any 

referrals. 

Rural area means an area that is not 

an urban area as defined at 

§ 412.62(f)(1)(ii) of this chapter. 

Same building means a structure 

with, or combination of structures that 

share, a single street address as assigned 

by the U.S. Postal Service, excluding all 

exterior spaces (for example, lawns, 

courtyards, driveways, parking lots) and 

interior loading docks or parking 

garages. For purposes of this section, the 

‘‘same building’’ does not include a 

mobile vehicle, van, or trailer. 

Specialty hospital means a subsection 

(d) hospital (as defined in section 

1886(d)(1)(B) of the Act) that is 

primarily or exclusively engaged in the 

care and treatment of one of the 

following: 

(1) Patients with a cardiac condition; 

(2) Patients with an orthopedic 

condition; 

(3) Patients receiving a surgical 

procedure; or 

(4) Any other specialized category of 

services that the Secretary designates as 

inconsistent with the purpose of 

permitting physician ownership and 

investment interests in a hospital. A 

‘‘specialty hospital’’ does not include 

any hospital—

(1) Determined by the Secretary to be 

in operation before or under 

development as of November 18, 2003; 

(2) For which the number of 

physician investors at any time on or 

after such date is no greater than the 

number of such investors as of such 

date; 

(3) For which the type of categories 

described above is no different at any 

time on or after such date than the type 

of such categories as of such date; 

(4) For which any increase in the 

number of beds occurs only in the 

facilities on the main campus of the 

hospital and does not exceed 50 percent 

of the number of beds in the hospital as 

of November 18, 2003, or 5 beds, 

whichever is greater; and 

(5) That meets such other 

requirements as the Secretary may 

specify. 

Transaction means an instance or 

process of two or more persons or 

entities doing business. An isolated 

financial transaction means one 

involving a single payment between two 

or more persons or entities or a 

transaction that involves integrally 

related installment payments provided 

that—

(1) The total aggregate payment is 

fixed before the first payment is made 

and does not take into account, directly 

or indirectly, the volume or value of 

referrals or other business generated by 

the referring physician; and 

(2) The payments are immediately 

negotiable or are guaranteed by a third 

party, or secured by a negotiable 

promissory note, or subject to a similar 

mechanism to ensure payment even in 

the event of default by the purchaser or 

obligated party. 

■ 3a. Section 411.352 is revised to read 

as follows: 

§ 411.352 Group practice. 

For purposes of this subpart, a group 

practice is a physician practice that 

meets the following conditions: 

(a) Single legal entity. The group 

practice must consist of a single legal 

entity operating primarily for the 

purpose of being a physician group 

practice in any organizational form 

recognized by the State in which the 

group practice achieves its legal status, 

including, but not limited to, a 

partnership, professional corporation, 

limited liability company, foundation, 

nonprofit corporation, faculty practice 

plan, or similar association. The single 

legal entity may be organized by any 

party or parties, including, but not 

limited to, physicians, health care 

facilities, or other persons or entities 

(including, but not limited to, 

physicians individually incorporated as 

professional corporations). The single 

legal entity may be organized or owned 

(in whole or in part) by another medical 

practice, provided that the other 

medical practice is not an operating 

physician practice (and regardless of 

whether the medical practice meets the 

conditions for a group practice under 

this section). For purposes of this 

subpart, a single legal entity does not 

include informal affiliations of 

physicians formed substantially to share 

profits from referrals, or separate group 

practices under common ownership or 

control through a physician practice 

management company, hospital, health 

system, or other entity or organization. 

A group practice that is otherwise a 

single legal entity may itself own 

subsidiary entities. A group practice 

operating in more than one State will be 

considered to be a single legal entity 

notwithstanding that it is composed of 

multiple legal entities, provided that—

(1) The States in which the group 

practice is operating are contiguous 

(although each State need not be 

contiguous to every other State); 

(2) The legal entities are absolutely 

identical as to ownership, governance, 

and operation; and 

(3) Organization of the group practice 

into multiple entities is necessary to 

comply with jurisdictional licensing 

laws of the States in which the group 

practice operates. 

(b) Physicians. The group practice 

must have at least two physicians who 

are members of the group (whether 

employees or direct or indirect owners), 

as defined at § 411.351. 

(c) Range of care. Each physician who 

is a member of the group, as defined at 

§ 411.351, must furnish substantially the 

full range of patient care services that 

the physician routinely furnishes, 

including medical care, consultation, 

diagnosis, and treatment, through the 

joint use of shared office space, 

facilities, equipment, and personnel. 

(d) Services furnished by group 

practice members. (1) Except as 

otherwise provided in paragraphs (d)(3), 

(d)(4), (d)(5), and (d)(6) of this section, 

substantially all of the patient care 

services of the physicians who are 

members of the group (that is, at least 


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75 percent of the total patient care 

services of the group practice members) 

must be furnished through the group 

and billed under a billing number 

assigned to the group, and the amounts 

received must be treated as receipts of 

the group. Patient care services must be 

measured by one of the following: 

(i) The total time each member spends 

on patient care services documented by 

any reasonable means (including, but 

not limited to, time cards, appointment 

schedules, or personal diaries). (For 

example, if a physician practices 40 

hours a week and spends 30 hours a 

week on patient care services for a 

group practice, the physician has spent 

75 percent of his or her time providing 

patient care services for the group.) 

(ii) Any alternative measure that is 

reasonable, fixed in advance of the 

performance of the services being 

measured, uniformly applied over time, 

verifiable, and documented. 

(2) The data used to calculate 

compliance with this substantially all 

test and related supportive 

documentation must be made available 

to the Secretary upon request. 

(3) The substantially all test set forth 

in paragraph (d)(1) of this section does 

not apply to any group practice that is 

located solely in a HPSA, as defined at 

§ 411.351. 

(4) For a group practice located 

outside of a HPSA (as defined at 

§ 411.351), any time spent by a group 

practice member providing services in a 

HPSA should not be used to calculate 

whether the group practice has met the 

substantially all test, regardless of 

whether the member’s time in the HPSA 

is spent in a group practice, clinic, or 

office setting. 

(5) During the start up period (not to 

exceed 12 months) that begins on the 

date of the initial formation of a new 

group practice, a group practice must 

make a reasonable, good faith effort to 

ensure that the group practice complies 

with the substantially all test 

requirement set forth in paragraph (d)(1) 

of this section as soon as practicable, 

but no later than 12 months from the 

date of the initial formation of the group 

practice. This paragraph (d)(5) does not 

apply when an existing group practice 

admits a new member or reorganizes. 

(6)(i) If the addition to an existing 

group practice of a new member who 

would be considered to have relocated 

his or her medical practice under 

§ 411.357(e)(2) would result in the 

existing group practice not meeting the 

substantially all test set forth in 

paragraph (d)(1) of this section, the 

group practice will have 12 months 

following the addition of the new 

member to come back into full 

compliance, provided that—

(A) For the 12-month period the group 

practice is fully compliant with the 

substantially all test if the new member 

is not counted as a member of the group 

for purposes of § 411.352; and 

(B) The new member’s employment 

with, or ownership interest in, the group 

practice is documented in writing no 

later than the beginning of his or her 

new employment, ownership, or 

investment. 

(ii) This paragraph (d)(6) does not 

apply when an existing group practice 

reorganizes or admits a new member 

who is not relocating his or her medical 

practice. 

(e) Distribution of expenses and 

income. The overhead expenses of, and 

income from, the practice must be 

distributed according to methods that 

are determined before the receipt of 

payment for the services giving rise to 

the overhead expense or producing the 

income. Nothing in this section prevents 

a group practice from adjusting its 

compensation methodology 

prospectively, subject to restrictions on 

the distribution of revenue from DHS 

under § 411.352(i). 

(f) Unified business. (1) The group 

practice must be a unified business 

having at least the following features: 

(i) Centralized decision-making by a 

body representative of the group 

practice that maintains effective control 

over the group’s assets and liabilities 

(including, but not limited to, budgets, 

compensation, and salaries); and 

(ii) Consolidated billing, accounting, 

and financial reporting. 

(2) Location and specialty-based 

compensation practices are permitted 

with respect to revenues derived from 

services that are not DHS and may be 

permitted with respect to revenues 

derived from DHS under § 411.352(i). 

(g) Volume or value of referrals. No 

physician who is a member of the group 

practice directly or indirectly receives 

compensation based on the volume or 

value of his or her referrals, except as 

provided in § 411.352(i). 

(h) Physician-patient encounters. 

Members of the group must personally 

conduct no less than 75 percent of the 

physician-patient encounters of the 

group practice. 

(i) Special rule for productivity 

bonuses and profit shares. (1) A 

physician in the group practice may be 

paid a share of overall profits of the 

group, provided that the share is not 

determined in any manner that is 

directly related to the volume or value 

of referrals of DHS by the physician. A 

physician in the group practice may be 

paid a productivity bonus based on 

services that he or she has personally 

performed, or services ‘‘incident to’’

such personally performed services, or 

both, provided that the bonus is not 

determined in any manner that is 

directly related to the volume or value 

of referrals of DHS by the physician 

(except that the bonus may directly 

relate to the volume or value of DHS 

referrals by the physician if the referrals 

are for services ‘‘incident to’’ the 

physician’s personally performed 

services). 

(2) Overall profits means the group’s 

entire profits derived from DHS payable 

by Medicare or Medicaid or the profits 

derived from DHS payable by Medicare 

or Medicaid of any component of the 

group practice that consists of at least 

five physicians. Overall profits should 

be divided in a reasonable and verifiable 

manner that is not directly related to the 

volume or value of the physician’s 

referrals of DHS. The share of overall 

profits will be deemed not to relate 

directly to the volume or value of 

referrals if one of the following 

conditions is met: 

(i) The group’s profits are divided per 

capita (for example, per member of the 

group or per physician in the group). 

(ii) Revenues derived from DHS are 

distributed based on the distribution of 

the group practice’s revenues attributed 

to services that are not DHS payable by 

any Federal health care program or 

private payer. 

(iii) Revenues derived from DHS 

constitute less than 5 percent of the 

group practice’s total revenues, and the 

allocated portion of those revenues to 

each physician in the group practice 

constitutes 5 percent or less of his or her 

total compensation from the group. 

(3) A productivity bonus must be 

calculated in a reasonable and verifiable 

manner that is not directly related to the 

volume or value of the physician’s 

referrals of DHS. A productivity bonus 

will be deemed not to relate directly to 

the volume or value of referrals of DHS 

if one of the following conditions is met: 

(i) The bonus is based on the 

physician’s total patient encounters or 

relative value units (RVUs). (The 

methodology for establishing RVUs is 

set forth in § 414.22 of this chapter.) 

(ii) The bonus is based on the 

allocation of the physician’s 

compensation attributable to services 

that are not DHS payable by any Federal 

health care program or private payer. 

(iii) Revenues derived from DHS are 

less than 5 percent of the group 

practice’s total revenues, and the 

allocated portion of those revenues to 

each physician in the group practice 

constitutes 5 percent or less of his or her 


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total compensation from the group 

practice. 

(4) Supporting documentation 

verifying the method used to calculate 

the profit share or productivity bonus 

under paragraphs (i)(2) and (i)(3) of this 

section, and the resulting amount of 

compensation, must be made available 

to the Secretary upon request. 

■ 4. Section 411.353 is revised to read 

as follows: 

§ 411.353 Prohibition on certain referrals 

by physicians and limitations on billing. 

(a) Prohibition on referrals. Except as 

provided in this subpart, a physician 

who has a direct or indirect financial 

relationship with an entity, or who has 

an immediate family member who has 

a direct or indirect financial 

relationship with the entity, may not 

make a referral to that entity for the 

furnishing of DHS for which payment 

otherwise may be made under Medicare. 

A physician’s prohibited financial 

relationship with an entity that 

furnishes DHS is not imputed to his or 

her group practice or its members or its 

staff. However, a referral made by a 

physician’s group practice, its members, 

or its staff may be imputed to the 

physician if the physician directs the 

group practice, its members, or its staff 

to make the referral or if the physician 

controls referrals made by his or her 

group practice, its members, or its staff. 

(b) Limitations on billing. An entity 

that furnishes DHS pursuant to a referral 

that is prohibited by paragraph (a) of 

this section may not present or cause to 

be presented a claim or bill to the 

Medicare program or to any individual, 

third party payer, or other entity for the 

DHS performed pursuant to the 

prohibited referral. 

(c) Denial of payment. Except as 

provided in paragraph (e) of this 

section, no Medicare payment may be 

made for a designated health service 

that is furnished pursuant to a 

prohibited referral. 

(d) Refunds. An entity that collects 

payment for a designated health service 

that was performed pursuant to a 

prohibited referral must refund all 

collected amounts on a timely basis, as 

defined at § 1003.101 of this title. 

(e) Exception for certain entities. 

Payment may be made to an entity that 

submits a claim for a designated health 

service if—

(1) The entity did not have actual 

knowledge of, and did not act in 

reckless disregard or deliberate 

ignorance of, the identity of the 

physician who made the referral of the 

designated health service to the entity; 

and 

(2) The claim otherwise complies 

with all applicable Federal and State 

laws, rules, and regulations. 

(f) Exception for certain arrangements 

involving temporary noncompliance. (1) 

Except as provided in paragraphs (f)(2), 

(f)(3), and (f)(4) of this section, an entity 

may submit a claim or bill and payment 

may be made to an entity that submits 

a claim or bill for a designated health 

service if—

(i) The financial relationship between 

the entity and the referring physician 

fully complied with an applicable 

exception under § 411.355, § 411.356, or 

§ 411.357 for at least 180 consecutive 

calendar days immediately preceding 

the date on which the financial 

relationship became noncompliant with 

the exception; 

(ii) The financial relationship has 

fallen out of compliance with the 

exception for reasons beyond the 

control of the entity, and the entity 

promptly takes steps to rectify the 

noncompliance; and 

(iii) The financial relationship does 

not violate the anti-kickback statute 

(section 1128B(b) of the Act), and the 

claim or bill otherwise complies with all 

applicable Federal and State laws, rules, 

and regulations. 

(2) Paragraph (f)(1) of this section 

applies only to DHS furnished during 

the period of time it takes the entity to 

rectify the noncompliance, which must 

not exceed 90 consecutive calendar days 

following the date on which the 

financial relationship became 

noncompliant with an exception. 

(3) Paragraph (f)(1) may be used by an 

entity only once every 3 years with 

respect to the same referring physician. 

(4) Paragraph (f)(1) does not apply if 

the exception with which the financial 

relationship previously complied was 

§ 411.357(k) or (m). 

■ 4a. Section 411.354 is revised to read 

as follows: 

§ 411.354 Financial relationship, 

compensation, and ownership or 

investment interest. 

(a) Financial relationships. (1) 

Financial relationship means—

(i) A direct or indirect ownership or 

investment interest (as defined in 

paragraph (b) of this section) in any 

entity that furnishes DHS; or 

(ii) A direct or indirect compensation 

arrangement (as defined in paragraph (c) 

of this section) with an entity that 

furnishes DHS. 

(2) Types of financial relationships. (i) 

A direct financial relationship exists if 

remuneration passes between the 

referring physician (or a member of his 

or her immediate family) and the entity 

furnishing DHS without any intervening 

persons or entities between the entity 

furnishing DHS and the referring 

physician (or a member of his or her 

immediate family). 

(ii) An indirect financial relationship 

exists under the conditions described in 

paragraphs (b)(5) and (c)(2) of this 

section. 

(b) Ownership or investment interest. 

An ownership or investment interest in 

the entity may be through equity, debt, 

or other means, and includes an interest 

in an entity that holds an ownership or 

investment interest in any entity that 

furnishes DHS. 

(1) An ownership or investment 

interest includes, but is not limited to, 

stock, stock options other than those 

described in § 411.354(b)(3)(ii), 

partnership shares, limited liability 

company memberships, as well as loans, 

bonds, or other financial instruments 

that are secured with an entity’s 

property or revenue or a portion of that 

property or revenue. 

(2) An ownership or investment 

interest in a subsidiary company is 

neither an ownership or investment 

interest in the parent company, nor in 

any other subsidiary of the parent, 

unless the subsidiary company itself has 

an ownership or investment interest in 

the parent or such other subsidiaries. It 

may, however, be part of an indirect 

financial relationship. 

(3) Ownership and investment 

interests do not include, among other 

things—

(i) An interest in a retirement plan; 

(ii) Stock options and convertible 

securities received as compensation 

until the stock options are exercised or 

the convertible securities are converted 

to equity (before this time the stock 

options or convertible securities are 

compensation arrangements as defined 

in paragraph (c) of this section); 

(iii) An unsecured loan subordinated 

to a credit facility (which is a 

compensation arrangement as defined in 

paragraph (c) of this section); 

(iv) An ‘‘under arrangements’’

contract between a hospital and an 

entity owned by one or more physicians 

(or a group of physicians) providing 

DHS ‘‘under arrangements’’ with the 

hospital (such a contract is a 

compensation arrangement as defined in 

paragraph (c) of this section); or 

(v) A security interest held by a 

physician in equipment sold by the 

physician to a hospital and financed 

through a loan from the physician to the 

hospital (such an interest is a 

compensation arrangement as defined in 

paragraph (c) of this section). 

(4) An ownership or investment 

interest that meets an exception set forth 

in § 411.355 or § 411.356 need not also 


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meet an exception for compensation 

arrangements set forth in § 411.357 with 

respect to profit distributions, 

dividends, or interest payments on 

secured obligations. 

(5)(i) An indirect ownership or 

investment interest exists if—

(A) Between the referring physician 

(or immediate family member) and the 

entity furnishing DHS there exists an 

unbroken chain of any number (but no 

fewer than one) of persons or entities 

having ownership or investment 

interests; and 

(B) The entity furnishing DHS has 

actual knowledge of, or acts in reckless 

disregard or deliberate ignorance of, the 

fact that the referring physician (or 

immediate family member) has some 

ownership or investment interest 

(through any number of intermediary 

ownership or investment interests) in 

the entity furnishing the DHS. 

(ii) An indirect ownership or 

investment interest exists even though 

the entity furnishing DHS does not 

know, or acts in reckless disregard or 

deliberate ignorance of, the precise 

composition of the unbroken chain or 

the specific terms of the ownership or 

investment interests that form the links 

in the chain. 

(iii) Notwithstanding anything in this 

paragraph (b)(5), common ownership or 

investment in an entity does not, in and 

of itself, establish an indirect ownership 

or investment interest by one common 

owner or investor in another common 

owner or investor. 

(iv) An indirect ownership or 

investment interest requires an 

unbroken chain of ownership interests 

between the referring physician and the 

entity furnishing DHS such that the 

referring physician has an indirect 

ownership or investment interest in the 

entity furnishing DHS. 

(c) Compensation arrangement. A 

compensation arrangement is any 

arrangement involving remuneration, 

direct or indirect, between a physician 

(or a member of a physician’s immediate 

family) and an entity. An ‘‘under 

arrangements’’ contract between a 

hospital and an entity providing DHS 

‘‘under arrangements’’ to the hospital 

creates a compensation arrangement for 

purposes of these regulations. A 

compensation arrangement does not 

include the portion of any business 

arrangement that consists solely of the 

remuneration described in section 

1877(h)(1)(C) of the Act and in 

paragraphs (1) through (3) of the 

definition of the term ‘‘remuneration’’ at 

§ 411.351. (However, any other portion 

of the arrangement may still constitute 

a compensation arrangement.) 

(1)(i) A direct compensation 

arrangement exists if remuneration 

passes between the referring physician 

(or a member of his or her immediate 

family) and the entity furnishing DHS 

without any intervening persons or 

entities. 

(ii) A physician is deemed to have a 

direct compensation arrangement with 

an entity furnishing DHS if the only 

intervening entity between the 

physician and the entity furnishing DHS 

is his or her physician organization. In 

such situations, for purposes of this 

section, the physician is deemed to 

stand in the shoes of the physician 

organization. 

(2) An indirect compensation 

arrangement exists if—

(i) Between the referring physician (or 

a member of his or her immediate 

family) and the entity furnishing DHS 

there exists an unbroken chain of any 

number (but not fewer than one) of 

persons or entities that have financial 

relationships (as defined in paragraph 

(a) of this section) between them (that is, 

each link in the chain has either an 

ownership or investment interest or a 

compensation arrangement with the 

preceding link); 

(ii) The referring physician (or 

immediate family member) receives 

aggregate compensation from the person 

or entity in the chain with which the 

physician (or immediate family 

member) has a direct financial 

relationship that varies with, or takes 

into account, the volume or value of 

referrals or other business generated by 

the referring physician for the entity 

furnishing the DHS, regardless of 

whether the individual unit of 

compensation satisfies the special rules 

on unit-based compensation under 

paragraphs (d)(2) or (d)(3) of this 

section. If the financial relationship 

between the physician (or immediate 

family member) and the person or entity 

in the chain with which the referring 

physician (or immediate family 

member) has a direct financial 

relationship is an ownership or 

investment interest, the determination 

whether the aggregate compensation 

varies with, or takes into account, the 

volume or value of referrals or other 

business generated by the referring 

physician for the entity furnishing the 

DHS will be measured by the 

nonownership or noninvestment 

interest closest to the referring 

physician (or immediate family 

member). (For example, if a referring 

physician has an ownership interest in 

company A, which owns company B, 

which has a compensation arrangement 

with company C, which has a 

compensation arrangement with entity 

D that furnishes DHS, we would look to 

the aggregate compensation between 

company B and company C for purposes 

of this paragraph (c)(2)(ii)); and 

(iii) The entity furnishing DHS has 

actual knowledge of, or acts in reckless 

disregard or deliberate ignorance of, the 

fact that the referring physician (or 

immediate family member) receives 

aggregate compensation that varies with, 

or takes into account, the volume or 

value of referrals or other business 

generated by the referring physician for 

the entity furnishing the DHS. 

(iv) For purposes of paragraph 

(c)(2)(i), a physician is deemed to ‘‘stand 

in the shoes’’ of his or her physician 

organization. 

(3)(i) For purposes of paragraphs 

(c)(1)(ii) and (c)(2)(iv), a physician who 

‘‘stands in the shoes’’ of his or her 

physician organization is deemed to 

have the same compensation 

arrangements (with the same parties and 

on the same terms) as the physician 

organization. For purposes of applying 

the exceptions in § 411.355 and 

§ 411.357 to arrangements described in 

paragraphs (c)(1)(i) and (c)(2)(i), the 

‘‘parties’’ to the arrangements are 

considered to be the entity furnishing 

DHS and the physician organization 

(including all members, employees, or 

independent contractor physicians). 

(ii) The provisions of paragraphs 

(c)(1)(ii) and (c)(2)(iv) need not apply 

during the original term or current 

renewal term of an arrangement that 

satisfied the requirements of 

§ 411.357(p) as of September 5, 2007. 

(d) Special rules on compensation. 

The following special rules apply only 

to compensation under section 1877 of 

the Act and subpart J of this part: 

(1) Compensation is considered ‘‘set 

in advance’’ if the aggregate 

compensation, a time-based or per-unit 

of service-based (whether per-use or 

per-service) amount, or a specific 

formula for calculating the 

compensation is set in an agreement 

between the parties before the 

furnishing of the items or services for 

which the compensation is to be paid. 

The formula for determining the 

compensation must be set forth in 

sufficient detail so that it can be 

objectively verified, and the formula 

may not be changed or modified during 

the course of the agreement in any 

manner that takes into account the 

volume or value of referrals or other 

business generated by the referring 

physician. 

(2) Unit-based compensation 

(including time-based or per-unit of 

service-based compensation) is deemed 

not to take into account ‘‘the volume or 

value of referrals’’ if the compensation 


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is fair market value for services or items 

actually provided and does not vary 

during the course of the compensation 

arrangement in any manner that takes 

into account referrals of DHS. 

(3) Unit-based compensation 

(including time-based or per-unit of 

service-based compensation) is deemed 

not to take into account ‘‘other business 

generated between the parties,’’

provided that the compensation is fair 

market value for items and services 

actually provided and does not vary 

during the course of the compensation 

arrangement in any manner that takes 

into account referrals or other business 

generated by the referring physician, 

including private pay health care 

business (except for services personally 

performed by the referring physician, 

which are not considered ‘‘other 

business generated’’ by the referring 

physician). 

(4) A physician’s compensation from 

a bona fide employer or under a 

managed care contract or other contract 

for personal services may be 

conditioned on the physician’s referrals 

to a particular provider, practitioner, or 

supplier, provided that the 

compensation arrangement meets all of 

the following conditions. The 

compensation arrangement: 

(i) Is set in advance for the term of the 

agreement. 

(ii) Is consistent with fair market 

value for services performed (that is, the 

payment does not take into account the 

volume or value of anticipated or 

required referrals). 

(iii) Otherwise complies with an 

applicable exception under § 411.355 or 

§ 411.357. 

(iv) Complies with both of the 

following conditions: 

(A) The requirement to make referrals 

to a particular provider, practitioner, or 

supplier is set forth in a written 

agreement signed by the parties. 

(B) The requirement to make referrals 

to a particular provider, practitioner, or 

supplier does not apply if the patient 

expresses a preference for a different 

provider, practitioner, or supplier; the 

patient’s insurer determines the 

provider, practitioner, or supplier; or 

the referral is not in the patient’s best 

medical interests in the physician’s 

judgment. 

(v) The required referrals relate solely 

to the physician’s services covered by 

the scope of the employment or the 

contract, and the referral requirement is 

reasonably necessary to effectuate the 

legitimate business purposes of the 

compensation arrangement. In no event 

may the physician be required to make 

referrals that relate to services that are 

not provided by the physician under the 

scope of his or her employment or 

contract. 

■ 5. Section 411.355 is revised to read 

as follows: 

§ 411.355 General exceptions to the 

referral prohibition related to both 

ownership/investment and compensation. 

The prohibition on referrals set forth 

in § 411.353 does not apply to the 

following types of services: 

(a) Physician services. (1) Physician 

services as defined in § 410.20(a) of this 

chapter that are furnished—

(i) Personally by another physician 

who is a member of the referring 

physician’s group practice or is a 

physician in the same group practice (as 

defined at § 411.351) as the referring 

physician; or 

(ii) Under the supervision of another 

physician who is a member of the 

referring physician’s group practice or is 

a physician in the same group practice 

(as defined at § 411.351) as the referring 

physician, provided that the supervision 

complies with all other applicable 

Medicare payment and coverage rules 

for the physician services. 

(2) For purposes of paragraph (a) of 

this section, ‘‘physician services’’

include only those ‘‘incident to’’

services (as defined at § 411.351) that 

are physician services under § 410.20(a) 

of this chapter. 

(b) In-office ancillary services. 

Services (including certain items of 

durable medical equipment (DME), as 

defined in paragraph (b)(4) of this 

section, and infusion pumps that are 

DME (including external ambulatory 

infusion pumps), but excluding all other 

DME and parenteral and enteral 

nutrients, equipment, and supplies 

(such as infusion pumps used for PEN)), 

that meet the following conditions: 

(1) They are furnished personally by 

one of the following individuals: 

(i) The referring physician. 

(ii) A physician who is a member of 

the same group practice as the referring 

physician. 

(iii) An individual who is supervised 

by the referring physician or, if the 

referring physician is in a group 

practice, by another physician in the 

group practice, provided that the 

supervision complies with all other 

applicable Medicare payment and 

coverage rules for the services. 

(2) They are furnished in one of the 

following locations: 

(i) The same building (as defined at 

§ 411.351), but not necessarily in the 

same space or part of the building, in 

which all of the conditions of paragraph 

(b)(2)(i)(A), (b)(2)(i)(B), or (b)(2)(i)(C) of 

this section are satisfied: 

(A)(1) The referring physician or his 

or her group practice (if any) has an 

office that is normally open to the 

physician’s or group’s patients for 

medical services at least 35 hours per 

week; and 

(2) The referring physician or one or 

more members of the referring 

physician’s group practice regularly 

practices medicine and furnishes 

physician services to patients at least 30 

hours per week. The 30 hours must 

include some physician services that are 

unrelated to the furnishing of DHS 

payable by Medicare, any other Federal 

health care payer, or a private payer, 

even though the physician services may 

lead to the ordering of DHS; or 

(B)(1) The patient receiving the DHS 

usually receives physician services from 

the referring physician or members of 

the referring physician’s group practice 

(if any); 

(2) The referring physician or the 

referring physician’s group practice 

owns or rents an office that is normally 

open to the physician’s or group’s 

patients for medical services at least 8 

hours per week; and 

(3) The referring physician regularly 

practices medicine and furnishes 

physician services to patients at least 6 

hours per week. The 6 hours must 

include some physician services that are 

unrelated to the furnishing of DHS 

payable by Medicare, any other Federal 

health care payer, or a private payer, 

even though the physician services may 

lead to the ordering of DHS; or 

(C)(1) The referring physician is 

present and orders the DHS during a 

patient visit on the premises as set forth 

in paragraph (b)(2)(i)(C)(2) of this 

section or the referring physician or a 

member of the referring physician’s 

group practice (if any) is present while 

the DHS is furnished during occupancy 

of the premises as set forth in paragraph 

(b)(2)(i)(C)(2) of this section; 

(2) The referring physician or the 

referring physician’s group practice 

owns or rents an office that is normally 

open to the physician’s or group’s 

patients for medical services at least 8 

hours per week; and 

(3) The referring physician or one or 

more members of the referring 

physician’s group practice regularly 

practices medicine and furnishes 

physician services to patients at least 6 

hours per week. The 6 hours must 

include some physician services that are 

unrelated to the furnishing of DHS 

payable by Medicare, any other Federal 

health care payer, or a private payer, 

even though the physician services may 

lead to the ordering of DHS. 

(ii) A centralized building (as defined 

at § 411.351) that is used by the group 

practice for the provision of some or all 


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of the group practice’s clinical 

laboratory services. 

(iii) A centralized building (as defined 

at § 411.351) that is used by the group 

practice for the provision of some or all 

of the group practice’s DHS (other than 

clinical laboratory services). 

(3) They are billed by one of the 

following: 

(i) The physician performing or 

supervising the service. 

(ii) The group practice of which the 

performing or supervising physician is a 

member under a billing number 

assigned to the group practice. 

(iii) The group practice if the 

supervising physician is a ‘‘physician in 

the group practice’’ (as defined at 

§ 411.351) under a billing number 

assigned to the group practice. 

(iv) An entity that is wholly owned by 

the performing or supervising physician 

or by that physician’s group practice 

under the entity’s own billing number 

or under a billing number assigned to 

the physician or group practice. 

(v) An independent third party billing 

company acting as an agent of the 

physician, group practice, or entity 

specified in paragraphs (b)(3)(i) through 

(b)(3)(iv) of this section under a billing 

number assigned to the physician, group 

practice, or entity, provided that the 

billing arrangement meets the 

requirements of § 424.80(b)(5) of this 

chapter. For purposes of this paragraph 

(b)(3), a group practice may have, and 

bill under, more than one Medicare 

billing number, subject to any 

applicable Medicare program 

restrictions. 

(4) For purposes of paragraph (b) of 

this section, DME covered by the inoffice ancillary services exception 

means canes, crutches, walkers and 

folding manual wheelchairs, and blood 

glucose monitors, that meet the 

following conditions: 

(i) The item is one that a patient 

requires for the purpose of ambulating, 

a patient uses in order to depart from 

the physician’s office, or is a blood 

glucose monitor (including one starter 

set of test strips and lancets, consisting 

of no more than 100 of each). A blood 

glucose monitor may be furnished only 

by a physician or employee of a 

physician or group practice that also 

furnishes outpatient diabetes selfmanagement training to the patient. 

(ii) The item is furnished in a building 

that meets the ‘‘same building’’

requirements in the in-office ancillary 

services exception as part of the 

treatment for the specific condition for 

which the patient-physician encounter 

occurred. 

(iii) The item is furnished personally 

by the physician who ordered the DME, 

by another physician in the group 

practice, or by an employee of the 

physician or the group practice. 

(iv) A physician or group practice that 

furnishes the DME meets all DME 

supplier standards set forth in 

§ 424.57(c) of this chapter. 

(v) The arrangement does not violate 

the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. 

(vi) All other requirements of the inoffice ancillary services exception in 

paragraph (b) of this section are met. 

(5) A designated health service is 

‘‘furnished’’ for purposes of paragraph 

(b) of this section in the location where 

the service is actually performed upon 

a patient or where an item is dispensed 

to a patient in a manner that is sufficient 

to meet the applicable Medicare 

payment and coverage rules. 

(6) Special rule for home care 

physicians. In the case of a referring 

physician whose principal medical 

practice consists of treating patients in 

their private homes, the ‘‘same 

building’’ requirements of paragraph 

(b)(2)(i) of this section are met if the 

referring physician (or a qualified 

person accompanying the physician, 

such as a nurse or technician) provides 

the DHS contemporaneously with a 

physician service that is not a 

designated health service provided by 

the referring physician to the patient in 

the patient’s private home. For purposes 

of paragraph (b)(5) of this section only, 

a private home does not include a 

nursing, long-term care, or other facility 

or institution, except that a patient may 

have a private home in an assisted 

living or independent living facility. 

(c) Services furnished by an 

organization (or its contractors or 

subcontractors) to enrollees. Services 

furnished by an organization (or its 

contractors or subcontractors) to 

enrollees of one of the following prepaid 

health plans (not including services 

provided to enrollees in any other plan 

or line of business offered or 

administered by the same organization): 

(1) An HMO or a CMP in accordance 

with a contract with CMS under section 

1876 of the Act and part 417, subparts 

J through M of this chapter. 

(2) A health care prepayment plan in 

accordance with an agreement with 

CMS under section 1833(a)(1)(A) of the 

Act and part 417, subpart U of this 

chapter. 

(3) An organization that is receiving 

payments on a prepaid basis for 

Medicare enrollees through a 

demonstration project under section 

402(a) of the Social Security 

Amendments of 1967 (42 U.S.C. 1395b–

1) or under section 222(a) of the Social 

Security Amendments of 1972 (42 

U.S.C. 1395b–1 note). 

(4) A qualified HMO (within the 

meaning of section 1310(d) of the Public 

Health Service Act). 

(5) A coordinated care plan (within 

the meaning of section 1851(a)(2)(A) of 

the Act) offered by an organization in 

accordance with a contract with CMS 

under section 1857 of the Act and part 

422 of this chapter. 

(6) A MCO contracting with a State 

under section 1903(m) of the Act. 

(7) A prepaid inpatient health plan 

(PIHP) or prepaid ambulance health 

plan (PAHP) contracting with a State 

under part 438 of this chapter. 

(8) A health insuring organization 

(HIO) contracting with a State under 

part 438, subpart D of this chapter. 

(9) An entity operating under a 

demonstration project under sections 

1115(a), 1915(a), 1915(b), or 1932(a) of 

the Act. 

(d) [Reserved] 

(e) Academic medical centers. (1) 

Services provided by an academic 

medical center if all of the following 

conditions are met: 

(i) The referring physician—

(A) Is a bona fide employee of a 

component of the academic medical 

center on a full-time or substantial parttime basis. (A ‘‘component’’ of an 

academic medical center means an 

affiliated medical school, faculty 

practice plan, hospital, teaching facility, 

institution of higher education, 

departmental professional corporation, 

or nonprofit support organization whose 

primary purpose is supporting the 

teaching mission of the academic 

medical center.) The components need 

not be separate legal entities; 

(B) Is licensed to practice medicine in 

the State(s) in which he or she practices 

medicine; 

(C) Has a bona fide faculty 

appointment at the affiliated medical 

school or at one or more of the 

educational programs at the accredited 

academic hospital (as defined at 

§ 411.355(e)(3)); and 

(D) Provides either substantial 

academic services or substantial clinical 

teaching services (or a combination of 

academic services and clinical teaching 

services) for which the faculty member 

receives compensation as part of his or 

her employment relationship with the 

academic medical center. Parties should 

use a reasonable and consistent method 

for calculating a physician’s academic 

services and clinical teaching services. 

A physician will be deemed to meet this 

requirement if he or she spends at least 

20 percent of his or her professional 

time or 8 hours per week providing 


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academic services or clinical teaching 

services (or a combination of academic 

services or clinical teaching services). A 

physician who does not spend at least 

20 percent of his or her professional 

time or 8 hours per week providing 

academic services or clinical teaching 

services (or a combination of academic 

services or clinical teaching services) is 

not precluded from qualifying under 

this paragraph (e)(1)(i)(D). 

(ii) The compensation paid to the 

referring physician must meet all of the 

following conditions: 

(A) The total compensation paid by 

each academic medical center 

component to the referring physician is 

set in advance. 

(B) In the aggregate, the compensation 

paid by all academic medical center 

components to the referring physician 

does not exceed fair market value for the 

services provided. 

(C) The total compensation paid by 

each academic medical center 

component is not determined in a 

manner that takes into account the 

volume or value of any referrals or other 

business generated by the referring 

physician within the academic medical 

center. 

(iii) The academic medical center 

must meet all of the following 

conditions: 

(A) All transfers of money between 

components of the academic medical 

center must directly or indirectly 

support the missions of teaching, 

indigent care, research, or community 

service. 

(B) The relationship of the 

components of the academic medical 

center must be set forth in one or more 

written agreements or other written 

documents that have been adopted by 

the governing body of each component. 

If the academic medical center is one 

legal entity, this requirement will be 

satisfied if transfers of funds between 

components of the academic medical 

center are reflected in the routine 

financial reports covering the 

components. 

(C) All money paid to a referring 

physician for research must be used 

solely to support bona fide research or 

teaching and must be consistent with 

the terms and conditions of the grant. 

(iv) The referring physician’s 

compensation arrangement does not 

violate the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. 

(2) The ‘‘academic medical center’’ for 

purposes of this section consists of—

(i) An accredited medical school 

(including a university, when 

appropriate) or an accredited academic 

hospital (as defined at § 411.355(e)(3)); 

(ii) One or more faculty practice plans 

affiliated with the medical school, the 

affiliated hospital(s), or the accredited 

academic hospital; and 

(iii) One or more affiliated hospitals 

in which a majority of the physicians on 

the medical staff consists of physicians 

who are faculty members and a majority 

of all hospital admissions is made by 

physicians who are faculty members. 

The hospital for purposes of this 

paragraph (e)(2)(iii) may be the same 

hospital that satisfies the requirement of 

paragraph (e)(2)(i) of this section. For 

purposes of this paragraph, a faculty 

member is a physician who is either on 

the faculty of the affiliated medical 

school or on the faculty of one or more 

of the educational programs at the 

accredited academic hospital. In 

meeting this paragraph (e)(2)(iii), faculty 

from any affiliated medical school or 

accredited academic hospital education 

program may be aggregated, and 

residents and non-physician 

professionals need not be counted. Any 

faculty member may be counted, 

including courtesy and volunteer 

faculty. For purposes of determining 

whether the majority of physicians on 

the medical staff consists of faculty 

members, the affiliated hospital must 

include or exclude all individual 

physicians with the same class of 

privileges at the affiliated hospital (for 

example, physicians holding courtesy 

privileges). 

(3) An accredited academic hospital 

for purposes of this section means a 

hospital or a health system that 

sponsors four or more approved medical 

education programs. 

(f) Implants furnished by an ASC. 

Implants furnished by an ASC, 

including, but not limited to, cochlear 

implants, intraocular lenses, and other 

implanted prosthetics, implanted 

prosthetic devices, and implanted DME 

that meet the following conditions: 

(1) The implant is implanted by the 

referring physician or a member of the 

referring physician’s group practice in 

an ASC that is certified by Medicare 

under part 416 of this chapter and with 

which the referring physician has a 

financial relationship. 

(2) The implant is implanted in the 

patient during a surgical procedure paid 

by Medicare to the ASC as an ASC 

procedure under § 416.65 of this 

chapter. 

(3) The arrangement for the furnishing 

of the implant does not violate the antikickback statute (section 1128B(b) of the 

Act). 

(4) All billing and claims submission 

for the implants does not violate any 

Federal or State law or regulation 

governing billing or claims submission. 

(5) The exception set forth in this 

paragraph (f) does not apply to any 

financial relationships between the 

referring physician and any entity other 

than the ASC in which the implant is 

furnished to, and implanted in, the 

patient. 

(g) EPO and other dialysis-related 

drugs. EPO and other dialysis-related 

drugs that meet the following 

conditions: 

(1) The EPO and other dialysis-related 

drugs are furnished in or by an ESRD 

facility. For purposes of this paragraph, 

‘‘EPO and other dialysis-related drugs’’

means certain outpatient prescription 

drugs that are required for the efficacy 

of dialysis and identified as eligible for 

this exception on the List of CPT/ 

HCPCS Codes; and ‘‘furnished’’ means 

that the EPO or dialysis-related drugs 

are administered to a patient in the 

ESRD facility or, in the case of EPO or 

Aranesp (or equivalent drug identified 

on the List of CPT/HCPCS Codes) only, 

are dispensed by the ESRD facility for 

use at home. 

(2) The arrangement for the furnishing 

of the EPO and other dialysis-related 

drugs does not violate the anti-kickback 

statute (section 1128B(b) of the Act). 

(3) All billing and claims submission 

for the EPO and other dialysis-related 

drugs does not violate any Federal or 

State law or regulation governing billing 

or claims submission. 

(4) The exception set forth in this 

paragraph does not apply to any 

financial relationship between the 

referring physician and any entity other 

than the ESRD facility that furnishes the 

EPO and other dialysis-related drugs to 

the patient. 

(h) Preventive screening tests, 

immunizations, and vaccines. 

Preventive screening tests, 

immunizations, and vaccines that meet 

the following conditions: 

(1) The preventive screening tests, 

immunizations, and vaccines are subject 

to CMS-mandated frequency limits. 

(2) The arrangement for the provision 

of the preventive screening tests, 

immunizations, and vaccines does not 

violate the anti-kickback statute (section 

1128B(b) of the Act). 

(3) All billing and claims submission 

for the preventive screening tests, 

immunizations, and vaccines does not 

violate any Federal or State law or 

regulation governing billing or claims 

submission. 

(4) The preventive screening tests, 

immunizations, and vaccines must be 

covered by Medicare and must be listed 

as eligible for this exception on the List 

of CPT/HCPCS Codes. 


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(i) Eyeglasses and contact lenses 

following cataract surgery. Eyeglasses 

and contact lenses that are covered by 

Medicare when furnished to patients 

following cataract surgery that meet the 

following conditions: 

(1) The eyeglasses or contact lenses 

are provided in accordance with the 

coverage and payment provisions set 

forth in § 410.36(a)(2)(ii) and § 414.228 

of this chapter, respectively. 

(2) The arrangement for the furnishing 

of the eyeglasses or contact lenses does 

not violate the anti-kickback statute 

(section 1128B(b) of the Act). 

(3) All billing and claims submission 

for the eyeglasses or contact lenses does 

not violate any Federal or State law or 

regulation governing billing or claims 

submission. 

(j) Intra-family rural referrals. (1) 

Services provided pursuant to a referral 

from a referring physician to his or her 

immediate family member or to an 

entity furnishing DHS with which the 

immediate family member has a 

financial relationship, if all of the 

following conditions are met: 

(i) The patient who is referred resides 

in a rural area as defined at § 411.351 of 

this subpart; 

(ii) Except as provided in paragraph 

(j)(1)(iii) of this section, in light of the 

patient’s condition, no other person or 

entity is available to furnish the services 

in a timely manner within 25 miles of 

or 45 minutes transportation time from 

the patient’s residence; 

(iii) In the case of services furnished 

to patients where they reside (for 

example, home health services or DME), 

no other person or entity is available to 

furnish the services in a timely manner 

in light of the patient’s condition; and 

(iv) The financial relationship does 

not violate the anti-kickback statute 

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

Federal or State law or regulation 

governing billing or claims submission; 

(2) The referring physician or the 

immediate family member must make 

reasonable inquiries as to the 

availability of other persons or entities 

to furnish the DHS. However, neither 

the referring physician nor the 

immediate family member has any 

obligation to inquire as to the 

availability of persons or entities located 

farther than 25 miles of or 45 minutes 

transportation time from (whichever test 

the referring physician utilized for 

purposes of paragraph (j)(1)(ii)) the 

patient’s residence. 

■ 6. Section 411.356 is revised to read 

as follows: 

§ 411.356 Exceptions to the referral 

prohibition related to ownership or 

investment interests. 

For purposes of § 411.353, the 

following ownership or investment 

interests do not constitute a financial 

relationship: 

(a) Publicly-traded securities. 

Ownership of investment securities 

(including shares or bonds, debentures, 

notes, or other debt instruments) that at 

the time the DHS referral was made 

could be purchased on the open market 

and that meet the requirements of 

paragraphs (a)(1) and (a)(2) of this 

section. 

(1) They are either—

(i) Listed for trading on the New York 

Stock Exchange, the American Stock 

Exchange, or any regional exchange in 

which quotations are published on a 

daily basis, or foreign securities listed 

on a recognized foreign, national, or 

regional exchange in which quotations 

are published on a daily basis; or 

(ii) Traded under an automated 

interdealer quotation system operated 

by the National Association of 

Securities Dealers. 

(2) They are in a corporation that had 

stockholder equity exceeding $75 

million at the end of the corporation’s 

most recent fiscal year or on average 

during the previous 3 fiscal years. 

‘‘Stockholder equity’’ is the difference 

in value between a corporation’s total 

assets and total liabilities. 

(b) Mutual funds. Ownership of 

shares in a regulated investment 

company as defined in section 851(a) of 

the Internal Revenue Code of 1986, if 

the company had, at the end of its most 

recent fiscal year, or on average during 

the previous 3 fiscal years, total assets 

exceeding $75 million. 

(c) Specific providers. Ownership or 

investment interest in the following 

entities, for purposes of the services 

specified: 

(1) A rural provider, in the case of 

DHS furnished in a rural area (as 

defined at § 411.351 of this subpart) by 

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

entity that furnishes substantially all 

(not less than 75 percent) of the DHS 

that it furnishes to residents of a rural 

area and, for the 18-month period 

beginning on December 8, 2003 (or such 

other period as Congress may specify), 

is not a specialty hospital. 

(2) A hospital that is located in Puerto 

Rico, in the case of DHS furnished by 

such a hospital. 

(3) A hospital that is located outside 

of Puerto Rico, in the case of DHS 

furnished by such a hospital, if—

(i) The referring physician is 

authorized to perform services at the 

hospital; 

(ii) Effective for the 18-month period 

beginning on December 8, 2003 (or such 

other period as Congress may specify), 

the hospital is not a specialty hospital; 

and 

(iii) The ownership or investment 

interest is in the entire hospital and not 

merely in a distinct part or department 

of the hospital. 

■ 7. Section 411.357 is revised to read 

as follows: 

§ 411.357 Exceptions to the referral 

prohibition related to compensation 

arrangements. 

For purposes of § 411.353, the 

following compensation arrangements 

do not constitute a financial 

relationship: 

(a) Rental of office space. Payments 

for the use of office space made by a 

lessee to a lessor if there is a rental or 

lease agreement that meets the following 

requirements: 

(1) The agreement is set out in 

writing, is signed by the parties, and 

specifies the premises it covers. 

(2) The term of the agreement is at 

least 1 year. To meet this requirement, 

if the agreement is terminated during 

the term with or without cause, the 

parties may not enter into a new 

agreement during the first year of the 

original term of the agreement. 

(3) The space rented or leased does 

not exceed that which is reasonable and 

necessary for the legitimate business 

purposes of the lease or rental and is 

used exclusively by the lessee when 

being used by the lessee (and is not 

shared with or used by the lessor or any 

person or entity related to the lessor), 

except that the lessee may make 

payments for the use of space consisting 

of common areas if the payments do not 

exceed the lessee’s pro rata share of 

expenses for the space based upon the 

ratio of the space used exclusively by 

the lessee to the total amount of space 

(other than common areas) occupied by 

all persons using the common areas. 

(4) The rental charges over the term of 

the agreement are set in advance and are 

consistent with fair market value. 

(5) The rental charges over the term of 

the agreement are not determined in a 

manner that takes into account the 

volume or value of any referrals or other 

business generated between the parties. 

(6) The agreement would be 

commercially reasonable even if no 

referrals were made between the lessee 

and the lessor. 

(7) A holdover month-to-month rental 

for up to 6 months immediately 

following the expiration of an agreement 

of at least 1 year that met the conditions 

of this paragraph (a) satisfies the 

requirements of this paragraph (a), 


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provided that the holdover rental is on 

the same terms and conditions as the 

immediately preceding agreement. 

(b) Rental of equipment. Payments 

made by a lessee to a lessor for the use 

of equipment under the following 

conditions: 

(1) A rental or lease agreement is set 

out in writing, is signed by the parties, 

and specifies the equipment it covers. 

(2) The equipment rented or leased 

does not exceed that which is 

reasonable and necessary for the 

legitimate business purposes of the lease 

or rental and is used exclusively by the 

lessee when being used by the lessee 

and is not shared with or used by the 

lessor or any person or entity related to 

the lessor. 

(3) The agreement provides for a term 

of rental or lease of at least 1 year. To 

meet this requirement, if the agreement 

is terminated during the term with or 

without cause, the parties may not enter 

into a new agreement during the first 

year of the original term of the 

agreement. 

(4) The rental charges over the term of 

the agreement are set in advance, are 

consistent with fair market value, and 

are not determined in a manner that 

takes into account the volume or value 

of any referrals or other business 

generated between the parties. 

(5) The agreement would be 

commercially reasonable even if no 

referrals were made between the parties. 

(6) A holdover month-to-month rental 

for up to 6 months immediately 

following the expiration of an agreement 

of at least 1 year that met the conditions 

of this paragraph (b) satisfies the 

requirements of this paragraph (b), 

provided that the holdover rental is on 

the same terms and conditions as the 

immediately preceding agreement. 

(c) Bona fide employment 

relationships. Any amount paid by an 

employer to a physician (or immediate 

family member) who has a bona fide 

employment relationship with the 

employer for the provision of services if 

the following conditions are met: 

(1) The employment is for identifiable 

services. 

(2) The amount of the remuneration 

under the employment is—

(i) Consistent with the fair market 

value of the services; and 

(ii) Except as provided in paragraph 

(c)(4) of this section, is not determined 

in a manner that takes into account 

(directly or indirectly) the volume or 

value of any referrals by the referring 

physician. 

(3) The remuneration is provided 

under an agreement that would be 

commercially reasonable even if no 

referrals were made to the employer. 

(4) Paragraph (c)(2)(ii) of this section 

does not prohibit payment of 

remuneration in the form of a 

productivity bonus based on services 

performed personally by the physician 

(or immediate family member of the 

physician). 

(d) Personal service arrangements. (1) 

General—Remuneration from an entity 

under an arrangement or multiple 

arrangements to a physician or his or 

her immediate family member, or to a 

group practice, including remuneration 

for specific physician services furnished 

to a nonprofit blood center, if the 

following conditions are met: 

(i) Each arrangement is set out in 

writing, is signed by the parties, and 

specifies the services covered by the 

arrangement. 

(ii) The arrangement(s) covers all of 

the services to be furnished by the 

physician (or an immediate family 

member of the physician) to the entity. 

This requirement is met if all separate 

arrangements between the entity and the 

physician and the entity and any family 

members incorporate each other by 

reference or if they cross-reference a 

master list of contracts that is 

maintained and updated centrally and is 

available for review by the Secretary 

upon request. The master list must be 

maintained in a manner that preserves 

the historical record of contracts. A 

physician or family member can 

‘‘furnish’’ services through employees 

whom they have hired for the purpose 

of performing the services; through a 

wholly-owned entity; or through locum 

tenens physicians (as defined at 

§ 411.351, except that the regular 

physician need not be a member of a 

group practice). 

(iii) The aggregate services contracted 

for do not exceed those that are 

reasonable and necessary for the 

legitimate business purposes of the 

arrangement(s). 

(iv) The term of each arrangement is 

for at least 1 year. To meet this 

requirement, if an arrangement is 

terminated during the term with or 

without cause, the parties may not enter 

into the same or substantially the same 

arrangement during the first year of the 

original term of the arrangement. 

(v) The compensation to be paid over 

the term of each arrangement is set in 

advance, does not exceed fair market 

value, and, except in the case of a 

physician incentive plan (as defined at 

§ 411.351 of this subpart), is not 

determined in a manner that takes into 

account the volume or value of any 

referrals or other business generated 

between the parties. 

(vi) The services to be furnished 

under each arrangement do not involve 

the counseling or promotion of a 

business arrangement or other activity 

that violates any Federal or State law. 

(vii) A holdover personal service 

arrangement for up to 6 months 

following the expiration of an agreement 

of at least 1 year that met the conditions 

of paragraph (d) of this section satisfies 

the requirements of paragraph (d) of this 

section, provided that the holdover 

personal service arrangement is on the 

same terms and conditions as the 

immediately preceding agreement. 

(2) Physician incentive plan 

exception. In the case of a physician 

incentive plan (as defined at § 411.351) 

between a physician and an entity (or 

downstream contractor), the 

compensation may be determined in a 

manner (through a withhold, capitation, 

bonus, or otherwise) that takes into 

account directly or indirectly the 

volume or value of any referrals or other 

business generated between the parties, 

if the plan meets the following 

requirements: 

(i) No specific payment is made 

directly or indirectly under the plan to 

a physician or a physician group as an 

inducement to reduce or limit medically 

necessary services furnished with 

respect to a specific individual enrolled 

with the entity. 

(ii) Upon request of the Secretary, the 

entity provides the Secretary with 

access to information regarding the plan 

(including any downstream contractor 

plans), in order to permit the Secretary 

to determine whether the plan is in 

compliance with paragraph (d)(2) of this 

section. 

(iii) In the case of a plan that places 

a physician or a physician group at 

substantial financial risk as defined at 

§ 422.208, the entity or any downstream 

contractor (or both) complies with the 

requirements concerning physician 

incentive plans set forth in § 422.208 

and § 422.210 of this chapter. 

(e) Physician recruitment. (1) 

Remuneration provided by a hospital to 

recruit a physician that is paid directly 

to the physician and that is intended to 

induce the physician to relocate his or 

her medical practice to the geographic 

area served by the hospital in order to 

become a member of the hospital’s 

medical staff, if all of the following 

conditions are met: 

(i) The arrangement is set out in 

writing and signed by both parties; 

(ii) The arrangement is not 

conditioned on the physician’s referral 

of patients to the hospital; 

(iii) The hospital does not determine 

(directly or indirectly) the amount of the 

remuneration to the physician based on 

the volume or value of any actual or 

anticipated referrals by the physician or 


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other business generated between the 

parties; and 

(iv) The physician is allowed to 

establish staff privileges at any other 

hospital(s) and to refer business to any 

other entities (except as referrals may be 

restricted under an employment or 

services contract that complies with 

§ 411.354(d)(4)). 

(2)(i) The ‘‘geographic area served by 

the hospital’’ is the area composed of 

the lowest number of contiguous zip 

codes from which the hospital draws at 

least 75 percent of its inpatients. The 

geographic area served by the hospital 

may include one or more zip codes from 

which the hospital draws no inpatients, 

provided that such zip codes are 

entirely surrounded by zip codes in the 

geographic area described above from 

which the hospital draws at least 75 

percent of its inpatients. 

(ii) With respect to a hospital that 

draws fewer than 75 percent of its 

inpatients from all of the contiguous zip 

codes from which it draws inpatients, 

the ‘‘geographic area served by the 

hospital’’ will be deemed to be the area 

composed of all of the contiguous zip 

codes from which the hospital draws its 

inpatients. 

(iii) Special optional rule for rural 

hospitals. In the case of a hospital 

located in a rural area (as defined at 

§ 411.351), the ‘‘geographic area served 

by the hospital’’ may also be the area 

composed of the lowest number of 

contiguous zip codes from which the 

hospital draws at least 90 percent of its 

inpatients. If the hospital draws fewer 

than 90 percent of its inpatients from all 

of the contiguous zip codes from which 

it draws inpatients, the ‘‘geographic area 

served by the hospital’’ may include 

noncontiguous zip codes, beginning 

with the noncontiguous zip code in 

which the highest percentage of the 

hospital’s inpatients resides, and 

continuing to add noncontiguous zip 

codes in decreasing order of percentage 

of inpatients. 

(iv) A physician will be considered to 

have relocated his or her medical 

practice if the medical practice was 

located outside the geographic area 

served by the hospital and—

(A) The physician moves his or her 

medical practice at least 25 miles and 

into the geographic area served by the 

hospital; or 

(B) The physician moves his medical 

practice into the geographic area served 

by the hospital, and the physician’s new 

medical practice derives at least 75 

percent of its revenues from 

professional services furnished to 

patients (including hospital inpatients) 

not seen or treated by the physician at 

his or her prior medical practice site 

during the preceding 3 years, measured 

on an annual basis (fiscal or calendar 

year). For the initial ‘‘start up’’ year of 

the recruited physician’s practice, the 

75 percent test in the preceding 

sentence will be satisfied if there is a 

reasonable expectation that the 

recruited physician’s medical practice 

for the year will derive at least 75 

percent of its revenues from 

professional services furnished to 

patients not seen or treated by the 

physician at his or her prior medical 

practice site during the preceding 3 

years. 

(3) The recruited physician will not 

be subject to the relocation requirement 

of this paragraph, provided that he or 

she establishes his or her medical 

practice in the geographic area served 

by the recruiting hospital, if—

(i) He or she is a resident or physician 

who has been in practice 1 year or less; 

(ii) He or she was employed on a fulltime basis for at least 2 years 

immediately prior to the recruitment 

arrangement by one of the following 

(and did not maintain a private practice 

in addition to such full-time 

employment): 

(A) A Federal or State bureau of 

prisons (or similar entity operating one 

or more correctional facilities) to serve 

a prison population; 

(B) The Department of Defense or 

Department of Veterans Affairs to serve 

active or veteran military personnel and 

their families; or 

(C) A facility of the Indian Health 

Service to serve patients who receive 

medical care exclusively through the 

Indian Health Service; or 

(iii) The Secretary has deemed in an 

advisory opinion issued under section 

1877(g) of the Act that the physician 

does not have an established medical 

practice that serves or could serve a 

significant number of patients who are 

or could become patients of the 

recruiting hospital. 

(4) In the case of remuneration 

provided by a hospital to a physician 

either indirectly through payments 

made to another physician practice, or 

directly to a physician who joins a 

physician practice, the following 

additional conditions must be met: 

(i) The written agreement in 

paragraph (e)(1) is also signed by the 

party to whom the payments are directly 

made. 

(ii) Except for actual costs incurred by 

the physician practice in recruiting the 

new physician, the remuneration is 

passed directly through to or remains 

with the recruited physician. 

(iii) In the case of an income 

guarantee of any type made by the 

hospital to a recruited physician who 

joins a physician practice, the costs 

allocated by the physician practice to 

the recruited physician do not exceed 

the actual additional incremental costs 

attributable to the recruited physician. 

With respect to a physician recruited to 

join a physician practice located in a 

rural area or HPSA, if the physician is 

recruited to replace a physician who, 

within the previous 12-month period, 

retired, relocated outside of the 

geographic area served by the hospital, 

or died, the costs allocated by the 

physician practice to the recruited 

physician do not exceed either—

(A) The actual additional incremental 

costs attributable to the recruited 

physician; or 

(B) The lower of a per capita 

allocation or 20 percent of the practice’s 

aggregate costs. 

(iv) Records of the actual costs and 

the passed-through amounts are 

maintained for a period of at least 5 

years and made available to the 

Secretary upon request. 

(v) The remuneration from the 

hospital under the arrangement is not 

determined in a manner that takes into 

account (directly or indirectly) the 

volume or value of any actual or 

anticipated referrals by the recruited 

physician or the physician practice (or 

any physician affiliated with the 

physician practice) receiving the direct 

payments from the hospital. 

(vi) The physician practice may not 

impose on the recruited physician 

practice restrictions that unreasonably 

restrict the recruited physician’s ability 

to practice medicine in the geographic 

area served by the hospital. 

(vii) The arrangement does not violate 

the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. 

(5) Recruitment of a physician by a 

hospital located in a rural area (as 

defined at § 411.351) to an area outside 

the geographic area served by the 

hospital is permitted under this 

exception if the Secretary determines in 

an advisory opinion issued under 

section 1877(g) of the Act that the area 

has a demonstrated need for the 

recruited physician and all other 

requirements of this paragraph (e) are 

met. 

(6) This paragraph (e) applies to 

remuneration provided by a federally 

qualified health center or a rural health 

clinic in the same manner as it applies 

to remuneration provided by a hospital, 

provided that the arrangement does not 

violate the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. 


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(f) Isolated transactions. Isolated 

financial transactions, such as a onetime sale of property or a practice, if all 

of the following conditions are met: 

(1) The amount of remuneration 

under the isolated transaction is—

(i) Consistent with the fair market 

value of the transaction; and 

(ii) Not determined in a manner that 

takes into account (directly or 

indirectly) the volume or value of any 

referrals by the referring physician or 

other business generated between the 

parties. 

(2) The remuneration is provided 

under an agreement that would be 

commercially reasonable even if the 

physician made no referrals to the 

entity. 

(3) There are no additional 

transactions between the parties for 6 

months after the isolated transaction, 

except for transactions that are 

specifically excepted under the other 

provisions in § 411.355 through 

§ 411.357 and except for commercially 

reasonable post-closing adjustments that 

do not take into account (directly or 

indirectly) the volume or value of 

referrals or other business generated by 

the referring physician. 

(g) Certain arrangements with 

hospitals. Remuneration provided by a 

hospital to a physician if the 

remuneration does not relate, directly or 

indirectly, to the furnishing of DHS. To 

qualify as ‘‘unrelated,’’ remuneration 

must be wholly unrelated to the 

furnishing of DHS and must not in any 

way take into account the volume or 

value of a physician’s referrals. 

Remuneration relates to the furnishing 

of DHS if it—

(1) Is an item, service, or cost that 

could be allocated in whole or in part 

to Medicare or Medicaid under cost 

reporting principles; 

(2) Is furnished, directly or indirectly, 

explicitly or implicitly, in a selective, 

targeted, preferential, or conditioned 

manner to medical staff or other persons 

in a position to make or influence 

referrals; or 

(3) Otherwise takes into account the 

volume or value of referrals or other 

business generated by the referring 

physician. 

(h) Group practice arrangements with 

a hospital. An arrangement between a 

hospital and a group practice under 

which DHS are furnished by the group 

but are billed by the hospital if the 

following conditions are met: 

(1) With respect to services furnished 

to an inpatient of the hospital, the 

arrangement is pursuant to the 

provision of inpatient hospital services 

under section 1861(b)(3) of the Act. 

(2) The arrangement began before, and 

has continued in effect without 

interruption since, December 19, 1989. 

(3) With respect to the DHS covered 

under the arrangement, at least 75 

percent of these services furnished to 

patients of the hospital are furnished by 

the group under the arrangement. 

(4) The arrangement is in accordance 

with a written agreement that specifies 

the services to be furnished by the 

parties and the compensation for 

services furnished under the agreement. 

(5) The compensation paid over the 

term of the agreement is consistent with 

fair market value, and the compensation 

per unit of service is fixed in advance 

and is not determined in a manner that 

takes into account the volume or value 

of any referrals or other business 

generated between the parties. 

(6) The compensation is provided in 

accordance with an agreement that 

would be commercially reasonable even 

if no referrals were made to the entity. 

(i) Payments by a physician. Payments 

made by a physician (or his or her 

immediate family member)—

(1) To a laboratory in exchange for the 

provision of clinical laboratory services; 

or 

(2) To an entity as compensation for 

any other items or services that are 

furnished at a price that is consistent 

with fair market value, and that are not 

specifically addressed by another 

provision in § 411.355 through 

§ 411.357 (including, but not limited to, 

§ 411.357(l)). ‘‘Services’’ in this context 

means services of any kind (not merely 

those defined as ‘‘services’’ for purposes 

of the Medicare program in § 400.202 of 

this chapter). 

(j) Charitable donations by a 

physician. Bona fide charitable 

donations made by a physician (or 

immediate family member) to an entity 

if all of the following conditions are 

satisfied: 

(1) The charitable donation is made to 

an organization exempt from taxation 

under the Internal Revenue Code (or to 

a supporting organization); 

(2) The donation is neither solicited, 

nor offered, in any manner that takes 

into account the volume or value of 

referrals or other business generated 

between the physician and the entity; 

and 

(3) The donation arrangement does 

not violate the anti-kickback statute 

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

Federal or State law or regulation 

governing billing or claims submission. 

(k) Nonmonetary compensation. (1) 

Compensation from an entity in the 

form of items or services (not including 

cash or cash equivalents) that does not 

exceed an aggregate of $300 per 

calendar year, as adjusted for inflation 

in accordance with paragraph (k)(2) of 

this section, if all of the following 

conditions are satisfied: 

(i) The compensation is not 

determined in any manner that takes 

into account the volume or value of 

referrals or other business generated by 

the referring physician. 

(ii) The compensation may not be 

solicited by the physician or the 

physician’s practice (including 

employees and staff members). 

(iii) The compensation arrangement 

does not violate the anti-kickback 

statute (section 1128B(b) of the Act) or 

any Federal or State law or regulation 

governing billing or claims submission. 

(2) The annual aggregate nonmonetary 

compensation limit in this paragraph (k) 

is adjusted each calendar year to the 

nearest whole dollar by the increase in 

the Consumer Price Index—Urban All 

Items (CPI–U) for the 12-month period 

ending the preceding September 30. 

CMS displays after September 30 each 

year both the increase in the CPI–U for 

the 12-month period and the new 

nonmonetary compensation limit on the 

physician self-referral Web site: http:// 

www.cms.hhs.gov/ 

PhysicianSelfReferral/10_CPIU_Updates.asp. 

(3) Where an entity has inadvertently 

provided nonmonetary compensation to 

a physician in excess of the limit (as set 

forth in paragraph (k)(1) of this section), 

such compensation is deemed to be 

within the limit if—

(i) The value of the excess 

nonmonetary compensation is no more 

than 50 percent of the limit; and 

(ii) The physician returns to the entity 

the excess nonmonetary compensation 

(or an amount equal to the value of the 

excess nonmonetary compensation) by 

the end of the calendar year in which 

the excess nonmonetary compensation 

was received or within 180 consecutive 

calendar days following the date the 

excess nonmonetary compensation was 

received by the physician, whichever is 

earlier. 

(iii) Paragraph (k)(3) may be used by 

an entity only once every 3 years with 

respect to the same referring physician. 

(4) In addition to nonmonetary 

compensation up to the limit described 

in paragraph (k)(1) of this section, an 

entity that has a formal medical staff 

may provide one local medical staff 

appreciation event per year for the 

entire medical staff. Any gifts or 

gratuities provided in connection with 

the medical staff appreciation event are 

subject to the limit in paragraph (k)(1). 

(l) Fair market value compensation. 

Compensation resulting from an 

arrangement between an entity and a 


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physician (or an immediate family 

member) or any group of physicians 

(regardless of whether the group meets 

the definition of a group practice set 

forth in § 411.352) for the provision of 

items or services (other than the rental 

of office space) by the physician (or an 

immediate family member) or group of 

physicians to the entity, or by the entity 

to the physician (or an immediate 

family member) or a group of 

physicians, if the arrangement is set 

forth in an agreement that meets the 

following conditions: 

(1) The arrangement is in writing, 

signed by the parties, and covers only 

identifiable items or services, all of 

which are specified in the agreement. 

(2) The writing specifies the 

timeframe for the arrangement, which 

can be for any period of time and 

contain a termination clause, provided 

that the parties enter into only one 

arrangement for the same items or 

services during the course of a year. An 

arrangement made for less than 1 year 

may be renewed any number of times if 

the terms of the arrangement and the 

compensation for the same items or 

services do not change. 

(3) The writing specifies the 

compensation that will be provided 

under the arrangement. The 

compensation must be set in advance, 

consistent with fair market value, and 

not determined in a manner that takes 

into account the volume or value of 

referrals or other business generated by 

the referring physician. 

(4) The arrangement is commercially 

reasonable (taking into account the 

nature and scope of the transaction) and 

furthers the legitimate business 

purposes of the parties. 

(5) The arrangement does not violate 

the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. 

(6) The services to be performed 

under the arrangement do not involve 

the counseling or promotion of a 

business arrangement or other activity 

that violates a Federal or State law. 

(m) Medical staff incidental benefits. 

Compensation in the form of items or 

services (not including cash or cash 

equivalents) from a hospital to a 

member of its medical staff when the 

item or service is used on the hospital’s 

campus, if all of the following 

conditions are met: 

(1) The compensation is offered to all 

members of the medical staff practicing 

in the same specialty (but not 

necessarily accepted by every member 

to whom it is offered) without regard to 

the volume or value of referrals or other 

business generated between the parties. 

(2) Except with respect to 

identification of medical staff on a 

hospital web site or in hospital 

advertising, the compensation is 

provided only during periods when the 

medical staff members are making 

rounds or are engaged in other services 

or activities that benefit the hospital or 

its patients. 

(3) The compensation is provided by 

the hospital and used by the medical 

staff members only on the hospital’s 

campus. Compensation, including, but 

not limited to, internet access, pagers, or 

two-way radios, used away from the 

campus only to access hospital medical 

records or information or to access 

patients or personnel who are on the 

hospital campus, as well as the 

identification of the medical staff on a 

hospital web site or in hospital 

advertising, meets the ‘‘on campus’’

requirement of this paragraph (m) of this 

section. 

(4) The compensation is reasonably 

related to the provision of, or designed 

to facilitate directly or indirectly the 

delivery of, medical services at the 

hospital. 

(5) The compensation is of low value 

(that is, less than $25) with respect to 

each occurrence of the benefit (for 

example, each meal given to a physician 

while he or she is serving patients who 

are hospitalized must be of low value). 

The $25 limit in this paragraph (m)(5) 

is adjusted each calendar year to the 

nearest whole dollar by the increase in 

the Consumer Price Index—Urban All 

Items (CPI–I) for the 12 month period 

ending the preceding September 30. 

CMS displays after September 30 each 

year both the increase in the CPI–I for 

the 12 month period and the new limits 

on the physician self-referral web site: 

http://www.cms.hhs.gov/ 

PhysicianSelfReferral/10_CPIU_Updates.asp. 

(6) The compensation is not 

determined in any manner that takes 

into account the volume or value of 

referrals or other business generated 

between the parties. 

(7) The compensation arrangement 

does not violate the anti-kickback 

statute (section 1128B(b) of the Act), or 

any Federal or State law or regulation 

governing billing or claims submission. 

(8) Other facilities and health care 

clinics (including, but not limited to, 

federally qualified health centers) that 

have bona fide medical staffs may 

provide compensation under this 

paragraph (m) on the same terms and 

conditions applied to hospitals under 

this paragraph (m). 

(n) Risk-sharing arrangements. 

Compensation pursuant to a risk-sharing 

arrangement (including, but not limited 

to, withholds, bonuses, and risk pools) 

between a MCO or an IPA and a 

physician (either directly or indirectly 

through a subcontractor) for services 

provided to enrollees of a health plan, 

provided that the arrangement does not 

violate the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. For purposes of 

this paragraph (n), ‘‘health plan’’ and 

‘‘enrollees’’ have the meanings set forth 

in § 1001.952(l) of this title. 

(o) Compliance training. Compliance 

training provided by an entity to a 

physician (or to the physician’s 

immediate family member or office 

staff) who practices in the entity’s local 

community or service area, provided 

that the training is held in the local 

community or service area. For 

purposes of this paragraph (o), 

‘‘compliance training’’ means training 

regarding the basic elements of a 

compliance program (for example, 

establishing policies and procedures, 

training of staff, internal monitoring, or 

reporting); specific training regarding 

the requirements of Federal and State 

health care programs (for example, 

billing, coding, reasonable and 

necessary services, documentation, or 

unlawful referral arrangements); or 

training regarding other Federal, State, 

or local laws, regulations, or rules 

governing the conduct of the party for 

whom the training is provided. For 

purposes of this paragraph, ‘‘compliance 

training’’ includes programs that offer 

continuing medical education credit, 

provided that compliance training is the 

primary purpose of the program. 

(p) Indirect compensation 

arrangements. Indirect compensation 

arrangements, as defined at 

§ 411.354(c)(2), if all of the following 

conditions are satisfied: 

(1) The compensation received by the 

referring physician (or immediate family 

member) described in § 411.354(c)(2)(ii) 

is fair market value for services and 

items actually provided and not 

determined in any manner that takes 

into account the volume or value of 

referrals or other business generated by 

the referring physician for the entity 

furnishing DHS. 

(2) The compensation arrangement 

described in § 411.354(c)(2)(ii) is set out 

in writing, signed by the parties, and 

specifies the services covered by the 

arrangement, except in the case of a 

bona fide employment relationship 

between an employer and an employee, 

in which case the arrangement need not 

be set out in a written contract, but must 

be for identifiable services and be 

commercially reasonable even if no 

referrals are made to the employer. 


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(3) The compensation arrangement 

does not violate the anti-kickback 

statute (section 1128B(b) of the Act), or 

any Federal or State law or regulation 

governing billing or claims submission. 

(q) Referral services. Remuneration 

that meets all of the conditions set forth 

in § 1001.952(f) of this title. 

(r) Obstetrical malpractice insurance 

subsidies. Remuneration to the referring 

physician that meets all of the 

conditions set forth in § 1001.952(o) of 

this title. 

(s) Professional courtesy. Professional 

courtesy (as defined at § 411.351) 

offered by an entity with a formal 

medical staff to a physician or a 

physician’s immediate family member 

or office staff if all of the following 

conditions are met: 

(1) The professional courtesy is 

offered to all physicians on the entity’s 

bona fide medical staff or in such 

entity’s local community or service area 

without regard to the volume or value 

of referrals or other business generated 

between the parties; 

(2) The health care items and services 

provided are of a type routinely 

provided by the entity; 

(3) The entity has a professional 

courtesy policy that is set out in writing 

and approved in advance by the entity’s 

governing body; 

(4) The professional courtesy is not 

offered to a physician (or immediate 

family member) who is a Federal health 

care program beneficiary, unless there 

has been a good faith showing of 

financial need; and 

(5) The arrangement does not violate 

the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. 

(t) Retention payments in underserved 

areas. 

(1) Bona fide written offer. 

Remuneration provided by a hospital 

directly to a physician on the hospital’s 

medical staff to retain the physician’s 

medical practice in the geographic area 

served by the hospital (as defined in 

paragraph (e)(2) of this section), if all of 

the following conditions are met: 

(i) The physician has a bona fide firm, 

written recruitment offer or offer of 

employment from a hospital, academic 

medical center (as defined at 

§ 411.355(e)), or physician organization 

(as defined at § 411.351) that is not 

related to the hospital making the 

payment, and the offer specifies the 

remuneration being offered and requires 

the physician to move the location of 

his or her medical practice at least 25 

miles and outside of the geographic area 

served by the hospital making the 

retention payment. 

(ii) The requirements of 

§ 411.357(e)(1)(i) through 

§ 411.357(e)(1)(iv) are satisfied. 

(iii) Any retention payment is subject 

to the same obligations and restrictions, 

if any, on repayment or forgiveness of 

indebtedness as the written recruitment 

offer or offer of employment. 

(iv) The retention payment does not 

exceed the lower of—

(A) The amount obtained by 

subtracting the physician’s current 

income from physician and related 

services from the income the physician 

would receive from comparable 

physician and related services in the 

written recruitment or employment 

offer, provided that the respective 

incomes are determined using a 

reasonable and consistent methodology, 

and that they are calculated uniformly 

over no more than a 24-month period; 

or 

(B) The reasonable costs the hospital 

would otherwise have to expend to 

recruit a new physician to the 

geographic area served by the hospital 

to join the medical staff of the hospital 

to replace the retained physician. 

(v) The requirements of paragraph 

(t)(3) are satisfied. 

(2) Written certification from 

physician. Remuneration provided by a 

hospital directly to a physician on the 

hospital’s medical staff to retain the 

physician’s medical practice in the 

geographic area served by the hospital 

(as defined in paragraph (e)(2) of this 

section), if all of the following 

conditions are met: 

(i) The physician furnishes to the 

hospital before the retention payment is 

made a written certification that the 

physician has a bona fide opportunity 

for future employment by a hospital, 

academic medical center (as defined at 

§ 411.355(e)), or physician organization 

(as defined at § 411.351) that requires 

the physician to move the location of 

his or her medical practice at least 25 

miles and outside the geographic area 

served by the hospital. The certification 

contains at least the following—

(A) Details regarding the steps taken 

by the physician to effectuate the 

employment opportunity; 

(B) Details of the physician’s 

employment opportunity, including the 

identity and location of the physician’s 

future employer or employment location 

or both, and the anticipated income and 

benefits (or a range for income and 

benefits); 

(C) A certification that the future 

employer is not related to the hospital 

making the payment; 

(D) The date on which the physician 

anticipates relocating his or medical 

practice outside of the geographic area 

served by the hospital; and 

(E) Information sufficient for the 

hospital to verify the information 

included in the written certification. 

(ii) The hospital takes reasonable 

steps to verify that the physician has a 

bona fide opportunity for future 

employment that requires the physician 

to relocate outside the geographic area 

served by the hospital. 

(iii) The requirements of 

§ 411.357(e)(1)(i) through 

§ 411.357(e)(1)(iv) are satisfied. 

(iv) The retention payment does not 

exceed the lower of—

(A) An amount equal to 25 percent of 

the physician’s current income 

(measured over no more than a 24- 

month period), using a reasonable and 

consistent methodology that is 

calculated uniformly; or 

(B) The reasonable costs the hospital 

would otherwise have to expend to 

recruit a new physician to the 

geographic area served by the hospital 

to join the medical staff of the hospital 

to replace the retained physician. 

(v) The requirements of paragraph 

(t)(3) are satisfied. 

(3) Remuneration provided under 

paragraph (t)(1) or (t)(2) must meet the 

following additional requirements: 

(i)(A) The physician’s current medical 

practice is located in a rural area or 

HPSA (regardless of the physician’s 

specialty) or is located in an area with 

demonstrated need for the physician as 

determined by the Secretary in an 

advisory opinion issued in accordance 

with section 1877(g)(6) of the Act; or 

(B) At least 75 percent of the 

physician’s patients reside in a 

medically underserved area or are 

members of a medically underserved 

population. 

(ii) The hospital does not enter into a 

retention arrangement with a particular 

referring physician more frequently than 

once every 5 years. 

(iii) The amount and terms of the 

retention payment are not altered during 

the term of the arrangement in any 

manner that takes into account the 

volume or value of referrals or other 

business generated by the physician. 

(iv) The arrangement does not violate 

the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. 

(4) The Secretary may waive the 

relocation requirement of paragraphs 

(t)(1) and (t)(2) of this section for 

payments made to physicians practicing 

in a HPSA or an area with demonstrated 

need for the physician through an 

advisory opinion issued in accordance 

with section 1877(g)(6) of the Act, if the 


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retention payment arrangement 

otherwise complies with all of the 

conditions of this paragraph. 

(5) This paragraph (t) applies to 

remuneration provided by a federally 

qualified health center or a rural health 

clinic in the same manner as it applies 

to remuneration provided by a hospital. 

(u) Community-wide health 

information systems. Items or services 

of information technology provided by 

an entity to a physician that allow 

access to, and sharing of, electronic 

health care records and any 

complementary drug information 

systems, general health information, 

medical alerts, and related information 

for patients served by community 

providers and practitioners, in order to 

enhance the community’s overall 

health, provided that—

(1) The items or services are available 

as necessary to enable the physician to 

participate in a community-wide health 

information system, are principally used 

by the physician as part of the 

community-wide health information 

system, and are not provided to the 

physician in any manner that takes into 

account the volume or value of referrals 

or other business generated by the 

physician; 

(2) The community-wide health 

information systems are available to all 

providers, practitioners, and residents of 

the community who desire to 

participate; and 

(3) The arrangement does not violate 

the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. 

(v) Electronic prescribing items and 

services. Nonmonetary remuneration 

(consisting of items and services in the 

form of hardware, software, or 

information technology and training 

services) necessary and used solely to 

receive and transmit electronic 

prescription information, if all of the 

following conditions are met: 

(1) The items and services are 

provided by a—

(i) Hospital to a physician who is a 

member of its medical staff; 

(ii) Group practice (as defined at 

§ 411.352) to a physician who is a 

member of the group (as defined at 

§ 411.351); or 

(iii) PDP sponsor or MA organization 

to a prescribing physician. 

(2) The items and services are 

provided as part of, or are used to 

access, an electronic prescription drug 

program that meets the applicable 

standards under Medicare Part D at the 

time the items and services are 

provided. 

(3) The donor (or any person on the 

donor’s behalf) does not take any action 

to limit or restrict the use or 

compatibility of the items or services 

with other electronic prescribing or 

electronic health records systems. 

(4) For items or services that are of the 

type that can be used for any patient 

without regard to payer status, the 

donor does not restrict, or take any 

action to limit, the physician’s right or 

ability to use the items or services for 

any patient. 

(5) Neither the physician nor the 

physician’s practice (including 

employees and staff members) makes 

the receipt of items or services, or the 

amount or nature of the items or 

services, a condition of doing business 

with the donor. 

(6) Neither the eligibility of a 

physician for the items or services, nor 

the amount or nature of the items or 

services, is determined in a manner that 

takes into account the volume or value 

of referrals or other business generated 

between the parties. 

(7) The arrangement is set forth in a 

written agreement that—

(i) Is signed by the parties; 

(ii) Specifies the items and services 

being provided and the donor’s cost of 

the items and services; and 

(iii) Covers all of the electronic 

prescribing items and services to be 

provided by the donor. This 

requirement is met if all separate 

agreements between the donor and the 

physician (and the donor and any 

family members of the physician) 

incorporate each other by reference or if 

they cross-reference a master list of 

agreements that is maintained and 

updated centrally and is available for 

review by the Secretary upon request. 

The master list must be maintained in 

a manner that preserves the historical 

record of agreements. 

(8) The donor does not have actual 

knowledge of, and does not act in 

reckless disregard or deliberate 

ignorance of, the fact that the physician 

possesses or has obtained items or 

services equivalent to those provided by 

the donor. 

(w) Electronic health records items 

and services. Nonmonetary 

remuneration (consisting of items and 

services in the form of software or 

information technology and training 

services) necessary and used 

predominantly to create, maintain, 

transmit, or receive electronic health 

records, if all of the following 

conditions are met: 

(1) The items and services are 

provided by an entity (as defined at 

§ 411.351) to a physician. 

(2) The software is interoperable (as 

defined at § 411.351) at the time it is 

provided to the physician. For purposes 

of this paragraph, software is deemed to 

be interoperable if a certifying body 

recognized by the Secretary has certified 

the software no more than 12 months 

prior to the date it is provided to the 

physician. 

(3) The donor (or any person on the 

donor’s behalf) does not take any action 

to limit or restrict the use, compatibility, 

or interoperability of the items or 

services with other electronic 

prescribing or electronic health records 

systems. 

(4) Before receipt of the items and 

services, the physician pays 15 percent 

of the donor’s cost for the items and 

services. The donor (or any party related 

to the donor) does not finance the 

physician’s payment or loan funds to be 

used by the physician to pay for the 

items and services. 

(5) Neither the physician nor the 

physician’s practice (including 

employees and staff members) makes 

the receipt of items or services, or the 

amount or nature of the items or 

services, a condition of doing business 

with the donor. 

(6) Neither the eligibility of a 

physician for the items or services, nor 

the amount or nature of the items or 

services, is determined in a manner that 

directly takes into account the volume 

or value of referrals or other business 

generated between the parties. For 

purposes of this paragraph, the 

determination is deemed not to directly 

take into account the volume or value of 

referrals or other business generated 

between the parties if any one of the 

following conditions is met: 

(i) The determination is based on the 

total number of prescriptions written by 

the physician (but not the volume or 

value of prescriptions dispensed or paid 

by the donor or billed to the program); 

(ii) The determination is based on the 

size of the physician’s medical practice 

(for example, total patients, total patient 

encounters, or total relative value units); 

(iii) The determination is based on the 

total number of hours that the physician 

practices medicine; 

(iv) The determination is based on the 

physician’s overall use of automated 

technology in his or her medical 

practice (without specific reference to 

the use of technology in connection 

with referrals made to the donor); 

(v) The determination is based on 

whether the physician is a member of 

the donor’s medical staff, if the donor 

has a formal medical staff; 

(vi) The determination is based on the 

level of uncompensated care provided 

by the physician; or 


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(vii) The determination is made in 

any reasonable and verifiable manner 

that does not directly take into account 

the volume or value of referrals or other 

business generated between the parties. 

(7) The arrangement is set forth in a 

written agreement that—

(i) Is signed by the parties; 

(ii) Specifies the items and services 

being provided, the donor’s cost of the 

items and services, and the amount of 

the physician’s contribution; and 

(iii) Covers all of the electronic health 

records items and services to be 

provided by the donor. This 

requirement is met if all separate 

agreements between the donor and the 

physician (and the donor and any 

family members of the physician) 

incorporate each other by reference or if 

they cross-reference a master list of 

agreements that is maintained and 

updated centrally and is available for 

review by the Secretary upon request. 

The master list must be maintained in 

a manner that preserves the historical 

record of agreements. 

(8) The donor does not have actual 

knowledge of, and does not act in 

reckless disregard or deliberate 

ignorance of, the fact that the physician 

possesses or has obtained items or 

services equivalent to those provided by 

the donor. 

(9) For items or services that are of the 

type that can be used for any patient 

without regard to payer status, the 

donor does not restrict, or take any 

action to limit, the physician’s right or 

ability to use the items or services for 

any patient. 

(10) The items and services do not 

include staffing of physician offices and 

are not used primarily to conduct 

personal business or business unrelated 

to the physician’s medical practice. 

(11) The electronic health records 

software contains electronic prescribing 

capability, either through an electronic 

prescribing component or the ability to 

interface with the physician’s existing 

electronic prescribing system that meets 

the applicable standards under 

Medicare Part D at the time the items 

and services are provided. 

(12) The arrangement does not violate 

the anti-kickback statute (section 

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

State law or regulation governing billing 

or claims submission. 

(13) The transfer of the items or 

services occurs and all conditions in 

this paragraph (w) are satisfied on or 

before December 31, 2013. 

■ 8. Section 411.361 is revised to read 

as follows: 

§ 411.361 Reporting requirements. 

(a) Basic rule. Except as provided in 

paragraph (b) of this section, all entities 

furnishing services for which payment 

may be made under Medicare must 

submit information to CMS or to the 

Office of Inspector General (OIG) 

concerning their reportable financial 

relationships (as defined in paragraph 

(d) of this section), in the form, manner, 

and at the times that CMS or OIG 

specifies. 

(b) Exception. The requirements of 

paragraph (a) of this section do not 

apply to entities that furnish 20 or fewer 

Part A and Part B services during a 

calendar year, or to any Medicare 

covered services furnished outside the 

United States. 

(c) Required information. The 

information requested by CMS or OIG 

can include the following: 

(1) The name and unique physician 

identification number (UPIN) or the 

national provider identifier (NPI) of 

each physician who has a reportable 

financial relationship with the entity. 

(2) The name and UPIN or NPI of each 

physician who has an immediate family 

member (as defined at § 411.351) who 

has a reportable financial relationship 

with the entity. 

(3) The covered services furnished by 

the entity. 

(4) With respect to each physician 

identified under paragraphs (c)(1) and 

(c)(2) of this section, the nature of the 

financial relationship (including the 

extent or value of the ownership or 

investment interest or the compensation 

arrangement) as evidenced in records 

that the entity knows or should know 

about in the course of prudently 

conducting business, including, but not 

limited to, records that the entity is 

already required to retain to comply 

with the rules of the Internal Revenue 

Service and the Securities and Exchange 

Commission and other rules of the 

Medicare and Medicaid programs. 

(d) Reportable financial relationships. 

For purposes of this section, a 

reportable financial relationship is any 

ownership or investment interest, as 

defined at § 411.354(b) or any 

compensation arrangement, as defined 

at § 411.354(c), except for ownership or 

investment interests that satisfy the 

exceptions set forth in § 411.356(a) or 

§ 411.356(b) regarding publicly-traded 

securities and mutual funds. 

(e) Form and timing of reports. 

Entities that are subject to the 

requirements of this section must 

submit the required information, upon 

request, within the time period 

specified by the request. Entities are 

given at least 30 days from the date of 

the request to provide the information. 

Entities must retain the information, 

and documentation sufficient to verify 

the information, for the length of time 

specified by the applicable regulatory 

requirements for the information, and, 

upon request, must make that 

information and documentation 

available to CMS or OIG. 

(f) Consequences of failure to report. 

Any person who is required, but fails, 

to submit information concerning his or 

her financial relationships in 

accordance with this section is subject 

to a civil money penalty of up to 

$10,000 for each day following the 

deadline established under paragraph 

(e) of this section until the information 

is submitted. Assessment of these 

penalties will comply with the 

applicable provisions of part 1003 of 

this title. 

(g) Public disclosure. Information 

furnished to CMS or OIG under this 

section is subject to public disclosure in 

accordance with the provisions of part 

401 of this chapter. 

■ 9. Section 411.370 is amended by 

revising paragraph (a) to read as follows: 

§ 411.370 Advisory opinions relating to 

physician referrals. 

(a) Period during which CMS accepts 

requests. The provisions of § 411.370 

through § 411.389 apply to requests for 

advisory opinions that are submitted to 

CMS during any time period in which 

CMS is required by law to issue the 

advisory opinions described in this 

subpart. 

* * * * * 

PART 424—CONDITIONS FOR 

MEDICARE PAYMENT 

■ 10. The authority citation for part 424 

continues to read as follows: 

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh). 

Subpart B—Certification and Plan of 

Treatment Requirements 

■ 11. In § 424.22, paragraph (d) is 

revised to read as follows: 

§ 424.22 Requirements for home health 

services. 

* * * * * 

(d) Limitation on the performance of 

certification and plan of treatment 

functions. A physician who has a 

financial relationship, as defined at 

§ 411.354 of this chapter, with a HHA 

may not certify or recertify the need for 

home health services or establish or 

review a plan of treatment for the HHA 

unless the financial relationship 

satisfies the requirements of one of the 


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exceptions set forth in § 411.355 

through § 411.357 of this chapter. 

(Program No. 93.774, Medicare—

Supplementary Medical Insurance Program) 

Dated: January 4, 2007. 

Leslie V. Norwalk, 

Acting Administrator, Centers for Medicare 

& Medicaid Services. 

Approved: June 11, 2007. 

Michael O. Leavitt, 

Secretary. 

[FR Doc. 07–4252 Filed 8–27–07; 3:45 pm] 

BILLING CODE 4120–01–P 


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