Friday,

March 26, 2004

Part III

Department of 

Health and Human 

Services

Centers for Medicare & Medicaid Services 

42 CFR Parts 411 and 424 

Medicare Program; Physicians’ Referrals 

to Health Care Entities With Which They 

Have Financial Relationships (Phase II); 

Interim Final Rule

16054 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Parts 411 and 424 

[CMS–1810–IFC] 

RIN 0938–AK67 

Medicare Program; Physicians’ 

Referrals to Health Care Entities With 

Which They Have Financial 

Relationships (Phase II)

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS.

ACTION: Interim final rule with comment 

period. 

SUMMARY: This interim final rule with 

comment period (Phase II of this 

rulemaking) incorporates into 

regulations the provisions concerning 

ownership and investment exceptions 

in paragraphs (c) and (d) and the 

compensation exceptions in paragraph 

(e) of section 1877 of the Social Security 

Act (the Act). Phase II also addresses 

comments concerning the reporting 

requirements in section 1877(f) of the 

Act. 

Phase I (as defined below) addressed 

the majority of issues in implementing 

section 1877 of the Act. Phase II both 

addresses the remaining issues not 

addressed in Phase I and responds to 

public comments. In general, in 

response to public comments, the 

Department has attempted to reduce 

regulatory burden by broadening 

exceptions using the Secretary’s 

discretionary authority under the statute 

to create exceptions that pose no risk of 

fraud or abuse. For the convenience of 

affected parties, we have set out the 

entire rule as previously promulgated, 

including the changes made by this 

rulemaking.

DATES: Effective date: This interim final 

rule is effective on July 26, 2004. 

Comment date: We will consider 

comments on Phase II issues if we 

receive them at the appropriate address, 

as provided below, no later than 5 p.m. 

on June 24, 2004. Late filed comments 

will be considered to the extent 

practicable.

ADDRESSES: In commenting, please refer 

to file code CMS–1810–IFC. Because of 

staff and resource limitations, we cannot 

accept comments by facsimile (FAX) 

transmission. 

Submit electronic comments to http:/

/www.cms.hhs.gov/regulations/

ecomments or to www.regulations.gov.

Mail written comments (one original 

and two copies) to the following address 

only: Centers for Medicare & Medicaid 

Services, Department of Health and 

Human Services, Attention: CMS–1810–

IFC, P.O. Box 8013, Baltimore, MD 

21244–8013. 

Please allow sufficient time for mailed 

comments to be timely received in the 

event of delivery delays. 

If you prefer, you may deliver (by 

hand or courier) your written comments 

(one original and two copies) to one of 

the following addresses: Room 445–G, 

Hubert H. Humphrey Building, 200 

Independence Avenue, SW., 

Washington, DC 20201, or Room C5–14–

03, 7500 Security Boulevard, Baltimore, 

MD 21244–1850.

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

could be considered late. 

All comments received before the 

close of the comment period are 

available for viewing by the public. 

After the close of the comment period, 

CMS posts all electronic comments 

received before the close of the 

comment period on its public Web site. 

To protect an individual’s privacy and 

identity, a commenter may wish to omit 

his or her full name and address from 

the comment. We request that the 

commenter identify only his or her zip 

code. For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:

Joanne Sinsheimer, (410) 786–4620.

SUPPLEMENTARY INFORMATION:

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. You can assist us by 

referencing the file code CMS–1810–IFC 

and the specific ‘‘issue identifier’’ that 

precedes the section on which you 

choose to comment. 

Inspection of Public Comments:

Comments received timely will be 

available for public inspection as they 

are received, generally beginning 

approximately 3 weeks after publication 

of a document, at the headquarters of 

the Centers for Medicare & Medicaid 

Services, 7500 Security Boulevard, 

Baltimore, Maryland 21244, Monday 

through Friday of each week from 8:30 

a.m. to 4 p.m. To schedule an 

appointment to view public comments, 

phone (410) 786–7197. 

Copies: To order copies of the Federal 

Register containing this document, send 

your request to: New Orders, 

Superintendent of Documents, P.O. Box 

371954, Pittsburgh, PA 15250–7954. 

Specify the date of the issue requested 

and enclose a check or money order 

payable to the Superintendent of 

Documents, or enclose your Visa or 

Master Card number and expiration 

date. Credit card orders can also be 

placed by calling the order desk at (202) 

512–1800 (or toll-free at 1–888–293–

6498) or by faxing to (202) 512–2250. 

The cost for each copy is $10. As an 

alternative, you can view and 

photocopy the Federal Register

document at most libraries designated 

as Federal Depository Libraries and at 

many other public and academic 

libraries throughout the country that 

receive the Federal Register. 

This Federal Register document is 

also available from the Federal Register

online database through GPO Access, a 

service of the U.S. Government Printing 

Office. The Web site address is: http://

www.access.gpo.gov/nara/index.html.

To help readers locate information in 

this interim final rule, we are providing 

the following Table of Contents. The 

Table of Contents also indicates whether 

a subject was previously addressed in 

Phase I or is a Phase II issue.

I. Background 

II. The General Prohibition under Section 

1877 of the Act (Phase I) 

A. General Comments 

B. When Is There a Financial Relationship 

Between the Referring Physician and the 

Designated Health Service (DHS) Entity? 

C. When Does a Physician Make a Referral? 

D. Definition of ‘‘Consultation’’ 

III. Physician Compensation Under Section 

1877 of the Act (Phase I) 

IV. The ‘‘Volume or Value’’ Standards under 

Section 1877 of the Act (Phase I) 

V. Exceptions Applicable to Ownership and 

Compensation Arrangements (Phase I) 

A. Physician Services Exception 

B. In-Office Ancillary Services Exception 

1. General Comments 

2. Covered Designated Health Services 

3. Direct Supervision 

4. The Building Requirements 

5. The Billing Requirement 

C. Group Practice Definition 

D. Prepaid Plans 

VI. General Exception Related Only to 

Ownership or Investment in PubliclyTraded Securities and Mutual Funds 

(Phase II) 

VII. Additional Exceptions Related Only to 

Ownership or Investment Prohibition 

(Phase II)

A. Hospitals in Puerto Rico 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16055

B. Rural Providers 

C. Hospital Ownership 

VIII. Exceptions Relating to Other 

Compensation Arrangements (Phase II) 

A. Rental of Office Space and Equipment 

B. Bona Fide Employment Relationships 

C. Personal Service Arrangements 

D. Remuneration Unrelated to the 

Provision of Designated Health Services 

E. Physician Recruitment 

F. Isolated Transactions 

G. Certain Group Practice Arrangements 

with Hospitals 

H. Payments Made by a Physician for Items 

and Services 

IX. Reporting Requirements (Phase II) 

X. Sanctions (Phase II) 

XI. Definitions (Phase I) 

A. Designated Health Services General 

Principles 

B. Professional Services as Designated 

Health Services 

C. Clinical Laboratory Services 

D. Physical Therapy Services 

E. Occupational Therapy Services 

F. Radiology and Certain Other Imaging 

Services 

G. Radiation Therapy Services and 

Supplies 

H. Durable Medical Equipment and 

Supplies 

I. Parenteral and Enteral Nutrients, 

Equipment, and Supplies 

J. Prosthetics, Orthotics, and Prosthetic 

Devices and Supplies 

K. Home Health Services 

L. Outpatient Prescription Drugs 

M. Inpatient and Outpatient Hospital 

Services 

N. Other Definitions 

1. Consultation 

2. Entity 

3. Fair Market Value 

4. Group Practice 

5. Health Professional Shortage Area 

6. Employee 

7. Immediate Family Member 

8. Referral 

9. Remuneration and the Exceptions in 

Section 1877(h)(1)(C) of the Act 

10. Transaction and Isolated Transaction 

(Phase II) 

XII. Regulatory Exceptions 

A. Academic Medical Centers (Phase I) 

B. Services Furnished Under Certain 

Payment Rates (Phase II) 

C. Implants in an ASC (Phase I) 

D. Fair Market Value Exception (Phase I) 

E. Non-Monetary Compensation up to $300 

and Medical Staff Incidental Benefits 

(Phase I) 

F. Risk-sharing Arrangements (Phase I) 

G. Compliance Training (Phase I) 

H. Anti-Kickback Safe Harbors (Phase II) 

I. Professional Courtesy (Phase II) 

J. Charitable Donations by a Physician 

(Phase II) 

K. Preventive Screening Tests, 

Immunizations, and Vaccines (Phase I) 

L. EPO and Other Dialysis-Related 

Outpatient Prescription Drugs Furnished 

in or by an ESRD Facility (Phase I) 

M. Intra-family Rural Area Referrals (Phase 

II)

N. Certain Arrangements Involving 

Temporary Noncompliance (Phase II) 

O. Retention Payments in Underserved 

Areas (Phase II) 

P. Community-wide Health Information 

Systems (Phase II) 

XIII. Technical Corrections (Phase II) 

XIV. Collection of Information Requirements 

XV. Regulatory Impact Statement 

A. Overall Impact 

B. Anticipated Effects 

C. Alternatives Considered 

D. Conclusion 

XVI. Waiver of Proposed Rulemaking 

Regulations Text 

Attachment

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 for those 

referred services, unless an exception 

applies. 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 fraud or abuse. 

In reviewing the public comments 

received, the Department has 

endeavored to reduce the burden and 

prescriptive nature of the rule while 

applying the statute and maintaining the 

integrity of the regulatory framework. 

The Phase II rule exercises the 

Secretary’s authority to create 

exceptions to accomplish this goal. In 

particular, the Phase II rule creates a 

new exception for community-wide 

health information systems. It also 

creates limited exceptions to allow 

physicians to refer to immediate family 

members in rural areas in certain 

circumstances when no other physician 

is available, and to exempt hospital 

payments to retain a physician who 

would otherwise leave a health 

professional shortage area. 

This is Phase II of a bifurcated final 

rulemaking under section 1877 of the 

Act. The current version of section 

1877, which applies to referrals for 

eleven DHS, has been in effect and 

subject to enforcement since January 1, 

1995. Proposed regulations were 

published in 1998 at 63 FR 1659 

(January 9, 1998) (the ‘‘January 1998 

proposed rule’’). 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. 

The reasons for bifurcation of the 

rulemaking are explained in the Phase 

I preamble (66 FR 859–860). With two 

exceptions, the regulations published in 

Phase I became effective on January 4, 

2002. Section 424.22(d), relating to 

home health services, became effective 

on April 6, 2001 (see our Federal 

Register notice dated February 2, 2001 

(66 FR 8771)). We delayed the effective 

date of the final sentence of 

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

of ‘‘set in advance’’ for one year from 

January 4, 2002 to January 6, 2003, in 

a Federal Register document published 

on December 3, 2001 (66 FR 60154). We 

further delayed the effective date of this 

sentence for an additional 6 months, 

until July 7, 2003, in a Federal Register

document published on November 22, 

2002 (67 FR 70322), and for an 

additional 6 months, until January 7, 

2004, in a Federal Register document 

published on April 25, 2003 (68 FR 

20347). We published another delay 

notice on December 24, 2003 (68 FR 

74491), delaying that effective date until 

July 7, 2004.

Phase I covered—

• 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 

• A number of new regulatory 

exceptions promulgated under section 

1877(b)(4) of the Act. 

Phase II covers—

• The remaining provisions of section 

1877 of the Act; 

• Additional regulatory definitions; 

• Additional new regulatory 

exceptions promulgated under section 

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

• Responses to the public comments 

on the Phase I regulations.

We had intended to address in this 

Phase II rulemaking section 1903(s) of 

the Act, which applies section 1877 of 

the Act to referrals for Medicaid covered 

services and which we interpreted in 

the proposed rule at § 435.1012 and 

§ 455.109. However, in the interest of 

expediting publication of these rules, 

we are reserving the Medicaid issue for 

a future rulemaking with one exception. 

In this rulemaking, we are amending the 

prepaid plans exception at § 411.356(c) 

to cover Medicaid managed care plans. 

Phase II has a 90-day comment period 

and will become effective 120 days after 

the date of publication. Comments 

received on the Phase II rulemaking will 

be addressed in a separate Federal 

Register notice. 

16056 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

Phase I and Phase II of this 

rulemaking are intended to be read 

together as a unified whole. Among 

other things, Phase I contains a 

complete legislative and regulatory 

history (66 FR 857–859), which is not 

repeated here. Modifications or 

revisions to Phase I are clearly indicated 

in this Phase II preamble and 

corresponding regulations text. Unless 

otherwise expressly noted, to the extent 

the preamble in Phase II uses different 

language to describe a concept 

addressed in Phase I, our intent is to 

better explain or clarify a Phase I 

discussion, not to change its scope or 

meaning. For clarity and ease of access 

of the general public to the entire set of 

issues raised by the statute, we are 

republishing the regulatory text in its 

entirety. This Department has 

consistently worked to clarify and 

simplify the Phase I rules in response to 

comments, as well as to reduce the 

burden of the entire set of rules by 

exercising the Secretary’s authority to 

create additional exceptions for 

financial relationships that pose no risk 

of fraud and abuse when all of the 

conditions of an exception are met. The 

Phase I and the Phase II rules, together, 

supersede the 1995 final rule (60 FR 

41914), which has been applicable to 

referrals for clinical laboratory services. 

As with Phase I, in developing Phase 

II of this rulemaking, we have carefully 

reconsidered the January 1998 proposed 

rule (63 FR 1659), given both the history 

and structure of section 1877 of the Act 

and the extensive comments we 

received to the January 1998 proposed 

rule, as well as the considerably smaller 

number of comments to the Phase I final 

rule. As with Phase I, we believe that 

Phase II of this rulemaking addresses 

many of the industry’s primary concerns 

with the January 1998 proposed rule, 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 more detailed discussion of the 

criteria we have applied in evaluating 

regulatory options for Phase II, see 66 

FR 859–863 of the Phase I rule. 

This Phase II preamble is generally 

organized to track the statute. We first 

address the general prohibition, then the 

exceptions, then the definitions 

(although certain key definitions, such 

as ‘‘group practice’’ and ‘‘isolated 

transaction’’ are addressed in the 

discussions of the exceptions to which 

they mainly relate). Discussion of new 

regulatory exceptions follows (except 

that regulatory exceptions closely 

related to a statutory provision are 

discussed together with the statutory 

provision). Topics previously covered 

by Phase I are clearly indicated, along 

with cross-references to the relevant 

Phase I preamble pages and regulatory 

text. Topics new to Phase II are also 

clearly indicated, and, as in Phase I, 

each Phase II issue begins with 

summaries of the existing law, the 

January 1998 proposed rule, and the 

final rule. These summaries 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. The General Prohibition Under 

Section 1877 of the Act 

(Section 1877(a) of the Act; Phase I—66 

FR 863–875; § 411.353 and § 411.351)

Overall, the commenters to the Phase 

I rulemaking welcomed the additional 

clarity provided with respect to the 

general statutory prohibition, 

particularly with respect to the 

treatment of indirect compensation 

arrangements. However, we received a 

number of comments with respect to 

various aspects of the general 

prohibition. As in Phase I, the 

summaries of the public comments and 

our responses are divided into four 

parts:

A. General comments. 

B. Comments related to whether a financial 

relationship exists between a referring 

physician and a designated health services 

entity (‘‘DHS entity’’). 

C. Comments related to whether there has 

been a referral from a referring physician to 

a DHS entity. 

D. Comments regarding the definition of 

‘‘consultation.’’

A. General Comments 

Comment: Many commenters praised 

the new regulations, particularly their 

clarity, flexibility, and focus on ‘‘bright 

line’’ rules. However, several stated that 

the regulations are still overly complex, 

lengthy, and burdensome. A physician 

organization asserted that the 

complexity discourages physicians from 

participating in the Medicare program. 

Response: A certain amount of 

regulatory complexity is inevitable 

under a statutory scheme that 

encompasses the full panoply of 

physician financial arrangements with 

providers of eleven different types of 

health care services. The Phase I 

preamble attempted to provide clear 

explanations of the rules and to respond 

to approximately 13,000 public 

comments. Accordingly, it is somewhat 

lengthy. However, the Phase I 

regulations themselves constitute only 

13 of the 108 pages published in the 

Federal Register. Moreover, while 

certain aspects of the statute and 

regulations involve detailed tests or 

standards, the overall statutory and 

regulatory scheme is straightforward. 

Most physician ownership in DHS 

entities is prohibited. Most physician 

compensation must be fair market value. 

We believe that the rule, like the statute, 

provides clear guidance for providers to 

comply demonstrably with the law. 

Comment: The basic sanction under 

section 1877 of the Act is nonpayment 

for DHS referred by a physician with an 

improper financial relationship with the 

DHS entity. A home health agency 

commented that payment denial was 

not a sufficient deterrent to improper 

referrals and that referring physicians 

and hospitals that own or operate their 

own home health services need to be 

penalized. 

Response: Section 1877(g) of the Act 

provides for two types of sanctions: 

nonpayment of claims for all violations 

and civil monetary penalties (CMPs) for 

knowing violations. Nonpayment 

applies to any DHS furnished to any 

Medicare patient under a prohibited 

referral. We believe the combination of 

nonpayment and CMPs is a strong 

deterrent. 

Comment: A practicing physician 

objected to physicians being denied the 

right to own businesses to which they 

refer. The physician complained that 

the law compels referrals to businesses 

owned by persons who are not 

physicians and who do not have the 

skills or expertise to run them. 

Response: As we explained in Phase 

I (66 FR 859), in enacting section 1877 

of the Act, the Congress responded in 

part to a number of studies showing that 

physician ownership of certain types of 

facilities resulted in significantly higher 

utilization of those facilities by the 

physician-owners. While in some cases 

physician-owners may have been 

actively involved in the businesses, in 

others they were merely passive 

investors. The Congress created 

exceptions for certain physician-owned 

DHS entities, including providers in 

rural areas (section 1877(d)(2) of the 

Act), and for DHS provided within a 

physician’s own office practice to the 

physician’s patients (the in-office 

ancillary services exception in section 

1877(b)(2) of the Act and § 411.355(b) of 

the regulations). 

Comment: Several commenters 

requested that we enact various ‘‘grace’’

periods under the exceptions to 

accommodate situations in which 

parties to an arrangement: (1) Fall out of 

compliance with aspects of an exception 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16057

through events outside their control; or 

(2) are unable to comply with an 

exception for temporary periods of time. 

Response: We are persuaded that a 

specified and limited exception for 

certain arrangements that have 

unavoidably and temporarily fallen out 

of compliance with other exceptions is 

warranted and consistent with the 

overall statutory scheme and the 

obligations the statute imposes on 

providers. Accordingly, using our 

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

Act, we have incorporated into these 

regulations an exception at § 411.353(f) 

for certain arrangements that have fully 

satisfied another exception for at least 

180 consecutive days, but have fallen 

out of compliance with the exception 

for reasons beyond the control of the 

DHS entity. Parties must take steps to 

rectify their noncompliance or 

otherwise comply with the statute as 

expeditiously as possible under the 

circumstances. The § 411.353(f) 

exception lasts up to 90 days and 

applies to DHS furnished during the 

exception period. By the end of the 90-

day exception period, parties must 

either comply with another exception or 

have terminated their otherwise 

prohibited arrangement. It is in the 

provider’s interest to document 

contemporaneously the reasons for the 

temporary noncompliance and the steps 

taken to rectify it. For example, this 

exception will allow rural providers that 

fall out of compliance with 

§ 411.356(C)(2) through re-designation 

of a rural area as a non-rural area time 

to finish patients’ existing courses of 

treatment or refer patients to other 

providers. 

This new exception, at § 411.353(f), 

does not apply to arrangements that 

previously complied with the 

exceptions for non-monetary 

compensation up to $300 or incidental 

medical staff benefits. To provide 

otherwise would effectively negate the 

limits set in those exceptions. (In the 

case of non-monetary compensation, it 

is, of course, possible to be compliant in 

the next year, since the exception 

permits non-monetary compensation up 

to $300 annually.)

The new exception is not intended to 

allow DHS entities to file otherwise 

prohibited claims or bills when they 

purposefully take or omit to take actions 

or engage in conduct that causes their 

financial relationship to be 

noncompliant with an exception. The 

exception period is limited to 90 

calendar days following the date of the 

initial event resulting in noncompliance 

with an exception and applies to DHS 

furnished during the exception period. 

The exception is intended to be used 

sparingly and may not be used by a DHS 

entity more often than once every three 

years with respect to referrals from the 

same referring physician. We believe 

this exception should address a number 

of situations that present special and 

temporary compliance problems, 

including conversion of publicly-traded 

companies to private ownership; loss of 

rural or health professional shortage 

areas (HPSA) designations; or delays in 

obtaining fully-signed copies of renewal 

agreements. As noted in section V.C 

below, we have also modified the group 

practice definition at § 411.352(d)(5) to 

address problems faced by group 

practices that fall out of compliance 

with elements of the definition when 

they add new members to the group. We 

have also interpreted the lease 

exceptions to permit holdover month-tomonth leases for up to six months. 

Comment: A commenter commended 

the Phase I regulations regarding 

referrals between physicians and their 

spouses, but submitted that the 

regulations did not go far enough in 

permitting certain cross-referrals 

between physicians who are family 

members. In the commenter’s view, 

these referrals should be allowed 

whenever the referral arrangement 

would be permitted between non-family 

member physicians. For example, the 

commenter believed that if a physician 

could himself perform a designated 

health service under the in-office 

ancillary services exception, he should 

be permitted to refer to his spouse if she 

could also otherwise provide that 

service under the in-office ancillary 

services exception. According to the 

commenter, a physician would have no 

greater incentive to refer to his or her 

spouse if the physician could otherwise 

provide the designated health service 

under an exception. Thus, the 

commenter believes prohibiting crossreferrals unfairly penalizes twophysician families. 

Response: The statute clearly provides 

that a physician may not make a referral 

to a DHS entity with which the 

physician (or an immediate family 

member) has a financial relationship, 

unless an exception applies. The change 

suggested by the commenter would 

contradict this clear statutory directive. 

However, as discussed in section V.B 

below, we are creating a new regulatory 

exception for some intra-family referrals 

that meet specific conditions. 

B. When Is There a Financial 

Relationship Between the Referring 

Physician and the DHS Entity? (Phase 

I—66 FR 864; § 411.351, § 411.354, and 

§ 411.357(p)) 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Financial Relationship 

Definition’’ at the beginning of your 

comments.]

The existence of a financial 

relationship between the referring 

physician (or an immediate family 

member) and the entity furnishing DHS 

is the factual predicate triggering the 

application of section 1877 of the Act. 

Section 1877(a)(2) defines a financial 

relationship as: (1) An ownership or 

investment interest of a referring 

physician (or an immediate family 

member) in the DHS entity; or (2) a 

compensation arrangement between the 

referring physician (or an immediate 

family member) and the DHS entity. 

Any financial relationship between the 

referring physician and the DHS entity 

implicates the statute, even if the 

financial relationship is wholly 

unrelated to a designated health service 

payable by Medicare (for example, a 

financial relationship involving only 

private pay business). Unless the 

financial relationship fits into a 

statutory or regulatory exception, 

referrals and corresponding claims for 

DHS are prohibited. Section 411.354 

addresses the circumstances under 

which a financial relationship exists. 

The statute expressly contemplates 

that ‘‘financial relationships’’ include 

both direct and indirect ownership and 

investment interests and direct and 

indirect compensation arrangements 

between referring physicians and DHS 

entities (sections 1877(a)(2) and 

1877(h)(1) of the Act, respectively). We 

consider a ‘‘direct’’ financial 

relationship to be an arrangement 

between the entity furnishing DHS and 

a referring physician (or an immediate 

family member) with no person or entity 

interposed between them 

(§ 411.354(a)(1)(2)). ‘‘Indirect’’ financial 

relationships—whether ownership or 

investment or compensation—exist 

where one or more persons or entities 

are interposed between the referring 

physician and the DHS entity. For 

indirect compensation arrangements, 

Phase I established a three part, ‘‘bright 

line’’ test that incorporated a knowledge 

element to protect DHS entities not in 

a position to know about or suspect an 

otherwise prohibited compensation 

arrangement with the referring 

physician. Phase I also established a 

corresponding new exception for 

indirect compensation arrangements. By 

16058 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

(1) defining the universe of ‘‘indirect 

compensation arrangements’’ that 

potentially triggers disallowance of 

claims and penalties; and (2) creating an 

exception for the subset of ‘‘indirect 

compensation arrangements’’ that will 

not trigger disallowance or penalties, we 

have structured the treatment of indirect 

compensation arrangements under 

section 1877 of the Act to parallel the 

treatment of direct compensation 

arrangements. 

Most commenters were pleased with 

the specificity of § 411.354, which sets 

out rules for determining whether a 

financial relationship exists, and the 

accompanying discussion in the Phase I 

preamble (66 FR 864). While § 411.354 

establishes rules for both direct and 

indirect financial relationships, very 

few comments addressed the rules for 

direct financial relationships. Rather, 

most comments addressed the definition 

of an indirect compensation 

arrangement at § 411.354(c)(2) and the 

interplay between that definition and 

the exception at § 411.357(p).

As discussed below, we are modifying 

the language of § 411.354 to address 

some of the concerns expressed by the 

commenters. These modifications 

include—

• Clarifying the meaning of direct and 

indirect ownership and affirming that 

common ownership of an entity does 

not create an ownership interest by one 

common investor in another; 

• Clarifying the relationship between 

the ‘‘indirect compensation

arrangements’’ definition and the 

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

generated’’ standards; 

• Clarifying that a referring physician 

may be treated as ‘‘standing in the 

shoes’’ of his or her wholly-owned 

professional corporation (PC). 

Summaries of the comments and our 

responses follow. 

Comment: One commenter asked us 

to clarify that remuneration received as 

a result of an arrangement that does not 

fit in the definition of a ‘‘financial 

relationship’’ under § 411.354(a) does 

not implicate section 1877 of the Act. 

Response: The commenter did not 

provide any specific examples of 

remuneration that would not result in a 

financial relationship. As a matter of 

law, section 1877 of the Act does not 

apply in the absence of a financial 

relationship as defined in § 411.354(a), 

but in the absence of specific examples, 

we find it difficult to identify any 

remuneration not covered by that 

definition. 

Comment: A number of commenters 

found the definition of ‘‘indirect 

compensation arrangement’’ at 

§ 411.354(c)(2) to be very complicated. 

One commenter stated that the 

definition was too broad and covered 

many arrangements that had not 

previously been subject to the statute. A 

national physician association 

emphasized that the physician 

community would need education as to 

the scope and application of the 

definition. 

Response: The definition of ‘‘indirect 

compensation arrangement’’ at 

§ 411.354(c)(2) requires three elements: 

• Paragraph (c)(2)(i)—an unbroken 

chain of financial relationships 

(ownership or compensation) linking 

the referring physician to the DHS 

entity; 

• Paragraph (c)(2)(ii)—aggregate 

compensation paid to the referring 

physician that varies with, or otherwise 

takes into account, the volume or value 

of referrals to, or other business 

generated for, the DHS entity; and 

• Paragraph (c)(2)(iii)—knowledge by 

the DHS entity that the physician 

receives aggregate compensation that 

varies with, or otherwise takes into 

account, the volume or value of referrals 

to, or other business generated for, the 

DHS entity (using the same knowledge 

standard that applies under the False 

Claims Act (31 U.S.C. § 3729) and the 

Civil Monetary Penalties Law (section 

1128A of the Act)). 

With education and experience, we 

think DHS entities and referring 

physicians will be able to apply the test 

without difficulty. (We discuss further 

the application of the various elements 

in response to specific comments 

below.) We have made several technical 

revisions to clarify the intent of the 

exception. 

We agree that the definition 

encompasses many arrangements that 

physicians and DHS entities claim not 

to have thought were covered by the 

statute. As we discussed in the Phase I 

preamble (66 FR 864), we believe that 

the knowledge element sufficiently and 

equitably sets the boundaries for the 

potential universe of prohibited 

arrangements. 

Comment: Many commenters 

expressed confusion at the interplay 

between (1) the definition of ‘‘indirect 

compensation arrangement’’ at 

§ 411.354(c)(2), which looks at whether 

the referring physician’s aggregate 

compensation varies with, or otherwise 

takes into account ‘‘the volume or value 

of referrals’’ generated by the referring 

physician, and (2) § 411.354(d)(2), 

which describes when certain 

compensation (such as time-based and 

unit-of-service based payments) will be 

deemed not to take into account ‘‘the 

volume or value of referrals,’’ even 

though aggregate per unit compensation 

will always vary with the volume or 

value of referrals. (We received similar 

comments regarding § 411.354(d)(3) 

with respect to when compensation 

does not take into account ‘‘other 

business generated between the 

parties.’’) These provisions were 

discussed in the Phase I preamble (66 

FR 876).

Specifically, under § 411.354(d)(2) 

and § 411.354(d)(3), time-based and 

unit-of-service based compensation is 

deemed not to take into account the 

volume or value of referrals or other 

business generated if the unit-based 

compensation: (i) Is fair market value for 

items or services actually provided; and 

(ii) does not vary over the term of the 

agreement in any manner that takes into 

account DHS referrals or other business 

generated by the referring physician. 

Some commenters questioned whether 

an indirect compensation arrangement 

exists at all if a referring physician 

receives time-based or unit-of-service 

based compensation that is fair market 

value and does not vary over the term 

of the agreement, that is, compensation 

that, by definition, does not take into 

account the volume or value of referrals 

or other business generated according to 

§ 411.354(d)(2) and § 411.354(d)(3). 

Similarly, the new exception for 

indirect compensation arrangements at 

§ 411.357(p), like § 411.354(d)(2) and 

§ 411.354(d)(3), does not look to 

aggregate compensation and 

incorporates a fair market value test. 

Given this, several commenters pointed 

out that the ultimate result would be the 

same whether time and unit-of-service 

based compensation arrangements are 

initially excluded from the definition of 

‘‘indirect compensation arrangement’’ in 

§ 411.354(c)(2) or included in the 

definition and then excepted by the new 

exception. One commenter proposed 

three options: (1) Retaining the indirect 

compensation arrangement definition in 

the final regulation and deleting the 

indirect compensation exception; (2) 

revising the indirect compensation 

arrangement definition by deleting the 

volume and value language; or (3) 

revising § 411.354(d)(2) and 

§ 411.354(d)(3) to make clear that those 

provisions do not apply to the indirect 

compensation arrangements definition. 

Response: An ‘‘indirect compensation 

arrangement’’ exists under 

§ 411.354(c)(2) if the referring 

physician’s aggregate compensation 

varies with, or otherwise takes into 

account, the volume or value of referrals 

or other business generated by the 

referring physician. Since time-based or 

unit-of-service based compensation will 

always vary with the volume or value of 

services when considered in the 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16059

aggregate, these compensation 

arrangements can constitute ‘‘indirect 

compensation arrangements’’ under 

§ 411.354(c)(2), even if the individual 

time or unit-of-service based 

compensation is fair market value and 

otherwise complies with the language of 

§ 411.354(d)(2) and § 411.354(d)(3). 

We agree that the close similarity in 

the regulatory language between 

§ 411.354(c)(2) and § 411.354(d)(2) and 

§ 411.354(d)(3) can be clarified. We are 

modifying § 411.354(c)(2)(ii) to do so. 

Our intent is two-fold. First, we intend 

to include in the definition of ‘‘indirect 

compensation arrangement’’ any 

compensation arrangements (including 

time-based or unit-of-service based 

compensation arrangements) where the 

aggregate compensation received by the 

referring physician varies with, or 

otherwise takes into account, the 

volume or value of referrals or other 

business generated between the parties, 

regardless of whether the individual 

unit of compensation qualifies under 

§ 411.354(d)(2) and § 411.354(d)(3). 

Second, we intend to exclude under the 

indirect compensation arrangement 

exception at § 411.357(p) that subset of 

indirect compensation arrangements 

where the compensation is fair market 

value and does not reflect the volume or 

value of referrals or other business 

generated and the other conditions of 

the exception are satisfied. Per unit 

compensation will meet this test if it 

complies with § 411.354(d)(2) and 

§ 411.354(d)(3). While we agree that the 

ultimate result may be the same—time, 

unit-of-service, or other ‘‘per click’’

based arrangements are generally 

permitted if they are at fair market value 

without reference to referrals—we 

believe this construct more closely 

corresponds to the statutory treatment of 

direct compensation arrangements. 

Accordingly, we are clarifying 

§ 411.354(c)(2)(ii). 

It is important to bear in mind that, 

depending on the circumstances, fixed 

aggregate compensation can form the 

basis for a prohibited direct or indirect 

compensation arrangement. This will be 

the case if such fixed aggregate 

compensation takes into account the 

volume or value of referrals (for 

example, the fixed compensation 

exceeds fair market value for the items 

or services provided or is inflated to 

reflect the volume or value of a 

physician’s referrals or other business 

generated). Section 411.354(d)(2) and 

§ 411.354(d)(3) were not intended to 

remove the existing prohibition on fixed 

compensation arrangements that take 

into account the volume or value of 

referrals or other business generated 

between the parties. We have clarified 

the language in these sections to reflect 

the distinction.

Comment: The first element of an 

‘‘indirect compensation arrangement’’ is 

an unbroken chain of financial 

relationships between the DHS entity 

and the referring physician. In Phase I, 

we explained that the links in the chain 

could be any form of financial 

relationship, whether excepted or not. 

Several commenters believe that there 

should be no indirect compensation 

arrangement if any financial 

relationship in the chain qualifies for an 

exception. One commenter pointed out 

that under section 1877(a)(2) of the Act, 

the definition of ‘‘financial 

relationship’’ excludes any financial 

relationship that fits in an exception. 

Thus, according to this commenter, the 

inclusion of an excepted financial 

relationship in a chain of financial 

relationships necessarily ‘‘breaks’’ the 

chain and precludes an indirect 

compensation arrangement. The 

commenter explained further that this 

result would make the application of the 

indirect compensation rules easier for 

DHS entities, especially hospitals, that 

have arrangements with group practices 

that employ, or contract with, referring 

physicians using compensation 

arrangements that fit in the 

employment, personal services 

contracts, or fair market value 

exceptions. Finally, the commenter 

suggested that, at a minimum, there 

should be no indirect financial 

relationship if every link in the chain 

qualifies for an exception. 

Response: Section 1877(a)(2) of the 

Act excludes from the definition of 

‘‘financial relationship’’ any ownership 

or compensation arrangement that fits in 

an exception. While the regulations are 

structured somewhat differently, they 

achieve the same result. The regulations 

define ‘‘financial relationship’’ in 

§ 411.354(a) without limiting the term to 

unexcepted financial relationships. 

Exceptions are set forth in separate 

provisions of the regulations. Thus, the 

reference in the definition of ‘‘indirect 

compensation arrangement’’ to an 

unbroken chain of ‘‘financial 

relationships’’ as defined in § 411.354(a) 

includes both excepted and unexcepted 

relationships. A direct financial 

relationship can form a link in a chain 

of financial arrangements that creates an 

indirect compensation arrangement, 

even if the direct financial relationship 

qualifies for an exception. While it is 

very unlikely, we believe that a chain 

consisting entirely of excepted financial 

relationships could theoretically create 

an indirect compensation arrangement, 

if the remuneration paid to the referring 

physician is not fair market value or 

varies with, or otherwise takes into 

account, the volume or value of referrals 

or other business generated for the DHS 

entity by the referring physician. A 

more likely scenario is that the chain 

would either involve fair market value 

compensation that would qualify the 

relationship under the indirect 

compensation arrangement exception. 

We address the special issue of 

contracts with group practices in a 

subsequent response below. 

Comment: A commenter asserted that 

‘‘indirect’’ compensation under section 

1877 of the Act means only nonmonetary benefits that are incidental to 

a direct financial relationship, and that 

the Secretary exceeded his statutory 

authority by extending the regulations 

to other indirect compensation 

arrangements. 

Response: The commenter provided 

no statutory support for its 

interpretation of section 1877 of the Act. 

Nor does the plain meaning of the term 

‘‘indirect’’ support the commenter’s 

view. The interpretation offered by the 

commenter would permit wholesale 

circumvention of section 1877 of the 

Act through the formal interposition of 

another person or entity between the 

referring physician and the DHS entity. 

The Congress clearly intended to 

prevent such schemes by including 

indirect compensation in the definition 

of remuneration in section 1877(b)(1)(B) 

of the Act. The Secretary has broad 

authority under sections 1102 and 1871 

of the Act to promulgate regulations 

implementing any provision of the Act.

Comment: One commenter asked how 

far an indirect compensation 

arrangement could be traced along a 

chain of financial relationships created 

through common ownership. 

Response: As with any indirect 

compensation arrangement, the chain of 

financial relationships can be of any 

length. As we discussed in the preamble 

to the Phase I rule (66 FR 864), the 

knowledge element in 

§ 411.354(c)(2)(iii) limits the potential 

liability of a DHS entity involved in a 

distant, indirect compensation 

arrangement. 

Comment: A number of commenters 

expressed the view that an indirect 

compensation arrangement should be 

excepted if any link in the chain fits in 

one of the exceptions for direct 

compensation arrangements. This issue 

was raised by group practices that 

contract to provide services to hospitals 

(or other DHS entities) or to lease space 

or equipment from DHS entities. For 

example, in the case of a services 

agreement between a hospital and a 

group practice, an indirect 

compensation arrangement is created 

16060 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

between the hospital and the 

contracting group practice’s employee 

or investor physicians (that is, the 

referring physicians). Instead of looking 

to the indirect compensation exception 

in such circumstances, commenters 

proposed that the test be whether the 

compensation arrangement between the 

hospital and the group practice fits in a 

direct compensation exception. 

Commenters suggested that we use a 

similar rule for other indirect 

compensation arrangements involving 

referring physicians who are members 

of group practices, where the link in the 

chain closest to the referring physician 

is his or her compensation arrangement 

with his or her group practice. 

Commenters requested comparable 

relief with respect to physician-owned 

PCs. In the commenter’s view, the fact 

that a physician practices through a 

wholly-owned PC should not convert a 

direct financial relationship with a DHS 

entity into an indirect relationship (that 

is, physician—PC—DHS entity). 

Response: We do not agree that an 

indirect compensation arrangement 

should be excepted if any link in the 

chain complies with a direct 

compensation exception. As we 

explained in the Phase I preamble (66 

FR 867), we are concerned that, in some 

situations, such a test would permit a 

middle entity to redirect compensation 

to referring physicians based upon the 

volume or value of referrals or other 

business generated by the physicians to 

the DHS entity (which is not the middle 

entity). 

We recognize that it is not necessary 

to treat a referring physician as separate 

from his or her wholly-owned PC. We 

have revised the definition of referring 

physician in § 411.351 to reflect this 

clarification. 

By way of example, under the Phase 

I regulations, if a hospital contracted 

with a referring physician’s PC for the 

provision of services, the hospital 

would potentially have an indirect 

compensation arrangement with the 

referring physician for which the only 

available exception would be the 

indirect compensation arrangements 

exception. Under the revised 

regulations, the contract would create a 

direct compensation arrangement 

between the hospital and the referring 

physician.

We believe the revised regulations 

should make it simpler for physicians 

and others to evaluate their financial 

relationships and the application of 

exceptions under section 1877 of the 

Act. 

We are not making any changes to the 

Phase I rule with respect to the issue of 

indirect compensation arrangements 

that are created when a group practice 

is an intervening entity in the chain 

between the DHS entity and referring 

physicians who are members of the 

group (for example, a hospital contracts 

with a group practice for services). The 

commenters’ proposal that the 

regulations permit physicians to stand 

in the shoes of their group practices, 

thereby converting indirect 

arrangements to direct arrangements, is 

inconsistent with the compensation 

exceptions as drafted. We believe that 

the knowledge standard in the indirect 

compensation arrangements definition 

and exception adequately protects DHS 

entities. We solicit comments on this 

issue. 

Comment: One commenter asked us 

to clarify the application of the indirect 

compensation arrangement rules to the 

situation in which a referring physician 

owns an interest in a hospital and the 

hospital contracts for services with a 

clinical laboratory to which the 

physician refers. In the preamble to the 

Phase I rule (66 FR 866), we indicated 

that there would be a chain of entities 

(referring physician—hospital—clinical 

lab). The commenter asked us whether 

that arrangement would fit in the 

indirect compensation arrangement 

definition and, if necessary, the indirect 

compensation exception. 

Response: As commonly structured, 

the example would not create an 

indirect compensation arrangement. 

There would be an unbroken chain of 

financial relationships between the 

referring physician and the clinical 

laboratory (the DHS entity) via the 

hospital. However, an unbroken chain is 

only one of three elements required 

under the definition of indirect 

compensation arrangement. Section 

411.354(c)(2)(ii) requires that the 

referring physician receives aggregate 

compensation that varies with, or 

otherwise takes into account, the 

volume or value of DHS referrals or 

other business generated by the referring 

physician for the DHS entity. Under 

§ 411.354(c)(2)(ii), we look to the nonownership or non-investment interest 

closest to the referring physician in the 

unbroken chain. That means that in the 

commenter’s scenario, we would look to 

the contractual relationship between the 

hospital and the clinical laboratory. 

Absent unusual circumstances, the 

hospital would not receive aggregate

compensation that reflects the volume 

or value of referrals, since the hospital 

would not be receiving any 

compensation from the clinical 

laboratory (assuming the contracted 

charges for laboratory services are fair 

market value). If, however, the 

contracted laboratory charges were less 

than fair market value, the arrangement 

could qualify as an indirect 

compensation arrangement between the 

referring physician and the clinical 

laboratory, provided the laboratory 

knew of, or had reason to suspect, the 

referring physician’s ownership interest 

in the hospital. Because the payments 

would not be fair market value, the 

arrangement could not fit in the indirect 

compensation arrangements exception. 

Comment: A commenter questioned 

whether the payment of a royalty by an 

equipment manufacturer to a physician 

inventor for a device implanted during 

surgeries performed by the physician 

inventor is permitted or whether that 

arrangement would create an indirect 

compensation relationship with the 

hospital that purchased the device. The 

commenter did not think that parties 

would be able to establish a fair market 

value for a unique invention.

Response: In the scenario described, 

the physician inventor would have an 

indirect compensation arrangement 

with the hospital in which the surgeries 

are performed (that is, the DHS entity 

(hospital) buys the invention from the 

manufacturer (the intermediary link in 

the chain), which pays the referring 

physician a royalty). However, as long 

as the royalty payment (the 

compensation link in the chain nearest 

the physician) is fair market value, the 

relationship should satisfy the indirect 

compensation exception at § 411.357(p). 

We see no reason that one cannot 

establish a fair market value for 

royalties, even on unique inventions. 

Comment: A number of commenters 

questioned the discussion in the Phase 

I preamble that relates to ownership 

interests and indirect compensation 

arrangements (66 FR 867 and 870). 

Specifically, commenters questioned the 

statement that common ownership of an 

entity may create an indirect financial 

relationship between or among the 

common owners (66 FR 867). One 

commenter asked us to explain what 

type of financial relationship was 

created and when. Other commenters 

complained that the statement was 

inconsistent with other statements that 

common ownership did not create an 

indirect ownership interest in the 

common owners (66 FR 870). Several 

commenters stated that co-ownership of 

a non-DHS entity should not create any 

financial relationship between the 

owners. 

Many commenters objected to the 

statement in the Phase I preamble that 

the direct compensation exceptions in 

section 1877 of the Act did not apply to 

indirect compensation arrangements. 

According to the commenters, all 

exceptions should be available, 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16061

regardless of whether the financial 

relationship is direct or indirect, and a 

DHS entity should be able to take 

advantage of any exception. A 

commenter asked whether a prohibited 

indirect ownership arrangement could 

be excepted if it satisfied the indirect 

compensation arrangement exception. 

Response: An ownership or 

investment interest in an entity creates 

a financial relationship between the 

investor and the entity (if the entity has 

an ownership or investment interest in 

another entity, the investor may have an 

indirect ownership or investment 

interest in that further entity, and so 

on). Absent unusual circumstances, 

common owners of an entity will not, by 

virtue of their common ownership, have 

ownership or investment interests in 

each other. However, an indirect 

compensation arrangement may arise 

from their common ownership. Since an 

indirect compensation arrangement 

requires an unbroken chain of any 

financial relationships between the 

referring physician and the DHS entity, 

ownership or investment interests in a 

common entity count as links. In other 

words, common ownership does not 

itself create an indirect compensation 

arrangement as defined in 

§ 411.354(c)(2) between co-owners; 

rather, the ownership or investment 

interests of the individual investors can 

satisfy the unbroken chain element of 

the three-part indirect compensation 

arrangement definition at 

§ 411.354(c)(2). For example, if a DHS 

entity and a referring physician jointly 

own an entity, such co-ownership 

creates a chain of financial relationships 

linking the DHS entity to the referring 

physician: DHS entity—[ownership 

relationship]—owned entity—

[ownership relationship]—referring 

physician. This chain is created 

regardless of the nature of the jointly 

owned entity. 

However, even if an unbroken chain 

exists, the other elements of the 

definition at § 411.354(c)(2) still need to 

be satisfied to establish an indirect 

compensation arrangement (which 

could then be excepted under the 

indirect compensation exception, if 

applicable). In the preceding example, 

as long as the physician’s aggregate

return on his investment in the coowned entity (including capital 

appreciation) did not vary or otherwise 

take into account the volume or value of 

referrals to, or other business generated 

for, the DHS entity (not the common 

venture), there would be no indirect 

compensation arrangement. We would 

expect this to be the case for most joint 

ownership of non-DHS entities. 

However, if the jointly owned entity is, 

for example, an imaging equipment 

leasing company co-owned by a hospital 

(the DHS entity) and a referring 

physician, the co-ownership may create 

an indirect compensation arrangement, 

since the physician’s aggregate payout 

from the leasing company may vary 

with, or otherwise take into account, the 

volume of imaging business he or she 

generates for the hospital, assuming that 

the hospital contracts with the leasing 

company. Sufficient knowledge of the 

co-ownership is likely to exist in this 

circumstance to satisfy the knowledge 

standard at § 411.354(c)(2)(iii). If an 

indirect compensation arrangement 

exists, the relevant inquiry is whether 

the arrangement fits in the indirect 

compensation exception. In general, if 

the rental payment (frequently a ‘‘per 

click’’ payment) by the hospital to the 

leasing company is fair market value 

(and the ‘‘per click’’ fee does not vary 

over the term of the agreement) and 

does not otherwise reflect the volume or 

value of referrals, the indirect 

compensation arrangement would be 

excepted. Such arrangements could still 

violate the anti-kickback statute.

To address the commenters’ concern, 

we are modifying § 411.354(b)(5)(i) and 

establishing new § 411.354(b)(5)(iii) and 

(b)(5)(iv) to make clear that common 

ownership does not establish an 

ownership or investment interest by one 

common investor in another common 

investor. An indirect ownership or 

investment interest requires an 

unbroken chain of direct ownership 

interests between the referring 

physician and the DHS entity such that 

the referring physician can be said to 

have an indirect ownership or 

investment interest in the DHS entity. In 

the preceding example, the referring 

physician has an ownership interest in 

the leasing company, but not in the 

hospital. (If, however, the leasing 

company owned an interest in a DHS 

entity, the physician would have an 

indirect ownership interest in that DHS 

entity). 

If an indirect ownership or 

investment interest exists, it cannot be 

excepted under the indirect 

compensation exception in § 411.357(p). 

The Phase I preamble may have 

inadvertently suggested otherwise. We 

created a new exception for indirect 

compensation arrangements because 

none of the statutory compensation 

exceptions apply by their terms to these 

arrangements, and we believe that the 

Congress did not intend a wholesale 

prohibition on indirect compensation 

arrangements. The new indirect 

compensation arrangements exception 

conceptually follows the statutory 

exceptions applicable to direct 

compensation arrangements; in other 

words, we attempted to make the 

indirect compensation exception 

analogous to the existing exceptions. By 

contrast, the Congress clearly included 

indirect ownership or investment 

interests in the definition of ownership 

or investment interests to which the 

statute applies (section 1877(a)(2) of the 

Act) and created exceptions that can 

apply to those indirect interests. Thus, 

we have not created a separate 

exception for indirect ownership or 

investment interests. However, the 

definition of an ‘‘indirect ownership or 

investment interest’’ in 

§ 411.354(b)(5)(i)(B) incorporates a 

knowledge element that should 

sufficiently limit the universe of 

prohibited ownership and investment 

interests so that most remote ownership 

or investment interests should not 

trigger the prohibition. 

Comment: The indirect compensation 

exception includes a requirement that 

the compensation arrangement not 

violate the anti-kickback statute, section 

1128B(b) of the Act (§ 411.357(p)(3)). 

One commenter wanted clarification as 

to which arrangement in the indirect 

compensation arrangement chain this 

provision referred. 

Response: The relevant subject of the 

inquiry would be the entire 

arrangement, including all sources of 

remuneration, between the DHS entity 

and the referring physician (or group 

practice where applicable). This would 

include each link in the chain as well 

as the overall arrangement viewed as a 

whole. 

Comment: One commenter asked us 

to clarify that compensation need not be 

‘‘set in advance’’ under the indirect 

compensation exception. 

Response: The indirect compensation 

exception does not include a ‘‘set in 

advance’’ requirement. 

Comment: One commenter asked that 

the regulatory text be modified to 

expressly state that a DHS entity can 

rely on a certification from a physician 

that a known indirect compensation 

arrangement between the physician and 

another entity is at fair market value not 

taking into account the volume or value 

of referrals. 

Response: While obtaining a 

certification may be an appropriate 

practice in some circumstances, we are 

not prepared to provide a blanket 

exception for reliance on certifications. 

Comment: While most commenters 

welcomed the knowledge requirement 

in the definition of an indirect 

compensation arrangement in 

§ 411.354(c)(2)(iii), a number of 

commenters had questions about the 

conditions under which a DHS entity 

16062 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

has a duty to inquire as to the existence 

of an indirect compensation 

arrangement with a referring physician 

(66 FR 865, 868). One commenter 

asserted that the knowledge element in 

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

did not impose any duty to inquire. 

According to that same commenter, the 

preamble discussion seemed to impose 

a simple negligence standard. Others 

believed that the ‘‘reason to suspect’’

language was inconsistent with other 

statements that there was no duty to 

inquire on the part of the DHS entity (66 

FR 865). 

Response: The knowledge element 

used in § 411.354(c)(2)(iii) is the same as 

in the False Claims Act and the Civil 

Monetary Penalty Law (section 1128A of 

the Act): actual knowledge or reckless 

disregard or deliberate ignorance. As we 

explained in the Phase I preamble (66 

FR 864), the phrase ‘‘reason to suspect’’

was simply intended as a convention to 

avoid repetition of the wordier ‘‘actual 

knowledge or reckless disregard or 

deliberate ignorance’’ standard. There is 

extensive case law applying the 

standard in the context of False Claims 

Act and the Civil Monetary Penalties 

Law. As stated in the Phase I preamble 

(66 FR 865), a DHS entity has no duty 

to inquire whether a referring physician 

receives aggregate compensation that 

varies with, or otherwise takes into 

account, referrals to, or other business 

generated for, the DHS entity unless 

facts or circumstances exist such that a 

failure to follow up with an inquiry 

would constitute deliberate ignorance or 

reckless disregard.

Comment: One commenter asked how 

the knowledge element in the definition 

of indirect compensation arrangements 

in § 411.354(c)(2)(iii) relates to the 

knowledge element in the sanctions 

sections 1877(g)(3) and (g)(4) of the Act 

(civil money penalties and exclusions). 

Response: The standards are identical. 

However, the standard would be 

applied separately for each inquiry. In 

other words, whether an indirect 

compensation arrangement exists is a 

separate inquiry from whether a person 

has knowingly presented or caused to be 

presented an improper claim or bill for 

services or has knowingly entered into 

a circumvention arrangement. It is 

likely, however, that some facts would 

be relevant to both inquiries. 

Comment: Several commenters, 

including a national physician 

professional association, questioned 

why the regulations only consider the 

DHS entity’s knowledge. These 

commenters urged that physicians be 

protected under section 1877 of the Act 

if they do not have knowledge of the 

existence of a prohibited financial 

relationship. 

Response: The statutory scheme 

already protects physicians from any 

liability in the absence of actual 

knowledge, reckless disregard, or 

deliberate ignorance. The basic statutory 

sanction is disallowance of claims or 

bills, which affects the DHS entity, not 

the referring physician. The new 

knowledge standards in 

§ 411.354(c)(2)(iii) and 

§ 411.354(b)(5)(i)(B) protect against this 

otherwise strict liability aspect of 

section 1877 of the Act. Under section 

1877 of the Act, physicians are only 

subject to sanction under the civil 

monetary provisions of section 1877(g) 

of the Act. Those provisions already 

contain a comparable knowledge 

element. 

Comment: One commenter asked that 

we clarify the statement in the Phase I 

preamble at 66 FR 866 that a 

distribution from an excepted 

ownership or investment interest is also 

excepted (and thus does not require 

recourse to a compensation exception), 

unless the distribution is a ‘‘sham’’. As 

an example, we posited a limited 

liability company that was losing 

money, but nonetheless made a 

distribution to physician investors after 

borrowing funds from a bank. The 

commenter suggested that the 

appropriate test should be whether the 

borrowing and distribution were lawful 

under applicable State law. 

Response: We do not believe it is 

possible to establish a ‘‘bright line’’ test 

for determining whether a particular 

distribution is a ‘‘sham’’ in all cases. 

Rather, it will depend on the 

circumstances. The reference to possible 

‘‘sham’’ distributions was intended to 

make clear that an excepted ownership 

or investment interest may not be used 

to shield payments that are not 

legitimately related to the ownership or 

investment interest (such as funneling 

additional remuneration to physicians 

as ostensible ‘‘returns’’ from an 

investment entity). 

Comment: A physician organization 

questioned why a referring physician’s 

investment interest in a subsidiary 

company should be considered an 

indirect ownership interest in the parent 

company if the subsidiary has any 

investment interest in the parent. The 

commenter thought the test should also 

require that the referring physician 

know that the investment interest exists. 

Response: Our treatment of 

investment interests in subsidiaries that, 

in turn, have investment interests in 

parent companies is consistent with the 

general definition of indirect ownership 

and investment interests, described 

above. In short, in those circumstances, 

a physician investor in the subsidiary 

has an indirect investment interest in 

the parent. If the parent is a DHS entity, 

the physician may not refer patients to 

the parent for DHS and the parent may 

not file claims for those DHS, unless an 

exception applies. With respect to 

indirect ownership or investment 

interests, however, § 411.354(b)(5)(B) 

limits liability to those DHS entities that 

have actual knowledge of, or act in 

reckless disregard or deliberate 

ignorance of, the existence of an indirect 

ownership or investment interest by the 

referring physician in the DHS entity. In 

other words, although the physician 

need not have knowledge to trigger the 

prohibition, the DHS entity must have 

some reason to suspect the existence of 

the indirect ownership or investment 

interest. This regulatory scheme does 

not adversely impact physicians who do 

not have knowledge; non-payment of 

claims affects only the DHS entity, and 

imposition of CMPs (the sanction 

applicable to physicians under section 

1877 of the Act) only applies to knowing

violations. 

Comment: One commenter asked us 

to clarify that, if a referring physician’s 

direct ownership or investment interest 

in a DHS entity would be protected 

under an exception, then a similar 

indirect ownership or investment 

interest of the physician in that same 

DHS entity would be excepted.

Response: The commenter is correct. 

For example, if a physician has an 

investment interest in a company that, 

in turn, owns an interest in a hospital 

in Puerto Rico, the physician’s indirect 

investment interest in the Puerto Rico 

hospital is excepted under 

§ 411.356(c)(3). 

Comment: One commenter questioned 

our conclusion that stock options and 

convertible securities create a 

compensation arrangement, rather than 

an ownership or investment interest 

(§ 411.354(b)(3)(ii)). The commenter 

pointed out that options and securities 

can be purchased on the open market 

and are not just received pursuant to 

employment. 

Response: We are persuaded that the 

commenter is correct and are modifying 

the definition of ownership or 

investment interest. The determination 

as to whether stock options and 

convertible securities create ownership 

or investment interests or compensation 

arrangements depends on the method of 

acquisition. If the options or securities 

are originally purchased or received for 

money or in return for a capital 

contribution in whole or in part, they 

will be considered ownership or 

investment interests. If they are received 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16063

as compensation for services, they will 

be considered compensation until the 

time that they are exercised, at which 

time they become an ownership or 

investment interest. 

Comment: One commenter objected to 

treating loans secured by the property of 

an entity as an ownership interest in the 

entity (§ 411.354(b)(1)). 

Response: Section 1877(a)(2) of the 

Act states that an ownership or 

investment interest may be through 

equity, debt, or other means. The rule 

adopted in Phase I for secured loans 

accommodated the industry’s desire for 

a ‘‘bright line’’ rule in this area. 

However, we agree with the commenter 

that loans or bonds that are secured by, 

or otherwise linked to, a particular piece 

of equipment or the revenue of a 

department or other discrete hospital 

operations should not be considered an 

ownership interest in the whole 

hospital, but only in a part or 

subdivision of the hospital. Therefore, 

the whole hospital exception would not 

apply. 

C. When Does a Physician Make a 

Referral? (Section 1877(h)(5) of the Act; 

Phase I—66 FR 871; § 411.351) 

As defined by section 1877(h)(5) of 

the Act, a ‘‘referral’’ means 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 (including any tests or 

procedures 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 

consultations by pathologists, diagnostic 

radiologists, and radiation oncologists. 

The regulations define ‘‘referral’’ in 

§ 411.351.

In Phase I, we excluded from the 

definition of ‘‘referral’’ services 

performed personally by the referring 

physician, but included services 

provided by a physician’s employees, 

co-workers, or independent contractors. 

We made clear that referrals can occur 

in a wide variety of formats—written, 

oral, or electronic—depending on the 

particular service. Moreover, referrals 

can be direct or indirect. Phase I also 

added a new regulatory exception at 

§ 411.353(e) for certain referrals of DHS 

to an entity with which the referring 

physician has a prohibited financial 

relationship that are ‘‘indirect’’ referrals 

(for example, when a physician has 

caused a referral to be made by someone 

else or has directed or routed a referral 

through an intermediary) or are oral 

referrals (that is, no written request or 

other documentation that would 

identify the referring physician is 

required). Under this exception, a claim 

by a DHS entity may be paid for 

purposes of section 1877 of the Act if 

the entity did not know of, or have 

reason to suspect, the identity of the 

physician making the indirect or oral 

referral. 

Comments to the Phase I rule on 

referrals and our responses follow. We 

are making no major changes to the final 

rule in this area. 

Comment: A number of commenters 

urged that the definition of referral 

exclude services that are performed 

‘‘incident to’’ a physician’s personally 

performed services or that are 

performed by a physician’s employees. 

According to the commenters, such 

services are integral to the physician’s 

services. Another commenter suggested 

that services by licensed professionals 

that are separately billable should be 

considered referrals, but services that 

are only billable as part of a physician’s 

service should not be considered 

referrals. One commenter suggested the 

appropriate test should be whether there 

is significant physician involvement in 

the provision of a service. 

Response: This is an issue about 

which we specifically solicited 

comments in the Phase I rulemaking. 

After careful consideration of the 

comments and the issues raised, 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 discussed in the Phase I 

preamble (66 FR 871–872), this 

interpretation is consistent with the 

statute as a whole. A blanket exclusion 

for services that are ‘‘incident to’’ a 

physician’s services or are performed by 

a physician’s employees would, for 

example, substantially swallow the inoffice ancillary services exception. 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 inoffice ancillary services or another 

exception. This approach to the 

definition of ‘‘referral’’ is consistent 

with the statutory scheme, which allows 

productivity bonuses for ‘‘incident to’’

services under the in-office ancillary 

services exception, but not under other 

exceptions. A ‘‘substantial 

involvement’’ test would be vague and 

impracticable. 

Comment: A group representing 

allergists and immunologists requested 

clarification that no referral occurs 

when a physician prepares an antigen 

and furnishes it to a patient. Another 

commenter requested clarification that 

there is no referral if a physician 

personally refills an implantable pump. 

Yet another commenter requested 

clarification that there is no referral if a 

physician personally provides durable 

medical equipment (DME) to a patient. 

Response: The commenters are 

correct. There is no ‘‘referral’’ if a 

physician personally performs a 

designated health service. However, as 

noted above, there is a referral if the 

designated health service is provided by 

someone else. In many cases, these 

referrals will qualify for an exception. 

Comment: A commenter sought 

clarification that no referral occurs 

when a physician personally performs 

services in a hospital, even if the 

hospital bills for the services pursuant 

to an assignment.

Response: If a physician personally 

performs the services, there is no 

referral, regardless of whether the 

physician bills the program directly or 

another entity bills pursuant to an 

assignment. However, technical 

components associated with a 

physician’s personally performed 

services in a hospital are referrals to 

which section 1877 of the Act applies 

(66 FR 871). 

Comment: One commenter suggested 

that the application of section 1877 of 

the Act to referrals within a physician’s 

medical practice is inconsistent with the 

Office of the Inspector General’s 

interpretation of the anti-kickback 

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

commenter suggested that there exists a 

blanket exception for such referrals 

under the anti-kickback statute. 

Response: As we discussed more 

thoroughly in the Phase I preamble (66 

FR 863), section 1877 of the Act is a 

separate statute from the anti-kickback 

statute and must be applied separately. 

We do not perceive any inconsistency, 

however, in the treatment of referrals 

within a physician’s medical practice. 

Like section 1877 of the Act, the antikickback statute contains no blanket 

exception for such referrals (contrary to 

the commenter’s suggestion). Some 

arrangements may be protected by a 

statutory or regulatory safe harbor under 

the anti-kickback statute. (42 CFR 

1001.952) 

Comment: One commenter requested 

clarification as to whether services 

ordered by a nurse practitioner or other 

licensed professional will be considered 

to have been referred by a physician in 

the same group practice. 

Response: In determining whether an 

independent health professional’s 

referral to a DHS entity should be 

attributed to the physician, all the facts 

16064 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

and circumstances surrounding the 

referral and the relationship of the 

independent health professional and the 

physician must be considered. As we 

indicated in the Phase I preamble (66 FR 

872), our concern is that physicians 

could attempt to circumvent section 

1877 of the Act by funneling referrals 

through nonphysician practitioners. The 

relevant inquiry is whether the 

physician has controlled or influenced 

the nonphysician’s referral such that the 

referral should properly be considered 

the physician’s referral. We are 

changing the regulation text accordingly 

to reflect Phase I preamble language. 

Comment: An imaging center 

commented that physicians do not refer 

patients to imaging centers, but only 

order tests. The commenter also stated 

that many radiology procedures have 

similar sounding names, and a patient 

may not know the difference between 

procedures if he or she is given an oral 

referral and may unwittingly request a 

designated health service rather than a 

service that is not a designated health 

service. The commenter also stated that, 

if a patient self-referred to an imaging 

center, a report would usually be sent to 

the patient’s physician, whether the 

physician made the referral or not. 

Response: Contrary to the 

commenter’s assertion, in many 

instances physicians do refer patients to 

entities that furnish imaging services. 

The determination whether a particular 

patient has been referred by a particular 

physician for a designated health 

service within the meaning of section 

1877 of the Act would depend on the 

facts and circumstances. While we are 

unclear about the commenter’s 

statement concerning patients, we note 

that imaging centers are in a position to 

ensure compliance with section 1877 of 

the Act by structuring any financial 

arrangement with a referring physician 

or immediate family member (or 

potential referring physician or 

immediate family member) to fit in an 

exception.

Comment: A commenter objected to 

the application of section 1877 of the 

Act to referrals for hospital and other 

Medicare Part A services. According to 

the commenter, the statutory definition 

of ‘‘referral’’ in section 1877 of the Act 

only applies to items or services ‘‘for 

which payment may be made under Part 

B.’’

Response: As we discussed in the 

January 1998 proposed rule (63 FR 

1691–1692), section 1877(h)(5) of the 

Act contains two parts defining 

‘‘referral’’. The first part, section 

1877(h)(5)(A) of the Act, defines a 

referral to include the request by a 

physician for an item or service for 

which payment may be made under Part 

B, including the request for a 

consultation with another physician 

(and any test or procedure ordered by, 

or to be performed by, or under the 

supervision of, that other physician). 

The second part, section 1877(h)(5)(B) 

of the Act, covers the request or 

establishment of a plan of care by a 

physician that includes the provision of 

a designated health service. Although 

this second part is not drafted in 

Medicare-specific terms and could be 

interpreted to include any designated 

health service, we interpreted it to cover 

only DHS that may be covered under 

Medicare. This would include DHS, 

such as hospital and home health care 

services, that are covered under 

Medicare Part A. We noted in 1998 that 

we were aware of no rationale for the 

broader reach of ‘‘referral’’ under the 

first part (a request for any Part B item 

or service) than the second (a request for 

a designated health service). We 

therefore took the position—which we 

affirm here—that the first part relating 

to Part B items and services should be 

limited to referrals for DHS. 

Comment: An association for nursing 

facilities objected to the concept of 

imputed or oral referrals. According to 

the association, the regulations will 

inhibit communications between 

physicians and patients by restricting a 

physician’s ability to share information 

about DHS entities freely with patients. 

The association suggested that the 

regulations protect any physician who 

provides patients with accurate 

information about all appropriate DHS 

entities and discloses his or her 

financial relationships with any of those 

DHS entities. 

Response: Section 1877 of the Act 

embodies a congressional determination 

to discourage physicians from having 

financial relationships with DHS 

entities to which they refer Medicare 

patients. Neither the statute nor the 

regulations burdens any physicianpatient communications except those 

communications in which the physician 

refers to those DHS entities with which 

the physician has a prohibited financial 

relationship. Although disclosure of 

financial interests to patients informs 

patients of the potential conflict of 

interest, we do not believe, nor does the 

statute contemplate, that such 

disclosure adequately protects against 

improper referrals or overutilization. If 

DHS entities and physicians insist on 

entering into financial relationships, 

they can protect themselves by 

structuring the relationships to fit in one 

of the exceptions. The commenter’s 

proposed exception would swallow the 

statute and inhibit enforcement. 

Comment: A hospital association 

requested that the ‘‘innocent entity’’

exception at § 411.353(e), which 

protects DHS entities that do not have 

knowledge of the identity of the 

referring physician, be expanded to 

protect DHS entities that do not have 

knowledge of the existence of a 

financial relationship with the referring 

physician. In particular, the commenter 

was concerned that it may be difficult 

for DHS entities to know if they have 

financial relationships with immediate 

family members of referring physicians. 

Response: Knowledge of the existence 

of a financial relationship is an element 

of the definition of an ‘‘indirect 

compensation arrangement’’. (66 FR 

864) Absent the requisite knowledge, no 

indirect compensation arrangement is 

established. This aspect of the definition 

should address many of the 

commenter’s concerns. We recognize 

that no comparable knowledge 

limitation applies to direct financial 

relationships, including direct financial 

relationships with referring physicians’

family members. The statute clearly 

contemplates a strict liability bar on 

direct financial relationships with 

immediate family members. The 

exception proposed by the commenter 

would effectively negate the statutory 

prohibition.

Comment: A number of commenters 

asked that we expand the protection of 

the ‘‘innocent entity’’ exception at 

§ 411.353(e) to referring physicians. 

Response: As discussed above, 

referring physicians have no liability 

under section 1877 of the Act unless 

they knowingly cause an improper 

claim or bill to be submitted or 

knowingly engage in a circumvention 

scheme. 

D. Definition of ‘‘Consultation’’ (Section 

1877(h)(5) of the Act; Phase I—66 FR 

873; § 411.351) 

The definition of a ‘‘referral’’ at 

section 1877(h)(5) of the Act includes 

DHS provided in accordance with a 

consultation with another physician, 

including DHS performed or supervised 

by the consulting physician or any DHS 

ordered by the consulting physician. 

Section 1877(h)(5)(c) of the Act 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. These include requests by a 

pathologist for clinical laboratory 

services or pathological examination 

services; a radiologist for diagnostic 

radiology services; or a radiation 

oncologist for radiation therapy. To 

qualify, the services must be furnished 

by, or under the supervision of, the 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16065

pathologist, radiologist, or radiation 

oncologist in accordance with a 

consultation requested by another 

physician. 

In Phase I, we broadly interpreted a 

‘‘consultation’’ for purposes of 

determining when an entity with which 

a pathologist, diagnostic radiologist, or 

radiation oncologist has an otherwise 

prohibited financial relationship will be 

permitted to submit a claim to Medicare 

for DHS ordered by those physicians (66 

FR 873). The ‘‘consultation’’ definition 

in this rule is not intended to, nor does 

it, apply to other Medicare coverage or 

payment rules relating to consultations. 

Moreover, neither section 1877(h)(5)(C) 

of the Act, nor the definition of 

‘‘consultation’’ at § 411.351, protects 

referrals from the physician requesting 

the consultation to a DHS entity with 

which the requesting physician has a 

prohibited financial relationship (66 FR 

875 of Phase I preamble). 

The Phase I rule adopted the 

following criteria to identify a 

consultation for purposes of section 

1877 of the Act: 

• A consultation is provided by a 

physician whose opinion or advice 

regarding evaluation and/or 

management of a specific medical 

problem is requested by another 

physician. 

• The request and need for the 

consultation is documented in the 

patient’s medical record. 

• After the consultation is provided, 

the consulting physician prepares a 

written report of his or her findings, 

which is provided to the physician who 

requested the consultation. 

• 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 furnished pursuant to 

a consultation, provided the radiation 

oncologist communicates with the 

referring physician on a regular basis 

about the patient’s course of treatment 

and progress.

We have modified the final rule slightly 

to accommodate concerns raised by 

consulting physicians in group practices 

and by radiation oncologists who 

furnish services that are ancillary and 

integral to radiation therapy services. 

Otherwise, we have made no major 

changes to the Phase I rule. Comments 

to the Phase I definition of 

‘‘consultation’’ and our responses are 

related below.

Comment: Several commenters 

questioned the level of supervision 

required for radiological procedures. 

Another asked us to affirm that it is 

sufficient to provide the level of 

supervision required by the Clinical 

Laboratory Improvement Amendments 

of 1988 (CLIA) (Pub. L. 100–578, 

October 31, 1988). One professional 

association asked us to clarify that the 

services need not be supervised by the 

consulting radiologist, but could be 

supervised by another physician in the 

consulting radiologist’s group practice. 

Response: Nothing in this rulemaking 

establishes any particular level of 

supervision for any particular services. 

The supervision necessary to come 

within the various exceptions that 

include a supervision requirement, as 

well as the definition of ‘‘consultation’’

in section 1877(h)(5)(C) of the Act, is the 

level of supervision otherwise required 

by the applicable Medicare payment 

and coverage rules for the specific 

service (66 FR 872). In § 411.351, the 

definition of ‘‘referral’’ in paragraph 

(2)(ii) provides that the DHS must be 

furnished ‘‘by or under the supervision 

of the pathologist, radiologist, or 

radiation oncologist.’’ We agree that 

supervision by a pathologist, radiologist, 

or radiation oncologist in the same 

group practice as the consulting 

pathologist, radiologist, or radiation 

oncologist, respectively, would be 

appropriate and consistent with the 

overall statutory scheme and structure. 

We have modified the regulation 

accordingly. Where applicable Medicare 

payment and coverage rules permit, the 

supervision required under section 

1877(h)(5)(C) of the Act may be 

provided by a physician in the same 

group practice. 

Comment: Section 1877(h)(5)(C) of the 

Act applies to requests by radiation 

oncologists for ‘‘radiation therapy.’’

Several professional associations 

representing radiologists and imaging 

centers requested that we interpret 

‘‘radiation therapy’’ to include other 

DHS performed as part of the radiation 

therapy treatment. According to the 

commenters, computerized axial 

tomography (CT), magnetic resonance 

imaging (MRI) and ultrasound services 

are often integral and necessary to the 

provision of radiation therapy. The 

commenters indicated that in many 

cases the in-office ancillary services 

exception at section 1877(b)(2) of the 

Act and § 411.355(b) will not cover 

these ancillary services. 

Response: We agree with the 

commenters that the exception for 

radiation oncologists who request 

radiation therapy services would fail its 

intended purpose if it did not also 

protect necessary and integral ancillary 

services requested, and appropriately 

supervised, by the radiation oncologist. 

We have modified the regulations 

accordingly. We believe this 

interpretation effectuates the statutory 

intent. Moreover, it is consistent with 

the existing exception in section 

1877(h)(5)(C) of the Act for diagnostic 

radiology services (including CT, MRI, 

and ultrasound) requested by a 

radiologist. 

Comment: One commenter objected 

that the consultation definition at 

§ 411.351 requires the consulting 

physician to produce a written report. 

According to the commenter, most 

consulting physicians do not prepare 

written reports. 

Response: Current Medicare rules 

governing payment and coverage for 

consultation services require a written 

report. Moreover, no other commenter, 

including the many physician 

associations, objected to the 

requirement. Since we believe that 

preparation of a written report is the 

general practice and consistent with 

Medicare program rules, and the 

commenter provided no evidence to 

support his assertion, we are retaining 

the written report requirement.

Comment: One commenter requested 

that we expand section 1877(h)(5)(C) of 

the Act to cover cardiologists who 

interpret echocardiograms under 

financial arrangements that are 

comparable to those that exist when a 

radiologist interprets a radiological 

ultrasound. 

Response: An echocardiogram 

ordered and read by a cardiologist is not 

a service integral to a consultation by a 

specialist within the meaning of section 

1877(h)(5)(C) of the Act. Under section 

1877(h)(5)(C) of the Act, the Congress 

specifically excepted three narrow 

categories of physicians who provide 

specific services pursuant to 

consultations. The statutory language is 

very specific and reflects congressional 

intent that the exception be narrow. We 

do not have the authority to extend this 

exception to other specialists. Moreover, 

there is a substantial difference between 

a radiologist ordering diagnostic 

radiology tests pursuant to a request for 

a consultation and a cardiologist 

ordering an echocardiogram. In the 

former situation, the ordering and 

interpretation of the procedure is the 

physician’s primary specialty; in the 

latter, the echocardiogram is ancillary to 

the cardiologist’s primary medical 

practice, the treatment of the heart. In 

other words, an echocardiogram ordered 

by a cardiologist is no different from any 

other designated health service test 

ordered by other physicians who are not 

pathologists, radiologists, and radiation 

oncologists; if the physician has a 

financial interest in the furnishing of the 

test, section 1877 of the Act is 

implicated. 

16066 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

Comment: One commenter stated that 

some patients self-refer to radiation 

oncologists for brachytherapy, which is 

then provided by an entity with which 

the radiation oncologist has a financial 

relationship. Since there is no referral 

from another physician, the 

consultation exception in section 

1877(5)(C) of the Act is not available. 

Moreover, according to the commenters, 

the in-office ancillary services exception 

in section 1877(b)(2) of the Act and 

§ 411.355(b) is often unavailable for 

these referred services, because patients 

primarily come to the radiation 

oncologist or his or her entity only for 

radiation therapy services. Thus, the 

services cannot meet § 411.355(b)(2)(i) 

of the in-office ancillary services 

exception in Phase I, which required 

that excepted services be provided in a 

building where the referring physician 

(or another member of the referring 

physician’s group practice) furnishes 

substantial physician services unrelated 

to the furnishing of DHS or in a 

centralized building owned or operated 

by the physician’s group practice on a 

full-time basis. The commenter 

wondered whether, in these 

circumstances, it would be appropriate 

for the radiation oncologist to refer the 

patient to a urologist who might then 

refer the patient back to the radiation 

oncologist. 

Response: While we recognize the 

problem identified by the commenter, 

the proposed solution would be an 

inappropriate circumvention. Rather, 

we believe the changes to the in-office 

ancillary services exception described 

in this Phase II preamble in section 

V.B.4 address the commenter’s 

concerns. These changes should enable 

most radiation oncologists to provide 

radiation therapy services to selfreferred patients under the in-office 

ancillary services exception. 

III. Physician Compensation Under 

Section 1877 of the Act (Phase I—66 FR 

875)

Section 1877 of the Act provides 

different exceptions for core physician 

compensation based on whether the 

physicians are physicians in a group 

practice (in connection with the inoffice ancillary services and physician 

services exceptions), employees, or 

independent contractors. The terms of 

the statutory exceptions vary. In 

addition, the Phase I regulations 

implemented new regulatory exceptions 

for fair market value compensation paid 

to employees or independent 

contractors and compensation for 

certain academic physicians. 

Many comments addressed the issue 

of physician compensation under 

section 1877 of the Act. We have 

provided detailed responses to these 

comments in the relevant sections of 

this preamble. However, some issues 

relate to more than one exception. We 

summarize those aspects of physician 

compensation here. This discussion 

supplements the discussion of 

physician compensation in section IV of 

the Phase I preamble (66 FR 875). 

A common thread in many of the 

comments was the observation that 

physician compensation arrangements 

are structured in various ways for 

legitimate reasons and that the form of 

the arrangement (for example, 

employment or personal services 

contract) should not constrain the 

structure of the compensation (for 

example, percentage-based 

compensation, productivity bonuses, or 

physician incentive plans). In short, 

many commenters thought that there 

should be only one set of conditions 

applicable to physician compensation, 

and that the same rules should apply to 

group practices, employees, and 

independent contractors, as well as 

under the fair market value and 

academic medical center exceptions. As 

explained below, we have tried to 

minimize the differences, consistent 

with the statute. 

First, the statute permits group 

practices to divide revenues among their 

physicians in ways that are very 

different from the ways other DHS 

entities are permitted to share revenues 

with employed or independent 

contractor physicians. The statute 

recognizes the differences between 

physicians in a group dividing income 

derived from their own joint practice 

and a hospital (or other entity) paying 

a physician employee or contractor who 

generates substantial income for the 

facility that would not ordinarily be 

available to a physician group. In effect, 

group practices receive favored 

treatment with respect to physician 

compensation: they are permitted to 

compensate physicians in the group, 

regardless of status as owner, employee, 

or independent contractor, for ‘‘incident 

to’’ services and indirectly for other 

DHS referrals. This preference is 

statutory. 

Second, outside of the group practice/

in-office ancillary services context, we 

have tried to equalize the most 

important conditions in the other main 

physician compensation exceptions 

(employment, personal services, fair 

market value, and academic medical 

centers). Under these exceptions in the 

regulations, physicians can be paid on 

a percentage of revenues or collections 

for personally performed services; 

receive a productivity bonus on any 

personally performed services; and 

participate in a physician incentive plan 

related to health plan enrollees. These 

issues are explained in more detail 

below and in the discussions of the 

relevant exceptions. 

• Percentage compensation 

arrangements. Commenters representing 

independent contractors argued that the 

statute and regulations unfairly restrict 

the kinds of compensation that 

independent contractor physicians can 

receive when compared to the 

compensation permitted for group 

practice physicians and employed 

physicians. In particular, the personal 

service arrangements and the fair market 

value exceptions (key exceptions for 

independent contractors) both contain a 

‘‘set in advance’’ requirement not 

present in the statutory group practice 

definition or employment exception. 

In Phase I, we interpreted ‘‘set in 

advance’’ to preclude most percentage 

compensation arrangements. As 

discussed below in section IV, we have 

modified our interpretation of ‘‘set in 

advance’’ to permit some percentage 

compensation if the methodology for 

calculating the compensation is set in 

advance and does not change over the 

course of the arrangement in any 

manner that reflects the volume or value 

of referrals or other business generated 

by the referring physician. As a result, 

like their group practice and employee 

counterparts, independent contractor 

physicians can receive certain limited 

forms of percentage compensation 

under section 1877 of the Act. The same 

is true for academic physicians under 

the academic medical centers exception, 

which also contains the ‘‘set in 

advance’’ requirement. 

• Productivity bonuses. A second 

concern for independent contractors is 

the availability of productivity bonuses 

under section 1877 of the Act. While the 

personal service arrangements, 

employment, fair market value, and 

academic medical centers exceptions all 

restrict compensation that is determined 

based on the volume or value of DHS 

referrals, the personal service 

arrangements, fair market value, and 

academic medical centers exceptions 

further restrict compensation that is 

determined based on the volume or 

value of ‘‘other business generated.’’

Moreover, the employment exception 

contains a provision that expressly 

permits productivity bonuses to be paid 

to employed physicians for services 

they personally perform. Independent 

contractor physicians have noted that 

the statute and regulations make no 

comparable provision for productivity 

bonuses for work personally performed 

by independent contractors. 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16067

We partially addressed this issue in 

the Phase I rulemaking. There, we 

defined ‘‘referral’’ under the statute to 

include only DHS referrals and to 

exclude personally performed DHS. In 

short, personally performed work -DHS 

or otherwise—is not considered a 

‘‘referral’’ under section 1877 of the Act. 

(See § 411.351.) Thus, a productivity 

bonus based on personally performed 

work would not be based on the volume 

or value of ‘‘referrals.’’

The personal service arrangements, 

fair market value, and academic medical 

centers exceptions bar compensation 

that takes into account ‘‘other business 

generated’’ by the referring physician. 

(In the January 1998 proposed rule, we 

had proposed adding by regulation a 

similar restriction to the employment 

exception, but we are not adopting that 

proposal.) In Phase I, we interpreted 

‘‘other business generated’’ to include 

any health care business, including 

private pay business (See

§ 411.354(d)(3)). Many commenters 

construed this definition to encompass 

personally performed services, 

including a physician’s professional 

services. That was not our intent, nor do 

we believe it to have been the intent of 

the Congress. We have clarified the 

regulations at § 411.354(d)(3) to reflect 

that ‘‘other business generated’’ does not 

include personally performed services. 

It does, however, include any 

corresponding technical component of a 

service that is billed by the DHS entity. 

The result of these interpretations is 

that all physicians, whether employees, 

independent contractors, or academic 

medical center physicians, can be paid 

productivity bonuses based on work 

they personally perform. As discussed 

above, consistent with the statutory 

scheme, group practices also may pay 

physicians in the group, whether 

independent contractors or employees, 

productivity bonuses based on 

‘‘incident to’’ services, as well as 

indirect bonuses and profit shares that 

may include DHS revenues, provided 

the distribution methodology meets 

certain conditions. As noted above, this 

additional latitude for group practices is 

statutory. 

• Physician incentive plans and other 

risk-sharing arrangements. A further 

perceived inconsistency raised by some 

commenters involves payments to 

physicians under risk-sharing 

arrangements. The statutory personal 

service arrangements exception contains 

an express provision allowing 

independent contractor physicians to be 

compensated under a physician 

incentive plan with respect to services 

provided to individuals enrolled with 

the entity making the payments. The 

group practice, employee, fair market 

value, and academic medical center 

exceptions do not contain comparable 

language. Notwithstanding, in Phase I, 

we established a new regulatory 

exception at § 411.357(n) for 

compensation under a risk-sharing 

arrangement for services furnished to 

enrollees of a commercial or employerprovided health plan. The new 

exception applies to payments made 

directly or through a subcontractor. The 

new exception is available for all 

qualifying risk-sharing arrangements, 

whether the physician is a member of a 

group practice, employed, an 

independent contractor physician, or an 

academic medical center physician. 

(The prepaid plans exception at 

§ 411.355(c) protects referrals of DHS 

furnished to enrollees of Medicare and 

Medicaid managed care plans.) The risk 

sharing arrangements exception is 

discussed in Phase I at 66 FR 912 

through 914. Also, in this Phase II, we 

have clarified that payments made by 

downstream subcontractors may be 

protected under the physician incentive 

plan provision of the personal service 

arrangements exception. 

In sum, we have modified the 

regulations to clarify that independent 

contractor and academic medical center 

physicians, like their group practice and 

employed counterparts, can be paid 

using certain forms of percentage 

compensation and can receive 

productivity bonuses based on 

personally performed services. 

Moreover, the regulations permit group 

practice, employed, and academic 

medical center physicians, like 

independent contractors, to be paid 

under risk-sharing arrangements. We 

believe these changes substantially 

address the concerns raised by the 

commenters. 

Despite these modifications, the terms 

and conditions of the statutory and 

regulatory exceptions differ with respect 

to physician compensation. For the 

convenience of the public, we are 

providing the following chart briefly 

summarizing key provisions. Readers 

are cautioned that the exceptions 

contain additional conditions not 

summarized here. (In the chart below, 

those sections referred to as 1877 refer 

to section 1877 of the Social Security 

Act; those sections referred to as 411 

refer to § 411 of the Code of Federal 

Regulations.)

Terms of exception 

Group practice physicians [1877(h)(4); 

411.352] 

Bona Fide employment 

[1877(e)(2); 411.357(c)] 

Personal service

arrangements 

[1877(e)(3); 

411.357(d)] 

Fair market value 

[411.357(1)] 

Academic medical 

centers [411.355(e)] 

Must compensation 

be ‘‘fair market 

value’’? 

No ............................. Yes—1877(e)(2)(B)(i) ... Yes—

1877(e)(3)(A)(v).

Yes—411.357(1)(3) .. Yes—

411.355(e)(1)(ii). 

Must compensation 

be ‘‘set in advance’’? 

No ............................. No ................................ Yes—

1877(e)(3)(A)(v).

Yes—411.357(1)(3) .. Yes—

411.355(e)(1)(ii). 

Scope of ‘‘volume or 

value’’ restriction.

DHS referrals—

1877(h)(4)(A)(iv).

DHS referrals—

1877(e)(2)(B)(ii).

DHS referrals or 

other business—

1877(e)(3)(A)(v).

DHS referrals or 

other business—

411.357(1)(3).

DHS referrals or 

other business—

411.355(e)(1)(ii). 

Scope of productivity 

bonuses allowed.

Personally performed 

services and ‘‘incident to’’, plus indirect—

1877(h)(4)(B)(i).

Personally performed 

services—1877(e)(2).

Personally performed 

services—411.351 

(‘‘referral’’) and 

411.354(d)(3).

Personally performed 

services—411.351 

(‘‘referral’’) and 

411.354(d)(3).

Personally performed 

services—411.351 

(‘‘referral’’) and 

411.354(d)(3). 

Are overall profit 

shares allowed? 

Yes—1877(h)(4)(B)(i) No ................................ No ............................. No ............................. No. 

Written agreement required? No ............................. No ................................ Yes, minimum 1 year 

term.

Yes (except for employment), no minimum term.Yes, written agreement(s) or other 

document(s). 

16068 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

Terms of exception 

Group practice physicians [1877(h)(4); 

411.352] 

Bona Fide employment 

[1877(e)(2); 411.357(c)] 

Personal service

arrangements 

[1877(e)(3); 

411.357(d)] 

Fair market value 

[411.357(1)] 

Academic medical 

centers [411.355(e)] 

Physician incentive 

plan (PIP) exception for services to 

plan enrollees? 

No, but risk-sharing 

arrangement exception at 

411.357(n) may 

apply.

No, but risk-sharing arrangement exception 

at 411.357(n) may 

apply.

Yes, and risk-sharing 

arrangement exception at 411.357 

may also apply.

No, but risk-sharing 

arrangement exception at 

411.357(n) may 

apply.

No, but risk sharing 

arrangement exception at 

411.357(n) may 

apply. 

General comments on physician 

compensation and our responses follow. 

Comment: Several commenters asked 

whether a physician’s personally 

performed services would be included 

as ‘‘other business generated between 

the parties.’’

Response: Personally performed 

services are not considered ‘‘other 

business generated’’ for purposes of 

these regulations. This interpretation is 

consistent with the exclusion of 

personally performed services from the 

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

regulations have been revised to clarify 

that personally performed services do 

not count as other business generated 

for the DHS entity. However, the 

technical component corresponding to a 

physician’s personally performed 

service would be considered other 

business generated for the entity. 

Comment: A number of exceptions, 

including the personal service 

arrangements, office and equipment 

rental, fair market value, and academic 

medical center exceptions, require that 

compensation be ‘‘set in advance.’’

Many commenters urged us to abandon 

our position that percentage 

compensation arrangements based on 

fluctuating or indeterminate measures 

or which result in the seller receiving 

different payment amounts for the same 

services from the same purchaser are 

not ‘‘set in advance’’ for purposes of 

section 1877 of the Act. This was of 

particular concern to academic medical 

centers and hospitals, which argued that 

percentage compensation is 

commonplace in their physician 

compensation arrangements. They also 

pointed out that, under the statute, 

group practices are not subject to the 

‘‘set in advance’’ restriction when 

paying profit shares or productivity 

bonuses to group practice physicians, 

nor are employers so restricted in their 

payments to employed physicians under 

the employee exception. 

Response: As noted in section I above, 

we delayed until January 7, 2004, the 

effective date of the last sentence of 

§ 411.354(d)(1), which contained the 

percentage compensation limitation, so 

we could reconsider our position 

without unduly upsetting existing 

percentage compensation arrangements. 

Upon further consideration, we are 

persuaded that our original position was 

overly restrictive. We are deleting the 

last sentence of § 411.354(d)(1) as 

promulgated in the Phase I final rule. 

Instead, we are modifying the ‘‘set in 

advance’’ definition at § 411.354(d)(1) to 

clarify that the formula for calculating 

percentage compensation must be 

established with specificity 

prospectively, must be objectively 

verifiable, and may not be changed over 

the course of the agreement between the 

parties based on the volume or value of 

referrals or other business generated by 

the referring physician. We are 

clarifying the regulations text to make 

clear that compensation is ‘‘set in 

advance’’ if it is set in an agreement 

before the services for which payment is 

being made are rendered. As explained 

above, the different treatment of group 

practice physicians is part of the 

statutory scheme. We address the 

specific circumstances of academic 

medical centers further in section XII.A 

below. 

Comment: One commenter requested 

clarification that the set in advance and 

fair market value tests in § 411.354(d)(1) 

are separate tests. 

Response: The commenter is correct. 

Compensation must be both ‘‘set in 

advance’’ and ‘‘fair market value.’’ We 

have clarified the regulation by deleting 

the second sentence of § 411.354(d)(1), 

which states that a ‘‘set in advance’’

payment must be fair market value not 

taking referrals or other business into 

account. This concept is already 

contained in § 411.354(d)(2) and (d)(3), 

as well as in the individual exceptions. 

IV. The ‘‘Volume or Value’’ Standards 

Under Section 1877 of the Act (Phase 

I—66 FR 876; § 411.354) 

Many of the exceptions in section 

1877 of the Act include a requirement 

that compensation not take into account 

the volume or value of any referrals and, 

in some of the exceptions, the further 

requirement that the compensation not 

take into account other business 

generated between the parties. In Phase 

I (66 FR 876), we interpreted the statute 

as permitting time-based or unit-ofservice based payments, even when the 

physician receiving the payment has 

generated the payment through a DHS 

referral, as long as the individual 

payment is set at fair market value at the 

inception of the arrangement and does 

not subsequently change during the 

term of the arrangement in any manner 

that takes into account DHS referrals. 

For those exceptions that also restrict 

payments that take into account ‘‘other 

business generated between the 

parties,’’ we interpreted the language to 

mean that the payments also may not 

take into account any other business, 

including non-Federal health care 

business, generated by the referring 

physician. We interpreted the phrase 

‘‘generated between the parties’’ to 

mean business generated by the 

referring physician. As discussed in the 

preceding section, we have interpreted 

‘‘other business generated’’ to make 

clear that it excludes personally 

performed services (but includes 

corresponding technical components). 

In short, we interpreted section 1877 

of the Act to establish a straightforward 

test that compensation arrangements 

should be at fair market value for the 

work or service performed or the 

equipment or space leased. We 

indicated that we would apply our 

interpretation of the volume or value 

standard uniformly to all provisions 

under section 1877 of the Act and part 

411 where the language appears. The 

‘‘other business generated’’ restriction 

applies only to those exceptions in 

which it expressly appears. 

In Phase I, we also concluded that, in 

certain situations, compensation 

arrangements that require physicians to 

refer to particular DHS entities would be 

permitted under section 1877 of the Act, 

if the compensation is set in advance, is 

consistent with fair market value 

(without regard to anticipated or 

required referrals), otherwise complies 

with an applicable exception, and 

complies with certain conditions 

ensuring patient choice, insurer choice, 

and a physician’s independent medical 

judgement. In response to comments, 

we are clarifying that this provision, 

codified at § 411.354(d)(4), applies only 

to employment, managed care, and 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16069

personal services arrangements and only 

if (i) the required referrals relate solely 

to the physician’s services covered 

under the arrangement; and (ii) the 

referral requirement is reasonably 

necessary to effectuate the legitimate 

purposes of the compensation 

relationship.

Comments to the Phase I rule on the 

‘‘volume or value’’ standards and our 

responses follow. 

Comment: Two commenters requested 

that we clarify that per-use or per unitof-service based payment methodologies 

do not vary with the volume or value of 

referrals or other business generated 

within the meaning of the regulations. 

One of the commenters asked that the 

regulatory text be modified to make this 

clear. 

Response: Section 411.354(d)(2) and 

§ 411.354(d)(3) clearly state that timebased and unit-of-service based 

compensation will be deemed not to 

take into account the volume or value of 

referrals or other business generated 

between the parties as long as the timebased or unit-of-service based 

compensation is fair market value for 

services or items actually provided and 

the compensation does not vary during 

the course of the compensation 

agreement in any manner that takes into 

account referrals of DHS (or, in the case 

of § 411.354(d)(3), other business 

generated by the referring physician, 

including private pay health care 

business). We consider per-use 

payments (also known as ‘‘per click’’) 

payments to be unit-of-service based 

compensation. When viewed in the 

aggregate (for example, for purposes of 

the indirect compensation arrangement 

definition at § 411.354(c)(2)), unit-ofservice based compensation is likely to 

vary or otherwise reflect the volume or 

value of DHS referrals or other business 

generated, as applicable. 

In reviewing the regulatory text, we 

discovered that the language ‘‘for 

services or items actually provided’’

appears in § 411.354(d)(2), but not 

correspondingly in § 411.354(d)(3); this 

was a technical oversight and has been 

corrected. We are also clarifying 

§ 411.354(d)(3) by changing the phrase 

‘‘during the term of the agreement’’ to 

‘‘during the course of the compensation 

agreement’’ to conform to the language 

used in § 411.354(d)(2). We intended 

these provisions to be comparable. 

Comment: A number of commenters 

questioned the discussion of the 

‘‘volume or value’’ standard as applied 

in the context of the indirect 

compensation arrangement definition at 

§ 411.354(c) and the indirect 

compensation arrangements exception 

at § 411.357(p). 

Response: As discussed above at 

section II.B, the use of very similar 

language in the indirect compensation 

arrangement definition, indirect 

compensation arrangments exception, 

and the explanations of the ‘‘volume or 

value’’ and ‘‘other business generated’’

standards at § 411.354(d)(2) and 

§ 411.354(d)(3) raised unnecessary 

questions, and we have revised the 

regulations. 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-ofservice 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-ofservice based fee is fair market value 

and not inflated to compensate for the 

generation of business. As noted above, 

we have revised § 411.354(c)(2)(ii) to 

clarify the application of the ‘‘volume or 

value’’ standards in § 411.354(d) to 

indirect compensation arrangements. 

Comment: A commenter asked 

whether a per-use or per unit-of-service 

based methodology that incorporated 

decreasing payments as volume 

increased would be permitted. 

According to the commenter, these 

payment methodologies often more 

accurately reflect fair market value for 

equipment leases because they spread 

fixed costs over the term of the lease.

Response: Payments of the sort 

described by the commenter would be 

reviewed on a case-by-case basis. There 

may be circumstances, particularly in 

the context of equipment leases, in 

which payments that decrease as 

volume increases most accurately reflect 

fair market value and do not take into 

account the volume or value of referrals 

or other business generated for purposes 

of section 1877 of the Act. For example, 

to the extent the declining payments are 

fair market value and based on costs, 

rather than volume, they would be 

permitted. It is our understanding that 

these declining payment arrangements 

primarily occur in the context of 

equipment leases, where the costs 

allocable to the equipment decline over 

time. 

Comment: In Phase I, we determined 

that the volume or value standard 

would not be implicated by an 

otherwise acceptable compensation 

arrangement solely because the 

arrangement required the physician to 

refer to a particular provider as a 

condition of payment, as long as certain 

conditions were satisfied (66 FR 878). 

Several commenters objected to 

permitting employers to require 

employees to refer to specific DHS 

entities, notwithstanding the conditions 

imposed under § 411.354(d)(4). 

Commenters representing competitor 

entities that are not part of integrated 

health systems objected to our position 

on required referrals, believing 

themselves to be competitively 

disadvantaged by our rule. 

Response: In limited circumstances, 

required referrals are a reasonable and 

appropriate aspect of certain health care 

business arrangements that should not, 

in and of themselves, implicate section 

1877 of the Act. Notwithstanding, we 

are persuaded by the commenters that 

§ 411.354(d)(4) is overly broad and 

could permit required referrals beyond 

those that are reasonable and 

appropriate. We are modifying 

§ 411.354(d)(4) to permit only those 

required referrals that are related to the 

services a physician performs while 

acting under his or her arrangement 

with an entity, such as when an 

employer requires its employees, when 

working in their capacity as employees, 

to refer to employer-affiliated entities or 

when a managed care organization 

requires its network providers, when 

treating enrollees, to refer to other 

network providers. Thus, 

§ 411.354(d)(4) will apply to 

employment, managed care, and other 

contractual arrangements that include 

required referrals only to the extent 

those referrals relate to the physician’s 

services that are covered under the 

contractual arrangement and the referral 

requirement is reasonably necessary to 

effectuate the legitimate purposes of the 

compensation relationship. For 

example, an entity that employs or 

contracts with a physician on a parttime basis to provide services to the 

entity cannot condition the employment 

or contract—or any compensation under 

16070 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

the employment or contract-on referrals 

of the physician’s private practice 

business (for example, patients seen by 

the physician when he or she is not 

working part-time for the entity). As we 

cautioned in Phase I, mandatory referral 

arrangements could still implicate the 

anti-kickback statute, depending on the 

facts and circumstances. 

Comment: Several commenters asked 

us to clarify whether the rules set out in 

§ 411.354(d) are requirements or simply 

‘‘safe harbors.’’ One commenter sought 

confirmation of the following 

interpretation: a promotional item 

offered free of charge to referring and 

non-referring physicians alike would 

not violate the ‘‘volume or value of 

referrals’’ standard, even though it 

would not qualify under § 411.354(d) 

because it was not sold at fair market 

value. 

Response: The provisions at 

§ 411.354(d) are intended to be 

‘‘deeming’’ or ‘‘safe harbor’’ provisions. 

In other words, there may be some 

situations not described in § 411.354(d) 

where an arrangement does not take into 

account the volume or value of referrals. 

The promotional giveaway arrangement 

described by the commenter might not 

take the volume or value of referrals into 

account if the promotional item were 

offered to all physicians in a community 

(but not, for example, if the giveaway 

were limited to all members of a 

particular medical staff in the 

community). The arrangement still 

creates a financial relationship with the 

referring physicians that would need to 

comply with an exception. Apart from 

the non-monetary compensation up to 

$300 or hospital medical staff incidental 

benefits exceptions, other potentially 

applicable exceptions require that 

compensation be fair market value. 

V. Exceptions Applicable to Ownership 

and Compensation Arrangements 

(Section 1877(b) of the Act; Phase I—66 

FR 879; § 411.355)

A. Physician Services Exception 

(Section 1877(b)(1) of the Act; Phase I—

66 FR 879; § 411.355(a)) 

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

that the general prohibition does not 

apply to services furnished on a referral 

basis, if the services are physician 

services, as defined in section 1861(q) of 

the Act, and are furnished: (1) 

Personally by another physician in the 

same group practice as the referring 

physician; or (2) under the personal 

supervision of another physician in the 

same group practice as the referring 

physician. We are making no 

modifications to the Phase I rule for this 

exception. 

Comment: We received one comment 

on this provision. A group practice of 

allergists objected to the inclusion of 

antigens as an outpatient prescription 

drug in the final rule. According to the 

commenter, the provision of antigens is 

paid as a physician service and is 

defined as a physician service in the 

Act. The group asked that we clarify 

that the provision of antigens is a 

physician service covered by 

§ 411.355(a) or, in the alternative, that 

the furnishing of such antigens by a 

physician in his office is not a referral 

when he or she personally furnishes the 

antigens to the patient. 

Response: The commenter is correct 

that providing antigens is a physician 

service and that the provision of 

antigens may qualify under the 

physician services exception at 

§ 411.355(a). Moreover, under the final 

rule, personally performed services are 

not considered referrals to an entity. 

Finally, we note that the provision of 

antigens will frequently qualify under 

the in-office ancillary services 

exception, which also covers physician 

services that are DHS. 

B. In-Office Ancillary Services 

Exception (Section 1877(b)(2) of the Act; 

Phase I—66 FR 880; § 411.355(b)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘In-Office Ancillary Services 

Exception’’ at the beginning of your 

comments.]

A detailed discussion of the in-office 

ancillary services exception appears in 

the Phase I preamble. In general, the 

exception regulates physicians’ ordering 

of DHS in the context of their own 

practices. The exception is designed to 

protect the in-office provision of certain 

DHS that are truly ancillary to the 

medical services being provided by the 

physician practice. 

The Phase I rule made significant 

changes to the January 1998 proposed 

rule, which was generally criticized as 

overly restrictive. In response to a large 

volume of comments to the January 

1998 proposed rule, we modified the 

types of services that could qualify for 

protection under the exception, the 

level of physician supervision required 

to qualify, the kinds of physicians that 

could provide the requisite supervision, 

and the locations where the services 

could be provided. While the 

overwhelming majority of the comments 

to the Phase I rule strongly supported 

the changes, some commenters raised 

concerns about aspects of the Phase I 

rule, particularly the building 

requirements. We have simplified the 

building tests as described in section 

V.B.4 of this preamble. We have made 

a number of other minor changes. 

As in Phase I, comments and 

responses to the in-office ancillary 

services exception are divided into five 

sections: general comments, covered 

DHS, supervision requirements, 

building requirements, and billing 

requirements. 

1. General Comments (§ 411.355(b)) 

Several commenters objected to the 

easing of the requirements for meeting 

the in-office ancillary services 

exception. In particular, a number of 

physical and occupational therapy 

organizations complained that 

physicians would use the exception to 

expand the scope of the services they 

provide within their practices and thus 

capture additional revenues from their 

own referrals. These commenters 

suggested tightening various elements of 

§ 411.355(b).

As we explained more fully in the 

Phase I preamble (66 FR 880), we 

believe the final rule reflects the balance 

that the Congress sought between 

regulating physician financial 

relationships and not unduly interfering 

with the practice of medicine. 

2. Covered Designated Health Services 

(Phase I—66 FR 881; § 411.355(b)) 

The in-office ancillary services 

exception in section 1877(b)(2) of the 

Act covers all DHS except durable 

medical equipment (DME) (other than 

infusion pumps) and parenteral and 

enteral nutrients, equipment, and 

supplies. In Phase I, we used the 

statutory authority at section 1877(b)(4) 

of the Act to expand the scope of DHS 

potentially included in the in-office 

ancillary services exception by—

(1) Clarifying that outpatient 

prescription drugs may be ‘‘furnished’’

in the office, even if they are used by the 

patient at home; 

(2) Permitting external ambulatory 

infusion pumps that are DME to be 

provided under the in-office ancillary 

services exception; 

(3) Clarifying that chemotherapy 

infusion drugs may be provided under 

the in-office ancillary services exception 

through the administration or 

dispensing of the drugs to patients in 

the physician’s office; and 

(4) Creating a new exception for 

certain items of DME furnished in a 

physician’s office for the convenience of 

the physician’s patients. 

We are making no further changes to 

the DHS covered by the in-office 

ancillary services exception in Phase II. 

Comment: Many commenters 

approved of the modification made in 

§ 411.355(b)(4) to permit physicians to 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16071

furnish crutches, canes, walkers, and 

manual folding wheelchairs to patients 

who need assistance in ambulating in 

order to depart from the physician’s 

office. Several physician organizations 

commended the modifications, but 

suggested that the regulatory language 

should not be specific as to the items 

covered. An association for DME 

suppliers expressed concern that the 

provision of folding manual wheelchairs 

might discourage patients from 

receiving more appropriate chairs and 

suggested we only permit physicians to 

loan wheelchairs. 

Response: It is unlikely that the 

provision of a folding wheelchair will 

deter a patient from receiving a more 

appropriate wheelchair on a long-term 

basis. In general, with the exception of 

infusion pumps, the statute expressly 

excludes DME from the in-office 

ancillary services exception. Given this 

statutory directive, we think a specific 

and limited list of permitted items is 

appropriate. While we recognize that 

specificity limits future flexibility, we 

do not anticipate significant changes in 

the equipment that might be permitted 

in the future. 

Comment: A DME supplier 

association asked us to clarify the 

provision in § 411.355(b)(4)(iv) that 

physicians or group practices that 

furnish DME under the in-office 

ancillary services exception must meet 

all DME supplier standards in 

§ 424.57(c). Specifically, the commenter 

asked whether physicians must apply 

for a supplier number from the National 

Supplier Clearinghouse. If not, the 

commenter asked how the DME will be 

billed to ensure that payment is made at 

the DME regional carrier (DMERC) rates. 

Response: Certification of a physician 

or physician group as a provider of 

Medicare services does not authorize 

that physician or group to bill Medicare 

for DME. Rather, the physician or 

physician group must obtain a Medicare 

certification as a DME Prosthethic, 

Orthotics and Supplies (DMEPOS) 

supplier under the DMEPOS fee 

schedule. Given this payment rule, if a 

physician or group intends to furnish 

and bill Medicare for DME under the inoffice ancillary services exception, the 

physician or group would need to 

obtain a supplier number.

3. Direct Supervision (Section 

1877(b)(2)(A)(i) of the Act; Phase I—66 

FR 885; § 411.355(b)(1)) 

The in-office ancillary services 

exception includes a requirement that 

the DHS be provided personally by: (i) 

The referring physician; (ii) a physician 

who is a member of the same group 

practice as the referring physician; or 

(iii) individuals ‘‘directly supervised’’

by the physician or another physician 

‘‘in the group practice’’ (section 

1877(b)(2)(A)(i) of the Act). In the Phase 

I final rule, we interpreted ‘‘directly 

supervised’’ to mean that the 

supervision meets the physician 

supervision requirements under 

applicable Medicare payment or 

coverage rules for the specific service at 

issue. We interpreted physicians ‘‘in the 

group practice’’ to include owners of the 

group practice, employees of the group 

practice, and independent contractors 

who, while not ‘‘members of the group,’’

contract to provide services to the 

group’s patients in the group’s facilities 

pursuant to an arrangement that 

complies with the reassignment rules in 

§ 424.80(b)(3) of these regulations and in 

section 3060.3, ‘‘Payment to Health Care 

Delivery System,’’ of the Medicare 

Carriers Manual (CMS Pub. 14–3), Part 

3—Claims Process. 

Commenters were generally pleased 

with the Phase I interpretation of the 

‘‘supervision’’ requirement, and we are 

making no significant changes to the 

rule. Comments to the Phase I rule and 

our responses follow. 

Comment: In the Phase I final rule, we 

interpreted the ‘‘direct supervision’’

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

Act to mean that supervision must be 

provided at the level necessary to meet 

the Medicare program payment and 

coverage rules applicable to the 

particular designated health service 

being furnished. (See 

§ 411.355(b)(1)(iii)). While several 

commenters approved of this general 

approach, they objected to various 

aspects of the current supervision 

standards in the payment and coverage 

rules. For example, several commenters 

objected to the fact that ‘‘incident to’’

services require a very high level of 

supervision. 

Response: This regulation is not the 

appropriate vehicle for addressing 

concerns with the supervision 

requirements in current coverage and 

payment rules and policies. This 

regulation addresses supervision of 

services only insofar as it is relevant to 

determining whether there is a 

prohibited financial relationship or a 

prohibited referral. In that regard, we 

have simply tied this regulatory scheme 

to the payment and coverage 

supervision standards. If those rules 

change in the future, those changes 

would similarly apply, prospectively, 

under these regulations. 

Comment: A physician organization 

asked that we modify the language of 

§ 411.355(b)(1)(iii) from ‘‘another

physician in the group practice’’

(emphasis added) to ‘‘a physician in the 

group practice.’’ According to the 

commenter, the proposed change more 

clearly reflects that a solo practitioner 

can furnish DHS through a shared 

facility in the same building. In the 

commenter’s view, the current language 

implies that the referring physician 

must be in a group practice. 

Response: The regulatory language 

cited by the commenter is identical to 

the statutory language. However, to 

forestall any confusion, we have 

clarified the regulatory text to make 

clear that the language ‘‘another 

physician in the group practice’’ is not 

intended to mean that the referring 

physician must be in a group practice. 

Under the regulations, a solo 

practitioner may provide DHS through a 

shared facility, as long as the 

supervision, location, and billing 

requirements of the in-office ancillary 

services exception are satisfied. The 

supervision requirement referenced by 

the commenter requires that the services 

be furnished personally by an 

individual supervised by: 

(1) The referring physician or, in the 

alternative if applicable; (2) another 

physician in the referring physician’s 

group practice. (Under other sections of 

the regulation, in-office ancillary 

services may also be furnished 

personally by the referring physician or 

a member of his or her same group 

practice (§ 411.355(b)(1)(i) and 

§ 411.355(b)(1)(ii))). Thus, a solo 

practitioner can satisfy the first 

alternative and provide the necessary 

supervision himself or herself. (The 

level of supervision that the practitioner 

must provide is dictated by the 

applicable Medicare coverage and 

payment rules for the service.) 

Comment: Several physical therapists 

and a professional association 

representing physical and occupational 

therapists urged us to require personal 

supervision under § 411.355(b)(1). The 

professional association specifically 

requested clarification of the following 

issues: 

• When physical therapists work in a 

physician office, is the physician 

required to bill ‘‘incident to’’ for those 

services? Would the standards of 

Medicare Carrier’s Manual 2050 apply? 

• Does the level of supervision 

required in the physician’s office differ 

depending on whether a physical 

therapist has his or her own provider 

number? 

• Can a group practice own a 

rehabilitation agency and bill through 

it? What is the supervision requirement?

• If a group practice owns a 

comprehensive outpatient rehabilitation 

facility (CORF), and the physicians who 

own the practice refer patients for 

16072 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

physical therapy, what are the 

supervision requirements? 

According to the commenter, if 

physicians can own these kinds of 

facilities without providing direct 

supervision, the intent of section 1877 

of the Act would be circumvented. 

Response: As explained in the Phase 

I preamble (66 FR 885–886), we have 

concluded that section 1877 of the Act 

should not subject physicians to 

supervision standards that differ from 

the standards for Medicare payment and 

coverage for the services provided. 

Thus, for example, services billed 

‘‘incident to’’ will require the level of 

supervision applicable under the 

‘‘incident to’’ rules. Services that require 

only low-level general supervision are 

subject to that lower level of supervision 

for purposes of section 1877 of the Act. 

As noted above, these regulations under 

section 1877 of the Act do not, in the 

first instance, establish the supervision 

requirements applicable to particular 

services, nor are they an appropriate 

vehicle for doing so. 

Similarly, group practices must 

comply with all existing billing and 

claims submission rules. These 

regulations do not change any of those 

existing rules, nor is this an appropriate 

place to address other rules. Strictly for 

purposes of meeting the in-office 

ancillary services exception, the referred 

DHS must be billed in a manner that 

satisfies § 411.355(b)(3) (discussed 

below). 

4. The Building Requirements (Section 

1877(b)(2)(A)(ii) of the Act; Phase I—66 

FR 887; § 411.355(b)(2)) 

Under the in-office ancillary services 

exception, DHS must be furnished to 

patients in the same building where the 

referring physicians provide their 

regular medical services, or, in the case 

of a group practice, in a central 

building, provided certain conditions 

are satisfied (section 1877(b)(2)(A)(ii) of 

the Act). As the Phase I preamble notes, 

the building requirements help ensure 

that the DHS qualifying for the 

exception are truly ancillary to the 

physician’s core medical office practice 

and are not provided as part of a 

separate business enterprise. 

In the Phase I final rule, we adopted 

the suggestion of some commenters and 

defined a ‘‘building’’ as 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 and interior parking 

garages. Under this test, a building can 

include a skilled nursing or other 

facility or a patient’s private home, 

provided all other conditions of the inoffice ancillary services exception are 

satisfied. A mobile van or trailer is not 

considered a building or a part of a 

building for purposes of section 1877 of 

the Act (see § 411.351). We are retaining 

the Phase I definition. 

We are also retaining without 

substantive change the Phase I 

‘‘centralized building’’ test for group 

practices under the in-office ancillary 

services exception. To prevent abuse of 

off-site DHS arrangements, such as parttime MRI or CAT scan rentals, Phase I 

provided that the group practice must 

have full-time, exclusive ownership or 

occupancy of the centralized space. 

While many commenters objected to 

this requirement, we are not changing 

the rule. 

We are, however, substantially 

revising the ‘‘same building’’ test under 

the in-office ancillary services exception 

to provide greater flexibility and a 

clearer rule. The same building test in 

the statute requires that the building be 

one in which the referring physician (or 

a member of his or group practice) 

furnishes physician services unrelated 

to the furnishing of DHS. In the Phase 

I rule, we interpreted this standard as 

requiring the referring physician (or 

another physician who is a member of 

the same group practice) to furnish in 

the same building ‘‘substantial’’

physician services unrelated to the 

furnishing of DHS. 

We defined the phrase ‘‘physician 

services unrelated to the furnishing of 

DHS’’ using a three-part test (the ‘‘Phase 

I three-part test’’). First, ‘‘physician 

services unrelated to the furnishing of 

DHS’’ was defined to mean physician 

services that are neither Federal nor 

private pay DHS, even if the physician 

services lead to the ordering of a 

designated health service. Second, we 

required that the physician services 

unrelated to the furnishing of DHS that 

are furnished in the building represent 

substantially the full range of physician 

services unrelated to the furnishing of 

DHS that the physician routinely 

provides (or, in the case of a member of 

a group practice, the full range of 

physician services that the physician 

routinely provides for the group 

practice). Third, we added a 

requirement that the DHS furnished in 

the building must be furnished to 

patients whose primary reason for 

coming in contact with the referring 

physician (or his or her group practice) 

is the receipt of physician services 

unrelated to the furnishing of DHS. The 

Phase I three-part test was intended so 

that parties could not use the same 

building test to circumvent the intent of 

the statute that the in-office ancillary 

services exception be limited to services 

that are truly ‘‘in-office’’ and related to 

the physician’s core medical services to 

his or her patients.

A number of commenters raised 

concerns about the Phase I three-part 

test. Some found it unclear or 

insufficiently ‘‘bright line’’. For 

example, some commenters wanted 

further guidance on the meaning of the 

‘‘substantial physician services’’ and 

‘‘primary reason’’ elements. 

Commenters representing practitioners 

in specialty groups that primarily 

provide DHS, such as radiology or 

oncology, suggested that the Phase I 

three-part test was unduly restrictive 

and precluded them from using the inoffice ancillary services exception. 

In addition, since publication of the 

Phase I final rule, we have become 

concerned that the Phase I three-part 

test might be susceptible to abuse. In 

particular, we are concerned that the 

test would allow physicians to 

implement arrangements in which DHS 

are insufficiently tied to the referring 

physician’s core medical practice and 

are, in essence, separate business 

enterprises. For example, under the 

Phase I three-part test, a group practice 

might lease space at an off-site imaging 

facility, provide physician services there 

one day a week, and then provide 

nothing but imaging services the 

remainder of the week without any 

involvement or presence of the group 

practice physicians at the site. These 

types of arrangements would not be 

consistent with the intent of the ‘‘same 

building’’ requirement in the statute, 

and we had not intended to permit 

them. 

For all of these reasons, we have 

developed three new, alternative tests 

that are more straightforward, afford 

physicians greater flexibility, and are 

less susceptible to abuse. Only one of 

the three tests needs to be satisfied to 

meet the ‘‘same building’’ requirement. 

All three tests are available to solo 

practitioners, as well as group practices. 

These new tests replace the Phase I 

three-part test in its entirety. We believe 

that virtually all legitimate 

arrangements that complied with the 

Phase I three-part test should qualify 

under one of the new tests, as will many 

arrangements that had difficulty 

meeting the Phase I three-part test. 

Arrangements that may have complied 

with the Phase I three-part test, but do 

not meet any of the new tests, should be 

restructured (or unwound) prior to the 

effective date of this regulation. 

Under the first new test, at 

§ 411.355(b)(2)(i)(A), a designated health 

service is furnished in the ‘‘same 

building’’ if the building is one in which 

the referring physician or his or her 

group practice (if applicable) has an 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16073

office that is normally open to their 

patients at least 35 hours per week, and 

the referring physician or one or more 

members of his or her group regularly 

practices medicine and furnishes 

physician services to patients in that 

office at least 30 hours per week. Some 

of the services must be physician 

services that are unrelated to the 

furnishing of DHS, whether Federal or 

private pay, although the unrelated 

physician services may lead to the 

ordering of DHS. This new test should 

address the concerns expressed by 

radiologists, oncologists, and others 

whose practices primarily consist of 

furnishing DHS. Conceptually, this test 

generally describes buildings that are 

the principal place of practice for 

physicians or their groups. 

Under the second new test, at 

§ 411.355(b)(2)(i)(B), a designated health 

service is furnished in the ‘‘same 

building’’ if the building is one in which 

the referring physician or his or her 

group practice has an office that is 

normally open to their patients at least 

8 hours per week, and the referring 

physician regularly practices medicine 

and furnishes physician services to his 

or her patients in that office at least 6 

hours per week (including some 

physician services unrelated to the 

furnishing of DHS). In this test, services 

provided by members of the referring 

physician’s group practice do not count 

toward the 6-hour threshold. In 

addition, the building must be one in 

which the patient receiving the 

designated health service usually sees 

the referring physician or other 

members of his or her group practice (if 

the physician practices in a group 

practice). Conceptually, this test 

generally describes a building where a 

referring physician practices medicine 

at least 1 day per week and that is the 

principal place in which the physician’s 

patients receive physician services. 

Under the third new test, at 

§ 411.355(b)(2)(i)(C), a designated health 

service is furnished in the ‘‘same 

building’’ if the building is one in which 

the referring physician or his or her 

group practice has an office that is 

normally open to their patients at least 

8 hours per week, and the referring 

physician or a member of his or her 

group practice (if any) regularly 

practices medicine and furnishes 

physician services to patients at least 6 

hours per week in that office (including 

some physician services unrelated to the 

furnishing of DHS). In addition, the 

referring physician must be present and 

order the designated health service in 

connection with a patient visit during 

the time the office is open in the 

building or the referring physician or a 

member of his or her group practice (if 

any) must be present while the 

designated health service is furnished 

during the time the office is open in the 

building. This test requires presence in 

the building, but not necessarily in the 

same space or part of the building. 

Conceptually, this test generally 

describes buildings in which referring 

physicians (or group practice members, 

if any) provide physician services to 

patients at least 1 day per week and the 

DHS are ordered during a patient visit 

or the physicians are present during the 

furnishing of the designated health 

service.

Under all of these tests, referring 

physicians or group practices must have 

offices in the building that are normally 

open to their patients a requisite 

number of hours per week. This 

standard is not intended to preclude 

occasional weeks in which the office is 

open fewer hours (for example, during 

vacation periods). In addition, under all 

three tests, referring physicians (or for 

§ 411.355(b)(2)(i)(A) and 

§ 411.355(b)(2)(i)(C), their group 

practice members) must regularly 

practice medicine and furnish physician 

services for a minimum number of 

hours per week in that office. This 

standard is not intended to preclude use 

of the in-office ancillary services 

exception by physicians or group 

practices that have unfilled 

appointment slots, cancellations, or 

other occasional gaps in the furnishing 

of services such that they do not 

actually provide the requisite number of 

hours of physician services in particular 

weeks. Rather, they must regularly (that 

is, in the customary, usual, and normal 

course) practice medicine and furnish 

physician services in the building for 

the minimum number of hours. In 

addition, consistent with the statute, the 

tests require that ‘‘some’’ of the 

physician services be unrelated to the 

furnishing of DHS. We are not requiring 

any particular threshold amount of 

physician services unrelated to the 

furnishing of DHS—‘‘some’’ should be 

interpreted in its common sense 

meaning. For purposes of establishing 

compliance with the ‘‘same building’’

test, we do not interpret the statute to 

mean that the physician services must 

be entirely disconnected from 

subsequent furnishing of DHS. A stricter 

interpretation would be inconsistent 

with the Congress’ intent to create an 

exception that allows physicians to 

conduct their medical practices in their 

own offices for their own patients. 

Moreover, in the context of this 

exception, we are concerned that a 

stricter interpretation could potentially 

adversely impact the delivery of patient 

care. Therefore, as in Phase I, we are 

defining ‘‘physicians’ services unrelated 

to the furnishing of DHS’’ to mean 

physician services that are neither 

Federal nor private pay DHS, even if the 

physician services lead to the ordering 

of a designated health service (for 

example, a physical examination that 

leads to the ordering of a clinical 

laboratory test or an x-ray). The 

provision of interpretations and reads of 

diagnostic or other tests will not be 

considered physicians’ services 

unrelated to the furnishing of DHS for 

purposes of this rule. 

Finally, we are making several minor 

modifications to the building 

requirements described in the responses 

to comments below. Moreover, we are 

revising the regulations to make clear 

that physicians and group practices may 

purchase the technical components of 

mobile services (which are not buildings 

for purposes of the in-office ancillary 

services exception) and bill for them 

pursuant to § 414.50 and the purchased 

diagnostic testing rules at section 3060 

of the Medicare Carriers Manual (as 

amended or replaced from time to time). 

Comments to the Phase I building 

requirements follow, along with our 

responses. 

Comment: A number of commenters 

objected to using the post office street 

address to determine whether DHS are 

being provided in the same building as 

the physician’s practice. Some 

commenters suggested various 

alternative tests, including same ‘‘strip 

mall’’, same ‘‘campus’’, ‘‘adjacent 

buildings’’, and several others. One 

commenter said that the decision as to 

location of the DHS was frequently 

controlled by the landlord, not the 

physician.

Response: Any bright line test in this 

area will produce aberrant results in 

some circumstances. Nevertheless, a 

bright line test for ‘‘same building’’ is 

essential given the significance of the 

in-office ancillary services exception 

and, in particular, the significance of the 

building tests. The post office address 

test was proposed by commenters to the 

January 1998 proposed rule (66 FR 888). 

None of the tests proffered by the Phase 

I commenters, nor any other test 

proposed in comments to the January 

1998 proposed rule, is sufficiently 

definite to establish a ‘‘bright line’’ test. 

Any specific listing of types of building 

configurations would invariably cover 

some situations but omit others. The 

postal address test, while imperfect, 

provides a clear, fair, easily-applied 

standard. Moreover, as we explained in 

Phase I (66 FR 889), the easing of the 

supervision standards under the 

16074 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

exception elevates the importance of 

meaningful building requirements in 

ensuring that the in-office ancillary 

services exception protects those DHS 

that are truly ancillary to the physician’s 

office practice and not those that are 

essentially a separate business 

enterprise. 

Comment: A number of commenters 

objected to the exclusion of services 

furnished in mobile vans or other 

facilities not permanently affixed to the 

building. These commenters stated that 

mobile equipment was cost-efficient and 

offered convenience to patients, 

especially in rural areas. One 

commenter asked why we were 

prohibiting physicians from purchasing 

the technical component of these mobile 

services. Another commenter asked that 

we clarify that mobile equipment that 

can be moved into a building can 

qualify for the in-office ancillary 

exception. 

Response: As we stated in the Phase 

I preamble (66 FR 891), part-time rentals 

of DHS equipment are precisely the 

arrangements that section 1877 of the 

Act was designed to restrict. Mobile 

equipment that is placed inside a 

building qualifies for the exception if it 

is located and used inside the ‘‘same 

building’’ (that is, not in the garage or 

an internal loading dock or parking 

garage). (In this regard, we have 

modified the rule consistent with our 

original intent in Phase I, to clarify that 

internal loading docks are not 

considered the ‘‘same building’’.) The 

special circumstances of rural area 

providers are addressed by the rural 

exception at section 1877(d)(2) of the 

Act (§ 411.356(c)(1)), discussed in more 

detail below at VII.B. 

It was not our intent to prohibit 

physicians and group practices from 

purchasing diagnostic tests under the 

purchased diagnostic testing rules 

§ 414.50 and in section 3060 of the 

Medicare Carriers Manual 

(Reassignment) (as amended or replaced 

from time to time). Upon further review, 

however, we have concluded that the 

Phase I rule did not adequately provide 

for the furnishing of those services. The 

purchased diagnostic tests rules permit 

physicians or groups to bill Medicare for 

purchased diagnostic tests, as long as 

they do not mark up the charge for the 

test, and they accept the lowest of the 

physician fee schedule, the physician’s 

actual charge, or the supplier’s net 

charge to the physician or group as 

payment in full for the test, even if 

assignment is not accepted. Having 

considered various options for 

addressing this issue in this interim 

final rule with comment period, we 

have determined that the best approach 

would be to exclude physicians (or 

group practices) who bill for purchased 

diagnostic tests in accordance with 

Medicare rules from the definition of 

‘‘entity’’ under § 411.351, which 

otherwise defines an ‘‘entity’’ as the 

party that bills Medicare for the DHS. 

Conceptually, this approach reflects the 

substance of a purchased diagnostic test 

transaction, in which another entity 

actually furnishes the test, but passes 

the responsibility for billing Medicare 

on to the physician, who is precluded 

from profiting. 

Comment: In response to comments to 

the January 1998 proposed rule, the 

Phase I rule included a special 

provision under the in-office ancillary 

services exception for services provided 

by physicians (including services 

provided by qualified persons 

accompanying those physicians) whose 

principal medical practice involves 

treating patients in their private 

residences (§ 411.355(b)(6)). Under 

§ 411.355(b)(6), the ‘‘same building’’ test 

is met if DHS are provided in a private 

home contemporaneously with a 

physician service that is not a 

designated health service. A private 

home does not include a nursing, longterm care, or other facility or institution. 

We solicited comments as to whether 

additional special rules might be 

appropriate. Two commenters urged us 

to expand the exception to cover more 

locations and to ease the other 

restrictions so that more physicians 

could qualify. One commenter objected 

to the requirement that the physician’s 

principal medical practice consist of 

home care; the commenter stated that 

the requirement was unnecessary and 

limited the applicability of the 

exception. The commenter suggested 

that a physician should qualify if his or 

her medical group spent more than 50 

percent of the group’s practice time 

outside of the office setting, including 

travel time, preparation, and follow up. 

The same commenter asked us to clarify 

that the requirement that the services be 

contemporaneous does not require the 

physician’s presence during the 

furnishing of the designated health 

service. 

Response: While we understand that 

relaxing the standards would result in 

more physicians qualifying under the 

special rule for home care physicians, 

the commenters apparently 

misunderstood our intent. Simply put, 

we intended to create a narrow rule for 

a particular group of specialty 

physicians who otherwise would 

generally be precluded from using the 

in-office ancillary services exception 

because they would have no ‘‘building’’

that could qualify as the place in which 

they furnish DHS under the exception. 

Restricting the special rule to physicians 

who principally practice in the home 

care field is designed to insure that the 

patient’s home is, in fact, the 

physician’s real locus of practice. The 

special rule is specifically limited to 

private residences, not nursing or other 

facilities. 

The commenter is correct that the 

contemporaneous requirement does not 

require the physician to be present 

throughout the furnishing of the 

designated health service. However, the 

physician must be present in the 

patient’s private residence at the 

inception of the designated health 

service. This presence requirement is 

necessary to limit the exception to 

services truly furnished as part of the 

referring physician’s ‘‘office’’ medical 

practice.

Comment: One commenter asked us 

to clarify that residences in independent 

living facilities and assisted living 

facilities qualify as private homes. The 

commenter observed that some assisted 

living facilities have examination rooms 

that physicians use to treat residents. 

The commenter asked whether DHS 

furnished in such rooms would qualify 

as services furnished in the patient’s 

residence. 

Response: We agree that private 

residences in independent living 

facilities and assisted living facilities 

should qualify as private homes for 

purposes of the special rule. We will 

consider a residence in an independent 

living facility or assisted living facility 

to be ‘‘private’’ if the patient occupies 

the premises as his or her residence, 

through ownership or lease (by the 

patient or a relative or friend on the 

patient’s behalf), and has the right to 

exclude others from the premises. The 

use of common examination rooms in 

those facilities is more problematic. For 

example, in some cases, assisted living 

facilities are conjoined with nursing 

facilities, and a case-by-case evaluation 

would be required to determine whether 

a shared examination room is part of the 

nursing facility or the assisted living 

facility. On balance, we prefer a clear 

rule in this area, and thus would not 

consider a common examination room 

to be a private residence. 

Comment: Many commenters objected 

to the requirements in the ‘‘same 

building’’ test that (i) the referring 

physician (or another physician in his 

or her group practice) furnish 

substantial physician services unrelated 

to the furnishing of DHS in the same 

building (§ 411.355(b)(2)(i)(A)); and (ii) 

those unrelated services represent the 

full range of services that the referring 

physician routinely provides (or, for a 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16075

referring physician in a group practice, 

the full range of services that the 

physician routinely provides for the 

group practice) (§ 411.355(b)(2)(i)(B)). 

These commenters described these 

requirements as vague, both with 

respect to the quantity of services that 

are not DHS that must be performed in 

the building and the kinds of services 

that are not DHS that qualify. Moreover, 

the commenters objected to the 

requirement in § 411.355(b)(2)(i)(C) that 

the receipt of DHS not be the primary 

reason the patient comes into contact 

with the referring physician or the 

group practice. Commenters pointed out 

that the latter requirement was 

particularly problematic for physicians 

in certain specialties, such as radiology 

and oncology, where much of their 

practice consists of furnishing DHS. 

Commenters suggested a number of 

replacements for the term ‘‘substantial,’’

including ‘‘any,’’ ‘‘more than 

incidental,’’ ‘‘10 percent,’’ and 

‘‘significant,’’ and requested 

clarification as to the application of the 

‘‘primary reason’’ test to oncology and 

radiology practices. 

Response: The statute requires that 

the DHS be furnished in the ‘‘same 

building’’ where the referring physician 

(or a member of his or her group 

practice) furnishes ‘‘physicians’’

services unrelated to the furnishing of 

DHS.’’ The requirements referenced by 

the commenters were intended to 

ensure that DHS furnished under the inoffice ancillary services exception are 

truly ancillary to the delivery of 

physician services and that the 

exception is sufficiently circumscribed 

to prevent abuse, particularly since the 

exception, as revised in the Phase I rule, 

permits certain shared facilities. 

As explained in detail above, we agree 

that the Phase I three-part test did not 

adequately take into account the nature 

of certain speciality practices, such as 

oncology and radiology, that inherently 

involve the furnishing of substantial 

DHS and relatively limited physician 

services unrelated to the furnishing of 

DHS. We have addressed those 

concerns, among others, by replacing 

the Phase I three part test with three 

new tests, one of which applies to any 

building in which a physician’s practice 

(whether solo or group) is normally 

open for business 35 hours per week 

and in which the physician (or, if 

applicable, members of his or her group) 

regularly practices medicine and 

furnishes physician services to patients 

at least 30 hours per week. Some part 

of the physician services must be 

physician services unrelated to the 

furnishing of DHS, even if the physician 

services lead to the ordering or 

furnishing of DHS. We are no longer 

requiring that the physician services 

unrelated to the furnishing of DHS be 

‘‘substantial.’’ We believe that radiology, 

oncology, and other specialty practices 

that primarily provide DHS to their 

patients will be able to meet the lower 

threshold of providing ‘‘some’’

unrelated services in the revised 

regulations. 

We note that interpretations or reads 

of tests are generally DHS and will not 

count as physician services unrelated to 

the furnishing of DHS. 

Comment: One commenter asked us 

to clarify that, in § 411.355(b)(2)(i)(B) of 

Phase I, the physician services unrelated 

to the furnishing of DHS can be 

provided by the referring physician or 

by another physician who is a member 

of the same group practice. 

Response: The commenter is correct, 

although the test will be superseded as 

of the effective date of these regulations 

by the new building tests described 

above. However, for referrals and claims 

filed during the period between the 

effective date of Phase I (January 4, 

2002) and the effective date of Phase II, 

the Phase I building test would apply.

Comment: Several commenters 

suggested that the Phase I three part test 

in § 411.355(b)(2) should count only 

DHS payable by Medicare or Medicaid. 

Response: We disagree. The purpose 

of the same building test is to determine 

the location where the physician or 

group practice is practicing medicine so 

as to ascertain whether the DHS are 

truly ancillary to the referring 

physician’s core medical practice and 

furnished in the same building as the 

referring physician’s (or his or her 

group’s) core medical practice. 

Consistent with this purpose, 

physicians should be providing in the 

building that is the subject of the 

inquiry at least some physician services 

that are unrelated to the furnishing of 

any DHS, whether Federal or private 

pay. In other words, the fact that a 

physician or group provides private pay 

x-rays in a building is insufficient to 

establish that the provision of DHS is 

ancillary to the physician’s or group’s 

core office medical practice. We have 

incorporated this concept in the three 

new same building tests described 

above. 

Comment: Several commenters asked 

us to clarify that the primary purpose 

element of the Phase I three-part test 

does not preclude a referral of a patient 

to a group practice or to a physician for 

DHS from a physician who is not in the 

group. 

Response: Unless the outside 

physician has a financial relationship 

with the group or physician to whom 

the patient is referred, a referral for a 

designated health service to a physician 

or group practice by an outside 

physician would not implicate section 

1877 of the Act. As noted previously, 

we are eliminating the primary purpose 

element in the new Phase II regulations. 

Comment: Many commenters 

commended our decision to permit 

shared facilities in the same building 

provided the parties comply with the 

supervision, location, and billing 

requirements of the in-office ancillary 

services exception. Several commenters 

urged us to permit shared facilities that 

are not located in the same building. 

Many commenters objected to the 

requirement in the centralized building 

test (66 FR 889) that the building be 

owned or leased by the group practice 

on a full-time basis and used 

exclusively by the group practice, thus 

excluding shared off-site facilities under 

the centralized building test. Some 

commenters observed that the full-time, 

exclusive use requirement unduly 

favored large group practices over small 

ones. 

Response: We are not persuaded to 

change the regulations regarding shared 

off-site facilities. As discussed in greater 

detail in the Phase I preamble (66 FR 

888), we believe that section 1877 of the 

Act is directed at arrangements that 

enable physicians to profit from 

referrals to free-standing DHS that are 

not ancillary to their medical practices. 

For the reasons given in the Phase I 

preamble (66 FR 888–893), we believe 

the final Phase I regulation strikes the 

proper balance with respect to shared 

facilities. 

Comment: Several commenters 

objected to our decision to permit group 

practices to have more than one 

centralized facility. 

Response: We discern no reason to 

restrict group practices to a single 

centralized building, nor does the 

statutory language compel that result. 

We believe the requirement that any 

centralized building must be owned or 

leased 24 hours per day, 7 days per 

week, for at least six months, and used 

exclusively by the group practice should 

adequately protect against abuse. 

5. The Billing Requirement (Section 

1877(b)(2)(B) of the Act; Phase I—66 FR 

893; § 411.355(b)(3))

To qualify for the in-office ancillary 

services exception under the statute, the 

DHS must be billed by one of the 

following: The physician performing or 

supervising the service; the group 

practice of which that physician is a 

member under that group practice’s 

billing number; or an entity that is 

wholly owned by the referring or 

16076 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

supervising physician or the referring or 

supervising physician’s group practice. 

In addition, under the Phase I rule, the 

group practice may bill if the physician 

is a ‘‘physician in the group practice’’

under the group practice’s billing 

number. (This interpretation corrected a 

statutory anomaly and conformed the 

billing requirement to the corresponding 

statutory supervision requirements.) As 

with the other requirements in the inoffice ancillary services exception, the 

billing requirements serve to directly 

associate the ancillary services for 

which self-referrals will be permitted 

with the physician’s core medical 

practice. The billing requirement is a 

threshold rule for determining whether 

a designated health service furnished by 

a physician practice may be billed or 

claimed. The bill or claim itself must 

still comply with all other applicable 

billing and claims submission laws, 

regulations, and policies. 

Comment: One commenter asked that 

we interpret the billing requirement to 

permit a shared facility to bill under its 

own billing number. 

Response: We decline to adopt the 

commenter’s suggestion. The billing 

arrangement proposed by the 

commenter clearly falls outside of the 

statutory requirement. Moreover, the 

proposal would undermine the role of 

the billing requirement in ensuring that 

the excepted furnishing of DHS closely 

relates to a physician’s core medical 

practice. 

Comment: The same commenter 

interpreted the final regulations as 

permitting physicians to bill ‘‘incident 

to’’ for DHS that only require general 

supervision, even though the ‘‘incident 

to’’ billing rules require ‘‘direct 

supervision’’. Another commenter asked 

whether physical therapy services had 

to be directly supervised by a physician 

if the services are billed by a physician 

or a group practice. 

Response: The commenter 

misapprehends the scope of these 

regulations. The regulations under 

section 1877 of the Act do not establish 

or authorize any billing practice that is 

not in full compliance with other 

applicable Medicare coverage and 

payment rules. The billing requirement 

set forth in these regulations is for the 

purpose of determining whether a 

designated health service fits within the 

in-office ancillary services exception 

such that, as a threshold matter, a claim 

or bill for the service may be submitted 

at all by a physician or group practice. 

If a claim or bill may be submitted, it 

must still comply with all applicable 

Medicare payment and coverage rules 

(including, for example, the ‘‘incident 

to’’ rules). 

Comment: A professional association 

for physical therapists asked the 

following questions: 

• If a physical therapist employed by 

a physician practice furnishes services, 

bills using the physical therapy provider 

number, and then reassigns payment to 

the group practice, are the billing 

requirements met? 

• Would a rehabilitation agency, 

which is owned by physicians, and has 

its own billing number, be considered a 

wholly owned entity for billing 

purposes? 

• Can physicians own a physical 

therapy private practice office and bill 

through the provider number of that 

office? 

• When a designated health service is 

billed by an entity wholly owned by a 

group practice, do the Medicare 

conditions of participation applicable to 

the wholly owned entity determine the 

applicable level of supervision or do the 

supervision requirements related to 

group practice billing apply?

Response: With respect to the first 

question, we assume it is directed at 

services provided after March 1, 2003, 

as prior to that date, services by an 

employed physical therapist had to be 

billed as ‘‘incident to’’ services. Billing 

by a physical therapist under his or her 

own billing number does not satisfy the 

billing requirement of section 

1877(b)(2)(B) of the Act, which requires 

that the service be billed by the 

performing physician, the supervising 

physician, the group practice using a 

number assigned to the group, or an 

entity wholly owned by the performing 

or supervising physician or the group 

practice. However, if the physical 

therapist reassigns his or her right to 

payment to the group, and the group 

bills using its own billing number (with 

the physical therapist’s number 

indicated on the bill), then the billing 

requirement would be met. As to the 

second and third questions, the 

rehabilitation facility or physical 

therapy practice would be considered 

wholly owned if it is owned 100 percent 

by the physician group practice; 100 

percent by the performing physician; or 

100 percent by the supervising 

physician. A wholly owned entity can 

bill using its own billing number (See

§ 411.355(b)(3)(iv)). With respect to the 

last question, the supervision must meet 

the requirements applicable to the 

billing submitted to the Medicare 

program. 

C. Group Practice Definition (Section 

1877(h)(4)) of the Act; Phase I—66 FR 

894; § 411.352) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Group Practice Definition’’ at the 

beginning of your comments.]

The Phase I rulemaking addressed the 

definition of a ‘‘group practice’’ under 

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

regulatory definition appears at 

§ 411.352). Most commenters 

commended the changes made in Phase 

I. In particular, the final rule 

incorporated significant additional 

flexibility for group practices. We are 

making no major changes to that 

definition in Phase II. We have modified 

the ‘‘primary purpose’’ test to make 

clear that the relevant inquiry is the 

current operation of the group practice 

and have eliminated the requirement for 

centralized utilization review under the 

‘‘unified business’’ test. We have revised 

the special rules on profit shares and 

productivity bonuses to make clear that 

the ‘‘safe harbors’’ are deeming 

provisions. We have also made certain 

modifications to address particular 

concerns raised by group practices 

operating across State lines, group 

practices employing part-time 

physicians, and existing group practices 

adding new members. 

Comments on the Phase I group 

practice definition and our responses 

follow. 

Comment: Two commenters asked us 

to clarify the application of the single 

legal entity rule in § 411.352(a) to a 

group practice that has offices in more 

than one contiguous State and thus 

operates through ‘‘mirror’’ entities with 

identical ownership and governance. 

Response: As long as both entities are 

absolutely identical as to ownership, 

governance, and operation, the States in 

which the group is operating are 

contiguous, and the group uses multiple 

legal entities solely to comply with 

jurisdictional licensing laws, we will 

consider the two entities to be a single 

legal entity. We have modified the 

regulation accordingly. We note that, as 

a whole, the States in which the group 

operates need to be contiguous, but each 

State need not be contiguous with every 

other State. 

Comment: A number of commenters 

objected to the requirement in 

§ 411.352(a) that the single legal entity 

must be formed primarily for the 

purpose of being a physician group 

practice. According to the commenters, 

the purpose at the time of formation is 

irrelevant, as long as the entity is 

currently operated primarily as a 

physician group practice.

Response: We agree with the 

commenters that the relevant inquiry 

should be whether the group currently 

is operating primarily for the purpose of 

being a physician practice. We have 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16077

revised the rule accordingly. We want to 

iterate, however, that an entity that has 

a substantial purpose other than 

operating a physician group practice, 

such as operating a hospital, will not 

qualify. Thus, hospitals that employ two 

or more physicians are not physician 

‘‘group practices’’ for purposes of 

section 1877(h)(4) of the Act and are not 

eligible under the in-office ancillary 

services exception. A hospital may own 

or acquire a separate physician group 

practice that qualifies under section 

1877(h)(4) of the Act and would be 

eligible under the in-office ancillary 

services exception. 

Comment: One commenter asked us 

to clarify that a group practice can meet 

the definition at § 411.352 if it is owned 

by a medical group, as long as the 

medical group that owns it no longer 

provides medical services. Some 

commenters asked us to reconsider our 

position that the single legal entity 

requirement is not met if a group 

practice is owned by another 

functioning medical group. 

Response: Under § 411.352(a), defunct 

medical groups no longer providing 

medical services can own or operate a 

medical practice that qualifies as a 

‘‘group practice’’ for purposes of section 

1877(h)(4) of the Act. In this regard, we 

have clarified the third sentence in 

§ 411.352(a) to read: ‘‘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).’’ We stand by our 

determination that a group practice 

owned by other functioning medical 

groups cannot meet the single legal 

entity requirement; to conclude 

otherwise would insufficiently protect 

against sham group practice 

arrangements or physicians forming 

groups substantially for the purpose of 

profiting from DHS referrals. 

Comment: Several commenters 

objected to our determination that, for 

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

Act, a hospital cannot form a group 

practice of its employed physicians 

without organizing them into a separate 

entity. 

Response: As we explained in the 

Phase I preamble (66 FR 898–899), 

treating a ‘‘group’’ of hospital-employed 

physicians as a ‘‘group practice’’ for 

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

would stretch the meaning of a ‘‘group 

practice’’ too far. It would enable 

hospitals that employ two or more 

physicians to use the in-office ancillary 

services exception inappropriately to 

protect virtually all inpatient and 

outpatient hospital services. We do not 

believe that the Congress intended the 

in-office ancillary services exception, 

which focuses on services provided by 

physician practices, to be used to 

exempt hospital services from the scope 

of section 1877 of the Act. Under the 

‘‘group practice’’ definition, a hospital 

may legally organize, own, or operate a 

group practice that is a separate legal 

entity; however, the hospital itself (or 

other facility or entity the primary 

purpose of which is something other 

than the operation of a physician group 

practice) cannot be a group practice for 

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

Act. Hospitals that employ physicians 

can appropriately structure their 

arrangements with physicians to fit in 

the employment exception.

Comment: Some commenters urged 

that a foundation-model physician 

practice should be allowed to qualify as 

a ‘‘group practice’’ under section 

1877(h)(4) of the Act. 

Response: It is our understanding that 

‘‘foundation-model’’ physician practices 

exist in a variety of forms, depending on 

jurisdiction and other factors (including, 

for example, whether a particular State 

bars the corporate practice of medicine). 

Given the variety of foundation-model 

arrangements, it would be difficult to 

craft a uniform definition of a 

foundation-model group. Moreover, the 

personal services arrangements 

exception corresponds more closely to 

the contractual arrangements that 

typically establish foundation-model 

physician practices. Indeed, the 

legislative history reflects congressional 

intent to apply the personal services 

exception to foundations. (H.R. Conf. 

Report No. 103–213 at 814 (1993) (‘‘The 

conferees intend that this exception 

would apply to payments made by a 

non-profit Medical Foundation under a 

contract with physicians to provide 

health care services and which conducts 

medical research [sic].’’)) Thus, as 

explained in Phase I (66 FR 897), 

foundation-model practices should use 

the personal service arrangements 

exception. We believe the modifications 

we are making to that exception in this 

Phase II will address the commenters’

concerns and offer adequate protection 

for DHS referrals within most 

foundation-model group structures. This 

determination does not preclude 

particular foundations or foundationmodel practices that, in fact, meet the 

single legal entity test from qualifying as 

a group practice and using the in-office 

ancillary services exception. 

Comment: Section 1877(h)(4) of the 

Act requires that a ‘‘group practice’’

consist of ‘‘2 or more physicians.’’

Several commenters asked that we 

clarify whether the ‘‘2 or more 

physicians’’ test is met if a group 

consists of one full-time physician and 

one part-time employed physician or 

independent contractor physician. The 

commenters interpreted the Phase I 

preamble as requiring that the second 

physician be a full-time, rather than 

part-time, employee. The commenters 

viewed this requirement as conflicting 

with § 411.352(b), which requires that 

the group have two physicians who are 

‘‘members of the group’’ (as defined in 

§ 411.351), whether as employees or 

direct or indirect owners. The 

commenters pointed out that, under the 

‘‘members of the group’’ test, a 

physician with only token ownership in 

the group could qualify as a member of 

the group. Given this relatively 

expansive test for ‘‘members of the 

group,’’ the commenters discerned no 

reason for the ‘‘2 or more physicians’’

test to require that the second physician 

be a full-time employee. 

Response: The list of examples of 

acceptable group practice structures in 

the Phase I preamble (66 FR 897) is 

illustrative, not exhaustive, of the kinds 

of arrangements that could qualify 

under the group practice definition. We 

agree with the commenters’

interpretation that the physicians 

counted for the ‘‘2 or more physicians’’

test can be part-time employed 

physicians. The group practice would 

still need to satisfy the remaining 

conditions of § 411.352. This 

interpretation is consistent with the 

language of § 411.352(b), and we are 

therefore making no textual change. 

However, with respect to independent 

contractor physicians, we are not 

expanding § 411.352(b) to permit them 

to fulfill the ‘‘2 or more physicians’’ test. 

Independent contractors are not group 

practice ‘‘members’’ under § 411.351. A 

large number of commenters to the 

January 1998 proposed rule, as well as 

commenters to the Phase I rule, opposed 

including independent contractors in 

the definition of ‘‘member of the group’’

because of concerns about meeting 

certain of the statutory group practice 

tests (66 FR 900). Accordingly, we 

excluded those physicians from being 

group practice members, but included 

them in the definition of ‘‘physicians in 

the group practice,’’ a resolution 

consistent with the comment letters and 

the statutory language. To count nonmember physicians in the ‘‘2 or more 

physicians’’ test would effectively 

expand the group practice definition to 

groups with no physician members (that 

is, groups with 2 or more independent 

contractors), a result inconsistent with 

the statute. That expansion would 

16078 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

enable physicians to nullify the various 

tests in section 1877(h)(4) of the Act 

related specifically to group practice 

members. For example, the ‘‘75 percent 

physician-patient encounters’’ test in 

section 1877(h)(4)(A)(v) of the Act, 

which requires that members of the 

group conduct at least 75 percent of the 

group practice’s physician-patient 

encounters, would be meaningless.

Comment: One commenter asked that 

we reconsider permitting group 

practices to elect to treat independent 

contractors as members for purposes of 

determining compliance with 

§§ 411.352(d) and (h) (the 75 percent 

‘‘substantially all’’ and ‘‘75 percent 

physician-patient encounters’’ tests, 

respectively). 

Response: We are not persuaded that 

a change is warranted or feasible. As we 

indicated in the Phase I preamble (66 FR 

900), an election process would impose 

an administrative burden on groups 

without significant corresponding 

benefit, given the overall design of the 

final ‘‘group practice’’ definition and inoffice ancillary services exception. 

Moreover, no mechanism currently 

exists to administer or monitor that 

election, and we do not believe most 

physician groups would favor creation 

of an election reporting requirement. 

Given the lack of an election reporting 

mechanism, any election provision 

would have to be an alternative to the 

existing test, making enforcement 

difficult. In short, an election procedure 

is impracticable. A single ‘‘bright line’’

test is preferable. 

The ‘‘substantially all’’ and ‘‘75 

percent physician-patient encounters’’

tests are intended to measure whether a 

group practice functions as an 

integrated whole. If a group is unable to 

take advantage of the benefits afforded 

group practices under the statute 

because of the use of independent 

contractor physicians, it can integrate 

the physicians into the group as 

employees or owners or restructure to 

comply with another exception. As 

noted above, a substantial number of 

commenters to the January 1998 

proposed rule (as well as commenters to 

the Phase I rule) asked that independent 

contractors not be considered members 

of the group to ease compliance with the 

group practice definition. In response to 

those original comments, we excluded 

independent contractors as members of 

the group, while including them as 

‘‘physicians in the group practice’’

where that term is relevant. 

Comment: Section 411.352(d)(5) 

establishes a 12-month ‘‘grace period’’

for start-up groups to come into 

compliance with the group practice 

definition. The grace period does not 

apply when an existing group adds a 

new member (for example, a new 

employed physician) or reorganizes. 

Several physician professional 

associations commented that 

application of this rule could cause 

group practices that add new physician 

members to lose their group practice 

designations for a period of time after 

the new physician joins, because the 

new physician could skew the 

‘‘substantially all’’ test (which requires 

that at least 75 percent of patient care 

services provided by group members be 

provided through the group and billed 

under a number assigned to the group, 

with the amounts received treated as 

revenues of the group). According to the 

associations, there are frequently delays 

in obtaining Medicare billing numbers 

for newly employed physicians. 

Moreover, the associations believe that 

the current rule discourages bringing 

younger physicians into existing 

practices. 

Response: Our intent in excluding 

existing group practices that add new 

members from the broad grace period 

under § 411.352(d)(5) was to ensure that 

groups would not, in essence, secure 

perpetual grace periods through the 

continuing addition of new physicians. 

In many cases, the addition of new 

physicians, such as physicians with 

established medical practices, to an 

existing group practice will not impair 

the group’s ability to meet the group 

practice definition. We concur with the 

commenters, however, that some 

accommodation should be made for 

group practices that add new members, 

as long as the group practice otherwise 

continues to fit squarely in the 

definition. We are therefore creating 

§ 411.352(d)(6) to provide that, if the 

addition of a new member who has 

relocated his or her practice to an 

existing group practice would cause the 

group practice to fall out of compliance 

with the requirements of the 

‘‘substantially all’’ test at 

§ 411.352(d)(1), the group practice will 

have 12 months to come back into full 

compliance, provided that—

(i) 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

(ii) The new physician’s employment 

with, or ownership or investment 

interest in, the group practice is 

documented in writing before 

commencement of the new employment 

or ownership. 

We have limited this rule to new 

members who have relocated their 

medical practices (as defined in the 

revised physician recruitment 

exception) to prevent abuse by groups 

that add new members through mergers 

with other groups. We are retaining the 

portion of the current rule that 

precludes group practices that 

reorganize from taking advantage of the 

startup or new member grace periods; if 

a group practice wants to use the 

exceptions available to group practices, 

the group should reorganize in 

accordance with the group practice 

definition. 

Comment: One commenter asked that 

we clarify whether leased physician 

employees can be considered employees 

(that is, members) of a group practice. A 

commenter noted that the new rules for 

coverage of ‘‘incident to’’ services treat 

leased employees as employees and 

suggested that the same treatment 

should extend to determining whether a 

leased physician employee is a member 

of a group practice. 

Response: To the extent that a leased 

employee is a bona fide employee of the 

group under IRS rules, that leased 

employee physician would be 

considered an employee of the group 

practice, and therefore a member of the 

group. Group practices bear the burden 

of establishing the necessary criteria for 

employment. We have clarified the 

definition of ‘‘member of the group’’

accordingly. 

Comment: The definition of 

‘‘physician in the group practice’’ in 

§ 411.351 provides that referrals from an 

independent contractor who is a 

physician in the group practice are 

subject to the prohibition on referrals 

under section 1877 of the Act and that 

the group practice is subject to the 

limitation on billing for referred 

services. A commenter asked us to 

clarify that this provision means that 

independent contractor referrals for 

DHS within the group implicate section 

1877 of the Act to the same extent that 

the group member’s referrals are 

implicated and not that DHS referrals 

cannot be made. 

Response: The commenter is generally 

correct. Like group practice members, 

an independent contractor who is a 

physician in the group practice can 

make referrals of DHS to the group 

practice, as long as an exception applies 

to those referrals. There is no group 

practice exception as such. In general, 

group practices rely on the in-office 

ancillary services exception for referrals 

within a group. Referrals from a 

‘‘physician in the group practice’’ can be 

covered by this exception if all of the 

conditions in the exception are met. 

Alternatively, referrals from an 

independent contractor to a group 

practice for DHS could be excepted 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16079

under the personal service arrangements 

or fair market value exceptions. 

Comment: A commenter representing 

free clinics requested modifications to 

the ‘‘substantially all’’ and ‘‘full range of 

services’’ tests to accommodate the 

special circumstances of volunteer 

physicians providing free patient care 

services at free clinics. The commenter 

suggested that these services be treated 

comparably to services provided in 

Health Professional Shortage Areas 

(HPSAs) under § 411.352(d)(4). The 

commenter explained that the 

modifications are necessary to prevent 

section 1877 of the Act from acting as 

a disincentive to providing free clinic 

services. Specifically, the commenter 

recommended that § 411.352(c) be 

amended to exclude volunteer patient 

services provided by physicians in 

HPSAs from the ‘‘full range of services’’

test and that a new subparagraph be 

added to § 411.352 to create a special 

rule for volunteer patient services 

provided at a clinic operated by a 

governmental entity or agency or by a 

tax-exempt entity.

Response: We do not believe, nor was 

it our intent, that donating volunteer 

services to patients at free clinics or 

similar facilities should adversely 

impact a group practice’s ability to 

qualify as a ‘‘group practice’’ within the 

meaning of § 411.352. The ‘‘full range of 

services’’ test at § 411.352(c) measures 

whether a member of a group practice 

provides substantially the same scope of 

patient care services within the group 

context as he or she provides outside 

the group context. The test does not 

require absolute identity of services. To 

the extent a physician donates the same 

scope of patient care services at a free 

clinic (that is, outside the group) as he 

or she provides as part of the group 

practice (that is, inside the group), there 

should be no problem meeting the ‘‘full 

range of services’’ test. To the extent the 

physician donates patient care services 

in a free clinic that are different from 

those he or she provides for the group, 

we would not expect that the donated 

patient care services would prevent the 

group from meeting the ‘‘substantially 

all’’ requirement. To the extent our 

reference in the Phase I preamble (66 FR 

903) to volunteer activities involving 

treating indigent patients suggested 

otherwise, we withdraw the reference. 

With respect to the ‘‘substantially all’’

test at § 411.352(d), a group practice 

member’s donation of volunteer services 

to a free clinic generally should not 

impair the group’s ability to meet the 75 

percent threshold. In those situations 

where it may, we see no reason that 

arrangements for the donated services 

could not be structured such that the 

services are donated to the free clinic 

through the group. So structured, we 

would consider donated patient care 

services to a free clinic (or comparable 

charitable enterprise) to be ‘‘billed’’

through the group, notwithstanding that 

no actual bills are sent or collected. 

Comment: A commenter representing 

physicians in group practices with 

members who provide substantial 

academic medical services sought relief 

similar to the preceding comment for 

time spent by physicians providing 

academic patient care services. The 

commenter explained that a medical 

school physician group would have 

difficulty meeting the ‘‘substantially all’’

test because its members provide 

substantial academic medical services to 

clinics and foundations at the medical 

school. One commenter gave an 

example of a medical school group in 

which physicians spend over 25 percent 

of their time supervising residents and 

providing care at a university-affiliated 

clinic, hospital, and foundation, 

primarily for Medicaid patients. Since 

these services count as ‘‘patient care’’

services under the definition of that 

term in § 411.351, and the physicians do 

not bill for these services under their 

arrangement with the academic medical 

center, the physician group cannot meet 

the ‘‘substantially all’’ test. The 

commenter urged that academic patient 

care services provided by academic 

physicians to university hospitals, 

clinics, and foundations as part of the 

university’s faculty practice plan be 

excluded from the ‘‘substantially all’’

test. 

Response: As with the donated 

volunteer services described above, we 

see no reason that, in situations in 

which the 75 percent threshold will not 

otherwise be met, arrangements for the 

provision of academic patient care 

services could not be structured such 

that the services are billed through the 

group and treated as receipts of the 

group (66 FR 905).

Comment: A commenter sought 

clarification that a medical school group 

practice can use the in-office ancillary 

services exception, even though it and 

its physicians are part of a faculty 

practice plan of an academic medical 

center. 

Response: If the medical school group 

practice meets the definition of a ‘‘group 

practice’’ in § 411.352, and all of the 

criteria of the exception are satisfied, it 

can use the in-office ancillary services 

exception to protect referrals within the 

group practice (but not referrals to other 

components of the academic medical 

center, such as the teaching hospital). 

Comment: A commenter representing 

several entities described as 

‘‘independent practice associations’’

(IPAs) expressed concern that 

physicians in group practices who 

participate in an IPA representing a 

significant revenue source for the group 

practice may forfeit their group practice 

eligibility because they will not meet 

the ‘‘substantially all’’ test. That test 

requires that 75 percent of the total 

patient care services of the group 

practice members be furnished through 

the group practice and billed under a 

billing number assigned to the group 

practice, and that the amounts received 

be treated as receipts of the group 

practice. According to the commenter, 

IPAs often employ or contract with 

group practice physicians directly and 

bill for the provision of their services 

under managed care contracts. 

According to the commenter, if a large 

portion of group members’ patient care 

services are provided and billed under 

these contracts, they will not meet the 

75 percent ‘‘substantially all’’ test. The 

commenter proposed two solutions. 

First, we could count as ‘‘patient care 

services’’ only ‘‘fee for service’’ services, 

excluding managed care services. 

Alternatively, we could count only 

Medicare and Medicaid services. 

Response: We are somewhat unclear 

as to the nature of the particular entities 

represented by the commenter. They do 

not appear to be typical IPAs, which 

generally do not employ physicians. 

Nevertheless, we understand the 

commenter to be asking about the 

treatment of managed care contract 

services under the ‘‘substantially all’’

test. In Phase I, a commenter posed a 

similar situation: a group member 

physician contracts with a hospital to 

provide professional services and 

reassigns his or her payments for those 

services to the hospital. Thus, the 

hospital, not the group, bills Medicare 

for the services. In response, we 

affirmed that a group should be able to 

count professional services provided by 

the group member under a global 

payment when calculating the ‘‘75 

percent of patient care services’’

requirement for purposes of the 

‘‘substantially all’’ test. As we 

explained, the ‘‘substantially all’’ test is 

intended to guarantee that group 

practice members are providing a 

substantial amount of their services 

through the group practice (66 FR 905). 

Thus, ‘‘if the group’s business includes 

providing professional services to 

another entity, which, in turn, pays the 

group for those services, it is our view 

that these are services that should count 

as services a physician provides through 

the group’’ (66 FR 905). We indicated 

our intent to interpret the requirement 

16080 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

that ‘‘substantially all’’ of a physician’s 

patient care services be provided 

through the group and billed ‘‘under a 

billing number assigned to the group’’ to 

include any physicians’ professional 

services billed by a group under any 

group billing number regardless of the 

payer of the services, provided the 

receipts are treated as receipts of the 

group. 

Applied to the commenter’s managed 

care contracts example, this 

interpretation means that the group 

practice could count patient care 

services provided under managed care 

contracts that are part of the group 

practice’s business (for example, where 

the group practice contracts with the 

IPA to provide the services or where an 

individual physician member contracts 

to provide the services, but assigns his 

or her right to payment to the group). 

However, services provided by 

physicians pursuant to outside 

employment or contractual 

arrangements that are not tied to the 

group cannot meaningfully be said to be 

provided ‘‘through the group practice.’’

Accordingly, such services would not be 

counted as patient care services 

provided through the group practice. 

Thus, services provided by physicians 

during the course of employment with 

an IPA would count against a group 

practice under the ‘‘substantially all’’

test. 

We are not adopting either of the two 

alternative tests suggested by the 

commenter. We believe they are too 

narrow to achieve the purpose of the 

‘‘substantially all’’ test in measuring the 

bona fides of a group practice. 

Comment: Section 411.352(d)(2) 

requires that data used to calculate 

compliance with the ‘‘substantially all’’

test in § 411.352(d)(1) and supportive 

documentation must be made available 

to the Secretary upon request. One 

commenter asked that we delete this 

requirement, calling it simply a backdoor attestation requirement. 

Response: The commenter 

misapprehends the legal distinction 

between an attestation, a document 

created to make mandatory 

representations, and a documentation 

requirement, which merely requires that 

a group retain records of its own 

activities. The documentation provision, 

which mandates production of 

documentation only upon the 

Secretary’s request, enables the 

government to ascertain whether the 

‘‘substantially all’’ test has been 

satisfied. Group practices that choose to 

take advantage of the special treatment 

afforded groups under the statute 

should be prepared to demonstrate 

compliance with relevant statutory and 

regulatory standards. 

Comment: Section 411.352(f) sets 

forth a three-part test for determining 

whether a group practice is a ‘‘unified 

business.’’ Section 411.352(f)(1)(i) 

requires 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. Section 

411.352(f)(1)(ii) requires consolidated 

billing, accounting, and financial 

reporting. One commenter asked us to 

clarify the meaning of these provisions. 

Specifically, the commenter asked 

whether the test is met if individual 

group practice locations devise their 

own budgets, including salary and 

compensation, and submit them for 

approval by the group’s governing 

board. 

Response: The ‘‘unified business’’ test 

is intended to be flexible and to 

accommodate a wide variety of group 

practice arrangements, while ensuring 

that a group practice for purposes of 

section 1877 of the Act is organized and 

operated on a bona fide basis as a single 

integrated business enterprise with legal 

and organizational integration. The 

‘‘unified business’’ test sets general 

parameters indicative of integration, but 

does not dictate specific practices. (For 

further discussion of the ‘‘unified 

business’’ test, see the Phase I preamble 

(66 FR 905).) With respect to the 

centralized decision-making aspect, we 

believe there must be substantial ‘‘group 

level’’ management and operation. 

While, in the interest of flexibility, we 

are not prescribing any particular 

process for managing budgets or 

determining compensation and salaries, 

the centralized management of the 

group practice must exercise substantial 

control over the process and output of 

these activities and not simply rubber 

stamp decisions by the various cost 

centers or locations. 

Comment: The third part of the 

‘‘unified business’’ test, 

§ 411.352(f)(1)(iii), provides that the 

group must have ‘‘centralized utilization 

review.’’ Several commenters asked that 

we delete or modify this requirement 

because many group practices do not 

perform utilization review. 

Response: We agree and are deleting 

§ 411.352(f)(1)(iii).

Comment: A number of commenters 

asked that we clarify that physicians in 

the group practice can be paid a 

productivity bonus or profit share based 

directly on services that are ‘‘incident 

to’’ services personally performed by the 

physician. The commenters stated that 

while the Phase I preamble plainly 

contemplated that such bonuses were 

permitted (66 FR 909), they found the 

language of the regulatory text in 

§ 411.352(i) to be ambiguous. 

Response: The commenters are correct 

with respect to our intent in Phase I, 

and we are amending the regulatory text 

in § 411.352(i)(3) to make our original 

intent clear. Section 1877(h)(4)(B)(i) of 

the Act expressly permits a physician in 

the group practice to receive a profit 

share or productivity bonus based 

directly on services that he or she 

personally performs and services that 

are ‘‘incident to’’ his or her personally 

performed services. We have revised the 

regulations to make clear that profit 

shares or productivity bonuses can be 

based directly on services that are 

‘‘incident to’’ the physician’s personally 

performed services. 

Comment: Two commenters asked 

that we apply the group practice bonus 

and profit sharing rules to employees 

and independent contractors. 

Response: For purposes of section 

1877 of the Act, a group practice may 

pay any employee or independent 

contractor of the group practice who 

qualifies as a ‘‘physician in the group 

practice’’ profit shares and productivity 

bonuses under § 411.352(i). Referrals 

from a physician in the group practice 

to the group practice may be protected 

under the in-office ancillary services 

exception (provided the conditions of 

the exception are met). However, if a 

group practice instead uses the bona 

fide employment, personal service 

arrangements, or fair market value 

exceptions to protect referrals from an 

independent contractor to the group 

practice, the compensation rules 

applicable under those exceptions must 

be satisfied. These rules are discussed in 

section VIII below. 

Comment: Section 411.352(i)(2) 

provides that ‘‘overall profits’’ of the 

group must be based on any component 

of the group consisting of at least five 

physicians. Several commenters asked 

that we permit groups to distribute 

profits based on pools of fewer than five 

physicians. Another commenter asked 

that we clarify that any grouping of five 

physicians in the group constitutes an 

acceptable pool. 

Response: As we explained in the 

Phase I preamble (66 FR 908), we 

believe a threshold of at least five 

physicians is broad enough to attenuate 

the ties between an individual 

physician’s compensation and his or her 

referrals. We rejected a previous 

suggestion from a commenter to the 

January 1998 proposed rule that we use 

a threshold of three physicians, because 

we believed that the lesser threshold 

would result in pooling that would be 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16081

too narrow and, therefore, potentially 

too closely related to DHS referrals. The 

commenter is correct that any grouping 

of five physicians is permissible. 

Comment: Two commenters asked 

that we clarify that bonuses based on 

factors other than the volume or value 

of referrals of DHS are permitted. 

Another commenter asked that we 

clarify that group practices may 

distribute all their revenue using the 

approved allocation methodologies in 

§ 411.352(i)(2) and § 411.352(i)(3). 

Response: Nothing in the statute or 

regulations prohibits or restricts group 

practice bonuses or incentives based on 

criteria that do not take into account the 

volume or value of DHS referrals. There 

is nothing to prevent a group practice 

from allocating all of its revenue using 

the ‘‘safe harbored’’ allocation 

methodologies. 

Comment: One commenter asked that 

we clarify that, for purposes of the ‘‘safe 

harbors’’ at § 411.352(i)(2)(iii) and 

§ 411.352(i)(3)(iii), less than five percent 

of the group practice’s revenues and less 

than five percent of each physician’s 

revenues must be attributable to DHS 

reimbursable by Medicare or Medicaid. 

Response: The commenter is generally 

correct. The regulations provide that 

revenues derived from DHS must be less 

than 5 percent of the group practice’s 

total revenues, and that the amount of 

those revenues allocated to any 

individual physician must constitute 5 

percent or less of his or her total 

compensation from the group practice. 

The regulations define ‘‘DHS’’ as 

Medicare or Medicaid DHS. Thus, an 

allocation method is acceptable if less 

than 5 percent of the group practice’s 

and less than 5 percent of each 

physician’s total revenues come from 

Medicare or Medicaid DHS. 

D. Prepaid Plans (Section 1877(b)(3) of 

the Act; Phase I—66 FR 911; 

§ 411.355(c)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Prepaid Plans Exception’’ at the 

beginning of your comments.]

Comments related to the prepaid plan 

exception are discussed in connection 

with comments to the risk-sharing 

arrangements exception at section XII.F 

below. 

In addition, in the January 1998 

proposed rule, we proposed a prepaid 

plans exception for certain Medicaid 

prepaid plans. As explained in Phase I 

(66 FR 911), a number of commenters 

urged us to expand the exception to 

include other Medicaid organizations 

analogous to the Medicare prepaid plans 

covered by section 1877(b)(3) of the Act, 

and we agree with these commenters. 

While we are deferring final regulations 

for section 1903(s) of the Act, given the 

prevalence of managed care in the 

Medicaid program, we believe it would 

be useful and appropriate to expand the 

prepaid plans exception at § 411.355(c) 

to include referrals of enrollees in 

Medicaid managed care plans analogous 

to the Medicare plans previously 

included in the exception. The 

modification effectively addresses the 

application of section 1903(s) of the Act 

to referrals of items or services provided 

to Medicaid managed care patients by 

making clear that such referrals would 

not result in the denial of payment 

under section 1877 of the Act and thus 

would not result in denial of Federal 

financial participation under section 

1903(s) of the Act. In short, instead of 

creating a separate exception for 

Medicaid prepaid plans as proposed in 

1998, we are achieving the proposed 

regulatory result through modification 

of § 411.355(c). 

VI. General Exception Related Only to 

Ownership or Investment in PubliclyTraded Securities and Mutual Funds 

(Section 1877(c) of the Act; Phase II; 

§ 411.356(a) and § 411.356(b))

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Publicly-Traded Securities Exception’’

at the beginning of your comments.]

Existing Law: Section 1877(c) of the 

Act creates an exception for ownership 

in certain publicly-traded securities and 

mutual funds. 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 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 be 

foreign securities listed on comparable 

exchanges or traded under the National 

Association of Securities Dealers 

automated quotation system; and 

(3) The ownership 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. 

Proposed Rule: The January 1998 

proposed rule interpreted the 

requirement that the investment 

securities be those that ‘‘may be 

purchased on terms generally available 

to the public’’ to mean that, at the time 

the physician (or his or her immediate 

family member) obtained the ownership 

interest, the interest could have been 

purchased on the open market, even if 

the physician or family member 

acquired the interest in another manner. 

For purposes of the $75 million test, the 

proposed regulation defined stockholder 

equity as the difference in the value 

between a corporation’s total assets and 

total liabilities. 

Final Rule: For reasons set out in 

more detail in the responses to 

comments that follow, we have 

reconsidered the interpretation of the 

‘‘may be purchased on terms generally 

available to the public’’ provision in the 

January 1998 proposed rule. In this 

Phase II interim final rule, we are 

interpreting the provision to mean that 

the ownership interest must be in 

securities that are generally available to 

the public at the time of the DHS 

referral. In other words, securities 

acquired by a referring physician or his 

or her family member prior to a public 

offering will fit in the exception if they 

are available to the public at the time of 

any designated health service referral 

(and the other conditions in the 

exception are satisfied). In addition, as 

explained in this preamble in section 

II.B, we will not consider stock options 

received as compensation to be 

ownership or investment interests until 

the time that they are exercised. Having 

received no comments on the definition 

of stockholder equity, we are adopting 

the January 1998 proposal. 

Comment: Several commenters 

objected to our interpretation in the 

January 1998 proposed rule that, in 

order to qualify for the public securities 

exception, the securities owned by the 

referring physician (or his or her 

immediate family member) must have 

been generally available to the public at 

the time the physician or family 

member acquired their ownership 

interest. According to the commenters, 

this interpretation conflicted with the 

language and history of the statute and 

the overall statutory scheme, which 

focuses on DHS referrals. The 

commenters suggested that the proper 

interpretation should be that the 

securities are generally available to the 

public at the time any DHS referrals are 

made. 

Response: After careful consideration 

of the proposed rule, the statutory 

scheme, and the comment letters, we 

have reconsidered our position and 

16082 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

concur with the commenters. The 

interim final rule adopts the 

interpretation proffered by the 

commenters. We believe this rule strikes 

an appropriate balance between 

excepting legitimate investments and 

precluding abusive ‘‘sweetheart’’ deals 

predicated on referrals.

Comment: Several commenters 

asserted that the statutory exception’s 

$75 million benchmark is too restrictive 

and that investments in smaller public 

companies should be permitted. Two 

commenters proposed that we except 

any investment in a publicly-traded 

company as long as the referring 

physician’s (or immediate family 

member’s) ownership constitutes less 

than five percent of the total ownership 

of the company. Another commenter 

suggested that we except any 

investment in any publicly-traded 

corporation or mutual fund. However, 

one commenter urged us not to expand 

the publicly-traded securities exception 

beyond the strict statutory standards. 

Response: We find no support in the 

statutory language for either of the 

suggested expansions of the exception, 

nor are we persuaded that either 

expansion would be without risk of 

abuse, the standard for promulgating 

new regulatory exceptions under section 

1877(b)(4) of the Act. The commenters 

urging the five percent ownership test 

misunderstand the purpose of the 

statute. The statute is targeted at 

financial relationships that create 

financial incentives for physicians to 

refer to DHS entities. While a five 

percent test may be probative on the 

issue of control of an entity, that test 

would be largely irrelevant to the 

existence of an incentive to refer. On the 

other hand, the limitation in the 

statutory exception to companies with 

stockholder equity in excess of $75 

million is relevant, because it effectively 

severs any tie between referrals and 

returns on the investment. In short, the 

relationship between returns and 

referrals is sufficiently diffuse. An 

exception for investments in all 

publicly-traded companies, including 

smaller companies, would not preclude 

abuse. 

Comment: One commenter requested 

that we create a new exception to permit 

publicly-traded companies that do not 

meet the statutory thresholds to bill for 

a de minimis amount of Medicare and 

Medicaid DHS referred by physicians 

(or immediate family members) if the 

company does not know that the 

physicians (or immediate family 

members) are stockholders of the 

company. 

Response: In Phase I, we added 

§ 411.353(e), which creates an exception 

for entities that submit claims for DHS 

if the entity does not have actual 

knowledge of, and does not act in 

reckless disregard or deliberate 

ignorance of, the identity of the referring 

physician, and the claim otherwise 

complies with all applicable laws, rules, 

and regulations. We believe § 411.353(e) 

adequately addresses the commenter’s 

concerns, and no further exception is 

needed. 

Comment: One commenter requested 

that we create a new exception to 

protect investments in privately held 

companies. According to the 

commenter, physicians are investing in 

a variety of risk-bearing, integrated 

practice structures, such as physiciansponsored organizations (PSOs) and 

physician practice management 

companies (PPMCs). The commenter 

believed that investments in these 

companies should be protected.

Response: Nothing in the statute or 

regulations prohibits investments in 

entities that do not furnish DHS. In 

Phase I of this rulemaking, we clarified 

and significantly narrowed the 

situations in which a managed care 

entity will be considered an entity 

providing DHS. (See § 411.351 

(definition of ‘‘entity’’); see also 66 FR 

943.) We also significantly expanded the 

statutory exception for referrals to 

prepaid plans at § 411.355(c) and 

created a new regulatory exception for 

risk-sharing arrangements at 

§ 411.357(n). These aspects of the 

interim final rule largely address the 

situations raised by the commenter. Of 

course, if the PSO, PPMC, or other 

investment entity directly (or indirectly 

through a subsidiary) furnishes DHS 

(that is, is an ‘‘entity’’ under the 

definition at § 411.351), there is no 

reason to treat it differently from any 

other DHS entity. 

Comment: One commenter was 

concerned that the January 1998 

proposed rule imposed an impossible 

administrative reporting requirement on 

publicly-traded companies. Under the 

August 1995 final rule, DHS entities 

were required to report to the Secretary 

any ownership, investment, or 

compensation arrangements, including 

the names and unique physician 

identification number (UPIN) of all 

physicians holding an ownership or 

investment interest. However, the 

regulations released entities from 

reporting any arrangements that 

qualified for certain exceptions under 

the Act, including the publicly-traded 

securities exception. By contrast, the 

January 1998 proposed rule proposed 

requiring entities to report all 

arrangements with physicians, 

including those that qualify for an 

exception. According to the commenter, 

while the proposal makes some effort to 

accommodate the burden placed on 

publicly-traded companies, the 

reporting requirements are unduly 

burdensome. 

Response: As explained in the section 

on reporting requirements at section IX 

below, this Phase II interim final rule 

eliminates the reporting requirement for 

shareholder information regarding 

financial relationships that satisfy the 

exceptions in § 411.356(a) and (b) for 

ownership and investment interests in 

publicly-traded securities and mutual 

funds. 

VII. Additional Exceptions Related 

Only to Ownership or Investment 

Prohibition (Section 1877(d) of the Act; 

Phase II; § 411.356) 

A. Hospitals in Puerto Rico (Section 

1877(d)(1) of the Act; Phase II; 

§ 411.356(c)(2)) 

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

that an ownership or investment interest 

in a hospital located in Puerto Rico is 

not a financial relationship within the 

meaning of section 1877 of the Act. We 

received no comments on the January 

1998 proposed rule for this exception. 

The interim final rule adopts the 

proposed rule without change. 

B. Rural Providers (Section 1877(d)(2) of 

the Act; Phase II; § 411.356(c)(1)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Rural Providers Exception’’ at the 

beginning of your comments.]

Existing Law: With respect to DHS 

furnished in a rural area (as defined in 

section 1886(d)(2)(D) of the Act), section 

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

exception for ownership or investment 

interests in rural providers 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 Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003 (MMA), (Pub. L. 108–173), 

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

to specify that, for the 18-month period 

beginning on December 8, 2003, the 

rural provider may not be a specialty 

hospital. Section 507 defined the term 

‘‘specialty hospital’’ in a new subsection 

1877(h)(7). 

Proposed Rule: 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, we provided that the DHS 

must be furnished in a rural area, and 

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

is not an urban area pursuant to 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16083

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

an area outside a Metropolitan 

Statistical Area (MSA)). We proposed 

eliminating the requirement from the 

August 1995 final rule that the rural 

provider be located in a rural area. 

Final Rule: Except for codifying the 

changes made by section 507 of MMA, 

this interim final rule adopts the 

January 1998 proposed rule without 

change. In addition, the Phase II interim 

final rule creates a limited new 

exception, § 411.355(j), for certain 

referrals from a referring physician to a 

DHS entity with which his or her 

immediate family member has a 

financial relationship, if the patient 

being referred resides in a rural area and 

there is no DHS entity available in a 

timely manner in light of the patient’s 

condition to furnish the DHS to the 

patient in his or her home (for DHS 

furnished to patients in their homes) or 

within 25 miles of the patient’s home 

(for DHS furnished outside the patient’s 

home). 

We have been asked to ‘‘grandfather’’

investments in DHS entities furnishing 

services in rural areas that are 

subsequently reclassified as non-rural 

areas. As we explained in the August 

1995 preamble (60 FR 41954), section 

1877 of the Act specifically requires that 

a rural provider provide DHS in a rural 

area and provide ‘‘substantially all’’ of 

its DHS to residents of a rural area. 

Accordingly, if an area is reclassified 

and these requirements cannot be met, 

a physician investor in a rural provider 

cannot refer Medicare patients for DHS 

to that rural provider. As noted in 

section II.A above, we have established 

a regulatory exception at § 411.353(f) for 

certain arrangements that inadvertently 

and temporarily fall out of compliance 

with certain exceptions. This new 

exception would apply to rural 

providers.

Comment: Two commenters stated 

that the proposed exception was too 

broad and would unfairly benefit 

physician-owned DHS entities in rural 

areas, especially home health agencies. 

One commenter suggested that the 

exception be limited to areas where 

there is no other provider of the 

designated health care services. 

Response: The statutory exception 

clearly applies to rural providers of DHS 

regardless of whether other DHS entities 

already operate in a particular rural area 

or serve a particular rural patient 

population. In this regard, the statute 

may benefit physician-owned entities to 

the detriment of competing DHS entities 

that are not owned by physicians. 

However, the statutory directive is clear. 

Comment: A commenter objected to 

our proposed interpretation of the term 

‘‘substantially all’’ in section 1877 of the 

Act as requiring the DHS entity to 

furnish at least 75 percent of its DHS to 

residents of a rural area. The commenter 

stated that many providers in rural areas 

are part of larger State-wide or regional 

health care systems that provide 

services outside the rural area. The 

commenter suggested that the 

‘‘substantially all’’ requirement should 

be met if the entity provides rural area 

residents with one or more DHS on a 24-

hour basis. 

Response: We disagree that a ‘‘24-

hour basis’’ rule would appropriately or 

adequately implement the 

‘‘substantially all’’ requirement. Indeed, 

the suggested test would create a 

loophole into which virtually any 

provider could fit, thereby evading the 

statutory prohibition. While we 

understand that many services in rural 

areas may be provided by entities that 

are part of larger systems, we are not 

convinced that fact should permit them 

to have physician ownership simply 

because they operate minimally in a 

rural area. We believe the Congress 

enacted the rural provider exception to 

ensure adequate access to DHS for 

residents in rural areas that might 

otherwise have difficulty attracting a 

sufficient number of providers and 

suppliers. The 75 percent test we are 

adopting fully implements the statutory 

requirement that ‘‘substantially all’’ of 

the DHS of an excepted rural provider 

be furnished to residents of a rural area. 

Comment: One commenter urged that 

physicians be permitted to own DHS 

entities in ‘‘rural’’ areas located inside 

an urban area (that is, inside a MSA). 

The commenter gave an example of a 

radiologist married to a primary care 

physician, where the nearest alternate 

radiologist is 15 miles away. In the 

commenter’s view, it would be a 

hardship for patients if the primary care 

physician were to send them to the 

remote radiology facility. 

Response: The fundamental premise 

of section 1877 of the Act is that 

physicians should not own DHS entities 

to which they refer. We see no reason 

to expand the scope of the rural 

provider exception beyond the bright 

line rural area definition provided in the 

statute. Moreover, commenters to the 

various rulemakings in section 1877 of 

the Act have consistently urged us to 

adopt ‘‘bright line’’ regulations. The 

commenter’s suggested test would blur 

an existing clear line and would present 

a substantial risk of program and patient 

fraud and abuse. 

With respect to the commenter’s 

example of the primary care physician 

(that is, the referring physician) married 

to the local radiologist (that is, the DHS 

entity for purposes of the example), the 

problem is less with the rural provider 

exception than with the financial 

relationship resulting from the family 

relationship (that is, the radiologist’s 

ownership of the DHS entity is imputed 

to the referring spouse because of the 

‘‘immediate family’’ rule). We discussed 

this problem in some detail in the Phase 

I preamble at 66 FR 885. There, we 

responded to a comment asking whether 

a referral to a physician spouse in 

another group practice, who 

subsequently orders a designated health 

service for the referred patient, could 

come within the in-office ancillary 

services exception. We responded that 

the referral should be allowed as long as 

DHS were not the reason for the original 

referral and any subsequent referrals by 

the physician spouse fit within the inoffice ancillary services exception. We 

further recognized that there could be 

some circumstances, particularly in 

underserved areas, where a spouse may 

be the only qualified provider of a 

particular designated health service. We 

indicated that we were considering a 

limited additional exception and invited 

comments. 

Having considered the issue further, 

and in the interest of ensuring access for 

patients in remote or sparsely-served 

areas, we have concluded that a limited 

exception is warranted for intra-family 

rural referrals where there are no other 

available providers or suppliers of the 

DHS in the area to furnish the 

designated health service in a timely 

manner in light of the patient’s 

condition. So as to prevent program 

abuse and to minimize any unfair 

competitive effect on non-physician 

owned DHS entities that may seek to 

provide services in rural areas, we have 

crafted a narrow exception under our 

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

Act. The new exception, at § 411.355(j), 

excepts intra-family rural referrals if the 

patient resides in a rural area and there 

is no DHS entity available to furnish the 

referred DHS to the patient in a timely 

manner in light of the patient’s 

condition (i) at the patient’s residence in 

the case of home health services or other 

services required to be furnished in the 

patient’s home (for example, certain 

DME, such as hospital beds), or (ii) 

within 25 miles of the patient’s 

residence in the case of services 

furnished outside the patient’s home. 

Although we have considered the 15-

mile radius suggested by the 

commenter, we believe a 25-mile radius 

will best serve our need to ensure access 

to care, preclude any potential for 

program abuse, and minimize the 

potential for any unfair competitive 

16084 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

effects on non-physician owned entities 

in rural areas. We note that this 

standard is consistent with that used 

elsewhere in this regulation. 

This new exception focuses on the 

location where the services are 

furnished, not where the DHS entity is 

located. In other words, if a physician 

knows that a home health agency 

located 50 miles away is willing to 

provide home health services to a 

patient, the patient may not be referred 

to a family-owned home health agency 

under this exception. The referring 

physician or the immediate family 

member must make reasonable inquiries 

as to the availability of other persons or 

entities to furnish 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 from the 

patient’s residence. Depending on the 

circumstances, reasonable inquiry might 

include, for example, consulting 

telephone directories, professional 

associations, other providers, or Internet 

resources. As with all exceptions in 

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

financial arrangement between the 

immediate family member and the DHS 

entity must not violate the anti-kickback 

statute. 

We note that while this new 

exception looks to timely availability of 

DHS, it does not take into account the 

quality of other available DHS entities. 

In other words, the exception is not 

available if a physician makes an intrafamily referral because he or she is 

dissatisfied with the quality of care 

provided by an otherwise available DHS 

entity. While quality services for 

Medicare beneficiaries and others is of 

the highest priority, it is not feasible to 

craft an objective, qualitative measure in 

the new exception. Other Federal, State, 

and local laws and regulations exist to 

address quality issues. 

C. Hospital Ownership (Section 

1877(d)(3) of the Act; Phase II; 

§ 411.356(c)(3)) 

Existing Law: 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 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 

MMA amended section 1877(d)(3) to 

provide that, effective for the 18-month 

period beginning on December 8, 2003, 

the ownership or investment interest 

must not be a specialty hospital. Section 

507 defined the term ‘‘specialty 

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

of the Act. 

Proposed Rule: In the preamble to the 

January 1998 proposed rule (63 FR 

1698), we 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. We further stated that the 

exception only protects referred 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. 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, because the statute 

does not require the physician to have 

a direct interest in the hospital (63 FR 

1713). The interest must be in the whole 

hospital, not in a part or department of 

the hospital. 

Final Rule: The Phase I final rule 

reincorporated the definition of 

‘‘hospital’’ that was originally 

established in the August 1995 final 

regulations and that was followed by the 

January 1998 proposed rule (with 

incidental conforming changes). In this 

Phase II rulemaking, we are adopting 

the January 1998 proposed rule for the 

hospital ownership exception without 

change, except for conforming 

amendments to incorporate the 

provisions of section 507 of MMA. 

Comments and responses follow. 

Comment: A commenter objected 

generally to the exception as giving 

physician-owned hospitals an unfair 

competitive advantage over not-forprofit community hospitals. The 

commenter recommended that we limit 

the exception to situations in which the 

physician-owned hospital was a sole 

community provider. 

Response: While we recognize that 

physician-owned hospitals may have a 

competitive advantage under section 

1877 of the Act, the statutory language 

is clear and applies to physician 

ownership in any hospital (but not a 

subdivision, part, or department of a 

hospital), if the DHS are provided by the 

hospital and the referring physician is 

authorized to perform services at the 

hospital. We believe that the statute 

requires a bona fide authorization to 

perform services at the hospital (for 

example, granting privileges to a 

physician who is not expected to 

perform services at the hospital is not a 

bona fide authorization to perform 

services). Notwithstanding, physician 

ownership of hospitals may implicate 

the anti-kickback statute, section 

1128B(b) of the Act, depending on the 

circumstances. For example, specialty 

hospital ventures in which investment 

opportunities are substantially limited 

to physicians in a position to refer to the 

specialty hospital may implicate the 

anti-kickback statute. Physician 

ownership interest in specialty hospitals 

may also implicate section 1877 of the 

Act, as revised by section 507 of the 

MMA. 

Comment: Several commenters, 

including several hospital trade 

associations, objected to our 

interpretation that the exception only 

applies to services furnished by the 

hospital and not to services furnished 

by other providers owned by the 

hospital. The commenters believe that 

the interpretation substantially limits 

the usefulness of the exception, since 

many hospitals provide DHS through 

entities that have separate accreditation 

or licensure. According to the 

commenters, the larger the consolidated 

entity (that is, hospital plus 

subsidiaries), the greater the attenuation 

of the financial incentive. A hospital 

trade association asserted that the 

proposed interpretation was 

inconsistent with the statutory language 

‘‘in the case of DHS provided by a 

hospital.’’ According to the association, 

if the statute only protected inpatient 

and outpatient hospital services 

provided by the hospital, rather than 

subsidiaries or affiliates, the use of the 

broader term ‘‘DHS’’ was unnecessary. 

Another commenter thought the 

proposed interpretation was 

inconsistent with the discussion in the 

January 1998 proposed rule (63 FR 

1713) relating to indirect ownership of 

a hospital through ownership of stock in 

a hospital chain.

Response: We believe our 

interpretation is correct and consistent 

with the statutory language. The 

commenter’s focus on the use of the 

term ‘‘DHS’’ ignores the modifying 

language ‘‘provided by a hospital’’ that 

immediately follows. The interpretation 

we are adopting gives meaning to every 

word in the statutory provision. The 

interpretation proffered by the 

commenters would effectively create a 

blanket exemption for for-profit hospital 

conglomerates and would create 

incentives for physicians to refer their 

patients to such conglomerates for all 

health services. Instead of attenuating 

the financial incentive to refer, 

ownership in a large hospital 

conglomerate is equally likely to 

intensify the incentive by increasing the 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16085

profit opportunities for the physician. 

Finally, the commenter’s suggested 

interpretation would give for-profit, 

hospital-owned DHS entities, including 

DME suppliers and home health 

agencies, a significant and unwarranted 

commercial advantage over their freestanding competitors. 

With respect to the comment that our 

interpretation is inconsistent with the 

discussion in the preamble to the 

January 1998 proposed rule addressing 

ownership interests in hospital chains 

(63 FR 1713), we disagree. In that 

discussion, we explained that we would 

except an indirect ownership interest in 

a hospital if a direct ownership in the 

hospital would have been excepted. We 

explained that the statutory language of 

the exception was not limited to direct 

ownership interests and that the 

exception had to be read in conjunction 

with section 1877(a)(2) of the Act, 

which establishes the principle that an 

ownership interest includes an indirect 

ownership interest for purposes of 

section 1877 of the Act. In the case of 

hospital-owned DHS entities, such as 

home health agencies, however, direct 

ownership by physicians would be 

prohibited (absent some other 

applicable exception). We see no reason 

to protect indirect ownership of such 

entities under the hospital ownership 

exception, nor do we believe that the 

Congress intended the exception to be 

used to circumvent the general 

prohibition on physician ownership of 

DHS entities. (We note that, in some 

cases, another exception-such as the 

rural provider or in-office ancillary 

services exception—may apply to 

referrals from a physician-owner of a 

hospital to a hospital-owned DHS 

entity.) Our interpretation conforms 

conceptually with the language in the 

exception precluding ownership of a 

part or subdivision of a hospital. 

VIII. Exceptions Relating to Other 

Compensation Arrangements (Section 

1877(e) of the Act; Phase II; § 411.357) 

A. Rental of Office Space and 

Equipment (Sections 1877(e)(1)(A) and 

(e)(1)(B) of the Act; Phase II; 

§ 411.357(a) and § 411.357(b)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Space and Equipment Rental 

Exception’’ at the beginning of your 

comments.]

The Existing Law: Section 

1877(e)(1)(A) and section 1877(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 and is used exclusively by the 

lessee when being used by the lessee 

(except that space leases can include 

appropriately prorated payments for 

common areas); (iii) the lease or rental 

term is at least one 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 by the Secretary 

to protect against program or patient 

abuse. ‘‘Fair market value’’ is defined in 

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 enacted 

§ 411.357(a) and § 411.357(b) (space and 

equipment rentals, respectively), which 

tracked the statutory language, 

including the definition of ‘‘fair market 

value.’’

The Proposed Rule: The preamble to 

the January 1998 proposed rule set forth 

several interpretive changes to the lease 

exceptions. First, we proposed 

interpreting the requirement that the 

lease term be for one year as permitting 

leases to be terminated for cause within 

the one-year period, provided the 

parties did not enter into another lease 

until after the expiration of the original 

term (63 FR 1713). We also proposed 

interpreting the one-year term 

requirement as requiring that any 

renewal of a lease be for at least one 

year, thereby precluding holdover 

month-to-month leases (63 FR 1713). 

Second, we proposed interpreting the 

exclusive use provisions to prohibit 

subleases, unless the sublease itself 

satisfied the conditions of the exception 

(63 FR 1714). Third, we proposed 

interpreting the exceptions as applying 

to operating leases, but not capital 

leases (63 FR 1714). Finally, we 

proposed that ‘‘per click’’ (for example, 

per use 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).

The Final Rule: The Phase I final rule 

addressed the definitions of several 

terms used in the lease exceptions, 

including: ‘‘fair market value’’, ‘‘set in 

advance,’’ ‘‘volume or value of 

referrals,’’ and ‘‘other business 

generated between the parties.’’ Under 

the final rule, these terms have uniform 

meanings wherever they appear in the 

regulations, including the lease 

exceptions. Additional discussion of the 

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

business generated,’’ and ‘‘set in 

advance’’ definitions appear elsewhere 

in this Phase II preamble in section IV. 

The final regulations for the lease 

exceptions at § 411.357(a) and 

§ 411.357(b) adopt the regulatory 

language of the January 1998 proposed 

rule, with minor changes noted in the 

responses to comments below. 

Specifically: 

• Leases or rental agreements may be 

terminated with or without cause as 

long as no further agreement is entered 

into within the first year of the original 

lease term and any new lease fits on its 

own terms in an exception. 

• Month-to-month holdover leases are 

allowed for up to six months if they 

continue on the same terms and 

conditions as the original lease. 

• All leases or rental agreements, 

whether operating or capital, are eligible 

for the lease exceptions if they meet the 

applicable criteria. 

• We have revised the ‘‘exclusive 

use’’ provision to allow subleases in 

many cases. The exclusive use test will 

be considered met as long as 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). A subleasing 

arrangement may create a separate 

indirect compensation arrangement 

between the lessor and the 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 as long as 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 in § 411.351 

and § 411.354. 

Our responses to comments on the 

lease exceptions follow. 

Comment: Several commenters 

requested that we interpret the one-year 

term rule to include leases or rental 

agreements that provide for termination 

without cause, as long as the parties do 

16086 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

not enter into a new agreement during 

the original term. According to the 

commenters, parties frequently prefer to 

use a ‘‘without cause’’ provision even if 

they have sufficient grounds to justify a 

‘‘for cause’’ termination to avoid the 

costs of litigation. Several commenters 

disagreed with our position that upon 

expiration of a contract’s term, holdover 

month-to-month tenancies would trigger 

the statutory prohibition. A commenter 

suggested that as long as the holdover 

was on the same terms and conditions 

as the original lease, there was little 

additional risk of abuse. 

Response: We agree that there is little 

risk from ‘‘without cause’’ terminations 

as long as the parties do not enter into 

a new lease or rental agreement during 

the first year of the original term and 

any new agreement fits on its own terms 

in an exception. We have modified 

§ 411.357(a)(2) and § 411.357(b)(3) 

accordingly. We also agree that there is 

little risk if a holdover month-to-month 

tenancy or possession proceeds on the 

same terms and conditions as the 

original lease or rental agreement for a 

limited time (that is, no more than six 

months). We have added § 411.357(a)(7) 

and § 411.357(b)(6) to reflect these 

interpretations.

Comment: One commenter sought 

clarification regarding whether the 

requirement that an arrangement be 

commercially reasonable in the absence 

of referrals only applies to referrals of 

Medicare DHS. The commenter said that 

a broader interpretation would prohibit 

the payment of any amounts for referrals 

of private pay DHS as part of the 

acquisition of the practice of a nonretiring physician. 

Response: In Phase I, we defined a 

referral for purposes of section 1877 of 

the Act to mean a request for, or plan 

of care that includes, a ‘‘designated 

health service’’ and ‘‘designated health 

service’’ to include only Medicarecovered services. We intend to use 

uniform definitions in these regulations 

whenever possible. For purposes of 

§ 411.357(a)(6) and § 411.357(b)(5), we 

interpret the restriction to mean that the 

lease or rental agreement must be 

commercially reasonable even if no 

referrals of Medicare DHS are made to 

the DHS entity. We note, however, that, 

in addition to the commercial 

reasonableness condition, sections 

1877(e)(1)(A)(iv) and (e)(1)(B)(iv) of the 

Act provide that rental charges may not 

be determined in a manner that takes 

into account ‘‘other business generated 

between the parties.’’ As discussed in 

this preamble in section IV, 

§ 411.354(d)(3) provides that ‘‘other 

business generated between the parties’’

includes private pay health care 

business (but not personally performed 

services). Of course, as with all 

exceptions and consistent with the 

statutory scheme and purpose, the 

conduct of the actual financial 

relationship between the parties must 

comport with the terms of the written 

agreement. The written agreement is the 

documentary evidence of the underlying 

financial relationship. 

Comment: A number of commenters 

objected to the interpretation in the 

January 1998 proposed rule that the 

exclusive use requirement in the lease 

exceptions prohibits subleases. These 

commenters recommended that we 

permit subleases if they meet the other 

requirements of the exception. 

Response: We concur with the 

commenters that the Congress did not 

intend for the lease exceptions to 

preclude lessees from subletting leased 

space or equipment. The statutory lease 

exceptions provide that the lessee must 

use the leased space or equipment 

‘‘exclusively’’ when the lessee is using 

the space or equipment. Upon further 

consideration of the statutory scheme 

and purpose, we believe a fair reading 

of the exclusive use provision in the 

context of the lease exceptions is that 

the rented space or equipment cannot be 

shared with the lessor when it is being 

used or rented by the lessee (or any 

subsequent sublessee). In other words, a 

lessee (or sublessee) cannot ‘‘rent’’ space 

or equipment that the lessor will be 

using concurrently with, or in lieu of, 

the lessee (or sublessee). (The statute 

and these regulations do allow shared 

common space when the rent is 

appropriately prorated.) Thus, for 

example, if a DHS entity rents 

examination rooms from a physician 

practice, the physician practice may not 

use those same examination rooms 

while the lessee (or a sublessee) is using 

or renting them. 

To preclude referring physicians or 

group practices from circumventing this 

rule by setting up separate real estate 

holding companies or subsidiaries to act 

as the ‘‘lessor’’, we are modifying the 

regulations to preclude sharing of rented 

space with the lessor or any person or 

entity related to the lessor, including, 

but not limited to, group practices, 

group practice physicians, or other 

providers owned or operated by the 

lessor. We believe our interpretation 

effectuates congressional intent to curb 

abusive rental arrangements, gives 

meaning to the exclusive use 

requirement in the statutory exceptions, 

and, in conjunction with other 

conditions in the exceptions (such as 

the fair market value and ‘‘reasonable 

and necessary for legitimate business 

purposes’’ requirements) adequately 

protects against abuses, while allowing 

legitimate subletting arrangements. 

Persons or entities should be aware 

that, depending on the circumstances, a 

sublease may create an indirect 

compensation arrangement between the 

original lessor and the sublessee 

through a chain of leases (that is, 

compensation arrangements). The 

indirect compensation arrangement thus 

created would have to fit in the indirect 

compensation arrangements exception 

in § 411.357(p). 

Finally, we note that, depending on 

the circumstances, equipment leases 

may be eligible alternatively under the 

new fair market value exception in 

§ 411.357(l) (66 FR 917). However, that 

exception, which is limited to items and 

services provided by physicians, does 

not apply to space leases. 

Comment: Several commenters 

disagreed with our interpretation that 

the lease exceptions apply only to 

operating leases and not capital leases. 

Response: We agree with the 

commenters. Any kind of bona fide

lease arrangement that in form and 

substance satisfies the regulatory 

conditions can fit in the exceptions. 

B. Bona Fide Employment Relationships 

(Section 1877(e)(2) of the Act; Phase II; 

§ 411.357(c)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Employment Relationships Exception’’

at the beginning of your comments.]

Existing Law: Section 1877(e)(2) of the 

Act establishes an exception for 

payments made by an employer to a 

physician (or immediate family 

member) with whom the employer has 

a bona fide employment relationship for 

the provision of services, if certain 

conditions are met. These conditions 

require that—

(1) The employment is for identifiable 

services; 

(2) The amount of the payment is fair 

market value for the services and is not 

determined in a manner that takes into 

account (directly or indirectly) the 

volume or value of referrals by the 

referring physician; 

(3) The employment agreement would 

be commercially reasonable even if no 

referrals were made to the employer; 

and 

(4) The employment meets such other 

requirements as the Secretary may 

impose to protect against program or 

patient abuse. 

The statute expressly provides that 

employers may pay employees 

productivity bonuses based on services 

the employee personally performs. The 

statute defines an ‘‘employee’’ as an 

individual who would be considered an 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16087

employee under the usual common law 

rules applicable in determining the 

employer-employee relationship, as 

applied for purposes of section 

3121(d)(2) of the Internal Revenue Code 

of 1986. (See section 1877(h)(2) of the 

Act.) We note that there is no 

presumption of employment under 

section 1877 of the Act. 

The August 1995 final rule 

incorporated the provisions of sections 

1877(e)(2) and 1877(h)(2) of the Act into 

the regulations in § 411.357(c) and 

§ 411.351, respectively, without 

imposing any additional requirements. 

Proposed Rule: The January 1998 

proposed rule retained the employee 

exception in § 411.357(c), with certain 

additional requirements. The preamble 

to the January 1998 proposed rule took 

the position that the productivity bonus 

provision created an improper financial 

incentive for physicians to generate 

referrals of DHS that the physician 

would personally perform. Thus, under 

the authority in section 1877(e)(2)(C) of 

the Act to add additional requirements 

in the interest of protecting against 

abuse, we proposed excluding any 

productivity bonus based on a 

physician’s own referrals of DHS, even 

where personally performed. We 

pointed out that this restriction would 

not limit a physician’s ability to receive 

productivity bonuses for generating 

referrals of non-DHS or non-covered 

services. The proposed rule also added 

a restriction on compensation related to 

other business generated between the 

parties that is not present in the statute. 

The proposed rule made no changes to 

the August 1995 final rule definition of 

‘‘employee.’’

Final Rule: We are adopting the 

January 1998 proposed rule without the 

proposed limitation on productivity 

bonuses or the addition of the ‘‘other 

business generated’’ language. The 

limitation is no longer relevant given 

our determination in the Phase I 

rulemaking that personally performed 

DHS are not referrals for purposes of 

section 1877 of the Act. Moreover, as we 

explained in the Phase I preamble, the 

statute contemplates that employed 

physicians can be paid in a manner that 

directly correlates to their own personal 

labor, including labor in the provision 

of DHS. What the statute does not 

permit are payments for an employee’s 

productivity in generating referrals of 

DHS performed by others (66 FR 876). 

Except as permitted under the group 

practice definition for employees of 

group practices, ‘‘incident to’’ DHS may 

not be the basis for productivity bonuses 

paid to employed physicians. We are 

adopting without change the January 

1998 proposed rule definition of 

‘‘employee’’, which follows the 

statutory language. 

Comments to the ‘‘employee’’

exception and our responses follow. 

Comment: Several commenters asked 

us to expand the statutory definition of 

‘‘employee’’ in § 411.351 beyond the 

common law definition established in 

the statute to include leased employees 

as defined by State law. 

Response: We believe that the 

statutory definition is clear and that 

incorporation of State law definitions of 

employment would be inconsistent with 

the statute. As noted above in the 

discussion of group practices, to the 

extent that a leased employee is a bona 

fide employee of the DHS entity under 

IRS rules, remuneration paid to that 

employee would be eligible under the 

exception. As with all exceptions, the 

DHS entity would bear the burden of 

establishing the necessary indicia of 

employment. There is no presumption 

of employment. 

Comment: A commenter expressed 

concern that physicians employed by 

health care systems are pressured into 

referring to DHS entities within the 

same health system, sometimes without 

regard to a patient’s best interests. Other 

commenters, however, urged that 

employers should be allowed to control 

their employees and should be able to 

require referrals to the employer or an 

entity affiliated with the employer. 

These commenters believed that the 

proper focus is on whether the referral 

requirement interferes with a 

physician’s medical judgement. A 

commenter representing emergency 

room physicians explained that 

emergency room physicians are often 

constrained when making referrals 

because of hospital policies and rules, 

on-call policies, contractual 

arrangements, patient’s prior contact 

with primary care doctors or specialists, 

common practice, or professional 

courtesy. 

Response: We agree that health care 

referrals should always take a patient’s 

best interests into account and that 

referral requirements should not 

interfere with a physician’s medical 

judgement. However, we believe that 

section 1877 of the Act was not 

intended to interfere unduly with 

legitimate employment and health 

system structures. As discussed above, 

we have narrowed the rule for directed 

referrals in § 411.354(d)(4) to employers, 

managed care organizations, and certain 

contractual arrangements (including 

many emergency room physician 

contracts). We have concluded that a 

referral restriction will not violate the 

volume and value of referrals standard 

in section 1877 of the Act if—

• The referring physician is 

compensated at fair market value for 

services performed in an arrangement 

that otherwise fits within the 

employment (or another) exception; 

• The referral restriction relates solely 

to the physician’s services covered by 

the scope of the employment or contract 

and is reasonably necessary to effectuate 

the legitimate purposes of the 

compensation relationship; and

• Referrals are not required (directly 

or indirectly)—

A. When the patient expresses a 

different choice, 

I. When the patient’s insurer 

determines the provider, or when the 

referral is not in the best medical 

interest of the patient in the physician’s 

judgment.

We believe this narrower rule strikes a 

reasonable balance between the 

legitimate business needs of employers 

and health systems, and protection of 

patient choice and physician judgment. 

Our determination here is limited to 

the effect of directed referrals under 

section 1877 of the Act. Other laws and 

regulations exist to address medically 

inappropriate referrals. 

Comment: A number of commenters 

objected to the January 1998 proposal to 

prohibit productivity bonuses based on 

personally performed DHS. Some 

commenters suggested that the 

limitation should apply only to referrals 

of DHS performed by others. Some 

commenters urged, however, that 

employers be permitted to base 

productivity bonuses on DHS rendered 

under the supervision of an employee 

or, in the case of physicians employed 

by a group practice, under the 

supervision of another member of the 

group practice. A commenter urged that 

productivity bonuses be permitted for 

supervision of ‘‘incident to’’ services 

that are not DHS. 

Response: We are not adopting the 

1998 proposed prohibition. In Phase I, 

we concluded that personally performed 

DHS are not referrals within the 

meaning of section 1877 of the Act. 

Accordingly, physicians may be paid 

productivity bonuses based on 

personally performed services, 

including personally performed DHS. In 

addition, nothing in the exception 

precludes a productivity bonus based 

solely on personally performed 

supervision of services that are not DHS, 

since that bonus would not take into 

account the volume or value of DHS 

referrals. 

Productivity bonuses based on 

supervising DHS raise a different issue. 

We are concerned that, in some cases, 

a payment for supervision services may 

16088 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

merely be a proxy payment for having 

generated the DHS being supervised. In 

many cases, especially in hospitals, the 

supervision required under Medicare 

rules is minimal, and the supervisor 

need do nothing more than be present 

in the facility while conducting other 

work. Accordingly, we are concerned 

that such payments could mask 

improper cross-referral or 

circumvention schemes. We note that 

any payment for supervision services 

must meet the fair market value 

standard in the exception. 

As for productivity bonuses for 

employees of group practices, we expect 

that most group practices will rely on 

the in-office ancillary services 

exception, rather than the employment 

exception, to protect referrals by 

employed physicians. In that case, the 

group practice may compensate the 

employed physicians under the 

productivity bonus provisions of the 

‘‘group practice’’ definition in § 411.352 

(discussed above at section V.C). If a 

group practice chooses to rely on the 

employment exception, it must restrict 

productivity bonuses to personally 

performed services and comply with the 

overall fair market value requirement. 

Comment: Two commenters asked 

whether the employment exception 

would be satisfied if an employer paid 

an employed physician a flat fee for 

each mid-level provider he or she 

supervises in order to compensate the 

physician for the time spent on 

supervision. 

Response: We see nothing in the 

exception that would bar flat fee 

compensation based on the number of 

mid-level providers under the 

physician’s supervision, as long as the 

compensation is fair market value for 

actual time dedicated to supervision 

services and is not determined in any 

manner that takes into account, directly 

or indirectly, the volume or value of 

DHS referrals generated by the 

physician. The burden of proving the 

time will be on the DHS entity.

Comment: A number of commenters 

raised questions regarding physician 

compensation that is stable and 

unvarying, but could still be viewed as 

predicated on the volume or value of 

referrals. For example, some 

commenters inquired regarding 

exclusivity provisions in employment 

contracts (for example, contracts for 

hospital-based physicians). The 

commenters noted that the exclusivity 

provision could be viewed as taking into 

account the volume or value of referrals, 

even if the dollar compensation paid to 

the exclusively employed physician is 

unvarying. One commenter observed 

that exclusivity in a hospital-based 

physician contract may be important for 

liability and insurance purposes. 

Similarly, some commenters asked for 

clarification regarding inclusion of 

covenants not to compete in 

employment contracts. 

Response: We agree that exclusive 

contracting arrangements between 

hospitals and traditional hospital-based 

physicians (radiologists, pathologists, 

anesthesiologists, and emergency room 

physicians) can, in certain 

circumstances, serve legitimate business 

purposes. To the extent that these 

payments are for personally performed 

services, we do not believe they raise 

any substantial concerns under the 

statute or regulations. If the payments 

reflect or take into account nonpersonally performed services, they may 

raise concerns under the statute and 

would merit case-by-case determination, 

regardless of the apparent fixed 

payment. In the circumstances 

described by the commenters, noncompete covenants in employment 

contracts generally do not take into 

account the volume or value of referrals. 

However, the payment for the noncompete covenant must be at fair market 

value. (We note that, in some contexts, 

these covenants in conjunction with a 

lease arrangement may not be able to 

satisfy the special fair market value 

rules for leases of space and equipment.) 

Comment: Several commenters urged 

that the exception permit hospitals to 

pay incentives to employed physicians 

based on meeting hospital or drug 

utilization targets. The commenters 

believe that these payments should not 

be construed as based on the volume or 

value of referrals for purposes of section 

1877 of the Act. 

Response: There is no exception in 

the statute or in these regulations that 

would permit payments to physicians 

based on their utilization of DHS, except 

as specifically permitted by the risksharing arrangements, prepaid plans, 

and personal service arrangements 

exceptions. None of those exceptions 

permit those payments other than in the 

context of services provided to enrollees 

of certain health plans. We believe that 

the Congress intended to limit these 

kinds of incentives consistent with the 

civil monetary penalty provision at 

section 1128A(b)(1) of the Act that 

prohibits a hospital from paying 

physicians to reduce or limit care to 

hospital patients. Given that 

prohibition, we cannot say that 

payments based on lowering utilization 

present no risk of fraud or abuse. Our 

specific authority in section 

1877(e)(2)(D) of the Act to add 

additional requirements to the 

employment exception is limited to 

requirements needed to protect against 

program or patient abuse. Since section 

1128A(b)(1) of the Act represents a 

legislative determination of potential 

abuse, we cannot create an exception for 

those activities. 

Comment: According to a commenter 

representing an integrated delivery 

system, employers should be able to 

reward employees based on 

appropriateness of referrals as measured 

by quality-oriented medical records 

review and compliance with clinical 

protocols and guidelines. In addition, 

the commenter supported allowing 

employers to pay employed physicians 

in part based on volume data in 

relationship to industry norms. The 

commenter believed that the statutory 

language, unencumbered by the 1998 

proposed addition, would achieve this 

result. 

Response: We agree that nothing in 

the statutory exception bars payments 

based on quality measures, as long as 

the overall compensation is fair market 

value and not based directly or 

indirectly on the volume or value of 

DHS referrals, and the other conditions 

of the exception are satisfied. For 

example, nothing in the statute or 

regulations would prohibit payments 

based on achieving certain benchmarks 

related to the provision of appropriate 

preventive health care services or 

patient satisfaction. To the extent that a 

payment gives a physician an incentive 

to reduce the volume or value of DHS, 

it must be a qualified physician 

incentive plan payment under the 

personal service arrangements exception 

or fit in the prepaid plans or risksharing arrangements exceptions. 

Moreover, hospitals should be aware 

that payments to reduce or limit 

services—which could include certain 

payments based on ‘‘appropriateness’’ of 

referrals—may violate the civil money 

penalty provision at section 1128A(b)(1) 

of the Act. 

Comment: A commenter presented 

the following scenario. A hospital 

employs a physician at an outpatient 

clinic and pays the physician for each 

patient seen at the clinic. The physician 

reassigns his or her right to payment to 

the hospital, and the hospital bills for 

the Part B physician service (with a site 

of service reduction). The hospital also 

bills for the hospital outpatient services, 

which may include some procedures 

furnished as ‘‘incident to’’ services in a 

hospital setting. The commenter’s 

concern is that the payment to the 

physician is inevitably linked to a 

facility fee, which is a designated health 

service (that is, a hospital service). 

Accordingly, the commenter wondered 

whether the payment to the physician 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16089

would be considered an improper 

productivity bonus based on a DHS 

referral (that is, the facility fee). 

Response: The fact that corresponding 

hospital services are billed would not 

invalidate an employed physician’s 

personally performed work, for which 

the physician may be paid a 

productivity bonus (subject to the fair 

market value requirement).

Comment: A commenter described the 

following scenario. A DME supplier 

leases a supply closet in a physician’s 

office. The DME supplier and the 

physician share a non-physician 

employee who measures braces and fits 

other supplies. If the physician does not 

see the patient, the DME supplier bills 

Medicare. If the physician does see the 

patient, the physician bills Medicare for 

a level 1 service. The DME supplier and 

the physician each pay for the 

employee’s services for which each 

bills. The commenter inquired whether 

the shared employee creates a financial 

relationship. 

Response: The scenario presented by 

the commenter suggests several possible 

financial relationships. First, the 

‘‘shared’’ employee raises significant 

issues. If the salary paid by the DME 

supplier covers any portion of the 

employee’s work that benefits the 

physician (for example, work for which 

the physician would otherwise have 

incurred costs), that portion of the 

employee’s salary could be remunerated 

to the physician that would create a 

financial relationship between the 

physician and the DME company. 

Second, if the shared employee is a 

family member of a referring physician, 

the employee’s salary payments from 

the DME supplier would also create a 

compensation arrangement with the 

referring physician. Third, the rental of 

the supply closet creates a direct 

financial relationship between the 

physician and the DME supplier. 

Comment: A commenter inquired 

whether a physician employed by a 

hospital-owned management services 

organization (‘‘MSO’’) could refer to the 

hospital if his or her compensation from 

the management services company fits 

in the employment exception. 

Response: The arrangement described 

by the commenter is a potential indirect 

compensation arrangement (hospital—

MSO—physician) that would need to be 

analyzed under the indirect 

compensation rules (discussed above in 

section II.B). Under the indirect 

compensation analysis, the physician’s 

compensation would be excepted if it is 

fair market value for services and does 

not reflect the volume or value of 

referrals to the hospital (that is, the DHS 

entity). The employment exception is 

not applicable in the commenter’s 

example, because the exception applies 

to direct employment arrangements 

between a referring physician and an 

employer that is an entity furnishing 

DHS (for example, section 1877(e)(2)(C) 

of the Act: ‘‘even if no referrals were 

made to the employer’’) (emphasis 

added). In the example, the hospital—

not the employer MSO—is the entity 

furnishing DHS. Thus, the referring 

physician’s financial relationship with 

the hospital is indirect. 

Comment: A commenter urged that a 

physician employed by a hospital 

should be allowed to refer to a home 

health agency owned by the hospital. 

Response: As in the preceding 

comment, the commenter’s scenario 

potentially involves an indirect 

compensation arrangement between the 

employed physician and the home 

health agency (the DHS entity) that 

would have to fit in the indirect 

compensation arrangements exception. 

Under that exception, the compensation 

paid by the hospital to the physician 

could not vary or otherwise take into 

account referrals to the home health 

agency. However, the hospital can 

require its employees to refer to its 

home health agency without running 

afoul of the restriction on compensation 

that reflects referrals if the requirements 

of § 411.354(d)(4) are satisfied. 

C. Personal Service Arrangements 

(Section 1877(e)(3) of the Act; Phase II; 

§ 411.357(d)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Personal Services Exception’’ at the 

beginning of your comments.]

Existing Law: Section 1877(e)(3) of the 

Act establishes an exception for 

personal service arrangements if—

(1) The arrangement is set out in 

writing, signed by the parties, and 

specifies the services covered by the 

arrangement; 

(2) The arrangement covers all of the 

services to be provided by the physician 

(or immediate family member) to the 

entity; 

(3) The aggregate services contracted 

for do not exceed those that are 

reasonable and necessary for the 

legitimate business purposes of the 

arrangement; 

(4) The term of the arrangement is for 

at least one year;

(5) The compensation paid over the 

term is set in advance, does not exceed 

fair market value, and, except for certain 

physician incentive plans, is not 

determined in a manner that takes into 

account the volume or value of referrals 

or other business generated between the 

parties; 

(6) The services do not involve the 

counseling or promotion of an unlawful 

business arrangement or other activity; 

and 

(7) The arrangement meets the other 

requirements that the Secretary may 

impose by regulation to protect against 

program or patient abuse. 

For purposes of the exception, a 

physician incentive plan (PIP) is 

defined in section 1877(e)(3)(B)(ii) of 

the Act as ‘‘any compensation 

arrangement between an entity and a 

physician or physician group that may 

directly or indirectly have the effect of 

reducing or limiting services provided 

with respect to individuals enrolled 

with the entity.’’ Under a PIP, 

compensation may be determined in a 

manner that takes into account (through 

a withhold, capitation, bonus or 

otherwise) directly or indirectly the 

volume or value of referrals or other 

business generated between the parties, 

provided that the PIP meets the 

following requirements—

(1) No specific payment is made as an 

inducement to reduce or limit medically 

necessary services provided with 

respect to a specific enrolled individual; 

(2) If the PIP places the physician at 

substantial financial risk, the PIP 

complies with the requirements in 

section 1876(i)(8)(A)(ii) of the Act; and 

(3) Upon the Secretary’s request, the 

entity provides the Secretary with 

access to descriptive information 

regarding the PIP to enable the Secretary 

to determine whether the PIP is in 

compliance with applicable 

requirements under the personal 

services exception. 

The August 1995 final rule 

incorporated section 1877(e)(3) of the 

Act into regulations in § 411.357(d) and 

the definition of ‘‘physician incentive 

plan’’ in § 411.351, without imposing 

any additional requirements. 

Proposed Rule: The January 1998 

proposed rule contained several 

technical changes and some additional 

proposed interpretations. The technical 

changes would conform the PIP 

requirements to the regulations 

governing PIPs issued on March 27, 

1996 (61 FR 13430) established in 

§ 417.479; delete § 411.357(d)(3), a timesensitive provision that is now obsolete; 

and reorder certain paragraphs for 

clarity. 

We proposed interpreting the 

exception as covering services furnished 

by a physician or his or her immediate 

family member (63 FR 1701). We 

proposed interpreting the requirement 

that the proposed arrangement cover all 

services to be provided by the physician 

(or immediate family member) to permit 

multiple agreements between the 

16090 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

physician and the entity if each 

individual agreement fits in an 

exception and all of the agreements 

incorporate one another by reference (63 

FR 1701). With respect to covered 

‘‘services’’ under the exception, we 

concluded that the exception is limited 

to ‘‘personal services’’, that is, services 

of any kind performed personally by an 

individual for an entity, but not 

including any items or equipment. 

Thus, ‘‘personal services’’ would not be 

limited to generic Medicare services 

(defined in § 400.202). We further 

interpreted the exception to permit the 

contracting physician (or immediate 

family member) to perform the services 

personally or to provide the services 

through technicians or others whom 

they employ (63 FR 1701). We 

interpreted the exception to apply to 

situations in which an entity has an 

arrangement with either an individual 

physician (or immediate family 

member) or a group practice to provide 

personal services. Thus, a hospital 

could use the exception if it contracted 

with a group practice for purposes of 

having group members serve as the 

hospital’s staff (63 FR 1702). 

With respect to PIPs, we concluded 

that the exception applies only when 

the entity paying the physician or 

physician group is the kind of entity 

that enrolls its patients, such as a health 

maintenance organization (63 FR 1701).

Final Rule: As described in more 

detail in the responses to comments, we 

are adopting the January 1998 proposed 

rule, with some modifications. These 

modifications include clarifying the 

treatment of the termination provisions, 

clarifying that payments from 

downstream subcontractors are 

included in the physician incentive 

plan exception, and easing the 

incorporation by reference rule. These 

changes are discussed in greater detail 

in the following comments and 

responses. In addition, we are making a 

technical change to § 411.357(d)(2)(iii) 

(the physician incentive plan (PIP) 

exception) by updating the citations to 

reflect that, since January 1, 1999, the 

PIP requirements that apply to Medicare 

risk contracts have been set forth at 

§ 422.208 and § 422.210. 

As indicated in the Phase I preamble 

(66 FR 897) and above in this preamble, 

we believe that the personal service 

arrangements exception is the 

applicable exception for most 

foundation-model physician practices. 

The fair market value exception may 

also be available, depending on the 

circumstances. Changes we have made 

to the regulations, particularly in the 

definitions of ‘‘referral’’ and ‘‘set in 

advance,’’ should enable foundationmodel practices to use the personal 

service arrangements exception to 

engage freely in common foundationmodel structures and compensation 

arrangements. In particular, the 

regulations make clear that independent 

contractor physicians—including most, 

if not all, foundation-model 

physicians—can receive compensation 

that takes into account the volume or 

value of personally performed services 

(that is, services that are not referrals for 

purposes of section 1877 of the Act) and 

can be compensated using a percentagebased compensation methodology as 

long as the methodology is set in 

advance. We also discuss, in the 

following responses to comments, new 

‘‘safe harbors’’ for determining fair 

market value for physician services. 

Comment: Several commenters 

suggested that the exception not be 

limited to contracts between entities 

and physicians or group practices. For 

example, the commenters suggested that 

contracts with hospitals, universities, or 

corporations for the services of 

employed physicians should be 

included. 

Response: In light of the new 

exceptions for fair market value 

compensation arrangements in 

§ 411.357(l), indirect compensation 

arrangements in § 411.357(p), and risksharing arrangements in § 411.357(n), 

we do not believe any further change is 

necessary to accommodate the types of 

arrangements described by the 

commenter under section 1877 of the 

Act. 

Comment: Several commenters sought 

clarification concerning whether the 

aggregate compensation paid under a 

personal services arrangement needed to 

be set in advance. 

Response: The aggregate 

compensation need not be set in 

advance under the personal service 

arrangements exception. The 

requirements under the ‘‘set in 

advance’’ standard are set forth in 

§ 411.354(d)(1) and discussed in this 

Phase II preamble at section IV above. 

Comment: Many commenters stated 

that the proposed regulations would not 

permit any termination of a personal 

service arrangement without cause 

before the end of the one-year term. 

These commenters believed that 

termination should be permitted for any 

reason as long as the parties do not enter 

into the same or substantially the same 

arrangement within the original term. 

Response: As with leases, we agree 

that there is little risk as long as the 

parties do not enter into the same or 

substantially the same arrangement 

during the first year of the original term 

and any subsequent agreement fits on its 

own terms in an exception. This 

provision includes, but is not limited to, 

arrangements for the same or 

substantially same services to the same 

or substantially same patients or 

entities. We have modified 

§ 411.357(d)(1)(iv) to reflect this 

interpretation. 

Comment: A number of commenters 

urged that we expand the PIP exception 

to include incentive plans with entities 

other than HMOs. Commenters also 

advocated for expansion of the PIP 

exception to include arrangements 

involving subcontractors of the HMO. 

Response: The PIP exception in the 

final rule has been modified to clarify 

that it applies to downstream 

subcontractor arrangements related to 

health plan enrollees. We addressed the 

issue of incentive plans with other 

entities in Phase I in connection with 

the new risk-sharing arrangements 

exception, discussed in the Phase I 

preamble (66 FR 912–914). 

Comment: Several commenters 

recommended that the exception be 

modified to allow physicians to hire 

independent contractors or use wholly 

owned companies to perform services 

they have contracted to provide. 

Response: The commenter’s proposal 

would present a potential for abuse. The 

personal service arrangements exception 

is not limited to professional services, 

and physicians may be hired to provide 

non-physician services as well. 

Allowing physicians to use independent 

contractors to provide services would 

allow a physician to enter into brokering 

arrangements for virtually any kind of 

service and take a fee as a middle 

person, without actually performing any 

services. This is contrary to the intent 

and purpose of the statute. Using bona 

fide employees to provide contract 

services is different. The employment 

relationship ties the employee to the 

physician in a manner evidencing a 

bona fide business operated by the 

physician to provide the services. Along 

these same lines, we agree that a 

physician should be able to use a 

wholly owned company to provide 

contracted services under the exception. 

Comment: One commenter inquired 

about the relationship between 

supervision requirements and services 

provided by a physician’s employees. 

Response: Nothing in these 

regulations affects the supervision 

necessary for Medicare payment and 

coverage purposes. A physician may 

only provide services through his or her 

employees if he or she provides the 

requisite level of supervision under the 

applicable payment and coverage rules.

Comment: Several commenters 

objected to our proposed interpretation 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16091

that items and equipment cannot be 

included in an arrangement under the 

personal service arrangements exception 

(63 FR 1701). These commenters urged 

that equipment or items incidental or 

peripheral to the provision of personal 

services should be covered by the 

exception, if the equipment or items 

comprise only a minor component of 

the overall arrangement. These 

commenters urged that providers not be 

required to parse an arrangement 

through several exceptions. One 

commenter noted that there is a 

difference between a lease, in which 

exclusive possession of the leased 

equipment is transferred, and a services 

contract in which the services provider 

uses his or her own equipment to 

provide a service. One commenter 

inquired, for example, whether parties 

contracting for personal services and an 

equipment lease would have to have 

two separate contracts. 

Response: We have reconsidered our 

position on items or equipment under 

the personal service arrangements 

exception. It is a common practice for 

many independent contractors to 

provide the tools of their trade in 

connection with their services contracts. 

As a practical matter, given the 

similarities between the personal 

service arrangements and equipment 

rental exceptions, the proposed 

exclusivity rule would be unnecessarily 

formalistic. Both exceptions require fair 

market value compensation that does 

not take into account the volume or 

value of DHS referrals or other business 

generated by the referring physician. For 

purposes of determining fair market 

value, however, we will separate 

services and equipment contained in a 

single arrangement. As previously 

noted, in all cases the conduct of the 

actual financial relationship between 

the parties must comport with the terms 

of the written agreement. 

Comment: Several commenters 

inquired about various forms of 

remuneration to ‘‘voluntary’’ or 

‘‘affiliated’’ physicians. For example, 

one commenter wanted the exception to 

cover ‘‘voluntary leadership’’

arrangements in which physicians 

volunteer several hours per week to 

enhance patient care or further an 

organization’s health care mission, 

receiving only incidental out-of-pocket 

expenses or training. According to the 

commenter, the time volunteered by the 

physician almost always exceeds the 

value of the training and costs incurred. 

Response: Nothing in the statute 

precludes a physician from ‘‘donating’’

time spent in excess of the fair market 

value of the compensation received in 

the circumstances described by the 

commenter. 

Comment: A commenter explained 

that many integrated delivery systems 

rely on affiliation agreements to 

encourage integration in managed care 

endeavors. The commenter believed that 

integrated delivery systems should be 

able to structure compensation under 

affiliation agreements that reflects the 

volume or value of appropriate referrals. 

The commenter suggested that the PIP 

exception in § 411.355(d)(2) be 

expanded to apply equally to 

compensation ‘‘intended to improve the 

quality of patient care.’’

Response: As discussed earlier in the 

context of employment arrangements, 

we do not believe an expansion of the 

physician incentive plans exception is 

appropriate. Compensation 

arrangements that reward physicians for 

reducing or limiting care to patients 

under their clinical care are subject to 

abuse. (See, for example, section 

1128A(b)(1) of the Act.) The only 

permitted arrangements are those that 

will fit in an existing exception. We 

note that physician incentive payments 

under existing exceptions are limited to 

enrollees of a health plan. Section 1877 

of the Act is not a per se prohibition on 

other forms of incentive payments that 

are not based on the volume or value of 

referrals or other business generated 

between the parties and that do not 

directly or indirectly reduce or limit 

medically necessary patient care. For 

example, a bonus paid to a physician for 

ensuring that his or her patients 

received preventive care services would 

not be considered to be a payment to 

reduce or limit medically necessary 

services. 

Comment: Several commenters stated 

that requiring multiple agreements to 

incorporate one another by reference 

imposes an undue administrative 

burden on providers, particularly large 

providers with high volumes of 

physician contracts, all subject to 

various commencement and termination 

dates. In addition, one commenter was 

concerned that the incorporation 

requirement potentially created a 

situation in which an agreement could 

be technically breached due to a default 

under a marginally related contract. The 

commenter offered the following 

example: if the wife of a physician were 

to breach her contract as a fitness 

instructor at a hospital, that breach 

could taint the hospital’s contract with 

her spouse’s group practice for the 

provision of medical services to hospital 

patients. Some commenters 

recommended that the incorporation 

requirement be deleted or that it be 

changed to require a cross-reference to 

a master list of contracts that would be 

maintained and updated centrally.

Response: We agree that the 

incorporation requirement may impose 

a significant burden on entities. We 

included the incorporation requirement 

to fulfill the statutory directive in 

section 1877(e)(3)(A)(ii) of the Act that 

arrangements cover all of the services to 

be provided. To alleviate the burden on 

entities, we are adopting the 

commenters’ suggestion and changing 

the regulations to require either 

incorporation of other agreements or 

cross-referencing to a master list of 

contracts that is maintained and 

updated centrally. We understand that 

some providers may organize their 

contracting functions by department or 

otherwise have more than one central 

repository for contracting data. The 

master list alternative will be satisfied if 

more than one master list is maintained 

and cross-referenced, so long as the 

several master lists, taken together, 

cover all of the contracts with the 

referring physician or immediate family 

member. Moreover, annual or other 

regular financial statements (such as 

quarterly statements) that clearly show 

parties, dates, payments, and purposes 

of payments separately for each 

personal service contract can qualify as 

a master list if the statements are 

appropriately cross-referenced in the 

agreement. We are adding a requirement 

that the master list or lists be made 

available for inspection by the Secretary 

upon request and that the list or lists be 

maintained in a manner that preserves 

the historical record (that is, updating 

should not be done in a manner that 

erases records of past contracts). We 

believe this solution adequately fulfills 

the statutory ‘‘covers all’’ requirement 

while minimizing the burden on 

entities. 

Comment: A commenter expressed 

concern that the personal service 

arrangements exception does not 

contain an exception for productivity 

bonuses, noting that this is a particular 

issue for contractors of group practices, 

who under the January 1998 proposed 

rule were not considered members of 

the group. The commenter asked 

whether independent contractors can be 

paid a percentage of collections related 

to work personally performed by the 

contractor if the percentage is fair 

market value and not based on DHS 

referred to the group by the independent 

contractor. 

Response: Changes made in the Phase 

I rulemaking largely address the 

commenter’s concern. First, under 

Phase I, independent contractors are 

considered ‘‘physicians in the group’’

and may be paid productivity bonuses 

16092 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

in accordance with the group practice 

rules set forth in § 411.352. However, if 

the independent contractor generates 

DHS referrals for the group practice, and 

the group practice relies on the personal 

service arrangements exception rather 

than the in-office ancillary services 

exception to protect those referrals, then 

the compensation rules of the personal 

service arrangements exception would 

apply. Second, under the Phase I rules, 

the definition of ‘‘referral’’ no longer 

includes personally performed DHS, so 

compensation paid for personally 

performed services does not vary based 

on the volume or value of referrals. 

Thus, all physicians, whether group 

practice physicians, employed 

physicians, or independent contractor 

physicians, can be compensated for 

personally performed DHS, whether 

self-referred or referred by someone 

else. (We note that, under the statute, 

productivity bonuses for services 

‘‘incident to’’ personally performed 

services are only permitted for 

physicians in group practices.) The 

personal service arrangements exception 

requires that a physician’s 

compensation be ‘‘set in advance.’’

Under changes we are making in this 

Phase II rule to the ‘‘set in advance’’

requirement in § 411.354(d)(1), certain 

percentage compensation arrangements 

will be considered ‘‘set in advance.’’

Assuming that the new ‘‘set in advance’’

requirements are met, the scenario 

described by the commenter would be 

permitted, since the compensation is 

fair market value and none of the 

compensation relates to referrals of 

DHS. 

Comment: Two commenters 

representing independent dialysis 

laboratories urged us to issue additional 

regulations prohibiting referrals 

between dialysis centers and 

laboratories owned by a common parent 

company. These commenters believed 

that the two major corporations that 

own dialysis facilities should be subject 

to the same referral prohibition as 

physicians. In addition, these 

commenters raised concerns about 

medical director contracts or other 

employment or services contracts 

entered into in connection with a 

physician’s sale of his or her dialysis 

facility to a corporate owner. The 

commenters believe that these 

contracts—which often are long-term 

and include non-compete clauses—are 

part of the overall purchase price of the 

facility and should be considered when 

determining whether the sale is at fair 

market value. They also believe that 

these contracts serve to lock the 

physician into referring to the 

corporation’s laboratories, thus 

competitively disadvantaging 

independent laboratories. 

Response: Section 1877 of the Act is 

limited to referrals by physicians and 

does not cover referrals among 

commonly held entities, absent 

involvement of a referring physician. 

With respect to medical director 

contracts or other contracts between 

corporate dialysis facilities and 

physicians, these arrangements may 

create indirect compensation 

arrangements between the medical 

director and the corporate laboratory 

that would need to fit in the indirect 

compensation exception. In other 

words, the medical director contract 

creates a link between the physician and 

the dialysis facility, which is linked 

through ownership to the parent 

corporation, which is linked by 

ownership to the corporation’s 

laboratory (the DHS entity). If the 

physician’s compensation takes 

laboratory referrals into account, the 

arrangement would not fit in the 

exception. (See discussion of indirect 

arrangements in section II.B)

Comment: One commenter 

recommended that we establish a 

benchmark for evaluating whether endstage renal disease (ESRD) facility 

medical director compensation is fair 

market value by establishing a 

presumed appropriate fair market value 

hourly rate. 

Response: With respect to the 

commenters’ suggestion that we fix a 

fair market value benchmark for medical 

directors, we are not in a position—nor 

would it be appropriate—to set a fixed, 

industry-wide fair market value rate for 

ESRD medical directors. However, we 

are creating a ‘‘safe harbor’’ provision 

under the definition of ‘‘fair market 

value’’ in § 411.351 for hourly payments 

to physicians for their personal services. 

The ‘‘safe harbor’’ provision applies to 

payments for services provided 

personally by the physician, but not to 

services provided by the physician’s 

employees or other persons or entities. 

The safe harbor is not limited to medical 

director services for ESRD facilities, but 

may be used for other hourly physician 

compensation paid by any DHS entity. 

The safe harbor consists of two 

methodologies for calculating hourly 

rates that will be deemed to be ‘‘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 

fiftieth percentile salary for the 

physician’s specialty of four national 

salary surveys and dividing the 

resulting figure by 2000 hours to 

establish an hourly rate. The ‘‘safe 

harbor’’ provides a choice of six 

recognized, readily-available surveys. If 

the relevant specialty does not appear 

on the survey, the safe harbor looks to 

the salary for general practice. 

Compliance with these safe harbor 

methodologies is entirely voluntary; 

DHS entities may continue to establish 

fair market value through other 

methods. DHS entities that choose to 

use either of the two ‘‘safe harbor’’

methodologies will be assured that their 

compensation rates will be deemed fair 

market value for purposes of section 

1877 of the Act. (Their arrangements 

will still need to meet all other 

conditions of an applicable exception.) 

For example, we believe that 

nephrology salary data from four 

surveys could be used to calculate an 

hourly payment for medical directors of 

ESRD facilities (that is, the average 

fiftieth percentile nephrologist salary 

from four surveys divided by 2000 

hours). DHS entities using other 

methodologies to determine fair market 

value will continue to bear the risk that 

their rates may not be considered fair 

market value. 

For purposes of section 1877 of the 

Act, we would treat a sale of a dialysis 

facility and an accompanying 

employment contract as separate 

arrangements to be evaluated under the 

isolated transactions exception and the 

employment exception, respectively. 

Both exceptions require fair market 

value compensation. 

Finally, we note that the arrangements 

described by the commenters may be 

problematic under the anti-kickback 

statute. 

Comment: Commenters representing 

independent dialysis laboratories stated 

that dialysis corporations sell dialysis 

supplies at a discount to physicians 

who agree to refer to the corporation 

laboratories and enter into management 

contracts with independent dialysis 

facilities that steer the facility business 

to the corporation laboratories.

Response: If the dialysis corporations 

sell items or services to physicians at a 

price below fair market value (including 

any discount), the arrangement will not 

fit in the exception for payments by a 

physician for items or services at 

§ 411.357(i). Similarly, cut-rate 

management contracts in exchange for 

the ability to steer business will not fit 

in an exception. Again, these 

arrangement may raise concerns under 

the anti-kickback statute. 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16093

Comment: Two commenters 

recommended that the personal service 

arrangements exception allow the 

substitution of bona fide locum tenens

physicians, consistent with the 

Medicare reassignment rules. 

Response: A physician may use a 

locum tenens physician to provide 

contracted services under this 

exception. To determine whether a 

physician is a bona fide locum tenens

physician for purposes of this rule, we 

will look to the definition of ‘‘locum 

tenens’’ in § 411.351, except that the 

requirement in the definition that the 

regular physician must be a member of 

a group practice will not apply (for 

example, the regular physician could be 

a sole practitioner). We will apply this 

standard, even if the contracted services 

are not reimbursable by Medicare. Also 

in this regard, in Phase I we expanded 

the group practice definition to include 

independent contractors and locum 

tenens physicians. 

Comment: In the preamble of the 

January 1998 proposed rule (63 FR 

1700), we indicated our intent to 

interpret the ‘‘commercially reasonable’’

requirement for purposes of all 

exceptions that require commercial 

reasonableness to mean that an 

arrangement was a sensible, prudent 

business arrangement from the 

perspective of the particular parties 

involved, even in the absence of 

potential referrals. In the commenter’s 

view, this interpretation injected an 

unwarranted subjective element into the 

test. 

Response: An arrangement will be 

considered ‘‘commercially reasonable’’

in the absence of referrals if the 

arrangement would make commercial 

sense if entered into by a reasonable 

entity of similar type and size and a 

reasonable physician (or family member 

or group practice) of similar scope and 

specialty, even if there were no 

potential DHS referrals. 

D. Remuneration Unrelated to the 

Provision of Designated Health Services 

(DHS) (Section 1877(e)(4) of the Act; 

Phase II; § 411.357(g)) 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Remuneration Unrelated to 

DHS Exception’’ at the beginning of 

your comments.] 

Existing Law: 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. (Until January 1, 1995, the 

payments to immediate family members 

were included.) Nor does it apply to 

remuneration from entities other than 

hospitals. 

Proposed Rule: To conform to various 

statutory changes, the January 1998 

proposed rule proposed to revise 

§ 411.357(g) by removing that portion 

that was based on the predecessor 

provision of section 1877(b)(4) of the 

Act, since that provision had expired, 

and by changing the reference to 

remuneration not related to the 

furnishing of clinical laboratory services 

to remuneration not related to the 

furnishing of DHS. 

In addition, the January 1998 

proposed rule discussed proposed 

interpretations of the exception. First, in 

order to come within the exception, the 

remuneration would have to be 

completely unrelated to the provision of 

DHS. Where a hospital made payments 

that were inordinately high for 

apparently unrelated services to a 

physician who referred DHS to the 

hospital, we would presume the excess 

payment was, in fact, related to the 

DHS. Second, we gave several examples 

to illustrate potentially ‘‘unrelated’’

services. These examples included fair 

market value payments by a teaching 

hospital to a physician to rent a house 

for use by visiting fellows, as well as 

payments for teaching, general 

administrative services, or utilization 

review. By contrast, payments to a 

physician for a medical device used in 

the provision of DHS (for example, 

inpatient procedures) or for malpractice 

insurance would be considered related 

to the provision of DHS. We stated that 

the test would be whether there was any 

link between the remuneration and the 

referral or provision of DHS. We noted 

that some of these arrangements might 

fit in another statutory or regulatory 

exception. 

Final Rule: We have incorporated the 

technical changes described in the 

January 1998 proposed rule. In light of 

the statutory history, we are interpreting 

the exception to be narrow and available 

only if remuneration is wholly 

unrelated to the provision of DHS. In 

general, for purposes of the exception, 

we will treat any item, service, or cost 

that could be allocated in whole or in 

part to Medicare or Medicaid under 

applicable cost reporting principles to 

be related directly or indirectly to the 

provision of DHS. In addition, other 

remuneration will be 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 will 

not apply to any other remuneration 

that is related in any manner to the 

provision of DHS. Given the other 

exceptions, especially the personal 

services arrangements and fair market 

value exceptions, any bona fide

compensation relationships related in 

any way to DHS could be structured to 

satisfy another exception.

Section 411.357(g) has been modified 

to reflect these interpretations, which 

are explained further in the responses to 

comments. 

Comment: Several commenters 

objected to our statement that any link 

to the provision of DHS would make the 

exception unavailable. One commenter 

stated that our position appeared to 

mean that if either party would use the 

items or services provided under the 

arrangement to furnish DHS, the 

exception would not apply. Another 

commenter stated that the broad 

statements in the preamble to the 

January 1998 proposed rule were not 

consistent with the statutory language. 

Another commenter objected to the 

example in the preamble suggesting that 

payments to a physician for a medical 

device used for an inpatient procedure 

would be considered related to the 

provision of a designated health service. 

The same commenter stated that 

payment for malpractice insurance 

should not be considered related to the 

provision of DHS and that under the 

proposed interpretation, even granting 

staff privileges would trigger the 

prohibition. 

Response: We believe that the 

exception for services unrelated to DHS 

in section 1877(e)(4) of the Act is 

intended to be very limited and 

available only if the remuneration is 

wholly unrelated to the provision of 

DHS, such as the rental of residential 

property. We believe this narrow 

reading is consistent with the statutory 

history. Initially, under the original 

statute, the exception was necessary to 

insulate a hospital’s relationships with 

physicians that were unrelated to the 

provision of clinical laboratory services, 

a very small element of a hospital’s 

practice. Since 1995, however, all

hospital services are DHS and a 

narrower interpretation of the exception 

is required to prevent abuse. Given this 

breadth of DHS, the statute’s purpose, 

and the industry’s desire for bright line 

rules in connection with section 1877 of 

the Act, we will treat any item, service, 

or cost that could be allocated in whole 

or in part to Medicare or Medicaid 

under applicable cost reporting 

principles as related to the provision of 

DHS. To the extent that the preamble to 

16094 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

the January 1998 proposed rule 

suggested that general administrative or 

utilization review services were not 

related to DHS, we are withdrawing that 

interpretation. Even if not covered by 

cost reporting principles, remuneration 

that is otherwise related to the provision 

of DHS will not come within the 

protection of the exception. We will 

consider remuneration to relate to DHS 

if it is furnished, directly or indirectly, 

explicitly or implicitly, to medical staff 

or other physicians in a position to 

make or influence referrals in any 

manner that is selective, targeted, 

preferential, or conditional. For 

example, a loan from a hospital to a 

physician to finance the physician’s 

purchase of an interest in a limited 

partnership that owns the hospital 

would be related to the provision of 

DHS. Likewise, for example, a hospital’s 

lease of office space in a nearby medical 

building to physicians in a position to 

refer to the hospital would be related to 

the provision of DHS. Any such 

arrangements must comply with another 

exception. Elsewhere in this 

rulemaking, we have promulgated 

sufficient exceptions that any legitimate 

arrangement between a hospital and a 

referring physician should be able to 

qualify for protection under another 

exception. Finally, the provision of 

malpractice insurance or other support 

services to physicians who would 

otherwise have to pay for them clearly 

creates a compensation arrangement 

within the language and intent of the 

statute. 

Comment: One commenter objected 

that the exception is limited to 

remuneration paid to physicians and 

does not extend to payments to 

immediate family members. 

Response: When the Congress 

amended the exception in 1993, it 

limited the provision solely to 

remuneration paid by a hospital to a 

physician. Accordingly, the regulation 

tracks the current statute. Legitimate 

arrangements with immediate family 

members should be able to qualify for 

one of the other available exceptions, 

such as the personal service 

arrangements or fair market value 

exceptions. 

Comment: A commenter objected to 

the statement in the preamble that we 

would presume that an above fair 

market value payment for services 

unrelated to the provision of DHS was 

actually related to those services. The 

commenter stated that we had no 

authority to add an additional 

requirement (that is, that payments for 

unrelated services be fair market value) 

to the statutory exception. 

Response: The commenter 

misunderstood our position. We agree 

that a payment that is wholly unrelated 

to the provision of DHS does not have 

to be fair market value for the exception 

to apply. However, as an enforcement 

matter, we will carefully scrutinize any 

payments that are above fair market 

value to ensure that they are not 

disguised payments related to DHS. 

Comment: One commenter concluded 

that our broad reading of ‘‘related’’

meant that payments to physicians for 

covenants not to compete could not fit 

in the exception, since those covenants 

were related to the furnishing of DHS. 

The commenter observed that there is a 

distinction between a reasonable 

geographic restriction on providing 

medical services and an affirmative 

obligation to make referrals. 

Response: We agree with the 

commenter that a covenant not to 

compete is not necessarily equivalent to 

an obligation to make referrals. The 

statutory exception in section 1877(e)(4) 

of the Act, however, only protects 

payments unrelated to the provision of 

DHS, and a payment by a hospital to a 

physician for a covenant not to compete 

is plainly related to the provision of 

DHS. Nevertheless, transactions 

involving non-compete covenants can 

be structured to fit within other 

exceptions.

Comment: One commenter asked 

whether the unrelated services 

exception would be available if the 

payment were from an entity related to 

a hospital, but not the hospital itself. 

Response: The exception is only 

available for payments from the hospital 

itself. Depending on the circumstances, 

payments from a legal entity related to 

the hospital would be analyzed as a 

direct compensation arrangement 

subject to the direct compensation 

exceptions or as an indirect 

compensation arrangement to which the 

indirect compensation exception may 

apply. 

E. Physician Recruitment (Section 

1877(e)(5) of the Act; Phase II; 

§ 411.357(e)) 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Physician Recruitment 

Exception’’ at the beginning of your 

comments.] 

Existing Law: 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, the following 

conditions must be met—

(i) The physician is not required to 

refer patients to the hospital; 

(ii) 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; 

(iii) 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 at § 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. 

Proposed Rule: The January 1998 

proposed rule retained § 411.357(e), 

with minor editorial changes. In the 

preamble, we interpreted the rule to 

require that the recruited physician 

reside outside the hospital’s geographic 

area and actually relocate into the area. 

We specifically solicited comments on 

how to define a hospital’s ‘‘geographic 

area.’’ We suggested that recruitment 

payments to physicians already residing 

in the hospital’s geographic area, for 

example, community physicians or 

hospital residents, might be excepted 

under the proposed new ‘‘fair market 

value’’ compensation exception 

(§ 411.537(l)). 

Final Rule: The final rule 

substantially modifies the January 1998 

proposed rule in the following respects: 

• The final rule looks to the 

relocation of the recruited physician’s 

medical practice, rather than the 

physician’s residence. A physician will 

be deemed to have relocated to the 

hospital’s geographic area (defined as 

the lowest number of contiguous postal 

zip codes from which the hospital 

draws at least 75 percent of its 

inpatients) if: (i) The physician has 

relocated the site of his or her practice 

a minimum of 25 miles; or (ii) 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 one 

year will not be considered to have an 

established practice and will therefore 

be eligible under the physician 

recruitment exception regardless of 

whether or not the physician actually 

moves his or her practice location.

• We have created a regulatory 

exception for federally qualified health 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16095

centers (FQHCs) that make recruitment 

payments to physicians on the same 

basis as hospitals. 

• Recruitment payments made 

through existing medical groups (rather 

than directly to the recruited physician) 

in connection with the recruitment of a 

new physician are covered under 

certain conditions elaborated below. 

• We have added a limited new 

exception at § 411.357(t) for some 

retention payments made to physicians 

with practices in HPSAs. 

• We have modified the proposed 

language requiring recruited physicians 

to establish staff privileges at other 

hospitals and to refer to other entities to 

make clear our original intent that 

recruitment payments not be used to 

lock physicians into using the recruiting 

hospital, except insofar as there may be 

a separate, excepted employment or 

contractual arrangement under which 

required referrals may be permitted in 

accordance with § 411.354(d)(4). The 

revised language makes clear that 

recruited physicians must be allowed to 

establish staff privileges at other 

hospitals and, except as noted in the 

preceding sentence, to refer to other 

entities (even if the other hospital or 

entity is a competitor). For purposes of 

section 1877 of the Act, reasonable 

credentialing restrictions on physicians 

becoming competitors of a hospital 

would not violate this condition. 

The reasons for these changes are 

discussed in the responses to comments 

that follow. 

Comment: A number of commenters 

objected to the proposed requirement 

that the recruited physician had to 

relocate his or her residence to qualify 

for the exception. The commenters 

suggested that the relevant inquiry 

should be where the physician practices 

medicine, not where the physician lives. 

One commenter urged abandonment of 

the relocation requirement entirely on 

the grounds that other conditions in the 

proposed regulation were sufficient to 

prevent abuse. Another commenter 

proposed that the exception apply as 

long as the recruited physician is new 

to the hospital’s medical staff and either 

relocates his or her practice at least ten 

miles or derives 75 percent of his or her 

patient revenue from patients new to the 

physician. A hospital trade association 

proposed that the test be that the 

recruited physician either relocates to 

the hospital’s service area (to be defined 

as the lowest number of contiguous zip 

codes of 51 percent of its inpatients) or 

relocates 15 miles. 

Response: In general, we agree with 

the commenters that our proposed 

regulation was unnecessarily restrictive. 

The relocation requirement is statutory, 

and even if it were not, we believe a 

relocation requirement is an important 

safeguard against abusive financial 

incentives disguised as ‘‘recruitment’’

payments. We are persuaded, however, 

that the recruited physician’s practice 

location, not his or her residence, 

should be the relevant consideration. As 

to the test for ‘‘relocation to the 

geographic area served by the hospital,’’

we believe the regulations should set 

bright line rules, but also incorporate 

some flexibility to accommodate 

variations in legitimate recruitment 

arrangements. We have revised 

§ 411.357(e) by combining and 

modifying several of the commenters’

suggestions. Specifically, the hospital’s 

geographic service area is defined for 

purposes of the exception as the area 

composed of the lowest number of 

contiguous zip codes from which the 

recruiting hospital draws 75 percent of 

its inpatients. Given the significant 

easing of the ‘‘relocation’’ test described 

below, we believe using a 75 percent 

criteria is more appropriate than the 51 

percent suggested by the commenter. In 

particular, it is less likely to lead to 

abusive recruiting payments to 

established physicians from nearby 

hospitals. 

The relocation test may be met by 

moving one’s medical practice a 

minimum distance of 25 miles or by 

establishing a practice with a substantial 

base of new patients (75 percent of the 

physician’s revenues from professional 

services provided to patients in the 

relocated practice (including services 

provided to hospital inpatients)). For 

the 75 percent revenues test, the 

regulations measure practice revenue 

annually on a fiscal or calendar year 

basis (at the physician’s option). For the 

initial ‘‘start up’’ year of the recruited 

physician’s relocated practice, the test is 

whether it is reasonable to expect that 

the recruited physician will meet the 75 

percent test. New patients are those 

patients who have not been seen by the 

physician in his or her previous practice 

for at least three years. We believe these 

tests provide clear rules with sufficient 

flexibility to permit legitimate 

recruitment arrangements, while 

protecting against potentially abusive 

arrangements (for example, cross-town 

recruitment of an established 

physician’s practice from a competitor 

hospital). Recruitment payments to 

community or other local physicians 

who do not meet the relocation 

requirement will not fit in the fair 

market value exception in § 411.357(1), 

which requires fair market value 

payments for services rendered. 

Comment: Many commenters objected 

to treating residents and new physicians 

as residing in the hospital’s service area. 

These commenters argued that these 

physicians have not yet established a 

medical practice, so hospitals should be 

permitted to recruit them. Other 

commenters pointed out that for many 

hospitals with residency programs, the 

residents were the most likely 

physicians to stay in the community.

Response: We agree and have 

modified the regulation to provide that 

hospital residents, as well as physicians 

who have been in practice one year or 

less, will not be subject to the relocation 

requirement. In our view, these 

physicians do not have an established 

practice to relocate. However, the 

recruited physician must establish his 

or her medical practice in the 

geographic area served by the hospital 

to be eligible for recruitment payments 

under the exception. 

Comment: Two commenters wanted 

the exception to protect recruitment 

payments from DHS entities other than 

hospitals. 

Response: The statutory exception is 

expressly limited to recruitment 

payments made by hospitals, and we are 

not persuaded that a wholesale 

extension to other DHS entities is 

warranted. Under our authority in 

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

additional exceptions, we are extending 

the exception to cover federally 

qualified health centers (FQHCs) that 

recruit physicians to join their medical 

staffs. We believe that FQHCs should be 

able to recruit physicians to join their 

medical staffs under the same terms and 

conditions applicable to hospitals. This 

extension is consistent with the 

statutory intent and scheme and will 

help ensure that the statute does not 

impede efforts by FQHCs, which 

provide substantial services to 

underserved populations, to recruit 

adequate staffs. We are not persuaded 

that the exception should similarly be 

extended to other DHS entities, such as 

nursing homes or home health agencies, 

that may want to recruit physicians into 

their service areas. These kinds of 

recruitment arrangements could pose a 

risk of abuse. We are not extending the 

recruitment exception to cover 

recruitment payments made by 

physician practices. In the first place, 

physician practices do not have medical 

staffs comparable to hospitals under the 

terms of the exception. Moreover, the 

in-office ancillary services exception is 

available to cover referrals from 

recruited physicians. Because the FQHC 

expansion falls under our authority in 

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

will be subject to the additional general 

conditions that their arrangements not 

violate the anti-kickback statute and that 

16096 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

claims submissions comply with all 

program rules. Since these are preexisting obligations, they are not unduly 

burdensome. 

Comment: Several commenters 

observed that, contrary to statements in 

the January 1998 proposed rule (63 FR 

1702), payments to recruit residents and 

payments to existing group practices to 

recruit physicians would not fit in the 

new fair market value exception. Two 

commenters noted that the proposed fair 

market value exception required 

compliance with the anti-kickback 

statute or an anti-kickback safe harbor 

and that the only available safe harbor 

was limited to physician recruitment in 

rural areas. Another commenter 

questioned whether recruitment would 

be an ‘‘item or service’’ for purposes of 

the fair market value exception. The 

commenter considered that a 

physician’s relocation to a community 

benefits the community, not the 

recruiting hospital. Another commenter 

claimed that the commercial 

reasonableness and fair market value 

criteria in the fair market value 

exception would require hospitals to 

incur costs for expensive valuations and 

stated that comparative data was kept 

confidential and difficult to obtain. 

Finally, a commenter pointed out that 

the proposed fair market value 

exception included none of the 

additional safeguards contained in the 

physician recruitment exception. 

Response: In the preamble to the 

Phase I rule, we stated that physician 

recruitment arrangements might fit in 

the new fair market value exception, 

depending on the specific facts. 

Nevertheless, we recognized that many 

recruitment arrangements that offer 

‘‘extra’’ payments to induce physicians 

to relocate would not be covered 

because the compensation would 

exceed the fair market value of the 

physician’s services (66 FR 919). We 

concluded that we would consider the 

issue further in Phase II of the 

rulemaking. 

Upon further consideration, we do not 

believe that recruitment incentives can 

fit in the fair market value exception in 

§ 411.357(l). We agree 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. 

As discussed above, we have modified 

the recruitment exception to make clear 

that payments to hospital residents can 

be covered. Payments by a hospital to a 

physician practice to assist the 

physician practice in recruiting 

physicians to the community who will 

join the existing practice are discussed 

in the following comment and response. 

On the issue of anti-kickback 

compliance, we refer to the discussion 

in the Phase I rulemaking (66 FR 918).

Comment: Many commenters believed 

the exception should be expanded to 

include hospital payments to medical 

groups in connection with the 

recruitment of a new physician to join 

the group. One commenter pointed out 

that the proposed rule protected any 

‘‘remuneration provided by a hospital to 

recruit a physician,’’ but did not specify 

to whom the payment had to be made 

(63 FR 1725). The commenters stated 

that many new physicians prefer to join 

existing groups and that such 

arrangements save the costs and labor of 

setting up a new practice and provide 

cross-coverage and peer review. Another 

commenter stated that under the 

existing Internal Revenue Service (IRS) 

rules, recruited physicians must report 

forgivable recruitment loan amounts in 

the years the debt is forgiven. According 

to the commenter, this rule discourages 

recruited physicians from staying in a 

community; allowing the payments to 

be made to a group practice might ease 

the tax burden. One commenter 

suggested that payments to a medical 

group be permitted if the group—

• Agrees to participate in Medicare 

and Medicaid; 

• Agrees to participate in the 

hospital’s on-call program; 

• Provides professional services to all 

hospital patients; and 

• Enters into an agreement with the 

recruited physician that does not 

contain a covenant not to compete or a 

liquidated damages provision if the 

physician leaves the group. According 

to the commenter, these conditions are 

consistent with IRS Revenue Ruling 97–

21. Another commenter thought that 

payments could be made to groups to 

recruit physicians as long as the terms 

of the arrangement are set out in writing 

and signed by all the parties, and the 

group agrees to pass substantially all of 

the remuneration to the recruited 

physician. 

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

Act expressly excepts payments made 

by a hospital ‘‘to a physician.’’ We 

recognize that many new or relocating 

physicians prefer to join existing 

practices rather than set up a new 

practice for legitimate reasons, such as 

cost, cross-coverage, and professional 

expertise. We also recognize that 

hospitals may want to provide financial 

support through existing medical groups 

to aid in recruiting new physicians to 

the community. We are concerned that 

a recruitment arrangement involving 

direct or indirect payments to an 

existing physician practice might be 

used improperly to pay for referrals 

from the existing physician practice, in 

essence creating an improper financial 

relationship between the hospital and 

the existing physician practice. 

However, we have concluded that some 

narrowly tailored accommodation for 

recruitment into existing groups would 

be appropriate under the recruitment 

exception and have sought to create 

criteria that would preclude abuse of the 

exception. Accordingly, the regulations 

provide that the exception will apply to 

remuneration provided by a hospital (or 

FQHC) to a physician indirectly through 

payments to another physician or 

physician practice, as long as the 

following conditions are met: 

• The arrangement between the 

hospital and the physician practice is 

set out in writing and signed by the 

parties. 

• Except for actual costs incurred by 

the physician or physician practice in 

recruiting the new physician, the 

remuneration is passed directly through 

to or remains with the recruited 

physician. 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. 

• In the case of an income guarantee 

made by the hospital to a physician who 

joins a local physician practice, costs 

allocated by the physician practice to 

the recruited physician may not exceed 

the actual additional incremental costs 

to the practice attributable to the 

recruited physician. 

• The new physician must establish a 

medical practice in the hospital’s 

geographic service area and join the 

hospital’s medical staff. 

• The physician practice’s 

arrangement with the recruited 

physician is set out in writing and 

signed by the parties. 

• The new physician is not required 

to refer patients to the hospital and is 

allowed to establish staff privileges at 

any other hospital(s) and to refer 

business to other entities (except insofar 

as required referrals are permitted under 

§ 411.354(d)(4)). 

• The remuneration from the hospital 

under the arrangement is not 

determined in any manner that takes 

into account (directly or indirectly) the 

volume or value of any referrals (actual 

or anticipated) by the recruited 

physician or by the physician practice 

receiving the direct payments from the 

hospital (or any physician affiliated 

with that physician practice). 

• The physician practice receiving 

the hospital payments may not impose 

additional practice restrictions on the 

recruited physician (for example, a nonVerDate jul<14>2003 20:39 Mar 25, 2004 Jkt 203001 PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 E:\FR\FM\26MRR3.SGM 26MRR3
Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16097

compete agreement), but may impose 

conditions related solely to quality 

considerations. 

The regulations similarly apply to 

payments made directly to a physician 

who joins a physician practice. 

Because we are expanding this 

exception under our authority in section 

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

the creation of new exceptions only if 

the excepted arrangement presents no 

risk of program or patient abuse, the 

arrangement must not violate the antikickback statute and must comply with 

all relevant claims submission and 

billing laws and regulations. In this 

context, if there is any intent unlawfully 

to reward or induce referrals from the 

physician practice whose recruitment 

the hospital chose to underwrite, the 

anti-kickback statute would be violated 

and the exception would not apply.

This rule for pass-through hospital 

recruitment payments establishes an 

exception applicable to the 

compensation arrangement created 

between the hospital and the recruited 

physician (and between the hospital and 

the existing physician practice). We 

note that if the physician practice 

receiving the payments from the 

hospital is a DHS entity to which the 

recruited physician will refer (that is, 

the practice submits claims to Medicare 

for DHS), any separate or additional 

financial relationship it has with the 

recruited physician will have to fit in an 

exception (for example, the in-office 

ancillary services exception). 

Comment: Several commenters 

suggested that the regulatory exception 

should be expanded to permit hospitals 

to provide incentives to retain 

physicians already on the medical staff. 

Several commenters pointed out that 

these incentives are particularly useful 

for hospitals in rural or inner city areas 

where there is a shortage of health 

professionals and constant turnover is a 

significant problem and expense. One 

commenter suggested that retention 

payments could be limited to situations 

where the hospital had a bona fide, 

reasonable, and documented belief that 

a physician may terminate his or her 

staff privileges and join another hospital 

staff. 

Response: We are sympathetic to the 

problems faced by hospitals and other 

entities in certain rural and inner city 

areas in retaining sufficient numbers of 

qualified physicians in the community. 

On the other hand, we are concerned 

about, among other things, protecting 

payments to physicians in bidding wars 

between hospitals. The commenter’s 

suggested standard of a reasonable and 

documented belief that a physician may 

terminate his staff privileges would not 

adequately address this potential abuse. 

We are persuaded that a narrow 

retention exception for some 

remuneration paid to physicians with 

practices in HPSAs to retain them in the 

community is appropriate and 

consistent with the statutory scheme. 

Therefore, in accordance with our 

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

Act, we have added a new exception for 

retention payments made to a physician 

with a practice located in a HPSA 

(regardless of whether the HPSA is 

specifically designated for the 

physician’s particular specialty) who 

has a firm written recruitment offer from 

an unrelated hospital or FQHC that 

specifies the remuneration being offered 

and that would 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 FQHC making the retention payment. 

The retention payment must be limited 

to the lower of (i) the difference between 

the physician’s current income from 

physician and related services and the 

income the physician would receive 

from physician and related services in 

the recruitment offer (over no more than 

a 24-month period) or (ii) the reasonable 

costs the hospital or FQHC 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. Parties 

must use a reasonable methodology to 

calculate the physician’s current and 

anticipated incomes for purposes of this 

test. Moreover, parties must use the 

same methodology when calculating the 

physician’s income from his or her 

current job and the anticipated income 

from the recruitment offer. Any 

retention payment must be subject to 

the same restrictions, if any, on 

repayment or forgiveness of 

indebtedness as the recruitment offer. A 

hospital may enter into a retention 

arrangement with a physician no more 

frequently than once every five years 

and 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. 

Except in these limited circumstances, 

we are unable to devise a sufficiently 

clear and flexible exception for 

retention payments that would be 

without risk of program or patient 

abuse. If a hospital or federally qualified 

health center wishes to retain an 

employed physician by matching a 

salary offer from another facility, the 

hospital or federally qualified health 

center may structure an arrangement to 

fit in this exception. Alternatively, the 

arrangement may be structured to fit in 

the employee exception at § 411.357(c) 

(as discussed in this preamble at section 

VIII.B), provided the compensation to be 

paid to the employed physician will be 

fair market value and the other 

conditions of the exception are satisfied. 

The new exception for retention 

payments in underserved areas does not 

protect payments made indirectly to a 

retained physician via another person or 

entity, including a physician practice. 

Apart from physicians practicing in 

HPSAs or employed physicians, we 

think the best approach is to make 

decisions on retention arrangements on 

a case-by-case basis through advisory 

opinions. Thus, the final rule provides 

for approval of retention payments to 

physicians in other underserved areas 

(or serving underserved patient 

populations) on a case-by-case basis 

through an advisory opinion. We are not 

further defining underserved areas or 

underserved patient populations for 

purposes of this regulation in order to 

give the Secretary maximum flexibility 

in evaluating the special circumstances 

attendant on retention payments. We 

expect to approve retention payments in 

advisory opinions only in unusual and 

compelling circumstances. We caution 

that retention arrangements can 

implicate the anti-kickback statute, and 

parties should take care to scrutinize 

their arrangements for compliance with 

that statute.

Comment: A trade association 

representing academic medical centers 

requested a special exception for 

teaching hospitals. 

According to the commenter, teaching 

hospitals often need to recruit local 

community physicians to teach. The 

commenter noted that many academic 

medical centers have closed medical 

staffs and would not be able to satisfy 

the condition that the recruited 

physician not be required to refer to the 

hospital. 

Response: We are not persuaded that 

a special exception is needed in light of 

the academic medical center exception 

created in the Phase I rulemaking and 

codified in § 411.355(e) (see discussion 

in section XII.A below). In addition, 

arrangements with local faculty may fit 

in the personal service arrangements 

exception in § 411.357(e)(3) or the 

employment exception in 

§ 411.357(e)(2). 

16098 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

F. Isolated Transactions (Section 

1877(e)(6) of the Act; Phase II; 

§ 411.357(f)) 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Isolated Transactions 

Exception’’ at the beginning of your 

comments.] 

Existing Law: Section 1877(e)(6) of the 

Act provides that an isolated 

transaction, such as a one-time sale of 

property or a 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. 

• The transaction meets any other 

requirements that the Secretary may 

impose by regulation as needed to 

protect against program or patient 

abuse. 

The August 1995 final rule 

incorporated the provisions of section 

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

regulations in § 411.357(f), with an 

additional requirement that there be no 

additional transactions between the 

parties for 6 months after the isolated 

transaction, except for transactions that 

are specifically excepted under another 

exception. The August 1995 final rule 

also established definitions of 

‘‘transaction’’ and ‘‘isolated transaction’’

in § 411.351. The rule defined a 

‘‘transaction’’ as an instance or process 

of two or more persons doing business 

and an ‘‘isolated transaction’’ as a 

transaction involving a single payment 

between two or more persons. The 

definition specifies that a transaction 

involving long-term or installment 

payments is not considered an isolated 

transaction. 

Proposed Rule: The January 1998 

proposed rule proposed retaining 

§ 411.357(f) and the definitions in 

§ 411.351, with a clarification that 

‘‘transactions’’ can involve persons or 

entities. 

Final Rule: The final rule retains the 

existing exception and definitions with 

the following modifications (as well as 

the clarification that transactions can 

involve persons or entities). 

First, we are modifying the definition 

of ‘‘isolated transaction’’ to permit 

installment payments, provided the 

total aggregate payment is: (i) Set before 

the first payment is made; and (ii) does 

not take into account, directly or 

indirectly, referrals or other business 

generated by the referring physician. 

Additionally, the outstanding balance 

must be guaranteed by a third party, 

secured by a negotiable promissory 

note, or subject to a similar mechanism 

to assure payment even in the event of 

default by the purchaser or obligated 

party. Second, 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. 

Comments and our responses follow. 

Comment: Two commenters found the 

single payment requirement—in 

conjunction with the six-month 

prohibition on other transactions—

impractical since it precluded common 

post-closing adjustments in connection 

with sales of practices and other 

transactions. According to the 

commenters, escrows or post-closing 

adjustments occur shortly after the 

initial closing and are designed to 

remedy unknown conditions, shortfalls 

in accounts receivable, or similar 

contingencies. One commenter 

suggested that commercially reasonable 

post-closing adjustments be permitted 

within six months, while another 

commenter requested a one-year grace 

period. 

Response: We have adopted the 

commenters’ suggestion to modify the 

rule to permit post-closing adjustments 

within six months of the date of sale if 

they are commercially reasonable, even 

if there are no referrals or other business 

generated by the referring physician.

Comment: Several commenters 

questioned the necessity for the single 

payment rule. Several pointed out that 

the safe harbor under the anti-kickback 

statute for the sale of a physician’s 

practice (§ 1001.952(e)) does not contain 

a similar requirement. According to 

these commenters, as long as the 

purchase price is set at the time of 

closing, consistent with fair market 

value, and not dependent on referrals, it 

should not matter if the funds are paid 

out over time. Two commenters 

observed that a seller would have a 

breach of contract claim for any unpaid 

amounts. One commenter pointed out 

that any risk that a selling physician 

would have an ongoing incentive to 

refer to a sold entity to assure payment 

by the purchaser could be addressed by 

requiring the purchase obligation to be 

secured in the event of the purchaser’s 

default or bankruptcy. 

Response: The Congress clearly 

intended that an isolated transaction, 

whether through a single payment or 

installment payments, creates a 

financial relationship between the 

parties on a prospective basis. We have 

reconsidered the single payment 

requirement in light of the comments 

and have modified the final rule to also 

permit installment sales under certain 

conditions. We are concerned, however, 

that many installment transactions 

provide continuing incentives to refer. 

Resort to costly and uncertain litigation 

to enforce a contractual right is 

insufficient protection against the 

pressure to continue referrals. To 

address that concern, the installment 

payments rule requires that payments 

must be either immediately negotiable 

or otherwise secured so that the seller 

is guaranteed payment in the event of 

the purchaser’s default or bankruptcy. 

Comment: A publicly-held company 

suggested that we create a special 

exception for installment payments by 

companies that are eligible for the 

publicly-held entity exception in 

§ 411.356(a). 

Response: As discussed above, the 

final rule permits installment sales that 

meet certain conditions. There is no 

reason to distinguish between large 

publicly-held companies and other 

purchasers. 

Comment: A physician association 

objected to the prohibition on other 

unexcepted transactions within six 

months of the transaction qualifying 

under the isolated transaction 

exception. According to the association, 

a better rule would be a maximum 

number of transactions within a 

calendar year. 

Response: We decline to adopt the 

suggestion. We think that the concept of 

an isolated transaction is incompatible 

with the suggestion that parties can 

routinely engage in multiple 

transactions each year or more than one 

transaction during a short period of 

time. 

Comment: One commenter asked us 

to clarify that only transactions related 

to DHS are subject to the prohibition on 

other transactions within six months of 

an isolated transaction. 

Response: The prohibition applies to 

all transactions. A financial relationship 

between a DHS entity and a referring 

physician can be created by any 

financial relationship, whether or not 

the financial relationship involves DHS 

and whether or not the financial 

relationship involves Medicare or 

private pay business. Unless the 

financial relationship—whatever it may 

be—can fit in one of the statutory or 

regulatory exceptions, the physician 

may not refer any Medicare DHS to the 

DHS entity and the entity may not 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16099

submit claims to Medicare for DHS 

provided in the event that such patients 

are nevertheless referred. 

G. Certain Group Practice Arrangements 

with Hospitals (Section 1877(e)(7) of the 

Act; Phase II; § 411.357(h)) 

Existing Law: Section 1877(e)(7) of the 

Act provides that an arrangement 

between a hospital and group under 

which DHS are furnished by the group 

but are billed by the hospital does not 

constitute a compensation arrangement 

for purposes of the prohibition on 

referrals if the following conditions are 

met: 

• With respect to the services 

furnished to a hospital inpatient, the 

arrangement is for the provision of 

inpatient hospital services under section 

1861(b)(3) of the Act. The arrangement 

began before December 19, 1989, and 

has continued in effect without 

interruption since that date. 

• With respect to the DHS covered by 

the arrangement, substantially all of 

those services furnished to patients of 

the hospital are furnished by the group 

under the arrangement. 

• The arrangement is set out in a 

written agreement that specifies the 

services to be furnished by the parties 

and the amount of compensation. 

• The compensation paid over the 

term of the agreement is consistent with 

fair market value, and the compensation 

per unit of services 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. 

• The compensation is provided 

under an agreement that would be 

commercially reasonable even if no 

referrals were made to the entity.

• The arrangement between the 

parties meets any other requirements 

the Secretary may impose by regulation 

as needed to protect against patient or 

Medicare program abuse. 

The 1995 final rule incorporated the 

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

Act, as they relate to clinical laboratory 

services, into the regulations in 

§ 411.357(h), without imposing any 

additional requirements. 

Proposed Rule: The January 1998 

proposed rule proposed to revise 

§ 411.357(h) to apply the provisions to 

all DHS, not just clinical laboratory 

services, and to make certain minor 

changes. In particular, the proposed rule 

proposed modifying the regulation to 

make clear that the arrangement for 

which the protection of the exception 

was sought had to have begun prior to 

December 19, 1989, and have continued 

in effect, without interruption, since 

that time. We also proposed interpreting 

the regulatory language to permit 

changes to the arrangement over time 

with respect to the services covered by 

the arrangement or the physicians 

providing those services. We also 

clarified that the ‘‘substantially all’’ test 

in section 1877(e)(7)(A)(iii) of the Act 

required that at least 75 percent of the 

DHS covered under the arrangement 

furnished to patients of the hospital be 

furnished by the group under the 

arrangement. 

Final Rule: We received no comments 

to this provision. This interim final rule 

adopts the proposed rule. 

H. Payments Made by a Physician for 

Items and Services (Section 1877(e)(8) 

of the Act; Phase II; § 411.357(i)) 

Existing Law: 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 or to an entity as 

compensation for other items or 

services, if the items or services are 

furnished at a price that is consistent 

with fair market value. The August 1995 

final rule incorporated the provisions of 

section 1877(e)(8) of the Act into the 

regulations in § 411.357(i). 

Proposed Rule: The January 1998 

proposed rule proposed to interpret 

‘‘other items or services’’ to mean any 

kind of items or services that a 

physician might purchase, but not 

including clinical laboratory services, or 

any items or services specifically listed 

under other compensation exceptions 

(63 FR 1703). In other words, under the 

proposed rule, exceptions would be 

mutually exclusive. In the August 1995 

final rule, we had defined remuneration 

to include discounts and explained that 

the exception in section 1877(e)(8) of 

the Act would not be available if the 

remuneration included a discount that 

did not reflect fair market value. In the 

preamble to the January 1998 proposed 

rule (63 FR 1694), we clarified that a 

discount would meet the fair market 

value standard if it were made pursuant 

to an arm’s-length transaction; were 

offered to all similarly situated 

individuals regardless of whether they 

make referrals; did not reflect the 

volume or value of past or future 

referrals; and were passed on to 

Medicare and other insurers. In 

addition, the January 1998 proposed 

rule proposed a new exception in 

§ 411.357(j) for discounts to physicians 

based on the volume of referrals, 

provided the discount is passed on in 

full to the patients or their insurers and 

does not benefit the physicians in any 

way. The proposed exception would not 

contain a fair market value standard. 

Final Rule: The final rule adopts the 

January 1998 proposed rule, without the 

proposed exception for discounts. Upon 

further consideration, we believe that 

legitimate discounts will fall within the 

range of values that is ‘‘fair market 

value.’’ In addition, pursuant to our 

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

Act, we are extending the exception to 

cover payments by a referring 

physician’s immediate family member. 

We believe the Congress did not intend 

that the fair market value purchase by 

immediate family members of items and 

services from health care entities would 

create a prohibited financial 

relationship such that the physician 

could not refer to the entity. 

Comment: Several commenters 

questioned the statutory authority for 

our determination that items or services 

that were potentially covered under 

another exception, such as a lease or 

personal service agreement, could not 

also be excepted under this provision. 

One commenter noted that in some 

instances, some payers will not pay 

separate physician and facility charges 

for certain hospital-based physician 

clinics because the physician payment 

includes practice expenses. In those 

situations, it is common for the hospital 

to charge the physician some amount for 

office space and equipment. However, 

those kinds of transactions cannot fit in 

the lease or services exceptions. 

Response: In the case of this 

particular exception, the determination 

that items and services addressed by 

another exception should not be 

covered in this exception is consistent 

with the overall statutory scheme and 

purpose and is necessary to prevent the 

‘‘payments by a physician’’ exception 

from negating the statute. However, we 

are modifying the regulatory text to 

make clear that parties can use the fair 

market value exception, where 

applicable, which should address some 

of the issues raised by commenters.

XI. Definitions (Section 1877(h) of the 

Act; Phase I—66 FR 922–49; § 411.351) 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Definitions’’ at the beginning 

of your comments.] 

A. Designated Health Services—General 

Principles (Section 1877(h)(6) of the Act; 

Phase I—66 FR 922) 

Section 1877(h)(6) of the Act lists 

eleven broad categories of DHS, but 

does not further define those categories. 

In response to requests for clear 

definitions of the various DHS, Phase I 

defined the entire scope of the following 

categories of DHS by reference to 

specific CPT and HCPCS codes: Clinical 

16100 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

laboratory services; physical therapy, 

occupational therapy, and speechlanguage pathology services; radiology 

and certain other imaging services; and 

radiation therapy services and supplies. 

The list of codes used to define these 

DHS categories appeared in an 

Attachment to Phase I and is updated on 

an annual basis in the physician fee 

schedule final rule and on the CMS Web 

site. For the convenience of the reader, 

we are also including this list of codes 

as an Attachment to this Phase II rule. 

Commenters generally responded 

favorably to our use of codes in defining 

DHS. Phase I defined the remaining 

DHS categories in regulatory 

descriptions that did not refer to a 

service-by-service list of CPT or HCPCS 

codes. 

In Phase I, we also published separate 

lists of CPT and HCPCS codes to 

identify DHS that may qualify for the 

new regulatory exceptions in 

§ 411.355(g) (regarding EPO and other 

dialysis-related outpatient prescription 

drugs furnished in or by an ESRD 

facility) and § 411.355(h) (regarding 

preventive screening tests, 

immunizations and vaccines). Services 

that qualify for one of these exceptions 

remain DHS for purposes of section 

1877 of the Act; however, referrals may 

be made and claims may be submitted 

for these DHS if all of the conditions of 

the applicable exception are satisfied. 

As noted below in the comments and 

responses section, we received a 

number of comments from various 

providers advocating that we either 

exclude certain services from the 

definition of a particular DHS category 

or create an exception for financial 

arrangements involving those services 

because, in the commenters’ view, the 

items or services pose a low risk of 

overutilization or abuse. For the reasons 

stated in Phase I (66 FR 922–923) and 

our responses below, we continue to 

decline to make service-by-service 

determinations of the risk of abuse. 

Accordingly, we are not adding any new 

regulatory exceptions for additional 

DHS in this Phase II rulemaking. 

Our responses to comments on the 

various DHS definitions follow in the 

order set forth in Phase I. 

Comment: Some commenters found it 

confusing to have a service included on 

both the list of codes used to define 

certain DHS and the list of codes that 

identifies certain services as ‘‘excluded’’

under either § 411.355(g) or 

§ 411.355(h). These commenters 

suggested that such services be omitted 

from the DHS list. 

Response: If a particular service is a 

DHS, the fact that it potentially qualifies 

for an exception under § 411.355 does 

not negate the fact that it is a DHS. The 

various exceptions serve to permit 

referrals and claims submission for DHS 

when certain enumerated conditions are 

satisfied. The exceptions do not convert 

DHS into services that are not DHS. 

Thus, we cannot omit from the DHS 

code lists those services that may be 

covered by a regulatory exception, such 

as the exception in § 411.355(h) for 

certain preventive screening tests, 

immunizations and vaccines. However, 

with respect to certain definitions in the 

Attachment to Phase I regarding the 

codes that would be ‘‘excluded’’ under 

the exceptions in § 411.355(g) and 

§ 411.355(h), we are making a number of 

technical revisions to the definitions of 

DHS in § 411.351 to more clearly reflect 

the regulatory scheme. In addition, in 

the December 31, 2002 physician fee 

schedule final rule (67 FR 79966), we 

have clarified that the codes listed 

under ‘‘Drugs Used by Patients 

Undergoing Dialysis’’ and ‘‘Preventive 

Screening Tests, Immunizations and 

Vaccines’’ constitute items or services to 

which the physician self-referral 

prohibition does not apply if the items 

or services are furnished in compliance 

with all of the conditions listed in the 

exceptions at § 411.355(g) and 

§ 411.355(h), respectively. 

Comment: One commenter urged us 

to define all categories of DHS by 

reference to specific CPT, HCPCS, or 

other relevant codes. In particular, the 

commenter was concerned about 

potential confusion regarding whether a 

supply is considered a DME, orthotic or 

prosthetic supply versus an ordinary 

supply.

Response: As explained in the Phase 

I preamble (66 FR 923), some DHS are 

not amenable to definition through 

codes. For those services, we believe the 

definitions provided in Phase I are 

sufficiently clear to permit entities and 

physicians to identify them readily. 

With respect to the commenter’s 

particular concern, we are unclear as to 

how or why the Phase I definitions of 

‘‘durable medical equipment’’ and 

‘‘prosthetics, orthotics, and prosthetic 

devices and supplies’’ generate any 

significant confusion. Phase I did not 

change any existing definitions for those 

terms. As discussed in the Phase I 

preamble (66 FR 932), the simplest way 

to determine the proper classification of 

these items is to consult the Durable 

Medical Equipment, Prosthetics, 

Orthotics and Supplies (DMEPOS) fee 

schedule, which identifies such items 

by HCPCS code and is available on the 

CMS Web site at: http://cms.hhs.gov/

providers/pufdownload/

default.asp#dme. Most supplies paid 

under the DMEPOS benefit (as opposed 

to ordinary supplies used in physician 

offices) are listed on this Web site. In 

general, a supply is categorized as a 

DME supply or a prosthetic, prosthetic 

device, or orthotic supply if it is 

disposable in nature and necessary for 

the effective use of DME, a prosthetic, 

a prosthetic device, or orthotic 

equipment by the patient outside of the 

physician’s office. 

B. Professional Services as Designated 

Health Services (Phase I—66 FR 924) 

Comment: Our DHS definitions, 

including the definition of ‘‘radiology 

and certain other imaging services’’ at 

§ 411.351, encompass both the 

professional and technical components 

of a service. A commenter stated that 

including the professional component is 

contrary to the statute and creates a 

significant obstacle to the delivery of 

ultrasound services provided anywhere 

except in a physician’s office. For 

example, according to the commenter, if 

a physician refers a hospital inpatient 

for an ultrasound, and a member of the 

referring physician’s group practice 

interprets the ultrasound (that is, 

provides the professional component), 

the in-office ancillary services exception 

is not applicable and the group cannot 

bill for the professional service. 

Response: First, we do not find any 

evidence that the Congress intended to 

exclude all professional physician 

services from the list of DHS, for the 

reasons explained in the Phase I 

preamble (66 FR 924). Second, under 

the physician services exception 

(section 1877(b)(1) of the Act; 

§ 411.355(a)), the self-referral 

prohibition does not apply to physician 

services that are personally performed 

by, or under the supervision of, another 

physician who is in the same group 

practice as the referring physician. 

Unlike the in-office ancillary services 

exception, the physician services 

exception does not impose any ‘‘same or 

centralized building’’ requirement. 

Thus, a physician may refer a hospital 

inpatient for ultrasound services when 

the professional component is furnished 

in a hospital by, or under the 

supervision of, another physician in his 

or her group practice. In many other 

cases, physician services that are DHS 

will fall under one of the other 

exceptions or will be personally 

performed by the referring physician 

and therefore not constitute a ‘‘referral’’

for purposes of section 1877 of the Act. 

C. Clinical Laboratory Services (Phase 

I—66 FR 924) 

In Phase I, we defined the entire 

scope of ‘‘clinical laboratory services’’

by reference to codes ‘‘as specifically 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16101

identified by the CPT and HCPCS codes 

posted on the HCFA Web site * * * and 

in annual updates * * *, except as 

specifically excluded on the HCFA Web 

site and in annual updates.’’ We are 

deleting the phrase ‘‘except as 

specifically excluded on the HCFA Web 

site and in annual updates’’ in response 

to comments discussed in section XI.A 

addressing the distinction between 

items and services that do not constitute 

a DHS and items and services that are 

DHS but may qualify for an exception 

under § 411.355. We are not making any 

other changes to the definition of 

‘‘clinical laboratory services.’’

Comment: One commenter urged us 

to exclude from the definition of 

‘‘clinical laboratory services’’ all 

laboratory tests for which the 

requirements of CLIA have been waived. 

The commenter stated that CLIA-waived 

tests should not be considered DHS 

because they are an integral part of 

patient care furnished in the physician 

office setting. 

Response: We see no reason to 

exclude CLIA-waived tests from the 

definition of ‘‘clinical laboratory 

services’’ under § 411.351. Under CLIA 

regulations, clinical laboratory tests are 

categorized based on complexity. The 

three categories are: waived tests, tests 

of moderate complexity, and tests of 

high complexity. The commenter is 

addressing the set of relatively simple 

tests that the CLIA rules categorize as 

waived tests. Under § 493.15, waived 

tests must: (1) Be cleared by the Food 

and Drug Administration (FDA) for 

home use; (2) employ methodologies 

that are so simple and accurate as to 

render the likelihood of erroneous 

results negligible; or (3) pose no 

reasonable risk of harm to the patient if 

the test is performed incorrectly. None 

of these factors reduces the risk of 

overutilization or other abuse for 

purposes of section 1877 of the Act. To 

the extent waived tests are an integral 

part of patient care and are furnished 

during an office visit, they will likely fit 

in the in-office ancillary services 

exception at § 411.355(b).

D. Physical Therapy Services (Phase I—

66 FR 924–927) 

In Phase I (66 FR 924–27, 955), we 

defined ‘‘physical therapy, occupational 

therapy, and speech-language pathology 

services’’ as those particular services 

identified by the CPT and HCPCS codes 

on our Web site (and in annual updates 

published in the Federal Register), 

regardless of who provides them. We 

listed the codes for each of these 

services under a single category because 

they overlap (for example, a particular 

service that is associated with a single 

CPT or HCPCS code may be within the 

scope of practice of both physical 

therapists and occupational therapists). 

We believe that the list of CPT and 

HCPCS codes for these services 

represents what most clinicians would 

define as physical therapy/occupational 

therapy/speech-language pathology 

services. However, we are removing 

CPT code 94762 (measure blood oxygen 

level) from the list of physical therapy/

occupational therapy/speech-language 

pathology services because it is not a 

physical therapy service. 

We received the following comments. 

Comment: One commenter was 

concerned that our use of the phrase 

‘‘regardless of who provides them’’

might imply that people other than 

licensed physical therapists and 

physical therapist assistants could 

provide physical therapy services in a 

physician’s office. The commenter 

believed that we should develop 

policies to avoid unlicensed or 

unqualified individuals from providing 

physical therapy services. 

Response: We do not intend for the 

description of ‘‘Physical therapy, 

occupational therapy, and speechlanguage pathology services’’ in 

§ 411.351 to have any effect on who is 

allowed to furnish physical therapy 

services to Medicare patients. Section 

411.351 merely defines the scope of 

services included in the definition; it 

does not address the qualifications 

required to perform them. As noted in 

the preamble to Phase I final rule (66 FR 

926), some physical therapy services 

can be performed by physicians, and we 

defer in this rule to existing Medicare 

policy concerning which professionals 

may provide a given service. 

Comment: A commenter stated that 

we should add two CPT codes to the list 

of physical therapy codes: 97601 for 

removal of devitalized tissue from 

wound without anesthesia and 97602 

for non-selective debridement, without 

anesthesia. 

Response: We agree. In Phase I, we 

defined physical therapy services, as 

described in section 1861(p) of the Act, 

to include the following: (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; and (iii) the 

establishment of a maintenance therapy 

program for an individual whose 

restoration potential has been reached. 

Removing devitalized tissue and nonselective debridement without 

anesthesia are physical medicine 

modalities, and the CPT places the 

codes for these services within a series 

of codes for other physical therapy 

services. We are therefore including 

CPT codes 97601 and 97602 on the list 

of codes used to define physical therapy 

services. 

Comment: One commenter asserted 

that we should not interpret the term 

‘‘physical therapy services’’ to include 

speech-language pathology. According 

to the commenter, neither section 1877 

of the Act nor its legislative history 

indicates that the term ‘‘physical 

therapy’’ encompasses speech-language 

pathology. Another commenter asserted 

that the Congress intended speechlanguage pathology services and 

physical therapy services to be separate 

benefits. The commenter asserts that 

although speech therapy services are 

referenced in section 1861(p) of the Act, 

the definition of these services is 

included in a separate statutory 

provision, section 1861(ll)(l) of the Act. 

The commenter noted that we also 

recognize speech-language pathology 

services as distinct from physical 

therapy. 

Response: As previously noted in 

Phase I (66 FR 926), the definition of 

‘‘outpatient physical therapy services’’

in section 1861(p) of the Act specifically 

states that ‘‘[t]he term ‘outpatient 

physical therapy services’ also includes 

speech-language pathology services 

furnished by a provider of services, a 

clinic, rehabilitation agency, or by a 

public health agency, or by others under 

an arrangement with, and under the 

supervision of, such provider, clinic, 

rehabilitation agency, or public health 

agency * * *.’’ Thus, by definition, 

speech-language pathology services are 

a subset of outpatient physical therapy 

services under the Medicare statute. 

Although the term ‘‘speech-language 

pathology services’’ is defined 

elsewhere in the Act, and there may be 

different regulatory guidelines 

applicable to physical therapy services 

and speech-language pathology services, 

the statute clearly includes the latter 

within the definition of ‘‘outpatient 

physical therapy services.’’

Comment: One commenter asserted 

that the Phase I preamble incorrectly 

stated that device mapping (the fine 

tuning of cochlear implants) is 

performed by speech-language 

pathologists (66 FR 935). According to 

the commenter, device mapping is not 

within the speech-language pathology 

scope of practice. The commenter also 

asserted that CPT code 92507 (speech/

hearing therapy) is not a designated 

health service and should be deleted 

from the code list.

Response: In Phase I (§ 411.351; 66 FR 

955), we described ‘‘speech-language 

16102 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

pathology services’’ as services 

performed ‘‘for the diagnosis and 

treatment of speech, language, and 

cognitive disorders that include 

swallowing and other oral-motor 

dysfunctions.’’ We noted in the Phase I 

preamble (66 FR 935) that, although 

cochlear implants are considered 

prosthetic devices, cochlear 

rehabilitation services (billed under CPT 

code 92510) are considered speechlanguage pathology services for 

purposes of Medicare coverage and 

payment. The Phase I Attachment also 

included CPT codes 92506 (speech/

hearing evaluation) and 92507–92508 

(speech/hearing therapy) as physical 

therapy/occupational therapy/speechlanguage pathology services. 

We have removed CPT code 92506 

(speech/hearing evaluation) from the list 

of codes used to define physical 

therapy, occupational therapy, and 

speech-language pathology services. 

CPT code 92506 is a diagnostic 

audiology service. Contrary to the 

commenter’s request, we are not 

removing CPT code 92507 (speech/

hearing therapy) because it is a speechlanguage pathology service. In addition, 

we note that we removed CPT 92510 

(rehab for ear implant) from the code list 

in the December 31, 2002 physician fee 

schedule final rule (67 FR 80017) 

because we no longer recognize this 

code as valid for payment purposes. The 

services formerly billed under this code 

may be billed under 92507–92508, 

which remain on the list of codes used 

to define physical therapy, occupational 

therapy, and speech-language pathology 

services. 

We did not intend to include 

audiology services within the scope of 

our description of speech-language 

pathology services. Accordingly, we are 

removing the following four codes, 

which were erroneously added to the 

DHS code list in the CY 2003 physician 

fee schedule update (67 FR 79966, 

80016, effective for services furnished 

on or after March 1, 2003): CPT 92601 

(cochlear implant f/up exam <7); 92602 

(reprogram cochlear implant <7); 92603 

(cochlear implant f/up exam 7>); and 

92604 (reprogram cochlear implant 7>). 

All of these codes represent diagnostic 

audiology services. 

Comment: A commenter stated that 

there are two additional CPT codes that 

should be considered speech-language 

pathology services: CPT 92520 

(laryngeal function studies) and CPT 

92511 (nasopharyngoscopy). According 

to the commenter, these services are 

clearly within the scope of practice of 

speech-language pathologists. 

Response: As we stated in Phase I (66 

FR 925), we are defining this category of 

DHS using specific codes that 

correspond to services that we consider 

to be speech-language pathology 

services. The Medicare program does 

not currently recognize 

nasopharyngoscopy (CPT 92511) and 

laryngeal function studies (CPT 92520) 

as therapy services. We intend that the 

list of CPT/HCPCS codes will reflect 

existing Medicare coverage and 

payment policies for each DHS category 

on the list. To include the codes 

suggested by the commenter would be 

contrary to existing policy; therefore, we 

are not including these codes as DHS 

under the physician self-referral 

prohibition. 

E. Occupational Therapy Services 

(Phase I—66 FR 926) 

We received no comments on this 

subject. Accordingly, we are not making 

any changes to the relevant portion of 

the definition of ‘‘physical therapy, 

occupational therapy, and speechlanguage pathology services.’’

F. Radiology and Certain Other Imaging 

Services (Phase I–66 FR 931) 

Under section 1877(h)(6)(D) of the 

Act, ‘‘radiology services, including 

magnetic resonance imaging, 

computerized axial tomography, and 

ultrasound services’’ are DHS. Radiation 

therapy services and supplies are DHS 

under section 1877(h)(6)(E) of the Act. 

In the January 1998 proposed rule, we 

proposed a single definition for both of 

these DHS categories. In Phase I, we 

took the following steps, among others, 

to define this category with greater 

clarity: 

• We separately defined the DHS 

identified in section 1877(h)(6)(D) and 

section 1877(h)(6)(E) of the Act. 

• We defined the category of services 

covered by section 1877(h)(6)(D) of the 

Act under the name ‘‘radiology and 

certain other imaging services’’ to make 

clear the Congress’s intent to include 

some imaging services other than 

radiology. 

• We defined the entire scope of DHS 

under section 1877(h)(6)(D) of the Act in 

a list of CPT and HCPCS codes. 

• We excluded the following services 

from the definition of ‘‘radiology and 

other imaging services’’: (i) X-ray, 

fluoroscopy, and ultrasound services 

that require the insertion of a needle, 

catheter, tube or probe; (ii) radiology 

procedures that are integral to the 

performance of, and are performed 

during, nonradiological medical 

procedures; and (iii) nuclear medicine 

procedures. 

We received a number of comments 

concerning radiology services, 

particularly with respect to nuclear 

medicine. We are deleting the 

parenthetical ‘‘(except as otherwise 

specifically excluded on the CMS Web 

site and in annual updates)’’ in response 

to comments discussed in section XI.A 

addressing the distinction between 

items and services that do not constitute 

a DHS and items and services that are 

DHS but may qualify for an exception 

under § 411.355. In response to 

comments, we are modifying the 

definition to exclude certain radiology 

procedures performed immediately after 

a nonradiological medical procedure. 

Comment: Several commenters asked 

us to confirm their belief that the only 

services that constitute ‘‘radiology and 

certain other imaging services’’ for 

purposes of section 1877 of the Act are 

those represented by the codes listed in 

the Attachment to Phase I (66 FR 963) 

and its subsequent updates. 

Response: The commenters are 

correct. 

Comment: One commenter asserted 

that echocardiograms should not be 

considered DHS because section 1877 

does not include cardiology services as 

DHS. In addition, an association of 

cardiologists stated that the Congress’s 

choice of language indicates that it 

intended to include only ultrasound 

services that are appropriately 

considered radiology services. That is, 

the commenter asserted that, although 

echocardiography is a diagnostic 

procedure using ultrasound technology, 

it should not be considered a radiology 

service because echocardiography is a 

service performed primarily by 

cardiologists, billed under cardiology 

CPT codes, and furnished to cardiology 

patients. In addition, the commenter 

asserted that echocardiography has not 

been identified as a service that poses a 

high risk of improper referrals, unlike 

other services appropriately included in 

the radiology services category. Another 

association of cardiologists asserted that 

we should exclude any ultrasound 

service not generally performed by 

radiologists, but instead performed by 

other specialists as part of their own 

specialties (such as cardiac, ophthalmic, 

and gynecologic ultrasound), just as we 

excluded nuclear medicine in Phase I. 

Response: In Phase I, we responded to 

public comments that questioned why 

cardiac, vascular, and obstetric 

ultrasound procedures should be 

considered radiology services. As we 

explained then, ‘‘these services are 

subject to the physician self-referral 

provisions because section 1877(h)(6)(D) 

of the Act specifically includes 

ultrasound as a DHS, not because they 

are ordinarily considered to be 

‘radiology services.’ ’’ (66 FR 928). We 

see no reason to reconsider this 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16103

determination. As explained in Phase I, 

we do not believe the Congress intended 

for us to make service-by-service 

determinations with respect to the risk 

of overutilization or other abuse. In 

many cases, these services may qualify 

for the in-office ancillary services 

exception or another exception. 

Comment: The Phase I definition of 

‘‘radiology and other imaging services’’

specifically states that the list of codes 

used to define these services excludes 

‘‘[r]adiology procedures that are integral 

to the performance of, and performed 

during, nonradiological medical 

procedures.’’ One commenter preferred 

the language we used in the preamble to 

the January 1998 proposed rule to 

indicate our intention to exclude 

radiology services that are ‘‘incidental’’

or ‘‘secondary’’ to another procedure (63 

FR 1676). 

Response: We decline to adopt the 

standard advocated by the commenter. 

Many of the comments we received on 

the January 1998 proposed rule 

indicated that the ‘‘incidental or 

secondary’’ standard was confusing or 

ambiguous. As noted in Phase I (66 FR 

928), ‘‘it is generally not possible to 

establish, based on the CPT code used, 

whether or not the primary purpose of 

the procedure was the interventional 

procedure itself (with the imaging 

procedure being an adjunct procedure) 

or whether the primary purpose was to 

take a picture with an imaging 

modality.’’ Those who commented on 

the ‘‘integral’’ standard generally 

favored the new language.

Comment: One commenter asserted 

that radiology services may be needed 

before a procedure to plan the manner 

in which a needle, catheter, or probe 

will be guided, and that radiology 

services may be performed after a 

procedure to assess whether the 

procedure was effective. Another 

commenter asserted that we should 

exclude all interventional radiology 

services, since in almost all cases, the 

physician making the referral performs 

part or all of the procedure. 

Response: We interpret the 

commenter to request that such pre- and 

post-procedure radiology services be 

considered ‘‘integral to and performed 

during’’ a procedure so as to qualify 

under the standard set forth at § 411.351 

(Radiology and other imaging services, 

subpara. (2)). We agree, in part, with the 

commenter. We have modified the 

definition of radiology and other 

imaging services at § 411.351 to make 

clear that radiology services performed 

immediately after a procedure in order 

to confirm the placement of an item 

during the procedure are not DHS. 

Otherwise, we decline to change the 

regulations for the reasons set forth in 

Phase I (66 FR 928–929). In addition, 

depending on the circumstances, 

existing exceptions in the statute and 

regulations, such as the in-office 

ancillary services exception or the rural 

provider exception, may apply to 

radiology procedures furnished pre- or 

post-surgery. 

Comment: Two commenters 

addressed ophthalmic A-scans, and one 

of the commenters also addressed Bscans. According to the commenters, 

because A-scans (particularly CPT 

76519) must be performed before 

cataract surgery to determine the 

appropriate power of the intraocular 

lens (IOL) to be implanted, these 

procedures are integral to cataract 

surgery even though they are not 

performed during the surgery. One 

commenter asserted that B-scans are 

performed only in support of another 

service or procedure. For example, the 

commenter stated that B-scans may be 

used in certain cataract surgery cases to 

view the posterior segment or retina of 

the eye to determine if a structural 

pathology is present. Both commenters 

argued that the ‘‘integral to and 

performed during’’ standard should be 

changed to accommodate A-scans and 

B-scans. Alternatively, the commenters 

advocated that we create a special 

exception for A-scans on the grounds 

that they are sufficiently integral to 

another procedure and are subject to 

little or no overutilization or abuse. One 

of the commenters alleged that such an 

exception would be based on the same 

rationale as that which led us to create 

the exception in § 411.355(g) regarding 

EPO and other dialysis-related drugs 

furnished in or by an ESRD. 

Response: We do not see a meaningful 

distinction between the A-scans and Bscans described by the commenters and 

other radiology services ordered by 

surgeons in connection with surgeries; 

nor do we think that A-scans and Bscans pose no risk of abuse. Moreover, 

we do not believe that our rationale for 

creating the exception in § 411.355(g) 

pertains here. Unlike ESRD services, Ascans and B-scans are not necessarily 

performed in conjunction with services 

that are paid for under a composite rate, 

nor are they subject to strict utilization 

and coverage criteria. Nevertheless, we 

would expect that in many cases, the inoffice ancillary services exception may 

apply to A-scans and B-scans. 

Comment: Commenters expressed 

concern that, in many cases, ASCs will 

not be able to provide radiology and 

ultrasound services that are not 

performed during surgery. These 

commenters urged that, if CMS 

continues to consider radiology and 

ultrasound services performed before or 

after surgery to be DHS, then the same 

reasons that support a special exception 

for prosthetic devices implanted in an 

ASC should also support a specific 

exception for these radiology services. 

Response: We are not persuaded that 

a special exception is warranted. The 

exception for implants in ASCs applies 

to the implantation of a device during 

a surgical procedure, rather than before 

or after it. In those circumstances, the 

implant is clearly integral (indeed, 

inseparable) from the surgery itself. 

Similarly, radiology included in the 

ASC composite rate for an ASC 

procedure is not a DHS for the reasons 

set forth in Phase I at 66 FR 923. We see 

no reason to treat radiology services that 

are furnished in an ASC, but are not 

paid for in the ASC composite rate, 

differently from radiology services 

provided by any other entity. 

Comment: One commenter advocated 

that we create an exception to permit 

interventional radiologists to order 

diagnostic, non-interventional radiology 

or other imaging procedures from an 

entity with which they have a financial 

relationship prior to performing 

interventional radiology and related 

surgical procedures. The commenter 

noted that the professional component 

of the diagnostic procedure may be 

performed at a hospital or an ASC by 

another physician in the radiologist’s 

group practice. According to the 

commenter, a limited exception would 

enable beneficiaries to benefit from 

interventional radiology.

Response: We see no need for a new 

exception. The self-referral prohibition 

does not apply to a radiologist’s request 

for diagnostic radiology tests pursuant 

to a consultation because the request is 

not a ‘‘referral’’ for purposes of section 

1877 of the Act. Our expansion of the 

definition of ‘‘referral’’ would permit a 

radiologist to order diagnostic radiology 

services that are supervised by another 

radiologist in the same group practice. 

If the request is not made pursuant to 

a consultation, the referral of the 

professional component may 

nevertheless qualify for another 

exception (such as the physician 

services exception). With respect to any 

technical component billed by a 

hospital or ASC, there are sufficient 

exceptions available in the statute and 

regulations to address legitimate 

financial relationships between 

physicians and these entities. 

Comment: A commenter urged us to 

amend the final rule to clarify that not 

only the ordering physician, but also 

other ‘‘physicians in the group 

practice,’’ may provide the professional 

component of a radiology service if all 

16104 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

the following conditions apply: (1) A 

physician in the group has ordered the 

technical component; (2) the 

professional component is provided at 

an institutional provider; and (3) the 

patient is either an outpatient or 

inpatient of the institution where the 

professional component is provided. 

Response: As explained in section 

II.D, above, we have expanded the 

consultation exception in the definition 

of ‘‘referral’’ in § 411.351 to permit 

supervision by another physician in the 

same group practice as the radiologist, 

as long as the request results from a 

consultation initiated by another 

physician and the other conditions of 

the exception are satisfied. Moreover, 

the physician services exception may 

apply in the circumstances described by 

the commenter. 

Comment: One commenter expressed 

concern that the exclusion of some 

interventional radiology codes for 

services such as angiographies, 

angiograms, cardiac catheterizations, 

and endoscopies might afford some 

physicians more incentive to refer for 

costly interventional tests that may not 

be medically necessary. Although these 

studies would be DHS under 

1877(h)(6)(K) when performed as 

inpatient or outpatient hospital services, 

some will be performed at freestanding 

facilities and therefore not constitute a 

DHS. The commenter asked that we 

reassess our decision, or, in the 

alternative, instruct contractors to 

monitor utilization patterns for 

excluded interventional radiology 

services. 

Response: As explained in Phase I (66 

FR 929), the services referenced by the 

commenter are not fundamentally 

radiological in nature because they do 

not involve an imaging service that is 

described in 1877(h)(6)(D) of the Act. 

These services are DHS when performed 

in a hospital inpatient or outpatient 

setting. Other statutes, including the 

Federal anti-kickback statute, are 

available even in instances where a 

particular item or service is not DHS 

under section 1877 of the Act. 

Comment: An association 

representing radiologists urged us to 

consider nuclear medicine a DHS 

because excluding nuclear medicine, as 

was done in Phase I, increases the risk 

of program abuse. The commenter 

asserted that nuclear medicine is a 

subspecialty of radiology and that 

radiologists perform and interpret the 

vast majority of nuclear medicine 

studies performed in the United States. 

The commenter also asserted that the 

exclusion of nuclear medicine has 

encouraged potentially abusive business 

arrangements involving physician 

financial relationships with entities to 

which they refer patients for positron 

emission tomography (PET) scans. 

Another commenter expressed concern 

that echocardiography is a DHS, while 

nuclear medicine procedures (some of 

which are commonly performed as a 

clinical alternative for stress 

echocardiography) are not. The 

comment suggested that a physician’s 

financial interest in nuclear medicine 

modalities could influence the 

physician to select nuclear medicine 

procedures over echocardiography. 

Response: We are making no changes 

to the treatment of nuclear medicine 

procedures under the DHS definitions at 

this time. However, we are mindful of 

the issue raised by the commenter and 

are continuing to consider the 

application of section 1877 of the Act to 

nuclear medicine procedures. Moreover, 

parties should be mindful that 

arrangements involving nuclear 

medicine may violate the anti-kickback 

statute, depending on the 

circumstances. 

G. Radiation Therapy Services and 

Supplies (Phase I—66 FR 931) 

Phase I indicated that the list of codes 

for radiation therapy services and 

supplies identified on our Web site and 

in annual updates is based on section 

1861(s)(4) of the Act (42 U.S.C. 

§ 1395(x)(s)(4)) and § 410.35, but does 

not include nuclear medicine 

procedures. As explained above in the 

immediately preceding section 

concerning radiology services, we are 

continuing to consider the application 

of section 1877 of the Act to nuclear 

medicine procedures, but we are not 

changing the treatment of nuclear 

medicine procedures under the DHS 

definitions at this time.

Comment: One commenter opposed 

our use of CPT and HCPCS codes to 

define the scope of ‘‘radiation therapy 

services and supplies’’ because 

Medicare has never used these codes to 

define such services. 

Response: As explained above, we 

used codes in Phase I to define various 

categories of DHS in response to public 

comments urging us to create ‘‘bright 

line’’ definitions for DHS. In general, 

commenters were pleased with this 

approach. The list of codes applies only 

to section 1877 of the Act and the 

corresponding regulations. The list is 

updated annually, and we look to 

commenters to identify any specific 

codes that we have listed that should 

not be considered ‘‘radiation therapy 

services and supplies.’’

Comment: One commenter stated that 

services that are furnished before or 

after radiation treatment (such as a 

consultation to plan the placement of 

radioactive elements or post-surgical 

dosimetry services) should not be 

considered radiation therapy services 

for physician self-referral purposes. 

According to the commenter, these 

services are neither radiation therapy 

services nor inpatient or outpatient 

hospital services; they are physician 

services performed in a physician’s 

office. 

Response: Pre-planning placement 

services (CPT codes 77300 and 77305 

through 77331) and normal follow-up 

post-surgical dosimetry services are 

professional physician services, as are 

many other radiation therapy services. 

To the extent that those services are 

billed as an outpatient hospital service, 

they would constitute a designated 

health service under section 

1877(h)(6)(K) of the Act. We think that, 

in many cases, these services will be 

performed or supervised by a radiation 

oncologist pursuant to a consultation 

and therefore will not constitute a 

‘‘referral’’ under § 411.351. To the extent 

that a request for these services 

constitutes a referral, it would appear 

that the in-office ancillary services 

exception and the physician services 

exception could apply in many cases. 

However, these exceptions are not 

available for any technical component 

that is billed as an outpatient hospital 

service. 

Comment: One commenter asked us 

to reconsider our statement in the 

January 2001 final rule preamble (66 FR 

931) that there is no logical or empirical 

evidence that physician ownership of 

brachytherapy centers improves quality 

of care. 

Response: The commenter offered no 

evidence or support for the proposition 

that physician ownership of 

brachytherapy centers improves quality 

of care. Our position remains the same. 

Comment: One commenter asked that 

we exclude from the list of codes that 

defines ‘‘radiation therapy services and 

supplies’’ the CPT codes for 

brachytherapy (CPT codes 77781 

through 77784). The commenter stated 

that excluding brachytherapy from the 

list of DHS codes would be appropriate 

because the Congress did not intend to 

include as DHS invasive forms of 

radiation therapy. According to the 

commenter, when the Congress 

expanded section 1877 to apply to 

radiation therapy services and supplies, 

radiation therapy typically 

encompassed only the use of an external 

electron beam through the body without 

any invasive procedure. The commenter 

also noted that the definitions of 

‘‘radiation’’ and ‘‘radiation therapy’’

found in Stedman’s Medical Dictionary 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16105

do not include treatments (such as 

brachytherapy) in which surgical means 

are necessary to insert radioactive 

isotopes into the body. See The 

American Heritage Stedman’s Medical 

Dictionary, Houghton Mifflin Company, 

Boston, Massachusetts, October 1995 

(defining ‘‘radiation’’ as the emission 

and propagation of energy in the form 

of rays or waves, and ‘‘radiation 

therapy’’ as the treatment of disease 

with radiation, especially selective 

irradiation with X-rays or other ionizing 

radiation and by ingestion of a 

radioisotope). The commenter asserted 

that the same logic that caused us to 

exclude certain invasive radiology 

procedures from the definition of 

‘‘radiology and certain other imaging 

services’’ should persuade us to exclude 

brachytherapy from the definition of 

‘‘radiation therapy services and 

supplies.’’

Response: As noted in § 411.351, the 

list of codes defining ‘‘radiation therapy 

services and supplies’’ is based on 

section 1861(s)(4) of the Act 

(authorizing Medicare payment for ‘‘xray, radium and radioactive isotope 

therapy’’). Brachytherapy involves the 

placement of radioactive isotopes under 

the skin for therapeutic purposes, and 

therefore is clearly within the scope of 

services identified in section 1861(s)(4) 

of the Act. Accordingly, brachytherapy 

is also within the scope of the DHS 

category of ‘‘radiation therapy services 

and supplies.’’ We find nothing in the 

statutory scheme or language to suggest 

that the Congress intended to exclude 

radiation therapy involving surgical or 

invasive procedures. We do not believe 

the Congress intended the definitions of 

DHS under the statute to be frozen in 

time, as this would eventually defeat the 

purpose of the statute. Just as new 

clinical laboratory tests are, and will 

continue to be, included in the 

definition of ‘‘clinical laboratory tests,’’

so, too should new radiation therapy 

services and supplies be included in the 

definition of ‘‘radiation therapy and 

supplies.’’ Moreover, in 1993, when 

section 1877 of the Act was made 

applicable to radiation therapy services 

and supplies, the Congress would have 

understood that this category included 

brachytherapy services. AMA-approved 

brachytherapy codes have been in 

existence since 1983: One 

brachytherapy service (CPT code 77776) 

received a CPT code in 1983; ten 

brachytherapy services (CPT codes 

77761–63; 77777–78; 77789; 77326–28; 

and 77799) received CPT codes in 1984; 

and four brachytherapy services (CPT 

codes 77781–84) received CPT codes in 

1991. Finally, the AMA chose to place 

the codes for these brachytherapy items 

and services in the 77000 section, a 

section for radiation therapy services.

Comment: The same commenter 

argued in the alternative that we should 

use our authority pursuant to section 

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

exception for financial relationships 

involving brachytherapy services. 

According to the commenter, such 

financial relationships do not pose a 

risk of program or patient abuse because 

brachytherapy is not a diagnostic 

procedure; it is used only after a 

diagnosis of cancer has been made by 

the treating physician. In addition, the 

commenter asserted that, since 

brachytherapy can be performed only 

once on a patient, any abuse in the form 

of repetitive billing would be obvious. 

Finally, the commenter asserted that 

abuse is more likely to occur with other 

competing and more expensive 

procedures that have higher profit 

margins, such as radical prostatectomy 

or external beam radiation. 

Response: We are not persuaded that 

an additional exception is warranted. To 

the extent brachytherapy services and 

supplies are furnished by a radiation 

oncologist pursuant to a consultation, 

the consultation exception could apply. 

To the extent that a urologist provides 

the services, there are a number of 

exceptions that could be available, 

depending on the circumstances. We 

recognize that there would be no 

exception available for a facility fee 

billed by an entity owned by a urologist, 

unless the entity were located in a rural 

area or the DHS qualified under the inoffice ancillary services exception. 

However, we continue to believe that 

brachytherapy may be subject to abuse. 

For example, a urologist who owns a 

brachytherapy facility may be more 

inclined to order brachytherapy rather 

than another radiation therapy 

treatment in which he or she may not 

have a financial interest. The statuory 

language and structure reflects the 

Congress’ intent to curb physician 

ownership in DHS entities to which 

they refer because such ownership 

creates an inappropriate financial 

incentive to make referrals. With respect 

to the commenter’s assertions regarding 

the nature of brachytherapy, all 

radiation therapy services and supplies 

are furnished only after a diagnosis of 

cancer is made; thus, we see no reason 

to differentiate among radiation therapy 

treatments on that basis. The fact that 

other treatments may be more expensive 

or have higher profit margins—and 

therefore may be more likely to be 

abused—is not a basis for concluding 

that brachytherapy poses no risk of 

abuse. 

Comment: A commenter stated that 

brachytherapy is less invasive than 

other procedures for removing a tumor 

in the prostate gland and that including 

it as a designated health service will 

prohibit physicians in multiple 

specialties from collaborating to provide 

the service. 

Response: We are unclear from the 

comment as to why including 

brachytherapy as a DHS will prohibit 

collaboration on such services. While 

certain financial interests in 

brachytherapy services may be 

prohibited, nothing in the statute or 

regulations prohibits physicians’

professional collaboration on patient 

care. A physician’s personally 

performed service is not considered a 

referral for purposes of section 1877 of 

the Act. Futhermore, physicians are free 

to refer to one another as long as they 

do not have a prohibited financial 

arrangement. Finally, we are not aware 

of a brachytherapy access problem in 

the United States. 

H. Durable Medical Equipment (DME) 

and Supplies (Phase I—66 FR 931) 

We received only one comment 

regarding our definition of DME, in 

which we defined DME with reference 

to section 1861(n) of the Act and 

§ 414.202. We are not making any 

changes to this definition. 

Comment: The January 1998 proposed 

rule explicitly stated that home dialysis 

equipment and supplies do not 

constitute DME for the purposes of 

section 1877 of the Act. A commenter 

sought clarification that the ESRD 

benefit under section 1861(s)(2)(F) of 

the Act (providing coverage for home 

dialysis supplies and equipment) is 

distinct from the DME benefit in section 

1861(s)(6) of the Act, and that home 

dialysis equipment and supplies are not 

covered as DME under Medicare. 

Response: The commenter is correct. 

Our position regarding home dialysis 

equipment and supplies remains the 

same: The DME and ESRD benefits are 

distinct, and home dialysis equipment 

and supplies are not DME, as defined in 

section 1861(n) of the Act and § 414.202 

of the regulations. 

I. Parenteral and Enteral Nutrients, 

Equipment and Supplies (Phase I—66 

FR 932) 

We received only one comment on 

this subject and are making no change 

to the definition set forth in Phase I. 

Comment: A commenter stated that 

the Phase I preamble (66 FR 933) asserts 

incorrectly that enteral nutrition is 

widely available in grocery stores, drug 

stores, and other retail outlets. The 

statement was made in response to a 

16106 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

comment advocating that we exclude 

from the definition or create an 

exception for parenteral nutrition 

furnished by a physician group practice 

to its own patients. 

Response: We have received 

conflicting reports about the routine 

availability of enteral nutrition in 

grocery stores and drug stores. The 

commenter may be correct with respect 

to patients who are completely 

dependent on enteral formulas for 

nutrition. Regardless, the Congress 

specifically excluded the provision of 

parenteral and enteral nutrients from 

the in-office ancillary services exception 

in section 1877(b)(2) of the Act. 

Accordingly, to the extent that the 

commenter would like us to reconsider 

our overall response to the original 

comment, we cannot do so.

J. Prosthetics, Orthotics, and Prosthetic 

Devices and Supplies (Phase I—66 FR 

933) 

We received no comments on this 

subject and are making no substantive 

changes to the definition. 

K. Home Health Services (Phase I—66 

FR 936) 

We received no comments on this 

subject and are making no changes to 

the definition. 

L. Outpatient Prescription Drugs (Phase 

I—66 FR 937) 

Phase I defined outpatient 

prescription drugs as ‘‘all prescription 

drugs covered by Medicare Part B.’’ We 

note that, effective January 1, 2006, 

many additional outpatient prescription 

drugs will be covered under Medicare 

Part D, which was added to the Social 

Security Act by section 101 of MMA. In 

light of the expanded coverage, we will 

revisit the definition of ‘‘outpatient 

prescription drugs’’ in a future 

rulemaking. The MMA amended Title 

XVIII to include a definition for 

‘‘covered Part D drug’’ in section 

1860D–2(e) of the Act. While we have 

no specific proposal at this time, we are 

interested in receiving comments 

regarding approaches to expanding the 

definition of ‘‘outpatient prescription 

drugs’’ to reflect the definition of 

‘‘covered Part D drug’’ in the MMA. We 

received the following comments 

regarding outpatient prescription drugs. 

Comment: A commenter asked us to 

clarify that antigens are not ‘‘outpatient 

prescription drugs’’ or, in the 

alternative, to clarify that a referral by 

a physician for antigens which he or she 

personally provides is not a ‘‘referral’’

within the meaning of section 1877 of 

the Act. 

Response: We responded to this 

comment in section V.A, noting that the 

provision of antigens may be protected 

under the physician services or in-office 

ancillary services exceptions. We also 

noted that when antigens are personally 

furnished by the referring physician, 

there is no ‘‘referral’’ for purposes of 

section 1877 of the Act. 

Comment: One commenter urged that 

any drug administered in a physician’s 

office not be considered an ‘‘outpatient 

prescription drug’’ because the 

physician may not be required to write 

a prescription for that item. According 

to the commenter, section 1877 of the 

Act was intended to govern only the inoffice dispensing (as opposed to 

administration) of drugs. In the 

alternative, the commenter believed that 

we should exclude all injectables from 

the definition of ‘‘outpatient 

prescription drugs,’’ whether or not they 

would qualify as immunizations or 

vaccines. According to the commenter, 

the administration of injectable drugs is 

so integral to a physician service that 

physicians should be permitted to 

furnish injectables without complying 

with the in-office ancillary services 

exception. 

Response: We responded to similar 

comments in Phase I (66 FR 938). We 

continue to find no meaningful 

distinction between prescription drugs 

dispensed by pharmacies and those 

mixed and administered in a 

physician’s office. Drugs administered 

in the physician office setting are 

outpatient prescription drugs; they are 

available only upon a physician’s order 

and are provided in an outpatient 

setting. Phase I made clear that drugs 

administered in a physician’s office 

may, and typically will, fit in the inoffice ancillary services exception. If 

administered personally by the referring 

physician, there is no ‘‘referral’’ for 

purposes of section 1877 of the Act. We 

are not convinced that creating an 

additional exception for all drugs 

administered in the physician office is 

either necessary or without any risk of 

fraud or patient abuse. 

M. Inpatient and Outpatient Hospital 

Services (Phase I—66 FR 940) 

In the January 1998 proposed rule, we 

solicited comments on whether we 

should exclude lithotripsy from the 

DHS category of ‘‘inpatient and 

outpatient hospital services.’’ We 

received hundreds of comments urging 

us to exclude lithotripsy as a designated 

health service. We addressed these 

comments in the Phase I preamble (66 

FR 940 through 941) and declined to 

exclude the service as an inpatient or 

outpatient hospital service. After the 

publication of Phase I, we received 

similar comments from two associations 

representing physicians with ownership 

interests in lithotriptors. 

Given the statutory language, we are 

not revising the regulatory definition. 

However, in light of the unique 

legislative history regarding the 

application of section 1877 of the Act to 

lithotripsy, we will not consider 

lithotripsy an ‘‘inpatient or outpatient 

service’’ for purposes of section 1877 of 

the Act. Contractual arrangements 

between hospitals and physicians or 

physician practices regarding lithotripsy 

nevertheless constitute a ‘‘financial 

relationship’’ under section 1877 of the 

Act. Accordingly, such contractual 

arrangements must comply with an 

exception if the physician will refer 

Medicare patients to the hospital for 

services that otherwise constitute an 

‘‘inpatient or outpatient hospital 

service’’ or another designated health 

service. 

N. Other Definitions (Phase I—66 FR 

942) 

1. Consultation 

The definition of ‘‘consultation’’ is 

addressed in section III.B.2 of the Phase 

I preamble (66 FR 873), in section II.D 

of this Phase II preamble (including 

comments and responses), and in the 

regulations in § 411.351. 

2. Entity 

The definition of ‘‘entity’’ is 

addressed in section VIII.N.2 of the 

Phase I preamble (66 FR 943) and in the 

regulations in § 411.351. Comments and 

our responses on the Phase I definition 

follow. 

Comment: Several commenters 

claimed that the definition of ‘‘entity’’

was confusing. In particular, the 

commenters urged that the definition be 

restructured to be more clear and that 

the statement that certain organizations 

that employ a supplier or operate a 

facility that ‘‘could’’ accept 

reassignment be changed to clarify 

whether such entities would, in fact, be 

deemed to provide DHS. 

Response: We have rewritten the 

language in an effort to provide greater 

clarity. The substance of the definition 

remains unchanged. 

Comment: A commenter representing 

independent practice associations urged 

that we exclude IPAs from the 

definition of ‘‘entity’’ when they furnish 

DHS directly, through employees or 

entities that they own. 

Response: We discern no reasonable 

basis to treat IPAs that furnish DHS 

differently from other entities that 

furnish the same services. If an IPA 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16107

furnishes DHS through employees or 

owned entities, then it is a DHS ‘‘entity’’

for purposes of section 1877 of the Act. 

3. Fair Market Value 

The definition of ‘‘fair market value’’

is addressed in section VIII.N.3 of the 

Phase I preamble (66 FR 944) and in the 

regulations in § 411.351. The following 

are our responses to comments to the 

Phase I definition.

Comment: A commenter expressed 

concern that the discussion of ‘‘fair 

market value’’ in the Phase I preamble 

does not provide sufficiently clear 

guidance for determining ‘‘fair market 

value.’’ That commenter recommended 

that the regulations include a rebuttable 

presumption of reasonableness and ‘‘fair 

market value’’ when entities benchmark 

their arrangements to objective 

measures or when they obtain the 

opinion of independent third parties as 

to ‘‘fair market value’’ in a particular 

arrangement. The commenter suggested 

that the presumption be similar to that 

contained in the IRS’s intermediate 

sanctions provisions. 

Response: We appreciate the 

commenter’s desire for clear ‘‘bright 

line’’ guidance. However, the statute 

covers such a wide range of potential 

transactions that it is not possible to 

verify and list appropriate benchmarks 

or objective measures for each. 

Moreover, the definition of ‘‘fair market 

value’’ in the statute and regulation is 

qualified in ways that do not necessarily 

comport with the usage of the term in 

standard valuation techniques and 

methodologies. For example, the 

methodology must exclude valuations 

where the parties to the transactions are 

at arm’s length but in a position to refer 

to one another. In addition, the 

definition itself differs depending on the 

type of transaction: leases or rentals of 

space and equipment cannot take into 

account the intended use of the rented 

item; and in cases where the lessor is in 

a position to refer to the lessee, the 

valuation cannot be adjusted or reflect 

the value of proximity or convenience to 

the lessor. Our Phase I discussion made 

clear that we will consider a range of 

methods of determining fair market 

value and that the appropriate method 

will depend on the nature of the 

transaction, its location, and other 

factors. While good faith reliance on a 

proper valuation may be relevant to a 

party’s intent, it does not establish the 

ultimate issue of the accuracy of the 

valuation figure itself. With respect to 

valuing physician services, however, we 

are establishing several ‘‘safe harbored’’

methodologies discussed in more detail 

in section VIII.C. 

Comment: A commenter sought 

clarification that determinations of ‘‘fair 

market value’’ could involve 

comparisons of national or regional data 

where appropriate. By way of example, 

the commenter suggested that the 

market for physician recruitment has 

become national. 

Response: Whether resort to national 

or regional data is appropriate will 

depend on the facts and circumstances 

of each case. The regulations necessarily 

cover a wide variety of arrangements, 

services, and markets, and no single 

means for determining ‘‘fair market 

value’’ will apply to all. For hourly 

physician compensation, we have added 

‘‘safe harbored’’ methodologies for 

establishing fair market value that take 

into account national and regional data 

(section VIII.C of this preamble). If 

parties are using comparables to 

establish fair market value, they should 

take reasonable steps to ensure that the 

comparables are not distorted. 

4. Group Practice 

The definition of ‘‘group practice’’ is 

addressed in section VI.C of the Phase 

I preamble (66 FR 894), in section V.C 

of this Phase II preamble, and in the 

regulations in § 411.352. 

5. Health Professional Shortage Area 

The definition of ‘‘health professional 

shortage area’’ is addressed in section 

VIII.N.5 of the Phase I preamble (66 FR 

945) and in the regulations in § 411.351. 

We received no comments on this 

definition and are making no changes to 

it. 

6. Employee 

The definition of ‘‘employee’’ is 

addressed in section VIII.N.6 of the 

Phase I preamble (66 FR 946), in section 

VIII.B of this Phase II preamble, and in 

the regulations in § 411.351. 

7. Immediate Family Member 

The definition of ‘‘immediate family 

member’’ is addressed in section 

VIII.N.7 of the Phase I preamble (66 FR 

946) and in the regulations in § 411.351. 

We received no comments on this 

definition and are making no changes to 

it. 

8. Referral 

The definition of ‘‘referral’’ is 

addressed in section III.B of the Phase 

I preamble (66 FR 871), section II.C of 

this Phase II preamble, and in the 

regulations in § 411.351. 

9. Remuneration and the Exceptions in 

Section 1877(h)(1)(C) of the Act 

The definition of ‘‘remuneration’’

(along with the exceptions) is addressed 

in section VIII.N.9 of the Phase I 

preamble (66 FR 946) and in the 

regulations in § 411.351. 

The statute expressly excludes from 

the definition of ‘‘remuneration’’

payments made by an insurer or selfinsured 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 that insurer or by that self-insured 

plan. This might occur, for example, if 

a plan enrollee receives out-of-network 

care in an emergency room. In practice, 

the application of this rule may not have 

the intended effect of excluding those 

payments from the definition of 

‘‘remuneration.’’ This is because, in 

many cases, payments are made by 

downstream subcontractors of insurers 

or self-insured plans (for example, 

providers who have assumed risk under 

a plan), rather than the insurer or plan 

itself. Accordingly, we have revised the 

regulations to cover payments made by 

downstream subcontractors.

In addition, we received the following 

comment: 

Comment: A commenter 

recommended that the items and 

services enumerated by the new 

exceptions for non-monetary 

compensation, medical staff incidental 

benefits, and compliance training be 

excluded from the definition of 

‘‘remuneration’’ rather than included in 

various new exceptions. 

Response: We disagree. Most, if not 

all, of the items and services covered by 

the new exceptions fit squarely in the 

broad statutory definition of 

‘‘remuneration.’’ The Congress included 

in the definition of ‘‘remuneration’’ a 

short list of specific items and services 

that it intended to exclude. The items 

and services covered by the new 

exceptions are not among them. 

Treating them as remuneration (that is, 

as creating compensation arrangements) 

and then excepting them is consistent 

with the statutory scheme and structure. 

We note that among the items 

specifically excluded from the 

definition of remuneration are items 

used to collect, transport, process, or 

store specimens. In the Phase I 

preamble, we indicated that sterile 

gloves do not fit in this category of items 

excluded from the definition of 

remuneration (66 FR 948). Our use of 

the term ‘‘sterile gloves’’ was intended 

to be illustrative, not exclusive, and 

other gloves similarly are not excluded 

from the definition of remuneration. As 

stated in the Phase I preamble, the 

provision of any free gloves would be 

remuneration and would need to fit in 

an exception. 

16108 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

10. Transaction and Isolated 

Transaction (Phase II—§ 411.357(f)) 

The definitions of ‘‘transaction’’ and 

‘‘isolated transaction’’ are addressed in 

section VIII.F of this Phase II preamble 

and in the regulations in § 411.351. 

XII. Regulatory Exceptions 

In Phase I, we created a number of 

new exceptions using the authority 

granted to the Secretary in section 

1877(b)(4) of the Act. We are creating 

some additional exceptions under 

section 1877(b)(4) of the Act in Phase II. 

Several commenters to Phase I 

objected to the condition in these new 

regulatory exceptions that the 

arrangement in question not violate the 

anti-kickback statute. The commenters 

felt that this condition injected an 

unnecessary facts and circumstances 

test in what is intended to be a bright 

line area of law. If the requirement is 

retained, a commenter urged that the 

language used in all references to 

violation of the anti-kickback statute in 

the regulations be made consistent. One 

commenter claimed to be confused by 

the requirement in new exceptions that 

compensation arrangements comply 

with all billing and claims submission 

laws or regulations. The commenter 

pointed out that, in some cases, it is 

difficult to see how compensation 

arrangements implicate billing or claims 

filing. 

We have endeavored to craft bright 

line rules under these regulations 

wherever possible. However, our 

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

Act is expressly limited to arrangements 

that pose no risk of program or patient 

abuse. Thus, if an arrangement poses 

even a low risk, we cannot create a new 

exception. The statutory ‘‘no risk’’

standard is not limited to a 

determination of ‘‘no risk’’ under 

section 1877 of the Act. Given this 

broad ‘‘no risk’’ standard, it would be 

impossible to create new exceptions for 

many arrangements without the antikickback statute condition. Many 

arrangements that might otherwise 

warrant an exception under section 

1877 of the Act—a strict liability 

statute—pose some degree of risk under 

the anti-kickback statute; these 

arrangements cannot, therefore, be said 

to pose no risk. We are rectifying the 

lack of consistency in the language used 

in these regulations when referring to 

the anti-kickback statute by making 

technical changes to several provisions. 

We are also clarifying through a new 

definition at § 411.351 that a party will 

be considered to have received a 

favorable advisory opinion from the OIG 

with respect to the anti-kickback statute 

if the opinion indicates that the OIG 

will not subject the party’s arrangement 

to sanctions arising under the antikickback statute. 

The billing and claims submission 

condition was also included to satisfy 

the absolute no risk standard under 

section 1877(b)(4) of the Act. We agree 

that many compensation arrangements 

will not implicate billing or claims 

filing. However, some arrangements 

may, and the exceptions are designed to 

cover a wide scope of arrangements. 

Moreover, most referrals will implicate 

billing and claims submission for the 

referred item or service. If a particular 

arrangement does not implicate billing 

or claims submission in any way, then 

the parties need not be concerned with 

that condition. We have also revised the 

regulations to rectify the lack of 

consistency of the language used in this 

regard. Specifically, technical changes 

have been made to several provisions.

We received one comment proposing 

a new exception that we are not 

promulgating. The request was for an 

exception for referrals in areas with a 

demonstrated community need (for 

example, areas lacking adequate health 

care facilities or providers, particularly 

inner city areas). The proposed 

exception would be comparable to the 

rural area exception and permit 

physician ownership of inner city DHS 

entities. We are unable to adopt the 

suggestion. The Congress clearly limited 

ownership of DHS entities in 

underserved areas to rural providers 

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

cannot conclude that ownership in 

inner city areas—which are proximate 

to more affluent urban areas from which 

to draw additional business—would be 

without risk. We are mindful of the 

difficulties some inner city areas 

experience in providing adequate health 

care to community residents. However, 

given the numerous statutory and 

regulatory exceptions—including the 

fair market value exception—we are not 

persuaded that section 1877 of the Act 

is a significant impediment. 

Comments and responses to new 

regulatory exceptions not already 

discussed in this preamble are set forth 

below. 

A. Academic Medical Centers (Phase I—

66 FR 915; § 411.355(e)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Academic Medical Centers Exception’’

at the beginning of your comments.]

In Phase I, we added a new regulatory 

exception for academic medical center 

arrangements, using the authority 

granted the Secretary under section 

1877(b)(4) of the Act. While most 

commenters praised the new exception 

in § 411.355(e), many suggested ways to 

improve it. The most significant 

comments addressed the requirements 

in § 411.355(e)(1)(ii) relating to the 

referring physician’s compensation. In 

particular, commenters observed that 

the requirement that a physician’s 

compensation be ‘‘set in advance’’

precluded calculating any component of 

the compensation using a percentagebased methodology. In addition, the 

requirement that compensation not take 

into account ‘‘other business generated 

by the referring physician within the 

academic medical center’’ potentially 

affected compensation based on a 

physician’s professional services. 

Commenters viewed these provisions as 

more strict than the requirements for 

physician compensation paid by group 

practices under § 411.352 or for other 

physician compensation arrangements. 

Other commenters requested 

modifications to various elements of the 

definition of an ‘‘academic medical 

center’’ in § 411.355(e)(2). These 

commenters wanted greater flexibility as 

to the number and organization of 

affiliated practice plans, and they 

objected to the requirements that a 

majority of the affiliated hospital’s 

medical staff be faculty members and a 

majority of the hospital’s admissions 

come from faculty members. 

Our modification of the ‘‘set in 

advance’’ and the ‘‘other business 

generated’’ provisions (see section IV 

above) should address the concerns of 

many commenters. We are revising the 

rule to make it easier to qualify as an 

academic medical center or a 

component of an academic medical 

center, and we have clarified some of 

the exception’s terminology. The 

particular changes are discussed in the 

responses to comments that follow. 

Comment: One commenter asked that 

we broaden the definition of an 

academic medical center in 

§ 411.355(e)(2) to eliminate the 

requirement that an academic medical 

center include an accredited medical 

school. According to the commenter, if 

a hospital has an approved medical 

education program, it should be enough 

to ensure that the hospital is part of an 

academic medical center. One 

commenter suggested including any 

hospital or health system that sponsors 

five or more medical education 

programs. 

Response: We agree that the definition 

is overly restrictive. We have modified 

the definition of an academic medical 

center in § 411.355(e)(2)(i) to permit 

hospitals or health systems that sponsor 

four or more approved medical 

education programs (for purposes of the 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16109

exception, an ‘‘accredited academic 

hospital’’) to qualify, provided they 

meet the other criteria in the exception. 

We think a requirement for four 

programs will adequately ensure that 

the hospital or health system has a 

substantial teaching mission. A hospital 

or health system meeting the 

requirement in § 411.355(e)(2)(i) may be 

the same hospital that meets the 

‘‘affiliated hospital’’ requirement of 

§ 411.355(e)(2)(iii), and we have 

modified the regulation to reflect this. 

Finally, to reflect this broader reading of 

an ‘‘academic medical center,’’ we have 

revised the regulations to clarify that the 

referring physician may be on the 

faculty of the affiliated medical school 

or the accredited academic hospital. 

Comment: We received many 

comments related to various aspects of 

the affiliated faculty practice plan 

requirement in § 411.355(e)(2)(ii). A 

number of commenters objected to the 

requirement that the practice plan be a 

tax exempt organization under either 

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

Internal Revenue Service (IRS) Code. 

These commenters noted that many 

bona fide plans are organized as 

professional corporations or not-forprofit organizations under State law or 

are not separate legal entities. Other 

commenters sought clarification as to 

whether an academic medical center 

could have more than one affiliated 

faculty practice plan. Finally, several 

commenters asked whether the faculty 

practice plan could be affiliated with 

the teaching hospital, rather than the 

medical school.

Response: We recognize that there are 

many variants of the basic academic 

medical center arrangement. We are 

eliminating the requirement that the 

faculty practice plan or plans be 

organized in any particular manner. As 

long as the other criteria of the 

exception can be met, there is sufficient 

assurance that the faculty practice plan 

is part of a bona fide academic medical 

center and that the practice plan 

supports the core teaching mission. We 

are also clarifying § 411.355(e)(2)(ii) to 

reflect that an academic medical center 

may have more than one affiliated 

faculty practice plan and that the faculty 

practice plans can be affiliated with the 

teaching hospital, the medical school, or 

the accredited academic hospital. 

Comment: A number of commenters 

questioned aspects of 

§ 411.355(e)(2)(iii), especially the 

requirements that a majority of the 

affiliated hospital’s medical staff be 

faculty members and that a majority of 

the hospital’s admissions be made by 

faculty members. A number of 

commenters suggested that these 

requirements are unnecessary in light of 

§ 411.355(e)(1)(i), which contains the 

requirements for referring physicians. 

Some commenters sought clarification 

that residents and non-physician 

practitioners need not be counted when 

calculating the percentage of medical 

staff that are faculty members. Other 

commenters suggested that courtesy and 

volunteer faculty should count as 

faculty members for purposes of the 

tests in § 411.355(e)(2)(iii), even if they 

do not qualify as referring physicians 

under § 411.355(e)(1)(i). One commenter 

on behalf of a children’s hospital stated 

that children’s hospitals frequently 

affiliate with several medical schools in 

their geographic area. The commenter 

suggested that we permit children’s 

hospitals to aggregate the faculty 

members from all affiliated medical 

schools. Another commenter on behalf 

of children’s hospitals asked that the 

tests be restructured to be alternatives, 

so that satisfying either test would be 

sufficient. One commenter asked that 

we include in the exception 

arrangements between a medical college 

and a hospital other than an affiliated 

teaching hospital by broadening the 

definition of an affiliated hospital; this 

commenter suggested that we include 

unaffiliated hospitals where otherwise 

bona fide faculty members of the 

academic medical center may be 

assigned by the medical school to 

perform services as part of their 

continued employment or appointment 

with the academic medical center. The 

commenter noted that these kinds of 

arrangements occur for a variety of 

practical reasons, ranging from 

availability of sophisticated specialty 

equipment to accommodating the needs 

of communities located near unaffiliated 

hospitals. 

Response: Given the breadth of the 

academic medical center exception, it is 

important to ensure that the relationship 

between the components is sufficiently 

focused on the academic medical 

center’s core mission. We believe the 

tests for affiliated hospital faculty and 

admissions set forth in 

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

of that core relationship. A teaching 

hospital can include any faculty, 

including courtesy and volunteer 

faculty, in determining whether it 

qualifies under these tests. We are, 

however, revising the regulatory text to 

clarify (i) that the majority of physicians 

on the medical staff must be on the 

faculty, and (ii) that the aggregation of 

faculty from any affiliated medical 

school is permitted. We agree with the 

commenters that residents and nonphysician professionals do not need to 

be included as medical staff for 

purposes of § 411.355(e)(2)(iii). 

Comment: Several commenters raised 

issues about the requirement in 

§ 411.355(e)(1)(i) that the referring 

physician must be an employee of a 

component of the academic medical 

center. Other commenters asked that 

volunteer faculty be included in the 

requirement. One commenter 

representing a State institution wanted 

primary care physicians included, even 

though they do not have substantial 

teaching responsibilities. One 

commenter asked that we clarify that 

the physician can be an employee of the 

hospital, as well as the medical school.

Response: The purpose of the 

academic medical center exception is to 

provide protection under section 1877 

of the Act for academic medical centers 

because they often have complex 

compensation arrangements with their 

faculty. If a physician is not an 

employee of any of the components of 

the academic medical center, we believe 

the relationship between the physician 

and the party paying the remuneration 

should not be sufficiently different from 

the usual arrangements of entities or 

organizations that are not academic 

medical centers, and one of the other 

exceptions under section 1877 of the 

Act should apply. For the same reasons, 

we are not including primary care 

physicians who do not perform 

substantial academic services or clinical 

teaching services. While we recognize 

that primary care services may be part 

of a State institution’s mission, the 

primary care physicians are essentially 

in the same circumstances as employed 

physicians of any health system. 

Arrangements with those physicians can 

be structured to fit in other exceptions, 

including the fair market value 

exception or the personal services 

exception. 

The referring physician need not be 

an employee of the medical school, 

however. Section 411.355(e)(1)(i) 

requires only that the referring 

physician be a bona fide employee of a 

component of the academic medical 

center. A referring physician could be 

an employee of the teaching hospital 

and a volunteer faculty member, for 

example, as long as his or her 

employment encompasses substantial 

academic services or clinical teaching 

services. 

Comment: Several commenters also 

asked that we clarify what constitutes 

‘‘substantial academic or substantial 

clinical teaching services’’ under 

§ 411.355(e)(1)(i)(D). 

Response: In the Phase I rule, we did 

not specify what constitutes 

‘‘substantial academic services or 

16110 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

clinical teaching services’’ because we 

believe it will vary with the precise 

duties of a given faculty member, and 

we wanted to provide academic medical 

centers with flexibility. Nevertheless, to 

provide added clarity, we are adding a 

‘‘safe harbor’’ provision to 

§ 411.355(e)(1)(i)(D) that will deem 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 (or a 

combination of academic services and 

clinical teaching services) as fulfilling 

the requirement. This test is intended to 

be a ‘‘safe harbor’’, not an absolute 

requirement, and the regulation is being 

modified to make clear that physicians 

who do not qualify under this ‘‘safe 

harbor’’ may still be providing 

substantial academic services or clinical 

teaching services, depending on the 

circumstances. Academic medical 

centers should use a reasonable and 

consistent method for calculating a 

physician’s academic services and 

clinical teaching services. We are also 

modifying the regulation text to clarify 

that the substantial services test can be 

met through either academic services 

(which would include, without 

limitation, both classroom and academic 

research services) or clinical teaching 

services, or a combination of both. 

Comment: One commenter asked that 

we clarify in which State the referring 

physician must be licensed. 

Response: The referring physician 

must be licensed in the States in which 

he or she practices. 

Comment: Many commenters objected 

to the requirements of § 411.355(e)(1)(ii) 

that the total compensation paid to the 

referring physician by all components of 

the academic medical center be ‘‘set in 

advance’’ and not take into account 

‘‘other business generated by the 

referring physician within the academic 

medical center.’’ The commenters stated 

that many faculty practice plans, like 

many group practices, base some part of 

the physician’s compensation on a 

percentage of collections or revenues 

attributable to the physician’s 

personally performed services. 

Moreover, commenters were unclear as 

to what effect the requirement that the 

compensation not take into account 

‘‘other business generated’’ by the 

referring physician would have on a 

physician’s personally performed 

services. The commenters generally 

thought that academic medical centers 

should be allowed to compensate 

referring physicians in the same manner 

as group practices or entities that 

employ physicians. 

Response: We believe the changes 

made to the definitions of ‘‘set in 

advance’’ and ‘‘other business 

generated’’ described in section IV 

above largely address the commenters’

concerns. We are not persuaded that 

further changes are needed. Nor are we 

persuaded that academic medical center 

arrangements are more similar to group 

practices than to other contractual 

arrangements.

Comment: Section 411.355(e)(l)(ii) 

(and the corresponding preamble 

discussion) refers to the referring 

physician’s total compensation for the 

‘‘previous 12-month period (or fiscal 

year or calendar year).’’ A commenter 

found this reference unclear insofar as 

compensation is generally set for a 

future period. Moreover, the commenter 

wondered how the ‘‘set in advance’’

requirement would be applied to 

compensation in a prior time period. 

The commenter suggested that the 

phrase ‘‘previous 12-month period’’ be 

deleted and that the exception instead 

require that the compensation be fixed 

for a specified time period. 

Response: We are revising 

§ 411.355(e)(l)(ii) to delete ‘‘the previous 

12-month period (or fiscal year or 

calendar year)’’ language. Upon further 

consideration, we do not believe that a 

time period requirement is necessary in 

light of the remaining conditions in 

§ 411.355(e)(l)(ii) and the exception as a 

whole. 

Comment: One commenter asked us 

to clarify that in establishing a referring 

physician’s compensation, an academic 

medical center is not limited to the fair 

market value at other academic medical 

centers if the fair market value for 

comparable private practice physicians 

in its area is higher. 

Response: The commenter is correct. 

An academic medical center can use 

either measure of fair market value. 

Comment: One commenter asked that 

the regulation except all transfers of 

funds between the components of an 

academic medical center and any other 

supporting organization, such as a 

foundation, as long as the supporting 

organization’s primary purpose is 

supporting the nonprofit mission of the 

academic medical center, including 

health care services, education, 

research, and disease prevention. 

Response: We agree in part with the 

commenter, although we consider the 

commenter’s proposed change to be 

overly broad in the context of this 

exception. We have revised the rule to 

include, in the list of possible 

components of an academic medical 

center, not-for-profit supporting 

organizations whose primary purpose is 

supporting the teaching mission of the 

academic medical center. 

Comment: A commenter asked that 

we clarify that the components of the 

academic medical center need not be 

separate legal entities. 

Response: We have made a clarifying 

change to § 411.355(e)(1)(i)(A). 

Comment: A number of commenters 

asked that we modify the requirement in 

§ 411.355(e)(1)(iii)(B) that the 

relationship among the components be 

set out in a written agreement. Some 

commenters asked that we permit the 

relationship to be set out in several 

separate documents. Others suggested 

that a course of conduct should be 

sufficient. A commenter representing an 

academic medical center with 

components all owned by a single legal 

entity noted that the relationship of its 

components is not reflected in written 

agreements among the components. 

This commenter suggested that transfers 

of funds documented in routine 

financial reports covering the 

components should suffice in lieu of 

written agreements. 

Response: We did not intend to 

restrict the written agreement to a single 

document. We have modified the 

regulatory text of § 411.355(e)(1)(iii)(B) 

to permit the relationship to be 

memorialized in multiple writings. In 

order to permit the government to verify 

an academic medical center’s 

compliance with the exception, it is 

necessary that the relationship of the 

components be memorialized in writing 

or that there be a clearly established 

course of conduct that is appropriately 

documented. In the case of a single legal 

entity academic medical center, we 

agree that financial reports documenting 

the transfers of funds between 

components would be sufficient. 

Comment: One commenter asked us 

to revise the language in 

§ 411.355(e)(1)(iii)(C) to permit use of 

research money for bona fide research, 

teaching, indigent care, and community 

service, the same missions listed in 

§ 411.357(e)(1)(iii)(A), as long as use of 

the funds is consistent with the terms 

and conditions of the research grant. 

The commenter explained that in many 

instances compensation paid to a 

physician under a research grant may 

properly be used for these purposes.

Response: We agree that some 

additional flexibility in this area is 

warranted. We have modified the 

regulations to cover research money 

used for teaching, a core academic 

medical center function. However, 

while we recognize the importance of 

indigent care and community service, 

the commenter’s proposal is overly 

broad in the context of research grants, 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16111

which can be an area subject to 

potential abuse. Payments to referring 

physicians for indigent care or 

community service may be structured to 

fit in other exceptions. 

B. Services Furnished Under Certain 

Payment Rates (§ 411.355(d); Phase I—

66 FR 924) 

Existing Law: In the August 1995 final 

rule, we took the position that clinical 

laboratory services furnished as part of 

a larger service paid by Medicare on a 

composite basis, such as surgery in an 

ambulatory surgical center (ASC) or 

treatment in an end-stage renal dialysis 

(ESRD) facility, was a referral to an 

entity providing clinical laboratory 

services. Accordingly, if the DHS entity 

and the referring physician had a 

prohibited financial relationship, any 

referral and corresponding claim would 

be tainted. However, under the 

authority granted in section 1877(b)(4) 

of the Act, the Secretary determined that 

referrals for certain clinical laboratory 

services furnished in ASCs or ESRD 

facilities or by a hospice do not pose a 

risk of Medicare program or patient 

abuse when payments for these services 

are included in the composite rates for 

those services. An exception for the 

services was included in the August 

1995 final regulation at § 411.355(d). 

Proposed Rule: The January 1998 

proposed rule would have retained the 

exception for certain composite rate 

services, extending it to all DHS, with 

an amendment to allow the Secretary to 

except services furnished under other 

payment rates that the Secretary 

determines provide no financial 

incentive for either underutilization or 

overutilization or other risk of program 

or patient abuse. We specifically 

solicited comment on whether there are 

analogous composite rates under the 

Medicaid program. 

Final Rule: In the Phase I final rule, 

we defined designated health services’’

to exclude services that are reimbursed 

by Medicare as part of a composite rate 

(for example, ASC services, skilled 

nursing facility (SNF) Part A services, or 

ESRD composite rate services), except to 

the extent the specifically enumerated 

DHS in section 1877(h)(6) of the Act are 

themselves payable through a composite 

rate (that is, all services provided as 

home health services or inpatient or 

outpatient hospital services remain 

DHS.) (See § 411.351.) 

Further, we created several exceptions 

for specific DHS often performed in 

association with services reimbursed on 

a composite rate, such as implants 

furnished in an ASC and certain drugs 

administered in or by an ESRD facility. 

Accordingly, we declined to extend 

§ 411.355(d) beyond clinical laboratory 

services. Further, we indicated that we 

were reconsidering the need for 

§ 411.355(d) in light of the new DHS 

definition and additional regulatory 

exceptions, and specifically solicited 

comments on this issue (66 FR 924). 

Two commenters believe that the new 

composite rate exception rendered the 

prior exception unnecessary and 

potentially confusing insofar as it would 

suggest that a separate exception is 

needed or that clinical laboratory and 

other DHS would be subject to disparate 

treatment. One commenter conceded 

that the prior exception is redundant 

given the new composite rate rule, but 

asked that we nonetheless retain it and 

extend it to all DHS. The commenter 

stated that a clear, separate rule has 

been helpful for providers. On balance, 

we concur with the first two 

commenters. We are deleting the ASC/

ESRD/Hospice exception, formerly in 

§ 411.355(d). We are persuaded that the 

risk of undue confusion outweighs any 

utility in having a repetitive exception. 

We note that services separately listed 

in section 1877(h) of the Act that are 

paid on a composite basis now or in the 

future (for example, home health and 

hospital services) are DHS, 

notwithstanding that they are paid on a 

composite basis. This concept was 

incorporated in the Phase I regulations 

at § 411.351 (definition of ‘‘designated 

health services’’). 

C. Implants in an ASC (Phase I—66 FR 

934; § 411.355(f)) 

In Phase I, we established a new 

exception for implants furnished by an 

ASC as a DHS entity. The new 

exception was necessary because many 

implantable items are DHS, but are not 

bundled in the ASC composite rate. 

Accordingly, the ASC becomes a DHS 

entity when it furnishes the implants. 

Comment: A commenter sought 

clarification that the new exception for 

ASC implants applies whether the ASC 

bills the insurer or the physician bills. 

Response: The exception applies to a 

financial relationship between the 

physician and the ASC (as the DHS 

entity) and to a referral for an implant 

used during an ASC procedure. 

Accordingly, the exception applies 

when the implant is billed by the ASC. 

When a physician bills for an implant, 

the physician is the DHS entity (as 

defined in § 411.351), rather than the 

ASC. In other words, not all implants 

qualify for this exception; implants 

implanted in an ASC qualify only if the 

ASC is the entity furnishing the 

implant. When a physician bills for the 

implant, another exception would need 

to be satisfied, such as the in-office 

ancillary services exception.

Comment: A commenter also sought 

confirmation that the exception applies 

to the implantation of radioactive seeds 

in the course of brachytherapy. 

Response: The exception in 

§ 411.355(f) applies only to ‘‘implanted 

prosthetics, implanted prosthetic 

devices, and implanted DME.’’

Accordingly, the implantation of 

radioactive brachytherapy seeds cannot 

qualify for this exception. 

D. Fair Market Value Exception (Phase 

I—66 FR 917; § 411.357(l)) 

In Phase I, we finalized an exception 

for fair market value arrangements 

originally proposed in the January 1998 

proposed rule, with several 

modifications in response to comments. 

The fair market value exception applies 

to arrangements, in writing, for the 

provision of items and services by

physicians (provided directly or through 

employees). Several commenters to the 

Phase I rule advocated expanding the 

exception to include remunerative 

relationships other than the provision of 

items or services. The commenters 

urged us to expand the exception to 

cover the transfer, lease or license of 

real property, intangible property, 

property rights, or a covenant not to 

compete. Moreover, in the commenters’

view, the exception should apply 

equally when the entity provides the 

items, services, property rights, and so 

forth to the physician. A commenter 

pointed out that the fair market value 

exception does not apply to leases of 

space by entities to physicians, contrary 

to statements in the preamble suggesting 

that the exception could apply in such 

circumstances. According to one 

commenter, as long as the arrangement 

is commercially reasonable, serves a 

legitimate business purpose, and 

provides for fair market value 

compensation that is set in advance and 

does not take into account the volume 

or value of referrals, the arrangement 

would be free of the potential abuse 

addressed by section 1877 of the Act. In 

addition, some commenters asserted 

that a written agreement should not be 

necessary if there is equally effective 

alternative evidence that the 

arrangement meets all of the 

requirements of the exception.

We are not persuaded to make 

substantive changes to the fair market 

value exception. We believe the other 

exceptions in the statute and regulations 

adequately address the various 

arrangements noted by the commenters, 

including arrangements in which 

physicians pay for items or services, 

such as office space. Moreover, we 

16112 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

believe that it would be difficult to 

expand the exception to be as 

comprehensive as the commenters 

advocate without posing a risk of fraud 

or abuse. 

E. Non-Monetary Compensation up to 

$300 and Medical Staff Incidental 

Benefits (Phase I—66 FR 920; 

§ 411.357(k) and § 411.357(m)) 

In Phase I, we finalized the proposed 

exception for non-monetary 

compensation up to $300 and added a 

new exception for incidental benefits 

provided by a hospital to its medical 

staff. Our responses to comments to the 

Phase I regulations on this subject 

follow. 

Comment: A commenter suggested 

that we raise the $300 threshold in the 

non-monetary compensation exception 

to $600 to conform to IRS Code section 

6041A(a), which requires businesses to 

report remuneration paid to service 

providers in excess of $600 per year. 

This change would enable providers to 

have a single tracking system for both 

purposes. 

Response: We decline to adopt the 

suggestion. We believe $600 is too high 

for purposes of section 1877 of the Act 

and would create a risk of abuse. We do 

not think it should be unduly 

burdensome for providers to track when 

they have met the $300 threshold. 

Comment: A commenter stated that 

the non-monetary compensation and 

medical staff incidental benefits 

exceptions imposed an undue burden 

on DHS entities by requiring them to 

keep track of the value of all items they 

provide to each physician in a given 

year. In addition, the commenter 

wondered whether an entity would risk 

having claims denied under section 

1877 of the Act if it sends a $25 dollar 

holiday basket at the end of the year that 

inadvertently puts the total value of 

goods provided to the physician over 

the $300 limit. 

Response: Section 1877 of the Act is 

clearly intended to make DHS entities 

responsible for monitoring their 

compensation arrangements with 

physicians. DHS entities that are not 

providing a high volume of free items to 

referring physicians are unlikely to be 

much affected by the requirement that 

they not provide more than $300 worth 

of items a year, nor should tracking be 

problematic. 

Comment: Several commenters 

suggested that the $300 and $25 

thresholds in § 411.357(k) and 

§ 411.357(m) be indexed for inflation, 

because otherwise the usefulness of the 

exceptions will diminish over time. 

Response: We agree that indexing is 

appropriate and have revised the 

regulations to reflect this change. The 

$300 limit for non-monetary 

compensation in § 411.357(k) and the 

$25 limit in § 411.357(m) will be 

adjusted annually for inflation to the 

nearest whole dollar effective January 1 

of each 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. As 

soon as possible after September 30 

each year, we intend to display both the 

increase in the CPI-U for that 12-month 

period and the new limits on the 

physician self-referral Web site at

http://cms.hhs.gov/medlearn/

refphys.asp.

Comment: A commenter questioned 

the restriction in the non-monetary 

compensation exception on gifts 

conferred on group practices, rather 

than individual physicians, such as 

office parties, equipment, or supplies. 

The commenter thought that these gifts 

should be allowed as long as the value 

apportioned over each physician in the 

practice is less than $300. By precluding 

any compensation requested by a 

physician, the strict anti-solicitation 

provision reduces the risk that 

compensation might be solicited in 

exchange for referrals. Because this is an 

exception under section 1877(b)(4) of 

the Act, the exception must be drafted 

so that covered arrangements pose no 

risk of patient or program abuse. 

Consistent with the statutory scheme 

and structure, as well as the industry’s 

expressed preference for bright line 

rules, the anti-solicitation provision 

applies to all physician requests for 

compensation, regardless of the purpose 

of the request. 

Response: We are retaining the 

restrictions. Our intent with respect to 

group gifts is to preclude high value 

gifts to group practices that may control 

referrals to the benefactor. The antisolicitation provision reduces the risk of 

abuse. 

Comment: Several commenters sought 

clarification of the ‘‘on-campus’’ rule 

under the new regulatory exception for 

incidental benefits provided to a 

hospital’s medical staff in § 411.357(m). 

In particular, the commenters viewed 

the ‘‘on campus’’ rule as unduly 

restrictive with respect to electronic 

communications, internet access (for 

access to records and patient-related 

communications), and pagers or twoway radios offered by hospitals to their 

medical staff. A commenter also 

explained that many hospitals are 

developing integrated information 

systems that electronically link various 

components of a health care system, 

including physicians. As part of these 

programs, physicians may be provided 

with dedicated computers to allow 

remote access to a hospital’s system in 

connection with hospital services 

provided to hospital patients. These 

systems allow physicians to order tests 

and medications for hospital patients, 

check test results, schedule surgery, and 

access treatment protocols and other 

decision support references from their 

own offices. 

A commenter also expressed concern 

about hospital Web sites that identify or 

list hospital-affiliated physicians. 

According to the commenter, these 

listings primarily benefit the hospital or 

health system and patients, but they 

may confer an incidental benefit on 

physicians that would be difficult to 

value and administratively difficult to 

track. The commenter urged that these 

listings be clearly excepted under the 

incidental benefits exception. 

Response: The ‘‘on-campus’’

requirement in the exception was 

intended to make clear that the new 

exception for medical staff incidental 

benefits was limited to benefits, such as 

parking, cafeteria meals, and the like, 

that are customarily provided by 

hospitals to their medical staff and that 

are incidental to services being provided 

by the medical staff at the hospital. The 

exception was 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 up to $300. As indicated 

in the Phase I preamble, it was clearly 

our intent to cover benefits in the form 

of computer and internet access that 

‘‘facilitates the maintenance of up-todate medical records and the 

availability of cutting edge medical 

information’’ (66 FR 921).

Accordingly, we have modified 

§ 411.357(m) to make our intent clear. 

We are also modifying § 411.357(m)(1) 

and § 411.357(m)(2) of the regulation by 

changing the word ‘‘offered’’ to 

‘‘provided’’ to be consistent with other 

paragraphs of the exception and by 

making clear that § 411.357(m)(1) will 

be satisfied if the benefits are offered to 

all members of the medical staff 

practicing in the same specialty, even if 

some members do not accept them. 

Moreover, in the interest of clarity, we 

are changing the phrase ‘‘performing 

other duties’’ to ‘‘are engaged in other 

services or activities.’’ These changes 

will help clarify that dedicated 

electronic or Internet items or services 

can meet the requirement in 

§ 411.357(m)(2), since those items or 

services would be provided ‘‘only 

during periods when the medical staff 

members are * * * engaged in other 

services or activities that benefit the 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16113

hospital or its patients.’’ Similarly, the 

revised exception will cover 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. 

We also agree that the simple listing 

or identification of the medical staff on 

a hospital’s Web site is an incidental 

benefit that should be excepted. We are 

revising the regulation to include 

listings of affiliated physicians in 

hospital advertising. However, 

advertising or promoting a physician’s 

private practice on a hospital Web site 

is not covered; those arrangements 

would have to fit in the exception for 

non-monetary compensation under $300 

or the hospital would have to charge the 

physician or practice a fair market value 

rate for the advertising. In light of all of 

the conditions contained in the 

exception, we do not believe that the 

arrangements that fit in the exception 

will pose a risk of program or patient 

abuse. 

A hospital’s provision of a computer 

or other technology that is wholly 

dedicated to use in connection with 

hospital services provided to the 

hospital’s patients would be for the 

hospital’s benefit and convenience and 

would not constitute remuneration to a 

physician for purposes of section 1877 

of the Act. Moreover, while we believe 

that the provision of valuable 

information technology, such as 

computer hardware or software, to 

physicians may be subject to abuse, 

using our authority under section 

1877(b)(4) of the Act, we are creating a 

new regulatory exception at § 411.357(u) 

for the provision of information 

technology items and services 

(including both hardware and software) 

by a DHS entity to a physician to 

participate in a community-wide health 

information system designed to enhance 

the overall health of the community, so 

long as certain conditions are met. The 

health information system must be 

community-wide, that is, available to all 

providers, practitioners, and residents of 

the community who desire to 

participate. The health care system must 

be one that allows community providers 

and practitioners to access and share 

electronic health care records. In 

addition to health care records, the 

system may permit access to, and 

sharing of, complementary drug 

information systems, general health 

information, medical alerts, and related 

information for patients served by 

community providers and practitioners. 

The DHS entity may only provide 

information technology items and 

services that are necessary to enable the 

physician to participate in the health 

information system. Thus, for example, 

if a physician already owns a computer, 

it may only be necessary to provide 

software or training specific to the 

health information system. Likewise, it 

would not be considered necessary to 

provide Internet access to a physician 

who already has Internet service. In all 

cases, the information technology items 

or services furnished under the 

exception must principally be used by 

the physician as part of the communitywide health information system. The 

items and services may not be provided 

in any manner that takes into account 

the volume or value of referrals or other 

business generated by the physicians. 

Thus, the exception would not apply to 

the selective provision of items and 

services to referral sources. Finally, as 

with all exceptions under section 

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

must not violate the anti-kickback 

statute and all claims and billing must 

comply with applicable Federal and 

State laws and regulations. Under these 

circumstances, we do not believe that an 

exception for the provision of 

community-wide information 

technology items and services poses a 

risk of program or patient abuse; 

however, we will revisit the terms of the 

exception if we become aware of 

abusive arrangements. 

Comment: A physician professional 

association asked that § 411.357(m)(5) 

be deleted from the exception for 

medical staff incidental benefits. 

Section 411.357(m)(5) requires that the 

incidental benefits be of a type offered 

to medical staff members at other local 

hospitals or by comparable hospitals in 

comparable regions. The commenter 

stated that this requirement imposed an 

unnecessary burden of inquiry on 

hospitals. The commenter believes that 

the $25 per occurrence limit was a 

sufficient safeguard.

Response: Section 411.357(m)(5) was 

not intended to, and did not, impose 

any duty of inquiry on hospitals. We 

believe that most hospital 

administrators are familiar with 

customary medical staff benefits offered 

by other hospitals locally and farther 

afield. The provision was included to 

help limit the exception to the provision 

of customary and usual staff benefits, 

such as meals, lab coats, and parking. 

We are concerned that the exception not 

be misused to protect an ever-increasing 

array of new ‘‘incidental benefits’’ that 

collectively are of considerable value to 

physicians. Nevertheless, we are 

persuaded that the other conditions in 

the exception sufficiently protect 

against such abuse. Accordingly, we are 

deleting § 411.357(m)(5). 

Comment: One commenter considered 

the $25 per occurrence limit in the 

medical staff incidental benefits 

exception to be too low. The commenter 

suggested that the limit be deleted, or, 

in the alternative, raised to $100. 

Response: We are not persuaded that 

the limit is unnecessary or too low. 

Benefits of higher value may still be 

protected under the exception for nonmonetary compensation up to $300. 

However, as with the exception for nonmonetary compensation, we have 

revised the regulations to provide for 

annual inflation indexing. 

Comment: A commenter sought 

clarification regarding our statement in 

the Phase I preamble (66 FR 921) that 

we did not believe that medical 

transcription services were an 

incidental benefit of nominal value. The 

commenter found the statement 

ambiguous. In particular, the 

commenter asked us to confirm that the 

statement is limited to medical 

transcription services of non-hospital 

services (for example, services provided 

by physicians in their private offices). 

Response: We do not believe that 

transcription of hospital medical 

records dictated by an attending 

physician is a benefit—incidental or 

otherwise—to the physician. Thus, such 

services do not create a compensation 

arrangement. However, the provision of 

transcription services for the benefit of 

the physician, such as transcription of 

his private office records, does create a 

compensation arrangement between the 

hospital and the physician that would 

need to fit in an exception. 

Comment: An association 

representing hospitals inquired about 

the treatment under section 1877 of the 

Act of certain benefits provided to 

physicians that cannot fit in the nonmonetary compensation exception, 

because they are worth more than $300; 

the medical staff incidental benefits 

exception, because they are worth more 

than $25 per occurrence; or the fair 

market value exception, because they do 

not involve a written contract. 

These examples include: 

• Business meetings with physicians 

(sometimes including spouses) that 

include a meal (for example, attendance 

at a Board of Trustees meeting or dinner 

with a hospital administrator to discuss 

operation of a hospital department). 

• A dinner to which hospital 

physicians (and sometimes spouses) are 

invited to meet and recruit a potential 

new physician for the staff. 

• Free use of a dedicated computer 

terminal located at the physician’s office 

but usable only in connection with 

hospital patients and services. 

16114 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

• Free continuing medical education 

(CME) or other training at the hospital. 

(The commenter notes that hospitals 

often obtain educational speakers free of 

charge, thus enabling them to provide 

low cost training.) 

• Physician referral services to the 

community in which they reside for 

which the physician may or may not 

pay a fee. 

Response: The first two examples 

cited by the commenter involve 

scenarios that do not lend themselves to 

categorical answers. The statute defines 

‘‘remuneration’’ broadly to include any 

remuneration, directly or indirectly, 

overtly or covertly, in cash or in kind 

(Section 1877(h)(1)(B) of the Act). 

Whether 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 at § 411.357(k) 

or the exception for fair market value 

compensation at § 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.

The third example cited by the 

commenter—the free use of a dedicated 

computer terminal used only for the 

hospital patients and services strikes us 

as unlikely to involve remuneration to 

the physician so long as the computer 

terminal has no independent value to 

the physician. Alternatively, the free use 

of the computer may qualify for the 

exception for medical staff incidental 

benefits at § 411.357(m). The fourth 

example, the free CME, could constitute 

remuneration to the physician, 

depending on the content of the 

program and the physician’s obligation 

to acquire CME credits. With respect to 

referral services, we believe these 

services should be excepted under 

section 1877 of the Act, and, 

accordingly, we are incorporating the 

safe harbor under the anti-kickback 

statute for referral services at 

§ 1001.952(f) into these regulations as a 

new exception at § 411.357(q). (We note 

that creation of a referral services 

exception was supported by a second 

commenter.) 

We recognize 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. 

We will also continue to evaluate 

whether remunerative arrangements 

exist for which additional exceptions 

are necessary and appropriate. 

Comment: A commenter urged that 

long-term care facilities be permitted to 

use all the exceptions available to other 

providers, including the medical staff 

incidental benefits and compliance 

training exceptions. 

Response: As noted in section XII.G, 

we are expanding the compliance 

training exception to include all 

entities. As for the medical staff 

incidental benefits exception, we agree 

that certain institutional entities, such 

as long-term care facilities, FQHCs, and 

other health care clinics, that have 

medical staffs should be permitted to 

provide incidental benefits to those 

staffs on the same terms and conditions 

as apply to hospitals under the 

exception. This exception applies only 

to bona fide medical staffs. Whether a 

facility has a bona fide medical staff will 

depend on the facts and circumstances. 

We have modified the regulations 

accordingly. 

Comment: A commenter urged that 

the Office of Inspector General (OIG) 

issue a statement that remuneration 

covered by the non-monetary 

compensation, medical staff incidental 

benefits, and compliance training 

exceptions does not violate the antikickback statute. 

Response: Whether to issue a 

statement of the sort requested by the 

commenter is a decision for the OIG 

and/or the Department of Justice and is 

outside the scope of this rulemaking. 

Parties may seek advisory opinions 

about their arrangements from the OIG 

pursuant to regulations at 42 CFR part 

1008. 

F. Risk-Sharing Arrangements (Phase 

I—66 FR 912–915; § 411.357(n)) 

We received several comments to the 

new risk-sharing arrangements 

exception in § 411.357(n) established in 

Phase I. The risk-sharing arrangements 

exception applies to compensation 

(including, but not limited to, 

withholds, bonuses, and risk pools) 

between a managed care organization or 

an independent physician’s association 

and a physician (either directly or 

indirectly through a subcontractor) for 

services provided to enrollees of a 

health plan. 

Comment: A commenter welcomed 

the new exception for risk-sharing 

arrangements, but requested a definition 

of the term ‘‘managed care organization’’

as used in the exception or clarification 

in preamble language that the new 

exception is meant to cover all risksharing compensation paid to 

physicians by an entity downstream of 

any type of health plan, insurance 

company, or health maintenance 

organization (HMO). A commenter 

sought clarification that the downstream 

entity could itself be an entity that 

furnishes DHS, such as a hospital. 

Response: The new exception is 

meant to cover all risk-sharing 

compensation paid to physicians by an 

entity downstream of any type of health 

plan, insurance company, HMO, or 

Independent Practice Association (IPA), 

provided the arrangement relates to 

enrollees and meets the conditions set 

forth in the exception. All downstream 

entities are included. We purposefully 

declined to define the term ‘‘managed 

care organization’’ so as to create a 

broad exception with maximum 

flexibility.

Comment: A physician association 

asked that the prepaid plans and risksharing arrangements exceptions be 

expanded to include referrals of patients 

to entities owned by a managed care 

organization, even if the patients are not 

enrollees in the managed care 

organization. The commenter gave as an 

example a referral to an orthopedic ASC 

owned by a managed care organization 

that is, in turn, owned by the referring 

physician. The commenter considered it 

illogical that the physician could refer a 

health plan enrollee to the ASC, but not 

a Medicare fee-for-service patient. 

Response: Contrary to the 

commenter’s perception, we discern 

nothing illogical in the result under the 

example provided. The fee-for-service 

referral to a DHS entity in which the 

physician has an indirect ownership 

interest is precisely the kind of 

improper referral barred by the statute, 

whereas the statute includes an 

exception for referrals of Medicare 

managed care patients (§ 411.355(c)). 

(We assume, for purposes of responding 

to the example, that the ASC furnishes 

some designated health care service not 

covered by the ASC composite rate, 

since composite rate services are not 

DHS for purposes of section 1877 of the 

Act). 

G. Compliance Training (Phase I—66 FR 

921; § 411.357(o)) 

A number of commenters asked that 

we expand the new compliance training 

exception to include compliance 

training provided by entities other than 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16115

hospitals. A commenter asked that the 

exception be expanded to include 

training of the physician’s office staff. 

We concur with both comments and 

have modified the exception in 

§ 411.357(o) to include compliance 

training provided by any entity that 

furnishes designated health care 

services to a physician or a physician’s 

office staff. We are also modifying the 

regulations to include compliance 

training addressing the requirements of 

any Federal, State, or local law, 

regulation, or rule governing the 

conduct of the party for whom the 

training is provided. We do not consider 

continuing medical education (CME) to 

be compliance training for purposes of 

this exception, which is primarily 

intended to promote legal compliance. 

In many cases, the provision of CME to 

physicians could constitute a benefit of 

significant monetary value to 

physicians. CME may be covered under 

the non-monetary compensation up to 

$300 exception. 

H. Anti-Kickback Safe Harbors (Phase II, 

§ 411.357(q) and § 411.357(r)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Anti-Kickback Safe Harbor Exception’’

at the beginning of your comments.]

In the Phase I preamble, we indicated 

that we were considering an exception 

for arrangements that fit squarely within 

an anti-kickback ‘‘safe harbor’’

(§ 1001.952 (Exceptions)). We have been 

urged to do so by providers frustrated by 

having to apply two sets of conditions 

to their financial arrangements. Having 

carefully considered the issue and the 

industry perspective, we have 

concluded that a wholesale importation 

of the anti-kickback safe harbors into the 

exceptions in section 1877 of the Act 

would be problematic. In some cases, 

the statutory requirements of seemingly 

comparable ‘‘safe harbors’’ and 

exceptions vary. In other cases, the 

section 1877 exception and the antikickback statute ‘‘safe harbor’’ for 

similar conduct differ for reasons 

attributable to the difference in statutory 

scope and scheme, core prohibited 

conduct, or liability standards. In some 

cases, the section 1877 exception is 

broader; in other cases, it is narrower. 

Many of the anti-kickback ‘‘safe 

harbors’’ address activities that do not 

implicate section 1877 of the Act. In 

sum, while we are mindful of the 

concerns expressed by the commenters, 

we believe it is not feasible to except 

financial relationships solely because 

they fit in an anti-kickback ‘‘safe 

harbor.’’

Nevertheless, we have reviewed the 

existing list of ‘‘safe harbored’’

arrangements for which there are no 

section 1877 analogs and have 

concluded that the ‘‘safe harbors’’ for 

referral services (§ 1001.952(f)) and 

obstetrical malpractice insurance 

subsidies (§ 1001.952(o)) should be 

incorporated by reference into section 

1877 of the Act. We are therefore 

creating new exceptions in § 411.357(q) 

and § 411.357(r) for these arrangements. 

As the anti-kickback ‘‘safe harbor’’

regulations are amended and 

supplemented from time to time, we 

will consider whether any additional 

‘‘safe harbored’’ arrangements should be 

incorporated as exceptions under 

section 1877 of the Act. 

A commenter has also suggested that 

we create a new exception for any 

arrangement approved in an OIG 

advisory opinion regarding the 

application of the anti-kickback statute 

to the arrangement. We decline to adopt 

the commenter’s suggestion. OIG 

advisory opinions may not be relevant 

in all respects to a determination under 

section 1877 of the Act. For example, a 

favorable opinion from the OIG often 

concludes that a potential remunerative 

relationship exists, but that the OIG 

would exercise its discretion and 

decline to impose sanctions arising from 

the potential anti-kickback violation 

(which contains an intent requirement 

not applicable under section 1877 of the 

Act). These determinations are not 

appropriate for blanket protection under 

section 1877 of the Act.

I. Professional Courtesy (Phase I—66 FR 

922; Phase II; § 411.357(s)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Professional Courtesy Exception’’ at 

the beginning of your comments.]

A number of commenters responded 

to our call for comments on a possible 

exception for professional courtesy. 

These commenters pointed out that free 

or discounted ‘‘professional courtesy’’ to 

physicians and their family members is 

a longstanding tradition and remains a 

widespread practice. Most commenters 

supported creation of an exception. One 

commenter suggested the following 

conditions: The services are routinely 

provided without charge to physicians 

and their family members by the 

provider, without regard to referrals, as 

part of the provider’s standard 

professional courtesy policy and notice 

is provided to all applicable public or 

private third party payers that the 

services were provided without charge 

to the physician as a professional 

courtesy (that is, the co-insurance 

obligation was waived). A commenter 

representing a radiology concern 

recommended that professional courtesy 

be limited to physicians and dependents 

for whom the physician would pay the 

medical bill and that the courtesy be 

further limited to free services for which 

no person or entity is billed. Further, 

the commenter wanted to limit the 

exception to circumstances where 

professional courtesy is the prevailing 

practice in a given marketplace. 

Another commenter suggested that 

the definition of ‘‘professional courtesy’’

be limited to partial ‘‘out-of-pocket’’

expense reductions (as opposed to total 

fee waivers or out-of-pocket cost 

waivers) offered by health care 

providers for health care services 

furnished to physicians and their family 

members who are not employed by the 

health care provider. The commenter 

excluded employees because discounts 

to employees could be protected under 

the employee exception. The 

commenter suggested limiting the 

exception to partial waivers because 

health care providers are more likely to 

offer partial waivers across the board; 

the commenter believed that health care 

providers are more likely to offer costly 

full waivers selectively based on 

referrals. As for specific conditions to 

apply under an exception, the 

commenter suggested the following: (1) 

The discount is offered to all physicians 

(whether or not affiliated with the 

health care provider) without regard to 

the volume or value of referrals or other 

business generated between the parties; 

(2) the professional courtesy policy is 

set out in writing and approved in 

advance by the governing body of the 

health care provider; (3) the discount is 

limited to 25 percent of what would 

otherwise have been the physician’s 

out-of-pocket expense and subject to an 

annual cap; (4) the discount is not 

offered to a physician (or family 

member) who is a Federal health care 

program beneficiary (this condition 

addresses the beneficiary inducement 

problem raised by professional courtesy 

arrangements); (5) all discounts are 

reported as income to the physician in 

accordance with Federal and State tax 

requirements; and (6) to avoid insurance 

fraud, insurers are informed of any 

reduction of a co-insurance obligation. 

The commenter notes that providers 

may want to make an offer of 

professional courtesy contingent on the 

insurer’s agreement to provide coverage 

notwithstanding. 

Yet another commenter, representing 

a physician association, suggested that 

the exception should cover professional 

courtesy, including fee waivers or 

discounts up to $300 per year 

16116 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

(consistent with the non-monetary 

compensation exception). One 

commenter expressed concern that 

providers not be required to offer 

professional courtesy, and that such 

arrangements should be entered into at 

the discretion of the parties. 

We are persuaded to promulgate an 

exception for certain services provided 

to a physician or his or her immediate 

family members. We are defining 

‘‘professional courtesy’’ in § 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: 

1. The professional courtesy is offered 

to all physicians on the entity’s bona 

fide medical staff or in the entity’s local 

community 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’s professional courtesy 

policy is set out in writing and 

approved in advance by the governing 

body of the health care provider;

4. 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; 

5. If the professional courtesy 

involves any whole or partial waiver of 

any coinsurance obligation, the insurer 

is informed in writing of that reduction 

so that the insurer is aware of the 

arrangement. 

6. The professional courtesy 

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

submission laws or regulations. 

While professional courtesy discounts 

may be covered under the employee 

exception, nothing in this new 

exception precludes hospitals or other 

entities from extending their 

professional courtesy policies to 

employees, including non-physician 

employees, under the new exception. 

Nothing in these regulations should be 

construed as requiring or encouraging 

professional courtesy arrangements. 

Moreover, parties are cautioned that 

some professional courtesy 

arrangements may violate the antikickback statute or the civil monetary 

penalties law against giving 

inducements to Medicare and Medicaid 

beneficiaries (section 1128A(a)(5) of the 

Act). Concerns regarding those laws 

should be addressed to the OIG. Private 

insurers may also have concerns about 

professional courtesy in the form of 

coinsurance waivers. The requirement 

to notify private insurers of a 

professional courtesy arrangement may 

provide an additional check against 

abusive arrangements. 

J. Charitable Donations by a Physician 

(Phase II; § 411.357(j)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Charitable Donations’’ at the beginning 

of your comments.]

A commenter to the January 1998 

proposed rule expressed concern about 

charitable contributions made by 

physicians to DHS entities, for example, 

the purchase of a hospital charity ball 

ticket or a donation to a charitable 

health care entity’s general fund-raising 

campaign. The commenter noted that, 

under section 1877 of the Act, funds 

flowing from a physician to a DHS 

entity can create a financial 

relationship. However, no exception 

exists for a physician’s bona fide

charitable donations. 

We agree that charitable donations 

from a physician to a DHS entity 

involve remuneration as defined in the 

statute, thus creating a compensation 

arrangement between donor and donee 

and that an exception for bona fide

charitable donations is appropriate. 

Under our authority in section 

1877(b)(4) of the Act, we have added a 

new exception in § 411.357(j) for bona 

fide charitable donations made by a 

physician (or immediate family 

member). To qualify, donations must be 

made to an organization exempt from 

taxation under the IRS Code (or to an 

exempt supporting organization, such as 

a hospital foundation). The new 

exception provides that the donation 

may not be solicited or made in any 

manner that reflects the volume or value 

of referrals or other business generated 

from one party for the other. Broadbased solicitations not targeted 

specifically at physicians, such as sales 

of charity ball tickets or general fundraising campaigns, will qualify under 

this exception. Parties engaged in more 

selective or targeted fund-raising 

activities should ensure that those 

activities are not conducted in any 

manner that reflects or takes into 

account referrals or the generation of 

business between the parties. As with 

all new regulatory exceptions under 

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

arrangement must not violate the antikickback statute or billing or claims 

filing rules. 

K. Preventive Screening Tests (Phase I—

66 FR 923; § 411.355(h)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Exceptions Preventive Screening’’ at 

the beginning of your comments.]

In the Phase I final rule, we used our 

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

Act to create a regulatory exception 

(§ 411.355(h)) for certain preventive 

screening tests, immunizations and 

vaccines. 

Section 411.355(h)(2) of the exception 

requires that the preventive screening 

tests, immunizations, and vaccines be 

reimbursed by Medicare under a fee 

schedule. It has come to our attention 

that some of the vaccines covered by the 

exception may be paid by Medicare 

using different reimbursement methods. 

To avoid confusion, we are deleting the 

fee schedule requirement from the 

regulation. We believe the remaining 

conditions in the exception are 

sufficient to protect against abuse under 

section 1877 of the Act.

In addition, we received the following 

comments. 

Comment: Two commenters 

representing pathologists inquired about 

the treatment of Pap tests under the 

final regulations. One association was 

concerned that only screening Pap tests, 

but not diagnostic Pap tests, could 

qualify for the preventive screening tests 

exception. Another association urged us 

not to except screening Pap tests 

because physicians would then have 

financial incentives to send all 

screening tests to clinical laboratories 

with which they have financial 

relationships and to send all diagnostic 

tests to different laboratories. In the 

commenter’s view, this might endanger 

continuity of care and the ability to 

compare the findings of screening and 

diagnostic Pap tests. 

Response: We can discern no reason 

to expand the exception to protect 

referrals for diagnostic Pap tests. As 

noted above, we created the exception 

in § 411.355(h) pursuant to our 

authority under section 1877(b)(4), 

which authorizes the Secretary to create 

additional exceptions for financial 

relationships that do not pose a risk of 

program or patient abuse. We are not 

persuaded that diagnostic Pap tests are 

any different from other diagnostic 

clinical laboratory tests to which the 

statutory prohibition applies. 

We are unclear as to how the potential 

use of two different laboratories for two 

different clinical laboratory tests will 

compromise continuity of patient care. 

Moreover, it is our understanding that 

screening and diagnostic Pap test results 

are not typically compared. We 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16117

continue to believe that the exception as 

set forth in Phase I is sufficiently 

limited to pose no risk of program or 

patient abuse. Accordingly, we are not 

removing the codes for screening Pap 

tests from the list of codes identifying 

those services that may qualify for the 

exception in § 411.355(h). 

Comment: An association 

representing radiologists supported our 

decision to include screening 

mammography in the exception for 

preventive screening tests at 

§ 411.355(h), but was disappointed that 

the exception does not cover diagnostic 

mammography. The association 

disagreed with our statement that 

diagnostic mammography could be 

subject to abuse. 

Response: For the reasons stated in 

Phase I (66 FR 930), diagnostic 

mammography is treated similarly to all 

other diagnostic radiology services. In 

many cases, a radiologist who has 

performed a screening mammogram will 

also recommend a diagnostic 

mammogram. We do not see why 

diagnostic mammography performed 

after screening mammography is less 

subject to abuse than any other 

diagnostic service that is performed 

after a screening service. We note that 

a radiologist who orders a diagnostic 

mammography pursuant to a 

consultation does not make a ‘‘referral’’

for purposes of section 1877 of the Act. 

Comment: A commenter stated that 

screening tests should not be considered 

DHS when performed either as 

screening tests or as part of a patient’s 

ongoing care once a problem has been 

identified. 

Response: We disagree. Consistent 

with the statutory and regulatory 

scheme, we have created an exception 

for a subset of screening tests furnished 

under circumstances that do not pose a 

risk of abuse. 

Comment: In the Phase I Attachment, 

we listed the CPT and HCPCS codes for 

screening tests that may qualify for the 

exception in § 411.355(h) if all of the 

criteria for that exception are satisfied 

(66 FR 965). We included in that list one 

code for a bone density test (CPT 

76977), which the Phase I Attachment 

also identified as a radiology service. 

Several commenters believed that the 

list should also include five other codes 

for bone density tests (CPT codes 76070, 

76075, 76076, 78350, and 78351). 

Response: Generally, a test performed 

for diagnostic reasons is subject to 

section 1877 of the Act. However, some 

tests performed as preventive screening 

tests are not subject to the physician 

self-referral prohibition if all conditions 

of the exception in § 411.355(h) are 

satisfied. None of the five codes 

identified by the commenters is a 

screening test, as none is available to the 

general population without a preexisting condition. Section 1861(rr) of 

the Act, which provides for the bone 

mass measurement benefit, identifies 

five specific categories of individuals 

with pre-existing conditions who 

qualify for the benefit. Accordingly, 

none of these five codes will be added 

to the list of codes that may qualify for 

the exception in § 411.355(h). Also, we 

are removing CPT code 76977 from the 

list of services that may qualify for the 

exception in § 411.355(h) for preventive 

screening tests because we had 

incorrectly identified it as a screening 

test. 

After careful review, we have 

determined that four of the bone density 

tests cited by the commenters (76070, 

76075, 76076, and 78350), fall within 

the definition of ‘‘radiology and certain 

other imaging services,’’ yet were not 

included as such on the Phase I 

attachment or its updates. (Although 

CPT code 78351 would otherwise fall 

within the category of ‘‘radiology and 

certain other imaging services,’’ CPT 

code 78351 is not a Medicare covered 

service and, thus, is not subject to the 

statute.)

In the physician fee schedule final 

rule, published December 31, 2002 (67 

FR 79996), we added CPT code 76070 

to the list of codes defining ‘‘radiology 

and certain other imaging services.’’ (At 

that time, we also added as ‘‘radiology 

and certain other imaging services’’ two 

other codes for bone density tests: CPT 

codes 76071 and 0028T.) 

We are now adding to the definitional 

code list for ‘‘radiology and certain 

other imaging services’’ the three 

remaining densitometry scans identified 

by the commenters (CPT codes 76075, 

76076, and 78350) that were 

inadvertently omitted from the previous 

list of codes. 

Additionally, in reviewing the bone 

density test codes, we found two codes 

(CPT code 76078 and HCPCS code 

G0130) not identified by the 

commenters. We have determined that 

these two codes also fall within the 

category of ‘‘radiology and certain other 

imaging services’’ and are adding them 

to that category. 

The following is a complete list of the 

densitometry scans that will be 

included in the definitional code list for 

‘‘radiology and certain other imaging 

services’’:

76070 Ct bone density, axial 

76071 Ct bone density, peripheral 

76075 Dexa, axial skeleton study 

76076 Dexa, peripheral study 

76078 Radiographic absorptiometry 

76977 Us bone density measure 

78350 Bone mineral, single photon 

0028T Dexa body composition study 

G0130 Single energy x-ray study

As explained above, none of these 

tests qualifies for the exception in 

§ 411.355(h). 

L. EPO and Other Dialysis-Related 

Outpatient Prescription Drugs 

Furnished in or by an ESRD Facility 

(Phase I—66 FR 939; § 411.355(g)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Exceptions-Dialysis Drugs’’ at the 

beginning of your comments.]

Phase I created a new exception for 

EPO and certain other dialysis-related 

outpatient prescription drugs furnished 

in or by an ESRD facility. The drugs that 

may qualify for this exception were 

initially identified by CPT and HCPCS 

codes in the Phase I Attachment, and 

updates to that list appear on the CMS 

Web site and in annual updates 

published in the Federal Register. 

Comment: One commenter advocated 

that we expand the list of codes to 

include other drugs specifically related 

to ESRD services if those drugs are used 

specifically and exclusively for a 

patient’s ESRD treatment. In particular, 

the commenter believed that the 

following drugs should be added to the 

list of drugs that may qualify for the 

exception in § 411.355(g): heparin 

(heparin sodium); normal saline (0.9 

percent sodium chloride) for catheter 

maintenance; paricalcitrol; carnitine; 

and albumin for injection. 

Response: We note that, according to 

section 3168.A of the Medicare 

Intermediary Manual, heparin and 

normal saline are included in the ESRD 

composite rate. Thus, these items do not 

constitute DHS when reimbursed under 

the composite rate and therefore did not 

need to appear on the list of codes that 

may qualify for the exception in 

§ 411.355(g). In addition, we added 

paricalcitol to this list of codes in 

Addendum E of the December 31, 2002 

Federal Register final rule, Revisions to 

the Physician Fee Schedule for Calendar 

Year 2003 (67 FR 79966 and 80172). 

(Zemplar is the trade name for 

paricalcitol, which is often referred to as 

paricalcitrol.) 

With respect to the other drugs 

mentioned by the commenter, we agree 

that the list of drugs was not broad 

enough to include all the drugs that 

should be excepted. We believe it is 

appropriate to use our authority under 

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

exception at § 411.355(g) to cover these 

and other outpatient prescription drugs 

that are required for the efficacy of 

dialysis, and are not self-administered 

16118 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

(except for EPO and darbepoetin alfa 

(Aranesp)), provided that all other 

conditions of the exception are satisfied. 

Therefore, we are adding to our list 

albumin and levocarnitine, which is the 

intravenous form of carnitine. 

We are also adding several other 

drugs to the list. We are including 

darbepoetin alfa (Aranesp), which is a 

new drug that is functionally equivalent 

to EPO although not structurally 

identical. For physician self-referral 

purposes, we are using the term EPO to 

include both epoetin alfa and 

darbepoetin alfa (Aranesp). Both 

products use the same biological 

mechanism to produce stimulation of 

the bone marrow to produce red blood 

cells. In addition, we are adding an 

additional vitamin D drug (calcitoninsalmon), and three additional 

thrombolytics used to declot central 

venous catheters. These thrombolytics 

are streptokinase, urokinase, and 

retaplase.

We believe that this exception does 

not pose a risk of patient or program 

abuse. First, as explained in the Phase 

I preamble (66 FR 938), we believe that 

this exception is appropriate because of 

the high correlation between the use of 

these drugs and dialysis. Second, strict 

utilization and coverage criteria for EPO 

and the other listed medically necessary 

drugs required for the efficacy of 

dialysis mitigates the risk of abuse. 

However, we intend to monitor use of 

this exception and, if we determine that 

the exception is abused, we would 

revisit it. Except as provided in this 

exception, we believe physician 

financial interests in the furnishing of 

self-administered drugs poses a risk of 

abuse. As we explained in the Phase I 

preamble (66 FR 938), this exception 

was never intended to protect drugs or 

supplies that patients use at home, 

except EPO in limited circumstances. 

Accordingly, we want to emphasize that 

this exception applies only to drugs that 

are not self-administered except when 

the facility furnishes EPO or Aranesp to 

the patient who dialyzes at home. Given 

the additions to the list of drugs, we are 

clarifying the regulation text in order to 

ensure that the exception will continue 

to pose no risk of program or patient 

abuse. 

M. Intrafamily Referrals (Phase II; 

§ 411.355(j)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Exceptions Intrafamily Referrals’’ at 

the beginning of your comments.] 

This exception is discussed in section 

VII.B of this preamble. 

N. Exception for Certain Arrangements 

Involving Temporary Noncompliance 

(Phase II; § 411.353(f)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Exceptions-Temporary 

Noncompliance’’ at the beginning of 

your comments.] 

This exception is discussed in section 

II.A of this preamble. 

O. Retention Payments in Underserved 

Areas (Phase I; § 411.357(t)) 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Exceptions—Retention Payments in 

Underserved Areas’’ at the beginning of 

your comments.]

This exception is discussed in section 

VIII.E of this preamble. 

P. Community-Wide Information 

Systems (Phase II; § 411.357(w)) 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘Exceptions-Community-wide 

Information Services’’ at the beginning 

of your comments.] 

This exception is discussed in section 

XII.E of this preamble. 

XIII. Technical Corrections 

In Phase I, we indicated our intent to 

remove § 411.360 relating to physician 

attestations, but the regulatory text did 

not do so. We have removed § 411.360. 

We have also changed references from 

HCFA to CMS, consistent with the final 

rule published July 31, 2001 (66 FR 

39450), which revised the references in 

accordance with the name change of the 

Health Care Financing Administration 

to the Centers for Medicare & Medicaid 

Services. In addition, we have updated 

references to Internet Web sites in the 

Phase I regulations. 

We have removed § 411.354(c)(1)(ii) 

that specified that the shared 

compensation for consultations 

conducted via interactive 

telecommunications systems required 

by the Medicare program under § 414.65 

was not a compensation arrangement. 

Section 414.65 was substantially revised 

in the November 1, 2001 physician fee 

schedule final rule (66 FR 55332). A 

consultant practitioner is no longer 

permitted to share payment with the 

referring practitioner, and thus, a 

provision for this situation is no longer 

necessary. 

In addition, pursuant to the Balanced 

Budget Act of 1997 (Pub. L. 105–33) and 

the Medicare, Medicaid, and SCHIP 

Balanced Budget Refinement Act of 

1999 (Pub. L. 106–113), we have 

replaced references to ‘‘primary care 

rural hospitals’’ with ‘‘critical access 

hospitals’’ in § 411.351. 

We have deleted the mailing address 

and telephone number for the 

Superintendent of Documents and the 

National Technical Information Service 

from § 411.351 since the Medicare 

Carriers Manual is available free of 

charge on the CMS Web site. In light of 

the recent and ongoing reorganization of 

CMS manuals, we have clarified that 

references to specific manual provisions 

incorporate any amendments to those 

provisions. 

We have also revised the title of 

subpart J to reflect the current scope of 

section 1877 of the Act and these 

regulations. 

Comment: One commenter noted that 

the references in § 411.352(d)(1) to 

§ 411.352(d)(2) and § 411.352(d)(3) 

should be to § 411.352(d)(3), 

§ 411.352(d)(4), and § 411.352(d)(5). 

Response: The commenter is correct. 

We have made the technical correction. 

We have also made a technical 

correction in § 411.352(b) by changing 

the words ‘‘this section’’ at the end of 

§ 411.352(b) to ‘‘§ 411.351’’. 

XIV. Collection of Information 

Requirements 

Under the Paperwork Reduction Act 

of 1995 (PRA), we are required to 

provide 60-day notice in the Federal 

Register and solicit public comment 

before a collection of information 

requirement is submitted to the Office of 

Management and Budget (OMB) for 

review and approval. In order to fairly 

evaluate whether an information 

collection should be approved by OMB, 

section 3506(c)(2)(A) of the PRA 

requires that we solicit comment on the 

following issues: 

The need for the information 

collection and its usefulness in carrying 

out the proper functions of our agency.

• The accuracy of our estimate of the 

information collection burden. 

• The quality, utility, and clarity of 

the information to be collected. 

• Recommendations to minimize the 

information collection burden on the 

affected public, including automated 

collection techniques. 

Therefore, we are soliciting public 

comments on each of these issues for 

the information collection requirements 

discussed below. 

The following information collection 

requirements and associated burdens 

are subject to the PRA. 

Section 411.352 Group Practice 

Under paragraph (d), a covered entity 

is required to document the total time 

each member spends on patient care 

services, and to maintain and make 

available to the Secretary, upon request, 

documentation concerning compliance 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16119

with the substantially ‘‘all test.’’ This 

paragraph also requires that a new 

member’s employment with, or 

ownership interest in, the group 

practice be documented in writing no 

later than the beginning of his or her 

new employment relationship or 

ownership or investment interest. 

The burden associated with these 

requirements is that of documentation 

and making available information to the 

Secretary. This documentation may be 

in the form of time cards, appointment 

schedules, personal diaries, or any 

alternative measure that is reasonable, 

fixed in advance of the performance of 

the services being measured, uniformly 

applied over time, and verifiable. This 

is not a new requirement to maintain or 

collect additional information because 

these types of records are usually kept 

by group practices in the normal course 

of business in order to allocate resources 

such as time, examination space, 

remuneration, and productivity 

bonuses. The documentation 

requirements reflect usual and 

customary business practices, and, as 

such, the burden is not subject to the 

PRA under 5 CFR 1320.3(b)(5); the 

burden of making the records available 

is exempt under 5 CFR 1320.4(a) as that 

incurred during an administrative 

action, investigation, or audit involving 

an agency against specific individuals or 

entities. In addition, this burden was 

found to be exempt from the 

requirements of the PRA in Phase I (66 

FR 856).

Section 411.354 Financial 

Relationship, Compensation, and 

Ownership or Investment Interest 

Paragraph (d)(4) of this section 

mandates that the requirement to make 

referrals to a particular provider, 

practitioner, or supplier be set forth in 

a written agreement signed by the 

parties. 

We do not believe this requirement 

imposes any additional burden. Where 

mandatory referral requirements are 

used, they are already routinely made 

part of a more comprehensive service 

agreement (for example, a contract 

between a physician and a managed 

care entity for the provision of 

physician services, or a preferred 

provider network agreement). We 

believe that this burden is a result of 

usual and customary business practice 

and, as such, is exempt from the PRA 

under 5 CFR 1320.3(b)(5). 

Section 411.355 General Exceptions to 

the Referral Prohibition Related to Both 

Ownership/Investment and 

Compensation 

Paragraph (e)(1)(iii) of this section 

requires 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 this 

requirement is that of documenting 

compliance, either in written 

documents or routine financial reports. 

The written documents, adopted by the 

governing body of each component, 

detailing the relationship of the 

components of the academic medical 

center may be any documents generated 

in the usual course of business, such as 

articles of incorporation or bylaws. In 

response to comments, we have 

decreased the minimal burden 

associated with this requirement for 

academic medical centers that consist of 

one legal entity. Those academic 

medical centers will satisfy the 

requirement if transfers of funds 

between components of the academic 

medical center are reflected in routine 

financial reports generated in the usual 

course of business. We believe that the 

burden imposed by § 411.351(e)(1)(iii) is 

a result of usual and customary business 

practice and, as such, is exempt from 

the PRA under 5 CFR 1320.3(b)(5). In 

addition, this burden (without the relief 

granted in this interim final rule for 

certain academic medical centers) was 

found to be exempt from the 

requirements of the PRA in Phase I (66 

FR 856, 949). 

Section 411.357 Exceptions to the 

Referral Prohibition Related to 

Compensation Arrangements 

This section requires a written 

agreement signed by the parties for 

space and equipment rental agreements 

and arrangements for personal services, 

physician recruitment, certain group 

practice arrangements with a hospital, 

fair market value compensation, and 

indirect compensation. In addition, an 

entity’s professional courtesy policy 

must be set out in writing if there is any 

whole or partial coinsurance reduction, 

and an entity must notify its insurers 

that the entity has a professional 

courtesy policy. 

The burden associated with these 

requirements is that of obtaining 

agreements in writing, setting out 

professional courtesy policies in writing 

and notifying insurers that an entity has 

a professional courtesy policy. The 

burden also includes a requirement that 

all separate personal service 

arrangements between an entity and a 

physician or an immediate family 

member of a physician must incorporate 

each other by reference or the entity 

must maintain centrally a master list of 

contracts that is updated and preserves 

the historical record of the personal 

service contracts. The lease of 

equipment is usually and routinely set 

forth in a written agreement, as are 

personal services arrangements, 

recruitment agreements, and contracts 

between group practices and hospitals. 

Therefore, the requirement that these 

arrangements be set forth in a written 

agreement does not impose an 

additional burden beyond usual 

business practices. In addition, the 

burden that direct and indirect 

compensation arrangements be set forth 

in writing was formerly found to be 

exempt from the requirements of the 

PRA in the Phase I final rule (66 FR 

856). We believe that the burden of 

these written agreements is a result of 

usual and customary business practice 

and, as such, is exempt from the PRA 

under 5 CFR 1320.3(b)(5). 

The requirement to notify insurance 

companies that an entity has a 

professional courtesy policy under 

which coinsurance is reduced or not 

collected could be met by creating a 

model letter or applying an edit to a 

claim where professional courtesy 

applies. We estimate that a health care 

entity would have to spend 

approximately 25 minutes to draft the 

model letter and then 5 minutes to 

prepare a letter for each insurer. We do 

not know how many of the 1.2 million 

entities (including approximately 

581,108 physicians) that furnish 

services to Medicare beneficiaries 

would offer professional courtesy to 

their bona fide medical staffs or to all 

physicians in the local community. 

However, traditionally, only hospitals 

and physicians have provided 

professional courtesy to physicians, 

their immediate family members, and 

sometimes the physician’s staff. We do 

not expect this pattern to change 

significantly but, for purposes of this 

analysis, we estimate that 75 percent of 

hospitals, 100 percent of physicians, 

and 10 percent of entities other than 

physicians and hospitals will offer 

professional courtesy. We also believe 

that these numbers are high but we 

16120 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

cannot satisfactorily reduce these 

estimates. That is, we do not believe 

that all physicians and all hospitals 

offer professional courtesy and we do 

not believe that even 10 percent of 

entities that have rarely offered 

professional courtesy will now start 

offering it.

Most of the 581,108 physicians 

practice in group practices. Many 

physicians practice in very large groups, 

while many practice in multi-specialty 

practices of 15 to 20 physicians or single 

specialty groups of fewer than 10 

physicians. For purposes of this 

discussion, we assume that the median 

number of physicians practicing 

together is 10. Therefore, we assume 

there are 58,110 physician entities 

(groups or sole practitioners) that could 

and would offer professional courtesy. 

We also assume that 75 percent of all 

hospitals (6,018 × 75 percent = 4,514) 

would offer professional courtesy. 

We assume that each hospital, 

physician group practice, and sole 

physician practice would have to notify 

10 insurers the first year under this 

interim final rule and that the other 

health care entities would have to notify 

5 insurers. Therefore, for physicians and 

hospitals that choose to use a model 

letter, 58,110 physician entities + 4,514 

hospitals would each spend a total of 75 

minutes [25 minutes to prepare model 

letter + (10 insurers × 5 minutes for 

preparing each copy) = 75 minutes] to 

comply with the notification 

requirement. This would result in an 

estimated overall burden on physicians 

and hospitals of approximately 78,280 

hours. The overall burden for entities 

other than hospitals and physicians 

should be 51,073 hours. (1,200,000 

entities ¥ 581,108 physicians ¥ 6,018 

hospitals = 612,874 × (10 percent) × [(25 

minutes + (5 insurers × 5 minutes for 

preparing each copy)] = 51,073). In each 

subsequent year, we expect that there 

might be one notification per entity to 

two new insurance companies, which 

would amount to 10 minutes per entity 

× (58,111 physicians + 4,514 hospitals + 

612,874 other entities) = 102,898 hours. 

Although we have estimated that it 

would take 25 minutes for each entity 

to create a model letter, we expect that 

a chain of hospitals or other entities 

would choose to prepare one model 

letter for use by each of its members. 

Also, we expect that some individual 

may develop a model letter that would 

be used by many entities. Although the 

paperwork burden may seem large, 

overall, we expect that the burden on an 

individual entity would be relatively 

minimal. The provisions in the personal 

services arrangements exception in this 

section requires that all separate 

arrangements between an entity and a 

physician or an entity and a member of 

a physician’s immediate family must 

incorporate each other by reference or 

all separate arrangements must be 

identified in a master list of contracts 

that is maintained and updated 

centrally. This requirement was 

suggested by the industry because it is 

less burdensome than the requirement 

in the proposed rule and because it 

more closely reflects current business 

practices (or practices that can be easily 

adapted). We added the requirements 

that the master list must be made 

available for review by the Secretary 

upon request and that the master list 

must be maintained in a manner that 

preserves the historical record. In the 

alternative, annual or other regular 

financial statements (such as quarterly 

statements) that clearly show parties, 

dates, payments, and purposes of 

payments separately for each personal 

service contract can qualify as a master 

list if the statements are appropriately 

cross-referenced in the agreement. An 

entity could meet this requirement by 

having several master lists that, taken 

together, cover all of the contracts with 

the referring physician and immediate 

family members. 

The ‘‘master list’’ alternative should 

impose minimal, if any, burden because 

it is a usual and customary business 

practice for a company to maintain 

records of its contracts. However, for 

those entities without a master list, 

multiple lists, or databases, creating a 

master list will take time. We request 

comments on these requirements. 

Of the approximately 677,002 health 

care entities (58,110 physician entities + 

6,018 hospitals + 612,874 other entities), 

we estimate that one-quarter, 169,251, 

contract for personal services with 

physicians or their immediate family 

members. We expect that many of these 

entities are relatively small physician 

group practices, clinical laboratories or 

other suppliers that can easily furnish a 

master list of contracts with physicians 

and immediate family members or have 

one contract with a physician or family 

member that covers everything this 

individual performs for the small entity. 

We expect that larger entities can meet 

this recordkeeping requirement 

relatively easily by creating a master list 

of contracts. We recognize that it is 

possible that some large entities (for 

example, certain urban hospitals) may 

have multiple contracts with physicians 

and family members and not currently 

meet this requirement.

We estimate that, on average, it would 

take a large entity 7 hours to meet this 

requirement and a small entity 2 hours. 

We assume that, since public 

commenters recommended the use of 

cross-referencing to a master list of 

contracts, many entities already have 

such a list. Therefore, we estimate that 

one-half of the 169,251 entities affected 

by this requirement will have to create 

a master list. Assuming that one-half of 

the entities are small and one half are 

large entities, we estimate that there will 

be a one-time burden of [(1⁄2 × 169,251 

× 2 hours) + (1⁄2 × 169,251 × 7 hours)] 

= 677,000 hours. We also estimate that 

it would take one-half of these entities 

1⁄2 hour annually to update the master 

list and it would take one-half of the 

entities 1 hour annually to update the 

master list, resulting in an annual 

burden of 126,938 hours. We note that 

these are preliminary estimates, so we 

specifically request comments on these 

estimates. 

Although the overall burden in 

creating a master list or referencing all 

other contracts with a physician or 

immediate family member in each 

contract might appear sizable, the 

burden on an individual entity should 

be relatively minimal. 

Under paragraph (d)(2), which allows 

physician incentive plans under the 

personal services exception, the entity 

must give the Secretary access to the 

plan upon request. 

Making the information available (or 

giving access) to the Secretary should 

occur rarely and would be exempt from 

the PRA under 5 CFR 1320.4(a) as 

information required during an 

administrative action, investigation, or 

audit involving an agency against 

specific individuals or entities. 

Section 411.361 Reporting 

Requirements 

This section requires that, except for 

certain exceptions, all entities 

furnishing services for which payment 

may be made under Medicare must 

submit information to us concerning 

their financial relationships (as defined 

in the section), in the form, manner, and 

at the times that we specify. 

The information that we request 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 who has an immediate family 

member (as defined in § 411.351) who 

has a financial relationship with the 

entity. 

(3) The covered services furnished by 

the entity. 

(4) With respect to specified 

physicians, the nature of the financial 

relationship (including the extent and/

or value of the ownership or investment

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16121

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 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. 

The first 3 requirements above are 

statutorily mandated. The fourth 

requirement was proposed in the 

proposed rule (63 FR 1659) and adopted 

in this rule with no changes. 

Entities that are subject to the 

requirements of this section must retain 

the information, and documentation 

sufficient to verify the information, and, 

upon request, must make that 

documentation available to us or to the 

OIG. 

The burden associated with these 

requirements is that of maintaining 

documentation and, if necessary, 

making it available to the Secretary. We 

believe that the information we are 

requiring the entities to maintain is 

information that they would have and 

maintain already. The proposed rule 

proposed that entities that are subject to 

requirements of this section must report 

to the agency on a prescribed form and 

thereafter report once a year all changes 

to the submitted information that 

occurred in the previous 12 months. In 

this rule, the requirement has been 

modified to require entities to make 

information available only upon request 

and to maintain the information only for 

the length of time specified by the 

applicable regulatory requirements for 

the information (that is, IRS, SEC, 

Medicare, Medicaid, or other programs). 

This substantially reduces the burden 

on entities, since this is information that 

is required to be maintained by other 

regulatory agencies in the usual course 

of business. We believe that this burden 

is a result of usual and customary 

business practice and, as such, is 

exempt from the PRA under 5 CFR 

1320.3(b)(5). 

Making information available to the 

Secretary will rarely be necessary and 

the information will be collected during 

the conduct of an administrative action, 

investigation, or audit involving an 

agency against specific individuals or 

entities. It is thus exempt from the PRA 

under 5 CFR 1320.4(a). 

For those requirements that are not 

exempt from the PRA, we have 

quantified the burden associated with 

compliance and have set forth time 

estimates. The total time estimated to be 

necessary to comply with the 

requirements of this section is 806,353 

hours for all entities in the country in 

the first year, and 229,836 hours 

annually thereafter. 

We have submitted a copy of this 

interim final rule with comment period 

to OMB for its review of the information 

collection requirements described 

above. These requirements are not 

effective until they have been approved 

by OMB.

If you comment on any of these 

information collection and record 

keeping requirements, please mail 

copies directly to the following:

Centers for Medicare & Medicaid 

Services, Office of Strategic 

Operations and Regulatory Affairs, 

Division of Regulations Development 

and Issuances, Attn: Reports 

Clearance Officer, 7500 Security 

Boulevard, Baltimore, MD 21244–

1850, Attn: John Burke, CMS–1810–

IFC. 

and 

Office of Information and Regulatory 

Affairs, Office of Management and 

Budget, Room 10235, New Executive 

Office Building, Washington, DC 

20503, Attn: Brenda Aguilar, Desk 

Officer. 

XV. Regulatory Impact Statement 

A. Overall Impact 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘Impact’’ at the beginning of your 

comments.]

We have examined the impact of 

Phase II of this rulemaking as required 

by Executive Order 12866 (September 

1993, Regulatory Planning and Review), 

the Regulatory Flexibility Act (RFA) 

(September 16, 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). 

Although we cannot determine with 

precise certainty the aggregate economic 

impact of Phase II of this rulemaking, 

we do not believe that the impact will 

approach $100 million or more 

annually. Physicians and DHS entities 

have been required to comply with the 

physician self-referral prohibition for 

many years. The prohibition has applied 

to physician referrals for clinical 

laboratory services since 1992 and to 

referrals for all other DHS since 1995. 

Phase I interpreted the prohibition 

narrowly and the exceptions broadly, 

and 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 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; 

• Non-monetary compensation up to 

$300; 

• Fair market value compensation; 

• Medical staff incidental benefits; 

• Risk-sharing arrangements; 

• Compliance training; and 

• Indirect compensation 

arrangements. 

Phase II covers—

• The remaining 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 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. 

Phase II also addresses public 

comments on the Phase I regulations. 

16122 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

Among other things, Phase II revises the 

Phase I ‘‘set in advance’’ definition to 

permit percentage compensation 

arrangements; revises the Phase I 

exception for academic medical centers 

to make it easier to qualify as an 

academic medical center or a 

component of an academic medical 

center; revises the Phase I ‘‘same 

building’’ definition to provide a 

simpler, bright-line rule that will 

substantially decrease the regulatory 

burden on many physician practices; 

eliminates the 1998 proposed restriction 

on productivity bonuses, thereby 

permitting employees to be paid based 

on personal productivity (but not 

ancillary referrals); expands the 

physician incentive plan exception to 

downstream contractors in the managed 

care context; and expands the physician 

recruitment exception to federally 

qualified health centers. 

Phase II does not generally unsettle 

existing financial relationships, and it 

offers sufficient exceptions to enable 

parties to restructure noncompliant 

arrangements. Wherever possible, we 

have accommodated legitimate financial 

relationships, thereby reducing the 

regulatory burden. 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 

government agencies. Most hospitals 

and most other providers and suppliers 

are small entities, either because they 

are nonprofit organizations or because 

they generate revenues of $6 million to 

$29 million in any one year. Currently, 

there are approximately 1.2 million 

physicians, other health care 

practitioners, and medical suppliers that 

receive Medicare payment. For purposes 

of the RFA, according to the latest 

numbers from the Small Business 

Administration’s North American 

Industrial Classification System, 95 per 

cent of offices of physicians in the U.S. 

have total revenues of $8.5 million or 

less and are considered small entities. 

Individuals and States are not included 

in the definition of a small entity. We 

determine that this interim 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, we are 

generally interpreting the prohibition 

narrowly and the exceptions broadly. 

We are creating new exceptions where 

appropriate, conforming the regulation 

to existing Medicare payment and 

coverage policies, and minimizing the 

possibility of disrupting non-abusive 

arrangements. Overall, this rule is very 

accommodating to legitimate industry 

practices for hospitals and physicians. 

In addition, section 1102(b) of the Act 

requires us to prepare an RIA if a rule 

may have a significant impact on the 

operations of a substantial number of 

small rural hospitals. This analysis must 

conform to the provisions of section 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. For the same reasons identified 

above for small businesses, this rule 

does not significantly impact small rural 

hospitals. Moreover, rural hospitals 

benefit in this rule from a new 

exception permitting certain retention 

payments for physicians in health 

professional shortage areas (HPSAs), 

and a new exception for communitywide health information systems. This 

interim final rule also revises the 

physician recruitment exception to 

permit hospitals to recruit residents and 

physicians who have been in practice 

for less than one year but for whom 

recruitment does not require relocation. 

This benefits small rural hospitals, 

which often experience difficulty in 

recruiting physicians. In summary, this 

interim 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 that may result in an expenditure 

in any one year by State, local, or tribal 

governments, in the aggregate, or by the 

private sector, of $100 million. Phase II 

of this rulemaking does not have such 

an effect on the governments 

mentioned, and we do not believe the 

private sector costs meet the $110 

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 Phase II of this 

rulemaking will have a substantial effect 

on State or local governments. 

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 interim 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 interim final rule with comment 

period primarily affects physicians and 

health care entities that furnish items 

and services to Medicare beneficiaries. 

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. In 

fact, we expect that Phase II of this 

rulemaking will have a much smaller 

impact than the provisions we 

proposed. Nevertheless, we wish to 

inform the public of what we regard as 

the major effects of this rulemaking.

In response to comments on the 

January 1998 proposed rule, we created 

in Phase I a more manageable regulation 

that included ‘‘bright line’’ rules to help 

the health care community determine 

more easily when a physician’s referrals 

are in compliance with the law. In this 

interim final rule, we are continuing our 

efforts to establish ‘‘bright line’’ rules, 

and attempting to minimize the effect of 

this rule on physicians and DHS entities 

by interpreting the law in a practical 

and realistic manner. The result, we 

believe, is an overall approach that 

should have far less impact on the 

business relationships of physicians and 

DHS entities than the January 1998 

proposed rule. We discuss below some 

of the possible economic effects upon 

physicians and DHS entities. We also 

briefly discuss the effects of the rules on 

Medicare beneficiaries. 

1. Effects on Physicians 

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 interim final rule may 

affect a physician’s or group practice’s 

decision to enter into a particular 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16123

financial relationship and the manner in 

which the arrangement is structured. 

We received voluminous comments 

on the January 1998 proposed rule from 

or on behalf of physicians and DHS 

entities (especially hospitals). In 

addition to specific complaints and 

objections, the commenters expressed a 

number of general concerns, including 

that the proposed regulation 

inappropriately intruded into the 

organization and delivery of medical 

care within physicians’ offices; that the 

regulation conflicted with other 

longstanding policies on coverage and 

similar issues; that the rule was unclear 

in many areas; that ‘‘bright line’’ rules 

were essential in light of the severe 

statutory penalties (especially payment 

denial); and that some aspects of the 

proposed rule, such as its treatment of 

indirect financial relationships, were 

administratively impractical or would 

have been prohibitively costly in terms 

of monitoring compliance. We have 

made every effort in both Phase I and 

this Phase II 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. 

a. Compensation. This interim final 

rule includes many clarifications and 

several new exceptions related to 

physician compensation. For example, 

this interim final rule revises the set-in 

advance definition to permit certain 

fluctuating compensation arrangements 

if the payment methodology is set in 

advance; eliminates the proposed 

restriction on productivity bonuses, and 

permits employees to be paid bonuses 

based on personal productivity (but not 

ancillary referrals). Moreover, the 

regulations permit group practice and 

employed physicians, like independent 

contractors, to be paid under risksharing arrangements. Phase II also 

clarifies the indirect compensation 

arrangements definition and exception, 

as well as the definitions of certain key 

concepts, such as ‘‘volume and value of 

referrals’’ and ‘‘other business 

generated.’’ Phase II also creates a 

physician hourly compensation 

‘‘deeming provision’’ that deems certain 

hourly compensation to physicians to be 

fair market value for purposes of 

complying with various exceptions. 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 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. 

b. In-office Ancillary Services. This 

interim final rule revises the in-office 

ancillary services exception. 

Specifically, this interim final rule eases 

the same building requirement by 

substituting simple, more expansive 

tests. The revised in-office ancillary 

services exception should also make it 

less burdensome for radiologists and 

oncologists to comply with the 

exception because the revised exception 

includes more definite standards. Thus, 

these physicians will have greater 

certainty that their arrangements 

comply with the statute. 

c. Physician Recruitment. This 

interim final rule revises the physician 

recruitment relocation exception to 

focus on relocation of the physician’s 

office and percentage of new patients, 

rather than the physician’s residence. 

The exception now provides for either 

a minimum move of the physician’s 

office practice or a substantial 

percentage (75 percent) of new patients. 

In addition, the relocation requirement 

in this exception does not apply to 

residents and physicians in practice for 

less than one year. It also now allows 

certain joint recruiting with existing 

group practices. Together, these changes 

permit a greater number of legitimate 

arrangements to comply with the 

statute. 

This interim final rule also adds an 

exemption for certain retention 

payments for physicians in health 

professional shortage areas (HPSAs) or 

in an area with demonstrated need for 

the retained physician as determined by 

the Secretary in an advisory opinion 

issued pursuant to section 1877(d)(6) of 

the Act. This new exception will permit 

a greater number of legitimate 

arrangements to comply with the law.

d. Miscellaneous. This interim final 

rule contains a new exception for 

professional courtesy, and establishes 

an exception for certain inadvertent and 

temporary lapses in compliance with an 

existing exception, both of which 

should minimize the effect of the final 

rule. To the extent that new or 

expanded exceptions permit additional 

legitimate arrangements to comply with 

the law, the potential and significant 

costs of noncompliance (for example, 

overpayment refunds, civil monetary 

penalties) are avoided. In addition, 

these changes will require fewer 

arrangements to be restructured to 

comply with an exception, thus 

reducing the costs of compliance. 

2. Effects on Other Health Care 

Providers and Suppliers 

As we stated above, Phase II of this 

rulemaking affects entities that furnish 

DHS by preventing them from receiving 

payment for services that they furnish as 

the 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 rule. 

However, we believe the number will be 

fewer than we had anticipated in the 

January 1998 proposed rule and the 

January 4, 2001 Phase I final rule 

because, as with Phase I, we have 

interpreted the prohibition narrowly 

and the exceptions broadly. 

There are a few provisions that will be 

especially beneficial to hospitals and 

other DHS entities. The first of these is 

the creation of safe harbors for different 

types of hourly compensation. This 

minimizes the risk for physicians, their 

employers, and DHS entities that 

contract with physicians to provide 

services. This interim final rule sets 

forth a physician hourly compensation 

deeming provision that deems hourly 

payments to a physician to be fair 

market value if the payment equals (i) 

the community hourly rate for ER 

doctors, or (ii) the average hourly rate 

for specialties as determined by 

averaging certain national physician 

compensation surveys. This interim 

final rule also addresses the issue of 

reporting requirements by requiring that 

DHS entities retain relevant information 

and make it available upon request by 

the Secretary. By not requiring periodic 

reporting, we have significantly eased 

the cost and burden of compliance. In 

addition, Phase II includes ownership 

exceptions for publicly-traded securities 

and mutual funds, rural providers, and 

hospitals. Additional exceptions that 

benefit DHS entities include the intrafamily referrals exception, the physician 

retention in underserved areas 

exception, the community-wide health 

information systems exception, and the 

temporary grace period exception. 

Again, to the extent that new or 

expanded exceptions permit additional 

legitimate arrangements to comply with 

the law, the potential and significant 

costs of restructuring arrangements is 

reduced, and the costs of 

noncompliance are avoided entirely. 

16124 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

3. Effects on the Medicare and Medicaid 

Programs 

Section 1877 of the Act was enacted 

to address over-utilization, anticompetitive behavior, and other abuses 

of health care services that occur when 

physicians have financial relationships 

with certain ancillary services entities to 

which they refer Medicare or Medicaid 

patients. Physician financial 

arrangements may have some anticompetitive 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. Overutilization increases program 

costs because Medicare (or Medicaid) 

pays for more items or services than are 

medically necessary. 

We expect that Phase II of this 

rulemaking will result in savings to the 

program by minimizing anti-competitive 

business arrangements as well as overutilization or other abuse of covered 

services. For example, the new ‘‘same 

building’’ definition will prohibit 

arrangements in which DHS are 

insufficiently tied to the referring 

physician’s core medical practice and 

essentially constitute separate business 

enterprises. We have made clear that 

these arrangements, which could 

otherwise encourage overutilization and 

anti-competitive behavior, will not 

qualify for the in-office ancillary 

services exception. We cannot gauge 

with any certainty the extent of these 

savings to the program at this time. 

We note that while we have delayed 

rulemaking with respect to portions of 

the application of section 1903(s)(2) of 

the Act, the fact that most providers and 

suppliers of Medicaid services also 

furnish Medicare services means that 

the Medicaid programs should 

indirectly benefit from compliance on 

the Medicare side. Thus, Phase II of this 

rulemaking should result in savings to 

the Medicaid program, but we cannot 

gauge with any certainty the extent of 

these savings at this time.

4. Effects on Beneficiaries 

Some commenters thought the 

January 1998 proposed rule exceeded 

our statutory authority and imposed 

unnecessary and costly burdens on 

physicians and other health care 

providers/suppliers that would harm 

patient access to health care facilities 

and services. We have tried to ensure 

that this rule will not adversely impact 

the medical care of Federal health care 

program beneficiaries. Where we have 

determined that Phase II of this 

rulemaking may have an impact on 

current arrangements under which 

patients are receiving medical care, we 

have attempted to verify that there are 

other ways available to structure the 

arrangement, so that patients may 

continue to receive services in the same 

location. In almost all cases, we believe 

Phase II of this rulemaking should not 

require substantial changes in delivery 

arrangements. For the same reasons 

noted above under ‘‘Effects on the 

Medicare and Medicaid Programs,’’ we 

believe that this interim final rule will 

help minimize anti-competitive 

behavior that can affect where a 

beneficiary receives health care services 

and possibly the quality of the services 

furnished, and we believe this rule will 

minimize the number of medically 

unnecessary tests performed or items or 

services ordered on Federal health care 

program beneficiaries. 

C. Alternatives Considered 

In drafting the January 1998 proposed 

rule, we interpreted the statute strictly 

and literally. After reviewing the 

voluminous number of comments we 

received, we considered in Phase I 

many alternatives to accommodate the 

practical problems that commenters 

raised, while still remaining true to the 

statutory language and intent. As noted 

throughout the Phase II preamble, we 

continued to consider alternatives 

raised in comments submitted on the 

January 1998 proposed rule and, where 

applicable, comments received on Phase 

I. For example, we received many 

comments requesting modifications to 

various provisions concerning academic 

medical centers. In Phase I, we added a 

new regulatory exception for academic 

medical center arrangements, pursuant 

to section 1877(b)(4) of the Act. In 

response to objections from Phase I 

commenters about the definition of an 

academic medical center in 

§ 411.355(e)(2), we are revising the 

definition in Phase II to more accurately 

reflect the nature of these entities. The 

new definition permits hospitals or 

health systems that sponsor four or 

more approved medical education 

programs to qualify as an academic 

medical center, provided they meet the 

other criteria in the exception. We 

considered requiring the hospital or 

health system to sponsor five or more 

approved medical education programs. 

However, after reviewing the issue more 

carefully, we decided that a requirement 

for four programs would adequately 

ensure that the hospital or health system 

has a substantial teaching mission and 

would not disqualify institutions that 

otherwise appeared to be bona fide

academic medical centers. 

We received comments suggesting 

that we revise the ‘‘same building’’

requirement in the in-office ancillary 

services exception to allow non-abusive 

arrangements or to clarify terms that 

commenters claimed were ambiguous. 

We considered maintaining the Phase I 

‘‘same building’’ test, but realized that 

we would be unable to protect 

legitimate arrangements involving the 

specialty groups that primarily furnish 

DHS such as oncology and radiology. 

For example, under the Phase I 

definition, the referring physician (or 

another physician who is a member of 

the same group practice) must furnish in 

the same building ‘‘substantial’’

physician services unrelated to the 

furnishing of DHS. At the suggestion of 

commenters, we considered 

replacements for the term ‘‘substantial,’’

including ‘‘any,’’ ‘‘more than 

incidental,’’ ‘‘10 percent,’’ and 

‘‘significant.’’ Ultimately, we decided 

that these replacement terms were not 

sufficiently bright-line and would not 

necessarily protect legitimate 

arrangements involving radiologists and 

oncologists. We replaced the Phase I 

same building test with three separate 

options, one of which was specifically 

designed to permit legitimate 

arrangements involving radiologists and 

oncologists. Under that test, a 

designated health service is furnished in 

the ‘‘same building’’ if the building is 

one in which the referring physician or 

his or her group practice has an office 

that is normally open to their patients 

at least 35 hours per week, and the 

referring physician or one or more 

members of his or her group regularly 

practices medicine and furnishes 

physician services to patients in that 

office at least 30 hours per week. 

However, the revised provision should 

not unsettle legitimate arrangements 

under the Phase I definition. In fact, the 

new ‘‘same building’’ test should permit 

some legitimate arrangements not 

protected by Phase I.

Many Phase I commenters objected to 

the definition of compensation that is 

‘‘set in advance’’ because it did not 

permit certain percentage compensation 

arrangements. We considered 

maintaining the Phase I definition of 

‘‘set in advance,’’ but realized that 

hospitals, academic medical centers, 

and other entities would have to 

renegotiate numerous legitimate 

contracts for physician services, 

potentially causing significant 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16125

disruption within the health care 

industry without a corresponding 

program integrity benefit. We were 

concerned that such disruption could 

unnecessarily inconvenience Medicare 

beneficiaries. Accordingly, reviewing 

this subject more thoroughly, we are 

revising the definition of ‘‘set in 

advance.’’ Compensation will be 

considered ‘‘set in advance’’ if the 

aggregate compensation, or a time-based 

or unit-of-service-based (whether peruse or per-service) amount, or a specific 

formula for calculating certain 

fluctuating compensation, is set forth in 

the initial agreement between the 

parties (and before the furnishing of the 

items or services for which the 

compensation is to be paid). 

Commenters on the January 1998 

proposed rule expressed considerable 

concern that the proposed reporting 

requirements were unduly burdensome. 

In response, we are making a number of 

changes to the reporting requirements. 

Most significantly, we are eliminating 

the requirement to report periodically 

information regarding financial 

relationships. Instead, we are requiring 

that entities retain certain information 

regarding their financial relationships 

with referring physicians and submit 

that information only upon request. The 

information required to be retained is 

that which the entity knows or should 

know about in the course of prudently 

conducting business, including records 

that the entity is already required to 

retain in accordance with the rules of 

the Internal Revenue Service, the 

Securities and Exchange Commission, 

and the Medicare and Medicaid 

programs. We are also specifying that 

ownership or investment interests in 

publicly-traded securities and mutual 

funds need not be reported if they 

satisfy the exceptions for such financial 

relationships in § 411.356(a) and 

§ 411.356(b). 

We considered maintaining the 

original reporting requirements, but 

decided that periodic reporting would 

not be particularly helpful to the 

agency. CMS and its contractors would 

be overwhelmed by the number of 

reports and financial relationships that 

would need to be analyzed. We decided 

that we would make better use of our 

available resources if we collected 

information on financial relationships 

in a more focused manner (such as 

during a fraud investigation of a 

particular provider or group of 

providers). 

In response to comments, we 

considered allowing a referring 

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

group practice or wholly-owned 

professional corporation (PC) when the 

only intervening entity between the 

referring physician and the DHS entity 

is his or her PC. Under such a rule, what 

would otherwise be analyzed as an 

indirect compensation arrangement 

could instead be analyzed as a direct 

compensation arrangement. We 

recognize in this interim final rule that 

it is not necessary to treat a referring 

physician as separate from his or her 

wholly-owned PC, and we have revised 

the definition of ‘‘referring physician’’

accordingly. However, we decided not 

to make any changes to the Phase I rule 

with respect to the issue of indirect 

compensation arrangements that are 

created when a group practice is an 

intervening entity in the chain between 

the DHS entity and the referring 

physicians who are members of the 

group. We believe that such a change 

would unnecessarily complicate the 

final rule and create confusion. 

Moreover, we believe such a change is 

unnecessary, since the knowledge 

standard in the indirect compensation 

arrangements definition and exception 

adequately protects DHS entities. 

We have created an exception for 

certain referrals from a referring 

physician to a DHS entity with which 

his or her immediate family member has 

a financial relationship, if the patient 

being referred resides in a rural area and 

there is no DHS entity available in a 

timely manner in light of the patient’s 

condition to furnish the DHS to the 

patient in his or her home or within 25 

miles of the patient’s home. In creating 

this exception for intra-family rural 

referrals, we considered permitting such 

referrals regardless of whether the 

patient resides in a rural area. Although 

intra-family referrals may be relatively 

infrequent, we decided to limit the 

exception to rural referrals because we 

cannot create a new regulatory 

exception if it poses any risk of program 

or patient abuse. In drafting the 

exception, we also considered using a 

15-mile standard. Ultimately, we 

decided that a 25-mile standard would 

be more consistent with similar 

standards elsewhere in the regulation 

and would minimize any unfair 

competitive effect on non-physician 

owned DHS entities that may seek to 

provide services in rural areas. 

As these examples demonstrate, our 

approach in Phase II of this rulemaking 

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.

XVI. Waiver of Proposed Rulemaking 

Section 902 of the Medicare 

Prescription Drug, Improvement, and 

Modernization Act of 2003 (MMA) 

provides that, effective December 8, 

2003, the Secretary, in consultation with 

the Director of the Office of 

Management and Budget (OMB), shall 

establish and publish a regular timeline 

for the publication of final regulations 

based on the previous publication of a 

proposed regulation or an interim final 

regulation. Section 902 further provides 

that the timeline may vary among 

different regulations, but shall not be 

longer than three years except under 

exceptional circumstances. 

Part of this Phase II rule finalizes 

portions of a proposed rule that was 

published in January 1998. Although we 

do not believe that section 902 prohibits 

the Secretary from finalizing every 

proposed rule that was published more 

than three years before December 8, 

2003, we recognize that section 902 may 

be susceptible to more than one 

interpretation. Accordingly, out of an 

abundance of caution, we are not 

publishing this rule as a final rule. 

Instead, we are waiving notice of 

proposed rulemaking and publishing 

this rule as an interim final rule with 

comment period. Under the 

Administrative Procedures Act (5 U.S.C. 

553(b)), an agency may waive 

publication of a notice of proposed 

rulemaking if the agency finds good 

cause that the notice and comment 

procedure is impracticable, 

unnecessary, or contrary to the public 

interest and the agency incorporates 

into the rule a statement of, and the 

reasons for, such a finding. For the 

reasons discussed below, we find that it 

would be impracticable and contrary to 

the public interest to publish as a 

proposed rule approximately half of the 

material contained in this interim final 

rule with comment period. 

The physician self-referral prohibition 

is implicated in nearly every financial 

relationship between and among 

physicians and entities that furnish 

DHS. Violations of the law (regardless of 

the intent of the parties) have 

substantial financial consequences, 

including denial of payment (or 

refunding of payments received) for 

DHS claims; civil monetary penalties; 

and program exclusion. The imposition 

of these sanctions can result in multimillion dollar liability. Violations of the 

physician self-referral prohibition may 

also be pursued under the False Claims 

Act, 31 U.S.C. 3729–3733. Given the 

scope and strict liability nature of the 

prohibition and the significant financial 

consequences of noncompliance, the 

16126 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

industry has asked for ‘‘bright-line’’

rules and new regulatory exceptions for 

nonabusive arrangements. 

We believe it is impracticable and not 

in the public interest to offer what 

would essentially constitute a third 

opportunity to comment on much of the 

material in this rule and thereby delay 

finalizing useful exceptions and the 

many ‘‘bright-line’’ rules necessary 

either to protect the Medicare program 

from fraud and abuse or permit 

nonabusive arrangements. We have 

already issued a proposed rule, major 

portions of which were finalized upon 

publication of the Phase I final rule with 

comment period and became effective 

on January 4, 2002. This interim final 

rule responds to public comments 

received on the January 1998 proposed 

rule as well as public comments 

received on Phase I. Phase I comments 

necessarily informed our rulemaking 

with respect to finalizing the remainder 

of the January 1998 proposed rule 

because those comments addressed 

definitions and other matters that apply 

throughout the regulatory scheme. To 

publish yet another proposed rule on 

this matter would prevent affected 

parties from using important new or 

expanded exceptions. Even if we were 

able to finalize a proposed rule in an 

expedited fashion, the inability to use 

the new or expanded exceptions could 

expose DHS entities to significant 

financial liability for otherwise 

nonabusive relationships. Moreover, the 

public will not be denied the 

opportunity to comment on this rule 

because we are publishing it as an 

interim final rule with comment period. 

In accordance with section 902 of MMA, 

we are obligated to consider comments 

on this interim final rule and publish a 

final rule addressing those comments 

within three years.

In the Phase I preamble, we informed 

the public that we intended to publish 

a second final rule with comment 

period (Phase II) that would address the 

remainder of the proposed rule as well 

as comments on Phase I. The additional 

regulatory definitions and new 

regulatory exceptions in Phase II are 

inextricably intertwined with the Phase 

I final rule. The industry has patiently 

and eagerly awaited the publication of 

a single, comprehensive Phase II 

regulation that would provide the 

guidance and finality necessary for 

physicians and health care providers to 

structure their financial relationships in 

a manner that assures each party’s 

compliance with the statutory 

prohibition. It would be contrary to the 

public interest to upset expectations by 

publishing another proposed rule 

thereby denying affected parties the 

clarity and finality they expected to 

obtain with this rule. In addition, to 

extract a significant portion of the 

material in this interim final rule (much, 

if not all, of which will not be 

controversial) and to publish it 

separately in another proposed rule 

would thwart our efforts to present the 

unified and complete regulatory scheme 

necessary to support both compliance 

and enforcement efforts. 

In addition, further delay could 

disrupt or hinder our programmatic 

objective of improving beneficiaries’

access to care. For instance, this interim 

final rule with comment period creates 

a new exception for certain payments 

made by a hospital or federally qualified 

health center to a physician to retain the 

physician’s medical practice in a health 

professional shortage area. In addition, 

this interim final rule creates an 

exception for intra-family rural referrals 

and obstetrical malpractice insurance 

subsidies. Beneficiary access to care in 

underserved or rural areas is a critical 

programmatic objective. It is not in the 

public interest to delay finalizing the 

new exceptions designed to serve this 

purpose. 

For the reasons explained above, we 

find good cause to waive notice of 

proposed rulemaking and to issue this 

rule as an interim final rule with 

comment period. 

In accordance with the provisions of 

Executive Order 12866, Phase II of this 

rulemaking 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.

■ For the reasons set forth in the 

preamble, CMS amends 42 CFR chapter 

IV as set forth below:

PART 411—EXCLUSIONS FROM 

MEDICARE AND LIMITATIONS ON 

MEDICARE PAYMENT

■ 1. The authority citation for part 411 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

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

1395hh).

Subpart A—General Exclusions and 

Exclusion of Particular Services

■ 2. In § 411.1, paragraph (a) is 

republished to read as follows:

§ 411.1 Basis and scope. 

(a) Statutory basis. Sections 1814(a) 

and 1835(a) of the Act require that a 

physician certify or recertify a patient’s 

need for home health services but, in 

general, prohibit a physician from 

certifying or recertifying the need for 

services if the services will be furnished 

by an HHA in which the physician has 

a significant ownership interest, or with 

which the physician has a significant 

financial or contractual relationship. 

Sections 1814(c), 1835(d), and 1862 of 

the Act exclude from Medicare payment 

certain specified services. The Act 

provides special rules for payment of 

services furnished by the following: 

Federal providers or agencies (sections 

1814(c) and 1835(d)); hospitals and 

physicians outside of the U.S. (sections 

1814(f) and 1862(a)(4)); and hospitals 

and SNFs of the Indian Health Service 

(section 1880 of the Act). Section 1877 

of the Act sets forth limitations on 

referrals and payment for designated 

health services furnished by entities 

with which the referring physician (or 

an immediate family member of the 

referring physician) has a financial 

relationship.

* * * * *

Subpart J—Financial Relationships 

Between Physicians and Entities 

Furnishing Designated Health Services

■ 3. The heading for subpart J is revised 

as set forth above, and subpart J is 

revised to read as follows:

Subpart J—Financial Relationships 

Between Physicians and Entities Furnishing 

Designated Health Services 

Sec. 

411.350 Scope of subpart. 

411.351 Definitions. 

411.352 Group practice. 

411.353 Prohibition on certain referrals by 

physicians and limitations on billing. 

411.354 Financial relationship, 

compensation, and ownership or 

investment interest. 

411.355 General exceptions to the referral 

prohibition related to both ownership/

investment and compensation. 

411.356 Exceptions to the referral 

prohibition related to ownership or 

investment interests. 

411.357 Exceptions to the referral 

prohibition related to compensation 

arrangements. 

411.361 Reporting requirements.

Subpart J—Financial Relationships 

Between Physicians and Entities 

Furnishing Designated Health Services

§ 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 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16127

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 Part A or Part B report 

information concerning ownership, 

investment, or compensation 

arrangements in the form, in the 

manner, and at the times specified by 

CMS.

§ 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 and/or 

management 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 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) Clinical laboratory services. 

(2) Physical therapy, occupational 

therapy, and speech-language pathology 

services. 

(3) Radiology and certain other 

imaging services. 

(4) Radiation therapy services and 

supplies. 

(5) Durable medical equipment and 

supplies. 

(6) Parenteral and enteral nutrients, 

equipment, and supplies. 

(7) Prosthetics, orthotics, and 

prosthetic devices and supplies. 

(8) Home health services. 

(9) Outpatient prescription drugs. 

(10) Inpatient and outpatient hospital 

services. 

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) through (10) 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) Meets a safe harbor under the antikickback statute in § 1001.952 of this 

title, ‘‘Exceptions’’; 

(2) Has been specifically approved by 

the OIG in a favorable advisory opinion 

issued to a party to the particular 

arrangement (e.g., 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 

(3) Does not violate the anti-kickback 

provisions in section 1128B(b) of the 

Act. 

A favorable advisory opinion for 

purposes of this definition means an 

opinion in which the OIG opines that—

(1) 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 

(2) The party will not be subject to 

any OIG sanctions arising under the 

anti-kickback statute (for example, 

under sections 1128(a)(7) and 

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

with the party’s specific arrangement. 

Durable medical equipment (DME) 

and supplies has the meaning given in 

section 1861(n) of the Act and § 414.202 

of this chapter. 

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, not-for-profit corporation, 

or unincorporated association that 

furnishes DHS. An entity does not 

16128 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

include the referring physician himself 

or herself, but does include his or her 

medical practice. A person or entity is 

considered to be furnishing DHS if it- 

(i) Is the person or entity 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 pursuant to 

§ 424.80(b)(1) (employer), (b)(2) 

(facility), or (b)(3) (health care delivery 

system) of this chapter (other than a 

health care delivery system that is a 

health plan (as defined in § 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 pursuant to 

§ 424.80(b)(1) and (b)(2) of this chapter, 

with respect to any designated health 

services 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 3060.4 of the Medicare 

Carriers Manual (Purchased diagnostic 

tests), 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. 

An hourly payment for a physician’s 

personal services (that is, services 

performed by the physician personally 

and not by employees, contractors, or 

others) shall be considered to be fair 

market value if the hourly payment is 

established using either of the following 

two methodologies: 

(1) The hourly rate is 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. 

(2) The hourly rate is determined by 

averaging the 50th percentile national 

compensation level for physicians with 

the same physician specialty (or, if the 

specialty is not identified in the survey, 

for general practice) in at least four of 

the following surveys and dividing by 

2,000 hours. The surveys are: 

• Sullivan, Cotter & Associates, Inc.—

Physician Compensation and 

Productivity Survey 

• Hay Group—Physicians 

Compensation Survey 

• Hospital and Healthcare 

Compensation Services—Physician 

Salary Survey Report 

• Medical Group Management 

Association—Physician Compensation 

and Productivity Survey 

• ECS Watson Wyatt—Hospital and 

Health Care Management Compensation 

Report 

• William M. Mercer—Integrated 

Health Networks Compensation Survey 

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 means those 

services that meet the requirements of 

section 1861(s)(2)(A) of the Act, 42 CFR 

§ 410.26, and section 2050 of the 

Medicare Carriers (CMS Pub. 14–3), Part 

3—Claims Process, 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 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16129

inpatient hospital service (even if they 

are billed by a hospital under an 

assignment or reassignment). 

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 designated health services under 

section 1877 of the Act or that may 

qualify for certain exceptions under 

section 1877 of the Act. It is updated 

annually, as published in the Federal 

Register, and is posted on the CMS Web 

site at http://www.cms.gov/medlearn/

refphys.asp.

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 3060.7 of the 

Medicare Carriers Manual (CMS Pub. 

14–3), Part 3—Claims Process, 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 prescription drugs covered by 

Medicare Part B. 

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 65–10 

of the Medicare Coverage Issues Manual 

(CMS Pub. 6), 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 65–10 

of the Medicare Coverage Issues Manual 

(CMS Pub. 6), 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 at 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 at 

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 

16130 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

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 with the group practice to 

provide services to the group practice’s 

patients in the group practice’s 

facilities. The contract must contain the 

same restrictions on compensation that 

apply to members of the group practice 

under § 411.352(g) (or the contract must 

fit in the personal services exception in 

§ 411.357(d)), and the independent 

contractor’s arrangement with the group 

practice must comply with the 

reassignment rules at § 424.80(b)(3) of 

this chapter (see also section 3060.3 of 

the Medicare Carriers Manual (CMS 

Pub. 14–3), Part 3—Claims Process, 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 subcontractor) 

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. 

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 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, but does not include nuclear 

medicine procedures. 

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, or 

other imaging services, computerized 

axial tomography, or magnetic 

resonance imaging, as covered under 

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

§ 410.32 and § 410.34 of this chapter but 

does not include—

(1) X-ray , fluoroscopy, or ultrasound 

procedures that require the insertion of 

a needle, catheter, tube, or probe 

through the skin or into a body orifice;

(2) Radiology 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; and 

(3) Diagnostic nuclear medicine 

procedures. 

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, 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 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16131

(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 

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 plan) to a physician to 

satisfy a claim, submitted on a fee-forservice 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 plan (or a 

subcontractor of the insurer or 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. 

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)) that is primarily or 

exclusively engaged in the care and 

treatment of one of the following: 

Patients with a cardiac condition; 

patients with an orthopedic condition; 

patients receiving a surgical procedure; 

or 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 

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, secured by a negotiable 

promissory note, or subject to a similar 

mechanism to assure payment even in 

the event of default by the purchaser or 

obligated party. § 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, 

not-for-profit 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 in § 411.351. 

(c) Range of care. Each physician who 

is a member of the group, as defined in 

§ 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.

16132 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

(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 

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 an HPSA, as 

defined in § 411.351. 

(4) For a group practice located 

outside of an HPSA (as defined in 

§ 411.351), any time spent by a group 

practice member providing services in 

an 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 practice under § 411.457(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 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 referrals by the physician, 

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 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 in § 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. 

(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 should be 

calculated in a reasonable and verifiable 

manner that is not directly related to the 

volume or value of the physician’s 

referrals of DHS. A productivity bonus 

will be deemed not to relate directly to 

the volume or value of referrals of DHS 

if one of the following conditions is met:

(i) The bonus is based on the 

physician’s total patient encounters or 

relative value units (RVUs). (The 

methodology for establishing RVUs is 

set forth in § 414.22 of this chapter.) 

(ii) The bonus is based on the 

allocation of the physician’s 

compensation attributable to services 

that are not DHS payable by any Federal 

health care program or private payer. 

(iii) Revenues derived from DHS are 

less than 5 percent of the group 

practice’s total revenues, and the 

allocated portion of those revenues to 

each physician in the group practice 

constitutes 5 percent or less of his or her 

total compensation from the group 

practice. 

(4) Supporting documentation 

verifying the method used to calculate 

the profit share or productivity bonus 

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

section, and the resulting amount of 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16133

compensation, must be made available 

to the Secretary upon request.

§ 411.353 Prohibition on certain referrals 

by physicians and limitations on billing. 

(a) Prohibition on referrals. Except as 

provided in this subpart, a physician 

who has a direct or indirect financial 

relationship with an entity, or who has 

an immediate family member who has 

a direct or indirect financial 

relationship with the entity, may not 

make a referral to that entity for the 

furnishing of DHS for which payment 

otherwise may be made under Medicare. 

A physician’s prohibited financial 

relationship with an entity that 

furnishes DHS is not imputed to his or 

her group practice or its members or its 

staff; however, a referral made by a 

physician’s group practice, its members, 

or its staff may be imputed to the 

physician, if the physician directs the 

group practice, its members, or its staff 

to make the referral or if the physician 

controls referrals made by his or her 

group practice, its members, or its staff. 

(b) Limitations on billing. An entity 

that furnishes DHS pursuant to a referral 

that is prohibited by paragraph (a) of 

this section may not present or cause to 

be presented a claim or bill to the 

Medicare program or to any individual, 

third party payer, or other entity for the 

DHS performed pursuant to the 

prohibited referral. 

(c) Denial of payment. 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 under a prohibited 

referral must refund all collected 

amounts on a timely basis, as defined in 

§ 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) This paragraph (f) may only be 

used by an entity once every 3 years 

with respect to the same referring 

physician. 

(4) This paragraph (f) does not apply 

if the exception with which the 

financial relationship previously 

complied was § 411.357(k) or (m).

§ 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) 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. (3) 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 

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); or 

(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). 

(4) An ownership or investment 

interest that meets an exception set forth 

in § 411.355 or § 411.356 need not also 

meet an exception for compensation 

arrangements set forth in § 411.357 with 

respect to profit distributions, 

dividends, or interest payments on 

secured obligations. 

(5) Indirect ownership or investment 

interest. (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 

16134 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

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 act 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. 

(1) 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’’ in 

§ 411.351. (However, any other portion 

of the arrangement may still constitute 

a compensation arrangement.)

(2) Indirect compensation 

arrangement. 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 

otherwise reflects, 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 

§ 411.354(d)(2) or (d)(3). 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 otherwise reflects, 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 otherwise reflects, the volume or 

value of referrals or other business 

generated by the referring physician for 

the entity furnishing the DHS. 

(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 will be considered 

‘‘set in advance’’ if the aggregate 

compensation, a time-based or per unit 

of service based (whether per-use or perservice) 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 reflects 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) will be 

deemed not to take into account ‘‘the 

volume or value of referrals’’ if the 

compensation is fair market value for 

services or items actually provided and 

does not vary during the course of the 

compensation agreement in any manner 

that takes into account referrals of DHS. 

(3) Unit-based compensation 

(including time-based or per unit of 

service based compensation) will be 

deemed to not take into account ‘‘other 

business generated between the parties’’

so long as 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 will not be considered ‘‘other 

business generated’’ by the referring 

physician). 

(4) A physician’s compensation from 

a bona fide employer or under a 

managed care or other contract may be 

conditioned on the physician’s referrals 

to a particular provider, practitioner, or 

supplier, so long as 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 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; and 

(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 relationship. 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 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16135

contract. § 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 in § 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, sbull; physician services’’

include only those ‘‘incident to’’

services (as defined in § 411.351) that 

are physician services under § 410.20(a) 

of this chapter.

(3) All other ‘‘incident to’’ services 

(for example, diagnostic tests, physical 

therapy) are outside the scope of 

paragraph (a) of this section. 

(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 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 in 

§ 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 

in § 411.351) that is used by the group 

practice for the provision of some or all 

of the group practice’s clinical 

laboratory services. 

(iii) A centralized building (as defined 

in § 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 the billing 

arrangement meets the requirements of 

§ 424.80(b)(6) 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 purposes of ambulating, 

uses in order to depart from the 

physician’s office, or is a blood glucose 

monitor (including one starter set of test 

strips and lancets, consisting of no more 

than 100 of each). A blood glucose 

monitor may be furnished only by a 

physician or employee of a physician or 

group practice that also furnishes 

outpatient diabetes self-management 

training to the patient. 

(ii) The item is furnished in a building 

that meets the ‘‘same building’’

requirements in the in-office ancillary 

services exception as part of the 

treatment for the specific condition for 

which the patient-physician encounter 

occurred. 

(iii) The item is furnished personally 

by the physician who ordered the DME, 

16136 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

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 located 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 managed care organization 

(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; and 

(D) Provides either substantial 

academic services or substantial clinical 

teaching services (or a combination of 

academic services and clinical teaching 

services) for which the faculty member 

receives compensation as part of his or 

her employment relationship with the 

academic medical center. Parties should 

use a reasonable and consistent method 

for calculating a physician’s academic 

services and clinical teaching services. 

A physician will be deemed to meet this 

requirement if he or she spends at least 

20 percent of his or her professional 

time or 8 hours per week providing 

academic services or clinical teaching 

services (or a combination of academic 

services or clinical teaching services). A 

physician who does not spend at least 

20 percent of his or her professional 

time or 8 hours per week providing 

academic services or clinical teaching 

services (or a combination of academic 

services or clinical teaching services) is 

not precluded from qualifying under 

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

(ii) The total compensation paid by all 

academic medical center components to 

the referring physician is set in advance 

and, in the aggregate, does not exceed 

fair market value for the services 

provided, and 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 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. 

(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 hospital(s) 

in which a majority of the physicians on 

the medical staff consists of physicians 

who are faculty members and a majority 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16137

of all hospital admissions are 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 provision, 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. 

(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 a 

Medicare-certified ASC (under part 416 

of this chapter) 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. 

(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 furnished in or by an ESRD 

facility. EPO and other dialysis-related 

drugs that meet the following 

conditions: 

(1) The EPO and other dialysis-related 

drugs are furnished in or by an ESRD 

facility. For purposes of this paragraph 

(g): ‘‘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 (g) does not apply to any 

financial relationship between the 

referring physician and any entity other 

than the ESRD facility that furnishes the 

EPO and other dialysis-related drugs to 

the patient. 

(h) Preventive screening tests, 

immunizations, and vaccines.

Preventive screening tests, 

immunizations, and vaccines that meet 

the following conditions: 

(1) The preventive screening tests, 

immunizations, and vaccines are subject 

to CMS-mandated frequency limits. 

(2) 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. 

(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 in 

§ 411.356(c)(1); 

(ii) Except as provided in paragraph 

(j)(1)(iii) of this section, no other person 

or entity is available to furnish the 

services in a timely manner in light of 

the patient’s condition within 25 miles 

of the patient’s residence; 

(iii) In the case of services furnished 

to patients where they reside (for 

example, home health services or inhome 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 from the patient’s 

residence.

§ 411.356 Exceptions to the referral 

prohibition related to ownership or 

investment interests. 

For purposes of § 411.353, the 

following ownership or investment 

interests do not constitute a financial 

relationship: 

(a) Publicly-traded securities.

Ownership of investment securities 

(including shares or bonds, debentures, 

notes, or other debt instruments) that at 

the time the DHS referral was made 

could be purchased on the open market 

and that meet the requirements of 

paragraphs (a)(1) and (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 

16138 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

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 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. A rural area for 

purposes of this paragraph (c)(1) is an 

area that is not an urban area as defined 

in § 412.62(f)(1)(ii) of this chapter. 

(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.

§ 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 an agreement of at least 1 year 

that met the conditions of this 

paragraph (a) will satisfy this paragraph 

(a), provided 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 an agreement of at least 1 year 

that met the conditions of this 

paragraph (b) will satisfy this paragraph 

(b), provided 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, an 

immediate family member of the 

physician, 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 will be met if all 

separate arrangements between the 

entity and the physician and the entity 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16139

and any family members incorporate 

each other by reference or if they crossreference a master list of contracts that 

is maintained and updated centrally and 

is available for review by the Secretary 

upon request. The master list should be 

maintained in a manner that preserves 

the historical record of 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 in 

§ 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, 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 State or Federal law. 

(2) Physician incentive plan 

exception. In the case of a physician 

incentive plan (as defined in § 411.351) 

between a physician and an entity (or 

downstream subcontractor), 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 

subcontractor 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 in 

§ 422.208, the entity (and/or any 

downstream contractor) complies with 

the requirements concerning physician 

incentive plans set forth at § 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 

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 a separate employment 

or services contract that complies with 

§ 411.354(d)(4)). 

(2) 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. A physician 

will be considered to have relocated his 

or her medical practice if—

(i) The physician moves his or her 

medical practice at least 25 miles; or 

(ii) 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) Residents and physicians who 

have been in practice 1 year or less will 

not be subject to the relocation 

requirement of this paragraph, except 

that the recruited resident or physician 

must establish his or her medical 

practice in the geographic area served 

by the hospital. 

(4) In the case of remuneration 

provided by a hospital to a physician 

either indirectly through payments 

made to another physician or physician 

practice, or directly to a physician who 

joins a physician practice, the following 

additional conditions must be met: 

(i) The written agreement in 

§ 411.357(e)(1) is also signed by the 

party to whom the payments are directly 

made; 

(ii) Except for actual costs incurred by 

the physician or 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 made by the hospital to a 

recruited physician who joins a 

physician or physician practice, the 

costs allocated by the physician or 

physician practice to the recruited 

physician do not exceed the actual 

additional incremental costs attributable 

to the recruited physician; 

(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 to 

be 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 or physician 

practice may not impose additional 

practice restrictions on the recruited 

physician other than conditions related 

to quality of care; and 

(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) This paragraph (e) applies to 

remuneration provided by a federally 

qualified health center in the same 

manner as it applies to remuneration 

provided by a hospital, so long as the 

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

Act), or any Federal or State law or 

16140 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

regulation governing billing or claims 

submission. 

(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. 

(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 excepted under 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 just 

those defined as ‘‘services’’ for purposes 

of the Medicare program in § 400.202). 

(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 made, 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) Non-monetary compensation up to 

$300. (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 

year, 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 $300 limit in this paragraph 

(k) will be adjusted each calendar year 

to the nearest whole dollar by the 

increase in the Consumer Price IndexUrban All Items (CPI–U) for the 12–

month period ending the preceding 

September 30. CMS intends to display 

as soon as possible after September 30 

each year, both the increase in the CPI–

U for the 12–month period and the new 

non-monetary compensation limit on 

the physician self-referral Web site: 

http://cms.hhs.gov/medlearn/

refphys.asp. 

(l) Fair market value compensation.

Compensation resulting from an 

arrangement between an entity and a 

physician (or an immediate family 

member) or any group of physicians 

(regardless of whether the group meets 

the definition of a group practice set 

forth in § 411.352) for the provision of 

items or services by the physician (or an 

immediate family member) or group of 

physicians to the entity, 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 

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 would be 

commercially reasonable (taking into 

account the nature and scope of the 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16141

transaction) and furthers the legitimate 

business purposes of the parties. 

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

Act), or any Federal or State law or 

regulation governing billing or claims 

submission. 

(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 State or Federal 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 provided 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, will meet the ‘‘on campus’’

requirement of this paragraph (m). 

(4) The compensation is reasonably 

related to the provision of, or designed 

to facilitate directly or indirectly the 

delivery of, medical services at the 

hospital. 

(5) The compensation is of low value 

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

each occurrence of the benefit (for 

example, each meal given to a physician 

while he or she is serving patients who 

are hospitalized must be of low value). 

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

will be 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 intends to display as soon as 

possible after September 30 each year 

both the increase in the CPI–U for the 

12–month period and the new limits on 

the physician self-referral Web site: 

http://cms.hhs.gov/medlearn/

refphys.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 managed care organization or 

an independent physicians’ 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 antikickback 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 ascribed 

to those terms 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 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, reporting); specific training 

regarding the requirements of Federal 

and State health care programs (for 

example, billing, coding, reasonable and 

necessary services, documentation, 

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 (but not 

including continuing medical 

education). 

(p) Indirect compensation 

arrangements. Indirect compensation 

arrangements, as defined in 

§ 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 value or volume 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. 

(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 in § 411.351) 

offered by an entity 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 the 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’s professional courtesy 

policy 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; 

(5) If the professional courtesy 

involves any whole or partial reduction 

of any coinsurance obligation, the 

insurer is informed in writing of the 

reduction; and 

16142 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

(6) 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) Remuneration provided by a 

hospital or federally qualified health 

center directly to a physician on the 

hospital’s or federally qualified health 

center’s medical staff to retain the 

physician’s medical practice in the 

geographic area served by the hospital 

or federally qualified health center (as 

defined in paragraph (e)(2) of this 

section), if all of the following 

conditions are met: 

(i) Paragraphs 411.357(e)(1)(i) through 

411.357(e)(1)(iv) are satisfied; 

(ii) The geographic area served by the 

hospital or federally qualified health 

center is a HPSA (regardless of the 

physician’s specialty) or is an area with 

demonstrated need for the physician as 

determined by the Secretary in an 

advisory opinion issued according to 

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

(iii) The physician has 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 

and would 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; 

(iv) The retention payment is limited 

to the lower of—

(A) The amount obtained by 

subtracting (1) the physician’s current 

income from physician and related 

services from (2) 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 

(B) 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; 

(v) Any retention payment is subject 

to the same obligations and restrictions, 

if any, on repayment or forgiveness of 

indebtedness as the bona fide

recruitment offer; 

(vi) The hospital or federally qualified 

health center does not enter into a 

retention arrangement with a particular 

referring physician more frequently than 

once every 5 years and 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; 

(vii) The arrangement otherwise 

complies with all of the conditions of 

this section; and 

(viii) 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. 

(2) The Secretary may waive the 

relocation requirement of paragraph 

(t)(1) 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 according to section 1877(g)(6) of 

the Act, if the retention payment 

arrangement otherwise complies with 

all of the conditions of this paragraph. 

(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. § 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) of each 

physician who has a reportable financial 

relationship with the entity. 

(2) The name and UPIN of each 

physician who has an immediate family 

member (as defined in § 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 and/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 in § 411.354(b) or any 

compensation arrangement, as defined 

in § 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 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16143

1CPT codes and descriptions only are copyright 

2003 American Medical Association. All rights are 

reserved and applicable FARS/DFARS clauses 

apply.

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.

PART 424—CONDITIONS FOR 

MEDICARE PAYMENT

■ 1. 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

■ 2. In § 424.22, paragraph (d) is 

republished to read as set forth below.

§ 424.22 Requirements for home health 

services.

* * * * *

(d) Limitation on the performance of 

certification and plan of treatment 

functions. The need for home health 

services to be provided by an HHA may 

not be certified or recertified, and a plan 

of treatment may not be established and 

reviewed, by any physician who has a 

financial relationship, as defined in 

§ 411.351 of this chapter, with that 

HHA, unless the physician’s 

relationship meets one of the exceptions 

in section 1877 of the Act, which sets 

forth general exceptions to the referral 

prohibition related to both ownership/

investment and compensation; 

exceptions to the referral prohibition 

related to ownership or investment 

interests; and exceptions to the referral 

prohibition related to compensation 

arrangements.

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare-Hospital 

Insurance; and Program No. 93.774, 

Medicare-Supplementary Medical Insurance 

Program)

Dated: February 13, 2003. 

Thomas A. Scully, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Dated: October 23, 2003. 

Tommy G. Thompson, 

Secretary.

Note: The following attachment will not 

appear in the Code of Federal Regulations.

Attachment—List of CPT1/HCPCS Codes for 

Purposes of Section 1877 of the Social 

Security Act—Effective July 26, 2004 

Clinical Laboratory Services 

Include CPT codes for all clinical 

laboratory services in the 80000 series, 

except EXCLUDE CPT codes for the 

following blood component collection 

services:

86890 Autologous blood process 

86891 Autologous blood, op salvage 

86927 Plasma, fresh frozen 

86930 Frozen blood prep 

86931 Frozen blood thaw 

86932 Frozen blood freeze/thaw 

86945 Blood product/irradiation 

86950 Leukacyte transfusion 

86965 Pooling blood platelets 

86985 Split blood or products

Include the following CPT and HCPCS 

level 2 codes for other clinical laboratory 

services:

0010T TB test, gamma interferon 

0023T Phenotype drug test, hiv 1 

0026T Measure remnant lipoproteins 

0030T Antiprothrombin antibody 

0041T Detect ur infect agnt w/cpas 

0043T Co expired gas analysis 

0058T Cryopreservation, ovary tiss 

0059T Cryopreservation, oocyte 

G0001 Drawing blood for specimen 

G0027 Semen analysis 

G0103 Psa, total screening 

G0107 CA screen; fecal blood test 

G0123 Screen cerv/vag thin layer 

G0124 Screen c/v thin layer by MD 

G0141 Scr c/v cyto, autosys and md 

G0143 Scr c/v cyto, thinlayer, rescr 

G0144 Scr c/v cyto, thinlayer, rescr 

G0145 Scr c/v cyto, thinlayer, rescr 

G0147 Scr c/v cyto, automated sys 

G0148 Scr c/v cyto, autosys, rescr 

G0306 CBC/diffwbc w/o platelet 

G0307 CBC without platelet 

G0328 Fecal blood scrn immunoassay 

P2028 Cephalin floculation test 

P2029 Congo red blood test 

P2033 Blood thymol turbidity 

P2038 Blood mucoprotein 

P3000 Screen pap by tech w md supv 

P3001 Screening pap smear by phys 

P9612 Catheterize for urine spec 

P9615 Urine specimen collect mult 

Q0111 Wet mounts/ w preparations 

Q0112 Potassium hydroxide preps 

Q0113 Pinworm examinations 

Q0114 Fern test 

Q0115 Post-coital mucous exam

Physical Therapy, Occupational Therapy, 

and Speech-Language Pathology 

Include the following CPT codes for the 

physical therapy/occupational therapy/

speech-language pathology services in the 

97000 series:

97001 Pt evaluation 

97002 Pt re-evaluation 

97003 Ot evaluation 

97004 Ot re-evaluation 

97010 Hot or cold packs therapy 

97012 Mechanical traction therapy 

97016 Vasopneumatic device therapy 

97018 Paraffin bath therapy 

97020 Microwave therapy 

97022 Whirlpool therapy 

97024 Diathermy treatment 

97026 Infrared therapy 

97028 Ultraviolet therapy 

97032 Electrical stimulation 

97033 Electric current therapy 

97034 Contrast bath therapy 

97035 Ultrasound therapy 

97036 Hydrotherapy 

97039 Physical therapy treatment 

97110 Therapeutic exercises 

97112 Neuromuscular reeducation 

97113 Aquatic therapy/exercises 

97116 Gait training therapy 

97124 Massage therapy 

97139 Physical medicine procedure 

97140 Manual therapy 

97150 Group therapeutic procedures 

97504 Orthotic training 

97520 Prosthetic training 

97530 Therapeutic activities 

97532 Cognitive skills development 

97533 Sensory integration 

97535 Self care mngment training 

97537 Community/work reintegration 

97542 Wheelchair mngment training 

97545 Work hardening 

97546 Work hardening add-on 

97601 Wound(s) care, selective 

97602 Wound(s) care, nonselective 

97703 Prosthetic checkout 

97750 Physical performance test 

97755 Assistive technology assess 

97799 Physical medicine procedure

Include CPT codes for physical therapy/

occupational therapy/speech-language 

pathology services not in the 97000 series:

64550 Apply neurostimulator 

90901 Biofeedback train, any meth 

90911 Biofeedback peri/uro/rectal 

92507 Speech/hearing therapy 

92508 Speech/hearing therapy 

92526 Oral function therapy 

92597 Oral speech device eval 

92607 Ex for speech device rx, 1hr 

92608 Ex for speech device rx addl 

92609 Use of speech device service 

92610 Evaluate swallowing function 

92611 Motion fluoroscopy/swallow 

92612 Endoscopy swallow tst (fees) 

92614 Laryngoscopic sensory test 

92616 Fees w/laryngeal sense test 

93797 Cardiac rehab 

93798 Cardiac rehab/monitor 

94667 Chest wall manipulation 

94668 Chest wall manipulation 

95831 Limb muscle testing, manual 

95832 Hand muscle testing, manual 

95833 Body muscle testing, manual 

95834 Body muscle testing, manual 

16144 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

95851 Range of motion measurements 

95852 Range of motion measurements 

96000 Motion analysis, video/3d 

96001 Motion test w/ft press meas 

96002 Dynamic surface emg 

96003 Dynamic fine wire emg 

96105 Assessment of aphasia 

96110 Developmental test, lim 

96111 Developmental test, extend 

96115 Neurobehavior status exam 

0029T Magnetic tx for incontinence

Include HCPCS level 2 codes for the 

following physical therapy/occupational 

therapy/speech-language pathology services:

G0279 Excorp shock tx, elbow epi 

G0280 Excorp shock tx other than 

G0281 Elec stim unattend for press 

G0283 Elec stim other than wound

Radiology and Certain Other Imaging 

Services 

Include the following codes in the CPT 

70000 series:

70100 X-ray exam of jaw 

70110 X-ray exam of jaw 

70120 X-ray exam of mastoids 

70130 X-ray exam of mastoids 

70134 X-ray exam of middle ear 

70140 X-ray exam of facial bones 

70150 X-ray exam of facial bones 

70160 X-ray exam of nasal bones 

70190 X-ray exam of eye sockets 

70200 X-ray exam of eye sockets 

70210 X-ray exam of sinuses 

70220 X-ray exam of sinuses 

70240 X-ray exam, pituitary saddle 

70250 X-ray exam of skull 

70260 X-ray exam of skull 

70300 X-ray exam of teeth 

70310 X-ray exam of teeth 

70320 Full mouth x-ray of teeth 

70328 X-ray exam of jaw joint 

70330 X-ray exam of jaw joints 

70336 Magnetic image, jaw joint 

70350 X-ray head for orthodontia 

70355 Panoramic x-ray of jaws 

70360 X-ray exam of neck 

70370 Throat x-ray & fluoroscopy 

70371 Speech evaluation, complex 

70380 X-ray exam of salivary gland 

70450 Ct head/brain w/o dye 

70460 Ct head/brain w/dye 

70470 Ct head/brain w/o & w/dye 

70480 Ct orbit/ear/fossa w/o dye 

70481 Ct orbit/ear/fossa w/dye 

70482 Ct orbit/ear/fossa w/o & w/dye 

70486 Ct maxillofacial w/o dye 

70487 Ct maxillofacial w/dye 

70488 Ct maxillofacial w/o & w/dye 

70490 Ct soft tissue neck w/o dye 

70491 Ct soft tissue neck w/dye 

70492 Ct sft tsue nck w/o & w/dye 

70496 Ct angiography, head 

70498 Ct angiography, neck 

70540 Mri orbit/face/neck w/o dye 

70542 Mri orbit/face/neck w/dye 

70543 Mri orbt/fac/nck w/o & w/dye 

70544 Mr angiography head w/o dye 

70545 Mr angiography head w/dye 

70546 Mr angiograph head w/o & w/dye 

70547 Mr angiography neck w/o dye 

70548 Mr angiography neck w/dye 

70549 Mr angiograph neck w/o & w/dye 

70551 Mri brain w/o dye 

70552 Mri brain w/dye 

70553 Mri brain w/o & w/dye 

71010 Chest x-ray 

71015 Chest x-ray 

71020 Chest x-ray 

71021 Chest x-ray 

71022 Chest x-ray 

71023 Chest x-ray and fluoroscopy 

71030 Chest x-ray 

71034 Chest x-ray and fluoroscopy 

71035 Chest x-ray 

71100 X-ray exam of ribs 

71101 X-ray exam of ribs/chest 

71110 X-ray exam of ribs 

71111 X-ray exam of ribs/chest 

71120 X-ray exam of breastbone 

71130 X-ray exam of breastbone 

71250 Ct thorax w/o dye 

71260 Ct thorax w/dye 

71270 Ct thorax w/o & w/dye 

71275 Ct angiography, chest 

71550 Mri chest w/o dye 

71551 Mri chest w/dye 

71552 Mri chest w/o & w/dye 

71555 Mri angio chest w or w/o dye 

72010 X-ray exam of spine 

72020 X-ray exam of spine 

72040 X-ray exam of neck spine 

72050 X-ray exam of neck spine 

72052 X-ray exam of neck spine 

72069 X-ray exam of trunk spine 

72070 X-ray exam of thoracic spine 

72072 X-ray exam of thoracic spine 

72074 X-ray exam of thoracic spine 

72080 X-ray exam of trunk spine 

72090 X-ray exam of trunk spine 

72100 X-ray exam of lower spine 

72110 X-ray exam of lower spine 

72114 X-ray exam of lower spine 

72120 X-ray exam of lower spine 

72125 Ct neck spine w/o dye 

72126 Ct neck spine w/dye 

72127 Ct neck spine w/o & w/dye 

72128 Ct chest spine w/o dye 

72129 Ct chest spine w/dye 

72130 Ct chest spine w/o & w/dye 

72131 Ct lumbar spine w/o dye 

72132 Ct lumbar spine w/dye 

72133 Ct lumbar spine w/o & w/dye 

72141 Mri neck spine w/o dye 

72142 Mri neck spine w/dye 

72146 Mri chest spine w/o dye 

72147 Mri chest spine w/dye 

72148 Mri lumbar spine w/o dye 

72149 Mri lumbar spine w/dye 

72156 Mri neck spine w/o & w/dye 

72157 Mri chest spine w/o & w/dye 

72158 Mri lumbar spine w/o & w/dye 

72170 X-ray exam of pelvis 

72190 X-ray exam of pelvis 

72191 Ct angiograph pelv w/o & w/dye 

72192 Ct pelvis w/o dye 

72193 Ct pelvis w/dye 

72194 Ct pelvis w/o & w/dye 

72195 Mri pelvis w/o dye 

72196 Mri pelvis w/dye 

72197 Mri pelvis w/o & w/dye 

72198 Mr angio pelvis w/o & w/dye

72200 X-ray exam sacroiliac joints 

72202 X-ray exam sacroiliac joints 

72220 X-ray exam of tailbone 

73000 X-ray exam of collar bone 

73010 X-ray exam of shoulder blade 

73020 X-ray exam of shoulder 

73030 X-ray exam of shoulder 

73050 X-ray exam of shoulders 

73060 X-ray exam of humerus 

73070 X-ray exam of elbow 

73080 X-ray exam of elbow 

73090 X-ray exam of forearm 

73092 X-ray exam of arm, infant 

73100 X-ray exam of wrist 

73110 X-ray exam of wrist 

73120 X-ray exam of hand 

73130 X-ray exam of hand 

73140 X-ray exam of finger(s) 

73200 Ct upper extremity w/o dye 

73201 Ct upper extremity w/dye 

73202 Ct uppr extremity w/o & w/dye 

73206 Ct angio upr extrm w/o & w/dye 

73218 MRI upper extremity w/o dye 

73219 MRI upper extremity w/dye 

73220 MRI uppr extremity w/o & w/dye 

73221 MRI joint upr extrem w/o dye 

73222 MRI joint upr extrem w/dye 

73223 MRI joint upr extr w/o & w/dye 

73500 X-ray exam of hip 

73510 X-ray exam of hip 

73520 X-ray exam of hips 

73540 X-ray exam of pelvis & hips 

73550 X-ray exam of thigh 

73560 X-ray exam of knee, 1 or 2 

73562 X-ray exam of knee, 3 

73564 X-ray exam, knee, 4 or more 

73565 X-ray exam of knees 

73590 X-ray exam of lower leg 

73592 X-ray exam of leg, infant 

73600 X-ray exam of ankle 

73610 X-ray exam of ankle 

73620 X-ray exam of foot 

73630 X-ray exam of foot 

73650 X-ray exam of heel 

73660 X-ray exam of toe(s) 

73700 Ct lower extremity w/o dye 

73701 Ct lower extremity w/dye 

73702 Ct lwr extremity w/o & w/dye 

73706 Ct angio lwr extr w/o & w/dye 

73718 MRI lower extremity w/o dye 

73719 MRI lower extremity w/dye 

73720 MRI lwr extremity w/o & w/dye 

73721 MRI jnt of lwr extre w/o dye 

73722 MRI joint of lwr extr w/dye 

73723 MRI joint lwr extr w/o & w/dye 

73725 Mr ang lwr ext w or w/o dye 

74000 X-ray exam of abdomen 

74010 X-ray exam of abdomen 

74020 X-ray exam of abdomen 

74022 X-ray exam series, abdomen 

74150 Ct abdomen w/o dye 

74160 Ct abdomen w/dye 

74170 Ct abdomen w/o & w/dye 

74175 Ct angio abdom w/o & w/dye 

74181 MRI abdomen w/o dye 

74182 MRI abdomen w/dye 

74183 MRI abdomen w/o & w/dye 

74185 MRI angio, abdom w or w/o dye 

74210 Contrst x-ray exam of throat 

74220 Contrast x-ray, esophagus 

74230 Cine/vid x-ray, throat/esoph 

74240 X-ray exam, upper gi tract 

74241 X-ray exam, upper gi tract 

74245 X-ray exam, upper gi tract 

74246 Contrst x-ray uppr gi tract 

74247 Contrst x-ray uppr gi tract 

74249 Contrst x-ray uppr gi tract 

74250 X-ray exam of small bowel 

74290 Contrast x-ray, gallbladder 

74291 Contrast x-rays, gallbladder 

74710 X-ray measurement of pelvis 

75552 Heart mri for morph w/o dye 

75553 Heart mri for morph w/dye 

75554 Cardiac MRI/function 

75555 Cardiac MRI/limited study 

75635 Ct angio abdominal arteries 

Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 16145

76000 Fluoroscope examination 

76006 X-ray stress view 

76010 X-ray, nose to rectum 

76020 X-rays for bone age 

76040 X-rays, bone evaluation 

76061 X-rays, bone survey 

76062 X-rays, bone survey 

76065 X-rays, bone evaluation 

76066 Joint survey, single view 

76070 Ct bone density, axial 

76071 Ct bone density, peripheral 

76075 Dexa, axial skeleton study 

76076 Dexa, peripheral study 

76078 Radiographic absorptiometry 

76082 Computer mammogram add-on 

76083 Computer mammogram add-on 

76090 Mammogram, one breast 

76091 Mammogram, both breasts 

76092 Mammogram, screening 

76093 Magnetic image, breast 

76094 Magnetic image, both breasts 

76100 X-ray exam of body section 

76101 Complex body section x-ray 

76102 Complex body section x-rays 

76120 Cine/video x-rays 

76125 Cine/video x-rays add-on 

76150 X-ray exam, dry process 

76370 Ct scan for therapy guide 

76375 3d/holograph reconstr add-on 

76380 CAT scan follow-up study 

76400 Magnetic image, bone marrow 

76499 Radiographic procedure 

76506 Echo exam of head 

76511 Echo exam of eye 

76512 Echo exam of eye 

76513 Echo exam of eye, water bath 

76514 Echo exam of eye, thickness 

76516 Echo exam of eye 

76519 Echo exam of eye 

76536 Us Exam of head and neck

76604 Us exam, chest, b-scan 

76645 Us exam, breast(s) 

76700 Us exam, abdom, complete 

76705 Echo exam of abdomen 

76770 Us exam abdo back wall, comp 

76775 Us exam abdo back wall, lim 

76778 Us exam kidney transplant 

76800 Us exam, spinal canal 

76801 Ob us < 14 wks, single fetus 

76802 Ob us < 14 wks, add’l fetus 

76805 Ob us >/= 14 wks, sngl fetus 

76810 Ob us >/= 14 wks, addl fetus 

76811 Ob us, detailed, sngl fetus 

76812 Ob us, detailed, addl fetus 

76815 Ob us, limited, fetus(s) 

76816 Ob us, follow-up, per fetus 

76818 Fetal biophys profile w/nst 

76819 Fetal biophys profil w/o nst 

76825 Echo exam of fetal heart 

76826 Echo exam of fetal heart 

76827 Echo exam of fetal heart 

76828 Echo exam of fetal heart 

76856 Us exam, pelvic, complete 

76857 Us exam, pelvic, limited 

76870 Us exam, scrotum 

76880 Us exam, extremity 

76885 Us exam infant hips, dynamic 

76886 Us exam infant hips, static 

76970 Ultrasound exam follow-up 

76977 Us bone density measure 

76999 Echo examination procedure

Include the following CPT codes for 

echocardiography and vascular ultrasound:

93303 Echo transthoracic 

93304 Echo transthoracic 

93307 Echo exam of heart 

93308 Echo exam of heart 

93320 Doppler echo exam, heart [if used in 

conjunction with 93303–93308] 

93321 Doppler echo exam, heart [if used in 

conjunction with 93303–93308] 

93325 Doppler color flow add-on [if used in 

conjunction with 93303–93308] 

93875 Extracranial study 

93880 Extracranial study 

93882 Extracranial study 

93886 Intracranial study 

93888 Intracranial study 

93922 Extremity study 

93923 Extremity study 

93924 Extremity study 

93925 Lower extremity study 

93926 Lower extremity study 

93930 Upper extremity study 

93931 Upper extremity study 

93965 Extremity study 

93970 Extremity study 

93971 Extremity study 

93975 Vascular study 

93976 Vascular study 

93978 Vascular study 

93979 Vascular study 

93980 Penile vascular study 

93981 Penile vascular study 

93990 Doppler flow testing

Include the following CPT and HCPCS 

level 2 codes:

51798 Us urine capacity measure 

78350 Bone mineral, single photon 

91110 Gi tract capsule endoscopy 

0028T Dexa body composition study 

0042T Ct perfusion w/contrast, cbf 

G0130 Single energy x-ray study 

G0202 Screening mammography digital 

G0204 Diagnostic mammography digital 

G0206 Diagnostic mammography digital 

G0288 Recon, CTA for surg plan 

R0070 Transport portable x-ray 

R0075 Transport port x-ray multipl 

Radiation Therapy Services and Supplies 

Include the following codes in the CPT 

70000 series:

77261 Radiation therapy planning 

77262 Radiation therapy planning 

77263 Radiation therapy planning 

77280 Set radiation therapy field 

77285 Set radiation therapy field 

77290 Set radiation therapy field 

77295 Set radiation therapy field 

77299 Radiation therapy planning 

77300 Radiation therapy dose plan 

77301 Radiotherapy dose plan, imrt 

77305 Teletx isodose plan simple 

77310 Teletx isodose plan intermed 

77315 Teletx isodose plan complex 

77321 Special teletx port plan 

77326 Brachytx isodose calc simp 

77327 Brachytx isodose calc interm 

77328 Brachytx isodose plan compl 

77331 Special radiation dosimetry 

77332 Radiation treatment aid(s) 

77333 Radiation treatment aid(s) 

77334 Radiation treatment aid(s) 

77336 Radiation physics consult 

77370 Radiation physics consult 

77399 External radiation dosimetry 

77401 Radiation treatment delivery 

77402 Radiation treatment delivery 

77403 Radiation treatment delivery 

77404 Radiation treatment delivery 

77406 Radiation treatment delivery 

77407 Radiation treatment delivery 

77408 Radiation treatment delivery 

77409 Radiation treatment delivery 

77411 Radiation treatment delivery 

77412 Radiation treatment delivery 

77413 Radiation treatment delivery 

77414 Radiation treatment delivery 

77416 Radiation treatment delivery 

77417 Radiology port film(s) 

77418 Radiation tx delivery, imrt 

77427 Radiation tx management, x5

77431 Radiation therapy management 

77432 Stereotactic radiation trmt 

77470 Special radiation treatment 

77499 Radiation therapy management 

77520 Proton trmt, simple w/o comp 

77522 Proton trmt, simple w/comp 

77523 Proton trmt, intermediate 

77525 Proton treatment, complex 

77600 Hyperthermia treatment 

77605 Hyperthermia treatment 

77610 Hyperthermia treatment 

77615 Hyperthermia treatment 

77620 Hyperthermia treatment 

77750 Infuse radioactive materials 

77761 Apply intrcav radiat simple 

77762 Apply intrcav radiat interm 

77763 Apply intrcav radiat compl 

77776 Apply interstit radiat simpl 

77777 Apply interstit radiat inter 

77778 Apply interstit radiat compl 

77781 High intensity brachytherapy 

77782 High intensity brachytherapy 

77783 High intensity brachytherapy 

77784 High intensity brachytherapy 

77789 Apply surface radiation 

77790 Radiation handling 

77799 Radium/radioisotope therapy

Include the following CPT and HCPCS 

level 2 codes classified elsewhere:

31643 Diag bronchoscope/catheter 

50559 Renal endoscopy/radiotracer 

55859 Percut/needle insert, pros 

61770 Incise skull for treatment 

61793 Focus radiation beam 

92974 Cath place, cardio brachytx 

G0173 Stereo radiosurgery, complete 

G0242 Multisource photon ster plan 

G0243 Multisour photon stero treat 

G0251 Linear acc based stero radio 

G0338 Linear accelerator stero pln 

G0339 Robot lin-radsurg com, first 

G0340 Robt lin-radsurg fractx 2–5

EPO and Other Dialysis-Related Drugs 

The physician self-referral prohibition does 

not apply to the following codes for EPO and 

other dialysis-related drugs furnished in or 

by an ESRD facility if the conditions in 

§ 411.355(g) are satisfied:

J0630 Calcitonin salmon injection 

J0636 Inj calcitriol per 0.1 mcg 

J0895 Deferoxamine mesylate inj 

J1270 Injection, doxercalciferol 

J1750 Iron dextran 

J1756 Iron sucrose injection 

J1955 Inj levocarnitine per 1 gm 

J2501 Paricalcitol 

J2916 Na ferric gluconate complex 

J2993 Reteplase injection 

J2995 Inj streptokinase /250000 IU 

J2997 Alteplase recombinant 

J3364 Urokinase 5000 IU injection 

P9041 Albumin (human), 5%, 50ml 

P9045 Albumin (human), 5%, 250ml 

P9046 Albumin (human), 25%, 20ml 

16146 Federal Register / Vol. 69, No. 59 / Friday, March 26, 2004 / Rules and Regulations 

P9047 Albumin (human), 25%, 50ml 

Q4054 Darbepoetin alfa, esrd use 

Q4055 Epoetin alfa, esrd use 

Preventive Screening Tests, Immunizations 

and Vaccines 

The physician self-referral prohibition does 

not apply to the following tests if they are 

performed for screening purposes and satisfy 

the conditions in § 411.355(h):

76083 Computer mammogram add-on 

76092 Mammogram, screening 

G0103 Psa, total screening 

G0107 CA screen; fecal blood test 

G0123 Screen cerv/vag thin layer 

G0124 Screen c/v thin layer by MD 

G0141 Scr c/v cyto, autosys and md 

G0143 Scr c/v cyto, thinlayer, rescr 

G0144 Scr c/v cyto, thinlayer, rescr 

G0145 Scr c/v cyto, thinlayer, rescr 

G0147 Scr c/v cyto, automated sys 

G0148 Scr c/v cyto, autosys, rescr 

G0202 Screening mammographydigital 

G0328 Fecal blood scrn immunoassay 

P3000 Screen pap by tech w md supv 

P3001 Screening pap smear by phys

The physician self-referral prohibition does 

not apply to the following immunization and 

vaccine codes if they satisfy the conditions 

in § 411.355(h):

90655 Flu vaccine, 6–35 mo, im 

90657 Flu vaccine, 6–35 mo, im 

90658 Flu vaccine, 3 yrs, im 

90732 Pneumococcal vaccine 

90740 Hepb vacc, ill pat dose im 

90743 Hep b vacc, adol, 2 dose im 

90744 Hepb vacc ped/adol 3 dose im 

90746 Hepb vaccine, adult, im 

90747 Hepb vacc, ill pat 4 dose im

[FR Doc. 04–6668 Filed 3–25–04; 8:45 am] 

BILLING CODE 4120–03–P