856 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 411 and 424

[HCFA–1809–FC]

RIN 0938–AG80

Medicare and Medicaid Programs;

Physicians’ Referrals to Health Care

Entities With Which They Have

Financial Relationships

AGENCY: Health Care Financing

Administration (HCFA), HHS.

ACTION: Final rule with comment period.

SUMMARY: This final rule with 90-day

comment period (Phase I of this

rulemaking) incorporates into

regulations the provisions in paragraphs

(a), (b), and (h) of section 1877 of the

Social Security Act (the Act). Under

section 1877, if a physician or a member

of a physician’s immediate family has a

financial relationship with a health care

entity, the physician may not make

referrals to that entity for the furnishing

of designated health services (DHS)

under the Medicare program, unless an

exception applies. The following

services are DHS: clinical laboratory

services; physical therapy services;

occupational therapy services; radiology

services, including magnetic resonance

imaging, computerized axial

tomography scans, and ultrasound

services; radiation therapy services and

supplies; durable medical equipment

and supplies; parenteral and enteral

nutrients, equipment, and supplies;

prosthetics, orthotics, and prosthetic

devices and supplies; home health

services; outpatient prescription drugs;

and inpatient and outpatient hospital

services.

In addition, section 1877 of the Act

provides that an entity may not present

or cause to be presented a Medicare

claim or bill to any individual, third

party payer, or other entity for DHS

furnished under a prohibited referral,

nor may we make payment for a

designated health service furnished

under a prohibited referral.

Paragraph (a) of section 1877 of the

Act includes the general prohibition.

Paragraph (b) of the Act includes

exceptions that pertain to both

ownership and compensation

relationships, including an in-office

ancillary services exception. Paragraph

(h) includes definitions that are used

throughout section 1877 of the Act,

including the group practice definition

and the definitions for each of the DHS.

We intend to publish a second final

rule with comment period (Phase II of

this rulemaking) shortly addressing, to

the extent necessary, the remaining

sections of the Act. Phase II of this

rulemaking will address comments

concerning the ownership and

investment exceptions in paragraphs (c)

and (d) and the compensation

exceptions in paragraph (e) of section

1877 of the Act. Phase II of this

rulemaking will also address comments

concerning the reporting requirements

and sanctions provided by paragraphs

(f) and (g) of the Act, respectively, and

include further consideration of the

general exception to the referral

prohibition related to both ownership/

investment and compensation for

services furnished in an ambulatory

surgical center (ASC), end-stage renal

dialysis facility, or by a hospice in

§ 411.355(d) of the regulations (this

exception presently is in force and effect

as to clinical laboratory services). In

addition, Phase II of this rulemaking

will address section 1903(s) of the Act,

which extends aspects of the referral

prohibition to the Medicaid Program.

Phase II will also address comments

received in response to this rulemaking,

as appropriate, and certain proposals for

new exceptions to section 1877 of the

Act not included in the 1998 proposed

rulemaking, but suggested in the public

comments.

DATES: Effective date: The regulations

delineated in Phase I of this rulemaking

are effective on January 4, 2002 except

for § 424.22(d), which is effective on

February 5, 2001.

Comment date: We will consider

comments if we receive them at the

appropriate address, as provided below,

no later than 5 p.m. on April 4, 2001.

ADDRESSES: Mail written comments (one

original and three copies) to the

following address only: Health Care

Financing Administration, Department

of Health and Human Services, Attn:

HCFA–1809–FC, P.O. Box 8013,

Baltimore, MD 21244–8013.

Since comments must be received by

the date specified above, please allow

sufficient time for mailed comments to

be received timely in the event of

delivery delays. If you prefer, you may

deliver your written comments (one

original and three copies) by courier to

one of the following addresses: Room

443–G, Hubert H. Humphrey Building,

200 Independence Avenue, SW.,

Washington, DC 20201, or C5–15–03,

Central Building, 7500 Security

Boulevard, Baltimore, MD 21244–1850.

Comments mailed to the two addresses

provided in this paragraph may be

delayed and received too late to be

considered.

Because of staffing and resource

limitations, we cannot accept comments

by facsimile (FAX) transmission. In

commenting, please refer to file code

HCFA–1809–FC.

Comments received timely will be

available for public inspection as they

are received, generally beginning

approximately 3 weeks after publication

of a document, in Room 443–G of the

Department’s offices at 200

Independence Avenue, SW.,

Washington, DC 20201, on Monday

through Friday of each week from 8:30

a.m. to 5 p.m. (phone: (202) 690–7890).

Copies: To order copies of the Federal

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your request to: New Orders,

Superintendent of Documents, P.O. Box

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Specify the date of the issue requested

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FOR FURTHER INFORMATION CONTACT:

Joanne Sinsheimer, (410) 786–4620.

SUPPLEMENTARY INFORMATION: This

Federal Register document is also

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At the time that we forward our

regulations and notices to the Office of

the Federal Register (OFR) for

publication, we announce them on our

Internet website (http://www.hcfa.gov/

regs/regsnotices.htm) as a service to the

public. We began providing this service

on May 30, 2000. We note that the OFR

may make minor editorial changes to a

document before publishing it. While

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 857

we provide a document on our website,

the document that we publish in the

Federal Register is the official HCFA

publication.

To help readers locate information in

this final rule, we are providing the

following Table of Contents:

I. Background

A. Legislative and Regulatory History

1. Section 1877 of the Act

2. Section 1903(s) of the Act

B. Regulations History

1. Regulations Published by HCFA and the

Office of the Inspector General (OIG)

Relating to Section 1877 of the Act

2. Details about Prior Related Regulations

II. Development of Phase I of this Final

Rulemaking

A. Technical Explanation of Bifurcation of

the Regulation

B. General Comments Regarding the

January 1998 Proposed Rule and

Responses

III. General Prohibition Under Section 1877

of the Act

A. When Is There a Financial Relationship

Between the Physician and the Entity?

B. When Does a Physician Make a Referral?

1. ‘‘Referral’’

2. ‘‘Consultation’’

IV. Physician Compensation Under Section

1877 of the Act: An Overview

V. ‘‘Volume or Value’’ of Referrals and

‘‘Other Business Generated’’ Standards:

An Overview

VI. Exceptions Applicable to Ownership and

Compensation Arrangements (Section

1877(b) of the Act)

A. Physician Services (Section 1877(b)(1)

of the Act)

B. In-office Ancillary Services (Section

1877(b)(2) of the Act)

1. Scope of Designated Health Services

That Can Be In-office Ancillary Services

2. Direct Supervision

3. The Building Requirements

4. The Billing Requirement

C. Group Practice Definition (Section

1877(h)(4) of the Act)

1. General Comments

2. Single Legal Entity Requirement

3. Members of the Group

4. The ‘‘Full Range of Services Test’’

5. The ‘‘Substantially All Test’’

6. The ‘‘Seventy-five Percent PhysicianPatient Encounters Test’’

7. The ‘‘Unified Business Test’’

8. Profit Shares and Productivity Bonuses

9. Group Practice Attestations

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

Act)

VII. New Regulatory Exceptions

A. Academic Medical Centers

B. Fair Market Value (§ 411.357(l))

C. Non-Monetary Compensation up to $300

(and Medical Staff Benefits)

(§§ 411.357(k) and (m))

VIII. Definitions of the Designated Health

Services

A. General Principles

B. General Comment: 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

H. Durable Medical Equipment (DME)

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 Areas

6. Employee

7. Immediate Family Members

8. Referral

9. Remuneration and the Exceptions in

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

IX. Collection of Information Requirements

X. Regulatory Impact Statement

A. Overall Impact

B. Anticipated Effects

1. Effects on Physicians

2. Effects on Other Providers

3. Effects on the Medicare and Medicaid

Programs

4. Effects on Beneficiaries

C. Alternatives Considered

D. Conclusion

Regulations Text

Attachment

I. Background

A. Legislative and Regulatory History

1. Section 1877 of the Act

Section 6204 of the Omnibus Budget

Reconciliation Act of 1989 (Pub. L. 101–

239) (OBRA 1989), enacted on

December 19, 1989, added section 1877

to the Act. Section 1877 of the Act

prohibited a physician from referring a

patient to an entity for clinical

laboratory services for which Medicare

might otherwise pay, if the physician or

the physician’s immediate family

member had a financial relationship

with the entity. The statute defined

‘‘financial relationship’’ as an

ownership or investment interest in the

entity or a compensation arrangement

between the physician (or the

physician’s immediate family member)

and the entity. The statute provided for

several exceptions to the prohibition.

Some applied to ownership/investment

interests and compensation

arrangements; others applied only to

ownership/investment interests or only

to compensation arrangements.

The statute further prohibited an

entity from presenting or causing to be

presented a Medicare claim or bill to

any individual, third party payer, or

other entity for clinical laboratory

services furnished under a prohibited

referral. Additionally, the statute

mandated refunding any amount

collected under a bill for an item or

service furnished under a prohibited

referral. Finally, the statute imposed

reporting requirements and provided for

sanctions, including civil monetary

penalty provisions. Section 1877 of the

Act became effective on January 1, 1992.

Section 4207(e) of the Omnibus

Budget Reconciliation Act of 1990 (Pub.

L. 101–508) (OBRA 1990), enacted on

November 5, 1990, amended certain

provisions of section 1877 of the Act to

clarify definitions and reporting

requirements relating to physician

ownership and referral and to provide

an additional exception to the

prohibition.

Several subsequent laws further

changed section 1877 of the Act. Section

13562 of the Omnibus Budget

Reconciliation Act of 1993 (Pub. L. 103–

66) (OBRA 1993), enacted on August 10,

1993, expanded the referral prohibition

to cover 10 ‘‘designated health

services,’’ in addition to clinical

laboratory services, modified some of

the existing statutory exceptions, and

added new exceptions. Section 152 of

the Social Security Act Amendments of

1994 (SSA 1994) (Pub. L. 103–432),

enacted on October 31, 1994, amended

the list of designated services, effective

January 1, 1995, changed the reporting

requirements at section 1877(f) of the

Act, and modified some of the effective

dates established by OBRA 1993. Some

provisions relating to referrals for

clinical laboratory services were

effective retroactively to January 1,

1992, while other provisions became

effective on January 1, 1995.

2. Section 1903(s) of the Act

Title XIX of the Act established the

Medicaid program to provide medical

assistance to individuals who meet

certain income and resource

requirements. The States operate

Medicaid programs in accordance with

Federal laws and regulations and with

a State plan that we approve. Though

States administer the Medicaid

programs, the Federal and State

governments jointly finance them. We

call the Federal government’s share of

medical assistance expenditures

‘‘Federal financial participation’’ (FFP).

Until OBRA 1993, there were no

statutory or regulatory requirements

affecting a physician’s referrals for

services covered under the Medicaid

program. Section 13624 of OBRA 1993,

entitled ‘‘Application of Medicare Rules

Limiting Certain Physician Referrals,’’

added a new paragraph (s) to section

1903 of the Act, that extends aspects of

the Medicare prohibition on physician

referrals to Medicaid. This provision

858 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

bars FFP in State expenditures for DHS

furnished to an individual based on a

physician referral that would result in a

denial of payment for the services under

the Medicare program if Medicare

covered the services to the same extent

and under the same terms and

conditions as under the State Medicaid

plan. The statute also made certain

reporting requirements in section

1877(f) of the Act and a civil monetary

penalty provision in section 1877(g)(5)

(related to the reporting requirements)

applicable to providers of DHS for

which payment may be made under

Medicaid in the same manner as they

apply to providers of such services for

which payment may be made under

Medicare. Section 1903(s) of the Act

applies to a physician’s referrals made

on or after December 31, 1994.

B. Regulations History

1. Regulations Published by HCFA and

the Office of the Inspector General (OIG)

Relating to Section 1877 of the Act

The following is a summary of the

series of regulations we have published

in the Federal Register over the past

several years to implement the

provisions of section 1877 of the Act, as

amended, and section 1903(s) of the

Act:

• On December 3, 1991, we issued an

interim final rule with comment period

(54 FR 61374) to set forth the reporting

requirements under section 1877(f) of

the Act.

• On March 11, 1992, we issued a

proposed rule (57 FR 8588) to

implement the self-referral prohibition

and exceptions related to referrals for

clinical laboratory services established

by section 1877 of the Act, and

amended by OBRA 1990.

• On August 14, 1995, we issued a

final rule with comment period (60 FR

41914) incorporating the provisions of

OBRA 1993 and SSA 1994 that relate to

referrals for clinical laboratory services

under section 1877 of the Act, effective

January 1, 1992, and revising the March

11, 1992 proposal based on the public

comments we received.

• On January 9, 1998, we issued a

proposed rule (63 FR 1659) to amend

the provisions of the August 1995 final

rule and to reflect other changes in

section 1877 of the Act enacted by

OBRA 1993 and SSA 1994 that were

effective January 1, 1995. These include,

among other changes, the expansion of

the referral prohibition to the 10

additional DHS, and the Medicaid

expansion.

• On January 9, 1998, we published a

final rule with comment period (63 FR

1846) incorporating into our regulations

the specific procedures we will use to

issue advisory opinions, as required

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

Section 1877(g)(6) of the Act requires

that we issue written advisory opinions

to outside parties concerning whether

the referral of a Medicare patient by a

physician for DHS (other than clinical

laboratory services) is prohibited under

section 1877 of the Act.

We also note that on October 20,

1993, the OIG published a proposed rule

(58 FR 54096) to implement the civil

money penalty provisions under

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

The OIG followed with publication of a

final rule with comment period (60 FR

16580) on March 31, 1995.

2. Details About Prior Related

Regulations

On August 14, 1995, we published in

the Federal Register a final rule with

comment period (60 FR 41914) that

incorporated into regulations the

provisions of section 1877 of the Act

prohibiting physician referrals for

clinical laboratory services under the

Medicare program. That rule

incorporated certain expansions and

exceptions created by OBRA 1993, and

the amendments in SSA 1994. It

included only the expansions and other

changes that related to prohibited

referrals for clinical laboratory services

that were retroactively effective to

January 1, 1992, and interpreted the

new provisions only in a few limited

instances in which it was essential to

implement the law. That rule also

included our responses to the public

comments we received on both the

December 3, 1991 interim final rule

with comment period (56 FR 61374) that

established the reporting requirements

under section 1877(f) of the Act, and the

March 11, 1992 proposed rule (57 FR

8588) that covered section 1877 of the

Act, as amended by OBRA 1990, and

related to referrals for clinical laboratory

services.

Because the August 1995 rule

addressed only those changes made by

OBRA 1993 and SSA 1994 that had a

retroactive effective date of January 1,

1992, we explained our intent to later

publish a proposed rule to fully

implement the extensive revisions to

section 1877 of the Act made by OBRA

1993 and SSA 1994, and to interpret

those provisions when necessary. In the

later proposed rule, we intended to

include the revisions that relate to

referrals for the additional DHS

(including clinical laboratory services)

that became effective January 1, 1995,

and to implement the Medicaid

expansion in section 1903(s) of the Act

that became effective for referrals made

on or after December 31, 1994.

As intended, on January 9, 1998, we

published the proposed rule (63 FR

1659). The rule was organized as

follows: In section I (63 FR 1661

through 1663), we summarized the

problems associated with physician selfreferrals and the relevant legislative and

regulatory background. In section II (63

FR 1663 through 1673), part A, we

summarized the provisions of our

proposed rule and described how we

proposed to alter the final regulation

covering referrals for clinical laboratory

services to apply it to the additional

DHS and to reflect the statutory changes

in section 1877 of the Act that were

effective on January 1, 1995. In section

II, part B, we described the changes we

proposed to make to the Medicaid

regulations to incorporate section

1903(s) of the Act. In section III (63 FR

1673 through 1705), we discussed in

detail how we proposed to interpret any

provisions in sections 1877 and 1903(s)

of the Act that we believed were

ambiguous, incomplete, or that

provided us with discretion. We also

discussed policy changes or

clarifications we proposed to make to

the August 1995 rule covering referrals

for clinical laboratory services. Section

IV (63 FR 1705 through 1715) of the

proposed rule included our responses to

some of the most common questions

concerning physician referrals that we

received from physicians, providers,

and others in the health care

community. We included our

interpretations of how the law applies

in the situations described to us. Section

V (63 FR 1715 through 1719) included

a Regulatory Impact Analysis, and

section VI (63 FR 1719 through 1720)

covered our policy on responding to

comments. The proposed regulation text

appeared at 63 FR 1720 through 1728.

In the January 1998 proposed rule, we

proposed to incorporate the Medicaid

expansion in section 1903(s) of the Act

into § 435.1012(a) (Limitation to FFP

related to prohibited referrals). Section

435.1012(a) stated that no FFP was

available for a State’s expenditures for

certain DHS, as they are defined in

proposed § 411.351, furnished to an

individual under the State plan. No FFP

is available if the services are those

furnished on the basis of a physician

referral that would, if Medicare

provided for coverage of the services to

the same extent and under the same

terms and conditions as under the State

plan, result in the denial of Medicare

payment for the services under

§§ 411.351 through 411.360. In

§ 435.1012(c), we included a cross

reference to the procedures we

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 859

established for individuals or entities to

request advisory opinions from us on

whether a physician’s referrals relating

to DHS (other than clinical laboratory

services) are prohibited under section

1877 of the Act. Although these

advisory opinions were meant to reflect

our interpretation of section 1877 of the

Act, they can potentially affect FFP

payments to States under the Medicaid

program.

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

from the referral prohibition services

furnished to enrollees of certain

‘‘prepaid’’ health plans; however, these

exceptions extend only to services

furnished to Medicare beneficiaries

under Medicare contracts and

demonstration projects. As a result, the

exception for prepaid arrangements

does not apply to physicians who wish

to refer in the context of the Medicaid

program. In order to give effect to this

exception in the Medicaid context, we

included, in the January 1998 proposed

rule, in § 435.1012(b) an exception for

DHS furnished by managed care entities

analogous to the Medicare entities

excepted under section 1877(b)(3) of the

Act. The new exception was meant to

cover entities that provide services to

Medicaid-eligible enrollees under

contract with State Medicaid agencies

and under certain demonstration

projects. (We discussed these analogous

entities in detail in the proposed rule at

63 FR 1697.)

To accommodate the Congress’s

subsequent creation of the

Medicare+Choice (M+C) Program in the

Balanced Budget Act of 1997 (Pub. L.

105–33) (BBA 1997), we included an

amendment to the physician referral

regulations as part of the June 26, 1998

interim final rule with comment period

(63 FR 35066) establishing the M+C

Program. We amended the final

physician self-referral regulations

covering referrals for clinical laboratory

services by adding an exception in

§ 411.355(c)(5) for services furnished to

prepaid enrollees by a coordinated care

plan. We defined a coordinated care

plan as such a plan, within the meaning

of section 1851(a)(2)(A) of the Act,

offered by an organization in accordance

with a contract with us under section

1857 of the Act and the M+C

regulations. We are reprinting that

provision in Phase I of this rulemaking.

II. Development of Phase I of This Final

Rulemaking

A. Technical Explanation of Bifurcation

of the Regulation

Phase I of this rulemaking implements

subsections (a) and (b) of section 1877

of the Act, and related definitions, as

applied to the Medicare program. We

intend to issue Phase II of this

rulemaking to cover the remainder of

section 1877 of the Act, including its

application to the Medicaid program,

shortly.

Phase I of This Rulemaking

Given the importance of subsections

(a) and (b), and the substantial changes

we are making to the January 1998

proposed rule, we are proceeding with

the issuance of Phase I of this

rulemaking at this time. Further, we are

issuing Phase I for comment and

delaying its effective date for 1 year to

allow individuals and entities engaged

in business arrangements affected by

Phase I time to restructure those

arrangements to comply with the

provisions of Phase I, except for

§ 424.22(d), which is effective February

5, 2001. The statutory provisions

interpreted by Phase I remain in effect,

as they have been since 1989 for clinical

laboratory services and 1993 for all

other DHS.

Phase I of this rulemaking differs

substantially from the January 1998

proposed rule in several major respects,

which include the following:

• Clarification of the definitions of

DHS.

• Clarification of the concept of

‘‘indirect financial relationship’’ and

creation of a new exception for indirect

compensation arrangements.

• Substantial broadening of the inoffice ancillary services exception by

easing the criteria for qualifying as a

group practice and conforming the

supervision requirements to HCFA

coverage and payment policies for the

specific services.

• Expansion of the in-office ancillary

services exception to cover certain DME

provided in physicians’ offices to

patients to assist them in ambulating,

and blood glucose monitors.

• Allowance of shared facilities in the

same building where physicians

routinely provide services that are in

addition to Federal and private pay

DHS.

• Exclusion of services personally

performed by the referring physician

from the definition of ‘‘referral.’’

• Creation of a new exception for

compensation of faculty in academic

medical centers.

• Addition of a new ‘‘risk-sharing’’

exception for commercial and employersponsored managed care plans.

• Interpretation of the ‘‘volume or

value’’ standard for purposes of section

1877 of the Act as permitting unit of

service or unit of time-based payments,

so long as the unit of service or unit of

time-based payment is fair market value

and does not vary over time. (The

details of these and other changes are

explained at length in section VI of this

preamble.)

• Creation of an exception where

DHS are furnished by entities that did

not know of or have reason to suspect

the identity of the referring physician.

In developing Phase I of this

rulemaking, we have carefully

reconsidered the January 1998 proposed

rule given both the history and structure

of section 1877 of the Act and the

extensive comments we received on the

January 1998 proposed regulation. We

believe that Phase I of this rulemaking

addresses many of the industry’s

primary concerns, is consistent with the

statute’s goals and directives, and

protects beneficiaries of Federal health

care programs.

Our paramount concern is to

implement section 1877 of the Act

consistent with congressional intent.

Prior to enactment of section 1877, there

were a number of studies, primarily in

academic literature, that consistently

found that physicians who had

ownership or investment interests in

entities to which they referred ordered

more services than physicians without

those financial relationships (some of

these studies involved compensation as

well). Increased utilization occurred

whether the physician owned shares in

a separate company that provided

ancillary services or owned the

equipment and provided the services as

part of his or her medical practice. This

correlation between financial ties and

increased utilization was the impetus

for section 1877 of the Act.

The approach chosen by the Congress

in enacting section 1877 of the Act is

preventive because it essentially

prohibits many financial arrangements

between physicians and entities

providing DHS. Specifically, section

1877 of the Act imposes a blanket

prohibition on the submission of

Medicare claims (and payment to the

States of FFP under the Medicaid

program) for certain DHS when the

service provider has a financial

relationship with the referring

physician, unless the financial

relationship fits into one of several

relatively specific exceptions.

Significantly, no wrongful intent or

culpable conduct is required. The

primary remedy is simply nonpayment

by the program, without penalties. In

other words, the basic remedy is

recoupment of overpayments by the

program. (Of course, wrongful conduct,

such as knowingly submitting a claim in

violation of the prohibition, can be

punished through recoupment of

overpayments and imposition of

860 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

penalties, the False Claims Act, and

other Federal statutory and common law

remedies.)

The effect of this statutory scheme is

that failure to comply with section 1877

of the Act can have a substantial

financial result. For example, if a

hospital has a $5,000 consulting

contract with a surgeon and the contract

does not fit in an exception, every claim

submitted by the hospital for Medicare

beneficiaries admitted or referred by

that surgeon is not payable, since all

inpatient and outpatient hospital

services are DHS.

While the statutory scheme of the

physician self-referral prohibition is, in

large part, the key to its effectiveness, it

obligates us to proceed carefully in

determining the scope of activities that

are prohibited. In Phase I of this

rulemaking, we have attempted to

minimize the impact of the rule on

many common physician group

governance and compensation

arrangements.

The potential impact of the regulation

was further confirmed by the

voluminous comments we received

from the public and health care

community in response to the January

1998 proposed rule. In addition to

specific complaints and objections

about the January 1998 proposed rule,

the commenters expressed several

general concerns, which include the

following:

• The rule inappropriately intruded

into the organization and delivery of

medical care within physicians’ offices.

• The rule, in many respects, was

counter to our other long-standing

policies on coverage and similar issues.

• The rule was unclear in many areas

and that given the potentially serious

consequences (for example, payment

denial), ‘‘bright line’’ rules were

essential.

• Some aspects of the rule, such as its

treatment of indirect financial

relationships, were administratively

impractical or would have been

prohibitively costly in terms of

monitoring compliance.

With these overall considerations in

mind, we have developed several

criteria for evaluating our regulatory

options. First, we have tried in Phase I

of this rulemaking to interpret the

prohibitions narrowly and the

exceptions broadly, to the extent

consistent with the statutory language

and intent. As a practical matter, we

believe that, while the statute must be

implemented to achieve its intent, we

should be cautious in interpreting its

reach so broadly as to prohibit

potentially beneficial financial

arrangements. Accordingly, we have

tried to focus the regulation on financial

relationships that may result in

overutilization, which we believe was

the main abuse at which the statute was

aimed. Some provisions of the January

1998 proposed rule did not appear to

address overutilization so much as other

potential abuses, such as unfair

competition. At the same time, we do

not believe the Congress intended us to

review every possible designated health

service to determine its potential for

overutilization. The Congress has

already made that determination, and

we believe that compliance with the

exceptions in Phase I of this rulemaking

should not cause undue disruption of

the health care delivery system.

Second, a corollary of the above

interpretation is that the Congress only

intended section 1877 of the Act to

establish a minimum threshold for

acceptable financial relationships, and

that potentially abusive financial

relationships that may be permitted

under section 1877 of the Act could still

be addressed through other statutes that

address health care fraud and abuse,

including the anti-kickback statute

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

instances, financial relationships that

are permitted by section 1877 of the Act

might merit prosecution under section

1128B(b) of the Act. Conversely,

conduct that may be proscribed by

section 1877 of the Act may not violate

the anti-kickback statute.

Third, we have attempted to ensure

that Phase I of this rulemaking will not

adversely impact the medical care of

Federal health care beneficiaries or

other patients. In those instances in

which we have determined that the

provisions of Phase I of this rulemaking

may impact 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 could continue to receive the

care in the same location. In almost all

cases, we believe the provisions of

Phase I of this rulemaking should not

require substantial changes in delivery

arrangements, although they may affect

the referring physician’s or group

practice’s ability to bill for the care. In

other words, while the provisions of

Phase I of this rulemaking may affect a

physician’s ability to profit financially

from the provision of some services,

there should be alternative providers

available to provide the services in the

same setting or alternative business

structures that would permit the

services to be provided (again, possibly

without physician financial interest).

Fourth, we have revised the

provisions of our January 1998 proposed

rule to conform, as much as possible, to

our other policies that affect the same or

similar activity. For example, we are

dropping the requirement that an inoffice ancillary service be supervised

under the strict ‘‘direct supervision’’

standards of the ‘‘incident to’’ billing

rules in favor of requiring the level of

supervision that is mandated under

Medicare payment and coverage rules

applicable to particular DHS.

Fifth, we have attempted, as much as

possible, to establish ‘‘bright line’’ rules

so that physicians and health care

entities can ensure compliance and

minimize administrative costs. We agree

with the commenters that as a payment

rule, the regulations implementing

section 1877 of the Act should establish

clear standards, and we have attempted

to do so within the constraints of the

statutory and regulatory scheme.

We believe Phase I of this rulemaking

substantially addresses the concerns

raised by the commenters and, yet, is

consistent with the statute. Given the

breadth of the statute and the myriad of

financial relationships to which it

applies, it is impossible to satisfy all

concerns in all instances. We have

attempted to read the statute narrowly

to avoid adversely impacting potentially

beneficial arrangements. However, we

will continue to monitor financial

arrangements in the health care industry

and will revisit particular regulatory

decisions if we determine there is abuse

or overutilization.

B. General Comments Regarding the

January 1998 Proposed Rule and

Responses

Comment: Many commenters echoed

the general views expressed by a major

physician trade association. The trade

association noted that section 1877 of

the Act significantly impacts the

manner in which physicians deliver

health care services and the manner in

which they relate to one another and to

other health care providers. The trade

association urged us to give physicians

and other providers clear direction on

how to structure their financial

arrangements, while providing

sufficient flexibility for physicians and

providers practicing in numerous and

varying arrangements throughout the

health care industry. The trade

association and other commenters

expressed concern that the January 1998

proposed rule failed to reflect the

fundamental changes occurring in the

health care marketplace—especially the

consolidation and integration of

physician practices, hospitals, and other

health care entities. Indeed, the

commenters perceived the proposed

regulations as hostile to those changes.

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 861

The trade association and others believe

that section 1877 of the Act and our

regulations should focus on passive

ownership and referral arrangements

and not on partially and fully integrated

practices demanded by the current

competitive marketplace.

In addition, some commenters,

including the trade association, thought

that the provisions of the January 1998

proposed rule exceeded our statutory

authority and imposed unnecessary and

costly burdens on physicians that would

harm patient access to health care

facilities and services, with no apparent

public benefit. In their view, the

provisions of the January 1998 proposed

rule (1) micro-managed physician

practices in situations that do not pose

a real potential for abuse, (2) limited

proper and reasonable management

practices, and (3) inappropriately

interfered with the practice of medicine.

Finally, a number of commenters

suggested that, instead of promulgating

a set of regulations that micro-manage

the business of medicine, we could

better control overutilization of DHS by

monitoring the medical necessity of

such services and the competency of

those providing them.

Response: In developing Phase I of

this rulemaking, we have been mindful

of the criticism that the provisions of

the January 1998 proposed rule

inappropriately micro-managed

physician practices. Given the purpose,

structure, and scope of section 1877 of

the Act, some impact on physician

practices is inevitable and, frankly,

intended. In Phase I of this rulemaking,

we have endeavored to create ‘‘bright

line’’ rules that are easily applied, while

providing the health care industry with

as much flexibility as possible. Where

possible, we have tried to simplify the

requirements in Phase I of this

rulemaking, consistent with the clear

congressional mandate to prohibit

certain physician referrals tainted by

physician financial self-interest. We

believe Phase I of this rulemaking offers

adequate flexibility to physician

practices as they integrate and

consolidate. For example, the revised

unified business test, in the group

practice definition, no longer bars costcenter or location-based distribution of

a group practice’s revenues from

services that are not DHS. Another

example: the in-office ancillary services

exception covers certain ancillary

services provided in facilities shared by

practitioners in the same building in

which they practice.

The provisions of Phase I of this

rulemaking do not prevent physicians

from directly providing their patients

with convenient, cost-effective DHS.

Consistent with the purpose of the

statute, however, the provisions of

Phase I of this rulemaking do restrict the

circumstances under which physicians

can financially benefit from DHS they

order that are provided by others. This

distinction is important. Section 1877 of

the Act regulates the financial

relationship between referring

physicians and the provider of the DHS.

If a physician determines not to provide

access to such services in the absence of

personal profit, the decision is the

physician’s, not the statute’s. Nothing in

section 1877 of the Act restricts patient

access to those services.

Finally, we cannot agree with the

claim that medical necessity reviews are

always an effective control on

overutilization. Medical necessity

reviews alone cannot control

unnecessary utilization and contain

health care costs. These reviews are

costly and only effective in controlling

the most aberrant behavior. Most

importantly, the statute does not permit

us—nor would we choose—to override

the Congress’ judgement by substituting

medical necessity reviews for existing

statutory standards.

Comment: Other commenters

expressed concern that neither the

statute nor the January 1998 proposed

rule goes far enough in preventing

abusive referral arrangements. Several

commenters complained that allowing

physicians to provide ancillary services

competitively disadvantages

independent ancillary services

providers that are not owned or

controlled by physicians. These

commenters believe that an obvious

referral-for-profit scheme occurs when a

physician employs his or her own

ancillary personnel. While most

commenters who expressed this view

were independent ancillary services

providers, one physician also

complained about fellow physicians

who ‘‘churn’’ patients through CT/MRI

machines in their offices, resulting in

what the commenter termed, a ‘‘cash

spigot.’’ The commenter expressed the

view that such machines are not

standard in a physician’s office and are

solely added to physicians’ offices to

generate profits. Commenters also

expressed concern that, in some cases,

physicians do not have appropriate

oversight or credentialing for the

ancillary services they provide. One

commenter suggested that physicians

should only be permitted to provide

ancillary services if no other provider is

available in the area.

Response: While we believe the

commenters raised valid concerns about

abuses in the health care system, the

plain language of the statute makes clear

that the Congress did not intend section

1877 of the Act to bar all physicianowned ancillary services facilities. To

the contrary, these facilities are

expressly allowed under certain specific

circumstances (see sections 1877(b), (c),

and (d) of the Act). Simply stated, the

law is meant to prevent only the most

egregious financial relationships; it does

not address every potential act of fraud

and abuse. As we caution throughout

this preamble, section 1877 of the Act

provides only a threshold check against

fraud and abuse; many arrangements

that are lawful under section 1877 of the

Act may still violate other fraud and

abuse laws, including the Federal antikickback statute (section 1128B(b) of the

Act).

Comment: Several commenters

believe that section 1877 of the Act and

implementing regulations would not

permit patients to receive services, such

as x-rays, physical therapy, or crutches,

at a physician’s office or in a long term

care facility where the patient resides.

The commenters observed that requiring

patients to seek services related to their

diagnoses or treatment at several

different locations is an inconvenience

to patients and may require them to

travel long distances to obtain services,

thus, discouraging elderly or disabled

patients from seeking needed health

care services.

Response: The commenters

misunderstand section 1877 of the Act.

Section 1877 of the Act regulates

financial relationships; it does not

regulate the delivery of services. Section

1877 of the Act does not bar the

provision of ancillary services in a

physician’s office, in a long term care

facility, or at nearby, convenient

locations. The law only imposes

restrictions on a physician who makes

a referral for a designated health service

if he or she has a financial relationship

with the ancillary services provider,

such as an employment contract, an

office space lease, or an ownership

interest. Depending on the structure of

the financial relationship, the physician

may be able to profit from ordering

ancillary services, thereby creating a

risk that his or her orders may be

motivated, in part, by personal financial

considerations. Statutory and regulatory

exceptions are designed to enable

physicians to make ancillary services

available on-site to their own patients,

provided they meet the conditions set

forth in the applicable exception.

However, nothing in the law prevents

physicians from making available

convenient ancillary services when the

physician has no financial interest in

the provision of the services. For

example, a physician may arrange for a

862 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

diagnostic services provider to perform

diagnostic tests in the physician’s office

for which the diagnostic services

provider bills, provided that any rental

arrangement meets the rental exception

in § 411.357(b) and does not violate the

anti-kickback statute. Section 1877 of

the Act reflects the Congress’

unmistakable intent to recognize and

accommodate the traditional role played

by physicians in the delivery of

ancillary services to their patients,

while constraining the abuse of the

public fisc that results when physician

referrals are driven by financial

incentives. These regulations reflect that

policy balance.

Comment: One commenter stated that

we had not informed Medicare

beneficiaries about the potential

restrictions on their access to care under

section 1877 of the Act and its

regulations, or informed Medicare

providers about the potential

restrictions on their ability to provide

ancillary services.

Response: Once both Phase I and

Phase II of this rulemaking are

published, we intend to educate

providers further about the new

regulations. Providers have been on

notice as to section 1877 of the Act

since 1989 with respect to clinical

laboratory services and 1993 with

respect to all other DHS. We intend to

provide general information to

beneficiaries as well. However, we do

not believe beneficiaries will face the

restrictions on access that the

commenters contemplate. Indeed, these

regulations do not restrict the provision

of services to Medicare beneficiaries. If

a physician chooses not to make

services available to patients if he or she

cannot personally benefit financially

from services he or she orders, but

which are provided by others, the

physician is responsible for restricting

access. Finally, Phase I of this

rulemaking is being, and Phase II of this

rulemaking will be, published in the

Federal Register and noted on the

Department’s website, which serves as

notice to the affected community. We

believe most providers will also be

informed through their trade press,

trade associations, and other sources.

Comment: Two commenters

expressed concern that section 1877 of

the Act and associated regulations

would criminalize common conduct in

physicians’ offices.

Response: Section 1877 of the Act is

a civil, not a criminal, statute. A

violation of section 1877 of the Act

results in nonpayment of claims and

monetary sanctions. Criminal penalties

or deprivation of liberty are not

authorized by section 1877 of the Act.

Comment: Given the alleged

complexity of the physician self-referral

law and regulations and their impact on

physicians’ traditional business

practices, several commenters requested

that the effective date of the regulation

be delayed to allow a reasonable time

for physicians to familiarize themselves

with the law and that the regulations be

applied prospectively only. One

commenter asked that we issue

compliance guidelines. Another

commenter inquired about penalties if

physicians ignore the physician selfreferral law.

Response: We agree with the

commenters that the health care

providers engaged in business

arrangements affected by Phase I of this

rulemaking may need time to

restructure those arrangements to

comply with Phase I of this rulemaking

where it proscribes conduct not

previously prohibited. We are, therefore,

delaying the effective date of Phase I of

this rulemaking for 1 year, except for

§ 424.22(d), which is effective February

5, 2001. In the meantime, the statute, in

its entirety, remains in full force and

effect with respect to all DHS listed in

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

effective date of these new final

regulations, the August 1995 final rule

covering referrals for clinical laboratory

services remains in full force and effect

with respect to clinical laboratory

services referrals and claims for

services. Any party or parties who do

not comply with the provisions of the

statute, the August 1995 final rule

covering referrals for clinical laboratory

services, or the provisions of Phase I of

this rulemaking (when it becomes

effective one year from the date of

publication of this Federal Register

notice) are subject to all applicable

penalties and sanctions, including those

that appear in section 1877(g) of the Act.

(Section 1877(g)(3) and (g)(4) sanctions

are covered in an OIG regulation that

was published at 60 FR 16580 on March

31, 1995.)

Because of the significant changes we

are making in Phase I of this

rulemaking, we are publishing these

regulations in final form with a 90-day

comment period. We are interested in

the industry’s views as to the changes

we have incorporated into these

regulations. Any further changes we

deem necessary based on comments will

be addressed in Phase II of this

rulemaking or shortly thereafter.

Regarding the issue of compliance

guidelines, we often issue guidelines in

the form of manual provisions or

operational policy letters when we find

that the statute and regulations do not

address particular issues in sufficient

detail.

Comment: A number of commenters

objected to what they perceived as

disparate treatment of solo and group

practitioners. One commenter, for

example, complained that under the

proposed rule, a solo practitioner could

provide, and keep the profits from,

unlimited ancillary services provided to

his or her patients, regardless of how

much the physician self-refers in his or

her own office, whereas a group

practitioner could not.

Response: Certain disparities between

the treatment of group and solo

practitioners are inherent in the

statutory language and structure. For

example, the Congress expressly limited

profit shares for group practice members

to methodologies that do not directly

take into account the member’s DHS

referrals. For obvious reasons, solo

practitioners cannot be similarly

limited. On the other hand, the statute

allows group practices greater flexibility

in terms of the locations where they can

provide DHS to their patients and still

come within the in-office ancillary

services exception. To the extent

possible, and consistent with the

statute, we have tried in Phase I of this

rulemaking to minimize the regulatory

disparities between group and solo

practitioners.

Comment: In noting that the January

1998 proposed regulation interpreted

the statute to minimize any risk of fraud

or abuse, several commenters stated that

the marginal anti-fraud benefit of this

approach is low because of additional

post-1993 fraud and abuse legislation,

the implementation of the anti-kickback

statute, computer claims payment edits

instituted by our carriers, and the

creation of the National Practitioners

Data Bank. The Health Insurance

Portability and Accountability Act of

1996 (HIPAA) increased funding for

Medicare program safeguards such as

increased coordination between Federal,

State, and local authorities;

investigations, audits, and inspections;

and guidance to the industry. HIPAA

also established the Medicare Integrity

Program to encourage private entities to

engage in anti-fraud activities. The BBA

in 1997 also created more severe

criminal penalties for health care fraud.

The commenters stated that the January

1998 proposed regulation prohibits

many otherwise appropriate

relationships in order to deter a small

proportion of inappropriate practices.

The commenters asked that the final

rule be more flexible and not

overcompensate for potential risks

because the commenters believe that

post-1993 legislation and enforcement

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 863

efforts can address any inappropriate

practices that may or may not be

deterred by the physician self-referral

law.

Response: As described above, the

approach taken by the Congress in

enacting section 1877 of the Act results

in important differences between it and

other anti-fraud and abuse measures,

especially the criminal anti-kickback

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

The laws are complementary and,

although overlapping in some aspects,

not redundant. We believe the Congress

intended to create an array of fraud and

abuse authorities to enable the

government to protect the public fisc,

beneficiaries of Federal programs, and

honest health care providers from the

corruption of the health care system by

unscrupulous providers. We have

revisited the January 1998 proposed rule

in significant respects that minimize

any unnecessary impact on providers.

Comment: A number of commenters

objected to the inclusion in several of

the proposed regulatory exceptions,

such as the exception for fair market

value transactions, of a requirement that

the transaction be in compliance with

the anti-kickback statute. According to

the commenters, the two statutes are

separate and, since the anti-kickback

statute is intent-based, it would be

impossible to determine with certainty

whether a transaction meets the

exceptions.

Response: We recognize that section

1877 of the Act and the anti-kickback

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

different statutes and compliance with

one does not depend on compliance

with the other in most situations.

Notwithstanding, the Secretary’s

authority to create additional regulatory

exceptions to section 1877 of the Act is

limited by the requirement in section

1877(b)(4) that she determine that the

excepted financial relationship ‘‘does

not pose a risk of program or patient

abuse.’’ Section 1877 of the Act sets a

minimum standard for acceptable

financial relationships; many

relationships that may not merit blanket

prohibition under section 1877 of the

Act can, in some circumstances and

given necessary intent, violate the antikickback statute. If the requirement that

a financial relationship comply with the

anti-kickback statute were dropped,

unscrupulous physicians and entities

could potentially protect intentional

unlawful and abusive conduct by

complying with the minimal

requirements of a regulatory exception

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

Act. (By contrast, the statutory

exceptions require no finding by the

Secretary and, thus, carry no

presumptive protection under the antikickback statute.) In addition, some

arrangements may pose a risk of

improper billing or claims submission.

As a practical matter, the statutory

language authorizing exceptions leaves

us two choices: (1) we can limit the

exceptions to those situations that pose

no risk of fraud or abuse—a very

stringent standard that few, if any, of the

proposed regulatory exceptions meet; or

(2) we can protect arrangements that, in

most situations, would not pose a risk,

and rely on the anti-kickback statute or

other fraud and abuse laws to address

any residual risk. Given the

commenters’ expressed preference for

flexibility, we have chosen the latter

alternative. Moreover, since the parties

should be in compliance with the antikickback statute, the additional

regulatory burden is minimal. In the

interest of simplification, we are

considering an additional exception

under section 1877 of the Act for any

arrangement that fits squarely in an antikickback ‘‘safe harbor’’ (section

1001.952 (Exceptions)) and plan to

address the matter further in Phase II of

this rulemaking.

III. The General Prohibition Under

Section 1877 of the Act

Section 1877(a) of the Act establishes

the basic structure and elements of the

statutory prohibition: A physician

cannot (1) refer patients to an entity (2)

for the furnishing of DHS (3) if there is

a financial relationship between the

referring physician (or an immediate

family member of the referring

physician) and the entity, (4) unless the

financial relationship fits within one of

the specific exceptions in the statute or

regulations issued by the Secretary.

(DHS are defined in § 411.351 and

discussed at length in section VIII.A of

this preamble.) In this section, we

discuss our interpretations of what

constitutes a financial relationship,

especially an indirect financial

relationship, and what constitutes a

referral, including an indirect referral.

Existing Law: Subject to certain

exceptions, section 1877(a)(1) of the Act

prohibits a physician from making a

referral to an entity for the furnishing of

DHS for which Medicare would

otherwise pay, if the physician (or an

immediate family member) has a

financial relationship with the DHS

entity, and prohibits the DHS entity

from billing Medicare or any individual

(including, but not limited to, the

beneficiary), third party payer, or other

entity for those services. A financial

relationship is (i) either an ownership or

investment interest in the DHS entity (or

in another entity that holds an

ownership or investment interest in the

entity) or (ii) a compensation

arrangement with the DHS entity, either

directly or indirectly. An ownership or

investment interest may exist through

equity, debt, or other means.

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.

Proposed Rule: In general, we

proposed interpreting the concept of

‘‘indirect financial relationship’’ very

broadly. In the January 1998 proposed

rule, we proposed including within the

reach of section 1877 of the Act any

ownership or investment interest,

including ownership or investment

interests through intermediate entities,

no matter how indirect, and we

proposed to include indirect

compensation relationships by tracing

compensation paid by an entity

furnishing DHS through other entities,

regardless of how the compensation

might be transformed.

We similarly proposed a broad

interpretation of the phrase ‘‘referral to

an entity.’’ As defined in the statute, a

referral is a ‘‘request’’ by a physician for

a DHS. We proposed defining a

‘‘request’’ as any step taken after a

physician performs an initial

examination or a physician service on a

patient that indicates that the physician

believes the DHS is necessary. Under

this broad reading, a referral could be

either written or oral, made on medical

charts or records, or indicated by a

prescription or written order. We also

proposed that a referral could be direct

or indirect, meaning that a physician

would be considered to have made a

referral if he or she caused the referral

to have been made by someone else (for

example, an employee, a hospital

discharge planner, or a staff member of

a company that the physician owns or

controls). We interpreted ‘‘referrals’’ to

include DHS services subsequently

performed by the referring physician.

The Final Rule: Given the significance

of the general prohibition, we received

many comments related to various

aspects of the January 1998 proposed

rule. In particular, commenters sought

clarification of fundamental statutory

concepts, including direct and indirect

864 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

compensation and ownership or

investment arrangements. In addition,

many commenters took issue with our

interpretation of several of the key

terms, including ‘‘referral,’’

‘‘consultation,’’ and ‘‘furnishing.’’

We are making a number of

significant changes to the general

prohibition sections in Phase I of this

rulemaking. These revisions include the

following:

• Clarification as to what constitutes

a ‘‘direct’’ versus an ‘‘indirect’’ financial

arrangement, including the addition of a

‘‘knowledge’’ element for indirect

financial relationships.

• Creation of a new exception for

indirect compensation arrangements.

• Clarification that payment

obligations that are secured, including

those secured by a revenue stream, are

among the relationships considered to

be ownership or investment interests.

• Revision of the definition of

‘‘referral’’ to exclude services personally

performed by the referring physician.

• Creation of an exception under

section 1877 of the Act for entities

submitting claims for DHS that did not

know of and did not have reason to

suspect the identity of the physician

who made the DHS referral to the entity.

These changes are discussed in

greater detail below. First, we address

the definition of a ‘‘financial

relationship;’’ second, we address the

definition of ‘‘referral.’’ These two

aspects of the general prohibition under

section 1877 of the Act are analytically

distinct and require separate analyses.

In general, we believe a sensible

approach is to ask two questions: (1) Is

there a direct or indirect financial

relationship between the referring

physician and the entity furnishing

DHS? (2) Is there a referral for DHS from

the physician to the entity? If the

answer to both questions is affirmative,

section 1877 of the Act is violated,

unless an exception applies.

A. When Is There a Financial

Relationship Between the Physician and

the Entity?

The existence of a financial

relationship between the referring

physician (or an immediate family

member) and the entity furnishing DHS

is the factual predicate for 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 immediate family

member) in the entity furnishing DHS,

or (2) a compensation arrangement

between the referring physician (or an

immediate family member) and the

entity furnishing DHS. Any financial

relationship between the referring

physician and the DHS entity triggers

application of the statute, even if the

financial relationship is wholly

unrelated to a designated health service

payable by Medicare. In many instances,

the financial relationship will not relate

to DHS. Unless the financial

relationship fits into a statutory or

regulatory exception, however, referrals

for DHS are prohibited.

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 immediate

family member with no person or entity

(other than agents) interposed between

them. While some commenters inquired

whether particular arrangements or

relationships, such as stock options or

vesting in retirement plans, could be

characterized as ownership or

compensation arrangements, there were

no substantive comments as to the

underlying definition of a direct

financial relationship. The specific

questions raised by the commenters are

addressed in the comments and

responses that follow.

With respect to ‘‘indirect’’ financial

relationships, in the preamble to the

January 1998 proposed rule, we

proposed to include as an ‘‘indirect’’

financial relationship any ownership or

investment interest, including

ownership or investment interests

through intermediate entities, no matter

how indirect, and we proposed to

include indirect compensation

relationships by tracing compensation

paid by an entity furnishing DHS

through other entities, regardless of how

the compensation might be transformed.

In short, we proposed very broad

interpretations of indirect financial

relationships.

We have generally adopted the overall

interpretations of ‘‘financial

relationship’’ in the January 1998

proposed rule, with the important

exception of ‘‘indirect’’ financial

relationships. Many commenters

objected to the discussions in the

preamble to the January 1998 proposed

regulations relating to indirect financial

relationships on the grounds that the

discussions were confusing,

inconsistent, administratively

impracticable, or unfair. We have

responded to the commenters by

substantially revising the regulations

pertaining to indirect financial

relationships, especially indirect

compensation arrangements. As

described in the paragraphs that follow,

we have added a knowledge element to

the definitions of ‘‘indirect’’ financial

relationships. We have also made other

significant changes in the treatment of

indirect compensation arrangements.

Knowledge Element for Establishing the

Existence of an Indirect Financial

Arrangement

We are amending the definitions of (i)

‘‘indirect ownership or investment

interest’’ and (ii) ‘‘indirect

compensation arrangement’’ in

§ 411.354 to include a knowledge

element. Many commenters expressed

concern that by extending liability for

indirect financial relationships to

relationships involving any number of

intermediate persons or entities, the

January 1998 proposed regulation

imposed an unfair burden on entities

furnishing DHS affirmatively to ferret

out and discover potential indirect

financial relationships or else risk

submitting improper claims because of

relationships they knew nothing about.

While we believe that, in most

circumstances, the referring physician

(or his or her immediate family member)

will only be one or two degrees of

separation from the entity furnishing the

DHS, we have nevertheless modified the

January 1998 proposed regulation to add

a ‘‘knowledge’’ element in cases of

indirect financial relationships. This

modification limits exposure under

section 1877 of the Act to those

circumstances in which the entity

furnishing DHS has actual knowledge of

an indirect financial relationship or acts

in reckless disregard or deliberate

ignorance as to the existence of an

indirect financial relationship. (We

sometimes refer to this ‘‘actual

knowledge or reckless disregard or

deliberate ignorance’’ standard in this

preamble by the shorthand phrase

‘‘knows or has reason to suspect.’’) We

define the ‘‘knowledge’’ element in a

manner consistent with Federal law, as

described below.

In order to satisfy this ‘‘knowledge’’

element in the case of an indirect

ownership or investment interest, the

DHS entity need only know or have

reason to suspect that the referring

physician (or immediate family

member) has some ownership or

investment interest in the entity

furnishing the DHS (or in an entity that

holds an ownership or investment

interest in the DHS entity). Likewise, to

satisfy this ‘‘knowledge’’ element in the

case of an indirect compensation

arrangement, the DHS entity need only

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 865

know or have reason to suspect that the

referring physician (or immediate family

member) is receiving some 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 DHS. In other words, we are

not requiring that the DHS entity have

knowledge of every link in the chain of

entities having financial relationships

that connects the DHS entity to the

referring physician (or immediate family

member).

Specifically, we are providing that, in

the case of indirect financial

relationships, referrals will only be

prohibited (and claims disallowed) if

the DHS entity (i) has actual knowledge

that the referring physician (or

immediate family member) has an

indirect financial relationship (that is,

that the referring physician or

immediate family member (a) has some

ownership or investment interest in the

DHS entity or (b) receives aggregate

compensation that takes into account or

otherwise reflects referrals or other

business generated by the referring

physician for the entity furnishing

DHS), or (ii) acts in reckless disregard or

deliberate ignorance of whether such an

indirect financial relationship exists.

Essentially, we are adopting a

‘‘knowledge’’ element comparable to the

scienter standard in the Civil Monetary

Penalty Law, section 1128A of the Act.

This ‘‘knowledge’’ element generally

imposes a duty of reasonable inquiry on

providers. In the specific context of

indirect financial relationships under

section 1877 of the Act, we wish to

make clear that, given the

impracticability of investigating every

possible indirect financial relationship

involving a referring physician, the

knowledge element does not impose an

affirmative obligation to inquire as to

indirect financial relationships. A duty

of reasonable inquiry does require,

however, that providers in possession of

facts that would lead a reasonable

person to suspect the existence of an

indirect financial relationship take

reasonable steps to determine whether

such a financial relationship exists and,

if so, whether that indirect financial

relationship falls within an exception to

the statute (such as the new exception

for certain indirect compensation

arrangements in § 411.354) or whether

the DHS being furnished fall within an

exception (such as the in-office ancillary

services exception) before submitting a

claim for the referred item or service or

making a referral. The reasonable steps

to be taken will depend on the

circumstances. Reasonable steps may

include the DHS entity obtaining, in

good faith, a good faith, written

assurance from the referring physician

(or immediate family member, as

applicable) or the entity from which the

referring physician (or immediate family

member) receives direct compensation

that the physician’s or immediate family

member’s aggregate compensation is fair

market value for services furnished and

does not take into account or otherwise

reflect referrals or other business

generated by the referring physician for

the DHS entity, so as to qualify under

the new exception for certain indirect

financial relationships in § 411.354

(discussed below). A written assurance

is not determinative, however,

especially if the DHS entity has

knowledge of, or reason to suspect,

other, contradictory evidence or

information.

The addition of a knowledge

requirement as an element of an

improper indirect financial relationship

addresses the concerns expressed by

many commenters that it would be

impossible continuously to investigate

and uncover indirect financial

relationships of every referring

physician and his or her immediate

family members. While the ‘‘knowing’’

element we are adopting may allow

more claims to be paid than a

requirement that would interpret the

statute to impose an absolute duty to

investigate (and may impose a higher

evidentiary burden on the government

in an enforcement action), we believe

that incorporating a knowledge element

in the definition of indirect financial

relationships more fairly balances the

burden of compliance against the risk of

abuse the statute was intended to

prevent. We iterate that for purposes of

section 1877 of the Act, the DHS entity

has no affirmative duty to inquire or

investigate whether an indirect financial

relationship with a referring physician

(or immediate family member) exists,

absent some information that would put

a reasonable person on alert, and that

the duty that is imposed is one of

reasonable inquiry in the circumstances.

Indirect Compensation Arrangements

We have substantially revised the

January 1998 proposed regulations by

restructuring our approach to indirect

compensation arrangements. In the

January 1998 proposed regulation, we

had proposed to trace compensation

paid by an entity furnishing DHS

through any number of other persons or

entities, regardless of how the

compensation might be transformed.

Many commenters complained that the

examples provided in different parts of

the preamble to the January 1988

proposed rule were inconsistent or

unclear. Upon reviewing the comments

and the preamble, we understand the

commenters’ confusion and have

revised the provisions that apply to

indirect compensation arrangements by:

• Defining ‘‘indirect compensation

arrangement’’ to establish a ‘‘bright

line’’ test, including the ‘‘knowing’’

element described above; and

• Creating a new exception under

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

indirect compensation arrangements

that is generally consistent with the new

‘‘fair market value’’ exception for direct

compensation arrangements.

This treatment of indirect

compensation arrangements more

clearly parallels the analysis and

regulatory treatment of direct

compensation arrangements by (i)

defining the universe of financial

relationships that potentially triggers

disallowance of claims (that is, the

definition of ‘‘indirect compensation

arrangement’’); and (ii) creating an

exception for the subset of ‘‘indirect

compensation arrangements’’ that will

not trigger disallowance. The standards

in the new exception for indirect

compensation arrangements are based in

large part on the standards found in the

various statutory and proposed

regulatory exceptions for direct

compensation arrangements, especially

the fair market value exception

proposed in the January 1998 proposed

regulations, which was received

favorably by the commenters and has

been incorporated into the final

regulations in § 411.354(d).

The definition of an ‘‘indirect

compensation arrangement’’ and the

new exception are discussed in detail

below.

• Definition of ‘‘Indirect

Compensation Arrangement.’’ We have

developed a simple test to identify

whether an indirect compensation

relationship exists. We are adopting in

Phase I of this rulemaking, a definition

of ‘‘indirect compensation arrangement’’

that has three elements: (1) There must

exist between the referring physician (or

immediate family member) and the DHS

entity an unbroken chain of persons or

entities that have financial relationships

between them (that is, each link in the

chain has either an ownership or

investment interest or compensation

arrangement with the preceding link);

(2) the aggregate compensation received

by the referring physician (or immediate

family member) from the person or

entity in the chain with which the

physician has a direct financial

relationship varies with, or otherwise

reflects, the volume or value of referrals

or other business generated by the

866 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

referring physician for the entity

furnishing DHS; and (3) the DHS entity

must have actual knowledge that the

aggregate compensation received by the

referring physician (or immediate family

member) from the entity with which the

physician has a direct financial

relationship varies with, or otherwise

reflects, the volume or value of referrals

or other business generated by the

referring physician for the entity

furnishing DHS, or act in reckless

disregard or deliberate ignorance of the

existence of such relationship.

The first element of the indirect

compensation arrangement definition is

met if there is an unbroken chain of

financial relationships from the DHS

entity to the referring physician (or

immediate family member), regardless

of the form or purpose of the payments

or their relationship to the DHS

referrals. This element is relatively

straightforward. The unbroken chain

that creates an indirect compensation

arrangement can consist of any

combination of excepted or unexcepted

financial relationships, whether

ownership or investment interests or

compensation arrangements.

One issue raised by several

commenters was whether an ownership

or investment interest could also create

a compensation arrangement. An

ownership or investment interest creates

a direct compensation arrangement

between the owner/investor and the

owned/investment entity, since the

ownership or investment establishes an

arrangement for the distribution of any

profits or other benefits (for example,

tax benefits in the case of a pass-through

entity) from the venture to the owners/

investors. However, when the

ownership or investment interest itself

meets a specific statutory exception

under section 1877 of the Act, any

anticipated return on investment or

other remuneration flowing from the

ownership or investment is similarly

excepted, provided the return or other

remuneration is bona fide and not a

sham (sham returns would include, for

example, use of loan proceeds to make

distributions in the absence of bona fide

profits from the venture).

An excepted financial relationship

may still constitute a link in a chain that

establishes an indirect compensation

arrangement between a referring

physician and a DHS entity. For

example, if a referring physician owns

an interest in a hospital that meets the

exception under section 1877(d)(3) of

the Act (which allows a referring

physician to own an interest in a

hospital as a whole, but not in a

subdivision of the hospital), and the

hospital contracts for services with a

clinical laboratory to which the

physician refers, there would exist a

chain of persons or entities having

financial relationships between the

referring physician and the DHS entity

(referring physician ‰ whole hospital

‰ clinical laboratory), even though the

financial relationship between the

referring physician and the hospital fits

in an exception. We address this issue

further in the responses to comments

that follow.

The second element of the definition

of indirect compensation arrangement is

that the aggregate compensation

received by the referring physician (or

immediate family member) from the

person or entity in the chain with which

the referring physician (or immediate

family member) has a direct financial

relationship varies with, or otherwise

reflects, the value or volume of referrals

or other business generated by the

referring physician for the entity

furnishing DHS. For the purpose of the

definition of indirect compensation

arrangements, we are looking at whether

aggregate compensation in the direct

financial relationship varies with, or

otherwise reflects, the value or volume

of referrals or other business generated

by the referring physician for the entity

furnishing DHS. Accordingly, for

purposes of this element, any ‘‘per

service’’ or ‘‘per use’’ payment

arrangement between the physician and

the person or entity with which the

physician has the direct relationship

that is based, in whole or in part, on

referrals or other business generated for

the DHS entity would satisfy this

element. So too, any payment or other

remuneration conditioned more

generally on referrals or business

generated for the DHS entity would

satisfy this element of the definition of

‘‘indirect compensation arrangement,’’

except as described in § 411.354(d)(5)

(describing limited circumstances when

an entity may condition compensation

on referrals). (For a discussion of

§ 411.354(d)(5), see section V of this

preamble).

If the financial arrangement between

the physician (or immediate family

member) and the person or entity in the

chain with which the physician has the

direct financial relationship is an

ownership or investment interest, we

will look at the relationship between

that person or entity (that is, the

‘‘owned entity’’) and the next person or

entity in the chain with which the

owned entity has a direct financial

relationship (if that financial

relationship is also an ownership or

investment interest, we will look to the

next direct financial relationship in the

chain, and so forth, until we reach a

compensation arrangement with an

‘‘unowned’’ entity with which there is

a compensation arrangement—a chain

consisting entirely of owned entities is

an indirect ownership or investment

interest, not an indirect compensation

arrangement). The inquiry then becomes

whether the aggregate compensation the

owned entity receives varies with, or

otherwise reflects, the volume or value

of referrals or other business generated

by the referring physician for the entity

furnishing DHS.

The third element in the definition of

indirect compensation arrangement is

that the entity furnishing DHS must

know or have reason to suspect that the

referring physician’s (or immediate

family member’s) aggregate

compensation varies with, or otherwise

reflects, the value or volume of referrals

or other business generated by the

referring physician for the entity

furnishing the DHS. As discussed above,

reason to suspect a financial

relationship will trigger a duty to make

an inquiry into the relationship that is

reasonable in the circumstances. In the

context of indirect compensation

arrangements, in most cases, the

referring physician (or immediate family

member) will have knowledge of the

basis for his or her compensation and be

in the best position to assure

compliance with section 1877 of the

Act. Thus, as noted above, reasonable

inquiry by the DHS entity may include

obtaining, in good faith, a good faith,

written assurance from the referring

physician (or immediate family

member, as applicable) or the entity

from which the referring physician (or

immediate family member) receives

direct compensation that the physician’s

or immediate family member’s aggregate

compensation falls within the indirect

compensation arrangement exception in

§ 411.354 (that is, the compensation is

fair market value for services furnished

and does not take into account or

otherwise reflect referrals or other

business generated by the referring

physician for the DHS entity). As

discussed below, we are creating a new

exception for indirect compensation

arrangements, for which we believe

most nonabusive indirect compensation

arrangements can readily qualify.

• Exception for Indirect

Compensation Arrangements. While the

definition of an ‘‘indirect compensation

arrangement’’ identifies the universe of

potentially improper arrangements, we

recognize that many of those indirect

compensation arrangements may be

substantially similar to direct

compensation arrangements that fit in

one of the existing statutory exceptions

in section 1877 of the Act or one of the

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 867

regulatory exceptions we proposed in

January 1998. However, many of these

indirect compensation arrangements

cannot fit in those direct compensation

arrangement exceptions, because the

arrangements are with persons or

entities that are not the person or entity

furnishing DHS. Accordingly, we are

creating a new exception, using the

Secretary’s authority under section

1877(b)(4) of the Act, to provide an

exception for certain indirect

compensation arrangements. The new

exception would protect an indirect

compensation arrangement if the

following conditions are satisfied:

• The compensation received by the

referring physician (or immediate family

member) from the person or entity in

the chain with which the referring

physician (or immediate family

member) has the direct financial

relationship is fair market value for the

items or services provided under the

arrangement and does not take into

account the value or volume of referrals

or other business generated by the

referring physician for the entity

furnishing DHS;

• The compensation arrangement

between the referring physician (or

immediate family member) and the

person or entity in the chain with which

the physician (or immediate family

member) has the direct financial

relationship is set out in writing, signed

by the parties, and specifies the services

covered by the arrangement (in the case

of a bona fide employment relationship,

the arrangement need not be set out in

a written contract, but it must be for

identifiable services and be

commercially reasonable even if no

referrals are made to the employer);

• The compensation arrangement

does not violate the anti-kickback

statute or any laws or regulations

governing billing or claims submission.

Where the financial relationship

between the physician and the person or

entity with whom he or she has a direct

financial relationship is an ownership

or investment interest, we will apply the

requirements of this exception to the

first compensation arrangement in the

chain of relationships between the

physician and the entity furnishing

DHS.

For purposes of the new exception, in

determining whether compensation

takes into account the value or volume

of referrals or other business generated

by the referring physician for the DHS

entity, we will apply the tests for

‘‘volume or value of referrals’’ and

‘‘other business generated’’ that are

discussed in section V of this preamble

and set forth in § 411.354(d) of these

regulations. This is consistent with our

determination to interpret those phrases

uniformly in all exceptions in which

they appear. Thus, ‘‘per service’’ or ‘‘per

use’’ compensation arrangements can fit

in the new exception for indirect

compensation arrangements, provided

the ‘‘per use’’ or ‘‘per service’’ payments

are fair market value for the items or

services provided (and do not include

any additional amount that might be

attributable to the volume or value of

referrals or other business generated

between the referring physician and the

entity furnishing DHS) and the

payments do not vary during the term

of the compensation arrangement in any

manner that takes into account referrals

to the DHS entity.

Some of the statutory and regulatory

exceptions operate to exclude certain

categories of services from the reach of

section 1877 of the Act, when certain

criteria are satisfied. In effect, services

described in these exceptions are not

DHS for purposes of the statute. These

service-based exceptions include the

physicians’ services exception, in-office

ancillary services exception, prepaid

plans exception, and academic medical

center exception, in § 411.355 of these

regulations. Thus, even if there is an

indirect compensation arrangement

between a referring physician and an

entity furnishing DHS, these exceptions

may apply to referrals of the particular

services described in the exception.

Referrals of DHS that do not fit in a

services-based exception would be

prohibited unless the indirect

compensation arrangement fits in the

new exception for indirect

compensation arrangements.

Finally, we are not adopting our

interpretation in the January 1998

proposed rule with regard to common

ownership or investment in the same

entity (which is not the entity

furnishing DHS) by the referring

physician (or immediate family

member) and the entity furnishing DHS.

In the January 1998 proposed rule, we

proposed that such common ownership

would not create a compensation

arrangement between the referring

physician and the DHS entity. However,

in the light of our modified and more

limited definitions of indirect financial

relationships, we have revisited the

issue of common ownership. We believe

that such relationships should be

analyzed in the same manner as any

indirect financial relationship.

We are also making the following

changes in the general prohibition

sections of the regulations:

• Clarification that an ownership or

investment interest in a subsidiary

corporation will not be considered a

direct ownership or investment interest

in the parent or a sibling corporation.

However, an owner of a subsidiary

corporation may have an indirect

financial relationship with the parent or

sibling company that could trigger a

violation of section 1877 of the Act.

• Treatment of stock options as

creating a compensation relationship

and not an ownership interest until

such time as the options are exercised.

• Clarification that payment

obligations that are secured, including

those that are secured by a revenue

stream, are considered ownership or

investment interests.

In the following paragraphs, we

address the specific comments we

received on the discussion and

proposed interpretations of financial

relationships set out in the January 1998

proposed rule and our responses to

them.

Comment: A number of commenters

objected to the concept of ‘‘tracing’’

compensation from, and ownership or

investment interests in, an entity

furnishing DHS through any number of

intermediate entities to a referring

physician. According to these

commenters, the administrative burden

of trying to comply would be costly and

ultimately impossible. These

commenters believe that our proposed

interpretation would place the entities

furnishing the services, as well as

physicians making referrals, at risk for

what was unknowable given potentially

complex business arrangements. One

commenter suggested that we keep the

same definition of financial relationship

as the August 1995 final rule, which the

commenter stated was limited to direct

ownership and compensation

arrangements.

Response: The commenter who

suggested that the August 1995 final

rule was limited to direct financial

relationships is mistaken. In the August

1995 final rule, we defined financial

relationship to include indirect

financial relationships. We did not,

however, expand on how we would

interpret and apply the term ‘‘indirect.’’

We believe that limiting the statutory

prohibition to direct ownership and

compensation arrangements would

seriously weaken the statute.

Unscrupulous physicians and entities

furnishing DHS would simply interpose

entities between themselves and funnel

the money through them. Furthermore,

as we stated in the preamble to the

January 1998 proposed rule, the statute,

by its terms, applies to indirect

ownership and investment interests and

compensation arrangements.

As discussed above, we have revised

the treatment of indirect compensation

arrangements. First, we are no longer

868 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

requiring any tracing of payments. The

initial screen is simply whether there is

an unbroken chain of persons or entities

having financial relationships between

the referring physician (or an immediate

family member) and the entity

furnishing DHS, regardless of the nature

of the payments or financial

relationships. Second, we have limited

liability to instances in which the DHS

entity knows or has reason to suspect

that aggregate compensation received by

the referring physician (or immediate

family member) varies with, or

otherwise reflects, the volume or value

of referrals or other business generated

for the DHS entity. Finally, we have

made clear that absent information that

would put a reasonable person on alert,

a DHS entity has no affirmative duty to

inquire or investigate such

arrangements.

Comment: A major trade association

representing physicians (and other

commenters) claimed that our

explanations of how we would treat

several types of situations involving

indirect financial relationships

appeared inconsistent. Specifically, the

association referred to the example of a

hospital contracting with a group

practice to furnish physician services

and to staff the hospital, and the

hospital paying the group practice for

these services, and with the group

practice, in turn, compensating the

physicians through salaries that ‘‘in

some way’’ reflect the hospital services.

According to the January 1998 proposed

rule, the physicians would have an

indirect compensation relationship with

the hospital that would require an

exception. The commenter complained

that this position is inconsistent with

another example in the preamble in

which we stated that, when a physician

who owned a physical therapy (PT)

company referred patients for treatment

including PT to a skilled nursing facility

(SNF) that contracted with the

physician’s PT company, we would

equate the physician with the PT

provider.

Response: We believe the new

provisions for indirect compensation

arrangements address the commenters’

concerns.

In the example cited by the

commenter involving the payments by a

hospital to a group practice that, in turn,

pays its employees a salary, we would

not require evidence that the salary is

‘‘in some way’’ related to the hospital

payment. It is enough that the hospital

has a financial relationship (that is, a

personal services contract) with the

medical group, which, in turn, has a

financial relationship with its

employees. Since there is an unbroken

chain of financial relationships between

the referring physician and the DHS

entity, the first element in the indirect

compensation definition is satisfied.

The second element of the definition

of an indirect compensation

arrangement would be satisfied if the

aggregate compensation to the referring

physician from the medical group

varied with, or otherwise reflected, the

volume or value of referrals or other

business generated by the referring

physician for the DHS entity (that is, the

hospital)—a fact that should be

relatively easy to establish.

The final element in the definition of

an indirect compensation relationship

requires that the hospital (that is, the

DHS entity) (i) have actual knowledge or

reason to suspect that the referring

physician is receiving compensation

from the medical group (that is, the

entity in the chain with which the

referring physician has a direct financial

relationship) that varies with, or

otherwise reflects, the volume or value

of referrals or other business generated

for the hospital.

Indirect compensation arrangements

that do not fit in the new exception for

such arrangements can be restructured

or abandoned. Arrangements under

which a referring physician receives

compensation tied to the volume or

value of his or her referrals or other

business generated for a DHS entity are

the very arrangements at which section

1877 of the Act is targeted.

Commenters claimed that our

discussion at 63 FR 1710 in the

preamble of the January 1998 proposed

rule was confusing because of the way

we described a physician’s referrals to a

SNF, which, in turn, referred the

patients to a PT company in which the

referring physician had an ownership

interest and which billed Medicare

directly for services to SNF patients. In

that example, the referring physician

had a direct financial relationship

(ownership) with the PT company.

There was no indirect financial

relationship involving the SNF. Rather,

the referring physician had a referral

arrangement with the SNF, but not a

financial relationship, and the SNF had

a referral arrangement with the PT

provider, but not a financial

relationship. We think the issue in the

example is whether, by sending patients

to the SNF, the physician is making

referrals to the PT provider, with which

the physician has a direct financial

relationship. We discuss that issue in

the following section on referrals.

However, we think it useful to

reconsider the example in light of

consolidated billing for SNFs. (We note

that consolidated billing should not be

confused with composite rate payments.

Consolidated billing is a process for

submitting claims while composite rate

payment constitutes a distinct payment

methodology.) Under consolidated

billing, the SNF in the example will be

billing the PT services directly to

Medicare. In this situation, there would

be an indirect compensation

relationship between the SNF—which is

now the DHS entity—and the referring

physician. Since the SNF would be

purchasing PT services from the PT

company owned by the referring

physician, a financial relationship

would exist between the SNF and the

PT company, and the physician’s

ownership interest in the PT company

would complete the chain (SNF‰ PT

company‰ referring physician). Thus,

the first element of the definition of an

indirect compensation arrangement

would be satisfied. With respect to the

second element, the financial

relationship between the referring

physician and the person or entity in

the chain with which the referring

physician has a direct financial

relationship (that is, the PT company) is

an investment interest. Accordingly, we

look to the compensation paid by the

SNF to the owned entity (that is, the PT

company) in order to see if the second

element is satisfied. Since the PT

company is compensated on a per

service basis that reflects referrals by the

referring physician to the SNF, the

second element is met. Assuming

knowledge on the part of the SNF, there

would be an indirect compensation

arrangement, and the issue becomes

whether the indirect compensation

arrangement satisfies the new exception

for indirect compensation arrangements

in § 411.354.

Comment: Several commenters stated

that when there is a chain of payments

that begins with a payment by a

provider of DHS to another entity

controlled by it, the first payment

outside the entities under common

control should be the arrangement that

has to meet an exception. For example,

in looking at payments from a hospital

to a physician group practice that is

wholly owned by the hospital for

hospital staffing and subsequent

payments from the group to its

employed physicians, the payments that

would need to qualify for an exception

are the payments to the employed

physicians. One commenter proposed

that when tracing indirect financial

relationships, the inquiry should end

any time a payment in the chain meets

an exception.

Response: The first commenters’

suggested approach is problematic

because the ‘‘volume or value’’ standard

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 869

for the employed physician’s

compensation is measured based on

referrals to the physician’s employer,

the medical group. Applying the

commenters’ proposed test to the

example, the medical group could pay

the physician employees based on the

volume and value of referrals and

business generated for the hospital and

still comply with the employment

exception. Phase I of this rulemaking

would require that the compensation to

the physicians not vary with or

otherwise reflect either referrals to the

group (to comply with the employee

exception) or referrals to, or other

business generated for, the hospital (so

that it does not qualify as an indirect

compensation relationship). To the

extent that the compensation paid to the

physicians did vary based on referrals or

other business generated for the

hospital, the arrangement would still be

protected if it complied with the new

indirect compensation arrangements

exception in § 411.354.

We also considered, but ultimately

rejected, the second commenter’s

proposal that the inquiry end any time

a financial relationship fits in an

exception. The fact that one financial

arrangement meets an exception does

not necessarily prevent the referring

physician from receiving payments

based on DHS referrals to a DHS entity.

For example, if a person or entity owns

both a group practice and a DHS entity,

a compensation arrangement with a

physician employee of the group

practice could fit in an exception so

long as it did not take into account

referrals between the employee and the

group practice. The exception would

not, however, prevent the compensation

arrangement from taking into account

referrals or other business generated by

the physician employee for the DHS

entity.

Having considered the several views

of the commenters, we believe that

Phase I of this rulemaking strikes a

balance that protects the Medicare

program while limiting the reach of the

regulation to abusive relationships.

Under Phase I of this rulemaking, there

would be an unbroken chain of financial

relationships (the DHS entity ‰ the

owner ‰ medical group ‰ referring

physician). However, unless the

compensation received by the employed

physician varies with or otherwise

reflects his or her referrals to, or other

business generated for, the DHS entity,

and the DHS entity has the requisite

knowledge, there would not be an

indirect compensation arrangement. If

there were, the arrangement would have

to meet an applicable exception.

Comment: One commenter asked

whether there would be an indirect

compensation arrangement if an

employed physician refers patients for

DHS to an entity that has an ownership

or investment interest in the physician’s

employer.

Response: There may be an indirect

compensation arrangement if a

physician refers patients for DHS to an

entity that has an ownership or

investment interest in the physician’s

employer, since the physician would be

referring to a DHS entity that has a

financial relationship (ownership or

investment) with an entity that has a

financial relationship (compensation)

with the physician. If the referring

physician’s compensation from his or

her employer reflected DHS referrals or

other business generated by the referring

physician for the entity providing the

DHS, and the DHS entity had actual

knowledge or reason to suspect that the

physician’s aggregate compensation

reflected the volume or value of referrals

or other business for the DHS entity,

there would be an indirect

compensation arrangement. Unless the

arrangement fit in the new indirect

compensation arrangements or another

exception, referrals to the entity would

be prohibited.

Comment: Another commenter asked

whether a physician’s referrals would be

prohibited in a situation involving a

physician practice management

company (PPMC). Specifically, the

commenter asked about a referring

physician who has an ownership or

investment interest in a PPMC, which,

in turn, controls a captive professional

corporation (PC) through a web of legal

agreements, including a long-term

management contract. The physician

refers patients for DHS to the captive

professional corporation.

Response: In the scenario described

by the commenter, there is very likely

an indirect compensation arrangement,

since the captive PC has a financial

relationship with the PPMC (the

management contract), which has a

financial relationship (ownership or

investment) with the referring

physician. Since the financial

relationship between the physician and

the entity in the chain of financial

relationships with which the physician

has a direct financial relationship (that

is, the PPMC) is an ownership or

investment interest, we look to the

compensation arrangement between the

owned entity (that is, the PPMC) and the

next entity in the chain, in this case, the

captive PC, to determine whether the

second element of the test for an

indirect compensation arrangement is

met. Accordingly, if the entity

furnishing the DHS (the captive PC in

this example) knows or has reason to

suspect that the PPMC’s compensation

from the captive PC varies with, or

otherwise reflects, the value or volume

of the captive PC’s business (and

consequently varies, in the aggregate,

based on the referring physician’s DHS

referrals to the captive PC), there would

be an indirect financial relationship

between the captive PC and the referring

physician. Unless the indirect

compensation arrangement fits in the

new indirect compensation

arrangements or another exception, the

physician could not refer DHS to the

captive PC, and the captive PC could

not submit claims for those DHS

referrals.

Comment: Several commenters

objected to our proposal that a

physician can receive indirect

compensation through a nonprofit

enterprise if the enterprise is controlled

by an individual who is in a position to

‘‘influence’’ the physician’s referrals.

The example was the owner of a clinical

laboratory who is also the director of

research at a nonprofit research facility

that could provide physician research

grants in exchange for referrals to the

laboratory.

Response: The issue is whether there

is a prohibited indirect financial

relationship between the DHS entity

(the clinical laboratory) and the

referring physician. Assuming there is a

financial relationship between the

owner of the clinical laboratory and the

nonprofit research facility, there would

be a chain of persons or entities with

financial relationships (clinical

laboratory ‰ research director ‰ notfor-profit ‰ referring physician), and

the issues become (i) whether the

aggregate amount of the research grants

to the referring physician varies with, or

otherwise reflects, the value or volume

of referrals or other business generated

by the referring physician for the

clinical laboratory, (ii) whether the

clinical laboratory knows of or has

reason to suspect that the referring

physician’s aggregate compensation

under the research grants varies with, or

otherwise reflects, the volume or value

of referrals or other business generated

for the clinical laboratory, and (iii) if

there is an indirect financial

relationship, whether an exception

applies. Of course, even if there is no

financial relationship between the

clinical laboratory and the nonprofit

research facility, there could be a

violation of the anti-kickback statute,

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

situation described in the comment.

Comment: Several commenters stated

that compensation derived from an

870 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

ownership or investment interest (for

example, a return on an investment

interest or a dividend) should not give

rise to indirect compensation. To

support this position, they referred to

discussions in the preamble to the

January 1998 proposed rule and in the

preamble to the August 1995 final

regulations, in which we stated that

compensation derived from, or ancillary

to, an investment interest that qualified

for an investment exception under

sections 1877 (b) through (d) of the Act

would not also have to meet a

compensation exception.

Response: We agree with the

commenters that dividends or profit

distributions from an ownership or

investment interest that qualifies for an

ownership or investment interest

exception under sections 1877(b)

through (d) of the Act do not also have

to meet a separate compensation

exception. In other words, the

ownership and investment exceptions

in the statute protect the ownership or

investment interest and any

corresponding return on the excepted

investment. Our discussion in the

preamble to the January 1998 proposed

rule specifically referenced and clarified

the August 1995 final rule preamble

discussion, which was limited to the

issue of whether distributions from an

excepted investment interest (that is, an

ownership or investment interest

protected under sections 1877(b)

through (d) of the Act) had to meet an

additional exception for compensation

arrangements. Nothing in either

preamble discussion was intended to be

interpreted as saying that any other

ownership or investment interests (that

is, ownership or investment interests

that are not specifically excepted) are

not compensation arrangements. We

believe that an ownership or investment

interest (including distributions from

the interest) creates a compensation

arrangement, as defined in section

1877(h)(1)(A) of the Act, between the

owner/investor and the owned/

investment entity and can be part of a

chain of persons or entities having

financial relationships that create an

indirect compensation arrangement.

Without this interpretation,

unscrupulous physicians could evade

section 1877 of the Act by simply

interposing a shell entity, which they

own, between themselves and the DHS

entity (which they do not own) and

taking out the compensation as

dividends. In short, they would simply

launder the compensation through the

shell investment entity.

Comment: Another commenter

suggested that a loan and any interest

payments should be treated as either

ownership or compensation, but not

both.

Response: We agree with the

commenter. If a loan qualifies as a

protected ownership or investment

interest, the interest payments do not

create a separate compensation

arrangement. Accordingly, the interest

payments need not satisfy a separate

compensation exception.

Comment: A number of commenters

asked that we clarify that an investment

in a subsidiary that does not furnish

DHS is not necessarily an ownership

interest in the parent or a sibling

corporation.

Response: 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. However, an owner

of a subsidiary company may have an

indirect financial relationship with the

parent or sibling company that could

trigger a violation of section 1877 of the

Act.

Comment: One commenter objected to

the suggestion in the preamble to the

January 1998 proposed rule that an

interest in a retirement plan might be

treated as an ownership or investment

interest. Another commenter stated that

an unsecured loan that was

subordinated to an entity’s credit

facility should not be treated as an

ownership or investment interest.

Response: We are persuaded by the

logic of the commenter and,

accordingly, we withdraw the statement

in the preamble to the January 1998

proposed rule that an interest in a

retirement plan might be treated as an

ownership or investment interest for

purposes of section 1877 of the Act. We

will consider contributions (including

employer contributions) to retirement

plans to be part of an employee’s overall

compensation arrangement with his or

her employer. We also agree that an

unsecured loan that is subordinated to

a credit facility is a compensation

arrangement and not an ownership or

investment interest for purposes of

section 1877 of the Act.

Comment: Another commenter stated

that secured debt given by a not-forprofit hospital, as part of its acquisition

of medical practices, should not be

treated as an ownership or investment

interest in the hospital, but as

compensation.

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

Act provides that ‘‘an ownership or

investment interest * * * may be

through equity, debt or other means.’’

Accordingly, we believe that loans,

bonds, or other financial instruments

that are secured with an entity’s

property or revenue, or a portion

thereof, constitute investment interests

within the meaning of section 1877 of

the Act. In addition, a contrary reading

would result in disparate treatment of

entities based on their organizational

status.

Comment: One commenter asserted

that stock options should be treated as

either ownership or investment interests

or compensation arrangements, but not

both. Another commenter stated that

stock options should be treated as

compensation and not ownership since

they do not carry voting rights or the

right to dividends and must be sold

upon conversion.

Response: In Phase I of this

rulemaking, we are revising the rule to

treat stock options as compensation at

the time they are awarded. At the time

they are exercised or converted, they

create an ownership or investment

interest and must meet an appropriate

exception. Any dividends or profit

distributions derived from an excepted

stock ownership or investment interest

would not have to meet a separate

compensation exception.

Comment: Another commenter stated

that stock options could be structured to

discourage referrals for DHS.

Response: The fact that a particular

financial arrangement might be

structured to discourage referrals does

not provide a basis for creating an

exception. The statute is intended to

remove incentives to overutilize by

prohibiting certain financial

relationships. If application of the

statute required a case-by-case

examination to determine the effect of

the financial relationship, the statute’s

efficacy would be undermined.

Comment: One commenter suggested

that the determination of whether a

convertible security is a compensation

arrangement or an ownership or

investment interest should depend on

which party has the right to convert the

security. According to the commenter, if

the DHS entity has the right to convert

the security, the interest should be

treated as compensation until

conversion.

Response: We are applying the same

approach to convertible securities as we

are applying to stock options, and we

will classify them as compensation until

they are converted into equity.

However, many convertible securities

are bonds that can be converted into

stock. Since bonds are typically secured

debt, bonds will be treated as an

ownership or investment interest.

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 871

B. When Does a Physician Make a

Referral?

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.

In the January 1998 proposed rule, we

interpreted ‘‘referral’’ to mean any

request by a physician for a service,

including services subsequently

performed by the physician. We

proposed defining a ‘‘request’’ as any

step taken after a physician performs an

initial examination or a physician

service on a patient that indicates that

the physician believes the service is

necessary. Under this broad definition,

a referral could be either written or oral,

made on medical charts or records, or

indicated by a prescription or written

order. We also proposed that a referral

could be direct or indirect, meaning that

a physician would be considered to

have made a referral if he or she caused

the referral to have been made by

someone else (for example, an

employee, a hospital discharge planner,

or a staff member of a company that the

physician owns or controls). As a

general principle, we proposed that a

physician may ‘‘cause’’ a referral to be

made if he or she has the ability to

control or influence the individual who

selects the entity that furnishes the

DHS.

In response to the public comments,

we are making several significant

changes to the definition of ‘‘referral’’ in

Phase I of this rulemaking. These

changes include the following:

• Revision of the definition of

‘‘referral’’ to exclude services performed

personally by the referring physician.

Simply stated, we are persuaded that a

physician cannot make a ‘‘request’’ of

himself or herself for services he or she

personally performs. However, a

physician can make a ‘‘request’’ of

others, including, without limitation,

his or her employees, co-workers, or

independent contractors. These requests

are ‘‘referrals’’ under section 1877 of the

Act (although many of them will fit in

an exception). We continue to believe

that a referral can occur in a wide

variety of formats, written, oral, or

electronic, depending on the particular

service.

• Adding an exception using our

regulatory authority under section

1877(b)(4) of the Act 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). A claim by the entity

furnishing the DHS may be paid for

purposes of section 1877 of the Act if

the entity did not know or have reason

to suspect the identity of the referring

physician. In these circumstances, there

is minimal risk of patient or program

abuse by the entity submitting the claim

(provided that the claim is otherwise

valid).

• Clarification of the definition of a

‘‘consultation.’’ In light of the

clarifications relating to indirect and

oral referrals described above, the

practical significance of the definition of

a ‘‘consultation’’ is substantially

reduced.

We believe that these changes address

many of the concerns expressed by

commenters. In particular, we have

endeavored to respond to the perceived

harshness of section 1877 of the Act by

creating a narrow exception under our

section 1877(b)(4) authority. If the entity

furnishing DHS knows of or has reason

to suspect the identity of the physician

who prescribed or ordered the DHS or

made the referral, the DHS entity may

not submit a claim for the services. If

the physician who prescribes or orders

a DHS is someone with whom the DHS

entity has a prohibited financial

relationship, we think a reasonable DHS

entity should suspect that the physician

referred the patient to the entity, absent

some credible evidence to the contrary.

In the following paragraphs, we

discuss and respond to the comments

we received on the proposed

interpretations of ‘‘referral’’ and

‘‘consultation’’ as published in the

January 1998 proposed rule.

1. ‘‘Referral’’

Comment: Many commenters objected

to our interpretation in the January 1998

proposed rule that a service ordered and

personally performed by a physician is

a referral within the meaning of section

1877 of the Act. Commenters asked us

to clarify that there is no referral if the

referring physician personally performs

the service. Similarly, some commenters

sought clarification that there is no

referral if the services are ‘‘incident to’’

services personally performed by the

referring physician.

Response: We are persuaded by the

commenters that a physician does not

make a ‘‘request,’’ in the ordinary sense

of that term, if he or she personally

performs a designated health service.

We agree it does not make sense to

consider work that a referring physician

initiates and personally performs as a

referral to an entity. Thus, we are

amending our definition of ‘‘referral’’ to

exclude services that are personally

performed by the referring physician

(that is, the referring physician

physically performs the service), and we

are revising our definition of ‘‘entity’’ to

clarify that the referring physician

himself or herself is not an entity for

purposes of section 1877 of the Act

(although the physician’s practice is an

entity). All other Medicare-covered DHS

performed at the request of a referring

physician are ‘‘referrals’’ for purposes of

section 1877 of the Act. A service

performed by a hospital for which the

hospital bills the technical or facility

component of the charge would be a

referred service. In such circumstances,

however, the physician’s service

performed at the hospital for which the

physician would bill Part B would not

be a referred service.

With respect to services performed by

others, including a physician’s

employees, we think the issue is more

complicated. Services performed by

others are reasonably considered to be

performed as a result of a ‘‘request.’’

Moreover, the statutory language in

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

indicates that the Congress considered

there to be a difference between

personally performed services and

services performed by others. On

balance, we have chosen to include

services performed by others, including

a physician’s employees, in the

definition of referral. We are concerned

that a blanket rule exempting services

performed by a physician’s employees

from the definition of ‘‘referral’’ could,

in some circumstances, undermine the

intent of section 1877 of the Act. For

example, by stationing employees in offsite DHS facilities, a physician practice

could circumvent the statutory

‘‘building’’ requirements of the in-office

ancillary services exception.

Even the more limited suggestion

made by some commenters that there

should be no ‘‘referral’’ if an employee’s

services are properly billable as

‘‘incident to’’ a physician’s personally

performed services could result in

circumvention of the ‘‘building’’

requirements in some cases.

872 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

However, we believe the definition of

‘‘referral’’ we are adopting here—in

conjunction with the in-office ancillary

services exception—strikes an

appropriate balance. Under the final

rule, services performed by anyone

other than the referring physician

(whether an employee, a staff member,

or a member of the physician’s group

practice) is a ‘‘referral’’ for purposes of

section 1877 of the Act. Thus, services

performed by a physician’s employees

will be considered ‘‘referrals’’. However,

in most cases, such referrals will be

permitted under the in-office ancillary

services exception, which is

substantially broader in this final rule

than in the 1998 proposed rule. Services

performed by employees that do not

meet the ‘‘same building’’ or

‘‘centralized building’’ tests (as

applicable, depending on whether the

physician is a solo or group practitioner)

will be prohibited unless another

exception applies.

We recognize that, in many cases,

services performed by a physician’s

employees are, for practical purposes,

tantamount to services performed by the

physician (for example, a physician’s

assistant applying a neck brace ordered

by a physician for an individual who

has been in an auto accident, when the

face-to-face encounter with the patient,

including the physical examination by

the physician, indicates the need for a

properly adjusted neck brace.) While

such services are included in the

definition of ‘‘referral’’ under this final

rule, given the significance of this issue,

we are soliciting comments as to

whether, and under what conditions,

services performed by a physician’s

employees could be treated as the

physician’s personally performed

services under section 1877 of the Act.

Comment: A commenter asked that

we clarify that a plan of care that

includes the provision of DHS by the

physician establishing the plan of care

is not a referral. If not clarified as

suggested, the commenter believes that

the physician would effectively be

barred from treating his or her own

patients.

Response: If the DHS are personally

performed by the physician who

established the plan of care, there would

be no referral as to those personally

performed services.

Comment: Some commenters objected

to our proposed presumption that a

physician has referred his or her patient

to an entity for the furnishing of DHS if

the patient obtains the services from the

entity with which the physician has a

financial relationship. One commenter

described the following scenario: A

physician orally tells a patient or

another person that the patient needs a

designated health service. The patient

obtains the service from an entity with

which the physician has a prohibited

financial relationship. The entity does

not know (and cannot know) that the

physician orally told the patient (or

other person) that the service was

needed. The commenter sought

clarification as to the application of

section 1877 of the Act in these

circumstances.

Response: We are establishing an

exception for indirect and oral referrals.

When there is no written order or other

documentation of the referral, the issue

is whether the DHS provider knows or

has reason to suspect the identity of the

physician who prescribed or ordered the

DHS or made the referral.

Comment: Several commenters sought

clarification that a physician’s ordering,

dispensing, or prescribing of drugs does

not constitute a referral to the

manufacturer of the drugs. The

commenters noted that the

manufacturers are not entities that

furnish DHS (that is, outpatient

prescription drugs) to patients. Rather,

furnishing of DHS is performed by

physicians, pharmacies, hospitals, and

clinics.

Response: We agree that, in most

cases, drug manufacturers are not

entities that furnish DHS to patients for

purposes of section 1877 of the Act,

and, therefore, the ordering, dispensing,

or prescribing of drugs would not

constitute a referral to the manufacturer

of the drugs. However, manufacturerowned or -affiliated retail pharmacy

operations, or other health care

providers may be entities for purposes

of section 1877 of the Act, if they

furnish DHS to patients.

Comment: A commenter

recommended that activities that a solo

practitioner performs as a customary

and integral part of patient treatment

should not be considered a ‘‘referral.’’

Response: We find the commenter’s

proposed language too vague to be used

in creating a standard. We believe our

revised definition of ‘‘referral’’ that

excludes personally performed services

and our changes to the in-office

ancillary services exception (see section

VII.B.1 of this preamble) adequately

address the commenter’s concerns.

Comment: A commenter stated that

referrals for DHS by a nonphysician

professional employee of a group

practice, such as a nurse practitioner or

a physician assistant, should not be

imputed to a physician member of the

group practice, when the nonphysician

is authorized and licensed to prescribe

treatment on his or her own and can

make independent decisions regarding

referrals. For example, if a nurse

practitioner, staffing a group practice

office without a physician member

present, orders and performs a plain xray, the referral for the x-ray should not

be imputed to a physician member of

the group practice. If the referral is

imputed, the service may not qualify

under the in-office ancillary services

exception, because it is not personally

performed by the referring physician,

another physician in the group practice,

or a person who is directly supervised

by the referring physician or another

group practice physician. Alternatively,

the commenter suggested that we

modify the ‘‘direct supervision’’

standard to mirror our payment and

coverage requirements to enable

‘‘imputed’’ referrals by a nurse

practitioner and a physician assistant to

fit in the in-office ancillary services

exception.

Response: As previously stated, we

are revising the ‘‘direct supervision’’

standard in the in-office ancillary

services exception to mirror our

payment and coverage requirements.

(See discussion in section VI.B.2 of this

preamble.) This change should address

the concern identified by the

commenter.

We believe that the question of

whether a referral by a nurse

practitioner or a physician assistant

should be imputed to an employer

physician will depend on the facts and

circumstances of the referral. The

inquiry is whether the physician

controls or influences the

nonphysician’s referral. The Congress

and HHS have recognized that many

nurse practitioners and physician

assistants are independent providers

authorized and licensed to prescribe

treatment and make independent

decisions regarding referrals. However,

these practitioners do not always act

independently of their employers. For

example, sometimes services of a

nonphysician practitioner are billed

‘‘incident to’’ a physician service rather

than directly under the nonphysician’s

independent billing number. In short,

we are concerned that physicians could

attempt to circumvent section 1877 of

the Act by funneling referrals through

nonphysician practitioners. We believe

the change in the supervision

requirement affords sufficient protection

for legitimate arrangements.

Comment: Several commenters were

confused by our discussion in the

preamble to the January 1998 proposed

rule at 63 FR 1710 of a situation in

which a physician who owned a

physical therapy (PT) company referred

patients for treatment, including PT, to

a skilled nursing facility (SNF) that

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 873

contracted with the physician’s PT

company. In the preamble, we indicated

that we would analyze the arrangement

as an indirect compensation

arrangement and equate the physician

with the PT provider.

Response: In the preamble of the

January 1998 proposed rule, we

suggested that the critical factor would

be the degree of control the physician

had over the PT provider and the extent

of the PT provider’s relationship with

the SNF. We are abandoning that

analysis. We think the proper focus is

whether the physician is making a

referral to the PT provider within the

meaning of section 1877 of the Act. In

other words, we believe that a physician

can make a referral of DHS ‘‘to an

entity’’ even though the referral is first

directed or routed through another

person or entity, provided the physician

has reason to know the identity of the

actual provider of the service. In the

SNF/PT provider example, the relevant

inquiry is whether the physician has

made a referral, directly or indirectly, to

the entity furnishing DHS, in other

words, whether he or she is referring

‘‘to’’ that entity. Accordingly, if the

physician referring the patient to the

SNF knows that the PT company in

which he or she has an investment

interest will furnish DHS to the patient

or could reasonably be expected to

know that the PT company will actually

furnish DHS to the patient, the referral

is a referral ‘‘to the entity’’ and is

prohibited, unless an exception applies.

Similarly, where the PT company

knows or has reason to suspect that the

referral for DHS came from a referring

physician with whom the PT company

has a prohibited financial relationship,

the PT company cannot submit the

claim for the DHS. The PT/SNF example

will be affected by the advent of full

consolidated billing for SNFs, as

described above in the responses to

comments on indirect compensation

arrangements.

To trigger section 1877 of the Act, the

direction or steering of a patient ‘‘to an

entity’’ does not need to be in writing,

nor does it have to be absolute; it need

only be reasonably intended to result in

the patient receiving the service from

the entity. Thus, for example, when a

physician provides an order or

prescription for a DHS to a patient that

ostensibly can be filled by any of a

number of entities and then suggests or

informs the patient that the order can be

serviced by a particular entity, there

would be a referral ‘‘to’’ that entity.

Given the administrative burden on

entities presenting claims, in the context

of an indirect financial relationship, we

believe a claim for DHS should be

subject to nonpayment unless the entity

does not know that, and does not have

reason to suspect that, the referring

physician had directed the patient to the

entity.

2. Consultation

The Existing Law: Section

1877(h)(5)(C) of the Act excepts from

the definition of a ‘‘referral’’ by a

‘‘referring physician’’ a request by a

pathologist for clinical laboratory tests

or pathological examination services, a

request by a radiologist for diagnostic

radiology services, and a request by a

radiation oncologist for radiation

therapy, if the services are furnished by,

or under the supervision of, the

specialist, pursuant to a consultation

requested by another physician. Section

1877(h)(5)(C) creates a narrow exception

from the definition of ‘‘referral’’ for a

small subset of services provided or

ordered by certain specialists pursuant

to a consultation requested by another

physician (the referring physician).

The Proposed Rule: In the preamble to

the 1998 proposed rule, we referred to

the interpretation of consultation that

appeared in the March 1992 proposed

rule for clinical laboratory services (57

FR 8595). There, we interpreted a

consultation to be:

A professional service furnished to a

patient by a physician (the consultant) at the

request of the patient’s attending physician.

A consultation includes the history and

examination of the patient as well as a

written report that is transmitted to the

attending physician for inclusion in the

patient’s permanent record. If, in the course

of that consultation, the consulting physician

deems it necessary to order clinical

laboratory services, those services may not be

ordered from a laboratory in which the

referring [attending] physician has a financial

interest. Other referrals, such as sending a

patient to a specialist who assumes

responsibility for furnishing the appropriate

treatment, or providing a list of referrals for

a second opinion, are not ‘‘consultations’’ or

‘‘referrals’’ that would trigger the [physician

referral provision].

We did not add anything to this

definition in the August 1995 final rule

concerning referrals for clinical

laboratory services.

Commenters to the 1998 proposed

rule took issue with this interpretation

for several reasons, including the

requirement that the consulting

physician examine and take a history of

the patient, and the interpretation’s

failure to demarcate clearly when a

consultant takes over treatment of the

patient.

The Final Rule: The final rule adopts

a very broad interpretation of a

consultation. We want to make clear

that this definition is only for the very

limited purpose of determining when a

pathologist’s, diagnostic radiologist’s, or

radiation oncologist’s ordering of DHS

from a facility with which he or she has

an otherwise prohibited financial

relationship will not prohibit

submission of a claim to Medicare. Most

importantly, this definition is not

intended to, and has no bearing on,

coverage or payment rules relating to

consultations. Coverage and payment

rules related to consultations raise many

issues that are irrelevant for the very

limited application of the term in

section 1877 of the Act. Simply put,

while there may be many difficult issues

in determining when certain specialty

services are consultations, as opposed to

routine treatment, such difficulties are

relatively rare in the context of the three

exceptions in section 1877(h)(5)(C) of

the Act (namely, a request by a

pathologist for clinical laboratory

services or pathological examination

services, a request by a radiologist for

diagnostic radiology services, or a

request by a radiation oncologist for

radiation therapy).

As a preliminary matter, we think it

important to recognize that section 1877

of the Act defines referrals very broadly.

Section 1877(h)(5) specifically includes

referrals or requests for services made

by the referring physician, as well as

any DHS provided pursuant to a

consultation with another physician,

including DHS provided by the

consulting physician or any DHS

ordered by the consulting physician.

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

having established that a referral

includes all DHS ordered by a

consulting physician, section

1877(h)(5)(C) then carves out: (i) A

request by a pathologist for clinical

laboratory services or pathological

examination services, (ii) a request by a

radiologist for diagnostic radiology

services, and (iii) a request by a

radiation oncologist for radiation

therapy, if the services are furnished by,

or under the supervision of, the

pathologist, radiologist, or radiation

oncologist pursuant to a consultation

requested by another physician.

The final rule adopts the following

criteria to identify a consultation for

purposes of section 1877:

(1) 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.

(2) The request and need for the

consultation is documented in the

patient’s medical record.

(3) After the consultation is provided,

the consulting physician prepares a

874 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

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.

Finally, we want to make clear that

the exception in section 1877(h)(5)(C) of

the Act only protects the referral of DHS

from the pathologist, diagnostic

radiologist, or radiation oncologist to

the DHS provider. If the DHS provider—

(1) knows or has reason to suspect that

the referral originated from the referring

physician, and (2) has a direct or

indirect financial relationship with the

referring physician, the DHS provider

cannot submit a claim to Medicare for

the DHS unless the financial

relationship fits into an exception.

Moreover, the referring physician may

not make the referral to the consultant

if he or she knows or has reason to

suspect that the consultant will order

DHS from an entity with which the

referring physician has a direct or

indirect financial relationship to which

no exception applies.

Comment: A commenter suggested

that the ‘‘diagnostic radiology’’

exception should be expanded to

include other DHS performed or

supervised by nonradiologist physicians

to assure quality of care and access to

a broad variety of services. The

commenter asked that we broaden the

consultation exception to include all

DHS used to diagnose disease that are

ordered pursuant to a consultation

initiated by another physician.

Response: We agree that section

1877(h)(5)(C) of the Act creates an

exception for the referrals of some

specialists and not others. However, the

Congress specifically excepted the

requests of radiologists for diagnostic

radiology services if the services are

furnished by, or under the supervision

of, the radiologist, pursuant to a

consultation requested by another

physician. It is our view that the

Congress regarded most radiologists in

this situation and the other excepted

specialists as physicians who were not

instigating a referral for services, but

merely implementing the request of

another physician who has already

determined that the patient is likely to

need radiology services. The Congress

believes that, in general, a radiologist in

this situation would not be likely to

overutilize services.

We do not believe that we have the

authority to extend this exception to

other specialists, some of whom provide

separate physician services to patients

and would be in a position to instigate

the referral for radiology.

Comment: One commenter was

concerned about our willingness to

exempt pathologists, radiologists, and

radiation oncologists, yet require other

arrangements and physicians to alter

their referral methods. The commenter

asserted that pathologists will order

further stains or studies on specimens to

aid in a diagnosis. Radiologists, not

infrequently, recommend further studies

as part of their interpretation, again to

help make a diagnosis. The commenter

stated that given the current medicolegal atmosphere, it is rare that he does

not follow the suggestions of these

consultants. In addition, the commenter

stated that he has seen cancer patients

with new or progressive diseases who

are being treated by radiation

oncologists without any direct input

from attending or primary care

physicians. In the commenter’s view,

these examples are standard medical

practice and self-serving. Since

radiologists often have an ownership

interest in the diagnostic facility and

pathologists in a laboratory facility, they

are doubly benefitted by the referral.

Response: The statute clearly

establishes special rules for diagnostic

radiologists, pathologists, and radiation

oncologists.

Comment: A number of commenters

explained their problems with

distinguishing a consultation from a

referral based on their particular

speciality area. For example, one

commenter stated that during an active

phase of an oncologic, hematologic, or

pneumatologic illness, the care of the

patient specific to that illness may be

managed by the subspecialist and the

overall care of the patient may be

managed by the referring physician

using the information obtained from the

consultation. This commenter believes

that a referral would occur only if the

total care of the patient were transferred.

Another commenter asserted that

rarely does a treating physician

completely give up the care of a patient

to another physician, and rarely does

the treating physician completely retain

responsibility for the care of the patient.

Rather, a physician will send a patient

to a specialist for testing, diagnosis, and

initial treatment, and then the

originating physician will take over the

care of the patient.

Representing specialists who

frequently perform consultations and

assume the neurological care of patients

at the request of referring physicians,

one commenter asserted that it is

appropriate to bill for a consultation

when care is transferred, rather than a

lower-paying evaluation and

management visit, because of the extra

work for the consulting physician

involved in preparing a report for the

attending physician.

Response: We agree with the

commenters that it can be difficult to

determine whether a first physician

initiating a visit to a second physician

should constitute a referral to another

physician or the request for a

consultation with that physician.

However, as discussed above, in the

three specific instances identified in the

statute, we think there will be little

disagreement in determining when there

is a consultation. In any event, for

purposes of section 1877(h)(5)(C) of the

Act, we are adopting a broader

interpretation of a consultation than is

in the coverage rules. Finally, payment

and coverage for consultations are not

addressed or affected by this rule.

Comment: One commenter,

representing an association of

radiologists, discussed the case of what

happens when a patient is sent to a

radiation oncologist for treatment of a

tumor. The commenter stated that

radiation oncology treatment occurs

over a period of weeks or months, and

is provided within a continuum of care

involving the radiation oncologist, the

referring physician, and even other

physicians.

Response: We agree with the

commenter and have clarified the

definition to recognize that radiation

therapy may extend over a prolonged

period of time and still be considered to

be pursuant to a consultation, provided

the radiation oncologist regularly

communicates with the referring

physician as to the patient’s care.

Comment: Commenters stated that

when a referring physician sends a

patient to a radiation oncologist for

radiation therapy, the referring

physician may not see the patient for

some time. The radiation oncologist

may decide during this time that the

patient needs services other than

radiation therapy services. The

commenter asked whether the radiation

oncologist’s referrals for nonradiation

therapy services falls within the scope

of the consultation exception.

Response: Under section 1877(h)(5)(C)

of the Act, for radiation oncology, only

a request for radiation therapy by a

radiation oncologist is not considered to

be a referral. We understand that in

some situations when a patient is

undergoing radiation therapy, the

patient’s care is not supervised by a

physician other than the radiation

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 875

oncologist. However, the radiation

oncologist cannot send the patient for

DHS other than radiation therapy

services to an entity with which the

radiation oncologist has a financial

relationship without meeting an

appropriate exception.

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

Act excepts DHS provided by consulting

pathologists, diagnostic radiologists,

and radiation oncologists if the services

are furnished by, or under the

supervision of, the consulting

physician. A commenter inquired

whether the required supervision could

be delegated to a member of the

consulting physician’s group practice.

Response: The plain language of

section 1877(h)(5)(C) of the Act does not

allow for supervision by anyone other

than the consulting physician. However,

we are broadly interpreting the

supervision requirement in this section

to be consistent with the supervision

requirements elsewhere in these

regulations. Thus, the level of

supervision required is whatever level is

required under the applicable Medicare

payment and coverage requirements.

Furthermore, the in-office ancillary

services exception may be available for

services supervised by a physician in

the consulting physician’s group

practice.

Comment: A commenter stated that

neither diagnostic radiologists nor

pathologists perform physical

examinations on patients. An

association representing certain

specialists stated that the definition of a

consultation should be modified so as

not to require a patient history and

physical examination except when

appropriate; for example, diagnostic

radiologists and nuclear medicine

physicians generally do not take a

patient’s history or perform a medical

examination. However, a nuclear

medicine physician would perform a

history and physical examination when

a patient is referred for therapy. In

addition, an association representing

clinical laboratories declared that it is

unlikely that a pathologist would ever

see a patient or take a history from a

patient. An association representing

radiologists asserted that diagnostic

radiologists generally do not take a

patient’s history or conduct a medical

examination; therefore, we should

clarify that a history and examination of

the patient is not required as part of a

radiologic consultation.

Response: For purposes of section

1877 of the Act, we agree that a

consultation does not necessarily

include either taking the history of a

patient or performing a physical

examination. Certainly, pathologists

would rarely see a patient. We do expect

that, on occasion, a consulting

physician, such as a radiologist, might

interview a patient to gain additional

information about the patient’s

condition, but this might not amount to

a full scale history. Similarly, the

radiologist might examine a patient, but

focus only on a particular area of

concern. We are amending our

description of a ‘‘consultation’’ to clarify

that there is no requirement that these

steps be performed.

Comment: A commenter asked

whether the prohibition under section

1877 of the Act is triggered when a

physician, who has no financial

relationship with a diagnostic imaging

center, initiates a referral to the imaging

center rather than to a particular

radiologist.

Response: We understand the

commenter to be asking whether the

consultation exception set forth in

section 1877(h)(5)(C) of the Act applies

if the request for the consultation is

made to the entity that employs or

contracts with a consulting radiologist

rather than to the consulting radiologist.

The commenter’s main concern seemed

to be whether a subsequent request by

the employed or contractor radiologist

for diagnostic radiology services

furnished by the imaging center would

be protected under section 1877(h)(5)(C)

of the Act. We believe that under

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

request for a consultation can be made

to either a particular radiologist or an

entity. Also, if the referring physician

does not have a financial relationship

with the diagnostic imaging center, the

referral to the center is not prohibited

under the general prohibition in section

1877(a) of the Act.

IV. Physician Compensation Under

Section 1877 of the Act: An Overview

Many public comments addressed

physician compensation issues. The

statute touches on physician

compensation in several places: the

definition of group practice, the

employee exception, and the personal

services exception. The interplay of

section 1877 of the Act and physician

compensation is one of the most

significant aspects of the self-referral

law.

Obviously, the issue of physician

compensation is of critical importance

to the physician community. As a

starting point, we do not believe that the

Congress intended section 1877 of the

Act to regulate physician compensation

practices, except as necessary to

minimize financial incentives to refer

DHS to entities with which the

physicians have financial relationships.

Having carefully studied the public

comments and having reconsidered the

statutory provisions, the legislative

history, and our January 1998 regulatory

proposals, we believe the following

general principles govern the

application of the statute to the manner

in which physicians are paid:

• First, as explained in section III.B of

this preamble, for purposes of section

1877 of the Act, the term ‘‘referral’’ does

not include DHS that are personally

performed by the physician. As a

practical matter, the statutory language

and structure indicate Congressional

recognition that physicians are

commonly compensated based on

productivity with respect to services

they personally perform.

• Second, with respect to group

practices, the Congress intended to

confer group practice status on bona

fide group practices and not on loose

confederations of physicians who come

together as a ‘‘group’’ substantially in

order to capture the profits of DHS

under the in-office ancillary services

exception to section 1877 of the Act. To

that end, we proposed adding a ‘‘unified

business’’ standard to the group practice

definition, using the statutory authority

the Congress conferred on the Secretary

to impose additional standards on group

practices. However, in response to

comments, we have reconsidered the

test for a ‘‘unified business’’; the final

regulations under Phase I of this

rulemaking adopt a considerably more

flexible approach to the same end.

Under Phase I of this rulemaking, one of

several characteristics of a ‘‘unified

business’’ is that the group’s physician

compensation methodologies are

established by the centralized

management of the group practice. For

the limited purposes of establishing that

a group practice is a unified business,

we think it is appropriate to look at

physician compensation derived from

all sources, not just from DHS. However,

location- and specialty-based

compensation practices are expressly

permitted with respect to the

distribution of revenues derived from

services that are not DHS. Such

practices may also be allowed for DHS,

depending on the circumstances. (See

the discussion of the group practice

definition in section VI.C of this

preamble.)

• Third, except for the limited

purpose of determining whether a group

practice is a unified business, the

physician compensation provisions for

group practices under section 1877 of

the Act only affect the distribution of

revenues derived from DHS. In general,

these revenues are likely to comprise a

relatively small portion of the total

876 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

revenues of most group practices. As we

indicated in 1998, section 1877 of the

Act does not affect the distribution of

monies earned from other services.

From a practical business standpoint,

however, some group practices may find

it impractical to segregate DHS

revenues. These parties may find it

more expedient to allocate

compensation in accordance with the

methods permitted for DHS revenues

under section 1877 of the Act.

• Fourth, the statute implicitly

recognizes that solo practitioners will

keep all the profits from DHS that fit in

the in-office ancillary services

exception, whether performed

personally or by others.

• Fifth, section 1877 of the Act

contemplates that physicians—whether

group practice members, independent

contractors, or employees—can be paid

in a manner that directly correlates to

their own personal labor, including

labor in the provision of DHS. In other

words, ‘‘productivity,’’ as used in the

statute, refers to the quantity and

intensity of a physician’s own work, but

does not include the physician’s

fruitfulness in generating DHS

performed by others (that is, the fruits

of passive activity). ‘‘Incident to’’

services are not included in

productivity bonuses under the statute

unless the services are incident to

services personally performed by a

referring physician who is in a bona fide

group practice. (‘‘Incident to’’ services

must meet the requirements of section

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

2050, ‘‘Services and Supplies,’’ of the

Medicare Carriers Manual (HCFA Pub.

14–3), Part 3—Claims Process.) In the

case of independent contractors under

the personal service arrangements

exception and employees under the

bona fide employment exception, the

amount of compensation for personal

productivity is limited to fair market

value for the services they personally

perform. The fair market value standard

in these exceptions acts as an additional

check against inappropriate financial

incentives. (The personal service

arrangements exception, as well as

several other exceptions, contains

additional restrictions on compensation

that varies based on the volume or value

of referrals. The volume or value

standard is discussed in section V of

this preamble.)

• Sixth, the Congress recognized that

in the case of group practices, revenues

derived from DHS must be distributed

to the group practice members in some

fashion, even though the members

generate the DHS revenue. However, the

Congress wished to minimize the

economic incentives to generate

unnecessary referrals of DHS.

Accordingly, the Congress permitted

group practice members (and

independent contractors who qualify as

‘‘physicians in the group practice’’) to

receive shares of the overall profits of

the group, so long as those shares do not

directly correlate to the volume or value

of referrals generated by the member or

‘‘physician in the group practice’’ for

DHS performed by someone else. In

addition, the Congress permitted groups

to pay their physicians productivity

bonuses based directly on personal

productivity (including services

incident to personally performed

services), but precluded groups from

paying group practice physicians any

productivity bonus based directly on

referrals of DHS performed by someone

else. As detailed below, we are

establishing under Phase I of this

rulemaking certain methodologies that

describe compensation practices that

will be deemed to be indirectly related

to the volume or value of DHS referrals

for purposes of section 1877(h)(4)(B)(i)

of the Act and therefore allowable under

section 1877 of the Act. Groups are free

to develop their own indirect

methodologies, but such methodologies

are subject to case-by-case review.

V. ‘‘Volume or Value’’ of Referrals and

‘‘Other Business Generated’’ Standards:

An Overview

Many of the exceptions in section

1877 of the Act covering specific kinds

of compensation arrangements include

as one element of the exception a

requirement that the 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 the preamble to the January 1998

proposed regulation, we had interpreted

this volume or value standard as

follows:

• Compensation could be based on

units of service (for example, ‘‘per use’’

equipment rentals) so long as the units

of service did not include services

provided to patients who were referred

by the physician receiving the payment.

For example, a physician who owned a

lithotripter could rent it to a hospital on

a per procedure basis, except for

lithotripsies for patients referred by the

physician-owner; payments for the use

of the lithotripter for those patients

would have to use a methodology that

did not vary with referrals.

• The language ‘‘or other business

generated between the parties’’ meant

that the payment in an arrangement had

to be fair market value for the services

expressly covered by the arrangement

and could not include any payment for

services not covered by the

arrangement.

• Physician compensation

arrangements that were fixed in amount

but conditioned either expressly or

implicitly on the physicians referring

patients to a particular provider or

supplier took into account the value or

volume of referrals within the meaning

of the statute.

After reviewing the comments

received, we are substantially revising

the regulation with respect to the scope

of the volume or value standard. Most

importantly, we are permitting timebased or unit-of-service-based

payments, even when the physician

receiving the payment has generated the

payment through a DHS referral. We

have reviewed the legislative history

with respect to the exception for space

and equipment leases and concluded

that the Congress intended that timebased or unit-of-service-based payments

be protected, so long as the payment per

unit is at fair market value at inception

and does not subsequently change

during the lease term in any manner

that takes into account DHS referrals. In

the case of those exceptions that include

the additional restriction that the

payment not take into account ‘‘other

business generated between the

parties,’’ the per unit payment also may

not take into account any other

business, including non-Federal health

care business, generated by the referring

physician. We are interpreting the

phrase ‘‘generated between the parties’’

to mean business generated by the

referring physician for purposes of

section 1877 of the Act.

Applying Phase I of this rulemaking

to the lithotripter example noted above,

the ‘‘per use’’ rental payments would be

protected, even for lithotripsies

performed on patients referred by the

physician-owner, provided that the ‘‘per

use’’ rental payment was at fair market

value, did not vary over the lease term,

and met the other requirements of the

rental exception. In other words, if the

‘‘per use’’ payment is fair market value,

we will not require a separate payment

arrangement for use of the equipment on

patients referred by the physicianowner. In determining whether the

initial ‘‘per use’’ payment is at ‘‘fair

market value,’’ we will generally look to

the price a hospital would pay to rent

the equipment from a company that did

not have any physician ownership or

investment (and thus was not in a

position to generate referrals or other

business—DHS or otherwise—for the

hospital) in an arm’s-length transaction.

In some cases, all the available

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 877

comparables or market values may

involve transactions between entities

that are in a position to refer or generate

other business. In such situations, we

would look to alternative valuation

methodologies, including, but not

limited to, cost plus reasonable rate of

return on investment on leases of

comparable medical equipment from

disinterested lessors. (The definition of

fair market value is discussed in more

detail in section VII.B of this preamble.)

In the light of our interpretation of the

volume or value standard as permitting

unit of service or unit of time-based

payments, we have determined that the

additional limiting phrase ‘‘not taking

into account * * * other business

generated between the parties’’ means

simply that the fixed, fair market value

payment cannot take into account, or

vary with, referrals of Medicare or

Medicaid DHS or any other business

generated by the referring physician,

including other Federal and private pay

business. Simply stated, section 1877 of

the Act establishes a straightforward test

that compensation arrangements should

be at fair market value for the work or

service performed or the equipment or

space leased—not inflated to

compensate for the physician’s ability to

generate other revenues.

In order to establish a ‘‘bright line’’

rule, we are applying this interpretation

of the volume or value standard

uniformly to all provisions under

section 1877 of the Act and part 411

where the language appears (for

example, the employee, personal service

arrangements, rental of office space/

equipment, fair market value, nonmonetary compensation under $300,

hospital medical staff benefits, academic

medical center exceptions, indirect

compensation arrangements, and the

group practice definition). The ‘‘other

business generated’’ restriction applies

only to those exceptions in which it

expressly appears.

Consistent with this interpretation,

we have determined that we will not

consider the volume or value standard

implicated by otherwise acceptable

compensation arrangements for

physician services solely because the

arrangement requires the physician to

refer to a particular provider as a

condition of payment. So long as the

payment is fixed in advance for the term

of the agreement, is consistent with fair

market value for the services performed

(that is, the payment does not take into

account the volume or value of the

anticipated or required referrals), and

otherwise complies with the

requirements of the applicable

exception, the fact that an employer or

a managed care contract requires

referrals to certain providers will not

vitiate the exception. Any such contract,

however, must expressly provide

exceptions (1) when the patient

expresses a different choice, (2) when

the patient’s insurer determines the

provider, or (3) when the referral is not

in the best medical interest of the

patient in the physician’s judgment. We

caution that these mandatory

arrangements could still implicate the

anti-kickback statute, depending on the

facts and circumstances.

Finally, we want to clarify that

ownership or investment interests that

are not protected under sections 1877(b)

through (d) of the Act (and are therefore

compensation arrangements under

section 1877(h)(1)(A) of the Act) are

deemed to take into account the value

or volume of referrals. We believe this

view is consistent with the general

prohibition on investment and

ownership interests in the statute.

Our responses to comments follow

below:

Comment: One commenter asked us

to clarify the statement in the preamble

of the January 1998 proposed rule at 63

FR 1780 that the volume or value

standard that is in the compensation

and other exceptions is uniformly meant

to cover (and thus exclude from an

exception) other business generated

between the parties. Another

commenter asked us to clarify that the

requirement that the compensation not

take into account the volume or value of

referrals or other business generated

between the parties refers only to

referrals of DHS.

Response: The discussion of the

phrase ‘‘other business generated

between the parties’’ in the preamble to

the January 1998 proposed rule caused

confusion. Based on our review of the

legislative history, we believe that the

Congress intended the language to be a

limitation on the compensation or

payment formula parallel to the

statutory and regulatory prohibition on

taking into account referrals of DHS

business. Simply stated, in the

provisions in which the phrase appears,

affected payments cannot be based or

adjusted in any way on referrals of DHS

or on any other business referred by the

physician, including other Federal and

private pay business.

Comment: One commenter urged us

to amend the language of the regulation

to correspond to the extensive

discussion of the volume or value

standard in the preamble.

Response: We are modifying the

regulation to clarify the meaning of the

volume or value standard.

Comment: One commenter asked us

to clarify that a valuation of a

physician’s practice could include the

value of self-generated DHS in the

purchase price as long as the purchase

agreement was not contingent on future

referrals.

Response: For purposes of section

1877 of the Act, the valuation of a

physician practice could include the

value of DHS in the purchase price if

the DHS provided by the selling

physician fit into an exception, such as

the in-office ancillary services

exception, and the purchase agreement

(and purchase price) is not contingent

on future referrals. Depending on the

identity of the purchaser, however, the

inclusion of the value of ancillary

revenues could implicate the antikickback statute.

Comment: Several commenters asked

us to clarify that the language requiring

that the payment be fixed in advance

and not be determined in a manner that

takes into account the value or volume

of referrals or other business generated

between the parties does not require

that the aggregate compensation be

established in advance, but only that the

methodology (for example, a rental per

use, or payment per service) be fixed in

advance.

Response: We are modifying the

regulation to make it clear that the

aggregate payment need not be specified

in advance. However, if the aggregate

amount is not specified, the amount of

the payment on a ‘‘per use,’’ ‘‘per

service,’’ or ‘‘per time period’’ basis

must be fixed in advance. For example,

a contract could include a fee schedule

for services, provided the fee schedule

is uniformly applied to all services

provided to the contracting party. In

addition, the payment must be fair

market value compensation not taking

into account the volume or value of

referrals or other business generated by

the referring physician either at

inception or during the term of the

agreement.

Comment: Commenters also wished

us to clarify whether the following

arrangements take into account the

volume or value of referrals or other

business generated between the parties:

(1) Payments based on a percentage of

gross revenues; (2) payments based on a

percentage of collections; (3) payments

based on a percentage of expenses; and

(4) payments based on a percentage of

a fee schedule.

Response: A compensation

arrangement does not take into account

the volume or value of referrals or other

business generated between the parties

if the compensation is fixed in advance

and will result in fair market value

compensation, and the compensation

does not vary over the term of the

878 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

arrangement in any manner that takes

into account referrals or other business

generated. The first three arrangements

described by the commenters are neither

aggregate fixed compensation amounts,

nor fixed ‘‘per service,’’ ‘‘per use,’’ or

‘‘per time period’’ payment amounts.

Percentage compensation that is

determined by calculating a percentage

of a fluctuating or indeterminate

amount, such as revenues, collections,

or expenses, is not fixed in advance.

Accordingly, the first three

arrangements do not meet the

requirement that compensation be fixed

in advance. Whether the fourth

arrangement mentioned by the

commenters—a percentage of a fee

schedule—is fixed in advance

compensation depends on the

circumstances. If the percentage

payments are based on a single fee

schedule, such that there is, in effect, a

single fixed fee for each service, the

arrangement meets the requirement that

the compensation be fixed in advance.

However, a percentage of fee schedule

arrangement that bases payments on

multiple fee schedules, such that there

may be different fees for a particular

service depending on the ultimate

payer, is not fixed in advance. Thus, for

example, if a physician has a contract

for services with a hospital that has a

chargemaster for all services, the

physician can be paid a fixed percentage

of that chargemaster fee schedule for

each service. However, when the

hospital accepts different payment

amounts from different payers for a

service, the physician cannot be paid a

percentage of those varying amounts.

Comment: Several commenters

requested that the final rule make clear

that payments based on ‘‘per use’’ or

‘‘per service’’ meet the volume or value

standard in the exceptions so long as the

payments are at fair market value and

the ‘‘per use’’ or ‘‘per service’’ amount

does not change over the term of the

contract based on the value or volume

of referrals of DHS. The commenters

stated that their position was consistent

with the intent of the Congress and

supported their position with language

from the Conference Committee report.

Response: As described above, we are

modifying the regulation to reflect the

Conference Committee report, H. Rep.

No. 213, 103rd Cong., 1st Sess. 814

(1993). The ‘‘per use,’’ ‘‘per service,’’ or

‘‘per time period’’ amount must reflect

fair market value at inception not taking

into account the volume or value of

referrals and must not change over the

term of the contract based on the

volume or value of DHS referrals, or,

when applicable, other business (that is,

other Federal or private pay business)

generated by the referring physician.

Comment: One commenter

specifically objected to our proposed

interpretation that a ‘‘per use’’ payment

was acceptable except when the

payment was for a referral from a

physician with an ownership or

investment interest in the equipment.

According to the commenter, the

physician’s ownership or investment

interest should not matter so long as the

physician does not have a controlling

interest.

Response: We believe equipment

rental arrangements are subject to abuse

whether the payment received is only a

small portion of the rental or the entire

amount. Control is irrelevant; it is the

financial incentive that has been shown

repeatedly to result in overutilization.

Despite the obvious potential for abuse,

given the clearly expressed

congressional intent in the legislative

history, we are permitting ‘‘per use’’

payments even when the physician is

generating the referrals. We wish to

make clear that these arrangements may

violate the anti-kickback statute.

Comment: A commenter asked that

we clarify that a hospital can lease

equipment on a ‘‘per use’’ basis to a

physician for use in the physician’s

practice.

Response: A hospital can lease

equipment to a physician for use in the

physician’s practice on a ‘‘per use’’

basis, provided the lease arrangement

otherwise fits in the rental exception. As

noted above, these arrangements may

violate the anti-kickback statute.

Comment: Many commenters objected

to our proposed interpretation in the

preamble that fixed payments to a

physician could be determined to take

into account the volume or value of

referrals if a condition or requirement

for receiving the payment was that the

physician refer DHS to a given entity,

such as an employer or an affiliated

entity. A number of commenters stated

that we did not have statutory authority

for our proposed interpretation. Some

commenters said these arrangements

were necessary to develop integrated

networks and ensure quality control.

Another commenter stated that the

proposal would interfere with exclusive

hospital-based physician relationships.

One commenter argued that the

proposed interpretation was

inconsistent with the employee

exception, while yet another stated the

position was inconsistent with the

common law duty of loyalty owed by an

employee to his or her employer and the

employer’s right to set the terms and

conditions of employment. Another

commenter stated that the proposed

interpretation would adversely impact

managed care arrangements by, in effect,

requiring all managed care arrangements

to meet the physician incentive plan

regulations. Finally, a commenter

proposed that we allow entities to

require physicians to refer to a

particular provider as part of a contract,

except (1) when the patient expresses a

different choice, (2) when the patient’s

insurer determines the provider, or (3)

when the referral is against the

physician’s judgment.

Response: While we believe that

payments tied to referral requirements

can be abused, we agree that the

proposed interpretation potentially

would have had far-reaching effects,

especially for managed care

arrangements and group practices. We

are adopting in modified form the one

commenter’s suggestion for appropriate

conditions listed in the last sentence of

the comment. We believe the suggested

conditions will not impose a significant

burden, since they are likely to be

required anyway under existing laws,

professional codes, and most contracts.

Thus, so long as the referral requirement

does not apply if a patient expresses a

different choice, the patient’s insurer

determines the provider, or the referral

is not in the best medical interest of the

patient in the physician’s judgment and

the payment to the physician is fixed in

advance at fair market value for the

services actually rendered and does not

vary based on referrals or, when

applicable, other business generated by

the physician, the fact that referrals may

be required to be made to specific

providers will not nullify an exception.

Comment: One commenter stated that

the final rule should not prohibit

primary care case management

arrangements.

Response: As discussed in the

preceding comment, we are no longer

viewing these arrangements as violating

the volume or value standard simply

because referrals may be required to be

made to certain providers. The

arrangement would have to meet the

other provisions of an exception.

Comment: According to two

commenters, many covenants not to

compete could be called into question

by the proposed interpretation that fixed

payments tied to referral requirements

can violate the volume or value

standard, a component of many of the

exceptions. The commenters argued that

these covenants are necessary adjuncts

to many business acquisitions and

personal services or management

arrangements and urged us to affirm

their legitimacy.

Response: The commenters were

unclear as to how the proposed

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 879

interpretation would have adversely

impacted covenants not to compete. A

requirement to refer to a specific

provider is different from an agreement

not to establish a competing business. In

other words, a covenant not to compete

might prevent a physician from setting

up a private practice or offering services

that compete with the entity that

purchased his or her practice. If an

agreement also included the

requirement that the physician refer

business to the purchaser, the agreement

would be suspect under the antikickback statute.

Comment: One commenter asked us

to clarify that the discussion in the

preamble about the volume or value

standard applies not only to its

interpretation in the context of the

compensation exceptions, but also to its

interpretation in the other exceptions in

which the same language appears.

Response: The meaning of the volume

or value standard as set forth in the

preamble and regulations text under

Phase I of this rulemaking applies to the

standard wherever it appears in the

statute and regulations.

Comment: One commenter stated that

the interpretation of the volume or value

standard in the January 1998 proposed

rule at 63 FR 1701 would permit

hospitals to pressure physicians to refer

to network and other providers that the

hospitals own or control.

Response: It is not clear from the

comment what aspect of the proposed

rule would lead the commenter to

believe that this kind of coercion would

occur. Nonetheless, section 1877 of the

Act is limited in its application and

does not address every abuse in the

health care industry. The fact that a

particular arrangement is not prohibited

by section 1877 of the Act does not

mean that the arrangement is not

abusive; it simply means that a referral

and submission of a claim for DHS is

not prohibited under section 1877 of the

Act.

VI. Exceptions Applicable to

Ownership and Compensation

Arrangements (Section 1877(b) of the

Act)

A. Physician Services (Section

1877(b)(1) of the Act)

The Existing Law: Section 1877(b)(1)

of the Act specifies that the general

prohibition under section 1877 of the

Act 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. Section 1861(q) defines

‘‘physicians’ services’’ as ‘‘professional

services performed by physicians,

including surgery, consultation, and

home, office, and institutional calls (but

not including services described in

subsection (b)(6) [certain intern and

resident services]).’’ A physician is

defined in the Act as a duly licensed

and authorized doctor of medicine or

osteopathy, doctor of dental surgery or

dental medicine, doctor of podiatric

medicine, doctor of optometry, or

chiropractor who meets certain

qualifications specified in the Act. (See

section 1861(r) of the Act.)

The August 1995 final rule

incorporated this provision in § 411.355

(General exceptions to the referral

prohibition related to both ownership/

investment and compensation),

paragraph (a) (Physician services),

covering physician services as defined

in § 410.20 (Physicians’ services),

paragraph (a) (Included services). The

definition of a physician service in

§ 410.20(a) generally parallels the

definition in section 1861(r) of the Act,

with the addition of diagnosis and

therapy services. Under the August 1995

final rule, physician services need not

be performed in any specific location.

The Proposed Rule: The January 1998

proposed rule retained § 411.355(a) as

set forth in the August 1995 final rule.

In the preamble to the January 1998

proposed rule, we noted that the

exception would apply to physician

services that constitute DHS under

section 1877 of the Act and regulations

and that the exception in the Medicare

context would not apply to services

performed by nonphysicians, even

though furnished under a physician’s

supervision, such as ancillary or

‘‘incident to’’ services. We interpreted

‘‘personal supervision’’ to mean that the

group practice physician must be legally

responsible for monitoring the results of

any test or other designated health

service and must be available to assist

the individual who is furnishing the

service, even though the group practice

physician need not be present while the

service is being furnished.

The Final Rule: In general, we believe

that the physician services exception is

of limited application. However, the

physician services exception does afford

protection for referrals of the narrow

class of physician services that are

included in the definitions of DHS,

especially in the area of radiology. (See

discussion in section VIII.A of this

preamble.) The physician services

exception enables physicians in group

practices to make referrals for physician

services that are DHS within their group

practices. In addition, the in-office

ancillary services exception may also

apply, depending on the circumstances.

We are interpreting the physician

services exception to apply to referrals

to (or referral services supervised by) a

member of the group practice or an

independent contractor who qualifies as

a ‘‘physician in the group’’ as defined in

§ 411.351 (Definitions).

In particular, we are incorporating the

physician services exception in

§ 411.355(a) as proposed in our January

1998 proposed rule, with the following

modifications:

First, we are interpreting ‘‘personal

supervision’’ to correspond with our

revised interpretation of ‘‘direct

supervision’’ in the context of the inoffice ancillary services exception. (See

discussion in section VI.B.2 of this

preamble.) We can discern no

compelling reason to have separate and

potentially inconsistent supervision

standards in the exceptions under

section 1877 of the Act. Accordingly,

the level of supervision required under

the physician services exception is the

level of supervision required under the

payment and coverage rules applicable

to the particular physician service at

issue.

Second, as noted above, we are

expressly interpreting the exception to

apply to referrals to (or physician’s

services supervised by) a member of the

group practice or an independent

contractor who qualifies as a ‘‘physician

in the group’’ as defined in § 411.351.

Finally, as many have pointed out, the

physician services exception (unlike the

in-office ancillary services exception)

does not cover referred services that are

performed by the referring physician.

We believe this narrower scope of the

physician services exception is evidence

that personally performed physician

services fall outside the scope of section

1877 of the Act. For this and other

reasons expressed elsewhere in this

preamble, in § 411.351 of Phase I of this

rulemaking, we are defining a ‘‘referral’’

for purposes of section 1877 of the Act

to exclude referrals for work personally

performed by the referring physician,

and we have made clear that a referring

physician is not himself or herself an

entity to which he or she makes

referrals.

Comment: A commenter asked that

the regulations include a clear provision

for providing compensation for

professional reading fees within an

outpatient group practice for diagnostic

procedures such as EKG, pulmonary

function testing, EEG, etc.

Response: To the extent that the

professional reading fees mentioned by

880 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

the commenter are DHS (see § 411.351),

the rules set forth in these regulations

apply. (We note, however, that

pulmonary function testing and EKGs

and ECGs typically will not be DHS

unless furnished in a hospital setting.)

First, if the professional reading is

performed personally by the referring

physician, no referral occurs for

purposes of section 1877 of the Act

(though there may still be a referral of

the technical component). Second, if the

professional reading is performed by a

physician other than the referring

physician, the physician services and

in-office ancillary services exceptions

are available. In the case of a group

practice, physician compensation will

be governed by the rules in § 411.352

(Group practice). Subject to those rules,

the physician performing the

professional reading may be paid

directly based on his or her personal

performance of professional services.

Comment: A commenter expressed

the view that all physician services are

excluded from the scope of section 1877

of the Act. The commenter asserted that

no evidence exists that the Congress

intended to include in section 1877 of

the Act physician services within the

meaning of section 1861(s)(1) of the Act.

The commenter, therefore, concluded

that including professional components

of services is beyond the scope of

section 1877 and our regulatory

authority.

Response: We disagree. A number of

the DHS enumerated by the Congress in

section 1877(h)(6) of the Act include

substantial physician services

components, and the Congress provided

no exclusion or carve out. Indeed, we

believe the physician services exception

itself clearly evidences the Congress’s

recognition that the DHS categories set

forth in section 1877(h)(6) of the Act

include some physician services. At the

very least, the Congress anticipated that

there might be situations in which it

would be difficult to demarcate clearly

professional and technical components

of the DHS. For those situations, the

Congress provided an exception that

makes clear that group practice

physicians may refer physician services

within their group practices when the

conditions of the exception are satisfied.

Comment: A commenter inquired

whether the physician services

exception applies to services performed

by a nonphysician. In the commenter’s

view, if the exception does not apply to

these services, the exception would

conflict directly with our other rules on

the practice parameters applicable to

nonphysician practitioners.

Response: We are cognizant of the

expanding and evolving role of

nonphysician practitioners in the health

care delivery system for Medicare

beneficiaries. Notwithstanding, we are

not persuaded that an expansion of the

physicians’ services exception is

appropriate or, in the light of other

interpretations set forth in these

regulations, necessary to accommodate

the commenter’s concerns.

Section 1877(b)(1) expressly applies

only to physicians’ services as defined

in section 1861(q) of the Act. Section

1861(q) of the Act provides that

physician services are ‘‘professional

services performed by physicians.’’ The

Act provides for Medicare coverage for

certain services that would be

physicians’ services if furnished by a

physician when such services are

performed by a physician assistant

(under the supervision of a physician)

or a nurse practitioner or clinical nurse

specialist (working in collaboration with

a physician) (see sections 1861(s)(K)(i)

and (s)(K)(ii) of the Act.) However,

while such services may be identical to

physicians’ services, they are not

physicians’ services under section

1861(q) of the Act. Congress has

provided for separate treatment of such

services under the payment rules. To

define nonphysician services as

physician services for purposes of

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

distort Medicare’s overall payment and

coverage scheme.

We are also concerned that expanding

the physicians’ services exception,

which has no building or billing

requirements, to include nonphysician

practitioners’ services would permit

group practices to circumvent the

requirements of the in-office ancillary

services exception.

However, while we are not including

nonphysician services under section

1877(b)(1) of the Act, we have made

other changes in the regulations that

address the commenter’s concerns.

Specifically, we have interpreted the

direct supervision requirement of the inoffice ancillary services exception as

requiring the level of supervision

mandated under the relevant Medicare

payment and coverage rules. See section

VII.B.2 of this preamble. In other words,

in the case of nonphysician

practitioners, the supervision

requirement of the in-office ancillary

services exception corresponds to the

supervision requirements applicable to

such practitioners. Thus, the in-office

ancillary services exception will cover

most referral DHS provided by

nonphysician practitioners in a group

practice setting (provided the

exception’s building and billing

requirements are also satisfied), without

imposing additional supervision

requirements on such practitioners.

Moreover, referrals made by

nonphysician practitioners generally do

not implicate section 1877 of the Act,

which focuses exclusively on referrals

by physicians. However, if a referral

made by a physician assistant or nurse

practitioner (or other nonphysician) is

directed or controlled by a physician,

we are treating the referral as an indirect

referral made by the directing or

controlling physician, who is, in fact,

the ‘‘referring physician.’’ This

interpretation is necessary to prevent

the use of nonphysician practitioners to

circumvent section 1877 of the Act.

We believe these interpretations

adequately address the commenter’s

concerns and are consistent with the

statutory language and structure.

However, we invite public comments as

to the need for a further exception for

referred DHS performed by

nonphysician practitioners in a group

practice setting.

Comment: A commenter sought

clarification as to the treatment of

‘‘incident to’’ services under the

physicians’ services exception. The

commenter believed that unless

‘‘incident to’’ services are included in

the exception, the exception would

conflict with other payment and

coverage rules.

Response: We are interpreting the

physicians’ services exception to apply

only to ‘‘incident to’’ services (as

defined in § 411.351) that are physician

services under section 1861(q). All other

‘‘incident to’’ services would need to

qualify under the in-office ancillary

services or another exception.

Comment: A commenter suggested

that the term ‘‘physician’’ should be

defined in the regulations.

Response: The Act defines

‘‘physician’’ in section 1861(r). We agree

that it would be helpful to incorporate

this definition into these regulations

and are doing so.

B. In-office Ancillary Services (Section

1877(b)(2) of the Act)

The Existing Law: We have divided

our discussion of the in-office ancillary

services exception into four subsections

that correspond with the statutory

structure: DHS included in the in-office

ancillary services exception,

supervision, building requirements, and

billing requirements. The relevant

provisions of the existing law are

described in each subsection below.

The Proposed Rule: The relevant

provisions of the proposed rule are

described in each subsection below.

The Final Rule: Many commenters

were highly critical of the January 1998

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 881

proposed rule’s interpretation of the

exception for in-office ancillary

services, contending that the rule was

arbitrary, inconsistent with our existing

policies, and inefficient. We have

revisited the premises of the January

1998 proposed rule, reexamined the

statutory language and legislative

history, and restructured the exception.

The in-office ancillary services

exception in Phase I of this rulemaking

is consistent with the language of

section 1877 of the Act and the

organization and operation of many

modern physicians’ offices. While in

most respects the exception is broader

and administratively simpler than the

proposed exception, we have

substantially limited the ability of group

practices to use part-time arrangements

to provide DHS in buildings or facilities

in which they do not routinely provide

a wide range of services other than

Federal or private pay DHS.

In revising the exception, we were

cognizant of several key considerations.

First, the Congress clearly was

concerned with regulating physicians’

ordering of DHS, even in the context of

their own practices; otherwise, a

detailed exception would not have been

necessary. Second, the Congress

intended to protect some in-office

ancillary services provided they were

truly ancillary to the medical services

being provided by the physician or

group; otherwise, the Congress would

not have created the exception. Finally,

we believe the boundaries of the

exception as intended by the Congress

are best expressed in the building

requirement in section 1877(b)(2)(A)(ii)

of the Act, which permits DHS to be

provided in the same building where

the physicians provide their regular

medical services, or, in the case of a

group practice, in a central DHS

building.

Based on those considerations, we

have revised the in-office ancillary

services exception to permit the

provision of DHS in the same building

in which a group or a physician

routinely provides the full range of the

group’s or physician’s medical services

with a minimum of restrictions. In

general, the final exception will protect

shared DHS facilities, so long as the

physicians or groups that share the

facility also routinely provide their full

range of services in the same building.

Moreover, in certain circumstances,

part-time practitioners would be

permitted to share the DHS facility, as

long as they are also providing medical

services they routinely provide that are

not DHS (whether Federal or private

pay). Coupled with a relaxation of the

proposed supervision requirement

described below, we believe the final

exception captures what the Congress

intended to protect.

What will not be protected by Phase

I of this rulemaking are a number of

part-time, intermittent arrangements

that functionally are nothing more than

shared off-site facilities. Many of these

part-time, off-site ancillary services

arrangements are inconvenient for

patients both as to location and time,

and are created by physicians

principally to capture revenue rather

than to enhance patient care. To

preclude such arrangements, and as a

counter-balance to allowing certain

shared facilities, we have interpreted

the same building requirement as

including a ‘‘full range of services’’

condition, and the centralized building

requirement as requiring exclusivity.

These interpretations are consistent

with the statutory language and

structure. To the extent the January

1998 proposed rule would have

permitted these arrangements, it is no

longer operative. To qualify under the

‘‘centralized building’’ standard, Phase I

of this rulemaking will require, among

other things, the group practice to own

or lease and use the space exclusively

on a full-time basis.

In addition to the changes to the

‘‘building’’ requirements, the exception

for in-office ancillary services under

Phase I of this rulemaking contains a

number of other significant changes (all

described in more detail in the relevant

comments and responses sections that

follow):

• Significantly expanding the scope

of services potentially included in the

in-office ancillary services exception

by—(1) making clear that outpatient

prescription drugs may be ‘‘furnished’’

in the office, even if they are used by the

patient at home; (2) explicitly

permitting external ambulatory infusion

pumps that are DME to be provided

under the in-office ancillary services

exception; (3) making clear 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 durable medical

equipment (DME) furnished in a

physician’s office for the convenience of

the physician’s patients.

• Substantially modifying the ‘‘direct

supervision’’ requirement to conform it

to relevant Medicare and Medicaid

payment and coverage rules for the

specific service, in keeping with our

premise that the Congress did not

intend to revamp radically the provision

of ancillary services in physicians’

offices.

• Allowing independent contractors

to provide the requisite supervision,

provided they are ‘‘physicians in the

group practice,’’ meaning that they have

contracted with the group practice to

treat group practice patients on group

premises and have reassigned their

claims to the group under § 424.80 of

these regulations (as further explained

in section 3060, ‘‘Reassignment,’’ of the

Medicare Carriers Manual (HCFA Pub.

14–3), Part 3—Claims Process).

Additional revisions and

modifications to the rule are addressed

in the discussion below. The discussion

is divided into four subparts: the scope

of DHS, supervision, building

requirements, and billing requirements.

The discussion of each subpart contains

summaries of public comments and our

responses to them.

1. Scope of Designated Health Services

That Can Be In-Office Ancillary Services

The Existing Law: As a threshold

matter, the DHS that are potentially

protected by the in-office ancillary

services exception are any of the DHS

enumerated in section 1877(h)(6) of the

Act, except DHS specifically excluded

from the exception under section

1877(b)(2) of the Act. Excluded are all

parenteral and enteral nutrients,

equipment, and supplies (PEN) and

DME (except for infusion pumps, which

remain eligible for the exception).

Referrals—in-office or otherwise—for

services that are not DHS need not fit in

the exception, since they do not

implicate the statute. The scope of

services that are considered to be DHS

is discussed in section VIII.A of this

preamble.

The Proposed Rule: We proposed that

DHS would be considered furnished in

the location where the service was

actually performed or where a patient

receives and begins using an item. We

also proposed expanding the category of

DHS included in the in-office ancillary

services exception to include crutches,

provided the physician does not mark

up the cost of the crutches.

The Final Rule: First, we are revising

the rule to provide that services will be

considered ‘‘furnished’’ for purposes of

the exception (1) in the location where

the service is actually performed upon

a patient or (2) when an item is

dispensed to a patient in a manner that

is sufficient to meet Medicare billing

and coverage rules. This change will

make application of the rule clearer in

the case of outpatient prescription drugs

and ambulatory infusion pumps that are

DME. Second, in the interests of patient

convenience, we are using our

882 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

regulatory authority under section

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

exception to include certain DME,

including crutches, canes, walkers, and

folding manual wheelchairs, that meet

conditions set forth in the regulations.

(Braces and collars are orthotics and,

thus, may already qualify under the

statute for the in-office ancillary

services exception.) These conditions

generally will require that—(1) the items

are DME, such as canes, crutches,

walkers, and folding wheelchairs, that a

patient uses to ambulate in order to

leave the physician’s office; (2) the

items are furnished in a building that

meets the ‘‘same building’’ requirements

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

§ 411.355(b)(2)(i) as part of the treatment

for the specific condition for which the

physician-patient encounter occurred;

(3) the items must be furnished

personally by the physician who

ordered the DME, by another physician

in the group practice, or by an employee

of the physician or the group practice;

(4) the physician who furnishes the

DME must meet all DME supplier

standards; (5) the arrangement does not

violate the anti-kickback statute; (6) the

billing and claims submission for the

DME complies with all applicable laws

and regulations; and (7) all other

requirements of the in-office ancillary

services exception are satisfied. We are

similarly excepting blood glucose

monitors.

We are withdrawing our proposal that

physicians not mark up these items

when provided in-office to their

patients; we believe the current DME

Regional Carrier (DMERC)

reimbursement provisions provide

sufficient cost containment controls. We

believe these limited modifications to

the DME exclusion will promote quality

of patient care without any significant

increased risk of patient or program

abuse.

Finally, with respect to infusion

pumps (other than pumps that are PEN

equipment or supplies), we are

including, under Phase I of this

rulemaking, the furnishing of external

ambulatory infusion pumps as in-office

ancillary services covered by the

exception (which uses the generic term

‘‘infusion pumps’’), provided all other

conditions of the exception are satisfied.

Because they are specifically included

in the statutory exception, external

ambulatory infusion pumps need not

meet the added requirements for DME

outlined in the preceding paragraph.

Comment: A hospital-based

pathologist in a hospital with a fullservice laboratory urged that the inoffice ancillary services exception

should not protect laboratories based in

physicians’ offices. The pathologist

asserted that these laboratories are

merely enterprises that enable

physicians to profit from referrals for

laboratory tests and create unfair

competition for pathology laboratories

that are not owned by physicians. The

pathologist expressed skepticism about

the justification proffered by many

physicians that in-office laboratories

exist for the convenience of patients,

noting that, in his case, his hospital

laboratory is located directly across the

street from the offices of physicians

with in-office laboratories.

Response: Despite the fact that

physician-owned or controlled

laboratories and other DHS facilities

may competitively disadvantage entities

that do not have physician ownership or

control, the Congress made a policy

determination not to apply the

prohibition under section 1877 of the

Act to DHS referrals that occur within

the parameters of a physician’s or group

practices’ own medical practice,

provided these referrals fit squarely in

an exception under section 1877 of the

Act.

Comment: The in-office ancillary

services exception applies to DHS that

are ‘‘furnished’’ in accordance with

certain statutory conditions. A number

of commenters objected to our

interpretation that the term ‘‘furnished’’

excluded items provided to a patient (or

delivered to a patient’s home) that are

meant to be used at home rather than in

the physician’s office. The commenters

observed that such a rule does not make

sense in the case of outpatient

prescription drugs, which are

commonly dispensed to patients for

later consumption at home.

Response: In general, we believe the

Congress intended to exclude from the

reach of the statute only items and

services provided (or used, as the case

may be) in the physician’s office.

However, we believe that our definition

of those circumstances can be simplified

to accommodate the provision of

outpatient prescription drugs, as well as

ambulatory infusion pumps that are

DME. Accordingly, we are revising the

rule to provide that services will be

considered ‘‘furnished,’’ for purposes of

the exception, 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 Medicare billing and

coverage rules.

Comment: One commenter suggested

that we should make clear that so long

as the in-office ancillary services

exception is met, discounts on drugs do

not need to be passed on to Medicare.

Response: Nothing in section 1877 of

the Act or these regulations is intended

to require physicians to pass discounts

on to the Medicare program. Whether a

discount must be passed on to the

program by physicians or others

remains the subject of other statutory

and regulatory provisions.

Comment: Commenters requested

clarification that the furnishing of

chemotherapy drugs can meet the inoffice ancillary services exception.

Commenters also sought clarification

with respect to chemotherapy-related

laboratory tests, x-rays, and prescription

drugs that are secondary to the

provision of chemotherapy.

Response: Chemotherapy infusion

drugs and ancillary laboratory tests, xrays, and prescription drugs are DHS for

purposes of section 1877 of the Act that

may be provided by physicians as inoffice ancillary services if all of the

conditions of the exception are satisfied.

In light of the changes we are making in

Phase I of this rulemaking—including

revisions to the definition of ‘‘furnish’’

and to the supervision requirement in

§ 411.355(b)(5)—we believe the

exception is sufficiently broad to

accommodate virtually all existing

arrangements for the provision of

chemotherapy drugs and related

services to patients in physicians’

offices. Under Phase I of this

rulemaking, referrals for chemotherapy

infusion drugs may be protected by the

in-office ancillary services exception if

they are administered or dispensed to

patients in the referring physician’s

office (or through the referring

physician’s group practice) in

accordance with the supervision

requirements already imposed by the

Medicare program. We anticipate no

appreciable disruption of chemotherapy

services to Medicare or other patients as

a result of Phase I of this rulemaking.

Comment: A commenter sought

clarification whether the furnishing of

allergen treatment sets would be

protected under the in-office ancillary

services exception.

Response: The provision of allergen

treatment sets is protected by the inoffice ancillary services exception so

long as all of the conditions of the

exception are satisfied. We believe that

the changes in Phase I of this

rulemaking to the definition of

‘‘furnish’’ in § 411.355(b)(5) and the

supervision requirements make clear

that allergen treatment sets may be

furnished to patients under the in-office

ancillary services exception.

Comment: A number of commenters

questioned the scope of our proposed

extension of the in-office ancillary

services exception to include the

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 883

furnishing of crutches (DME being

otherwise excluded by statute). The

proposed extension would permit

physicians to provide crutches if they

make no profit on them and otherwise

meet certain criteria. We proposed that

the physician could bill only for the cost

of acquiring and supplying the crutches.

Commenters were confused as to how

these costs would be determined and

found the proposal to be unnecessarily

restrictive. In addition, commenters

wondered why crutches were included,

but not canes, walkers, collars, splints,

and the like. Other commenters

variously sought inclusion of other

DME, including DME for

rheumatological conditions, orthopedic

DME, and blood glucose monitors.

Commenters suggested various

measures for determining when DME

should be permitted as an in-office

ancillary service. One commenter

proposed that whatever test we adopt

should take into account the following:

(1) the intended use of the item (that is,

whether the item is an integral element

in the customary continuum of patient

care); (2) the cost of the item (that is, fair

market value or a dollar cap); (3) the

life-expectancy of the item (that is,

whether items are limited to one-time

prescriptions for 5 or 6 weeks); and (4)

physician instruction (that is, whether

some physician instruction in the use of

the item is required). Other commenters

proposed dollar caps as a means of

excluding from the exception physiciandirected sales of expensive wheelchairs,

beds, and other pieces of equipment on

which markups are significant.

Response: In the interest of patient

convenience, we are using our

regulatory authority under section

1877(b)(4) of the Act to expand the inoffice ancillary services exception to

include certain DME, including

crutches, canes, walkers, and folding

wheelchairs, that meet conditions set

forth in the regulation (in our January

1998 proposed rule, we proposed a

more limited exception for crutches

only). (Braces and collars are classified

as orthotics and already potentially

qualify under the statute for the in-office

ancillary services exception; splints are

covered under section 1861(s)(5) of the

Act and are not included in any

category of DHS.) In doing so, we are

concerned primarily with enabling the

patient to depart from the physician’s

office. The narrow scope of this

expansion and the fact that the need for

ambulation equipment is objectively

verifiable mitigate the potential for

overutilization.

For somewhat different reasons, we

are also creating an exception to permit

blood glucose monitors (and one starter

set of testing strips and lancets,

consisting of no more than 100 of each;

this number is at least one month’s

supply) to be provided under the inoffice ancillary services exception

(under the authority granted in section

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

4105 of the BBA 1997, which added a

Medicare benefit for diabetes selfmanagement training services, we do

not believe that the Congress intended

the physician self-referral law to

interfere with a physician’s efforts to

provide blood glucose monitors to

patients. Therefore, the in-office

ancillary services exception may be

used by a physician or group practice to

furnish a blood glucose monitor and a

starter set of strips and lancets if the

physician or group furnishes outpatient

diabetes self-management training to

patients for whom the blood glucose

monitors are furnished.

While commenters sought the

inclusion in this exception of various

other items of DME, we decline to

extend the in-office ancillary services

exception further. To do so would, in

essence, vitiate the congressional

determination to exclude DME from the

in-office ancillary services exception.

We do not find—and we believe that the

Congress did not find—that the in-office

furnishing of other DME would pose no

risk of fraud or abuse, as required under

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

Having considered the various

suggestions made by the commenters,

we are adopting the following

conditions for DME provided as an inoffice ancillary service (these conditions

being in addition to all other conditions

of the exception):

• 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).

• 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 physician-patient encounter

occurred.

• The item is furnished personally by

the physician who ordered the DME, by

another physician in the group practice,

or by an employee of the physician or

the group practice.

• A physician or group practice that

furnishes the DME meets all DME

supplier standards located in paragraph

(c) of § 424.57 (Special payment rules

for items furnished by DMEPOS

suppliers and issuance of DMEPOS

supplier billing numbers).

• The arrangement does not violate

the anti-kickback statute or any law or

regulation governing billing and claims

submission. (This condition is necessary

to meet the ‘‘no risk of fraud or abuse’’

standard in 1877(b)(4) of the Act.)

• All other requirements of the inoffice ancillary services exception are

satisfied.

We agree with the commenters that

our proposal with respect to not

marking up costs was confusing and

unnecessarily restrictive, and we are not

adopting it. While we find the

commenters’ suggestions for dollar caps

on DME items attractive, we have

concluded that it is not feasible to

devise dollar caps that would

appropriately include low-value DME

and exclude high-value DME in all cases

(for example, a $150 limit might be high

for some types of DME and low for

others). Upon further reflection, we

believe the current DMERC

reimbursement provisions provide

sufficient cost containment controls,

with respect to these items of DME we

are including in the exception. We

believe the modifications to the DME

exclusion that we are making will

promote quality of patient care without

any significant increased risk of patient

or program abuse.

Finally, we note with respect to DME

furnished in physicians’ offices that

these arrangements remain subject to

our conditions of participation for DME

suppliers and other applicable payment

and coverage rules.

Comment: A commenter asked that

the final rule address whether the use of

consignment closets as a means of

providing DME in a physician’s office

implicates section 1877 of the Act. For

example, a surgeon enters into an

arrangement for a DME supplier to rent

space (for example, a closet) in the

surgeon’s office at fair market value

under a lease that meets the rental

exception. The technician who

measures for braces or DME supplies is

a shared employee of the surgeon’s

practice and the supplier, with the

supplier paying for the time the

technician spends measuring the braces

and supplying DME. The billing is done

by the supplier. The commenter

asserted that in this example, there is no

financial relationship because the

surgeon does not bill Medicare.

Response: If the lease fits squarely in

the rental exception and the

arrangement for the personal services of

the technician fits squarely in the

personal service arrangements

exception, the ‘‘consignment closet’’

arrangement described in the preceding

comment may not create a prohibited

financial relationship under section

884 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

1877 of the Act. We wish to clarify that

this result does not depend on whether

the physician bills Medicare. To the

contrary, the essential prohibition under

section 1877 of the Act is on physicians

making referrals to entities with which

they have prohibited financial

relationships and on those entities

billing Medicare. Nothing in this rule is

intended to, or should be interpreted as,

legitimizing consignment closet

arrangements. These arrangements raise

significant questions under other legal

authorities, including the anti-kickback

statute and our supplier standards.

Physicians and suppliers who are

considering ‘‘consignment closet’’

arrangements would be well-advised to

read the OIG’s Special Fraud Alert on

the Rental of Physician Office Space by

Persons or Entities to Which They Refer

published in the Federal Register on

February 24, 2000 (65 FR 9274).

Comment: One commenter expressed

concern about the interaction of section

1877 of the Act and the proposed surety

bond rule that would exempt physicians

from the surety bond requirement if

they provide DME incident to patient

care. Specifically, the commenter asked

whether we believe that physicians are

allowed to disburse DME, orthotics, and

prosthetics incident to patient care

without violating the provisions of

section 1877 of the Act and whether

these provisions are applicable if a

physician has a surety bond.

Response: Section 1877 requirements

under the exception exist wholly apart

from other requirements of law that may

apply. In addition, the commenter is

mistaken in asserting that we proposed

to exempt physicians who furnish DME

in their offices from the proposed surety

bond requirements that would apply to

all suppliers. We assume that the

commenter is referring to our proposed

rule concerning supplier standards that

was published on January 20, 1998 (63

FR 2926). Such an exception is not

included in the proposed rule.

Comment: Oncologists complained

that the proposed regulations—which

interpreted the in-office ancillary

services exception as applying only to

infusion pumps that are implanted in a

physician’s office—would prohibit them

from furnishing external ambulatory

infusion pumps to their patients,

contravening clear congressional intent

and causing substantial inconvenience

to patients. External ambulatory

infusion pumps are used to administer

chemotherapy agents and pain

medication to cancer patients. The

pumps are typically filled in the

oncologist’s office, and the drug flow is

ordinarily initiated before the patient

leaves the office. The statutory in-office

ancillary services exception excludes

DME (which typically is used by

patients in their homes), but includes

‘‘infusion pumps.’’ Thus, the

commenters asserted that the plain

language of the exception indicates clear

congressional intent to authorize

physicians to furnish a certain category

of DME—infusion pumps—to patients,

even though those pumps will be used

at home.

Response: We agree. The statute uses

the general term ‘‘infusion pumps.’’ We

are revising the regulation in

§ 411.355(b) to make clear that the inoffice ancillary services exception

protects external ambulatory infusion

pumps (other than pumps that are PEN

equipment or supplies) that are filled or

serviced in the physician’s office, even

though the patient uses them at home.

However, the in-office ancillary services

exception does not protect an infusion

pump that is used to deliver PEN

because that pump is not classified as

DME, but is considered PEN. PEN is

categorically excluded from the

exception under section 1877(b)(2) of

the Act. The statutory language

addressing infusion pumps in the inoffice ancillary services exception

applies only to DME.

Comment: Two commenters requested

clarification as to the application of the

in-office ancillary services exception to

home care physicians who primarily

treat patients in their homes. These

commenters asserted that home care

physicians play an important role in the

delivery of cost-effective, quality care to

patients and provide services that, in

some cases, preclude the need for more

expensive hospitalizations. These

commenters believe that section 1877 of

the Act should not apply to home visits.

In the alternative, these commenters

requested clarification of the following

issues:

• Are DHS performed in a patient’s

home concurrently with the

performance of a physician service

included in the in-office ancillary

services exception (for example, a

physician uses a hand-held portable

laboratory during a physician visit in

the home)? Can a technician

accompanying the physician perform

the DHS during the home visit?

• What is the application of section

1877 of the Act to group practices that

own home health agencies that in turn

provide DHS to group patients?

• Are referrals from medical directors

of home health agencies protected by

the employee or another exception?

Response: We find nothing in the

statute that excludes referrals for DHS

by home care physicians from the reach

of the statute. To the contrary, the

Congress expressly included home

health services as a designated health

service. That said, we generally agree

with the commenters that the provision

of DHS in a patient’s home should be

protected by the in-office ancillary

services exception, provided that all of

the conditions of the exception are

satisfied. However, in many cases,

services provided by home care

physicians will not fit neatly into the inoffice ancillary services exception. For

example, under the ‘‘same building’’

requirements, we are requiring that

physicians provide substantial

physician services unrelated to DHS in

the building and that the services

provided there be the full range of the

physicians’ services. We believe that a

home care physician meets these ‘‘same

building’’ tests if his or her principal

medical practice consists of treating

patients in their private homes (for

purposes of determining whether a

physician is principally a home care

physician, private homes do not include

nursing, long term care, or other

facilities), and the physician (or a staff

member accompanying him or her)

provides a designated health service in

a private home contemporaneously with

a physician service (provided by the

referring physician) that is not a

designated health service and the other

exception requirements are met. (DHS

provided in facilities, such as nursing

homes, by home care or other

physicians may qualify under the inoffice ancillary services exception if all

conditions of the exception are

satisfied.) We have concluded that it

may be appropriate to develop

additional rules for home care

physicians under the in-office ancillary

services exception. We are expressly

soliciting comments on this issue and

will consider it further in Phase II of

this rulemaking.

As to the commenter’s second

question, section 1877 of the Act applies

to a group practice’s ownership of a

home health agency in the same manner

it applies to the ownership by a group

practice of any DHS entity. Referrals to

the entity by the group practice or by

members of the group must qualify

under an ownership exception, such as

the in-office ancillary services

exception. In general, we do not believe

that the furnishing of most home health

services will meet the requirements of

the in-office ancillary services

exception. Unless a physician in the

group personally conducts the home

visit and provides a physician service

unrelated to the furnishing of DHS, the

‘‘same building’’ requirements will not

be satisfied (we see no plausible way for

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 885

home health services to qualify under

the ‘‘centralized building’’ option under

section 1877(b)(2)(A)(ii)(II) of the Act).

In some cases, the ‘‘rural provider’’

exception may apply (that exception

will be discussed in the Phase II

rulemaking).

Finally, with respect to referrals from

medical directors of home health

agencies, these referrals may be

protected by the employee exception or

the personal service arrangements

exception, depending on the facts and

circumstances of the medical director’s

relationship with the home health

agency. However, if the medical director

is an owner of a group practice that

owns the home health agency, an

ownership exception would still need to

apply.

Comment: A commenter sought

clarification as to 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.

The commenter observed that there are

many two-physician marriages in the

health care industry and that many

spouses engage in different specialities

and practice in different group

practices. The commenter argued that

the referrals between physician spouses

to each other’s group practices should

not constitute prohibited referrals, so

long as either the referring physician or

the physician spouse accepting the

referral complies with an exception. In

our January 1998 proposed rule, we took

the position that a physician in one

group practice will be prohibited from

referring to his or her physician spouse

in another group practice because the

referring physician cannot meet the inoffice ancillary services exception. The

commenter found this interpretation

overly restrictive and narrow. In the

commenter’s view, if the physician

receiving the referral meets the in-office

ancillary services exception, he or she

should be able to accept the referral,

because the accepting spouse and not

the referring spouse is ordering the

designated health service.

Response: On reconsideration, we

generally agree with the commenter,

with one important distinction. We

believe that the referral to a spouse

should be allowed, if the referral is for

a physician service unrelated to the

furnishing of a designated health service

(that is, a designated health service is

not the reason for the referral) and any

subsequent DHS referrals by the spouse

fit within the in-office ancillary services

exception with respect to the spouse

receiving the referral. We recognize that

there may be some circumstances,

particularly in underserved areas, where

a spouse may be the only qualified

provider of a particular DHS. We are

considering whether a limited

additional exception is warranted and

will address the issue further in Phase

II of this rulemaking. We invite

comments on this issue.

2. Direct Supervision

The Existing Law: Section 1877(b)(2)

of the Act provides an exception for inoffice ancillary services. To qualify as

in-office ancillary services, the services

must, among other things, be furnished

personally by a referring physician or

another physician member in the same

group practice, or be furnished by

individuals who are ‘‘directly

supervised’’ by the referring physician

or another physician in the group

practice. The August 1995 final rule

covering referrals for clinical laboratory

services defined ‘‘direct supervision’’ in

§ 411.351 as supervision by a physician

who is present in the office suite and

immediately available to provide

assistance and direction throughout the

time services are being performed.

The Proposed Rule: The January 1998

proposed rule retained this definition,

with several clarifications and changes.

In the preamble to the January 1998

proposed regulation, we expressed our

view that the Congress intended the inoffice ancillary services exception to

apply to services that are closely

attached to the activities of the referring

physician. Consistent with this

interpretation, we used the definition of

‘‘direct supervision’’ that appears in

section 2050, ‘‘Services and Supplies,’’

of the Medicare Carriers Manual (HCFA

Pub. 14–3), Part 3—Claims Process,

which describes services that are

incident to a physician’s professional

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

the Act. Under this rule, supervision

must be provided by a physician who is

present in the office suite in which the

services are being furnished, throughout

the time they are being furnished, and

who is immediately available to provide

assistance and direction. The definition

in the proposed rule also clarified the

meaning of the term ‘‘present in the

office suite’’ to mean that the physician

is actually physically present. However,

we would still have considered the

physician ‘‘present’’ during brief

unexpected absences, as well as during

routine absences of a short duration

(such as during a lunch break), provided

the absences occur during time periods

in which the physician is otherwise

scheduled and ordinarily expected to be

present and the absences do not conflict

with any other requirements in the

Medicare program for a particular level

of physician supervision.

The Final Rule: Our interpretation of

the ‘‘direct supervision’’ standard

produced the largest number of public

comments about the in-office ancillary

services exception, virtually all

suggesting that our proposal would be

overly burdensome, result in enigmatic

technical rules, and require wasteful

and inefficient practices.

We have revisited the direct

supervision requirement and are now

interpreting ‘‘directly supervised’’ in the

statute to mean that the supervision

meets the supervision requirements

under applicable Medicare and

Medicaid payment or coverage rules for

the specific services at issue. Upon

further review and consideration, we

concluded that the Congress did not use

the phrase ‘‘directly supervised’’ in any

technical sense. Rather, the Congress

sought to establish a nexus between the

referring physician and the individual

performing the ancillary services in

order to limit the exception to services

that are truly ‘‘ancillary’’ to the referring

physician’s medical practice. We

believe that the Congress did not intend

section 1877 of the Act to supersede or

replicate existing statutory and

regulatory structures that address

supervision of services from the

perspective of quality of care or patient

safety. This interpretation is consistent

with the often cited legislative history

for section 1877 of the Act indicating

that the Congress did not intend to

require physicians to be present at all

times that ancillary services were being

performed. (See Conference Report for

OBRA 1993, H. Rep. No. 213, 103d

Congress 810 (1993).) Instead, we

believe a sensible approach is to defer

to existing Medicare and Medicaid

supervision requirements. (Those rules

are not addressed in Phase I of this

rulemaking.)

In our January 1998 proposed rule

with respect to the group practice

definition, we proposed eliminating

independent contractors as members of

the group practice. This created the

prospect that independent contractors

would not be able to provide the

supervision required under the in-office

ancillary services exception. The statute

provides that physicians ‘‘in the group

practice’’ may supervise the furnishing

of ancillary services to patients of a

referring physician who is a member of

the group practice. Under Phase I of this

rulemaking, physicians ‘‘in the group

practice’’ include owners of the group

practice, employees of the group

practice, and independent contractors

who are ‘‘in the group practice.’’

Owners and employees may also be

886 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

members of the group; independent

contractors may not. We will consider

an independent contractor physician to

be ‘‘in the group practice’’ if he or she

has a contractual arrangement to

provide services to the group’s patients

in the group practice’s facilities and the

independent contractor’s arrangement

with the group 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 (HCFA Pub. 14–3), Part 3—

Claims Process. Independent contractors

who qualify as physicians ‘‘in the group

practice’’ may receive overall profit

shares and productivity bonuses

described in section 1877(h)(4)(B)(i) of

the Act, as implemented by these

regulations, and may provide the

supervision required under the in-office

ancillary services exception.

Comment: Many commenters raised

concerns about the level of supervision

required under the in-office ancillary

services exception. Many commenters

objected to our proposed interpretation

of the direct supervision requirement,

which would have adopted the

supervision requirement applicable to

‘‘incident to’’ services in section 2050,

‘‘Services and Supplies,’’ of the

Medicare Carriers Manual (HCFA Pub.

14–3), Part 3—Claims Process, including

a ‘‘present in the office suite’’

requirement, with an exception for brief

absences by the physician. These

commenters variously found the

‘‘presence’’ requirement overly

burdensome, impractical, confusing,

and unclear. Commenters believe that a

general requirement of a physician’s

physical presence for all ancillary

services would create unnecessary

inefficiencies in the delivery of health

care services, drive up costs, and

inconvenience patients. For example,

some commenters noted that tests are

often scheduled in the mornings when

physicians are making rounds or

attending hospital meetings, with the

physicians interpreting the tests when

they arrive later at the office. Some

commenters observed that they could

discern no obvious connection between

direct supervision and curtailing fraud

and abuse. Others noted that a strict

direct supervision requirement does not

guarantee that DHS are medically

appropriate and are not simply being

performed for financial gain.

Commenters suggested various

alternative standards, including

‘‘appropriate supervision,’’

‘‘professional responsibility,’’ ‘‘general

supervision,’’ and ‘‘employee status.’’

The vast majority of commenters,

however, urged that the in-office

ancillary services exception ‘‘direct

supervision’’ requirement be interpreted

to comport with the applicable

supervision requirements under our

other payment and coverage rules.

These commenters stressed that these

rules adequately take into account

quality concerns and the health and

safety of patients and that there is no

justification for imposing an additional

layer of supervision requirements.

Response: Upon further review and

consideration of the statute, the

legislative history, and the public

comments, we have concluded that the

Congress did not use the phrase

‘‘directly supervised’’ in any technical

sense in the statute. Rather, we believe

the Congress sought to establish a nexus

between the referring physician and the

individual performing the ancillary

services in order to limit the exception

to services that are truly ‘‘ancillary’’ to

the referring physician’s medical

practice. We believe that the Congress

did not intend section 1877 of the Act

to supersede or replicate existing

statutory and regulatory structures that

address supervision of services from the

perspective of quality of care or patient

safety. This interpretation is consistent

with the often cited legislative history

indicating that the Congress did not

intend in the context of section 1877 of

the Act to require physicians to be

present at all times that ancillary

services were being performed (‘‘The

conferees intend that the requirement

for direct supervision by a physician

would be met if the lab is in the

physician’s office which is personally

supervised by a lab director, or a

physician, even if the physician is not

always on site’’ (H. Rep. No. 213, 103d

Cong. 810 (1993)). We are persuaded

that a more sensible approach is to defer

to existing Medicare and Medicaid

supervision requirements. (Those rules

are not addressed in Phase I of this

rulemaking.) Thus, the in-office

ancillary services exception supervision

requirements will be satisfied if the

level of supervision provided meets all

applicable Medicare or Medicaid

payment and coverage requirements.

Comment: One commenter viewed the

strict ‘‘direct supervision’’ standard

established in the August 1995 final rule

as an important check on inappropriate

referrals and objected to any

liberalization of the requirement,

arguing that it would allow the

connection between a physician’s

activities and DHS to ‘‘grow too thin.’’

The commenter believes it is

appropriate for us to impose higher

standards of care to protect patients who

are referred for DHS, because these

services have been determined to

present a particularly high risk of

inappropriate referrals. The commenter

further noted that as the health and

safety rationale for supervision declines

(supervision being less necessary for

certain low-risk services), the risk of

unnecessary referrals and

overutilization increases. The

commenter recommended that we retain

the ‘‘incident to’’ direct supervision

standard. In the alternative, the

commenter proposed a ‘‘sphere of

service’’ test under which a physician

would be allowed to refer a patient for

services only if that physician, and not

another licensed practitioner, normally

would perform the services. According

to the commenter, this approach would

eliminate physician incentives to

establish ‘‘backroom’’ practices to

provide services that could be provided

more efficiently elsewhere.

Response: We share this commenter’s

concerns about inappropriate financial

incentives driving the provision of DHS.

We are concerned that heightened

downward pressure on physician

incomes will generate increased upward

pressure to expand in-office ancillary

services as a means of offsetting income

losses. However, we believe the

Congress clearly articulated a policy

determination to allow in-office

ancillary services that meet certain

statutory criteria. While the stricter

‘‘incident to’’ supervision standard

might serve to reduce the risk of

overutilization somewhat, on balance,

we believe that using section 1877 of the

Act to superimpose a separate

supervision requirement on existing

regulatory structures governing

appropriate levels of supervision would

be overly burdensome, inefficient, and

inconsistent with the overall design of

the statute. We note, however, that

physicians wishing to bill DHS

‘‘incident to’’ (and group practice

physicians wishing to obtain

productivity bonuses for services

incident to their personally performed

physician services) must comply with

the ‘‘incident to’’ supervision

requirements, including the ‘‘present

and available’’ requirement and the

employee requirement, as set forth in

section 2050, ‘‘Services and Supplies,’’

of the Medicare Carriers Manual (HCFA

Pub. 14–3), Part 3—Claims Process.

Comment: One commenter asked

whether technicians must be directly

supervised if a group practice provides

technician services to a hospital. If so,

the commenter requested that we clarify

whether the group practice must follow

self-referral supervision standards or

hospital supervision standards.

Response: If a hospital is billing for

the services, as this commenter implied,

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 887

the in-office ancillary services exception

does not apply (along with its

supervision requirement). Any hospital

standards would always apply, since

any requirement for supervision under

section 1877 of the Act is separate and

distinct from other supervision

requirements under the Medicare and

Medicaid statute and regulations.

Comment: While many commenters

approved of our proposal to exclude

independent contractors as members of

a group practice for purposes of

complying with the definitional tests for

a group practice (making it easier for

many groups, especially smaller groups,

to qualify as a group practice for

purposes of section 1877 of the Act),

many commenters also urged that

independent contractors be included as

members of a group practice for

purposes of the direct supervision

requirement of the in-office ancillary

services exception. Many commenters

expressed concern that our bar on direct

supervision by independent contractors

would undercut the ability of group

practices to deliver necessary health

care services in situations in which

employment of the physician is not

possible or desirable. To support their

claim that the statute does not require

that the direct supervision be provided

by a ‘‘member’’ of the group,

commenters observed that section

1877(b)(2)(A)(i) of the Act only requires

supervision ‘‘by the [referring]

physician or by another physician in the

group.’’ One commenter noted that this

language is consistent with section

3060.3, ‘‘Payment to the Health Care

Delivery System,’’ of the Medicare

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

3—Claims Process, which treats

independent contractors as ‘‘in the

group’’ for reassignment purposes.

Another commenter suggested that an

independent contractor could properly

be considered ‘‘in the group’’ if the

physician provides services to the group

practice’s patients in the group

practice’s facility under a contract with

the group, and the services are billed by

the group.

Response: Having reviewed the

comments and reconsidered the

statutory language, we are persuaded

that independent contractors may be

physicians ‘‘in the group’’ for purposes

of the in-office ancillary services

exception. We are considering an

independent contractor physician to be

‘‘in the group practice’’ if (1) he or she

has a contractual arrangement to

provide services to the group’s patients

in the group practice’s facilities, (2) the

contract contains compensation terms

that are the same as those that apply to

group members under section

1877(h)(4)(iv) of the Act or the contract

fits in the personal services exception,

and (3) the contract complies with the

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

these regulations and in section 3060.3,

‘‘Payment to the Health Care Delivery

System,’’ of the Medicare Carriers

Manual (HCFA Pub. 14–3), Part 3—

Claims Process, so that his or her

services are billed by the group practice.

We are codifying this new test in

§ 411.351 of the regulations. This latter

requirement presents a technical

problem under the plain language of the

statute, which we address as follows.

The billing requirements under section

1877(b)(2)(B) of the Act do not provide

for billing by the group practice when

a supervising physician is ‘‘a physician

in the group practice,’’ rather than a

member of the group. Given the

statutory structure and language,

particularly the language of the direct

supervision requirement under section

1877(b)(2)(A)(i)of the Act, we are

interpreting the billing requirements to

extend to billing by the group practice

when the supervising physician is ‘‘in

the group practice’’ in order to

effectuate the direct supervision

requirement. Independent contractors

who qualify as ‘‘physicians in the group

practice’’ may receive overall profit

shares and productivity bonuses

described in section 1877(h)(4)(B)(i) of

the Act, as implemented by these

regulations. As discussed in section

VI.C.3 of this preamble, independent

contractors are not ‘‘members’’ of the

group.

Comment: Several commenters sought

clarification with respect to the

application of the in-office ancillary

services exception to referrals for DHS

from an independent contractor to the

group practice with which he or she

contracts (for example, referrals from an

independent contractor to the group’s

in-office laboratory).

Response: Independent contractor

physicians will have compensation

relationships with the group practices

with which they contract. In order for

an independent contractor to refer DHS

to the group practice, an exception must

apply. Possible exceptions, depending

on the circumstances, include the inoffice ancillary services exception for

independent contractors who are

‘‘physicians in the group’’, the

physicians’’ services exception, the

personal service arrangements

exception, or the risk-sharing exception

for services provided to certain managed

care enrollees. We note that under the

in-office ancillary services exception,

the furnishing of DHS would have to

take place in a ‘‘same building’’ location

under section 1877(b)(2)(A)(ii)(I) of the

Act, as the ‘‘centralized building’’

provision (section 1877(b)(2)(A)(ii)(II) of

the Act) only applies to referring

physicians who are group members.

Comment: Several practitioners of

ultrasonography commented that a

direct supervision requirement that

mandates physician presence for inoffice ancillaries unfairly benefits

radiologists, who are generally available

on-site because they do not have

‘‘patients’’ to see or other

responsibilities, while disadvantaging

vascular laboratories that operate

without physicians on-site. The

commenters suggested that the rule

require that ultrasound examinations

and interpretations be performed in

accordance with standards set by

independent professional associations.

However, another commenter—

radiologist—urged us to retain the direct

supervision requirement in the interest

of patient health and safety.

Response: As noted above, we are

modifying the direct supervision

requirement under the in-office

ancillary services exception to apply the

requisite supervision requirements

under Medicare and Medicaid payment

and coverage rules.

3. The Building Requirements

The Existing Law: Under section

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

ancillary services must be furnished in

a building in which the referring

physician, or another physician who is

a member of the same group practice,

furnishes physician services unrelated

to the furnishing of DHS. Alternatively,

in the case of a referring physician who

is a member of a group practice, the inoffice ancillary services can be

furnished in another building that is

used by the group practice for the

provision of some or all of the group’s

clinical laboratory services, or for the

centralized provision of the group’s

DHS (other than clinical laboratory

services). (The existing regulations

address the same and other building

requirements only with respect to

clinical laboratory services.)

The Proposed Rule: In our January

1998 proposed rule, we proposed

defining the ‘‘same building’’ in

§ 411.355(b)(2)(i) as the same physical

structure, with one address, and not

multiple structures connected by

tunnels or walkways.

The Final Rule: The building

requirements are designed to ensure that

the DHS qualifying for the exception are

truly ‘‘in-office’’ (that is, part of the

physician’s routine medical office

practice) and not provided as part of a

separate business enterprise. The

location requirements do not pertain to

888 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

the furnishing of DHS that are not

payable by Medicare or Medicaid; these

services may be furnished anywhere,

subject to any restrictions in other

applicable Federal, State, or local laws.

In general, the structure of the

statutory language suggests that the

Congress had two main objectives:

permitting the provision of in-office

ancillary services for the convenience of

patients during their patient visits and,

in the group practice context, permitting

the provision of in-office ancillary

services in a dedicated building used for

these services (for example, a central

clinical laboratory). By contrast, we

believe the Congress did not intend to

protect part-time rentals of ancillary

services facilities under this exception.

Upon further consideration, we

believe that the Congress did not intend

the application of the in-office ancillary

services exception to turn on the

nuances of architectural design. Thus,

for purposes of Phase I of this

rulemaking, a ‘‘building’’ is defined as

a structure with, or combination of

structures that share, a single street

address as assigned by the U.S. Postal

Service. For purposes of this rule, the

‘‘same building’’ does not include

exterior spaces, such as courtyards,

lawns, driveways, or parking lots, or

interior parking garages. The building

could include a SNF or other facility or

a patient’s home, provided all other

conditions of the exception are satisfied.

A mobile van or trailer is not a building

or a part of a building.

The statute implements congressional

intent by offering two location options:

the ‘‘same building’’ option, available to

solo practitioners and group practices,

and the ‘‘centralized building’’ option,

available only to groups. (See section

1877(b)(2)(A)(ii)(I) and (b)(2)(A)(ii)(II) of

the Act.)

‘‘Same Building’’

Under section 1877(b)(2)(A)(ii)(I) of

the Act, services qualify for the in-office

ancillary services exception if they are

furnished ‘‘in a building in which the

referring physician (or another

physician who is a member of the same

group practice) furnishes physician

services unrelated to the furnishing of

designated health services.’’ We believe

the underlying intent of this provision

is to allow physicians to furnish DHS

that are ancillary to the physician’s core

medical practice in the location where

the core medical services are routinely

delivered. We believe the Congress did

not intend to permit the wholesale

provision of DHS in locations in which

physicians perform only token services

that are not related to the furnishing of

DHS (that is, only token physician

services that are not Federal or private

pay DHS). Simply stated, the DHS

should be ancillary to physician

services that are not DHS, and not the

other way around. The exception was

intended as an accommodation to

physicians’ customary practice of

medicine and not as a loophole for

physicians and group practices to

operate DHS enterprises that are

unconnected—or only marginally

connected—to their medical practices.

In addition, the significant easing of the

‘‘direct supervision’’ requirement

described above necessitates a

somewhat stricter interpretation of the

location standards than we proposed in

our January 1998 proposed rule, in

order to ensure an adequate nexus

between in-office ancillary DHS and the

physician’s core medical practice. Thus,

we are making the following changes

(except where noted) in the ‘‘same

building’’ requirements:

• In our January 1998 proposed rule,

we proposed interpreting the rule as

allowing any quantity of services

unrelated to DHS to be furnished in the

same building. We are revising the rule

to require that 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 Federal or private pay

DHS. We are defining the phrase

‘‘services unrelated to the furnishing of

designated health services’’ to mean

physician services that are neither

Federal nor private pay DHS, even if the

physician service leads to the ordering

of DHS. In addition, to preclude singleservice DHS enterprises from the inoffice ancillary services exception, we

are requiring that the unrelated

physician services 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).

• We are adding a requirement that

the DHS furnished in the building be

furnished to patients whose primary

nexus with the referring physician (or

his or her group practice) is the receipt

of physician services unrelated to the

furnishing of DHS. Simply stated,

obtaining DHS should not be the main

reason the patient has contact with the

referring physician (or his or her group

practice). Again, this standard will

ensure that self-referred DHS are

ancillary and not primary services for

the patients who receive them. Thus, for

example, a physician who provides

physician services and DHS for his or

her patients in a nursing home may not

also provide token physician services to

other nursing home patients in order to

provide DHS under the in-office

ancillary services exception.

• The space in the building in which

the DHS are provided need not be

adjacent to the space in which services

that are not DHS are provided (subject

to the dictates of any Medicare or

Medicaid payment or coverage

supervision rules).

• Shared facilities in the same

building are permitted to the extent they

comply with the supervision, location,

and billing requirements of the in-office

ancillary services exception; we are not,

however, creating a broader sharedfacility exception.

• We believe that a home care

physician whose principal medical

practice consists of treating patients in

their private homes meets the ‘‘same

building’’ requirements if the physician

(or a staff member accompanying the

physician) provides a designated health

service contemporaneously with a

physician service (provided by the

referring physician) that is not a

designated health service in the

patient’s private home and the other

exception requirements are met.

Because the location requirements of the

in-office ancillary services exception

may disadvantage home care

physicians, we are considering whether

special rules should be developed under

the ‘‘same building’’ requirements for

physicians who primarily practice as

home care physicians. We are soliciting

comments on that issue and intend to

address it further in Phase II of this

rulemaking.

‘‘Centralized Building’’

Under section 1877(b)(2)(A)(ii)(II) of

the Act, in the case of a referring

physician who is a member of a group

practice, services qualify for the inoffice ancillary services exception if

they are furnished ‘‘in another building

which is used by the group practice

* * * for the provision of some or all

of the group’s clinical laboratory

services, or * * * for the centralized

provision of the group’s designated

health services (other than clinical

laboratory services).’’ We believe that

this statutory provision—which allows

group practices to have ‘‘off-site’’ DHS

locations—was intended to

accommodate the concerns of group

practices with multiple office locations

that wanted to consolidate DHS

operations for cost containment

purposes. However, in permitting group

practices to provide centralized DHS,

the Congress did not intend to

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 889

eviscerate the ‘‘in-office’’ element of the

exception. We are therefore interpreting

the ‘‘centralized building’’ standard as

follows:

• The space (whether an entire

building, subpart of a building, or

mobile unit) used for the provision of

the group practice’s clinical laboratory

services or centralized DHS qualifies for

the exception only if it is used

exclusively by the group, that is, it is

wholly owned by the group practice or

leased by the group practice on a fulltime basis (that is, 24 hours per day, 7

days per week). To preclude part-time

arrangements in the form of one-day

rentals, we are requiring that the

centralized building be owned or leased

exclusively by the group practice for at

least 6 months. This rule precludes

facilities shared by group practices in

off-site buildings.

• Part-time ‘‘centralized’’ DHS

arrangements are precluded. For

example, a group practice may not rent

a magnetic resonance imaging (MRI)

facility 1 day per week and treat that

facility as a ‘‘centralized’’ building

under section 1877(b)(2)(A)(ii)(II) of the

Act.

• Under the authority granted to the

Secretary in the unnumbered paragraph

that follows section

1877(b)(2)(A)(ii)(II)(bb) of the Act (that

allows the Secretary to determine other

terms and conditions related to section

1877(b)(2)(A)(ii)(II)(bb) under which the

provision of DHS does not present a risk

of program or patient abuse), we are

determining that a mobile facility (for

example, an x-ray van) owned and used

exclusively by a group practice (24

hours per day, 7 days per week, for at

least six months) will be considered to

meet the ‘‘centralized building’’

standard, even though a mobile facility

is not a building.

• Group practices may lease or

sublease DHS facility space (including

mobile units) to or from other group

practices or solo practitioners on a parttime basis, but DHS provided to patients

of part-time lessee or sublessee group

practices will not fit in the in-office

ancillary services exception, unless the

‘‘same building’’ requirements are met.

• Referrals for ancillary services from

other physicians or group practices that

are not affiliated with the group practice

providing the DHS do not implicate

section 1877 of the Act, provided there

are no impermissible financial

relationships between the parties. A

referral for a designated health service

does not create a financial relationship.

These building rules are designed to

give physicians and group practices a

meaningful opportunity to provide bona

fide in-office ancillary DHS to their

patients, while preventing group

practices from using the in-office

ancillary services exception to operate

enterprises that are functionally nothing

more than self-referred DHS enterprises,

providing minimal services that are not

DHS so as to comply nominally with the

exception and capture DHS profits. We

believe the Congress did not intend the

exception to include these operations.

Far from promoting patient convenience

and quality of care, these arrangements

pose a significant risk of overutilization

of services and shuttling of patients to

DHS locations for the economic

betterment of the physicians, without

regard to the patient’s best interests.

Comment: Many commenters found

the proposed regulations and

interpretations of the ‘‘building’’

requirements to be confusing, over

broad, potentially contradictory, and, in

the words of one commenter,

‘‘metaphysical.’’ With respect to our

proposed ‘‘physical structure’’

requirements, many commenters urged

us not to place the agency or physicians

into surveying real estate to determine

whether a structure is one building.

Commenters variously observed that

while some walkways or tunnels

between commercial medical office

buildings may be sidewalks between

distinct and separate buildings, other

walkways or tunnels are part of the

modern architecture of these buildings

or are required to comply with zoning,

land use, open space, or other real estate

laws or to surmount natural barriers

present on the site of the building.

There were a number of suggestions

for revising the requirement. One group

of commenters urged us to adopt a

mailing address rule stating that a

building would be considered as one

building for all suites or room numbers

located inside that are required by the

U.S. Postal Service to use the same

street address, regardless of suite

number. Under this rule, suites operated

by the same group practice or solo

physician in buildings that use separate

street addresses would be treated as

separate buildings for the purposes of

the in-office ancillary services

exception. Other commenters objected

to a street address test, noting that

physicians have no control over the

manner in which their buildings are

assigned street addresses and that the

parameters for assigning street addresses

may vary by State and locality. One

commenter expressed concern about

buildings located on corner lots that

might have two street addresses.

A second approach proposed by one

commenter was to revise the regulations

to allow connected buildings or portions

of buildings that are owned or

controlled by the same group practice.

Still other commenters claimed that the

emphasis should be on the proximity of

the supervising physician to the patient

during the performance of DHS. Under

this view, the location requirement of

the in-office ancillary services exception

should focus on whether the physician

is ‘‘immediately available’’ to the

support personnel and not on an

artificially imposed physical design

constraint. Along these lines, several

commenters proposed that services be

considered in the ‘‘same building’’ if the

physician is within a certain number of

minutes (for example, 10 minutes) from

the patient or if the physician is ‘‘close

at hand.’’

Response: We regard the building

requirement of the in-office ancillary

services exception, in combination with

the supervision and billing

requirements, as the Congress’s attempt

to circumscribe the exception so that it

applies only to services provided within

the referring physician’s actual sphere

of practice. Without these requirements,

physicians could refer to, and profit

from, almost any entity, with the claim

that somehow the referred services are

‘‘in-office’’ services that are being

supervised from some remote place.

Notwithstanding, we realize that our

proposed definition of a ‘‘building’’—

which attempted to define a building in

architectural terms—could cause

practical problems for some physicians

and that a clearer, ‘‘bright line’’ rule

would be preferable. Accordingly,

having considered the various

alternatives suggested by the

commenters, we have concluded that for

purposes of Phase I of this rulemaking,

we are defining a ‘‘building’’ as a

structure with, or combination of

structures that share, a single street

address as assigned by the U.S. Postal

Service. A building will be considered

as one building for all suites or room

numbers located inside that are required

by the U.S. Postal Service to use the

same street address, regardless of the

suite number. Under this rule, suites

used by the same group practice or solo

physician in buildings with separate

street addresses will be treated as

separate buildings for the purposes of

the in-office ancillary services

exception. While we recognize that this

mailing address rule may result in an

occasional anomaly, we are persuaded

that it creates a ‘‘bright line’’ rule that

will be easy to apply and will produce

fair results in the vast majority of cases.

Questionable cases may be appropriate

candidates for an advisory opinion.

The space in the building in which

the DHS are provided need not be

adjacent to the space in which services

890 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

that are not DHS are provided (subject

to the dictates of any Medicare or

Medicaid payment or coverage

supervision rules). Shared facilities in

the same building are permitted under

section 1877 of the Act to the extent

they comply with the supervision,

location, and billing requirements of the

in-office ancillary services exception;

we are not creating a broader shared

facility exception.

Because of the increased risk of abuse,

we do not intend to protect DHS

provided by mobile vans or other

mobile facilities under the in-office

ancillary services exception, except in

very limited circumstances described in

section VI.B.3 of this preamble. Thus,

we wish to make clear that for purposes

of this rule, a ‘‘building’’ does not

include exterior spaces, such as

courtyards or parking lots, nor does it

include interior parking garages. For

purposes of the in-office ancillary

services exception, a building consists

of usable professional office space and

common areas such as lobbies,

corridors, elevator banks, and restrooms.

In light of the changes we are making

in the supervision standard, we believe

it is necessary to revisit the building

standards in order to effectuate

congressional intent to limit the scope

of the in-office ancillary services

exception to services that are truly

ancillary to physician services and are

not a primary business of the practice.

Thus, we are revising the ‘‘same

building’’ requirements to more

definitively tie in-office ancillary

services to the referring physician’s core

medical practice. Simply stated, we

want to ensure that services covered by

the exception are, in fact, furnished ‘‘in

office.’’ Under section

1877(b)(2)(A)(ii)(I) of the Act, services

qualify for the in-office ancillary

services exception if they are furnished

‘‘in a building in which the referring

physician (or another physician who is

a member of the same group practice)

furnishes physicians’ services unrelated

to the furnishing of designated health

services.’’ We believe the underlying

intent of this provision is to allow

physicians to furnish DHS that are

ancillary to the physician’s core medical

practice in the location where the core

medical practice occurs. We believe the

Congress did not intend to permit the

wholesale provision of DHS in locations

in which physicians perform only token

services unrelated to the furnishing of

DHS. Thus, we are interpreting the

‘‘same building’’ requirements as

follows:

• 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. In

addition, we are requiring that the

unrelated physician services 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).

Independent contractors are not

members of a group practice for

purposes of section 1877 of the Act;

thus, their activities do not count for

purposes of compliance with the

substantial physician services test or the

full range of services test under the

‘‘same building’’ requirements, unless

they are the referring physician. (See

discussion in section VI.B.3 of this

preamble.)

• For purposes of this exception, we

are defining the phrase ‘‘services

unrelated to the furnishing of

designated health services’’ to mean

physician services that are neither

Federal nor private pay DHS, even if the

services might generate orders or

referrals of DHS. Thus, for example, a

cardiologist who examines a patient and

thereafter orders a diagnostic radiology

test has performed a service unrelated to

the furnishing of DHS. On the other

hand, a cardiologist who reads the

results of a diagnostic radiology test

(such as, for example, a transthoracic

echocardiography for congenital cardiac

anomalies, CPT code 93303) (whether

for a Federal or private pay patient) has

performed a service that is related to the

furnishing of DHS.

• The DHS furnished in the building

are furnished to patients whose primary

nexus with the referring physician (or

the group practice of which the referring

physician is a member) is the receipt of

physician services unrelated to the

furnishing of DHS. Thus, for example, a

physician who provides physician

services and DHS for his or her patients

in a nursing home may not also provide

token physician services to other

nursing home patients in order to

provide those services under the inoffice ancillary services exception.

Comment: One commenter believes

that our proposed interpretation of the

‘‘same building’’ requirements

contradicts the purpose of section

1877(b)(2)(A)(ii) of the Act. The

commenter focused on the part of this

provision that requires that ancillary

services be furnished in a building ‘‘in

which the referring physician * * *

furnishes physicians’ services unrelated

to the furnishing of designated health

services.’’ The proposed rule regarded a

physician’s examination and diagnosis

of a patient that leads to the physician

requesting a designated health service as

acts that are ‘‘unrelated to the furnishing

of designated health services.’’ The

commenter is concerned that this

interpretation would allow a physician’s

office to be a single specialty ‘‘mill’’ in

which the physician could quickly

generate a large quantity of referrals for

profit. In other words, the exception

could apply to a physician who does

little more than conduct cursory

evaluations and refer patients for a

particular designated health service (for

example, physical therapy). The

commenter believes that, instead, the

physician’s office is meant to be a

location in which the physician

provides bona fide diagnostic and

curative services to individuals

presenting a variety of conditions.

Response: We share the commenter’s

general concern about inappropriate

DHS arrangements, although we believe

that the statute does not require us to

include in the in-office ancillary

services exception only services referred

by physicians who treat a variety of

conditions. The focus of the exception,

in our view, is the requirement that the

services be provided or performed in

conjunction with a physician’s own

professional activities or as adjuncts to

physician services, in a location in

which the physician (or a member of his

or her group practice) practices. If we

were to limit this exception as the

commenter suggested, some physician

specialists might be prohibited from

referring within their own practices. On

the other hand, we agree that some

restriction in the definition is

appropriate to preclude physicians from

providing virtually nothing more than

referrals for DHS. Thus, as discussed

above, in Phase I of this rulemaking, we

are requiring that the unrelated

physician services 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).

Comment: Several commenters

believe that our proposal to have our

regional carriers determine whether the

building requirements are satisfied was

unworkable and impractical and would

result in inequitable application of the

law. Commenters noted that local

carriers are often reluctant to express

opinions on these issues and

disinclined to provide written opinions.

If the proposal survives, one commenter

urged us, at a minimum, to give carriers

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 891

explicit authority and direction to issue

these written opinions.

Response: We have endeavored to

develop regulations that provide

sufficiently clear rules so that parties

can determine compliance without

resorting to a regional carrier’s

determination.

Comment: A commenter expressed

concern about DHS performed by

physicians who travel to see patients.

The commenter is a physician in a

group practice of six physiatrists who

perform electromyography and nerve

conduction studies in a midwestern

State. The group travels to rural

counties in the State in which it

practices to evaluate patients for

musculoskeletal and neurologic

problems. The patients often need nerve

testing, and the group’s physiatrists are

often the only health care professionals

in the county able to perform this

testing. The commenter expressed

concern that the regulations would

prohibit the physiatrists from providing

needed medical assessment and care to

patients in these circumstances.

Response: Electromyography and

nerve conduction studies are not

physical therapy services under our

definition in § 411.351; therefore,

referrals for these services do not

implicate section 1877 of the Act.

Nonetheless, we wish to address the

commenter’s underlying question

regarding traveling practitioners.

Assuming that the physiatrist group

meets the definition of a group practice

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

the DHS are performed in the same

building where the physiatrist (or a

member of the group) also performs

substantial physician services unrelated

to the furnishing of Federal or private

pay DHS, we believe the in-office

ancillary services exception may apply

in the situation described by the

commenter. As noted elsewhere, we are

soliciting comments on problems faced

by physicians who principally practice

in patients’ homes and may be

disadvantaged by the location

requirements of the in-office ancillary

services exception. We note also that the

rural provider exception (to be

addressed in Phase II of this

rulemaking) may apply in the situation

described by the commenter.

Comment: A commenter asked that

we make clear that if a solo practitioner

provides a designated health service for

his or her own patients in the solo

practitioner’s own office, then the solo

practitioner is not in violation of section

1877 of the Act.

Response: In the vast majority of

situations we can envision, if a solo

practitioner provides a designated

health service for his or her own

patients in the solo practitioner’s own

office, then the solo practitioner will not

violate section 1877 of the Act. First, we

are revising the definition of a ‘‘referral’’

for purposes of section 1877 of the Act

to exclude DHS personally performed

by the referring physician. Second, with

respect to DHS performed by employees

of the solo practitioner (including

‘‘incident to’’ services), we believe the

Congress intended for the in-office

ancillary services exception to apply to

solo practitioners as well as group

practices. Thus, so long as a solo

practitioner’s provision of DHS meets

the in-office ancillary services

exception, section 1877 of the Act

would not be violated.

Comment: Commenters were divided

about the provision of ancillary services

through mobile units. Some believe that

the use of mobile units and equipment

leads to abusive arrangements. Other

commenters supported the use of

mobile units as cost-efficient means of

sharing expensive DHS resources,

particularly in rural areas. One

commenter noted that State certificate of

necessity (CON) volume requirements

would be nearly impossible to meet

without mobile units. The same

commenter argued that sharing

equipment is a critical part of cost

containment, because idle equipment

may lead to overutilization. One

commenter pointed out that Federal

antitrust agencies approve joint

ownership of high technology

equipment and that Blue Cross/Blue

Shield has many policy provisions

requiring joint ownership. These

commenters generally advocated that

mobile units be permitted and that

mobile units qualify as a centralized

location for the provision of DHS. A

commenter observed that under the

January 1998 proposed rule, a group

practice could move any piece of

equipment from office to office and,

applying the ‘‘same building’’

requirements, use that piece of

equipment for the provision of DHS. In

light of this, the commenter questioned

whether it made sense for the group

practice to be prohibited from

transporting the piece of equipment in

a mobile vehicle to the various practice

sites and using the equipment in the

vehicle, if the mobile unit were

exclusively used by the group practice

and is not leased to any other health

care provider. The commenter requested

clarification that in these circumstances,

the mobile unit would meet either the

‘‘same building’’ requirements or

‘‘centralized building’’ standard. Other

commenters urged a broader exception

for mobile units, for example, including

them if they are parked in the parking

lot of a physician’s medical office

building or treating the units themselves

as buildings.

Response: The treatment of mobile

units presents difficult questions under

section 1877 of the Act. On the one

hand, we have serious concerns about

the potential for fraud and abuse when

services are provided with mobile units.

These are the same concerns we have

(and believe the Congress shares) about

all shared physician-owned or

controlled ancillary services facilities.

We believe that section 1877 of the Act

is aimed at arrangements that enable

physicians to profit from referrals to

free-standing, money-making services

ventures that are not central to their

medical practices. On the other hand,

we agree that the statute clearly permits

services provided by mobile units that

qualify under the ‘‘same building’’

requirements. Thus, we agree with the

commenter that a group practice can

move any piece of equipment from

office to office and use that ‘‘in-office’’

piece of equipment for the provision of

DHS in a location that meets the ‘‘same

building’’ requirements. Because we are

defining ‘‘building’’ narrowly to exclude

parking lots and interior parking

garages, services provided in mobile

vans or trailers will not comply with the

‘‘same building’’ requirements. We

believe it reasonable to conclude that

these services are not ‘‘in-office’’ when

a van circulates among various

physicians’ offices and is rented serially

by each. These arrangements would

seem to be calculated to enhance

physician revenues, rather than patient

convenience, since patients would

likely be encouraged, if not required, to

schedule appointments on the day that

the physician stands to profit from the

services.

That said, we believe that mobile

services can constitute an important

part of the health care delivery system

for many patients. Nothing in the statute

or these regulations precludes a

physician or group practice from

arranging for a mobile provider to treat

the physician’s patients at his or her

office location, so long as the financial

arrangement, if any, between the

physician or group practice and the

ancillary services provider fits in an

exception under section 1877 of the Act.

In addition, in rural areas, the ‘‘rural

provider’’ exception (to be addressed in

Phase II of this rulemaking) may apply

to protect some physician-owned

mobile service providers. Finally, we

are persuaded that the risk is low if a

group practice exclusively owns and

uses its own mobile van or trailer that

892 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

circulates among its group practice

locations. In that limited circumstance,

we are treating the mobile unit as akin

to a ‘‘centralized’’ building under

section 1877(b)(2)(A)(ii)(II) of the Act.

Comment: Several commenters sought

clarification in the regulations text that

group practices can have more than one

centralized location for the provision of

DHS. However, one commenter offered

a contrary view. This commenter

expressed the view that the Congress

intended that the in-office ancillary

services exception be interpreted

narrowly with respect to centralized,

free-standing locations. Specifically, the

commenter cites the Conference Report

for OBRA 1993 in H. Rep. No. 213, 1st

Sess., 810 (1993), which states: ‘‘The

conference agreement includes an

exception for clinical laboratory services

provided by a group practice with

multiple office locations. For all other

DHS the exception for group practices

applies only if the services are provided

in a centralized location’’ (emphasis

added). Based on this language, the

commenter believes that the Congress

intended to permit group practices to

have a single centralized location to

provide DHS, but not to permit group

practices to establish multiple wholly

owned locations or franchises for DHS.

Response: Under section

1877(b)(2)(A)(ii)(II) of the Act, in the

case of a referring physician who is a

member of a group practice, services

qualify for the in-office ancillary

services exception if they are furnished

‘‘in another building which is used by

the group practice * * * for the

provision of some or all of the group’s

clinical laboratory services, or * * * for

the centralized provision of the group’s

designated health services (other than

clinical laboratory services).’’ Neither

the statute nor the legislative history for

this provision specifically requires one

single centralized location for a group to

provide DHS. In addition, we see no

compelling reason to impose such a

requirement. We are interpreting the

word ‘‘centralized’’ to apply when a

group practice has established a

separate facility for furnishing DHS to

patients, without the requirement that it

service all of the practice’s offices or

provide all of the practice’s DHS. We are

incorporating this interpretation into the

regulations text.

If we were to require only one

centralized facility for DHS, a group

practice could be in the position of

having to send patients from some

offices to inconvenient locations or to

house a variety of different kinds of

ancillary services in one location, such

as combining all physical therapy,

laboratory services, and x-rays in one

building. It may be entirely impractical

for a group practice to house the

equipment and staff for such diverse

services in one location. We believe the

Congress meant to allow groups to use

this kind of ‘‘central’’ or dedicated

location in situations in which the

facility is convenient to some of the

different offices, but as a result may not

be physically attached to any one of

them. Thus, the facility is ‘‘central’’ to

multiple offices, rather than attached to

just one.

Comment: Several commenters sought

clarification that a group practice with

a single office location for the delivery

of services that are not DHS can have a

separate, centralized building for the

delivery of DHS.

Response: While we believe that the

‘‘centralized building’’ provision—

which allows group practices to have

‘‘off-site’’ DHS locations—was intended

to accommodate the concerns of group

practices with multiple office locations

that wanted to consolidate DHS

operations for cost containment

purposes, we can discern nothing in the

statute or legislative history that would

prevent a group practice with only one

office location from using a centralized

building for the provision of DHS.

However, we are concerned that

allowing single and multi-office group

practices to have multiple off-site

locations for DHS would effectively gut

the in-office ancillary services exception

without additional controls.

Accordingly, we are modifying the

‘‘centralized building’’ standard to

ensure that DHS referrals protected by

the in-office ancillary services exception

are truly part of the group practice’s

medical practice. First, we are requiring

that the centralized office space

(whether an entire building, subpart of

a building, or mobile unit) used for the

provision of the group practice’s clinical

laboratory services or DHS qualifies for

the exception only if it is used

exclusively by the group practice or

group practice physicians, that is, it is

wholly owned by the group practice

(other than a security interest held by an

unrelated lender or mortgagor) or is

leased or subleased by the group

practice on a full-time basis (that is, 24

hours per day, 7 days per week, for at

least 6 months). This rule precludes

group practice shared facilities in offsite buildings. Second, part-time

‘‘centralized’’ DHS arrangements are

precluded. For example, a group

practice may not rent an MRI facility

one day per week and treat that facility

as a ‘‘centralized’’ building. Third, a

mobile facility (for example, an x-ray

van) owned and used exclusively by the

group practice will be considered a

‘‘centralized building.’’

Notwithstanding, group practices may

lease or sublease DHS facility space

(including mobile units) to or from other

group practices or solo practitioners on

a part-time basis. However, DHS

provided to patients of part-time lessee

or sublessee group practices will not fit

in the in-office ancillary services

exception, unless the ‘‘same building’’

requirements are met. Finally, referrals

for ancillary services to a group practice

from physicians not in the group

practice or other group practices do not

implicate section 1877 of the Act,

provided there are no impermissible

financial relationships between the

parties. A referral for a designated

health service does not create a financial

relationship.

Comment: Many commenters urged

us to establish a separate exception for

shared facilities. Several commenters

argued that shared facilities pose no

greater risk of overutilization than DHS

furnished by solo practices or group

practices. Moreover, commenters

believe that shared facilities overseen by

referring physicians are likely to be

more convenient, efficient, and

accountable than other facilities. A

number of commenters suggested that

failure to protect shared facilities would

disrupt existing arrangements that are

widespread in the industry (as one

commenter stated, shared facilities are

the ‘‘reality of what’s going on’’), leaving

many solo practitioners with only two

options: merge with others to form

group practices or disband their shared

facilities. One physician commenter

believes that if his shared radiology and

clinical laboratory facilities are not

permitted, the result would be a shift of

income to commercial laboratory

ventures, pathologists, and radiologists,

further ‘‘dichotomizing’’ the incomes of

primary care physicians and specialists.

The physician claimed that his income

would drop by 25 percent and that he

would have to fire employees and

default on a lease. Commenters

representing the interests of solo

practitioners asserted that there is no

meaningful distinction between DHS

facilities shared by solo practitioners

and group practice-owned DHS

facilities.

A physician-oriented trade

association and other commenters urged

us to add a new exception to allow the

legitimate use of shared office facilities

by physicians modeled on language

included in BBA 1997, but never

enacted. Other commenters offered

different formulations, including

allowing shared facilities if they are in

the same building or complex of

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 893

buildings as the solo practitioners’ office

practices.

Response: In the August 1995 final

rule and the preamble to the January

1998 proposed regulation, we observed

that the in-office ancillary services

exception would allow certain shared

facility arrangements among solo

practitioners who do not wish to

become a group practice. For example,

we noted that two solo practitioners

who share an office and jointly own a

laboratory can continue to refer to that

laboratory, as long as each physician (1)

furnishes physician services unrelated

to the furnishing of DHS in the office

(that is, the arrangement meets the

‘‘same building’’ requirements), (2)

directly supervises the laboratory

services for his or her own Medicare or

Medicaid patients while they are being

furnished, and (3) bills for the services.

We further noted that if only one of the

solo practitioners owns the laboratory in

a shared office, the nonowning

physician can refer to the laboratory as

long as he or she is not receiving

compensation from the owner in

exchange for referrals. We solicited

comments on the effects of section 1877

of the Act on other shared facility

arrangements.

After careful review of the public

comments, we are persuaded that our

original approach in the January 1998

proposed regulations is most consistent

with the purposes of section 1877 of the

Act. Under that approach, shared

facilities are permitted if they comply

with the supervision, location, and

billing requirements of the in-office

ancillary services exception. With

respect to the location of the shared

facility, Phase I of this rulemaking

permits shared facilities that meet the

‘‘same building’’ requirements.

(However, shared facilities do not

qualify under the ‘‘centralized building’’

standard because they will not meet the

exclusively used requirement). Thus, as

noted above, two solo practitioners who

share an office and jointly own a

laboratory can continue to refer to that

laboratory, as long as each physician

furnishes substantial physician services

unrelated to the furnishing of DHS in

the building where the laboratory is

located, provides (directly or through an

independent contractor if permitted

under applicable payment and coverage

rules) the appropriate level of

supervision for DHS for his or her own

Medicare or Medicaid patients, and bills

for the services. We believe the

relaxation of the direct supervision

requirement under these regulations

will enable additional shared facilities

to come within the exception.

Additionally, if only one of the solo

practitioners owns the laboratory in a

shared facility arrangement, the

nonowning physician can refer to the

laboratory as long as he or she is not

compensated by the owner in exchange

for referrals.

We are not persuaded, however, that

a separate exception for shared facilities

is warranted. The BBA 1997 language

that several commenters proffered

would apply to services that are

furnished—

• Personally by the referring

physician who is a shared facility

physician or personally by an

individual directly employed or under

the general supervision of such a

physician;

• By a shared facility in a building in

which the referring physician furnishes

substantially all of the services of the

physician that are unrelated to the

furnishing of shared facility services;

• To a patient of a shared facility

physician; and

• That are billed by the referring

physician or a group practice of which

the physician is a member.

Given that we are revising the

supervision standards under the inoffice ancillary services exception, we

believe that the in-office ancillary

services exception will cover most, if

not all, of the nonabusive shared facility

arrangements that would have been

protected by this commenter’s proposed

additional exception.

Comment: A commenter questioned

the application of the proposed

regulations if physicians who share a

building, but for legal or personal

reasons are not formally organized into

a professional structure (that is, a

‘‘single legal entity’’), form a joint

venture to establish a clinical laboratory

or other ancillary service provider.

Response: As explained above, solo

practitioners may own and operate

shared DHS facilities so long as they fit

in the in-office ancillary services

exception. If the practitioners form a

separate joint venture to provide the

services, they may run into problems

complying with the billing requirements

of the in-office ancillary services

exception, if the joint venture does the

billing (that is, the joint venture will not

qualify as a wholly owned entity and,

therefore, will not fit into any of the inoffice ancillary billing requirements

under section 1877(b)(2)(B) of the Act or

§ 411.355(b)).

4. The Billing Requirement

The Existing Law: 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 such

physician is a member, under that group

practice’s billing number; or

• An entity that is wholly owned by

the referring or supervising physician or

the referring or supervising physician’s

group practice.

The Proposed Rule: In the proposed

regulation, we interpreted the billing

requirements to allow a single group to

bill under more than one billing number

assigned to the group and to allow an

agent to bill for the group in the group’s

name, using the group’s number,

provided the billing arrangement meets

the requirements in § 424.80(b)(6). We

further interpreted the ‘‘wholly owned’’

entity provision to mean that a

physician or group practice can

establish a wholly owned provider of

DHS that can bill Medicare or Medicaid

on its own behalf, under its own billing

number that is not a group billing

number.

The Final Rule: As with the other

requirements in this exception, the

billing requirements serve to tie the

ancillary services for which selfreferrals will be permitted to the

physician’s routine medical practice.

Phase I of this rulemaking incorporates

the OBRA 1993 amendment clarifying

that in-office ancillary services that are

billed by a group practice of which the

referring or supervising physician is a

member must be billed under a billing

number assigned to the group practice.

However, group practices may have, and

bill under, multiple group practice

billing numbers, subject to any

applicable Medicare or Medicaid

program restrictions. Wholly owned

entities that qualify to do the billing

under the rule may use their own billing

numbers and need not use a number

assigned to the physician or group

practice that owns them. The entities

must be wholly owned either by the

physician performing or supervising the

services or by the group practice; joint

ventures between group practices and

individual group practice physicians or

that include other providers or investors

do not qualify as wholly owned entities.

Billing may be done by independent

third party billing companies if they are

acting as agents of a solo practitioner,

group practice, or entity, but the billing

must be done under billing numbers

assigned to the solo practitioner, group

practice, or entity, and the services may

not be separately billed under a billing

company’s number. The billing

arrangements must meet the

requirements of § 424.80(b)(6).

The express billing requirements of

section 1877(b)(2)(B) of the Act contain

894 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

no billing method applicable to

supervising independent contractor

physicians who are ‘‘physician in the

group’’ under section 1877(b)(2)(A)(i) of

the Act and § 411.351, but who are not

members of the group under § 411.351

(these physicians cannot bill themselves

as the supervising physician because

they are required to reassign their

billing rights to the group in order to

qualify as ‘‘physicians in the group’’).

We believe the Congress intended the

billing requirements of section

1877(b)(2)(B) of the Act to correspond

with the supervision requirements of

section 1877(b)(2)(a)(i) of the Act and

that this omission was simply a

legislative drafting oversight.

Accordingly, we are interpreting the

billing requirements to be consistent

with the supervision requirements,

which permit supervision by a

‘‘physician in the group.’’ Therefore, the

billing conditions will be satisfied if the

DHS are billed by the group practice

when the supervising physician is a

‘‘physician in the group.’’

In summary, under the regulations in

Phase I of this rulemaking, to qualify for

the in-office ancillary services

exception, DHS must be billed by one of

the following:

• The physician performing or

supervising the service.

• The group practice of which such

physician is a member, under that group

practice’s billing number.

• The group practice if the physician

is a ‘‘physician in the group practice,’’

under that group practice’s billing

number.

• An entity that is wholly owned by

the referring or supervising physician or

the referring or supervising physician’s

group practice.

Comment: One commenter objected to

our interpretation of the ‘‘wholly

owned’’ entity provision as unsupported

by the statute. The commenter believes

that allowing separate and distinct

entities to provide services and bill on

their own behalf would frustrate efforts

to detect fraud and abuse, because the

provider numbers of the physician

making the referral and the entity

providing the DHS would not be clearly

linked on a claim form. The commenter

believes that the Congress likely

intended to exempt only wholly owned

entities that primarily provide

administrative and billing services.

Response: We find nothing in the

statutory language that would limit

wholly owned entities under section

1877(b)(2)(B) of the Act to entities that

provide only administrative and billing

services. Rather, we believe the wholly

owned entity provision can be read

reasonably to permit group practices to

provide DHS and bill through these

entities. A narrower interpretation

would seem to imply that the group

practices could only bill using third

party billing companies if these

companies were wholly owned by the

group. We believe it unlikely that the

Congress intended such an

interpretation.

Comment: A commenter suggested

that the billing provisions in the inoffice ancillary services exception be

changed to include billing by a hospital

for physician services furnished under

arrangements. This change would allow

physician services for hospital patients

to come within the in-office ancillary

services exception.

Response: The in-office ancillary

services exception is designed to

exempt from the referral prohibition

certain DHS that are provided within a

group practice. As discussed in section

VIII of this preamble, DHS provided

under arrangements with a hospital are

inpatient or outpatient hospital services

for purposes of the statute. We believe

the Congress did not intend to protect

inpatient and outpatient hospital

services under the in-office ancillary

services exception. In fact, in describing

the in-office ancillary services exception

in H. Rep. No. 111, 103d Congress, 1st

Sess. 546 (1993), the Congress pointed

out that services provided by a hospital

or other provider ‘‘under arrangement’’

with a group practice are not protected

under the general exception for in-office

ancillary services. ‘‘Under

arrangements’’ issues are further

discussed in section VIII.M of this

preamble.

C. Group Practice Definition (Section

1877(h)(4) of the Act)

The Existing Law: As defined in

section 1877(h)(4) of the Act, a ‘‘group

practice’’ is a group of two or more

physicians legally organized as a

partnership, professional corporation,

foundation, not-for-profit corporation,

faculty practice plan, or similar

association, that meets certain

conditions. Section 1877(h)(4) of the Act

was promulgated as part of the original

section 1877 law and later amended by

OBRA 1993. The current law contains

the following conditions applicable to

‘‘group practices’’ for purposes of

section 1877 (those conditions added by

OBRA 1993 are so noted):

• Each physician member of the

group furnishes substantially the full

range of services that the physician

routinely furnishes, including medical

care, consultation, diagnosis, or

treatment, through the joint use of

shared office space, facilities,

equipment, and personnel (the ‘‘full

range of services’’ test).

• Substantially all of the services of

the physician members of the group are

furnished through the group, are billed

under a billing number assigned to the

group, and amounts so received are

treated as receipts of the group (the

‘‘substantially all test’’) (revised by

OBRA 1993).

• The overhead expenses of and the

income from the practice are distributed

in accordance with methods previously

determined (modified by OBRA 1993).

• No physician member of the group

directly or indirectly receives

compensation based on the volume or

value of referrals by the physician, with

the exception of certain profits and

productivity bonuses (added by OBRA

1993).

• Members of the group personally

conduct at least 75 percent of the

physician-patient encounters of the

group practice (the ‘‘75 percent

physician-patient encounters test’’)

(added by OBRA 1993).

• The group practice complies with

all other standards established by the

Secretary in regulations.

In addition, section 1877(h)(4)(B) of

the Act establishes two ‘‘Special

Rules’’—

• A physician in a group practice may

be paid a share of the overall profits of

the group, or a productivity bonus based

on services personally performed or

services incident to the personally

performed services, so long as the share

or bonus is not determined in any

manner that is directly related to the

volume or value of referrals by the

physician (added by OBRA 1993); and

• In the case of a faculty practice plan

associated with a hospital, institution of

higher education, or medical school

with an approved medical residency

training program in which physician

members may furnish a variety of

different specialty services and furnish

professional services both within and

outside the group, as well as perform

other tasks such as research, the

conditions contained in the definition of

‘‘group practice’’ apply only with

respect to the services furnished within

the faculty practice plan.

Our August 1995 final rule covering

clinical laboratory services referrals

defined ‘‘group practice’’ at § 411.351

based on the statute as it read effective

January 1, 1992. At that time, we

interpreted the ‘‘substantially all test’’ to

mean that at least 75 percent of the

patient care services (defined as services

addressing the medical needs of specific

patients) of the group practice members

must be furnished through the group.

We interpreted members of the group to

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 895

include owners, employees, and

independent contractors. We required

that the group practice be ‘‘a single legal

entity.’’ Finally, we stated that the

‘‘substantially all test’’ would not apply

to any group practice that is located

solely in a health professional shortage

area (HPSA). For group practices located

outside of a HPSA, the rule provided

that any time spent by group practice

members providing services in a HPSA

would not be used to calculate whether

the group practice located outside the

HPSA had met the ‘‘substantially all

test.’’

The Proposed Rule: We proposed

several changes to the definition of

‘‘group practice’’ in § 411.351 to

incorporate OBRA 1993 changes. We

also proposed several other significant

changes. First, we proposed a ‘‘unified

business test’’—targeted at sham group

practices—that would require group

practices to exhibit ‘‘centralized

decision making, a pooling of expenses

and revenues, and a distribution system

that is not based on each satellite office

operating as if it were a separate

enterprise.’’ Second, we proposed

excluding independent contractors as

members of the group to ease

compliance with the ‘‘substantially all

test.’’ Third, we proposed expanding

our definition of ‘‘patient care services’’

to include any of a physician’s tasks that

address the medical needs of specific

patients or patients in general or that

benefit the group practice.

Final Rule: As with the in-office

ancillary services exception, we have

been guided in developing the final

definition of ‘‘group practice’’ by twin

goals: (1) To minimize the regulatory

intrusiveness of the definition while

giving meaning to the statutory language

and intent; and (2) to provide clear

guidance as to what constitutes a ‘‘group

practice’’ for purposes of section 1877 of

the Act. We understand the importance

of group practice status to physicians:

simply stated, it allows group members

to refer patients to one another (or to the

group itself) for DHS payable by

Medicare or Medicaid, and it allows

group members to share in profits

derived from such DHS. Section 1877 of

the Act recognizes that referrals within

groups are commonplace and may be

appropriate adjuncts to a group’s core

medical practice.

As an initial matter, the definition of

‘‘group practice’’ promulgated in the

statute and these regulations applies

only for purposes of section 1877 of the

Act and may have little or no bearing for

purposes of other Medicare or Medicaid

provisions. For example, the definition

of a ‘‘physician group’’ under the

physician incentive plan rules is

broader than the definition of ‘‘group

practice’’ under section 1877 of the Act.

A common complaint about our

January 1998 proposed regulation was

that it would exclude many bona fide

group practices, intrude too far into the

business and financial operations of

physician practices, and chill group

practice integration that is crucial in an

increasingly managed care environment.

We have been mindful of these concerns

in developing Phase I of this

rulemaking. It is not our intent to micromanage group practices or dictate their

organization or operation; rather, our

intent is to define ‘‘group practice’’ so

as to create, consistent with our

understanding of the statutory intent, a

meaningful exception to the general

referral prohibition under section 1877

of the Act, an exception that permits

certain traditional and commonplace

referral patterns within group practices,

without permitting the exception to

swallow the rule. In general, Phase I of

this rulemaking is more expansive than

our January 1998 proposed rule and

affords physicians substantial flexibility

in designing and managing their

medical practices (subject, of course, to

any other legal impediments imposed

by Federal or State law).

We believe the group practice

definition set forth in section 1877(h)(4)

of the Act is premised on two

assumptions. First, internal group

practice referrals should only be

protected under the physician services

or in-office ancillary services exceptions

(both of which apply in specific ways to

group practices) if the group practice is

a bona fide group practice and not a

loose confederation of individual

physicians bound together primarily to

profit from DHS referrals. We believe

the Congress intended a true group

practice to consist of physicians whose

practices are fully integrated, medically

and economically. In short, the

physicians practice medicine together in

a single group, not separately, and their

financial prospects are interdependent.

Thus, the Congress imposed certain

tests that demonstrate the requisite

integration and gave the Secretary

regulatory authority to impose

additional tests. If true integration is

present, we do not believe the Congress

otherwise intended to regulate the

formal structure and operation of the

group. Second, the financial incentives

for group practice physicians to generate

referrals of Medicare or Medicaid

payable DHS for the group should be

attenuated. Thus, the group practice

definition provides that group practice

physicians may not be paid directly or

indirectly based on the volume or value

of DHS referrals, unless the

compensation is a profit share or

productivity bonus that is only

indirectly related to those referrals.

With these precepts in mind, Phase I

of this rulemaking incorporates the

following significant revisions:

• Broadening of the types of

arrangements that qualify as a ‘‘single

legal entity’’ to include, among other

things, multi-entity legal structures and

structures owned by a single physician.

• Adoption of our proposal to

exclude independent contractors from

the definition of a ‘‘member of the

group.’’ However, independent

contractors who meet the conditions set

forth at § 411.351 may qualify as

‘‘physicians in the group practice’’ who

may receive profit shares and

productivity bonuses under section

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

• Adoption of our proposed

expanded definition of ‘‘patient care

services’’ so that patient care services

include all services a physician

performs that address the medical needs

of specific patients or patients in general

or benefit the group practice (for

example, administrative services for the

group).

• Expansion of our 1998 proposal to

gauge compliance with the

‘‘substantially all test’’ by measuring a

physician’s actual time spent on patient

care services by permitting groups to

adopt other reasonable methods for

determining compliance.

• Creation of a substantially more

flexible definition of a ‘‘unified

business’’ that will permit group

practices to use cost- and location-based

accounting with respect to services that

are not DHS, and, in some cases, with

respect to services that are DHS if the

compensation method is not directly

related to the volume or value of the

physician’s referrals and other

conditions are satisfied.

• Revision of the productivity bonus

rules so that group practices may pay

member physicians and independent

contractors who qualify as ‘‘physicians

in the group’’ productivity bonuses

based directly on the physician’s

personal productivity (including

services incident to such personally

performed services that meet the

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

the Act and section 2050 of the

Medicare Carriers Manual, Part 3), but

may not pay such physicians any bonus

based directly on their referrals of DHS

that are performed by someone else.

• Promulgation of specific methods

for ensuring that compensation for DHS

is only indirectly related to referral

income. In addition, parties may use

other methods that are reasonable and

documented.

896 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

• Elimination of the group practice

attestation requirement.

These revisions and others are

discussed in the comments and

responses that follow. Each comment

and response section begins with an

overview of the relevant provision in

the group practice definition and a

summary of the final rule relating to that

provision. The sections are divided as

follows: General comments, the single

legal entity requirement, members of the

group, the ‘‘full range of services’’ test,

the ‘‘substantially all’’ test, and the

‘‘75% physician-patient encounters’’

test.

1. General Comments

Comment: Many commenters,

including a group practice trade

association, criticized the proposed

regulations for group practices as overly

intrusive into the internal operations of

physician practices, unnecessarily

complex, and incapable of

implementation in a fair and reasonable

manner. The association and other

commenters believe that the Congress

intended the group practice provisions

in the law predominately to regulate the

external ownership, compensation, and

referral arrangements of physicians and

not the inner workings of group

practices themselves. The association

and other commenters protested that the

rules create arbitrary distinctions among

different types of physicians. These

commenters contended that no tenable

reason exists to treat group practices,

pathologists, radiologists, and radiation

oncologists—all of whom are permitted

under the statute or various exceptions

to make referrals to entities with which

they have financial relationships under

certain circumstances—differently than

other physicians, since they have an

equal incentive to self-refer.

Response: As indicated above, in

preparing Phase I of this rulemaking, we

have been mindful of the commenters’

concerns about the intrusiveness of the

proposed rule, and have sought to

minimize the regulatory impact of the

group practice definition and to provide

clear guidance as to what constitutes a

‘‘group practice’’ for purposes of section

1877 of the Act. We do not intend to use

these regulations to micro-manage group

practices or to dictate their organization

or operation, except as is necessary to

give effect to the statutory intent of the

Congress to create a limited exception to

the general referral prohibition for DHS

referrals by physicians within their own

group practices. In general, Phase I of

this rulemaking is broader than the

January 1998 proposed rule and affords

physicians substantial flexibility in

designing and managing their medical

practices.

While we have endeavored to apply

these rules as equally as possible to solo

and group practitioners and among

various types of practitioners, some

differences in regulation and outcomes

are unavoidable, and in some cases

desired, given the wide array of

arrangements to which the statute

applies and the distinctions inherent in

the statutory scheme. For example, the

Congress included a specific exception

for referrals by consulting pathologists,

diagnostic radiologists, and radiation

oncologists that does not apply in the

case of other consulting physicians. The

Congress intended disparate treatment

of these consulting physicians,

reasonably, we believe, because of the

limited ability of pathologists,

diagnostic radiologists, and radiation

oncologists to generate patient referrals

of services they either perform or

supervise. Similarly, the Congress

judged referrals within group practices

(and solo practices) deserving of special

consideration based, we believe, on a

recognition of physicians’ traditional

practice of delivering DHS in their own

offices to their own patients.

Comment: A commenter sought

clarification as to whether a group

practice was exempt from section 1877

of the Act. Several commenters

observed that group practice status does

not, by itself, protect against the risk of

overutilization of ancillary services

provided by the group.

Response: A group practice is not

exempt from section 1877 of the Act by

virtue of being a ‘‘group practice’’ under

the definition in section 1877(h)(4) of

the Act and § 411.352 of these

regulations. A relevant exception, such

as the in-office ancillary services or the

physician services exceptions, must still

apply.

Comment: Several commenters

suggested that section 1877 of the Act

and the regulations should focus on

referrals of medically unnecessary tests

to entities with which physicians have

prohibited financial relationships. Some

commenters suggested that we use our

utilization data to develop norms for

each physician specialty that could be

the basis for measuring appropriate

utilization and preventing inappropriate

referrals.

Response: We disagree that section

1877 of the Act should apply only to

referrals of unnecessary items and

services. While overutilization is a

principal concern of the statute, and a

primary focus of this rule, nothing in

the statute suggests that the Congress

intended to limit the statute’s reach to

referrals of medically unnecessary tests

or procedures. Rather, the statute

applies to all referrals of DHS to entities

with which a referring physician has a

prohibited financial relationship. The

statute is designed to create a bright line

that prohibits a high risk category of

financial relationships and relieves the

government from having to ‘‘look

behind’’ every physician referral.

2. Single Legal Entity Requirement

The Existing Law: Under the statute,

a group practice must consist of ‘‘two or

more physicians who are legally

organized as a partnership, professional

corporation (PC), foundation, not-forprofit corporation, faculty practice plan,

or similar association.’’ The August

1995 final rule took the position that a

group practice could consist of only one

legal entity and that any individual or

entity could organize, operate, or

control a group practice, as long as two

or more physicians had a role in

providing services and the group met all

of the other specific requirements for

being a group practice under section

1877 of the Act. Thus, for example, a

hospital could ‘‘own or operate’’ a group

practice, provided no State law

prohibited it.

The Proposed Rule: The January 1998

proposed regulations retained the

interpretation of the single legal entity

requirement from the August 1995 rule,

requiring the legally organized group

practice to consist of a ‘‘single legal

entity’’, that is, one legal entity

identified as the group practice that

meets all of the group practice

definitional tests. In addition, the

January 1998 proposed regulations

proposed allowing individual

physicians who are incorporated as

individual professional corporations to

form a group practice, subject to

meeting the remaining conditions of the

group practice definition.

The Final Rule: We are retaining and

incorporating into the regulations text

the ‘‘bright line’’ rule that a group

practice must be a single legal entity.

The single legal entity can assume any

form recognized by the State in which

the entity achieves its legal status,

including, but not limited to, a

corporation (for-profit, professional, or

nonprofit), partnership, foundation,

faculty practice plan, or limited liability

company. The single legal entity can be

legally organized by any party or

parties, including, but not limited to,

physicians, health care facilities, or

other persons or entities. The single

legal entity must be formed primarily

for the purpose of being a physician

group practice. Hence, for example, a

hospital that employs physicians is not

a ‘‘group practice’’ for purposes of

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 897

section 1877 of the Act, although the

hospital can form or acquire a group

practice that is a separate single legal

entity. The following structures are

among those that may qualify under

Phase I of this rulemaking, assuming all

other requirements of the group practice

definition are satisfied:

• A partnership between two or more

physicians.

• A partnership between one

physician and another party, provided

that the partnership employs at least

one other physician. (Similarly, a

partnership between two nonphysician

parties can qualify if it employs at least

two physicians).

• A corporation or limited liability

company with one or more physician

shareholders or members, provided that

a corporation or limited liability

company with only one physician

shareholder or member employs at least

one other physician.

• A corporation or limited liability

company owned by nonphysicians,

provided it employs at least two

physicians.

• A single legal entity owned by two

or more physicians through their

individual professional corporations.

• A solo practitioner who is

organized as a legal entity (for example,

a professional corporation) and employs

at least one other full-time physician.

• A single legal entity (whether a

corporation, limited liability company,

or other form) owned by one or more

other legal entities (that is, a multientity arrangement) that involves two or

more physicians through employment

or indirect ownership, provided that the

‘‘investing’’ or ‘‘owner’’ entities are not

themselves functioning group practices.

(In other words, existing groups may not

band together to form a group practice

primarily to share in-office ancillary

referrals.) It is our understanding that

the prevalent practice in these kinds of

arrangements is for the physicians who

own the investing entities to become

employees of the new group practice,

and for the investing entities themselves

to cease functioning as group practices.

This list is illustrative only, and other

variations are possible. What is essential

is that there must be one identifiable

legal entity that is a bona fide group

practice of two or more physicians. The

definition of group practice does not

include a loose confederation of

physicians, a substantial purpose of

which is to share profits from referrals

(sometimes referred to as a ‘‘group

practice without walls’’), or separate

group practices under common

ownership or control through a

physician practice management

company, hospital, or health care

system, or other entity or organization.

We have responded to public

comments regarding problems faced by

faculty practice plans under section

1877 of the Act by using our regulatory

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

Act to create a new exception applicable

to faculty practice plans. This new

exception is discussed in section VII.A

of this preamble.

While several commenters requested

accommodation in the group practice

definition for bifurcated foundationmodel group practices (that is,

arrangements between a nonprofit entity

that provides health care services and a

physician group, typically used in

States that restrict the corporate practice

of medicine), we have determined that

those arrangements are better addressed

by the personal service arrangements

exception. As noted elsewhere in this

preamble, we intend to apply our

uniform interpretation of the volume or

value standard to all exceptions in

which it appears. (See the discussion in

section V of this preamble.)

Comment: Many commenters

concurred with our position that a

group practice can be organized by any

individual or entity, but took issue with

other aspects of our group practice

organizational tests. As a threshold

matter, a number of commenters

maintained that the statute does not

require a ‘‘single legal entity.’’ These

commenters generally fell into three

categories: (1) Commenters seeking

protection for foundation model

‘‘groups’’ in States that follow the

corporate practice of medicine doctrine,

(2) commenters seeking protection for

physician ‘‘groups’’ practicing in

academic medical settings, and (3)

commenters seeking protection for

‘‘groups’’ that are under common

ownership or control, but that are not

bound together in a single legal entity.

Comments on the first two issues—

foundation models and academic

medical settings—are summarized and

addressed elsewhere in this section and

in section VII.A of this preamble.

As to the third category—common

ownership and control—commenters

generally requested that we recognize

organizations under common control as

a single unit or group practice, as we do

in our definition of ‘‘hospital’’ in

§ 411.351 (Definitions) of the

regulations. (Section 411.351 reads as

follows: ‘‘Hospital * * * 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.’’)

Specifically, the commenters suggested

we interpret this portion of the group

practice definition as covering a single

legal entity that includes any separate,

legally-organized operating entity plus

any subsidiary, related entity, or other

entities that perform services for the

group practice’s patients and for which

the group practice bills. Some

commenters noted that the ability to

have subsidiaries is important for

groups for valid, nonabusive business

reasons, such as to operate in more than

one State when States have different

corporate requirements, to organize

components of the continuum of care

such as home health or skilled nursing

care, and to operate as multi-entity

integrated delivery systems. Some

commenters indicated that some State

laws require physicians to practice in a

different entity when working in a

bordering State. Also noted was that

complex corporate structures are

sometimes required for a variety of other

legitimate business reasons, such as

allowing groups to meet State licensing

requirements, to allocate the risk of

liability, to comply with inconsistent

State regulations, or to meet corporate

practice of medicine requirements.

Similarly, these commenters maintained

that an aggregation of groups managed

by the same physician practice

management company or multiple

groups owned by the same hospital

should be considered a ‘‘group practice’’

for purposes of section 1877 of the Act.

Response: Having considered the

comments, we iterate our view that a

group practice must be a ‘‘single legal

entity.’’ A standard that would allow

entities under common ownership or

control to be a group practice under

section 1877(h)(4) of the Act does not

sufficiently protect against sham group

practice arrangements or loose

confederations of physicians operating

as a group practice substantially for

purposes of profiting from DHS

referrals. We find nothing in the statute

that suggests that the Congress intended

for a ‘‘group practice’’ to be so broadly

construed as to include multiple group

practices that happen to use the services

of the same management company or

that happen to be affiliated with the

same health system. Single legal entities

owned by multiple entities are

permitted, as discussed in the response

to the next comment. We address the

special needs of foundation-based

practices and faculty practice plans in

this section and in section VII.A of this

preamble, respectively.

Comment: Many commenters

considered our proposed parameters for

the composition of the ‘‘single legal

entity’’ too restrictive, taking issue, in

particular, with our statement that ‘‘the

898 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

statute specifically requires that a

partnership consist of two or more

physicians who are partners and that a

PC consist of two or more physicians

who are incorporated together.’’ While

several commenters commended our

proposal to allow group practices to

include individual professional

corporations that employ their own

shareholders, commenters generally

espoused expanding the group practice

definition to include any physician

group (regardless of its ownership) that

is organized as a distinct legal entity

and that employs more than one

physician, provided that all of the other

group practice definitional tests are met.

In these commenters’ view,

prohibiting a sole practitioner from

owning a group practice that employs

multiple physicians is unfair,

inconsistent, anticompetitive, and not

supported by the statutory language.

The commenters pointed out that, under

our January 1998 proposed rule, a

hospital could own a group practice, but

an individual physician could not.

Commenters believe that the other

requirements for meeting the group

practice definition prevent any sham

practice arrangements and that an

interpretation requiring direct

ownership by two physicians does not

further Federal fraud and abuse policy.

A number of commenters asked that

we clarify that a group practice may be

owned by any legal corporate structure

or arrangement including, but not

limited to, limited liability companies,

multi-member professional

corporations, sole physician shareholder

companies that employ at least one

physician, hospitals that employ

physicians, entities owned jointly by

physicians and a hospital (for example,

a physician hospital organization

(PHO)), or general corporations that

employ two physicians without any

physician ownership. This

interpretation is consistent with the

August 1995 final rule. In particular,

several commenters observed that group

practices commonly are formed through

the merger of existing group practices.

The merging practices typically

contribute assets and transfer physicians

and other employees to the new group

practice entity, which bills for the

physician services under a group billing

number and treats amounts received as

receipts of the new group practice, and

which meets the other group practice

definitional requirements. The

commenter urged that the new group

practice entity should qualify for group

practice status, without having to

dissolve the merging shareholder

entities, which are often maintained for

tax or other purposes unrelated to

Medicare or the fraud and abuse laws.

To prevent sham group practices, one

commenter suggested that, in the case of

a new group practice formed by the

merger of existing group practices or

professional corporations, we should

require the new group practice to

employ its members rather than

allowing the multiple professional

corporations (PCs) that formed the new

group to continue employing practice

members (except in the case of an

individual professional corporation that

employs a physician and owns a stake

in a group practice). Similarly, another

commenter recommended requiring all

group practices (regardless of layers of

composition) to be fully integrated into

a single operating medical business at

the top or ‘‘group’’ level. A group

practice would be deemed fully

integrated if it met the group practice

definitional tests and presented itself as

a single medical business whose equity

holders operate as a single business by

sharing such things as contracts,

liability, facilities, equipment, support

personnel, management, and a pension

plan. A fully-integrated group would be

required to employ or contract with all

physicians at the group level so that

physician compensation and accounts

receivable of all members of the group

would be ‘‘at risk’’ in the event of losses

due to poor management of the group or

in the event of a malpractice claim

against any member of the group.

Response: We generally agree with the

commenters. We have reconsidered the

statutory language and believe that the

provision requiring ‘‘a group of 2 or

more physicians legally organized as a

partnership, professional corporation,

foundation, not-for-profit corporation,

faculty practice plan, or similar

association—’’ can be interpreted in

several ways. It can reasonably be read

to mean that a group must consist of

some kind of legally organized entity,

owned by virtually any combination of

individuals or other entities, provided

that there are at least two physicians

providing services to patients as group

practitioners. We have amended the

definition of a group practice

accordingly in § 411.351. We believe

this interpretation allows us to treat all

practices, regardless of who owns or

operates them, more uniformly. The

introduction to this section provides an

illustrative list of possible group

practice organizational structures.

We are adopting the commenters’

suggestion that no entity that owns all

or part of a group practice (that is, no

equity holder in the group) may itself

function or qualify as a group practice

(whether a group practice under section

1877(h)(4) of the Act or otherwise).

Thus, for example, in the case of a new

group practice formed through the

merger of existing group practices, the

merging or defunct group practices may

not themselves operate as medical group

practices (that is, they may not furnish

or bill for health care services);

however, the defunct practices are not

required to dissolve. The merging group

practices should transfer all medical

assets to the new group practice, and the

new group practice should employ the

physicians and bill for their services,

treating receipts as receipts of the new

group practice.

We also generally agree that a group

practice should consist of a single

medical business whose equity holders

operate as a single business by sharing

such things as contracts, liability,

facilities, equipment, support personnel,

management, and a pension plan. This

aspect of a group practice is addressed

by the unified business test in § 411.352

of the regulations. (See section VI.C.7 of

this preamble for additional

information).

Comment: Commenters questioned

whether a hospital could qualify as the

‘‘single legal entity’’ needed to establish

group practice status. In the August

1995 regulations, we stated that ‘‘* * *

if a clinic (or other facility) is legally

organized to include two or more

physicians and provides the services of

physicians, it is a group practice, even

if it is established, operated, and

controlled by a nonphysician group or

corporation. This would be so regardless

of who employs the physicians (in the

scenario presented by the commenter,

the clinic physicians were employed by

the hospital that established the

clinic).’’ (60 FR 41937) One commenter

interpreted this language to mean that a

hospital, which is itself a legal entity,

could employ physicians and, therefore,

qualify as a group practice if the other

requirements of the group practice

definition were met. Thus, the hospital

would not need to establish a separate

legal entity for its employed physicians

to be considered a group practice. A

related concern was whether a single

hospital could encompass multiple

group practices. According to the

commenter, the ability of hospitals to

establish multiple groups is especially

important for a hospital entity that may

operate several campuses in different

cities as unincorporated divisions, a

situation likely to increase as providers

consolidate into regional networks.

Response: We believe the

commenter’s interpretation would

stretch the meaning of a ‘‘group

practice’’ too far. We do not believe that

a hospital can reasonably be construed

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 899

as a ‘‘group practice.’’ We find no basis

to conclude that the Congress thought

otherwise. The statement from the

August 1995 regulations was made in

response to a comment regarding an

arrangement in which a tax-exempt

hospital had affiliated group practices

and established a separate tax-exempt

physician-directed clinic as the group

practice’s operating entity, but

employed the physicians in the

affiliated groups directly. In responding

to the comment, we attempted to make

two points: (1) That a group practice

need not be legally organized by

physicians; and (2) that a physiciandirected clinic could qualify as a group

practice.

We iterate that a group practice may

be legally organized by a hospital or

other nonphysician person or entity;

however, neither the hospital itself nor

any other facility the primary purpose of

which is something other than to

operate a physician group medical

practice, can be a group practice. A

hospital may establish multiple group

practices through subsidiaries or

affiliated entities that are separate legal

entities. Each entity may be a group

practice for purposes of section 1877 of

the Act, although the aggregation of

groups will not be. Exceptions, such as

the in-office ancillary services

exception, would only apply to referrals

within one of those groups and not

across multiple groups within the same

hospital entity.

Comment: A commenter noted that

the August 1998 proposed rule clearly

states that a hospital may own and

operate a group practice (assuming there

is no State law impediment to such

ownership) and that physicians may

own a group indirectly through

individual professional corporations. In

light of these statements, the commenter

sought clarification on three points: (1)

Whether a single legal entity owned

jointly by physicians and the parent

company of a hospital could qualify as

a group practice, provided all of the

other conditions in the definition were

satisfied; (2) whether the ‘‘single legal

entity’’ test could be met by a limited

liability company; and (3) whether

several physicians organized as a

limited liability company could, in turn,

own another entity (for example, a

second limited liability company) that

could qualify as a group practice.

Response: In responding to the

commenter’s questions, we apply the

principles described above. First, a

single legal entity owned jointly by

physicians and the parent company of a

hospital could qualify as a group

practice, provided all of the other

conditions in the definition were

satisfied. Second, a limited liability

company duly organized under

applicable State law could qualify as a

‘‘single legal entity.’’ Third, several

physicians organized as a limited

liability company could, in turn, own

another entity that could qualify as a

group practice provided that the first

limited liability company is not, and

does not operate as, a group practice. In

this last case, the physician members of

the first limited liability company

would be considered members of the

group by virtue of their indirect

ownership interest in the second entity.

Comment: Commenters note that

health systems, management companies,

hospitals, and other nonprofit and forprofit corporations must comply with

State laws governing the corporate

practice of medicine. In some States,

these laws restrict or prohibit a

corporation from directly employing

physicians. In some cases, the

corporations form a ‘‘captive’’ or

‘‘friendly’’ professional corporation with

one physician owner who holds the

ownership rights to the professional

corporation in trust for the corporation.

The friendly professional corporation

directly employs physicians who then

form the group practice. The

corporation manages the business of the

group practice, with the sole physician

shareholder acting primarily as a

‘‘figurehead.’’ The arrangement ensures

that the corporation only indirectly

employs the physicians and does not

violate the corporate practice of

medicine rules. Commenters noted that

typically only one physician is a

shareholder in the friendly professional

corporation so that day-to-day

transactions are less cumbersome.

Response: Since we have amended

the group practice definition to cover

groups that consist of one physician

owner and one or more physician

employees, we believe that the types of

‘‘captive’’ or ‘‘friendly’’ professional

corporations described in the comment

can both meet our definition and

comply with corporate practice of

medicine requirements. Groups must

continue to meet all of the other criteria

in the group practice definition in

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

§ 411.351.

Comment: Several commenters asked

that we clarify whether the ‘‘single legal

entity’’ requirement precludes a group

practice from having subsidiary entities

that, for example, own real estate or

equipment, provide billing services, or

operate ancillary services.

Response: As we noted in the August

1995 final regulations, we believe that

the statute does not preclude a single

group practice from owning other legal

entities for the purposes of providing

services to the group practice. Thus, to

cite the example in the August 1995

final regulation at 60 FR 41936, a group

practice could wholly own and

separately incorporate a laboratory

facility that provides laboratory services

to a group practice or other patients.

The physicians could qualify for the inoffice ancillary services exception

provided they meet the requirements for

supervision, location, and billing. The

billing requirement in section

1877(b)(2)(B) of the Act allows services

to be billed by the referring or

supervising physician, the group

practice, or an entity wholly owned by

the group practice. The exception

appears to anticipate that a group

practice may wholly own separate legal

entities for billing or for providing

ancillary services. Parties should be

aware, however, that the group practice

safe harbor under the anti-kickback

statute (§ 1001.952(p) of this title), does

not protect group practice ownership of

ancillary services; for purposes of the

anti-kickback statute, these

arrangements are evaluated on a caseby-case basis.

3. Members of the Group

The Existing Law: Under the August

1995 final regulations, owners,

employees, and independent contractors

were all considered ‘‘members of a

group’’ practice for purposes of the

group practice definitional tests.

The Proposed Rule: The proposed

regulations proposed modifying the

definition of the term ‘‘members of the

group’’ to include only physician

partners, shareholders, and full-time

and part-time physician employees.

Independent contractors would no

longer be considered members of the

group. This change was proposed to aid

group practices attempting to comply

with the 75 percent ‘‘substantially all

test.’’ Physicians would be considered

members of the group during the time

that they furnish patient care services to

the group.

The Final Rule: We are adopting our

January 1998 proposal to define a

member of a group practice as any

physician who owns, or is employed by,

the group practice. In the case of a group

practice owned by professional

corporations or defunct group practices,

the physicians who own those entities

will be considered members of the

group practice. Also, those physicians

who own all or part of the group

practice through their own professional

corporations and who are employed by

their own professional corporations

(which contract with the group practice

to provide physician services) will be

900 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

considered members of the group.

Physicians are members of the group

during the time they furnish ‘‘patient

care services’’ (as defined at § 411.351)

to patients of the group or for the benefit

of the group, even if those services

cannot be billed by the group (for

example, certain administrative

services, pro bono services).

Independent contractors and leased

employees will not be considered

members of the group. The exclusion of

independent contractors is intended to

aid many group practices in complying

with the ‘‘substantially all test’’

described below. Although not group

practice members, under certain

circumstances, independent contractors

may provide the required supervision

for the in-office ancillary services

exception, as described in section VI.B.2

of this preamble.

While nonphysicians, such as nurse

practitioners and physicians assistants,

may be group practice ‘‘members’’ for

general purposes under section 1877 of

the Act, their membership will have no

practical effect, since they are not

‘‘physicians’’ for purposes of the three

group practice ‘‘tests’’ (the ‘‘full range of

services,’’ ‘‘substantially all,’’ and ‘‘75

percent physician-patient encounters’’

test), nor for purposes of the profits and

productivity bonuses provisions. While

referrals by nurse practitioners and

physician assistants generally do not

trigger section 1877 of the Act, which

applies only to physicians (as defined at

section 1861(r) of the Act), referrals

made by nonphysician health care

professionals may implicate the statute

if those referrals are directed or

controlled by a physician. In other

words, a physician or group practice

cannot channel referrals through a nurse

practitioner, physician assistant, or

other nonphysician health care

professional in order to circumvent the

prohibition under section 1877, and any

channeled referrals would be imputed

to the responsible physician.

Comment: Many commenters

supported our proposal to count owners

and employees as members of the group,

but not independent contractors. This

change would facilitate compliance

with the group practice definition by

group practices that use part-time

independent contractor physicians to

supplement and expand the range of

services the group offers to patients.

Some commenters recommended that

independent contractors be excluded

only for purposes of the ‘‘substantially

all test,’’ but not for other purposes,

including the direct supervision

requirement of the in-office ancillary

services exception and the 75 percent

physician-patient encounters test. Some

commenters objected to excluding

independent contractors from the

definition of ‘‘members of the group’’

because they perceived that such

exclusion would prevent group

practices from paying independent

contractors productivity bonuses for the

work they personally perform under

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

Response: We are retaining our

proposal to exclude independent

contractors from the definition of

‘‘members of the group practice.’’ On

balance, we believe this change will

benefit many group practices that wish

to qualify for group practice status. As

to the other concerns raised by

commenters, we believe those concerns

have largely been addressed by other

changes in these regulations. We have

liberalized the direct supervision

standard in the in-office ancillary

services exception to permit supervision

by independent contractors who meet

certain conditions that establish that the

independent contractors are ‘‘physicians

in the group practice.’’ (See discussion

in section VI.B.2 of this preamble). As

discussed below, in greater detail, we

are permitting group practices to pay

productivity bonuses to independent

contractors who are ‘‘physicians in the

group practice.’’ (See discussion in

section VI.C.8 of this preamble).

Comment: A number of commenters

advocated a flexible approach to the

definition of ‘‘member of the group,’’

urging that groups be permitted to elect

whether to include independent

contractors as members on an annual or

other basis. These elections would

apply uniformly for purposes of

qualifying under all of the group

practice definitional tests and the inoffice ancillary services exception, and

would be reported to us.

Response: The election process

described by the commenters strikes us

as unnecessary given the significant

changes in this final rule with respect to

the treatment of independent

contractors under the in-office ancillary

services exception and the group

practice productivity bonus provisions.

In our view, an election process would

impose an additional administrative

burden on groups and the government,

with minimal offsetting benefit.

Comment: To accommodate multientity group arrangements, a commenter

suggested that ‘‘members of a group’’

should include owners of the group,

employees of the group, and owners of

any sole or multiple shareholder

professional corporation that has an

ownership interest in the group (that is,

indirect owners).

Response: For purposes of the

definition of ‘‘members of the group,’’

we are including any physician owners

of a sole or multiple shareholder PC or

other entity that has an ownership

interest in the group. In essence, we

intend to ‘‘look through’’ any corporate

or entity owners to the ultimate

physician owners. Thus, members of the

group include physicians who are

owners (directly or indirectly) and bona

fide employees of the group.

Comment: Several commenters

suggested that independent contractors

be permitted to qualify as group practice

members on a locum tenens basis. Thus,

for example, a group would be allowed

to use independent contractors to

provide coverage when a member of the

group is ill and unable to practice

medicine temporarily. Other reasons to

use locum tenens physicians could

include death or disability of a

physician, resignation of a physician,

accommodating seasonal increases in

patient loads, and ‘‘trial runs’’ of

physicians being recruited to join a

practice. According to commenters,

locum tenens providers are typically

paid on a fee-for-time basis by the

staffing organizations with which they

are affiliated. Thus, they typically have

no direct financial relationships with

any of the health care entities to which

they are assigned. The health care

entities retain all patient receipts and,

when possible, Medicare payments are

reassigned to the health care entity.

Response: Nothing in section 1877 of

the Act or these regulations prevents the

use of locum tenens physicians in

situations like those described in the

comments. The issue raised, however, is

how these physicians should be treated

for purposes of a group practice’s

compliance with the group practice

definition and how referrals by such

physicians should be treated under the

general prohibition under section 1877.

As to the first issue, we believe an

appropriate use of locum tenens

physicians in exigent situations should

not prevent a group practice that

otherwise complies with the definition

at section 1877(h)(4) and § 411.352 of

these regulations from qualifying for

group practice status. We are applying

the rules at section 3060

‘‘Reassignment,’’ of the Medicare

Carrier’s Manual (HCFA Pub. 14–3), Part

3—Claims Process (the reassignment

provisions) as the test for whether a

physician is a locum tenens physician.

A locum tenens physician will be

considered as ‘‘standing in the shoes’’ of

the regular physician (as defined in

section 3060.7) if he or she replaces the

regular physician in accordance with

section 3060.7. We note that section

3060.7 does not treat a physician hired

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 901

on a ‘‘trial run’’ basis as a locum tenens

physician.

Comment: One commenter sought

clarification that on-call physicians who

are independent contractors would be

exempted from the group member and

group practice requirements but would

be able to provide and supervise care on

behalf of a group member. On-call

physicians for one group may be

members of other group practices. They

may or may not be compensated for

their services or bill under the group

practice billing number of the group for

which they are serving in an on-call

capacity. According to the commenter,

on-call arrangements are commonplace,

especially among groups that do not

have sufficient numbers of specialists to

cover for each other. The commenter

requested a specific exemption under

the statute so that on-call physicians do

not impede groups from meeting the

group practice definition and are not

precluded from ordering DHS when

they are serving in an on-call capacity.

The commenter suggested an on-call

physician be treated as ‘‘standing in the

shoes’’ of the member while providing

on-call services for purposes of the

‘‘substantially all test,’’ the 75 percent

physician-patient encounters test, and

the supervision requirement of the inoffice ancillary services exception.

Response: We agree that it is

appropriate to treat on-call physicians

as ‘‘standing in the shoes’’ of the

member while providing on-call

services for purposes of the

‘‘substantially all test,’’ the 75 percent

physician-patient encounters test, and

the supervision requirement of the inoffice ancillary services exception,

provided that the services are billed by

the practice for which the physician is

serving on an on-call basis.

Comment: Several commenters

questioned whether nurse practitioners,

physician assistants, or other

nonphysician providers could be group

members, and if so, whether their

services would count in the calculation

of the 75 percent physician-patient

encounters test.

Response: We perceive nothing in the

statute that would prevent group

practices from admitting nurse

practitioners, physician assistants, or

others as members of the group for

purposes other than section 1877 of the

Act. However, the definition of a ‘‘group

practice’’ in section 1877(h)(4) of the

Act contains several requirements that

apply specifically to physician members

of the group. Provisions of the in-office

ancillary services exception and the

physician services exception also refer

specifically to physician members or

physicians in the same group practice.

The term ‘‘physician’’ is specifically

defined under the Medicare statute at

section 1861(r) of the Act and does not

include nurse practitioners or physician

assistants. Any services that these

individuals provide are not counted

under the ‘‘substantially all test’’ or

under any other part of the group

practice requirements or exceptions that

apply to physician members.

The referral prohibition in section

1877 of the Act applies only to referrals

that are made by a physician to an entity

with which that physician, or an

immediate family member, has a

financial relationship. If a nonphysician

practitioner is referring a physician’s

patients at the physician’s suggestion or

in lieu of the treating physician, we

would impute the referrals to the

physician. Simply stated, physicians

may not delegate their own referrals to

avoid the referral prohibition. On the

other hand, we would not impute the

referrals if the nurse practitioner or the

physician assistant is independently

treating the patients and initiates the

referrals on his or her own. We think the

determination will depend on the

specific facts and circumstances.

Comment: One commenter asked that

we exclude from the definition of

members of the group any employees

who provide interpretation or

supervision services only and are not

otherwise involved in patient care.

Response: Given the revisions we

have made in Phase I of this rulemaking

to the in-office ancillary services

exception and the group practice

definition, we see no need for a special

exclusion for physicians who provide

interpretation or supervision services

only. We recognize that these

physicians may affect, among other

things, a group practice’s ability to

comply with the 75 percent physicianpatient encounters test because they

generally do not see patients. But to

exclude physicians who generally do

not see patients would undermine the

purpose of the test, which is to ensure

that group practices are first, and

foremost, joint medical practices for the

provision of physician services to

patients and not primarily designated

health care services enterprises. The

Congress addressed the special

circumstances of pathologists,

diagnostic radiologists, and radiation

oncologists in a separate provision. (See

discussion of section 1877(h)(5)(C) in

section III.B of this preamble).

Comment: A commenter sought

clarification that physicians who are

employees of their own individual

professional corporations instead of the

group practice are considered ‘‘group

members.’’ The definition of a group

member in § 411.351 already includes

physicians whose ownership interest in

the group is held through an individual

professional corporation. Many

physicians wish to not only hold

ownership interests in an individual

professional corporation, but to be

employees of these corporations for

pension and tax reasons. To avoid

potential abuse, the commenter

suggested that we add the following

parenthetical to the definition of

‘‘member of group’’ in § 411.351:

‘‘(including physicians who are

employed by an individual professional

corporation, as long as the group has

legal authority over the terms of the

physician’s employment and is legally

responsible for services provided by the

physician on the group’s behalf).’’

Response: We agree with the

commenter that these physicians are

‘‘members’’ of the group. If a physician

already qualifies as an ‘‘owner’’ of the

group through his or her individual

professional corporation, then his or her

status as an employee or contractor is

irrelevant for purposes of qualifying for

group practice status. The amendatory

language proposed by the commenter is

not necessary, although we are revising

the regulations text to clarify that a

physician who is employed by an

individual professional corporation that

has an ownership interest in the group

practice is a ‘‘member of the group.’’

Physicians who are employed by their

own individual professional

corporations and who have no

ownership interest in the group (directly

or through an individual professional

corporation), but provide services to the

group, are independent contractors and

therefore not members of the group.

Comment: A commenter suggested

that a physician who opts out of, and is

not receiving any payments from, the

Medicare program should not be bound

by the limitations in section 1877 of the

Act, and, thus, should be able to refer

to entities with which he or she has a

financial relationship. The commenter

also asked that we clarify whether a

physician who opts out of the Medicare

program pursuant to the private

contracting authority in the BBA 1997,

but continues to practice with a

particular group of physicians, is a

group ‘‘member’’ for purposes of the

physician self-referral law. The

commenter reported that we have

elsewhere stated that a group

physician’s opting out does not affect

the ability of the rest of the group

members to provide and bill for services

they furnish to Medicare beneficiaries.

The commenter stated that physicians

who reassign benefits to organizations

that participate in Medicare may not opt

902 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

out, and that consequently physicians

who belong to groups that participate in

Medicare and who opt out may not bill

and accept payments from Medicare

beneficiaries through the group practice

unless the entire group practice opts

out. Thus, a physician who opts out

would have to bill under his or her own

name instead of through the group.

The commenter also questioned

whether a physician’s time spent

treating Medicare beneficiaries that is

billed through the physician’s own

name must be counted against the

amount of time the physician has spent

treating other patients of the group

practice. (We assume this means that,

for the ‘‘substantially all test,’’ the

commenter wishes to know whether the

physician’s private billing constitutes

‘‘patient care services’’ provided outside

the group context that would affect

whether the physician provides

substantially all of his or her services

through the group and bills

substantially all of his or her services

under a billing number assigned to the

group.)

The commenter urged that we

consider physicians who have opted out

as ‘‘members’’ of the group practice only

for those services furnished through the

group, but not count the physician

services in calculating whether the

group has met the ‘‘substantially all

test.’’

Response: We agree with the

commenter that a physician who opts

out of the Medicare program and is not

receiving any payments from the

Medicare program is not bound by the

limitations in section 1877 of the Act

and, therefore, can refer to entities with

which he or she has a financial

relationship. Section 1877 prohibits

only referrals for services ‘‘for which

payment otherwise may be made under

Medicare,’’ and Medicare would not

otherwise pay for services under a

private contract. The commenter also is

correct in stating that when a group

physician has opted out, it does not

affect the ability of the rest of the group

members to furnish and bill for services

they furnish to Medicare beneficiaries.

The commenter is not correct,

however, that when a group physician

has opted out, the group may not bill in

its own name for services provided by

the opt-out physician under a private

contract. The Medicare statute does not

prevent an opt-out physician’s group—

regardless of whether the group has a

participation agreement with

Medicare—from billing payers other

than Medicare for services furnished

under a private contract. Of course,

neither the physician nor the group is

allowed to bill Medicare for services

furnished under a private contract.

Thus, a physician who opts out can

remain a group member during the time

he or she provides services to group

patients, provided the services are billed

through the group practice to payers

other than Medicare. We believe the

requirements in the group practice

definition are meant to demonstrate that

the physicians involved in the group are

actually practicing medicine together. A

physician can demonstrate a significant

level of participation by treating either

program or nonprogram patients, as long

as they are group patients.

We also believe that any services the

physician bills in his or her own name

are not group services and, therefore,

should be factored into the

‘‘substantially all test’’ as outside

patient care services.

Comment: Several commenters were

concerned about the proposed rule’s

effects on nonprofit medical

foundations, particularly in light of our

statement that a group practice can

consist of only one legal entity. One

commenter was specifically concerned

about medical foundations in California,

where such entities are established so

that practices can comply with the

corporate practice of medicine

prohibition. One of the key exceptions

to the prohibition allows nonphysician

(‘‘lay’’) participation in arranging for the

delivery of physician services if the

nonphysician is a qualified medical

foundation. (These entities are nonprofit

and exempt from Federal income

taxation under section 501(c)(3) of the

Internal Revenue Code). In California,

for example, these foundations provide

patient care through a separate,

contracted medical group that is

comprised of at least 40 physicians who

collectively practice in at least 10

specialty areas. A chief concern was that

our proposed rules would prevent the

nonprofit foundation-model group

practice from furnishing DHS under the

in-office ancillary services exception

because it has no employed physicians

or physician owners who can qualify as

‘‘members of the group’’ for purposes of

the group practices definitional tests.

The commenter considers the

California nonprofit medical foundation

to be, in essence, one bifurcated medical

services provider that should be treated

as a ‘‘single legal entity’’ for purposes of

section 1877 of the Act. That is, under

California law, the medical foundation

is itself a health care provider; yet this

can only work if the medical foundation

encompasses the physicians who

contract to provide the professional

services. The IRS currently regards the

physician-foundation relationship as

comprising an integrated whole and

grants tax-exempt status to those truly

integrated foundations as providers of

professional medical care. The

foundation operates and owns all

elements of the practice, but cannot

provide the physician services, and the

physicians have agreed to furnish all

patient care services through the

foundation model; it is the foundation,

and not the physicians, who own the

medical practice.

The commenter stated that entities

such as management service

organizations do not merit tax-exempt

status because they support the

provision of services, but do not

actually provide services, while the

foundations actually provide services.

The IRS scrutinizes the entire

foundation relationship to assure that its

interdependent functions and

operations comply with the

fundamental requirements for tax

exemption.

Response: As an initial matter, that an

arrangement is subject to IRS regulation

is not determinative under section 1877

of the Act. The IRS’s goals in regulating

business structures do not necessarily

take into account preventing fraud and

abuse in the Medicare and Medicaid

programs. As to foundation-model

practices in corporate practice of

medicine States, we recognize that they

present special problems under section

1877 of the Act. On the one hand,

section 1877(h)(4)(A) clearly authorizes

group practices that are ‘‘foundations.’’

On the other hand, in the typical

foundation-model arrangement, the

physicians are not legally organized as

a ‘‘foundation.’’

In reviewing the statute and

legislative history, we have reached the

following conclusions. First, the

Congress used the term ‘‘foundation’’ in

the group practice definition in a

generic sense to cover any situations in

which the single legal entity, that is, the

group practice, consists of a foundation;

the reference was not necessarily

intended to encompass bifurcated

foundation-model arrangements.

Second, the Congress intended for

foundation-model arrangements to be

excepted under the personal service

arrangements exception. The OBRA

1993 Conference Report states that the

‘‘conferees intend that this exception

[personal service arrangements] would

apply to payments made by a nonprofit

Medical Foundation under a contract

with physicians to provide health care

services and which conducts medical

research.’’ H. Rep. No. 213, 103d Cong.,

1st Sess. 814 (1993).

The personal service arrangements

exception should provide foundationmodel arrangements with additional

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 903

flexibility in structuring their

arrangements and that most foundationmodel arrangements will be able to fit

in the exception, in accordance with the

congressional intent. The ‘‘volume or

value of referrals’’ and ‘‘other business

generated’’ standards will apply

uniformly to all exceptions in which

they are included. (See the discussion in

section V of this preamble and the

regulations at § 411.354(d).)

Comment: Several commenters noted

that another arrangement commonly

used in corporate practice of medicine

States is the use of ‘‘friendly’’ or

‘‘captive’’ PCs to create hospitalaffiliated group practices in States that

prohibit hospitals from employing

physicians directly. For example, a

commenter explained that in Ohio, a

single physician may own stock in a PC,

but hold the stock in trust for a hospital

or other nonprofit corporation. The PC

itself employs physicians who operate

as a group practice and would fulfill all

of the other group practice

requirements. The commenter suggested

that this arrangement would satisfy

section 1877 of the Act if the rule were

changed to permit groups to be owned

by a single physician owner.

Response: As noted in section VI.C.2

of this preamble, we have made the

change suggested by the commenter.

Group practices may be owned by a

single physician provided that the group

practice employs at least one other

physician. Therefore, we believe that

‘‘friendly’’ or ‘‘captive’’ PCs can qualify

as group practices if they meet all of the

other conditions of the group practice

definition.

Comment: Several commenters noted

that the sole owner of the ‘‘captive’’ or

‘‘friendly’’ PC may be a hospital-based

physician who does not practice

medicine as part of the group. These

commenters wondered whether a

nonparticipating physician owner

would be a member of the group for

purposes of the group practice

definitional tests, particularly the

‘‘substantially all test.’’

Response: We believe that a hospitalbased physician, who does not practice

medicine as part of the group, is not a

member of the group practice for

purposes of the definitional tests.

However, that means that the physician

is not a member for any other purpose

either. Thus, for example, a captive or

friendly PC owned by such a physician

would need to employ at least two

physicians to qualify as a group

practice. In addition, the sole physician

owner described in the comment would

not be eligible for sharing in overall

profits or productivity bonuses under

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

§ 411.352(i) of the regulations.

Comment: Commenters generally

supported our position in the proposed

regulations that a physician’s financial

relationship with an entity under

section 1877 of the Act would not be

imputed to his or her group practice.

Thus, other members of the group

practice could continue to make

referrals to the entity, provided that the

members did not have financial

relationships with the entity and the

physician with the financial

relationship was not in a position to

control the referrals of other group

members. However, one commenter

suggested that we include as members

(who could continue to make referrals)

physicians who are employed by their

own PC (instead of the group) as long

as the group has legal authority over the

terms of the physician’s employment

and is legally responsible for services

provided by the physician on behalf of

the group. This commenter noted that

for tax and pension reasons, many

physicians prefer to be employed by

their PCs rather than the group practice

entity.

Response: We are adopting the

position we discussed in the proposed

regulations, that is, that a physician’s

financial relationship with an entity

under section 1877 of the Act will not

be imputed to his or her group practice.

Thus, other members of the group

practice can continue to make referrals

to the entity, provided that the members

do not have financial relationships with

the entity and the physician with the

financial relationship is not in a

position to control the referrals of other

group members. As we have indicated

elsewhere in this preamble, physicians

who are employed by their own

individual PCs are considered members

of the group if the PC has an ownership

interest in the group. If not, the

physician would be considered an

independent contractor who is not a

member of the group.

4. The ‘‘Full Range of Services Test’’

Existing Law: The definition of a

group practice in section

1877(h)(4)(A)(i) of the Act provides that,

among other requirements, each

physician who is a member of the group

must provide substantially the full range

of services that the physician routinely

provides, including medical care,

consultation, diagnosis, or treatment,

through the joint use of shared office

space, facilities, equipment, and

personnel. In the August 1995 final rule

covering referrals for clinical lab

services, we required physician

members to furnish the full range of

‘‘patient care services,’’ defined as

services addressing the medical needs of

specific patients.

The Proposed Rule: In the January

1998 proposed rule, we proposed

expanding ‘‘patient care services’’ to

include any physician’s tasks that

address the medical needs of specific

patients or patients in general or that

benefit the practice. These activities

could include, for example, time spent

training group staff members, arranging

for equipment, or performing

administrative or management tasks, as

long as these activities benefit the

operation of the group practice. Services

wholly outside the group’s medical

practice, such as teaching, do not count

as patient care services. This proposed

test was designed to ensure that a

physician is actually practicing

medicine as he or she ordinarily would

as part of the group and has not simply

joined the group in name only. It further

ensures that physicians are practicing as

part of the group and not simply using

the group to profit from DHS referrals.

The Final Rule: We are promulgating

the test as proposed in the January 1998

proposed rule.

Comment: Commenters generally

favored our proposal to revise the

definition of ‘‘patient care services’’ to

include any physician task that

addresses the medical needs of specific

patients or patients in general, or that

benefits the group practice. However,

commenters requested clarification

whether activities that are conducted

outside the group practice, such as

teaching, overseeing residents, or

conducting medical research, but that

nonetheless benefit patients in general,

are covered within the definition. Other

similar activities might include

administrative positions within hospital

systems or independent physicians’

associations that involve oversight of

patients beyond those of the group

practice.

Response: It does not appear to us that

the activities listed by the commenter

would particularly benefit group

practice patients, except possibly in a

very attenuated way. (The answer might

change if the group itself was contracted

to perform these ‘‘outside’’ tasks.)

Therefore, we would generally not

regard them as patient care services

performed for the group. Instead, they

might qualify as patient care services

provided outside of the group. For

example, the physician could be

supervising residents in a hospital while

the residents treat patients, the

volunteer activities might involve

treating indigent patients, or the

administrative work could involve

904 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

overseeing the efficient delivery of care

to patients.

If the physician furnishes patient care

services exclusively within the group,

then whatever services he or she

furnishes should constitute the full

range of that physician’s routine patient

care services. If the physician furnishes

patient care services both inside and

outside of the group, then the services

for the group’s patients should be

comparable in scope to those provided

outside of the group setting. Any of a

physician’s services that do not involve

caring for patients should not affect this

test. For example, if a physician teaches

medicine outside of the practice, but

does not oversee patient care, we would

not expect that the physician would also

be performing teaching services as part

of his or her group services.

5. The ‘‘Substantially All Test’’

The Existing Law: Under the

definition of a ‘‘group practice’’ in

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

substantially all of the services of the

physician members must be provided

through the group and billed under a

billing number assigned to the group,

and amounts so received must be

treated as receipts of the group. In

§ 411.351, we interpreted ‘‘substantially

all’’ to mean at least 75 percent of the

total patient care services of the group

practice’s members. We promulgated

special rules for group practices located

solely in HPSAs and for physician

members’ time spent providing services

in HPSAs.

The Proposed Rule: We proposed

measuring patient care services (using

the same definition of ‘‘patient care

services’’ applied in the full range of

services test described above) by the

‘‘total patient care time’’ each member

spends on these services. We concluded

that patient care time was the most

straightforward and least burdensome

method for measuring a physician’s

patient care services, but we solicited

comments on other viable

methodologies. Again, this test ensures

that physicians who are members of the

group practice are economically bound

to the group for other than DHS referrals

and are not just members of the group

for purposes of profiting from DHS

referrals.

The Final Rule: We are promulgating

this test as proposed in our January

1998 proposed rule, except as discussed

in this preamble. As proposed in our

January 1998 proposed rule, the

‘‘substantially all test’’ could be

measured based on the member

physician’s actual time spent

performing patient care services,

whether performed inside or outside the

group practice. Having reviewed the

comments regarding alternative

methods for meeting the test, we are

amending the ‘‘substantially all test’’ to

allow group practices greater flexibility.

While ‘‘actual time spent’’ remains the

default standard, group practices may

adopt alternative measures, provided

those measures are reasonable, fixed in

advance of the performance of the

services being measured (that is, no ex

post facto methods), uniformly applied

over time, verifiable, and documented.

Independent contractors and leased

employees are not defined under the

final rule as members of the group;

therefore, their services need not be

counted for purposes of complying with

the ‘‘substantially all test.’’

Comment: Many commenters

appreciated our expansion of the

definition of patient care services to

include services that benefit group

patients in general or the group practice

itself, but suggested that group practices

be allowed to adopt alternative methods

for measuring compliance with the 75

percent ‘‘substantially all test,’’

depending on the particular

circumstances of the group and the most

reasonable manner available for the

group. These commenters pointed out

that many physicians do not maintain

time records and to do so would create

an unnecessary administrative burden.

Additionally, some commenters believe

that it would be difficult or misleading

to calculate the exact number of patient

care hours as we suggested in the

proposed regulations because many fulltime physicians tend to work more than

40 hours per week. (Data submitted by

a major physician trade association

reflected that the ‘‘average’’ physician

works 57.9 hours a week, with 53.2

hours spent on patient care activities).

For example, one physician in a practice

may work a full-time schedule of 40

hours per week for the group and

another 60 hours per week; it would be

inconsistent to count both as furnishing

the same 100 percent of their time to the

practice. Alternatively, a physician may

work a full 40-hour week at his or her

practice and then an additional 20 hours

at a hospital or clinic. To count this

physician as working only two-thirds

time for the group, based on a straight

calculation of hours, would be

unreasonable. One commenter thought

that the regulations should establish a

presumption that 40 hours per week of

patient care time for physicians equals

100 percent of such time for purposes of

calculating the 75 percent ‘‘substantially

all test’’; any hours spent beyond 40

hours on professional patient care time

would fall outside of the 75 percent

‘‘substantially all test.’’ Some groups

expressed a preference for using relative

value units (RVUs) to measure patient

care services, while others preferred a

revenue based calculation or a test

based on patient encounters furnished

and billed through the group. One

commenter thought that the ‘‘patient

care time’’ standard was ambiguous and

not objectively verifiable, since

physician timekeeping often does not

account for time spent on activities not

involving direct patient care.

Response: We are persuaded that it

would be appropriate to permit group

practices additional flexibility in

measuring compliance with the

‘‘substantially all test’’ based on their

unique circumstances. The ‘‘actual time

spent’’ standard described in the

preamble of the January 1998 proposed

rule remains the default standard.

Group practices that employ that

standard can be assured that they are

appropriately measuring ‘‘patient care

services.’’ As we noted in the January

1998 proposed rule, we are not

requiring that physicians use detailed

time sheets or time cards; in most cases,

appointment calendars, personal

schedules, billing records, or other

existing sources will be sufficient to

establish the time spent on patient care

services. Group practices may adopt

alternative means of satisfying the

‘‘substantially all test,’’ provided the

means used are (1) reasonable, (2) fixed

in advance of the performance of the

services being measured (that is, no ex

post facto methods), (3) uniformly

applied over time, and (4) verifiable.

The data used to calculate compliance

with the ‘‘substantially all test’’ and

supporting documentation must be

made available to the Secretary upon

request.

Comment: Several commenters sought

clarification whether the 75 percent

‘‘substantially all test’’ for patient care

services is measured based on total

patient services across all specialities in

a group or whether it is measured on a

specialty-by-specialty basis.

Response: Section 1877(h)(4)(A)(ii) of

the Act provides that a group practice is

a legally organized entity ‘‘for which

substantially all of the services of the

physicians who are members * * * are

provided through the group * * * .’’ In

§ 411.351, we interpreted ‘‘substantially

all’’ to mean at least 75 percent of the

total patient care services of each of the

group practice’s members. It is our view

that a group practice should aggregate

all of the patient care services that each

of its members provides, both inside

and outside of the practice, including all

varieties of patient care services, to

determine whether 75 percent of those

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 905

services are furnished through the

group. However, any services that are

provided by a group through

independent contractors would not be

figured into the test. The test is designed

to demonstrate that the activities of each

member are conducted through the

group. Services performed by

independent contractors would have no

bearing on this measure.

Comment: One commenter sought

clarification in applying the 75 percent

rule to new group practices that may be

owned by, or employ, part-time

physicians who are practicing elsewhere

during the group’s initial 12-month

start-up period. In some cases, these

groups will not meet the group practice

definition during the start-up period.

Response: We agree with the

commenter that some accommodation

should be made for new group practices.

Nothing in the statutory language

precludes such accommodation.

Accordingly, the final regulations

provide that during the ‘‘start up’’

period for a new group practice (not to

exceed 12 months), a group practice

must make a reasonable, good faith

effort to ensure that the group practice

complies with the ‘‘substantially all

test’’ as soon as practicable, but no later

than 12 months from the date of the

initial formation of the group practice.

This ‘‘start up’’ provision does not apply

when an existing group practice admits

a new member or when an existing

group practice reorganizes.

Comment: A commenter related the

following scenario: A specialist

provides professional services for a

hospital outpatient under a contract

with the hospital that allows a hospital

employee to perform the technical

component of the service. The specialist

reassigns his or her payments for the

professional services to the hospital.

The hospital then bills Medicare for a

global payment that includes the

professional and technical components.

Under this arrangement, the hospital

pays the specialist a contractual amount

for the professional component. The

commenter requested that we explicitly

permit the professional component of

these types of services to be counted as

part of the 75 percent requirement for

purposes of the ‘‘substantially all test,’’

even though the hospital and not the

group practice bills Medicare for the

specialist’s services. Alternatively,

commenters recommended that we

change the two compensation

exceptions that deal with hospitals

(located in regulations in §§ 411.357(g)

and (h)) to exclude compensation paid

to a physician for professional services.

Response: We agree that a group

practice should be able to count the

professional component of services

provided by a member physician under

a global payment when calculating the

‘‘75 percent of patient care services

requirement’’ for purposes of the

‘‘substantially all test,’’ even though the

hospital actually bills Medicare directly

for the physician services. We regard the

‘‘substantially all test’’ as designed to

guarantee that a physician is providing

a substantial amount of his or her own

services through the group practice. 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.

We are, therefore, interpreting the

requirement that substantially all of a

physician’s services be provided

through the group and be billed ‘‘under

a billing number assigned to the group’’

and amounts so received treated as

receipts of 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. In other

words, the phrase ‘‘billed under a

billing number assigned to the group’’ in

section 1877(h)(4)(A)(ii) of the Act does

not refer exclusively to Medicare or

Medicaid billing numbers.

Comment: Several commenters

objected to the proposed regulation

because they believe it would require

groups to bill under a group billing

number and would force physicians in

a group to bill individually when a

patient has been seen in the hospital.

Response: While we are somewhat

unclear as to the commenters’ concern,

we see nothing in these regulations that

affects how group practice physicians

bill for services provided to their own

patients seen in a hospital.

6. The ‘‘Seventy-Five Percent PhysicianPatient Encounters Test’’

The Existing Law: Under section

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

members of a group practice must

personally conduct at least 75 percent of

the group practice’s patient encounters

(measured per capita, not by time). The

test ensures that the group practice is a

legitimate medical practice and not

primarily a business for the provision of

lucrative ancillary services.

The Proposed Rule: The proposed

rule would exclude independent

contractors or leased employees from

the test because they would not be

considered members of the group.

The Final Rule: We are promulgating

this test as proposed in our January

1998 proposed rule.

Comment: A commenter requested

confirmation that bona fide employed

physicians count for purposes of the 75

percent physician-patient encounters

test.

Response: As discussed in section

VI.C.3 of this preamble, members of a

group practice include employed

physicians. Thus, patient encounters by

bona fide employed physicians count

for purposes of the 75 percent

physician-patient encounters test.

7. Unified Business Test

The Existing Law: For purposes of the

group practice definition, section

1877(h)(4)(A)(iii) of the Act requires that

‘‘the overhead expenses of and the

income from the group practice are

distributed in accordance with methods

previously determined.’’

The Proposed Rule: In our January

1998 proposed rule, we proposed

exercising our discretion under section

1877(h)(4)(vi) of the Act to impose an

additional standard under the definition

of group practice that would require

groups to be a ‘‘unified business.’’ Our

purpose was to ensure that group

practices are substantially integrated

business operations and that their

allocation of group expenses and

income to members reflect this. Absent

a unified business test, we are

concerned about the development of

sham groups that are formed primarily

for the purpose of profiting from selfreferrals, but not for other, bona fide

purposes. Thus, in the proposed

regulations, we interpreted section

1877(h)(4)(A)(iii) of the Act as requiring

that the group’s overhead expenses and

income be distributed according to

methods that are—

• Determined prior to the time period

during which the group has earned the

income or incurred the costs, and

• Distributed according to methods

indicating that the group practice is a

unified business.

We indicated that the methods must

reflect ‘‘centralized decision making, a

pooling of expenses and revenues, and

a distribution system that is not based

on each satellite office operating as if it

were a separate enterprise.’’

The Final Rule: The statute requires

that the overhead expenses of, and

income from, the group practice be

distributed in accordance with methods

‘‘previously determined.’’ Unlike the

January 1998 proposed rule, which

interpreted ‘‘previously determined’’ as

meaning before the group earned the

income or incurred the cost, the final

rule treats a distribution methodology as

‘‘previously determined’’ if it is

determined prior to receipt of payment

for the services giving rise to the

906 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

overhead expense or producing the

income. Apart from this limitation, the

rule does not prevent group practices

from adjusting their compensation

methodologies prospectively as

frequently as they desire (subject to the

restrictions on the distribution of DHS

revenues in section 1877(h)(4)(B)(i) of

the Act).

Commenters were nearly uniform in

their criticism of the proposed unified

business test, claiming that it

invalidated many bona fide and

common group practice compensation

structures and discouraged beneficial

integration of group practices. Reflecting

these comments, Phase I of this

rulemaking retains the general unified

business test, but offers groups

considerable additional flexibility in

satisfying the requirement. Importantly,

Phase I of this rulemaking permits many

forms of cost center and location-based

accounting, provided that compensation

formulae with respect to DHS revenues

otherwise meet the requirements of the

law. To meet the unified business test,

a group practice must be organized and

operated on a bona fide basis as a single

integrated business enterprise with legal

and organizational integration. Essential

elements are: (1) Centralized decision

making by a body representative of the

practice that maintains effective control

over the group’s assets and liabilities

(including budgets, compensation, and

salaries); (2) consolidated billing,

accounting, and financial reporting; and

(3) centralized utilization review (for

example, utilization review conducted

on a group-wide basis). We designed the

rule to preclude group practice status

for loose confederations of physicians

that are group practices in name, but not

operation. As adopted in Phase I of this

rulemaking, the unified business test

sets general parameters indicative of

integration, but does not dictate specific

compensation practices. Compensation,

with respect to DHS, is subject to

separate limitations described in these

regulations.

Comment: Many commenters objected

to our proposal to interpret the phrase

‘‘previously determined’’ to mean that

the methodology for setting group

members’’ compensation must be fixed

before the group has earned the income

or incurred the costs of providing the

designated health care services. One

commenter stated that this proposed

interpretation would overly restrict a

group practice’s ability to adjust

physician compensation periodically to

reflect a physician’s contribution to the

group practice or to pay discretionary

bonuses. Some commenters observed

that groups have traditionally used ad

hoc compensation systems that allow

groups to ‘‘wait and see how the year

goes.’’ These systems afford groups

flexibility to deal with business realities

as they occur without, in the

commenters’ view, increasing the risk of

self-referral compensation. In lieu of our

proposed ‘‘prior to incurrence’’ rule, a

number of commenters favored a ‘‘prior

to distribution’’ rule. One commenter

recommended coupling a ‘‘prior to

distribution’’ rule with a requirement

that distributions not relate to the

volume or value of Medicare or

Medicaid DHS referrals and that

distributions not be retroactively

adjusted in a manner that establishes a

relationship between compensation and

referrals. Another commenter suggested

that ‘‘previously determined’’ be

interpreted to mean that the

compensation formula must be reported

at the same time groups report their

financial relationships to us.

Response: It is a statutory requirement

that a group’s compensation

methodology be determined in advance.

Unrestricted ad hoc compensation

systems would allow groups to

compensate physicians directly based

on the number of designated health care

services referrals they generate—the

very conduct the statute is intended to

prohibit. A ‘‘prior to distribution’’ rule

would be circular, since any

distribution scheme would be

determined prior to the distribution. We

agree, however, that groups should have

some flexibility in designing and

implementing compensation systems

that are responsive to changing

circumstances. It is our understanding

that most groups operate on a cash

basis. In the final rule, we are requiring

that group practices determine the

methodology for distributing overhead

expenses of, and income from, the

provision of designated health care

services prior to the receipt of payment

for those services. The methodology

may be determined at any time until

payment has been received, even if the

income has been earned or costs

incurred. This rule permits groups to

adjust their methodologies prospectively

as often as they deem appropriate. We

believe Phase I of this rulemaking

provides groups with sufficient

flexibility to respond to business

realities, while complying with the

statutory requirement that the

distribution system be ‘‘previously

determined.’’

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

prohibits a physician member of the

group from being compensated in a

manner that takes into account the

volume or value of DHS referrals, except

as provided in section 1877(h)(4)(B)(i) of

the Act. Thus, a compensation method

that directly relates to the volume or

value of Medicare referrals or is

retroactively adjusted would violate

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

Comment: A commenter asked

whether a group practice can distribute

unexpected income which, by its

nature, was not ‘‘previously’’ part of the

group’s distribution methodology. The

commenter cited as an example a group

practice opening a new site without

specifically determining in advance

how revenues or profits would be

distributed to group members.

Response: We are unclear as to the

circumstances under which a group

practice would open a new office

without considering distribution of the

revenues or profits from that new office.

We see no reason to deviate from the

‘‘prior to payment’’ rule established in

these regulations for ‘‘unexpected

income.’’

Comment: Although many

commenters generally recognized the

appropriateness of precluding group

practice status for groups that are

merely confederations of independent,

unintegrated medical groups, many

commenters expressed concerns about

the unified business requirement

promulgated in the proposed

regulations. First, commenters

questioned our legal authority to graft

this new condition onto the statutory

group practice definition. Second,

commenters expressed the view that the

unified business standard as proposed

would have a chilling effect on

legitimate group practices and

discourage beneficial integration. Of

particular concern was the perception

that the regulations would completely

prohibit or unduly complicate the group

practices’ use of profit and cost center

or location-based accounting and

distribution of expenses and income. In

this regard, many commenters argued

that site-specific or specialty-specific

accountability encourages efficient

management of expenses and practice

patterns and eliminates a ‘‘free rider’’

problem that impedes cost effective

integration, which groups find

increasingly important with the growth

of managed care. One commenter,

representing a physician practice

management company, noted that one

reason groups prefer cost center

accounting is that many physicians in

newly-acquired group practices want to

minimize changes in income levels they

have historically realized; cost center

accounting facilitates more absolute

integration over time.

Instead of barring cost center or

location-based accounting and

distribution of expenses and income,

commenters encouraged us to rely on

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 907

other indicators of integration. One

commenter suggested that we could

address our concern about loose

confederations of groups by revising the

rule to require that a group practice be

organized and operated on a bona fide

basis as a single business enterprise

integrated legally and operationally.

According to the commenters, while

many legitimately integrated medical

practices allow their satellite offices to

make day-to-day, local practice

decisions, almost all significant

decisions, such as hiring and firing

physicians and approval of annual

operating budgets, are made by the

entire practice’s governing body.

Moreover, the costs of central business

activities such as billing, collections,

managed care contracting, and

purchasing of some products and

services are, in most cases, shared by all

practice sites, either per capita or based

on a generally applied formula.

Commenters offered numerous

suggestions as to relevant criteria for

ascertaining that a group practice is a

unified business.

Response: Our statutory authority to

impose a unified business test resides in

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

which vests in the Secretary the ability

to impose additional standards on group

practices by regulation. Upon further

consideration, we agree with the

commenters that our proposed unified

business test was too restrictive. The

unified business test was designed to

ensure that group practices are

substantially integrated business

operations and that their distribution of

group expenses and income to members

reflects this. The unified business test

guards against the development of sham

groups formed primarily for the purpose

of profiting from self-referrals.

Phase I of this rulemaking, described

in detail above, retains the general

unified business test, but offers groups

considerable flexibility in satisfying the

requirement. Importantly, many forms

of cost center and location-based

accounting are permitted, provided that

compensation formulae with respect to

the distribution of DHS revenues

otherwise meet the requirements of the

law.

Comment: A physician trade

association asked whether groups that

compensate their physicians under

more than one methodology can qualify

as a ‘‘unified business.’’ This issue is

especially significant for larger groups

that have expanded through the

acquisition of other existing group

practices, each of which may have

negotiated different compensation

arrangements. Typically, the

methodology for compensating each

new physician who joins the group is

set in advance, based on the

negotiations between the parties and

approved by the governing body of the

acquiring group (or an authorized

committee of the governing body).

Response: We see no impediment in

the revised unified business test to

groups like those described in the

comment from qualifying as a unified

business. In order to qualify for group

practice status, the group would have to

meet all of the other group practice

tests, including the limitations on

compensation based directly or

indirectly on the volume or value of

referrals and the restrictions on profit

sharing and productivity bonuses. (See

the discussion in section VI.C.8 of this

preamble.)

Comment: One commenter expressed

concern that the proposed unified

business standard could be interpreted

to prevent integrated medical practices

from compensating their physicians on

an individual collections minus

expenses basis. A commenter urged that

groups be allowed to compensate

physicians based on their own

productivity (excluding any revenue or

expense related to the group’s DHS),

and that it be permissible to calculate

the physician’s compensation by

allocating to the physician all of the

physician’s direct medical expenses of

practice (including, but not limited to,

for example, malpractice insurance,

continuing medical education, space

cost, supplies) and his or her pro rata

share of general overhead not based on

any volume or value of his or her

referrals (for example, administrative

and management costs). Similarly,

another commenter stated that it is

common practice for groups to

compensate their members according to

formulae that take into account ‘‘office

profits,’’ described as collected revenues

attributable to a physician’s medical

services performed by that physician or

personnel under his supervision, not

including revenues for DHS or direct or

indirect expenses of that physician.

Response: Distribution of group

practice revenues derived from DHS is

subject to the compensation rules set

forth at § 411.352. With respect to

income derived from other sources,

groups are free to divide it in any

manner they choose, provided they can

demonstrate that they are a unified

business under the three principles

discussed in section VI.C.7 of this

preamble. Depending on individual

circumstances, we believe that most of

the compensation methodologies

described in the comment can be

accommodated within the parameters of

the revised unified business test.

Comment: One commenter questioned

whether a total contingent revenue pool,

distributed on an aggregate basis (after

subtracting expenses that include

allocated central practice or ‘‘home

office’’ expenses) to the practitioners in

a given branch or satellite office of a

larger statewide PC according to a

predetermined formula, would meet the

requirements of the unified business

test.

Response: Whether the described

scheme fits in the exception would

depend on whether the three factors

described above are present. The

scheme would also have to meet the

requirements of sections

1877(h)(4)(A)(iv) (compensation for

group members) and (h)(4)(B)(i) (profits

and productivity bonuses) of the Act

with respect to DHS. In particular,

under the overall profit shares rule as

set forth in Phase I of this rulemaking,

as discussed in section VI.C.8, overall

profit shares must be derived from

aggregations of the entire practice or a

component of the practice consisting of

at least five physicians.

Comment: A commenter sought

clarification as to whether the financial

allocation requirements under the

unified business standard apply solely

to the DHS furnished by the group or

whether they extend more broadly to all

health care services furnished by the

group. The commenter viewed the latter

approach as beyond the statutory

authority, which applies only to

furnishing DHS, and as contrary to our

own statements in the preamble to the

proposed regulations that compensation

arrangements for services that are not

DHS are outside the scope of the statute

and regulations.

Response: The Congress specifically

conferred on the Secretary in section

1877(h)(4)(A)(vi) of the Act authority to

impose additional standards in the

definition of a group practice. For the

limited purposes of establishing that a

group practice is a unified business, we

believe it is appropriate to consider the

group practice’s methods of distributing

revenues derived from all sources, not

just DHS. Group practices can distribute

the revenues from services that are not

Medicare-DHS in any manner they

wish. However, if the payment methods

do not indicate a unified business (or

indicate a business that is unified solely

with respect to the provision of DHS),

the group may not qualify as a group

practice under section 1877(h)(4) of the

Act and § 411.352. Compensation paid

to a physician creates a compensation

arrangement within the meaning of

§ 411.354, even if the compensation

relates only to services that are not DHS.

Absent an applicable exception (for

908 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

example, the in-office ancillary services

or employee exceptions), this

compensation arrangement triggers the

self-referral prohibition as to any of the

physician’s referrals of DHS.

8. Profit Shares and Productivity

Bonuses

The Existing Law: In general, the

statute provides that a physician who is

a member of the group may not be

compensated directly or indirectly

based on the volume or value of his or

her referrals of DHS. In addition, the

statute provides that a ‘‘physician in a

group practice’’ may receive shares of

overall profits of the group or a

productivity bonus based on services

personally performed or incident to

such personally performed services,

provided the share or bonus is not

determined in a manner that is directly

related to the volume or value of

referrals by such physician. In other

words, group practice compensation

formulae that are only indirectly related

to the volume or value of referrals of

DHS are permissible.

The Proposed Rule: We proposed to

interpret the statute to mean that

productivity bonuses could only relate

to work personally performed by the

physician that results from referrals

from other physicians in the group, and

could not relate (directly or indirectly)

to work that results from self-referrals or

DHS referrals to other physicians and

other office personnel. Thus, we said

that a physician could only receive

compensation for his or her own DHS

referrals through the aggregation that

occurs as part of the overall sharing of

group profits. As to the overall sharing

of profits, we indicated that profits must

be aggregated at the group level and not

at a component level.

The Final Rule: In section IV of this

preamble, we provide an overview of

the physician compensation provisions

of section 1877 of the Act. In general, a

group practice can segregate its DHS

revenues from its other revenues for

purposes of compensating physicians;

section 1877 of the Act applies only to

a practice’s DHS revenues. Generally,

this income is likely to comprise a

relatively small portion of the total

revenues of most practices.

Under Phase I of this rulemaking,

group practices may pay member

physicians and independent contractors

who qualify as ‘‘physicians in the

group’’ productivity bonuses based

directly on the physician’s personal

productivity (including services

incident to such personally performed

services that meet the requirements of

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

section 2050 of the Medicare Carriers

Manual, Part 3), but may not pay these

physicians any bonus based directly on

their referrals of DHS that are performed

by someone else. The statute also

permits group practice members (and

independent contractors who qualify as

‘‘physicians in the group’’) to receive

shares of the overall profits of the group,

so long as those shares do not directly

correlate to the volume or value of DHS

referrals generated by the physician that

are provided by someone else. We are

defining ‘‘share of overall profits’’ as

meaning a share of the entire profits of

the entire group or any component of

the group that consists of at least 5

physicians derived from DHS.

Under the statutory scheme, revenues

generated by DHS may be distributed to

group practice members and physicians

in the group in accordance with

methods that indirectly take into

account DHS referrals. In general, we

believe a compensation structure does

not directly take into account the

volume or value of referrals if there is

no direct correlation between the total

amount of a physician’s compensation

and the volume or value of the

physician’s DHS referrals (regardless of

whether the services are personally

performed). Phase I of this rulemaking

contains specific methodologies that

describe compensation methods that are

deemed to be indirect. In addition,

Phase I of this rulemaking contains

additional provisions that allow group

practices to devise other reasonable

indirect compensation methodologies.

The distribution methods for overall

profit shares are as follows:

1. A per capita (that is, per physician)

division of the overall profits.

2. A distribution of DHS revenues

based on the distribution of the group

practice’s revenues attributable to

services that are not DHS payable by

Federal or private payers.

3. Any distribution of DHS revenues

if the group practice’s DHS revenues are

less than 5 percent of the group

practice’s total revenues and no

physician’s allocated portion of those

revenues is more than 5 percent of the

physician’s total compensation from the

group practice.

The methods for productivity bonuses

are as follows:

1. A productivity bonus based on the

physician’s total patient encounters or

RVUs.

2. A productivity bonus based on the

allocation of the physician’s

compensation that is attributable to

services that are not DHS payable by

Federal or private payers.

3. Any productivity bonus that

includes DHS revenues if the group

practice’s DHS revenues are less than 5

percent of the group practice’s total

revenues and no physician’s allocated

portion of those revenues is more than

5 percent of the physician’s total

compensation from the group.

Comment: Many commenters objected

to our proposed interpretation of the

statute to mean that productivity

bonuses can relate only to work

personally performed that results from

referrals from other physicians in the

group, and cannot relate (directly or

indirectly) to work that results from selfreferrals. Commenters protested that

this interpretation barred any

compensation based on a physician’s

personal productivity for self-referred

DHS and was, therefore, contrary to

clear statutory intent. Several

commenters explained that our

interpretation would produce

anomalous results in some

circumstances. For example, an internist

refers a patient with a gastrointestinal

complaint to a gastrointestinal

specialist, and the specialist evaluates

the patient at an initial visit. The

specialist subsequently performs an

endoscopy on the patient. Under the

proposed January 1998 regulations, the

endoscopy would be a self-referral by

the specialist, and the specialist could

not receive a productivity bonus for

performing the endoscopy. However, if

the specialist referred the patient to

another physician in the same group

practice for the endoscopy, the

specialist could receive compensation

indirectly based on that endoscopy.

Thus, in the commenter’s view, the rule

creates a disincentive to perform

services and an incentive to refer (which

may be contrary to good patient care

and not cost effective). The commenter

further noted that specialists who

perform substantial amounts of DHS are

disadvantaged by the proposed

interpretation because they cannot be

rewarded for personal productivity,

while their counterparts, for whom the

performance of DHS is a less significant

part of their practices, can.

Commenters suggested an

interpretation that would permit

productivity bonuses for DHS

personally performed by the referring

physician, but not for DHS referred to

others. The commenters generally

requested that the final rule allow group

practices to compensate members of the

group based upon the volume or value

of DHS, so long as the services are

personally performed by the physician

or are incident to the physician’s

personally performed services. One

commenter noted that ancillary services

(including ‘‘incident to’’ services)

performed for one’s own patients are

more ‘‘personal’’ to the ordering or

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 909

supervising physician than are services

he or she performs on colleagues’

patients. Commenters also complained

that our proposed interpretation would

lead to disparate treatment of solo and

group practitioners, since solo

practitioners could receive the profits

from personally performed DHS that

they self-refer, whereas group

practitioners could not. One commenter

thought that this discrepancy would

make solo practitioners reluctant to join

group practices, thereby discouraging

beneficial market integration.

Finally, some commenters noted that

many group practices have insufficient

information technology systems to track

whether a service performed by a

physician resulted from a self-referral or

a referral from another physician.

Commenters asserted that our proposed

interpretation would impose a

significant additional administrative

burden on those groups.

Response: In light of the comments,

the changes we have made to our

interpretation of the definition of a

‘‘referral’’ and the volume or value

standard, and our further review of the

statutory language, we are persuaded

that our proposed interpretation of the

scope of productivity bonuses was

unnecessarily restrictive. Accordingly,

we have revised the regulation to make

clear that group practices may pay

member physicians (and independent

contractors who qualify as ‘‘physicians

in the group’’) productivity bonuses

based directly on the physician’s

personal productivity (including

services ‘‘incident to’’ such personally

performed services that meet the

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

the Act and section 2050, ‘‘Services and

Supplies,’’ of the Medicare Carrier’s

Manual (HCFA Pub. 14–3), Part 3—

Claims Process), but may not pay these

physicians any bonus based directly on

their referrals of DHS that are performed

by someone else.

Comment: Commenters sought

clarification about the treatment of

productivity bonuses for ‘‘incident to’’

services. One commenter observed that

according to long-standing regulatory

policies, ‘‘incident to’’ services are

services that are an incidental although

integral part of a physician’s personal,

professional service to a patient. Thus,

in the commenter’s view, there cannot

be a referral for ‘‘incident to’’ services in

any ordinary sense, since what the

ancillary service provider does is part of

the physician’s service itself. Several

commenters expressed their belief that

one purpose of the productivity bonus

provision was to allow physicians to

receive ‘‘credit’’ for ‘‘incident to’’

services in their compensation. One

commenter pointed out that it would be

hard to exclude ‘‘incident to’’ services

in the calculation of productivity

bonuses since claim forms typically do

not indicate who performed the

‘‘incident to’’ service (that is, whether

the service was performed by the

supervising physician or someone else).

Other commenters interpreted the

statutory reference as equating ‘‘incident

to’’ services with ‘‘in-office ancillary’’

services. Under this view, commenters

asserted that the statutory language

plainly allows productivity bonuses

based indirectly on the volume or value

of the physician’s in-office ancillary

services and opposed our proposed

interpretation that prohibited any

compensation based on referrals for inoffice ancillary services.

Response: We agree with the essence

of these comments with respect to group

practices. Under the final regulation,

group practice physicians can receive

compensation directly related to the

physician’s personal productivity and to

services incident to the physician’s

personally performed services, provided

the ‘‘incident to’’ services comply with

the requirements of section

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

2050, ‘‘Services and Supplies,’’ of the

Medicare Carrier’s Manual (HCFA Pub.

14–3), Part 3—Claims Process, and any

subsequent or additional HHS rules or

regulations affecting ‘‘incident to’’

billing. This means that the ‘‘incident

to’’ services must be directly supervised

by the physician. In other words, the

physician (or another clinic physician

in the case of a physician-directed

clinic) must be present in the office

suite and immediately available to

provide assistance and direction.

Moreover, the person performing the

‘‘incident to’’ services must be an

employee of the physician (or the

physician-directed clinic). We believe

that the heightened supervision

requirement imposed by the ‘‘incident

to’’ rules provides some assurance that

the ‘‘incident to’’ DHS will not be the

primary incentive for the self-referral.

However, we may revisit the issue of

compensation tied to ‘‘incident to’’

services if we find that abuses are

occurring, especially in the area of

physician-directed clinics.

Comment: We received a number of

comments seeking clarification related

to the methods of paying compensation

that are not directly based on the

volume or value of referrals. First,

commenters urged that we allow

pooling of revenues that are not DHS

revenues, because such revenues are not

governed by the statute. Second, a

number of commenters objected to our

position in the proposed regulations

that overall profits are not profits that

‘‘belong only to a particular specialty or

subspecialty group’’ (even if the group

is located in several States or has several

locations in one State) because ‘‘the

narrower the pooling, the more likely it

will be that a physician will receive

compensation for his or her own

referrals.’’ Commenters urged that

pooling at practice sites with more than

a few physicians should not result in

any individual’s compensation being

directly related to the volume or value

of his or her referrals, even if DHS

revenues are included in the pool.

Commenters generally advocated that

we allow pooling if at least three

physicians are included in the pool and

the distribution formula is not related to

DHS referrals. Third, commenters

offered a variety of suggestions about

how to calculate ‘‘indirect’’

compensation. For example, one

commenter suggested that compensation

be considered ‘‘indirect’’ if the referrals

have no mathematical effect on

compensation. Others suggested that

compensation be considered ‘‘indirect’’

if it is based on per capita calculations,

RVUs, patient encounters, hours

worked, ownership shares in the

practice, or seniority.

Response: First, we are persuaded that

we should permit some additional

flexibility related to the distribution of

shares of overall profits by group

practices. Thus, we are defining a

‘‘share of overall profits’’ to mean a

share of the entire profits derived from

DHS of the entire group practice or any

component of the group that consists of

at least five physicians. We believe a

threshold of at least five physicians is

likely to be broad enough to attenuate

the ties between compensation and

referrals. We are rejecting the suggestion

to use a threshold of three physicians

because we believe that the lesser

threshold would result in pooling that

would be too narrow and, therefore,

potentially too closely related to DHS

referrals. Second, we recognize the need

for clear guidance as to appropriate

indirect compensation methodologies.

For that reason, we are including in

Phase I of this rulemaking

methodologies that describe

compensation distribution systems that

we deem to be indirect. In other words,

if a group practice wants absolute

assurance that its productivity bonuses

or profit shares are not directly related

to referrals, the group practice may

employ one of the regulatory

methodologies set forth in § 411.352 of

the regulations. Group practices are not

required, however, to use these

methods. The regulations clarify that

910 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

other methods (including distributions

based on ownership interests or

seniority) are acceptable so long as they

are reasonable, objectively verifiable,

and indirectly related to referrals. These

compensation methods should be

adequately documented and supporting

information must be made available to

the Secretary upon request. Under this

latter ‘‘catch-all’’ provision, the group

practice essentially bears the risk of

noncompliance.

Comment: Several commenters sought

clarification as to whether an

independent contractor could be

compensated under the productivity

bonus provision of the group practice

definition as a ‘‘physician in the group’’,

even though independent contractors

are not members of the group.

Response: Independent contractors

who qualify as ‘‘physicians in the

group’’ under the provisions of

§ 411.351 can receive productivity

bonuses under section 1877(h)(4)(B)(i)

of the Act.

Comment: One commenter sought

clarification as to how providers should

treat capitation payments that cover

more than one service for purposes of

allocating profit shares and productivity

bonuses.

Response: In general, we believe that

capitation payments are not likely to

lead to increased utilization. Parties

may use any reasonable allocation

method with respect to such payments.

Comment: On page 1691 of the

preamble to the January 1998 proposed

regulations, we explained our view that

‘‘profits should not be pooled and

divided between group members so that

they relate directly to the number of

designated health services for Medicare

or Medicaid patients physicians referred

to themselves or the value of those selfreferrals (such as a value based on

complexity of the service).’’ A

commenter objected to the parenthetical

statement, asserting that barring

consideration of the complexity of the

service is contrary to other Medicare

payment provisions, which take into

consideration the level of training

necessary to perform, and difficulty of,

certain procedures.

Response: Given our revised

interpretation, we believe the

parenthetical statement (‘‘such as value

based on complexity of the service’’) is

no longer relevant to these regulations.

Group practice members can be

compensated directly based on their

personal productivity (that is, the fruits

of their own labors), but not on their

productivity in generating referrals.

They may only be compensated based

indirectly on DHS referrals to other

physicians or providers. So long as the

compensation is only indirectly related

to the volume or value of DHS referrals,

we believe it makes little difference if

the value of the DHS referrals reflects

the complexity of the services.

Comment: A commenter sought

clarification that when a physician is a

member of a group practice and is also

an employee of the group practice, his

or her compensation may be determined

under the group practice’s rules without

regard to the employee exception.

Response: We agree that when a

physician is a member of a group

practice, his or her compensation need

only comply with the group practice

rules. Meeting the group practice

definition allows physicians in the

group to refer within the group under

the in-office ancillary services exception

or the physicians’ services exception.

However, nothing prevents a physician

and group practice from using the

employee exception instead. It is

important to remember that referrals of

DHS are only permitted if an exception,

such as the in-office ancillary services

exception or employee exception,

applies.

Comment: Several commenters were

confused by our use of the terms

‘‘revenues’’ and ‘‘profits’’ throughout

the preamble to the January 1998

proposed regulations. For example, on

page 1691 we stated that ‘‘the referring

physician can receive a portion of the

group’s overall pooled revenues from

these services as long as the group does

not share these profits in a manner that

relates directly to who made the

referrals for them.’’ Similarly, on the

same page we stated that we ‘‘regard

‘over-all profits of the group’ to mean all

of the profits or revenues a group can

distribute in any form to group members

* * *.’’ These commenters requested

that the terms ‘‘profits’’ and ‘‘revenues’’

be used in a manner that is consistent

with their generally accepted meanings

or that definitions of the terms be

provided in the regulations.

Response: We agree that the terms

‘‘revenues’’ and ‘‘profits’’ were used

inconsistently in the January 1998

proposed regulation. In Phase I of this

rulemaking, we have endeavored to use

those terms consistent with their

generally accepted meanings.

9. Group Practice Attestations

The Existing Law: In § 411.360 of the

August 1995 final rule covering referrals

for clinical laboratory services, we

included the requirement that group

practices provide their carriers with a

written statement annually to attest that,

during the most recent 12-month period,

75 percent of the total patient care

services of group members was

furnished through the group. Any group

that intended to meet the definition of

a group practice in order to qualify for

one of the exceptions provided in the

regulations was required to submit the

required attestation to its carrier by

December 12, 1995. On December 11,

1995, we published in the Federal

Register, at 60 FR 63438, a final rule

that delays the date by which a group

of physicians must file an attestation

statement. The December final rule

amended § 411.360 to require that a

group that intends to meet the definition

of a group practice must submit an

attestation statement to its carrier no

later than 60 days after the group

receives attestation instructions from its

carrier. The preamble to the December

rule points out that a group could regard

itself as a group practice in the interim

period before it receives attestation

instructions, provided the group

believes that it meets the definition of

a group practice under § 411.351.

The Proposed Rule: The proposed

rule retained § 411.360, as amended by

the December 1995 final rule, with

several minor changes.

The Final Rule: We have eliminated

the attestation requirement.

Comment: One commenter suggested

that group practice attestations not be

required until 1 year after final

regulations are published, while another

recommended 11⁄2 years after

publication of the final rule. Otherwise,

the commenter stated, a group practice

would have to attest to membership

requirements for the previous 12

months, without benefit of having had

the membership requirements published

in advance and an opportunity to

comply with them.

One commenter also questioned

whether we will actually use the

information gained from group practice

attestations. The commenter believes

that imposing a civil money penalty for

failing to submit an attestation is overly

harsh when compared to the minimal

benefit that may be derived from the

attestations. The commenter

recommended that we remove the

requirement for attestations or, at least,

reduce the related penalties.

Response: We agree with the

commenters. After reviewing the

attestation requirement, we have

concluded that it would impose an

unwarranted burden on group practices.

We intend instead to allow groups to

treat the information they need to

establish that they are a group practice

in the same manner as any information

a furnishing entity must provide to us

under the reporting requirements in

§ 411.361. In order to make reporting

requirements more manageable, we

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 911

intend to develop a streamlined

‘‘reporting’’ system that does not require

entities to retain and submit large

quantities of data. We believe instead

that entities should retain enough

records to demonstrate, in the event of

an audit, that particular relationships

are excepted under the law. In the case

of the in-office ancillary services

exception and physician services

exceptions in section 1877(b)(1) and

(b)(2), an entity may need to establish

that the services it provided were

referred by members of a genuine group

practice. Thus, a group should retain

records that demonstrate that it meets

the requirements in section 1877(h)(4)

of the Act and § 411.351.

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

the Act)

The Existing Law: In the August 1995

final rule, we interpreted the prepaid

plan exception, section 1877(b)(3) of the

Act, as creating an exception to the

general prohibition on referrals for

services furnished by certain prepaid

health plans to their enrollees,

including Federally qualified health

maintenance organizations (HMOs) or

prepaid health care organizations with a

contract or agreement under sections

1876 or 1833(a)(1)(A) of the Act, or

organizations participating in

demonstration projects under section

402(a) of the Social Security

Amendments of 1967 or section 222(a)

of the Social Security Amendments of

1972. The August 1995 final rule

incorporated section 1877(b)(3) into the

regulations in § 411.355(c), concerning

clinical laboratory services furnished by

an organization (or its contractors or

subcontractors) to enrollees of these

prepaid health plans (not including

services provided to enrollees in any

other plan or line of business offered or

administered by the same organization).

The Proposed Rule: The January 1998

proposed rule proposed an additional

exception for services provided by

organizations participating in the

Medicaid program that are analogous to

those cited in section 1877(b)(3) of the

Act, including managed care

organizations (MCOs) that contract with

Medicaid under section 1903(m) of the

Act, entities operating under a

demonstration project under section

1115(a) of the Act, prepaid health plans

contracting with a State, and health

insuring organizations furnishing

services as managed care contractors.

(Although we proposed including

demonstration projects under section

1115(a) of the Act in the preamble of the

January 1998 proposed rule at 63 FR

1697, they were not listed in proposed

§ 435.1012 as the result of a drafting

error. We will include a technical

correction for this section in Phase II of

this rulemaking.) In addition, the rule

proposed to extend the protection of

section 1877(b)(3) of the Act to

providers, suppliers, and other entities

that provided services to enrollees of the

protected organizations under contracts

with these organizations, either directly

or indirectly.

The January 1998 proposed rule also

took a number of other positions that

directly affected physicians’ financial

relationships with managed care entities

and plans other than Medicare and

Medicaid managed care plans. Most

importantly, we proposed that MCOs

would be deemed to be entities

‘‘furnishing’’ DHS provided by other

entities if the MCOs billed Medicare for

DHS provided to Medicare patients by

providers and suppliers pursuant to a

contractual arrangement with the MCOs

(other than services under a plan

protected under section 1877(b)(3) of

the Act or other protected arrangement).

The preamble of the January 1998

proposed rule also discussed whether

an MCO network physician could refer

private fee-for-service patients to other

physicians and providers that were

participating in an MCO network.

According to the preamble, a physician

who had a contractual relationship with

an MCO could refer a nonenrolled

Medicare fee-for-service patient for a

designated health service to another

physician who also had a contract with

the MCO provided that the physician to

whom he or she referred the patient was

not otherwise affiliated with the MCO.

However, if the same physician referred

the same patient to a laboratory owned

by the MCO, the general prohibition

would apply and the financial

arrangement between the MCO and the

physician would have to qualify for an

exception. In other words, the referring

physician would not have a financial

relationship with the second physician,

but he would have one with the

laboratory. Of course, the arrangement

could still be protected under the

personal service arrangements

exception.

The M+C interim final rule (63 FR

35066) amended § 411.355(c) of the

regulations covering referrals for clinical

laboratory services to include a new

paragraph (5). This paragraph added to

the list of prepaid plans coordinated

care plans (within the meaning of

section 1851(a)(2)(A) of the Act) offered

by an organization in accordance with a

contract with us under section 1857 of

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

was also amended by section 524(a) of

the Balanced Budget Refinement Act of

1999 (BBRA) (Pub. L. 106–113, enacted

on November 29, 1999), which added a

new paragraph (E). Paragraph (E)

includes in the prepaid plans exception

services referred by a physician to an

organization that is an M+C

organization under Part C that is

offering a coordinated care plan

described in section 1851 of the Act [42

U.S.C. 1395w–21(a)(2)(A)] to an

individual enrolled with the

organization.

The Final Rule: Virtually all

commenters agreed with our decision to

interpret the prepaid plan exception to

protect any referrals by physicians for

DHS covered by the listed Medicare

managed care plans to an MCO that has

a Medicare managed care contract or

any entity, provider, or supplier

furnishing these services under a

contract or subcontract with the MCO,

directly or indirectly (‘‘downstream

providers’’). Several commenters asked

that we amend the regulations text to

reflect the interpretation. We are

amending the text of § 411.355(c) to

make clear that downstream providers

are protected.

We are not finalizing at this time the

proposed new § 435.1012 (Limitation on

FFP related to prohibited referrals),

paragraph (b) (Exception for services

furnished to enrollees on a

predetermined, capitated basis), which

would have extended the protection to

certain prepaid plans under Medicaid.

A number of commenters agreed with

our proposed exception for services

provided by organizations analogous to

those cited in section 1877(b)(3) of the

Act. These and other commenters

suggested that a number of other

Medicare or Medicaid arrangements be

included in the exception, including

M+C coordinated care plans, Medicaid

managed care plans under the BBA

1997, Medicaid managed care entities

operating under a waiver pursuant to

section 1115 of the Act, any

demonstration project approved by us,

including primary care case

management programs (PCCMs) and

managed long term care programs

(MLTCs), programs of all-inclusive care

for the elderly (PACE), capitated

Medicare demonstration programs

(including social health maintenance

organizations (SHMOs), the Medicare

subvention demonstration, and the

Medicare prepaid competitive pricing

demonstration). The commenters

pointed out that although the preamble

to the January 1998 proposed rule had

proposed to include some of the above

programs in the new exception, they

had not been referenced in the

regulations text. We agree with the

commenters on adding the Medicaid

organizations that are analogous to those

912 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

in section 1877(b)(3) of the Act as

described in the January 1998 proposed

rule and on some of the other listed

areas; however, we will address

Medicaid managed care, and potentially

other suggestions related to Medicaid

managed care raised by the commenters,

in Phase II of this rulemaking.

We are also revising in Phase I of this

rulemaking the proposed regulations in

response to comments expressing

concerns about the impact of the

January 1998 proposed rule on

commercial and employer-provided

managed care arrangements. First, we

are creating a new compensation

exception for remuneration pursuant to

a bona fide ‘‘risk-sharing arrangement’’

between a physician and a health plan

for the provision of items or services to

enrollees of the health plan, even when

such an arrangement does not fall

within existing statutory exceptions.

(We note that the new risk-sharing

arrangement exception differs from the

shared risk exception to the antikickback statute at §§ 1001.952(t) and

(u); for example, unlike the antikickback exception, the new exception

under section 1877 of the Act contains

no conditions related to the volume of

Medicare beneficiaries enrolled in the

health plan or the quantification of the

financial risk.) Physicians generally are

compensated for services to managed

care enrollees in one of three ways, the

first two of which do not vary based on

the volume or value of referrals: (1) A

salary in the case of a physician who is

an employee, (2) a ‘‘fee-for-service’’

contractual arrangement under which

the physician assumes no risk, or (3) a

risk-sharing arrangement, under which

the physician assumes risk for the costs

of services, either through a capitation

arrangement, or through a withhold,

bonus, or risk-corridor approach. The

first two compensation arrangements are

eligible for the statutory exceptions for

bona fide employment relationships and

personal service arrangements, while

the third is potentially eligible for the

new risk-sharing arrangement exception

we are creating in this final rule in

§ 411.357(n).

Second, we are revising the definition

of ‘‘entity’’ in § 411.351 to permit

physician ownership of network-type

HMOs, MCOs, provider-sponsored

organizations (‘‘PSOs’’) and

independent practice associations

(‘‘IPAs’’). Specifically, we are clarifying

the definition of entity furnishing DHS,

to provide that a person or entity is

considered to be furnishing DHS if it is

the person or entity to which we make

payment for the DHS, directly or upon

assignment on the patient’s behalf,

except that if the person or entity has

reassigned its right to payment to (i) an

employer pursuant to § 424.80(b)(1), (ii)

a facility pursuant to § 424.80(b)(2), or

(iii) a health care delivery system,

including clinics, pursuant to

§ 424.80(b)(3) (other than a health care

delivery system that is a health plan (as

defined in § 1000.952(l)), and other than

any MCO, PSO, or IPA with which a

health plan contracts for services

provided to plan enrollees), the person

or entity furnishing DHS is the person

or entity to which payment has been

reassigned. We are providing further

that 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) is the entity

furnishing DHS for any services

provided by such supplier.

We believe these changes address the

comments we received from the

commercial and employer-sponsored

managed care plans.

Comment: While commenters

uniformly welcomed the broad

protection given in the January 1998

proposed rule to referrals for services

covered by Medicare prepaid health

plans, several commenters stated that

we interpreted several provisions of the

statute in a manner that, taken together,

would severely limit MCOs’ use of

physician incentive plans, whether

under commercial or Medicare

contracts. The commenters strongly

objected to our statement that the

prohibition on DHS referrals applies to

referrals to entities that arrange for the

furnishing of the DHS to Medicare or

Medicaid patients by contracting with

other providers, whenever the arranging

entity also bills Medicare or Medicaid

for the services. (See 63 FR 1706.) The

commenters explained that this view,

when joined with our interpretation of

section 1877(e)(3)(B) of the Act (the

physician incentive plan provision in

the personal service arrangements

exception), could effectively preclude

the use of risk-sharing arrangements

with physicians in any health plan,

including commercial plans. The

commenters explained the problem as

follows:

• Physicians that participate in a

managed care network will have a

compensation arrangement with the

MCO for payment for services to the

MCO’s enrollees. That payment

arrangement will create a financial

relationship for purposes of section

1877 of the Act. (Even participation in

the network of an organization eligible

for the Medicare prepaid plans

exception would not entirely avoid this

result, since the prepaid plans exception

only protects referrals for DHS

furnished to beneficiaries enrolled

under the Medicare contract). Many of

these compensation arrangements use

withholds, capitation, bonuses, or other

methodologies that take into account,

directly or indirectly, the volume or

value of referrals or other business

generated by the referring physician.

• Most, if not all, commercial or

employer-provided group health plans

offered by MCOs include some enrollees

who are Medicare beneficiaries.

Typically, these enrollees either are

retired employees who have expanded

benefits under an employer-provided

plan (in which case Medicare is the

primary insurer and the employer plan

secondary) or are beneficiaries who

have group health plan coverage based

on current employment status (in which

case the employer plan is the primary

insurer and Medicare secondary). Even

the MCOs that have Medicare managed

care lines of business that are protected

by the prepaid plans exception

commonly have commercial lines of

business that include some Medicare

beneficiaries who are not enrolled under

the organization’s Medicare contract

(that is, Medicare’s payment is made on

a fee-for-service basis under the

traditional Medicare program).

• When a Medicare beneficiary is

enrolled in a commercial or employerprovided group health plan, Medicare

often pays for services provided by the

plan to the beneficiary/enrollee on a feefor-service basis. In such a case, if

Medicare is the primary insurer, it will

reimburse the provider according to the

same provisions as any fee-for-service

provider; if Medicare is the secondary

insurer, it will pay based on a formula

prescribed by law.

• Generally, if an enrollee of a

commercial or employer-provided

health plan has primary coverage under

Medicare, the network physician or

supplier (not the MCO) will submit the

claim to Medicare directly, since

Medicare is the primary insurance.

However, many, if not all, such MCOs

will occasionally bill Medicare for

services provided by network providers

to these Medicare beneficiaries. Most

often, the purpose of the billing is to

coordinate with Medicare when

Medicare is the secondary payer.

Occasionally, the MCOs may bill

Medicare as the primary payer; for

example, when there has been a recent

change in beneficiary status, such as

when a beneficiary’s group health plan

coverage ceases being based on current

employment status because the

beneficiary retires and Medicare

becomes the primary insurer. Of course,

MCOs may bill and be paid by Medicare

only where the MCO meets the criteria

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 913

for direct payment, assignment of

benefits or reassignment of benefits.

(See §§ 424.73 and 424.80 of these

regulations.)

• Accordingly, under the

interpretation in the January 1998

proposed rule, a physician in the MCO

network will be deemed to make a

referral to the MCO for the provision of

a DHS whenever the physician refers an

enrollee of the MCO’s commercial plan

who also happens to be a Medicare

beneficiary to another network provider

for DHS. (Referrals of enrollees in any

of the excepted prepaid plans would not

be affected since they are not referrals

of DHS by virtue of the prepaid plans

exception.)

• As a result, unless all of the MCO’s

payment arrangements with network

physicians, regardless of the line of

business, fit in an exception under

section 1877 of the Act, the referral of

any enrollee with primary or secondary

coverage under Medicare for a

designated health service would be

prohibited.

• The only kinds of physician

compensation arrangements that are

protected by the personal service

arrangements exception in the proposed

rule are (1) fixed per-service payments

based on fair market value (for example,

discounted fee-for-service arrangements)

or (2) payment arrangements that

incorporate risk-sharing elements, such

as bonuses or withholds, provided they

qualify as a physician incentive plan

under section 1877(e)(3)(B) of the Act.

• However, many payment

arrangements in commercial or

employer-provided health plans contain

risk-sharing elements that take into

account a physician’s referrals or the

volume of services provided but that do

not currently comply with the physician

incentive plan regulations. These

arrangements would have to be

restructured. Moreover, even if

restructured, the physician incentive

plan regulations contain a number of

requirements that would require

revision if they are to be implemented

with respect to non-M+C plans.

• Lastly, in the preamble to our

January 1998 proposed rule, we stated

that section 1877(e)(3)(B) of the Act only

applied to compensation arrangements

directly between the ‘‘entity’’ (that is,

the MCO) and the physician; any

compensation arrangements between a

physician and party other than the

MCO, such as an IPA or other

subcontractor, would not qualify as a

physician incentive plan.

The commenters asserted that the net

effect of our interpretation in the

January 1998 proposed rule of when an

entity was furnishing DHS provided by

another entity would be the total

disruption of commercial and employerprovided health plans. The only way an

MCO could assure that its physician

compensation arrangements were in

compliance with section 1877 of the Act

would be to restructure all its payment

arrangements to pay all physicians for

all lines of business on a discounted feefor-service basis. Moreover, since the

MCOs and, in many instances,

subcontractors such as IPAs would also

be entities furnishing DHS, any

physician ownership of such entities

would be a prohibited investment

interest unless an appropriate exception

applied.

Response: Nothing in the legislative

history suggests that section 1877 of the

Act was intended by the Congress to

require the wholesale restructuring of

commercial managed care arrangements

with physicians. Accordingly, we are

making two major changes to the

January 1998 proposed rule that we

believe will address the commenters’

concerns. First, as noted above, we are

creating a new compensation exception

for bona fide risk-sharing arrangements

between a health plan and providers for

services provided to plan enrollees that

do not otherwise qualify for an existing

statutory exception. This exception will

address concerns related to the

prohibition on compensation

arrangements in section 1877 of the Act.

Second, we are revising our definition

of ‘‘entity’’ to clarify that a person or

entity is considered to be furnishing

DHS if it is the person or entity to which

we make payment for the DHS, directly

or upon assignment on the patient’s

behalf, except that if the person or entity

has reassigned its right to payment to (i)

an employer pursuant to § 424.80(b)(1),

(ii) a facility pursuant to § 424.80(b)(2),

or (iii) a health care delivery system,

including clinics, pursuant to

§ 424.80(b)(3) (other than a health care

delivery system that is a health plan (as

defined in § 1000.952(l)), and other than

any MCO, PSO, or IPA with which a

health plan contracts for services

provided to plan enrollees), the person

or entity furnishing DHS is the person

or entity to which payment has been

reassigned. We are providing further

that 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) is the entity

furnishing DHS for any services

provided by such supplier. We believe

this change should address the possible

adverse impact on physician ownership

of MCOs and IPAs.

With respect to the first change, we

are creating in § 411.357(n) a new

exception under section 1877(b)(4) of

the Act for bona fide risk-sharing

compensation arrangements between an

MCO and a physician (either directly or

indirectly through a subcontractor) for

services to enrollees of a health plan.

(For purposes of the new exception, we

are incorporating the definitions of

‘‘health plan’’ and ‘‘enrollees’’ found in

§ 1001.952(l).) The vast majority of

Medicare and Medicaid beneficiaries in

managed care plans are either in M+C

plans or Medicaid managed care plans,

both of which are already required to

comply with the physician incentive

plan regulations. As to the relatively

small number of Medicare beneficiaries

in commercial or employer-sponsored

plans that do not necessarily satisfy

physician incentive plan requirements,

or otherwise qualify for an existing

exception under section 1877 of the Act,

we are not currently aware of any fraud

or abuse involving the Medicare

program or Medicare beneficiaries

arising from physician risk-sharing

arrangements in these commercial or

employer-provided health plans. Given

the potential for the unintended

disruption of these arrangements

described by the commenters and the

administrative need for ‘‘bright line’’

rules, we believe the new physician

risk-sharing arrangements exception to

section 1877 of the Act is needed. We

will continue to monitor these

arrangements for possible abuse and, if

necessary, may revisit the issue in the

future.

With respect to the second change,

the potential impact of the January 1998

proposed rule on physician ownership

of MCOs and IPAs was attributable to

our interpretation that an MCO or IPA

was an entity furnishing DHS provided

by another entity whenever it billed for

the services provided by another entity

pursuant to a contract with the MCO or

IPA. As noted above, in response to the

above comment, we are amending the

definition of ‘‘entity’’ in § 411.351 to

clarify that a health plan, or an MCO,

PSO, or IPA with which the plan

contracts directly or indirectly for

services to plan enrollees, will only be

considered to be furnishing DHS when

the health plan, MCO, PSO, or IPA

furnishes the services directly (that is,

through an employee), or otherwise is

the entity to which we make payment

for the DHS, either directly or upon

assignment on the patient’s behalf, or

pursuant to a valid reassignment under

the Medicare rules and regulations to (i)

an employer pursuant to § 424.80(b)(1),

(ii) a facility pursuant to § 424.80(b)(2),

or (iii) a health care delivery system,

including clinics, pursuant to

914 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

§ 424.80(b)(3) (other than a health care

delivery system that is a health plan (as

defined in § 1000.952(l)), and other than

any MCO, PSO, or IPA with which a

health plan contracts for services

provided to plan enrollees). We are

providing further that 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) is

the entity furnishing DHS for any

services provided by such supplier.

We believe this change should allow

for physician ownership of most types

of network IPAs and MCOs. Ownership

or investment interests in entities,

including MCOs and IPAs, that provide

DHS directly would still be prohibited

(absent an applicable exception).

Moreover, any indirect financial

arrangements between physicians and

the entities directly providing DHS

would need to be analyzed to ensure

there are no prohibited indirect

financial relationships. For example, an

MCO may have an investment interest

in a lab, and a physician that contracts

with that MCO may refer a Medicare

beneficiary to that lab for DHS, for

which Medicare is billed on a fee-forservice basis. While the MCO would not

be considered to be furnishing the DHS

for purposes of section 1877 of the Act,

the lab in which the MCO has an

investment interest would be furnishing

DHS. Since the physician has a financial

relationship with the MCO, and the

MCO has an investment interest in the

lab, there may be an indirect financial

relationship that would then have to fit

in an exception, most likely the indirect

compensation arrangement exception or

the risk-sharing arrangement exception.

(See discussion in section III.A of this

preamble.)

Finally, in Phase II of this rulemaking,

we expect to amend the January 1998

proposed regulations for the personal

service arrangements exception to

reflect that risk-sharing compensation

arrangements between entities

downstream of a Medicare MCO can

qualify as physician incentive plans

within the meaning of section

1877(e)(3)(B) of the Act; this

interpretation is consistent with our

interpretation in the Medicare physician

incentive plan regulations in §§ 422.208

and 422.210.

We believe these provisions will

address the commenters’ concerns.

Comment: One commenter stated that

even if the MCO itself directly provided

DHS pursuant to a physician referral,

the MCO’s compensation arrangement

with the referring physician should not

be deemed to take into account the

volume or value of referrals for DHS

unless the risk-sharing arrangement was

based in part on the utilization or cost

of the DHS provided directly by the

MCO.

Response: For purposes of the

personal service arrangements

exception, the compensation from the

MCO does not take into account ‘‘the

volume or value of referrals or other

business generated between the parties’’

unless the compensation varies based

on the volume or value of the MCO’s

business that is generated by the

physician. (See the discussion of

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

generated’’ in section V of this

preamble.) We have addressed the issue

of physician risk-sharing arrangements

(including, but not limited to, capitation

payments, bonuses, and withholds) with

commercial and employer-sponsored

managed care plans by creating a new

exception under section 1877(b)(4) of

the Act for bona fide risk-sharing

compensation arrangements between an

MCO and a physician (either directly or

indirectly through a subcontractor) for

services to enrollees of a health plan.

Comment: Several commenters were

unclear whether physicians who

participate in a managed care network

would be prohibited from referring

Medicare fee-for-service patients who

are not enrollees of a managed care plan

for DHS to other providers in the

managed care network simply because

both providers had contractual

relationships with the same MCO.

Response: Physicians who participate

in a managed care network would not be

prohibited from referring Federal feefor-service patients who are not

enrollees of a managed care plan for

DHS to other providers with contractual

relationships with the same MCO solely

on the basis of the parallel contractual

arrangement with the MCO. In other

words, two physicians who contract

with an MCO do not have a financial

relationship with each other for

purposes of section 1877 of the Act on

that basis alone. However, they may

have other financial relationships

(including indirect financial

relationships) that would bar their

referrals (in the absence of an applicable

exception).

Comment: Several commenters asked

that we create an exception for

nongovernment plans that include any

significant cost-sharing elements. This

exception would be similar to the

exception in the Federal anti-kickback

statute for risk-sharing arrangements.

Response: As discussed earlier, we

have created a new exception for bona

fide risk-sharing compensation

arrangements between health plans and

physicians. The exception we are

creating is substantially broader than

the shared risk exception in the Federal

anti-kickback statute.

Comment: Another commenter asked

that we create an exception to permit

public hospitals to enter into incentive

arrangements with physician groups for

the treatment of the public hospital’s

patients. One commenter also suggested

that we create an exception for

commercial managed care product lines

that serve fewer than 20 percent

Medicare patients as part of the group

and that are not marketed directly to

Medicare patients.

Response: As described above, we

have created a risk-sharing

arrangements exception in § 411.357(n)

that should address the commenter’s

concern regarding commercial managed

care arrangements. With respect to the

request to create an exemption for

public hospital patients, the commenter

provided no explanation of the types of

arrangements proposed to be excepted,

and we see no reason why these

arrangements could not be subject to

abuse.

Comment: Two commenters asked us

to clarify that the prepaid plan

exception protects any DHS provided to

any enrollee of any plan (including

commercial or employer-sponsored

plans) offered by an entity that either is

a Federally-qualified HMO or has a

contract under one of the programs cited

in section 1877(b)(3) of the Act. One of

the commenters asked us to clarify that

services to persons covered under an

employer self-funded health plan that is

administered by an entity with a

qualified contract under section

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

MCO’s network of providers would also

be exempt under the prepaid plan

exception.

Response: We believe that the

Congress intended that the exception in

section 1877(b)(3) of the Act protect

only the financial arrangements for

services to enrollees of the prepaid

plans identified in section 1877(b)(3).

We see no basis for concluding that

because an entity has one contract

covering a specific population, there is

any protection against abusive

relationships in other product lines.

Accordingly, we are clarifying the

regulation to state that the protection

extends only to financial arrangements

for the services to enrollees of the plans

specifically identified in the regulation

and does not protect enrollees in any

other plan or line of business furnished

by the MCO or to which the MCO

provides administrative services.

Comment: One commenter suggested

that we use the definition of health plan

and enrollee set forth in the managed

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 915

care safe harbor regulations to the

Federal anti-kickback statute, § 1001.952

(Exceptions), paragraph (l) (Increased

coverage, reduced cost-sharing amounts,

or reduced premium amounts offered by

health plans). The commenter stated

that it was unclear from the preamble of

the January 1998 proposed rule whether

employees covered by an employer selffunded plan that utilized a commercial

insurer to administer the plan would be

considered ‘‘enrollees’’ of the

commercial insurer for purposes of the

prepaid plan exception and for

application of the physician incentive

plan provision of the personal service

arrangements exception.

Response: We agree that employer

self-funded plans should be able to

qualify for protection of their physician

compensation arrangements. We believe

the new risk-sharing compensation

exception will address the commenters’

concerns. For purposes of the new

exception, we are incorporating the

definitions of ‘‘health plan’’ and

‘‘enrollee’’ from the safe harbor

regulations for certain health plans set

forth in § 1001.952(l)(2). This definition

would result in equal treatment for selffunded plans and insured plans.

Comment: One commenter requested

that we interpret section 1877 of the Act

to ‘‘grandfather’’ any pre-existing

managed care arrangements. The same

commenter asked that we broaden the

exception for personal service

arrangements to protect quality-related

incentive plans that take into account

the volume or value of DHS referrals.

Response: The statutory provisions

clearly envision their application to

managed care plans. Accordingly, a

blanket ‘‘grandfather’’ provision for

these plans is inappropriate. With

respect to the request for protection of

quality-related incentive plans, the

commenter did not provide any details

as to the kind of incentives being

described. We do not perceive any

impediment in the regulation that

would preclude basing compensation on

quality measures unrelated to the value

or volume of DHS referrals or other

business generated by the physician.

However, absent further clarification,

we are not inclined to protect any

arrangement that takes into account

referrals or business generated by the

physician.

Comment: One commenter requested

that we create a new exception for

payer-directed services. According to

the commenter, in managed care

arrangements, the payer is the party that

directs the referrals for DHS and not the

physician who is contractually obligated

to refer in the network. Another

commenter stated that, in the managed

care environment, our proposed

presumption in the January 1998

proposed rule that a physician has

referred a patient to an entity with

which he or she has a financial

relationship if the patient, in fact,

procures the services from this entity—

even if there is no order or written plan

of care—should not be applied.

Response: We believe the changes we

have made to accommodate various

financial relationships between

managed care organizations and

physicians should address the referral

issues in the managed care

environment.

Comment: Several commenters asked

that the provision in the group practice

definition permitting employees to

receive productivity bonuses be

expanded to permit remuneration based

on volume or value of DHS referrals if

the arrangement complies with the

physician incentive plan regulations as

permitted in the personal service

arrangements exception. The

commenters noted that in some

arrangements, the employed physicians

have separate contracts with the MCO,

while in others the contract is between

the MCO and the group, making it

important to permit the group to

incentivize its employed physicians.

According to the commenters,

employers should have at least as much

latitude in structuring their

compensation arrangements with

employees as with independent

contractors. The commenters suggested

that the group practice definition

already expressly permits productivity

bonuses indirectly tied to referrals—a

greater concern since overutilization is

the primary concern of section 1877 of

the Act. In light of that provision, one

commenter believes it is incongruous to

prohibit physician incentive plan

arrangements that discourage utilization

if they comply with the physician

incentive plan regulations.

Response: We agree that, at least in

the managed care environment, there is

little reason to impose a more restrictive

requirement on compensation

arrangements between a group and its

employees than on arrangements

between the group and its independent

contractors. However, this concern is

only one aspect of the broader

relationship between the group practice,

personal service arrangement, and bona

fide employment relationship

exceptions that is discussed in sections

IV and VI.C.8 of this preamble.

Comment: Several commenters asked

that we clarify the reporting obligations

of plans that are not technically subject

to the physician incentive plan

regulations, since they are not Medicare

or Medicaid managed care plans (or

M+C plans), but that are complying with

the regulations to qualify their financial

arrangements with physicians for the

personal service arrangements exception

in section 1877 of the Act.

Response: The various reporting

requirements associated with, or

triggered by, the regulation will be

addressed in Phase II of this rulemaking.

VII. New Regulatory Exceptions

This section describes new regulatory

exceptions that are not in the statute,

but which appeared in the January 1998

proposed rule or that we have created in

response to comments and pursuant to

statutory authority conferred on the

Secretary. The new exceptions

discussed here include: Academic

medical centers, fair market value, and

non-monetary compensation up to $300

(and medical staff benefits). Other new

exceptions described elsewhere in this

preamble include: Implants in an ASC

(§ 411.355(e); section VIII.J of this

preamble); EPO and other dialysisrelated drugs (§ 411.355(f); section VIII.L

of this preamble); preventive screening

tests, immunizations, and vaccines

(§ 411.355(h); section VIII.L of this

preamble); risk-sharing arrangements

(§ 411.357(n); section VI.D of this

preamble); compliance training

programs (§ 411.357(o); section VII.C of

this preamble); eyeglasses and contact

lenses (§ 411.355(i); section VIII.J of this

preamble); and indirect compensation

arrangements (§ 411.354(c)(3); section

III.A of this preamble).

A. Academic Medical Centers

The Existing Law: Section 1877(h)(4)

of the Act contains a special rule for

faculty practice plans. The rule provides

that ‘‘in the case of a faculty practice

plan associated with a hospital,

institution of higher education, or

medical school with an approved

medical residency training program in

which physician members may provide

a variety of different specialty services

and provide professional services both

within and outside the group, as well as

perform other tasks such as research,

subparagraph (A) [the definition of

‘‘group practice’’] shall be applied only

with respect to the services provided

within the faculty practice plan.’’

Several commenters to the August

1995 final rule suggested that we create

a separate exception for faculty practice

plans, since these plans are typically

involved in complex organizational

arrangements that do not fit

comfortably—or at all—in the group

practice definition. At the time of the

August 1995 final rule, we rejected the

suggestion for a new exception based on

916 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

our view that the personal service

arrangements exception and the

employment exception would provide

physicians in academic medical settings

with appropriate protection under

section 1877 of the Act.

The Proposed Rule: We proposed no

changes.

The Final Rule: We have revisited our

prior position. The comments have

persuaded us that academic medical

practices raise numerous questions

under section 1877 of the Act that are

not adequately addressed by existing

exceptions.

Though the relevant provision in the

group practice definition is somewhat

obscure, we believe it demonstrates

congressional intent to address the

circumstances of physicians practicing

in academic medical settings. We do not

believe, however, that the core problem

of how to treat academic medical

practices under section 1877 of the Act

is amenable to resolution under the

group practice definition; the problem

lies elsewhere.

Academic medical settings often

involve multiple affiliated entities that

jointly deliver health care services to

patients (for example, a faculty practice

plan, medical school, teaching hospital,

outpatient clinics). There are frequent

referrals and monetary transfers

between these various entities, and

these relationships raise the possibility

of indirect remuneration for referrals.

The exceptions under section 1877 of

the Act do not easily apply. For

example, faculty practice plan

physicians refer patients for ancillary

services to entities that are outside of

(and not wholly owned by) the single

legal entity in which they conduct their

medical practices (that is, the ‘‘group

practice’’), but with which they may

have direct or indirect compensation

relationships (for example, part of the

physician’s compensation may come

from an affiliated medical school or

teaching hospital). These referrals

typically will not qualify under the inoffice ancillary services exception, and

it may be difficult to structure

compensation relationships for faculty

practice plan physicians that securely fit

in the personal service arrangements

exception because the physician’s

compensation often comes directly or

indirectly from several separate sources.

Having reviewed the comment letters

addressing the problems facing faculty

practice plans under section 1877 of the

Act, we believe the fundamental need of

faculty practice plans is for a separate

compensation exception for payments to

faculty of academic medical centers that

takes into account the unique

circumstances of a faculty practice,

including the symbiotic relationship

among faculty, medical centers, and

teaching institutions, and the

educational and research roles of faculty

in these settings. Therefore, we are

using our regulatory authority under

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

separate compensation exception for

payments to faculty of academic

medical centers that meet certain

conditions that ensure that the

arrangement poses essentially no risk of

fraud or abuse. This exception is in

addition to other exceptions that may

apply in particular circumstances; an

arrangement need only fit in one

available exception.

The conditions applicable under the

new exception in § 411.355(e)(1)(i) are

that the referring physician is a bona

fide employee of a component of an

academic medical center on a full-time

or substantial part-time basis, is

licensed to practice medicine in the

State, has a bona fide faculty

appointment at the affiliated medical

school, and provides either substantial

academic or substantial clinical

teaching services for which the faculty

member receives compensation as part

of his or her employment relationship

with the academic medical center. The

purpose of this condition is to ensure

that protected physicians are truly

engaged in an academic medical

practice. The exception does not apply

to payments to physicians who provide

only occasional academic or clinical

teaching services or who are principally

community rather than academic

medical center practitioners.

Under the new exception in

§ 411.355(e)(1)(i)(A), a ‘‘component’’ of

an academic medical center means an

affiliated medical school, faculty

practice plan, hospital, teaching facility,

institution of higher education, or

departmental professional corporation.

For purposes of this exception, an

academic medical center may have

some, but need not have all, of these

components. As indicated in the

preceding provision, however, the

minimum requirements are a medical

school, a faculty practice plan, and a

hospital.

Under the new exception in

§ 411.355(e)(1)(ii), the total

compensation paid for the previous 12-

month period (or fiscal year or calendar

year) from 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

within the academic medical center. As

with the corresponding provisions in

the personal service arrangements,

employee, and fair market value

exceptions, this provision requires that

remuneration to physicians be for bona

fide services provided by the physicians

and not for referrals. In determining fair

market value for services in an academic

medical practice, we believe the

relevant comparison is aggregate

compensation paid to physicians

practicing in similar academic settings

located in similar environments.

Relevant factors include geographic

location, size of the academic

institutions, scope of clinical and

academic programs offered, and the

nature of the local health care

marketplace. Nothing in this regulation

is intended to preclude productivity

bonuses paid to academic medical

center physicians on the basis of

services they personally perform.

Under the new exception in

§ 411.355(e)(2), the ‘‘academic medical

center’’ for purposes of this section shall

consist of—(1) an accredited medical

school (including a university, when

appropriate); (2) an affiliated faculty

practice plan that is a nonprofit, taxexempt organization under section

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

Revenue Code (or is a part of such an

organization under an umbrella

designation); and (3) one or more

affiliated hospital(s) in which a majority

of the hospital medical staff consists of

physicians who are faculty members,

and where a majority of all hospital

admissions are made by physicians who

are faculty members. This provision

ensures that the exception only protects

physician compensation in genuine

academic medical settings. This new

exception reflects our view that the

predominant purpose of an academic

medical center is to teach new

physicians and to run medical practices

that support the teaching mission.

To fit within the new exception in

§ 411.355(e)(3), the academic medical

center must meet the following

conditions:

• 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. This provision ensures that the

academic medical center is bona fide

and that transfers of funds are not

inappropriate payments of indirect

compensation for referrals. We believe

that patient care is integral to an

academic medical center’s community

service mission.

• The relationship of the components

of the academic medical center must be

set forth in a written agreement that has

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 917

been adopted by the governing body of

each component. This provision

requires a bona fide affiliation between

the medical center components.

• All money paid to a referring

physician for research must be used

solely to support bona fide research. We

are concerned that research funding

could be used to disguise additional

payments for referrals. We are including

this provision to ensure that money

earmarked (intended or designated) for

research is used solely for research

purposes.

Under the new exception in

§ 411.355(e)(4), the referring physician’s

compensation arrangement must not

violate the anti-kickback statute (section

1128B(b) of the Act) and billing and

claims submission must be proper. As

with all exceptions created under

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

provision is necessary to ensure that the

arrangement poses no risk of fraud or

abuse.

Comment: As noted above,

commenters pointed out that the

structure of faculty practice plans can be

very complicated; for example,

physicians in a faculty practice plan

may be compensated by one entity, but

conduct their medical practice through

a separate entity and order laboratory

and other ancillary services from

additional related entities (for example,

the teaching hospital, the university’s

research laboratory for highly

specialized testing, in-office laboratories

within the faculty departments that may

or may not be incorporated as

professional corporations). As a result,

arrangements between and among the

various sub-entities of such faculty

practice plans can raise a number of

issues under section 1877 of the Act. In

particular, the question arises whether

each separate legal entity and

relationship among legal entities must

meet an exception under section 1877 of

the Act.

Commenters appealed for a separate

exception for faculty practice plans,

insisting that faculty practice plans pose

a minimal risk of abuse under section

1877 of the Act. First, they asserted that

physicians in faculty practice plans are

less likely to make abusive referrals than

their more entrepreneurial counterparts

in private practice because they practice

in a setting that focuses on academic

pursuits and patient care at affiliated

teaching hospitals and clinics. Second,

they stated that many faculty practice

plans include not-for-profit

organizations that are regulated under

IRS rules that forbid private inurement

and private benefit.

Response: As explained in the

introduction to this section of the

preamble, we have revisited the issue of

academic medical practices and are

persuaded that academic medical

practices present unique concerns under

section 1877 of the Act that warrant a

separate exception. Our new exception

is described in the introduction. We

believe that faculty practice plans will

pose little risk of fraud or abuse under

the conditions set forth in the new

exception. We are not persuaded that

physicians in faculty practice plans are

necessarily less economically-motivated

than their private practice counterparts

or that regulation under IRS rules,

though beneficial, is sufficient to

prevent fraud or abuse.

Comment: A commenter suggested

that the group practice definition and

the requirements of the in-office

ancillary services exception or personal

service arrangements exception should

be applied only at the level of the

‘‘umbrella’’ organization (that is, the

organization that encompasses all the

physicians within the faculty practice

plan) for the entire faculty practice, thus

obviating the need for each legal entity

within the same academic setting to

meet the provisions of section 1877 of

the Act.

Response: In light of the new

exception, we see no need to create new

rules under existing exceptions for

faculty practice plans. Parties may use

the new exception or existing

exceptions, depending on their

individual circumstances.

Comment: As an alternative to a

separate exception for faculty practice

plans, one commenter urged that faculty

practice plans be permitted to have

independent contractors as ‘‘members’’

during the time they are providing

services to the group. The commenter

expressed the view that this solution

would be preferable to requiring the

faculty practice plan to employ such

individuals.

Response: In light of the new

compensation exception for physicians

in faculty practice plans, we see no need

to alter the definition of ‘‘member of the

group’’ for academic medical practices.

The definition of a ‘‘group practice’’

expressly includes a ‘‘faculty practice

plan,’’ and any faculty practice plan that

fits in the definition is a ‘‘group

practice’’ for purposes of section 1877 of

the Act.

Comment: A commenter observed that

under section 1877(b)(4)(B)(ii) of the Act

a faculty practice plan qualifies as a

group practice based solely on the

services provided and revenue

generated by the participating

physicians within the faculty practice

plan, regardless of the outside activities

of those physicians. The commenter

sought clarification that the converse

would also be true, that time and

revenue allocable to a physician’s

faculty practice would not count against

the ‘‘group practice’’ status of his

outside medical group.

Response: The outside medical group

must qualify for group practice status

under the tests described in section

1877(h)(4) of the Act (§ 411.352 of the

regulations) and in this preamble at

VI.C. Time and revenue allocable to a

physician’s faculty practice would be

treated as all other outside time and

revenue for purposes of those tests. In

other words, such time and revenue

would be treated no differently than

time group practice physicians who are

not in faculty practice plans spend

supervising residents or conducting

research.

B. Fair Market Value (§ 411.357(l))

The Proposed Rule. This proposed

rule created an exception for

compensation relationships that are

based upon fair market value and meet

certain other criteria. This exception is

available for compensation

arrangements between an entity and

either a physician (or immediate family

member) or any group of physicians

(even if the group does not meet the

definition of group practice set forth in

§ 411.351), as long as the compensation

arrangement—

• Is in writing, is signed by the

parties, and covers only identifiable

items or services, all of which are

specified in the agreement;

• Covers all of the items and services

to be provided by the physician (or

immediate family member) to the entity

or, alternatively, cross refers to any

other agreements for items or services

between these parties;

• Specifies the time frame for the

arrangement, which can be for any

period of time and contain a termination

clause, provided the parties enter into

only one arrangement covering 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;

• Specifies the compensation that

will be provided under the arrangement,

which has been set in advance. The

compensation must be consistent with

fair market value and not be determined

in a manner that takes into account the

volume or value of any referrals (as

defined in § 411.351), payment for

referrals for medical services that are

not covered under Medicare or

Medicaid, or other business generated

between the parties;

918 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

• Involves a transaction that is

commercially reasonable and furthers

the legitimate business purposes of the

parties; and

• Meets a safe harbor under the antikickback statute or otherwise is in

compliance with the anti-kickback

provisions in section 1128B(b) of the

Act.

The Final Rule: Except for the

revisions described below, Phase I of

this rulemaking adopts the proposed

regulation. The revisions include:

• Elimination of the requirement that

the written document cross-reference

other agreements between the parties.

• Revision of the ‘‘set in advance’’

language to conform the exception to

other exceptions in which that language

appears. ‘‘Set in advance,’’ as used in

the fair market value exception, will

have the uniform meaning described in

section V of this preamble and

§ 411.354(d) of the regulations.

• Revision of § 411.357(l)(3) to

conform to our uniform interpretation of

the volume or value standard in

§ 411.354(d) (discussed at section V of

this preamble).

• Revision of the proposal in

§ 411.357(l)(5) that required

‘‘compliance with’’ the anti-kickback

statute. Under the final regulations, the

compensation arrangement must—(1)

not violate the anti-kickback statute, (2)

comply with a statutory or regulatory

anti-kickback safe harbor, or (3) have

been approved by the OIG pursuant to

a favorable advisory opinion issued in

accordance with part 1008 (Advisory

Opinions of the OIG) of this chapter. In

addition, billing and claims submission

must be proper.

• Addition of a provision to mirror

section 1877(e)(3)(A)(vi) of the Act,

which clarifies that the services

performed under the agreement cannot

involve the counseling or promotion of

a business arrangement or other activity

that violates Federal or State law. While

we believe this condition is implied

throughout the statute, we are

conforming the new fair market value

exception to the Congress’s inclusion of

this same standard in the personal

service arrangements exception.

Comment: Several commenters

objected to the requirement that an

arrangement must meet a safe harbor

under the anti-kickback statute or

otherwise be in compliance with the

anti-kickback provisions in section

1128B(b) of the Act. First, commenters

pointed out that the anti-kickback

statute is an intent-based statute that

prohibits certain knowing and willful

conduct, whereas section 1877 of the

Act is not based upon intent. In

addition, one commenter was concerned

that a violation of the anti-kickback

statute by one party would preclude

both parties from using the fair market

value exception. Thus, the innocent

party who might be unaware of the

other party’s violation of the antikickback statute and relying on the fair

market value exception could

unknowingly violate section 1877 of the

Act. Second, several commenters stated

that few arrangements would meet the

requirements necessary to obtain safe

harbor protection under the antikickback statute. Therefore, such

arrangements would be excepted from

section 1877 of the Act only if they met

the standard of being ‘‘in compliance

with the anti-kickback statute.’’ These

commenters were concerned that ‘‘being

in compliance with the anti-kickback

statute’’ was a nebulous standard that

could only be accomplished with

certainty by obtaining an OIG advisory

opinion.

Response: In response to the concerns

of commenters, we have revised

§ 411.357(l)(5) of the regulations to

make it clear that for a compensation

arrangement to qualify for the fair

market value exception, it must meet

one of the following criteria:

• It must not violate the anti-kickback

statute.

• It must comply with a statutory or

regulatory anti-kickback safe harbor.

• It must have been approved by the

OIG pursuant to a favorable advisory

opinion issued in accordance with part

1008 of this title.

This revision is both a clarification of

the text set forth in the January 1998

proposed rule and an expansion of the

types of arrangements that may qualify

for the fair market value exception. In

particular, we are changing the

requirement from ‘‘being in compliance

with’’ the anti-kickback statute to

requiring that the arrangement not

violate the anti-kickback statute. The

revised language is more appropriate

with respect to a criminal statute, such

as the anti-kickback statute. In addition,

since the broad statutory language of the

anti-kickback statute technically covers

some relatively innocuous commercial

arrangements, and since the OIG has

promulgated regulations granting safe

harbor protection for some of these

arrangements (§ 1001.952 of this title),

we are revising the criteria to permit

compensation arrangements that comply

fully with a regulatory safe harbor.

Arrangements that comply with the

statutory exceptions at section

1128B(b)(3) of the Act also satisfy the

new criteria. Finally, any compensation

arrangement that has been approved by

the OIG pursuant to a favorable advisory

opinion issued in accordance with part

1008 of this title would meet the criteria

of § 411.357(l)(5). (We caution, however,

that only the requestor of an OIG

advisory opinion may rely on the

opinion for any purposes, including,

without limitation, the fulfillment of

this criteria. Therefore, all parties that

intend to rely on the advisory opinion

should be included as requestors.)

Finally, we address the scenario

where only one party has the requisite

intent (that is, acting knowingly and

willfully) to violate the anti-kickback

statute. In such a case, only the party

with the requisite intent would have

violated the anti-kickback statute.

However, if both parties relied on

meeting the ‘‘not in violation of the antikickback statute’’ standard to qualify for

the fair market value exception, the antikickback statute violation would

preclude the use of the fair market value

exception to section 1877 of the Act and

both parties would have violated section

1877 of the Act. Although we

understand the dilemma, we believe

that it would be unusual that only one

party to a compensation arrangement

would have the requisite intent for

violation of the anti-kickback statute. If

any one purpose of remuneration is to

induce or reward referrals of Federal

health care program business, the

statute is violated. (See United States v.

Kats, 871 F.2d 105 (9th Cir. 1989);

United States v. Greber, 760 F.2d 68 (3d

Cir.), cert. denied, 474 U.S. 988 (1985).)

Also, if the ‘‘innocent’’ party knows that

the compensation arrangement would

violate the anti-kickback statute but for

the lack of the requisite intent, that

party should be aware of the risk he or

she is facing and take action to ensure

that prohibited payments are not made.

In that situation, we would advise

structuring the arrangement to fit within

a safe harbor, if possible, or obtaining an

OIG advisory opinion.

For a discussion on the differences

between section 1877 of the Act and the

anti-kickback statute, together with an

analysis of the impact that the antikickback statute has on these regulatory

exceptions, see section II of this

preamble.

Comment: Some commenters

requested clarification regarding

whether services provided by an entity

to a physician would fit within the fair

market value exception. One commenter

was confused by the fact that the

preamble to the January 1998 proposed

rule implied that the exception would

cover any compensation arrangements

based upon fair market value, but the

rule itself implied that it only covered

arrangements where the physician (or

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 919

immediate family member) provided

items or services.

Response: This fair market value

exception only covers items or services

provided by a physician or any

immediate family member to an entity.

Depending on the facts, payments made

by a physician to an entity for items or

services furnished by the entity might

qualify for the exception for payments

by a physician which is set forth under

§ 411.357(i), provided that the

compensation is consistent with fair

market value and the payments are not

specifically excepted under another

provision in §§ 411.355 through

411.357.

Comment: One commenter requested

clarification regarding whether this

exception would be available if another

exception could apply.

Response: In the preamble to the

January 1998 proposed rule, we stated

that parties involved in a compensation

arrangement should use the fair market

value exception if they have doubts

about whether they meet the

requirements in the other exceptions

listed in § 411.357. We have

reconsidered our position. The parties

may use the fair market value exception

even if another exception potentially

applies. We believe that the safeguards

against overutilization included in the

fair market value exception are

sufficient to cover various types of

compensation arrangements, including

some arrangements that are covered by

other exceptions.

Comment: A couple of commenters

expressed concern regarding the

application of the fair market value

exception to legitimate physician

recruitment practices that do not

otherwise qualify for exception under

the physician recruitment exception set

forth at § 411.357(e). One commenter

was concerned that in order to meet the

‘‘commercially reasonable’’ and

‘‘legitimate business purposes’’

prerequisites, hospitals would be forced

to obtain costly experts’ reports

regarding recruiting incentives provided

in comparable situations. Another

commenter sought clarification

regarding whether the ‘‘commercially

reasonable’’ prerequisite was based

upon the specific business in which the

parties are involved or business in

general. This commenter was concerned

that some arrangements (for example,

loan forgiveness programs) might be

commercially reasonable in the context

of hospital/physician relationships, but

might not be commercially reasonable

from a general business perspective.

Response: Physician recruitment

arrangements might be covered by this

fair market value exception or the

physician recruitment exception,

depending on the specific facts

involved. However, we recognize that

many physician recruitment

arrangements that offer ‘‘extra’’

payments to induce physicians to

relocate will not be covered by the fair

market value exception, because

compensation offered for the

physician’s services exceeds the fair

market value for such services. We will

consider the comments on the

recruitment exception in Phase II of this

final rule.

With respect to determining what is

‘‘commercially reasonable,’’ any

reasonable method of valuation is

acceptable, and the determination

should be based upon the specific

business in which the parties are

involved, not business in general. In

addition, we strongly suggest that the

parties maintain good documentation

supporting valuation. Finally, with

respect to difficult cases, the parties

could seek an advisory opinion under

section 1877 of the Act. (See § 411.370.)

However, we cannot express opinions

on whether compensation represents

fair market value. (See § 411.370(c)(1).)

For further discussion of ‘‘fair market

value’’, see section VIII.B.3 of this

preamble.

Comment: One commenter thought

that it would be burdensome to require

inclusion of all items and services

provided by the physician (or

immediate family member) or a cross

reference to other pertinent agreements.

First, the commenter noted that there

may be no written agreement for certain

bona fide employment arrangements.

Therefore, if an immediate family

member of a physician is employed by

the entity and there is no written

employment agreement, the physician’s

compensation arrangement with the

entity could not satisfy this requirement

of the fair market value exception.

Second, the commenter stated that

arrangements between an entity and a

physician (or immediate family

member) may change from time to time

as a result of new arrangements,

terminations, renewals, etc. Therefore,

the list of other agreements would

become outdated quickly. Third, the

commenter asserted that the

requirement duplicated the information

that was already required under the

reporting requirements. To rectify the

foregoing problems, the commenter

suggested that the exception should

only require a reference to a master list

of contracts that could be updated

periodically. Finally, the commenter

requested clarification regarding what

contracts must be cross-referenced when

there is a compensation arrangement

between an entity and a member of a

physician group practice. The

commenter questioned, with respect to

a contract between an entity and an

immediate family member of a

physician who is a member of a group

practice, whether the contract must

cross-reference arrangements between

the entity and—(1) the group practice,

(2) each member of that group practice,

and (3) any family member of a member

of the group practice.

Response: We agree that it is

burdensome to require that the written

agreement either cover all items and

services to be provided by the physician

or immediate family member to the

entity, or cross refer to any other

agreements for items or services

between any of these parties. To

alleviate this burden, we are eliminating

the requirement that the agreement

cross refer to any other agreements.

Nevertheless, we note that crossreferencing other agreements and

arrangements is a good practice and will

enable contracting entities, as well as

auditors, to review more efficiently the

full scope of a physician’s relationship

to the entity. In cases where a physician

or an immediate family member of a

physician is employed by the entity and

there is no written employment

agreement, the commenter’s conclusion

that the physician’s compensation

arrangement with the entity could not

satisfy this requirement of the fair

market value exception is correct.

Another exception, such as the

employment exception, may apply,

since it does not require a written

agreement.

Comment: Some commenters were

concerned that by requiring that the

compensation not be related to the

volume or value of program referrals,

non-program referrals, or other business

generated between the parties, we had

undermined the usefulness of the fair

market value exception, as well as many

other exceptions which are subject to

the same restriction. One commenter

suggested that an arrangement should

not pose a risk of abuse as long as the

compensation does not reflect the

volume or value of the physician’s own

referrals.

Response: For a discussion of the

‘‘value or volume of referrals’’ standard,

refer to the discussion at section V of

this preamble. We are conforming the

language of the new fair market value

exception to our uniform interpretation

of the standard, which is discussed at

section V of this preamble.

920 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

C. Non-Monetary Compensation up to

$300 (and Medical Staff Benefits

(§§ 411.357(k) and (m))

The Proposed Rule. Physicians and

their immediate family members are

often given noncash items or services

that have a relatively low value and are

not part of a formal, written agreement.

For example, a physician might receive

free samples of certain drugs or

chemicals from a laboratory or free

coffee mugs or note pads from a

hospital. Although these free or

discounted items and services fall

within the definition of ‘‘compensation

arrangement,’’ we believe that such

compensation is unlikely to cause

overutilization, if held within

reasonable limits. Therefore, we

proposed a new exception, titled De

Minimis Compensation, for

compensation from an entity in the form

of items or services that would not

exceed $50 per gift and an aggregate of

$300 per year. In addition, to qualify for

the proposed exception, the entity

providing the compensation would have

to make it available to all similarly

situated individuals, regardless of

whether these individuals refer patients

to the entity for services, and the

compensation could not be determined

in any way that would take into account

the volume or value of the physician’s

referrals to the entity.

The Final Rule. Except for the

revisions discussed below, the

regulations in Phase I of this rulemaking

are the same as the proposed rule:

• Changing the name of this

exception from ‘‘De Minimis

Compensation’’ to ‘‘Non-Monetary

Compensation Up To $300’’ to avoid

any unintentional implication that the

dollar limits set forth in the exception

are minimal or inconsequential in all

circumstances. That is, although the

$300 dollar limit may be relatively low

when compared to the average

physician’s annual income, we believe

the amount could be sufficient to induce

referrals. However, we believe that the

dollar limit, together with the other

conditions of the exception, are

sufficient to protect against abuse.

• Elimination of the $50 per gift limit.

Therefore, if the other conditions of the

exception are met, an entity can give a

physician one noncash gift per year

valued up to $300 or two or more

noncash gifts per year, as long as the

annual aggregate value of the gifts does

not exceed $300.

• Addition of a provision that

precludes protection for gifts solicited

by physicians to prevent physicians

from making such gifts a condition or

expectation of doing business.

• Elimination of the ‘‘similarly

situated’’ standard. This standard was

designed to ensure that compensation

was not paid primarily to reward high

referrers. To ensure the same end, we

are augmenting the standard that

prohibits compensation that takes into

account the volume or value of referrals

by also prohibiting compensation that

takes into account the volume or value

of any other business generated between

the parties.

• Addition of a new exception

(§ 411.357(m)) to allow certain

incidental benefits of low value

provided by hospitals to their medical

staffs.

Comment: Several commenters argued

that section 1877 of the Act does not

apply to relationships between

physicians and drug manufacturers,

because a drug manufacturer is not an

‘‘entity’’ that furnishes health services to

which a physician purchasing drugs

makes a ‘‘referral’’ under section 1877 of

the Act. Applying this interpretation,

commenters concluded that free drug

samples, free training, and other gifts

(for example, pens, notepads, and other

items) provided to physicians by drug

manufacturers are not prohibited by

section 1877 of the Act, and, therefore,

do not need to qualify for any of the

exceptions. Also, many expressed

concern that, if section 1877 of the Act

is interpreted as applying to physicians’

relationships with drug manufacturers,

then free drug samples and training

provided to physicians by

pharmaceutical companies would be

prohibited, because they would exceed

the proposed per gift and annual dollar

limits of the de minimis exception. They

reasoned that free drug samples should

be exempt from section 1877 of the Act,

because they are extensively regulated

by Federal law that restricts their use

and prohibits their sale, and, therefore,

free drug samples pose little risk of

abuse. They also stressed that free

training given in connection with free

samples should be exempt, because it is

part of the sales effort which benefits

patients, as well as physicians.

Response: We agree that drug

manufacturers typically are not

‘‘entities’’ that furnish health services to

which physicians purchasing drugs

make ‘‘referrals’’ under section 1877 of

the Act. (See section VIII.B of this

preamble.) Therefore, as a general rule,

neither free drugs, free training, nor gifts

provided to physicians by drug

manufacturers are prohibited by section

1877 of the Act. We caution, however,

that free or discounted items or services

provided by drug manufacturers to

physicians must be scrutinized to

ensure compliance with other

applicable laws and regulations,

including, without limitation, the antikickback statute and the Federal laws

restricting the sale and distribution of

drug samples, 21 U.S.C. § 353(c) through

(d).

Comment: Many commenters

expressed concern regarding the per gift

and annual dollar limits. In particular,

they stated that the dollar limits were so

low that they precluded protection for

many legitimate compensation

arrangements. For example, many

commenters were concerned that no

protection would be provided for free or

discounted benefits provided by a

hospital for its medical staff.

Commenters believe that free or

discounted benefits (for example, free or

discounted meals and refreshments, free

or discounted parking, free continuing

medical education or other training, free

computer/Internet access, free

laboratory coats, free or discounted

malpractice insurance, free transcription

of medical records, and free

photocopying) would add up and

exceed the dollar limits quickly.

Concern was also expressed about the

administrative burden of tracking the

exact dollar amounts for benefits

provided to each medical staff

physician.

Finally, one commenter questioned

whether, with respect to group

practices, the dollar limit would apply

to each individual member of the group

or to the group as a whole. Another

commenter suggested that the dollar

limits should be indexed for inflation.

Response: First, we have added a new

exception (§ 411.357(m)) for incidental

benefits given to a hospital’s medical

staff members. The question of

incidental benefits given by a hospital to

members of its medical staff was

addressed previously in the preamble to

the January 1998 proposed rule at 63 FR

1713–1714. In particular, we noted that:

Entities, such as hospitals, often provide

physicians with certain incidental benefits,

such as their malpractice insurance, or with

reduced or free parking, meals or other

incidental benefits. We believe the answer to

this question hinges on the nature of any

other financial relationship the physician has

with the entity. For example, if a physician

receives free ‘‘extras’’ such as malpractice

insurance, parking, or meals while he or she

serves as the entity’s employee, then these

extras might qualify as part of the

compensation that the physician receives

under a bona fide employment relationship,

provided they are specified in the

employment agreement. If the physician or

entity can demonstrate that the extras

constitute part of the payment that such

entities typically provide to physicians,

regardless of whether they make referrals to

the entity, the extras constitute payment that

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 921

is consistent with fair market value, and that

furthers the entity’s legitimate business

purposes. If an incidental benefit cannot

meet the requirements under a statutory

exception or the new general exception for

compensation arrangements we have

included in § 411.357(l), it might still meet

the de minimis exception we have included

in § 411.357(k) if it has limited value. We

have also been asked about parking spaces

that a hospital provides to physicians who

have privileges to treat their patients in the

hospital. It is our view that, while a

physician is making rounds, the parking

benefits both the hospital and its patients,

rather than providing the physician with any

personal benefit. Thus, we do not intend to

regard parking for this purpose as

remuneration furnished by the hospital to the

physician, but instead as part of the

physician’s privileges. However, if a hospital

provides parking to a physician for periods

of time that do not coincide with his or her

rounds, that parking could constitute

remuneration.

We recognize that many of the

incidental benefits that hospitals

provide to medical staff members do not

qualify for the employment exception

because most members of a hospital’s

medical staff are not hospital

employees, and do not qualify for the

fair market value exception because, to

the extent that the medical staff

membership is the only relationship

between the hospital and certain

physicians, there is no written

agreement between the parties to which

these incidental benefits could be

added. While we still believe that

medical staff incidental benefits could

be structured in a way that would

reward physicians for referrals and,

thereby, lead to overutilization, we also

recognize that many medical staff

incidental benefits are customary

industry practices that are intended to

benefit the hospital and its patients. For

example, free computer/Internet access

benefits the hospital and its patients by

facilitating the maintenance of up-todate, accurate medical records and the

availability of cutting edge medical

information. Consequently, we have

added a new exception (§ 411.357(m)),

which provides that medical staff

incidental benefits are excepted from

section 1877 of the Act, if the benefits

in question are—

• Offered by a hospital to all members

of the medical staff without regard to

the volume or value of referrals or other

business generated between the parties;

• Offered only during periods when

the medical staff members are making

rounds or performing other duties that

benefit the hospital and its patients;

• Provided by the hospital and used

by the medical staff members only on

the hospital’s campus;

• Reasonably related to the provision

of, or designed to facilitate directly or

indirectly the delivery of, medical

services at the hospital;

• Consistent with the types of

benefits offered to medical staff

members by other hospitals within the

same local region or, if no such

hospitals exist, by comparable hospitals

located in comparable regions; and

• Of low value (that is, less than $25)

with respect to each occurrence of the

benefit (for example, each benefit must

be of low value).

Regardless of compliance with the

foregoing, we caution that medical staff

incidental benefits should be reviewed

to ensure compliance with other

applicable laws and regulations,

including, without limitation, the antikickback statute.

Medical staff incidental benefits that

do not meet the foregoing conditions

could constitute prohibited

remuneration and, therefore, would be

permitted under section 1877 of the Act

only if an exception applies. For

example, malpractice insurance offered

by a hospital only to its emergency room

physicians would not meet the

foregoing conditions. Therefore, to be

exempt from section 1877 of the Act, it

would have to qualify for one of the

exceptions. Malpractice insurance

would not qualify for the exception for

non-monetary compensation up to $300,

because it would exceed the applicable

dollar limits. Nor would it qualify for

the exception for remuneration

unrelated to the provision of DHS,

because such payments would be

related to the provision of emergency

services, which are included in the

definition of inpatient hospital services

and, therefore, are DHS. Malpractice

insurance provided to emergency room

physicians might qualify for the

employee exception if the physician is

employed by the hospital and the

insurance is part of the employment

agreement. Similarly, we do not believe

medical transcription services are an

incidental benefit of nominal value.

We are aware that some hospitals are

offering compliance training programs

for physicians on their medical staffs or

in their local communities. Because we

believe such programs are beneficial

and do not pose a risk of fraud or abuse,

we are creating a new exception for

such compliance training programs.

We intentionally set the dollar limits

in the proposed exception at a low level

to decrease the likelihood that the items

or services would influence utilization.

However, in response to the comments,

we have eliminated the $50 per gift

dollar limit. Therefore, under the final

rule, an entity could give a physician

either one noncash gift per year of up

to $300 in value or two or more noncash

gifts per year, as long as the annual

aggregate value of the gifts does not

exceed $300. This change permits larger

one-time gifts. For example, a noncash

gift valued at $150 would have

exceeded the per gift dollar limit of the

proposed rule, but would be permitted

under the final rule, as long as the

annual aggregate does not exceed $300

and the other conditions of the

exception are met.

The exception for non-monetary

compensation up to $300 only protects

gifts to individual physicians. Thus,

gifts given to a group practice would not

qualify for this exception. Noncash gifts

could, however, be given to one

member, several individual members, or

each member of a group practice, if each

such gift meets all of the conditions of

the exception for non-monetary

compensation up to $300. We caution,

however, that the exception will not

apply to gifts, such as holiday parties or

office equipment or supplies, that are

valued at not more than $300 per

physician in the group, but are, in effect,

given or used as a group gift.

Notwithstanding the foregoing, we

recognize that the aggregate dollar

amount could be substantial for gifts to

individual physician members of very

large groups. For example, if a group

consists of 50 physicians, each

physician of the group could be given

an aggregate of $300 in non-cash gifts

within a given year, equaling a total of

$15,000 from one entity. Such a large

gift could provide an economic

incentive for overutilization. Therefore,

to counter-balance the removal of the

$50 per gift limit and to further guard

against abuse, we have added a

provision that excludes gifts solicited by

the receiving physicians or their group

practice. This change also serves to

clarify that our use of the term ‘‘gift’’

refers to the ordinary meaning of the

term; that is, a gift must involve a

voluntary transfer made without

consideration or compensation expected

or received in return. This new

provision prevents members of group

practices, as well as solo practitioners,

from making noncash gifts a condition

of doing business with a particular

entity. We intend to monitor the

provision of gifts to group practice

physicians under this exception and

may revisit our position if abuses occur.

Such gifts remain subject to the antikickback statute.

Finally, we have decided not to index

the $300 annual aggregate dollar limit

for inflation. Removal of the per gift

dollar limit gives entities much greater

922 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

flexibility with respect to the value of

noncash gifts. That is, under the

proposed rule, a single gift could not

exceed $50; whereas, under the final

rule, the value of a single gift could be

up to $300, as long as the other

conditions are met. We believe that this

revision decreases the need for

adjustment for inflation. In addition, we

think it would create confusion as to the

actual limit in succeeding years if we

were to provide for an inflation adjuster.

The rule as it stands creates an easy-tofollow bright line. However, we will

continue to monitor the effect of the

$300 limit and may revisit the limit in

the future.

Comment: One commenter asked for

clarification regarding the relationship

between the de minimis exception and

the statute’s exception for remuneration

provided by a hospital to a physician ‘‘if

such remuneration does not relate to the

provision of designated health

services.’’ (See section 1877(e)(4) of the

Act.)

Response: The exception for nonmonetary compensation up to $300 and

the statutory exception for remuneration

unrelated to the provision of DHS are

totally separate exceptions with

different criteria. The determination as

to which of these exceptions, if any, is

applicable depends on the facts and

circumstances of the case involved.

Comment: One commenter questioned

whether the requirement that

compensation must be made available to

all similarly situated individuals would

prohibit hospitals from hosting meals on

a person-to-person basis. Another

commenter suggested that the similarly

situated requirement should be

eliminated because the type of

promotional items that would be

covered by the exception would

probably be provided only to referrers or

potential referrers, and such minimal

gifts were unlikely to cause

overutilization.

Response: We agree that, on balance,

the ‘‘similarly situated’’ test does not

add significantly to the protections of

the exception. Accordingly, we have

eliminated the ‘‘similarly situated’’

standard. This standard was designed to

ensure that compensation was not paid

primarily to reward high referrers. To

ensure the same end, we are augmenting

the standard that prohibits

compensation that takes into account

the volume or value of referrals by also

prohibiting compensation that takes into

account the volume or value of any

other business generated by the referring

physician.

Comment: Two commenters

questioned how professional courtesy

discounts (that is, free or discounted

services provided to physicians) would

be handled under section 1877 of the

Act. One of the commenters suggested

that professional courtesy discounts

should not violate section 1877 of the

Act, because they fall within the nonmonetary compensation up to $300

exception or they do not constitute

‘‘remuneration.’’

Response: The term ‘‘professional

courtesy’’ is used (or misused) to

describe a number of analytically

different practices, including the

practice by a physician of waiving the

entire fee for services provided to the

physician’s office staff, other

physicians, and/or their families (the

traditional meaning); the waiver of

coinsurance obligations or other out-ofpocket expenses for physicians or their

families (that is, insurance only billing);

and similar payment arrangements by

hospitals or other institutions for

services provided to their medical staffs

or employees. Therefore, we cannot

generalize about the application of

section 1877 of the Act to such

arrangements. Some such arrangements

may fit in an existing exception,

depending on the circumstances (for

example, the non-monetary

compensation up to $300 exception if

the value of the courtesy services is less

than $300 and the other conditions of

the exception are satisfied). However,

some such arrangements may not fit in

an exception. We are considering

whether an exception could be

developed for such arrangements and

will address the matter further in Phase

II of this rulemaking. We are soliciting

comments about appropriate conditions

for such an exception and an

appropriate definition of ‘‘professional

courtesy.’’ In addition to conducting an

analysis of professional courtesy

arrangements under section 1877 of the

Act, these arrangements must be

analyzed with respect to other fraud and

abuse, as well as payment, authorities,

including the anti-kickback statute, the

False Claims Act (31 U.S.C. § 3729 et

seq.), and the prohibition of

inducements to beneficiaries (section

1128A(a)(5) of the Act).

VIII. Definitions of the Designated

Health Services

A. General Principles

Basis for the Definitions

As we pointed out in the preamble to

the January 1998 proposed rule (63 FR

1673), section 1877(h)(6) of the Act lists

the DHS, but does not define them.

Moreover, the list in section 1877(h)(6)

of the Act does not necessarily

correspond to specific service categories

as they are defined under either

Medicare or Medicaid. For example,

section 1877(h)(6)(D) of the Act uses the

phrase, ‘‘[r]adiology services, including

magnetic resonance imaging,

computerized axial tomography scans,

and ultrasound services,’’ although

ultrasound is not usually considered a

radiology service. In defining the DHS

in § 411.351 of the January 1998

proposed rule, we stated that we chose,

as much as possible, to base the

definitions in section 1877 of the Act on

existing definitions in the Medicare

program. We also explained that in

situations in which it was not clear

whether a service was included, we

would look to the intent of the statute.

In general, we believe the Congress

meant to include specific services that

are or could be subject to abuse.

Because we had received a number of

inquiries from individuals who were

confused about whether a particular

service fell under one of the DHS

categories, we proposed defining the

DHS whenever we could by crossreferencing existing definitions in the

Medicare statute, regulations, or

manuals or by including specific

language whenever we believed the

definitions should deviate from

standard Medicare definitions.

Many of the comments we received

on the proposed rule reflected that

commenters were still unclear about

which services fall under the DHS

categories. Many commenters

specifically requested that we establish

a ‘‘bright line’’ test for identifying these

services, and suggested that we base the

services on an established list, such as

the Current Procedural Terminology

(CPT) codes. We agree that more precise

definitions will make it much easier

administratively for physicians and

entities to comply with the law.

Accordingly, we have determined that

we will define certain DHS (clinical

laboratory services, physical therapy,

occupational therapy, radiology and

certain other imaging services, and

radiation therapy services (sections

1877(h)(6)(A)through (h)(6)(E) of the

Act) by publishing specific lists of CPT

and HCFA Common Procedure Coding

System (HCPCS) codes that physicians

and providers most commonly associate

with a given designated health service.

The lists of codes will define the entire

scope of the designated services

category for purposes of section 1877 of

the Act. While the definitions section of

the regulations will contain a general

explanation of the principles used to

select the codes, in all cases the

published list of codes will be

controlling.

For services described in section

1877(h)(6) of the Act, paragraphs (F)

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 923

through (K), we will not be publishing

a service-by-service list. The codes for

these services may be just one

component used for identifying the

service; the codes may be all those that

appear in a specific ‘‘level,’’ such as all

HCPCS level 2 codes, for a service; or

the service is not defined using HCPCS

codes at all. The definitions for the

services in paragraphs (F) through (K)

are explained in detail below under

each service category.

The HCPCS is a collection of codes

and descriptors that represent

procedures, supplies, products, and

services that may be provided to

Medicare beneficiaries and to

individuals enrolled in private health

insurance programs. We believe that

these codes will already be familiar to

many in the health care industry. These

codes must be used when billing

Medicare for Part B services and

supplies. The codes are divided into

three levels, the first two of which are

used in this final rule and are described

below; they are listed in HCPCS 2001:

Level I: Codes and descriptors

copyrighted by the American Medical

Association in its Current Procedural

Terminology, Fourth Edition (CPT–4).

These are 5-position numeric codes

primarily representing physician

services.

Level II: These are 5-position alphanumeric codes representing primarily

items and nonphysician services that

are not represented in the level I codes.

Included are codes and descriptors

copyrighted by the American Dental

Association’s Current Dental

Terminology, Second Edition (CDT–2).

These are 5-position alpha-numeric

codes comprising the ‘‘D’’ series. All

other level II codes and descriptors are

approved and maintained jointly by the

alpha-numeric editorial panel

(consisting of HCFA, the Health

Insurance Association of America, and

the Blue Cross and Blue Shield

Association).

Because these specific codes change

and can quickly become out-of-date, we

are not including the lists of DHS codes

in the regulations text, but rather in an

accompanying attachment. The

definitions of specific services in the

regulations text will cross refer to a

comprehensive table that will appear

initially in the Federal Register along

with Phase I of this rulemaking and

thereafter in an addendum to the annual

final rule concerning payment policies

under the physician fee schedule rule.

This list titled, ‘‘List of CPT/HCPCS

Codes Used to Describe Certain

Designated Health Services Under the

Physician Referral Provisions (Section

1877 of the Social Security Act),’’ will

also be posted on the HCFA web site at

http://www.hcfa.gov on the date of

Federal Register publication of this

final rule. The table published each year

will be a comprehensive listing of all

codes for DHS and not merely a listing

of changes to the prior year’s table. The

updates will also be posted on the

HCFA web site. The physician fee

schedule rule is generally published in

late October or early November. We will

consider comments on each year’s

revised list if we receive them during

the applicable comment period for that

rule. If any changes are made, we will

then publish a revised table and

respond to any public comments that

we receive. This approach will provide

an annual comprehensive list of codes

for those DHS noted above (sections

1877(h)(6)(A)through (h)(6)(E) of the

Act).

We are not providing lists of codes for

the following categories of DHS

(sections 1877(h)(6)(F) through (h)(6)(K)

of the Act): Durable medical equipment

and supplies; parenteral and enteral

nutrients, equipment, and supplies;

prosthetics, orthotics, and prosthetic

devices and supplies; home health

services; outpatient prescription drugs;

or inpatient and outpatient hospital

services. We believe the definitions in

Phase I of this rulemaking for these DHS

provide sufficiently clear ‘‘bright line’’

rules.

In the preamble to the January 1998

proposed rule, we had stated that we

believed the Congress intended to

include specific services that are or

could be subject to abuse and that we

would attempt to define the services

accordingly. In the January 1998

proposed rule preamble and regulations

text, we then attempted in some cases

to include or exclude services or types

of services based on our view as to their

potential for abuse. Many commenters

disagreed with our views about

particular services (for example,

lithotripsy), and many more argued that

the particular service they provided

should also be excluded because it was

not overutilized. In light of these

comments and upon further review of

the statutory scheme, we have decided

that the Congress did not intend that we

categorize DHS by determining the

potential for overutilization or abuse on

a service-by-service basis. Accordingly,

in Phase I of this rulemaking, we are

including all services that we believe

come within the general categories; we

have created limited exceptions for a

few specific cases (that is, implants in

ambulatory surgical centers,

legislatively mandated preventive

screening tests and immunizations

subject to frequency limits, eyeglasses

and contact lenses subject to frequency

limits, and erythropoietin (EPO)

provided by end-stage renal disease

(ESRD) facilities) for which we believe

an exception poses a limited risk of

abuse and is necessary to avoid needless

disruption of patient care. However,

even for those rare exceptions, we will

continue to monitor the services for

abuse and, if necessary, revisit the

exclusions.

We also stated in the preamble to the

January 1998 proposed rule (63 FR

1673) that we consider a service to be

a designated health service, even if it is

billed as something else or is subsumed

within another service category by being

bundled with other services for billing

purposes. We gave as an example

skilled nursing facility (SNF) services,

which can encompass a variety of DHS,

such as physical therapy (PT),

occupational therapy (OT), or laboratory

services. Commenters complained that

this interpretation would result in an

expansion of the DHS beyond the

services specifically listed in the law.

According to the commenters, when the

Congress intended to cover specific

Medicare services (including composite

rate services, such as hospital or home

health services), it did so expressly.

Upon review, we agree with the

commenters. Under the final rule,

services that would otherwise constitute

DHS, but that are paid by Medicare as

part of a composite payment for a group

of services as a separate benefit (for

example, ambulatory surgical center

(ASC) or SNF rate), are not DHS for

purposes of section 1877 of the Act. (As

expressly provided in section 1877(h)(6)

of the Act, hospital and home health

services remain DHS although they are

paid through a composite rate.) We note,

however, that because of SNF

consolidated billing, most, if not all,

SNFs will also be considered entities

providing DHS (for example, PT or OT)

under Part B to SNF patients who have

exhausted their Part A benefit or to

other nursing home residents (that is,

patients for whom the services are not

covered as part of a composite rate). The

consolidated billing requirement places

with the SNF the Medicare billing

responsibility for most of the services

that a SNF resident receives (except for

certain practitioner services and a

limited number of other services) under

Part A and under Part B. (Presently,

consolidated billing is in effect only for

patients in a covered Part A stay, but

will become effective for Part B services

in the near future.) Accordingly, a

physician will not be able to refer

Medicare patients who will require DHS

to a SNF in which he or she has an

924 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

ownership or investment interest,

unless the interest is protected under an

exception to section 1877 of the Act.

In the August 1995 final rule relating

to clinical laboratory services, we

created an exception for laboratory

services furnished in an ASC or ESRD

facility or by a hospice if the services

were included in a composite rate or per

diem hospice charge. (See § 411.355(d)).

In the January 1998 proposed rule, we

had proposed extending this composite

rate exception to include all DHS

furnished in an ASC or ESRD facility or

by a hospice if payment is included in

the ASC payment rate, the ESRD

composite payment rate, or as part of

the hospice payment rate. This proposal

was intended to address problems faced

by ASCs, ESRD facilities, and hospices

in the light of our proposed stance on

DHS subsumed by bundled payments.

However, since under the final rule DHS

that are subsumed by a bundled

payment do not implicate section 1877

of the Act, we have not adopted our

proposal to extend § 411.355(d) beyond

clinical laboratory services. Moreover,

given our final interpretation, we are

reconsidering the need for § 411.355(d)

as applied to clinical laboratory services

and intend to address the matter further

in Phase II of this rulemaking. We are

soliciting comments on this issue.

B. General Comment: Professional

Services as Designated Health Services

Comment: Many commenters

expressed the view that the professional

component of DHS (particularly clinical

laboratory and radiology services)

should not implicate section 1877 of the

Act. Commenters asserted that the

Congress did not intend for professional

services to come within the physician

self-referral law prohibition and that we

exceeded our authority to promulgate

regulations by including them.

Commenters also contended that

limiting DHS under section 1877 of the

Act solely to the technical components

of services would sufficiently control

the risk of program or patient abuse.

Other commenters stated that if we

included professional components of

some DHS, we should do so for all DHS.

The commenters pointed out that our

proposed position on productivity

bonuses (that is, that they may not

reflect the volume or value of any DHS

referrals) would require special

bookkeeping to segregate professional

fees when calculating bonuses that will

burden practices, without serving a

public policy purpose.

Response: We believe that it was not

the intent of the statute to exclude all

professional services from the list of

DHS. Many of the DHS, such as

radiology and radiation therapy, have

substantial physician service

components. If the Congress intended to

exclude them, we would expect the

statute to specifically do so. While some

services are not viewed as having a

professional component that is paid

separately, Medicare still requires

professional supervision of them to

qualify for Medicare payment.

We agree to some extent that limiting

referrals for the technical component of

a service should greatly reduce the

number of unnecessary referrals.

Nonetheless, there are some DHS that

consist only of a professional

component (for example, some radiation

therapy services) or are primarily

professional in nature, and these would

not otherwise be subject to the law if we

carved out all professional components.

We agree with the commenters that

we should include professional

components when relevant in all DHS

categories. Therefore, we have revised

the definitions of each of the DHS to

include the professional components in

each case in which a professional

component is included in the CPT or

HCPCS codes that represent one of those

services.

We understand that these rules may

impose an administrative burden on

some group practices, depending on

how they choose to comply with section

1877 of the Act. We think Phase I of this

rulemaking has a number of substantive

changes that will ease the

administrative burden of compliance,

including the exception from the

definition of ‘‘referral’’ for personally

performed services and the greater

flexibility afforded group practices over

their distribution of revenues. As a

practical matter, the professional

component of many of these services

will be excluded from the definition of

a referral as services personally

performed by the referring physician.

Individual Designated Health Services

We discuss below each designated

health service category in the order in

which it appears in section 1877(h)(6) of

the Act. Each discussion includes a

general summary of the category,

summaries of the relevant public

comments, and our responses.

C. Clinical Laboratory Services

In the August 1995 final rule covering

a physician’s referrals for clinical

laboratory services, we defined these

services in § 411.351 as—

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. These

examinations also include procedures to

determine, measure, or otherwise describe

the presence or absence of various substances

or organisms in the body.

We had stated in the August 1995

final rule, in response to a commenter

who requested a definition of clinical

laboratory services, that we believed the

most appropriate way for a physician or

clinical laboratory to determine if a

diagnostic test is a clinical laboratory

test subject to the requirements of

section 1877 of the Act, is to find out

if the test is subject to categorization

under the Clinical Laboratory

Improvement Act (CLIA). We pointed

out that there is a list of clinical

laboratory test systems, assays, and

examinations categorized by complexity

and published by the Center for Disease

Control (CDC). We also stated that,

given this definition, CPT codes would

not be the sole references to identify

clinical laboratory services for physician

referral purposes.

Commenters also had asked about the

professional components of laboratory

services. We stated that we believed that

CLIA covers the actual examination of

materials, their analysis, and any

interpretation and reporting of the

results that are performed by a facility

that qualifies as a laboratory, as defined

in § 493.2 (Definitions). However, if a

laboratory sent test results to an

independent physician, any

interpretation performed by the

physician would not be performed by

the laboratory facility. As a result, the

services would not constitute part of the

clinical laboratory test.

We stated in the January 1998

proposed rule covering referrals for the

other DHS that we would retain the

definition of clinical laboratory services

that was incorporated into our

regulations by the August 1995 final

rule. However, in line with our revised

approach for identifying the DHS in this

final rule, we have amended the rule to

refer specifically to CPT and HCPCS

codes. We have included as DHS the

professional components of laboratory

tests when they are listed as such in the

codes. It is our belief that the

specification of the codes in the

attachment to this final rule is

consistent with, although not identical

to, the definition of clinical laboratory

services in our January 1998 proposed

rule.

D. Physical Therapy Services

We proposed to define physical

therapy services in § 411.351 as those

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 925

outpatient physical therapy services

(including speech-language pathology

services) described at section 1861(p) of

the Act and in § 410.100 (Included

services), paragraphs (b) and (d). Under

section 1861(p) of the Act, the term

‘‘outpatient physical therapy services’’

specifically includes speech-language

pathology services. Because section

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

therapy services in general, and not just

outpatient services, we also included in

the definition any other services with

the characteristics described in

§ 410.100(b) and (d) that are covered

under Medicare Part A or Part B,

regardless of who provides them, the

location in which they are provided, or

how they are billed.

We pointed out that services that are

essentially the same as ‘‘outpatient

physical therapy services’’ are also

covered by Medicare in other contexts

and in different settings, and may be

billed under different categories. For

example, we have a longstanding policy

of covering physical therapy and

occupational therapy as diagnostic or

therapeutic inpatient hospital services.

Similarly, these services can also be

covered as SNF services, and can be

furnished as ‘‘incident to’’ physician

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

the Act. (Section 1877 implications for

DHS provided by SNFs are discussed

earlier in this section.)

It was our view in the January 1998

proposed rule that covered outpatient

physical therapy services basically

included three types of services, which

were best described in § 410.100(b)

(which specifically concerns services

provided by a comprehensive

rehabilitation facility (CORF)). This

definition covers the testing and

measurement of the function or

dysfunction of the neuromuscular,

musculoskeletal, cardiovascular, and

respiratory systems; assessment and

treatment related to dysfunction caused

by illness or injury and aimed at

preventing or reducing disability or pain

and restoring lost function; and the

establishment of a maintenance therapy

program for an individual whose

restoration has been reached. Many

commenters asserted that the proposed

definition was imprecise or improperly

included some procedures that are not

generally considered physical therapy

services.

We have responded to these concerns

by redefining physical therapy services,

as some commenters suggested, by using

a list of HCPCS codes. We believe the

list is limited to services that are more

traditionally regarded as physical

therapy. In general, these services are

described in the ‘‘Physical Medicine

and Rehabilitation’’ section (the 97000

series) of the CPT and in other relevant

sections of the HCPCS.

In the January 1998 proposed rule, we

also included speech-language

pathology services as a designated

health service since section 1861(p) of

the Act includes ‘‘speech-language

pathology services’’ in the definition of

‘‘outpatient physical therapy services.’’

These services are defined in section

1861(ll)(1) of the Act as speech,

language, and related function

assessment and rehabilitation services

furnished by a qualified speechlanguage pathologist as this pathologist

is legally authorized to perform under

State law (or the State regulatory

mechanism) as would otherwise be

covered if furnished by a physician.

Section 1861(ll)(3) of the Act defines a

‘‘qualified speech-language

pathologist.’’

We used in the proposed rule the brief

description of speech-language

pathology services in § 410.100(d),

which applies to services provided in

CORFs, as those services that are

necessary for the diagnosis and

treatment of speech and language

disorders that create difficulties in

communication. In an effort to furnish

a ‘‘bright line’’ test, we are defining the

services in Phase I of this rulemaking by

the specific codes that correspond to the

services that we consider to be speechlanguage pathology services.

As we developed the list of CPT and

HCPCS codes relevant to speechlanguage pathology, we realized that our

proposed definition, which cross-refers

to the CORF definition in § 410.100(d),

did not encompass the full range of

services that are commonly considered

to be speech-language pathology

services. It failed to recognize that

speech-language difficulties can be

caused by cognitive disorders and failed

to recognize that speech-language

pathology may be used to treat

swallowing and other oral-motor

dysfunctions. Therefore, in developing

the list of codes for speech pathology in

Phase I of this rulemaking, we included

the diagnosis and treatment of cognitive

disorders including swallowing and

other oral-motor dysfunctions.

Finally, because of the overlap

between physical therapy, occupational

therapy, and speech-language pathology

services, we are listing the codes for all

three services together. We believe that

this set of HCPCS codes represents what

most clinicians would define as PT/OT/

speech therapy services that are covered

by the Medicare program. The list is set

out in the attachment to this final rule.

Comment: A number of commenters

were particularly concerned that the

proposed definition of physical therapy

services implies that physical therapists

can perform diagnostic testing and

measurements, such as

electromyography tests (EMGs). These

tests are used primarily to provide

medical diagnostic information

regarding neuromuscular diseases and

occasionally to measure neuromuscular

function. Although some States permit

physical therapists to perform these

tests, the commenters believe that EMGs

are typically performed by a physician

as part of a physical examination to

determine whether a patient is a

surgical candidate or if some other

course of treatment is warranted.

In addition, other commenters stated

that the proposed definition of physical

therapy services could be interpreted to

include therapeutic procedures such as

nerve blocks and arthrocentesis that the

commenters believe are physician

services. One commenter, a physician

who practices physical medicine and

rehabilitation, asserted that our

proposed definition of physical therapy

included services that could be

administered by physicians and

physical therapists. He feared that this

could prohibit him from treating

patients he diagnoses. Several

commenters responded to the inclusion

in the definition of physical therapy of

any ‘‘assessment and treatment’’

designed to alleviate pain or disability.

The commenters asserted that this

phrase captures a large portion of

modern medicine, given that pain is the

most common presenting symptom in a

physician’s office, and virtually any

assessment or treatment following

therefrom would have as its purpose the

alleviation of that pain.

Response: Nothing in the proposed

definition affected the scope of any

practitioner’s practice. We agree with

the commenters that only in certain

States are physical therapists licensed to

perform EMGs. Additionally, we agree

that therapeutic procedures such as

nerve blocks and arthrocentesis are

typically performed by a physician and

are not generally considered to be a part

of physical therapy. These procedures

are not included on the list of codes that

defines the scope of physical therapy for

purposes of section 1877(h)(6)(B) of the

Act. In the January 1998 proposed rule,

we did not intend to convey the

message that what is generally

considered physical therapy would

change. We proposed to use an existing

definition of physical therapy (in

§ 410.100(b), which covers physical

therapy services in CORFs) precisely

because we did not want to change the

existing perception of physical therapy.

926 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

In order to avoid confusion, we are

revising our proposed definition by

providing a list of CPT and HCPCS

codes that are, collectively, the PT/OT/

speech-language therapy DHS. This list

of codes defines the entire scope of PT/

OT/speech-language therapy services for

purposes of section 1877 of the Act.

Finally, we note that under Phase I of

this rulemaking, if a physician

personally provides a designated health

service to his or her patient, there is no

‘‘referral’’ for purposes of section

1877(a)(1) of the Act. See section III.B of

this preamble.

Comment: One commenter asserted

that pulmonary function tests are for the

measurement of the function of the

respiratory system and have nothing to

do with physical therapy. However,

another commenter recommended that

the definition of physical therapy

include the neuromuscular and

pulmonary function tests that test for

functional capacity ratings and that are

usually performed by a physical

therapist without the direct supervision

of a physician.

Response: We agree with the

commenter that pulmonary function

tests for the measurement of the

function of the respiratory system are

not physical therapy. The only

pulmonary function test that may be

considered to be a physical therapy

service is pulse oximetry testing, CPT

code 94762, when it is used to test for

functional capacity ratings. A pulse

oximetry test that is performed to

determine whether a patient has enough

oxygen to perform certain activities of

daily living is, for example, a physical

therapy service.

Comment: One commenter

recommended that we define physical

therapy as those therapeutic exercises

and physical medicine modalities

described in the 97000 series of the CPT

codes, included in the patient’s written

plan of physical therapy treatment, and

provided by a physical therapist or

physical therapy aide.

Response: We agree with the

commenter that PT services should be

based on the CPT codes and have

modified the rule accordingly. With

respect to which professionals can

provide a given service, we defer in this

rule to existing Medicare policy. Many

of these DHS can be provided by

physicians.

Comment: A number of commenters

opposed the inclusion of speechlanguage pathology services in the

definition of physical therapy services.

The commenters stated that the

Congress did not intend to include these

services within the ban on physician

referrals and asserted that including

these services as DHS is unnecessary

(although they did not state why this

would be the case). One commenter

asserted that when the Congress

intended to include outpatient speechlanguage pathology services within the

category of outpatient physical therapy

services, the Congress enacted explicit

language that made that intention clear.

The commenter pointed to section

4541(a)(1) of the BBA 1997, which

added paragraph (8)(A) to section

1833(a) of the Act. That provision states

that, for covered individuals, amounts

will be paid from the Medicare Trust

Fund for ‘‘outpatient physical therapy

services (which includes outpatient

speech-language pathology services) and

outpatient occupational therapy services

furnished—’’ * * * by certain entities.

Response: The definition of

‘‘outpatient physical therapy services’’

in section 1861(p) of the Act specifically

states that ‘‘the 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.

* * *’’ Thus, by definition, speechlanguage pathology services are a subset

of outpatient physical therapy services

under the Medicare statute. We believe

that the parenthetical language under

the BBA 1997 simply confirms our

interpretation.

E. Occupational Therapy Services

In the January 1998 proposed

regulations text, we proposed to include

those OT services described in section

1861(g) of the Act and the CORF

regulations in § 410.100(c). We

proposed that occupational therapy

services would also include any other

services with the characteristics

described in § 410.100(c) that are

covered under Medicare Part A or Part

B, regardless of who furnishes them, the

location in which they are furnished, or

how they are billed. In proposed

§ 411.351, OT services included the

following:

• Teaching of compensatory

techniques to permit an individual with

a physical impairment or limitation to

engage in daily activities.

• Evaluation of an individual’s level

of independent functioning.

• Selection and teaching of taskoriented therapeutic activities to restore

sensory-integrative function.

• Assessment of an individual’s

vocational potential, except when the

assessment is related solely to

vocational rehabilitation.

As discussed in the preceding section,

we are revising our proposed definition

by providing a list of CPT and HCPCS

codes that collectively are the PT/OT/

speech therapy DHS. Also, as described

above, we are excluding from the

definition of DHS any designated health

service that is paid for as part of a

‘‘bundled’’ payment (for example,

services covered by the SNF Part A rate

or the ASC rate), unless the statute

otherwise provides that a ‘‘bundled’’ set

of services is itself a designated health

service (for example, home health

services and inpatient and outpatient

hospital services).

Comment: A major OT association

asserted that the definition of OT is too

narrow because it does not adequately

capture the scope of the OT benefit. For

example, OT is furnished to patients

with cognitive impairments as well as to

patients with physical impairments and

limitations. As another example, OT

may also be furnished in partial

hospitalization programs for patients

with a psychiatric illness. The

commenter believes that it is important

for the definition in § 411.351 to be as

complete and accurate as possible to

assure appropriate compliance with the

law, and that § 410.100(c) is too narrow

to be used as the complete definition of

OT services for purposes of these

regulations. The commenter suggested

that we broaden the definition by

adding to it the coverage guidelines

stated in section 3101.9, ‘‘Occupational

Therapy Furnished by the Hospital or

by Others under Arrangements with the

Hospital and under its Supervision,’’ of

the Medicare Intermediary Manual

(HCFA Pub. 13–3), Part 3— Claims

Process, and section 2217, ‘‘Covered

Occupational Therapy,’’ of the Medicare

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

3—Claims Process. The commenter

recommended that we use the following

definition for OT in § 411.351:

Occupational therapy services means those

services described at section 1861(g) of the

Act, § 410.100(c) of this chapter, and in the

occupational therapy coverage guidelines

contained in section 3101.9 of the Medicare

Intermediary Manual and section 2217 of the

Medicare Carriers Manual. Occupational

therapy services also include any other

services with the characteristics described in

§ 410.100(c) and the occupational therapy

coverage guidelines that are covered under

Medicare Part A or B, regardless of who

furnishes them, the location in which they

are furnished, or how they are billed.

Response: We agree with the

commenter that the proposed definition

does not clearly recognize that OT is

furnished to patients with cognitive

impairments. As we have stated

previously in this preamble, we did not

intend to change what is commonly

regarded as OT. We referred to the

existing definition in § 410.100(c) so

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 927

that we would not be proposing any

change. However, as the commenter

pointed out, the existing definition at

§ 410.100(c) is not complete. Therefore,

we are expanding the proposed

definition by including codes for the

‘‘teaching of compensatory techniques

to permit an individual with a physical

or cognitive impairment or limitation to

engage in daily activities.’’

However, the commenter is correct

that a partial hospitalization program

may provide OT services. This is in

accordance with section 1861(ff) of the

Act, which defines ‘‘partial

hospitalization services’’ and

specifically includes OT as a partial

hospitalization service. However, with

respect to partial hospitalization, we

have determined that services provided

as part of a group of services paid under

a bundled rate are not DHS. Partial

hospitalization services are paid under

a bundled rate. Therefore, partial

hospitalization services (including OT

services provided as part of the partial

hospitalization benefit) furnished by a

community mental health center are not

DHS. However, partial hospitalization

services furnished by a hospital are

outpatient hospital services, which is a

category of DHS.

In order to eliminate any confusion

the January 1998 proposed regulations

may have caused and to make Phase I

of this rulemaking clear, we are defining

OT by a list of specific HCPCS/CPT

codes. In light of the changes we have

made in Phase I of this rulemaking, it is

not necessary for us to include the

references to the intermediary and

carrier manuals that the commenter

suggested.

Occupational therapy services may be

furnished by an occupational therapist,

an occupational therapy aide who is

supervised by an occupational therapist,

or by a physician. Section 1861(r) of the

Act allows a physician to furnish any

medical service that his or her State

allows the physician to furnish.

F. Radiology and Certain Other Imaging

Services

In the January 1998 proposed rule, we

combined the DHS in section

1877(h)(6)(D) of the Act—‘‘radiology

services, including magnetic resonance

imaging, computerized axial

tomography, and ultrasound services’’—

and 1877(h)(6)(E) of the Act—‘‘radiation

therapy services and supplies’’ into the

following definition:

Radiology services and radiation therapy

and supplies means any diagnostic test or

therapeutic procedure using X-rays,

ultrasound or other imaging services,

computerized axial tomography, magnetic

resonance imaging, radiation, or nuclear

medicine, and diagnostic mammography

services, as covered under section 1861(s)(3)

and (4) of the Act and §§ 410.32(a), 410.34,

and 410.35 of this chapter, including the

professional component of these services, but

excluding any invasive radiology procedure

in which the imaging modality is used to

guide a needle, probe, or a catheter

accurately.

Commenters found the proposed

definition to be confusing in two main

respects:

• The definition both combined two

different categories of radiology-related

services (that is, radiology and radiation

therapy and supplies) and included

other services not commonly considered

to be radiology-related (ultrasound and

nuclear medicine). Many commenters

thought that all services not strictly

considered radiology should be

excluded.

• At different places in the January

1998 proposed regulation preamble, we

stated that we were excluding DHS that

were peripheral, incidental, or

secondary to a nondesignated health

service. In the proposed definition,

however, we only excluded imaging

modalities used to ‘‘guide a needle,

probe, or catheter.’’ Many commenters

thought the scope of excluded radiology

and other imaging services should be

broader than just guidance, while others

thought the distinction between primary

and secondary services would be

difficult to apply in practice.

Based on the comments, we have

redefined this category of DHS in a

manner that should provide greater

clarity. First, we have segregated

radiation therapy and supplies from

radiology and other imaging services

and returned them to a separate

category, as in the statute. (We discuss

comments relating to radiation therapy

services in section VIII.G of this

preamble). Second, we are excluding

nuclear medicine since those services

are not commonly considered to be

radiology. Third, for purposes of these

regulations we have renamed the

category of services covered by section

1877(h)(6)(D) of the Act ‘‘Radiology and

Certain Other Imaging Services’’ to

make clear the Congress’s intent to

include in subsection (D) some imaging

services other than radiology. Fourth,

consistent with the approach we are

following with several other of the DHS

categories, we are defining the entire

scope of covered services under section

1877(h)(6)(D) of the Act by using lists of

CPT and HCPCS codes, which lists

control in all circumstances. The lists

include those services typically

considered as radiology or ultrasound

services, or as constituting an MRI or a

computerized axial tomography (CAT)

scan. Fifth, we have excluded certain

covered preventive screening

procedures, such as screening

mammography, that are subject to

HCFA-imposed frequency limits that

mitigate the potential for abuse. In these

circumstances, we believe the Congress

did not intend the physician self-referral

law to interfere with a physician’s or

entity’s attempts to provide these

preventive procedures to Medicare

patients.

Sixth, based on the comments we

received, we concluded that the terms

‘‘invasive’’ radiology and radiology

‘‘incidental’’ or ‘‘secondary’’ to a nonDHS procedure used in our proposed

definition of ‘‘radiology services’’

created confusion and uncertainty. We

agree with commenters that ‘‘invasive’’

radiology includes more than just those

procedures used to ‘‘guide a needle,

probe or catheter.’’ Consequently, we

are revising our definition of radiology

and certain other imaging services to

exclude from the definitional list of

codes x-ray, fluoroscopy, and

ultrasound services that are themselves

invasive procedures that require the

insertion of a needle, catheter, tube, or

probe. Thus, cardiac catheterizations

and endoscopies will not fall within the

scope of ‘‘radiology services’’ for

purposes of section 1877 of the Act. All

MRIs or CAT scans, however, are within

the scope of DHS because excluding

some on the basis that they are

‘‘invasive’’ tests would have the effect of

excluding all MRIs and CAT scans that

use contrast injection. The use of

contrast is not mandatory for the

performance of a scan, as it is for the

performance of a barium enema,

excretory urogram, or traditional

vascular angiography. Thus, an

exclusion from the DHS definition of

contrast for MRIs and CAT scans could

have the effect of encouraging the use of

contrast when it is not necessary.

In addition, we have concluded that

radiology procedures that are integral to

the performance of, and performed

during, a nonradiology medical

procedure are not within the scope of

DHS. The list of codes that defines the

scope of ‘‘radiology and certain other

imaging services’’ will make this

distinction clear. Examples of these

integral services include, but are not

limited to, imaging guidance procedures

and radiology procedures used to

determine, during surgery, whether

surgery is being conducted successfully.

In the CPT, these radiology procedures

are identified as cross-references to the

principle procedures with which they

are associated. A radiology procedure,

such as a CAT scan or a chest x-ray,

performed before or after another

928 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

procedure, such as a lung cancer

resection, is considered to be a

diagnostic radiology procedure that is

not integral to the principle procedure

(that is, the lung cancer resection).

While these radiology procedures are

essential to the performance of the

principle procedure, physicians have

discretion in choosing which entity

provides the radiology service

independent of the entity providing the

principle surgical service. These

nonconcurrent services are DHS.

Regardless of our definition of

‘‘radiology and certain other imaging

services,’’ some services that are not

within the scope of that definition may

still be DHS if they are inpatient or

outpatient hospital services, a separate

category of DHS under section

1877(h)(6)(K) of the Act. These services

would be subject to the physician

referral rule if the referring physician

has a financial relationship with the

hospital. We anticipate most of these

financial arrangements will meet an

exception under section 1877 of the Act

(for example, the exception for hospital

ownership or either the employment or

personal service arrangements

exception).

We address comments related to the

definition of services covered by section

1877(h)(6)(D) of the Act below. To the

extent some commenters raised issues

such as the general effects of section

1877 of the Act on physicians’ practices

or on medicine in general, those issues

are addressed elsewhere in the

preamble, where relevant.

Comment: Several commenters

asserted that the proposed definition of

‘‘radiology services’’ that included all

sound-based or imaging-based

technologies is contrary to congressional

intent. The commenters argued that the

Congress intended to limit the

definition by removing original

language that included the phrase

‘‘other diagnostic services’’ along with

radiology services.

Response: The phrase ‘‘radiology, or

other diagnostic services’’ was added in

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

OBRA 1993 as one of the categories of

DHS the Congress chose to cover in

addition to clinical laboratory services.

This one set of services appeared to

include the extremely broad category of

‘‘other diagnostic services,’’ in addition

to radiology services. The Congress

narrowed this category in section 152 of

the Social Security Act Amendments of

1994 (SSA 1994), Public Law 103–432,

enacted on October 31, 1994, perhaps

because it realized the huge scope of

‘‘diagnostic services.’’ The amendments

revised section 1877(h)(6)(D) of the Act,

effective January 1, 1995, by replacing

the category with ‘‘radiology services,

including magnetic resonance imaging,

computerized axial tomography, and

ultrasound services.’’ While all of these

services might not be subsumed in the

category ‘‘radiology services,’’ the

Congress clearly intended to include

them as DHS. We have renamed the

category ‘‘radiology and certain other

imaging services’’ to reflect the

Congress’s intent.

Comment: One commenter questioned

why cardiac, vascular, and obstetric

ultrasound procedures could not be

referred. The commenter stated that in

most institutions these procedures are

not considered radiology procedures

since radiologists may never supervise

or interpret them. Another commenter

argued that although echocardiography

is a type of ultrasound procedure, it

should not be considered a radiology

service because echocardiography is a

service developed and performed

primarily by cardiologists, billed under

cardiology CPT codes, and furnished to

cardiac patients. As a result, the

commenter argued that it is inaccurate

and inappropriate to include

echocardiography within the definition

of radiology services.

Response: Cardiac, vascular, and

obstetric ultrasound procedures are

subject to the physician self-referral

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

of the Act specifically includes

ultrasound as a designated health

service, not because they are ordinarily

considered to be ‘‘radiology services.’’

Simply stated, the term ‘‘radiology

services’’ as applied to the services

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

Act is a misnomer. Section

1877(h)(6)(D) of the Act includes any

services that are traditionally regarded

as ‘‘radiology’’ services, as well as MRIs,

CAT scans, and ultrasound services.

Cardiac echography and vascular

echography are clearly ultrasound

services. Nothing in the regulation

would prohibit a vascular surgeon,

neurologist, or other specialist from

ordering a particular service from an

entity with which he or she has no

prohibited financial relationship.

Comment: Several commenters were

opposed to our proposal to exclude as

‘‘invasive’’ radiology only those

invasive procedures used to guide a

needle, probe, or catheter accurately.

Two of the commenters were concerned

that invasive radiology procedures,

which use an imaging modality not only

to guide a needle, probe or catheter, but

also to record an accurate picture of the

areas of the body being probed or

catheterized, would be included in the

definition of radiology. (An example of

this would be an ultrasound device

placed at the end of a catheter or

endoscope.)

Response: We agree and have not

included x-ray, fluoroscopy, and

ultrasound services that require the

insertion of a needle, catheter, tube, or

probe on the list of HCPCS/CPT codes

that defines the full scope of radiology

and other imaging services for purposes

of section 1877 of the Act. Some of these

services may still be DHS when they fall

within the category of inpatient and

outpatient hospital services.

Comment: Several commenters

objected to our proposal to exclude

radiology services that were ‘‘merely

incidental or secondary’’ to another

procedure that the physician has

ordered. (See our January 1998

proposed rule, 63 FR 1676.) Some

commenters noted that 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 being an adjunct procedure)

or whether the primary purpose was to

take a picture with an imaging modality.

Because it is extremely difficult and

impractical in the commenters’ view to

separate the radiology component from

the underlying procedure, the

commenters recommended that we

exclude all invasive radiology services,

encompassing those procedures that

may include an adjunct radiology

procedure performed at the same time

as the interventional procedure. Other

commenters thought that the definition

of radiology services should also

exclude imaging services when they are

performed before and/or after a surgical

procedure. For example, a commenter

requested that we add language to the

proposed definition of radiology to

exclude any radiology procedure in

which the imaging modality is used to

plan the invasive procedure. The

commenter noted that for many invasive

procedures, an ultrasound before the

actual procedure might be routinely

necessary in order to plan the manner

in which the needle, catheter, or probe

would be guided during the actual

invasive procedure. In these

circumstances, the patient already has

received the diagnosis that the invasive

procedure is necessary. The commenter

believes that we should maintain the

view that a physician would not refer a

patient for these procedures in order to

profit from unnecessary radiology

services. Another commenter stated that

under our proposed interpretation of

invasive procedures, an echocardiogram

that showed a need for bypass surgery

would be a designated health service,

while one that ruled out surgery would

not, since there would be no surgical

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 929

procedure to which the imaging service

would be ‘‘incidental.’’ Finally, a

neurologist commented that there are a

number of radiology procedures

performed by neurologists that are

incidental to other procedures,

particularly certain surgical services.

One of the examples given by the

commenter was carotid duplex or

transcranial Doppler ultrasound, which

are tests performed after carotid

endarterectomy to look for clots. The

commenter believes these radiology

services should be excluded.

Response: We agree with the

commenter that the ‘‘incidental/

secondary’’ test in the January 1998

proposed rule has led to some confusion

and uncertainty and have abandoned it

in Phase I of this rulemaking. We

believe the list of codes set forth in

Phase I of this rulemaking (and annually

thereafter in the physician fee schedule

rule) will create a ‘‘bright line’’ test that

will ease compliance. In selecting the

codes for radiology and ultrasound, we

are not including any codes for

radiology or ultrasound procedures that

have an invasive component; that is,

that include the insertion of a needle,

catheter, tube, or probe through the skin

or into a body orifice. (‘‘Invasive’’ would

encompass radiology services involving

contrast that must be injected, but not

contrast materials that are ingested by

the patients themselves.) In addition, we

are not including radiology and

ultrasound procedures that are integral

to and performed during the time a

nonradiology procedure is being

performed, such as ultrasound used to

provide guidance for biopsies and major

surgical procedures or used to

determine, during surgery, whether

surgery is being conducted successfully.

Phase I of this rulemaking requires that

to be considered integral to a

nonradiology procedure (and therefore

not a radiology or other imaging service

for purposes of section 1877(h)(6)(D) of

the Act), the imaging procedure must be

performed during the nonradiology

procedure. A radiology or ultrasound

procedure performed before or after

another procedure (for example, a scan

or a chest x-ray before a lung cancer

resection, an echocardiogram before a

bypass, or a duplex carotid ultrasound

before or after surgery) is a diagnostic

radiology procedure that is not integral

to another procedure and therefore is a

radiology or other imaging service under

section 1877(h)(6)(D) of the Act. In the

case of services performed before or

after a procedure, referring physicians

have discretion in choosing the entity

that provides the radiology service

independent of the entity providing the

surgical service. Depending on the facts,

referrals for these services to entities

with which the referring physician has

a financial relationship may be

protected under the various exceptions

to the statute.

In all cases, the definitional list of

codes controls in determining whether a

service falls within the scope of

‘‘radiology or certain other imaging

services’’ for purposes of section 1877 of

the Act.

Comment: Two commenters were

opposed to our proposal to exclude

‘‘invasive’’ or ‘‘interventional’’ radiology

procedures from the definition of

radiology services. The commenters

believe that these procedures should be

included as DHS in order to safeguard

against overutilization and ensure that

appropriately trained physicians

perform the services. One commenter

argued that as a clinical matter,

‘‘invasive’’ or ‘‘interventional’’ radiology

services rarely are performed in an

office setting. Typically, interventional

radiologists perform such procedures as

angiography or angioplasty in a hospital

because they involve significant and

delicate work on a patient’s

cardiovascular system. Patients who

undergo invasive procedures must then

be monitored for a period of time in an

appropriate medical setting.

Consequently, that commenter, as well

as another, objected to our statement in

the preamble to the January 1998

proposed rule (63 FR 1676) that invasive

procedures ordinarily are ‘‘merely

incidental or secondary to another

procedure that the physician has

ordered.’’ One of the commenters stated

that the radiology services are neither

incidental nor secondary, but a vital and

integral part of the invasive procedure

performed. The procedures are as much

radiological as they are any other

portion. One commenter stated that if

invasive procedures occur in an office,

they should be performed by a

radiologist. The commenter believes

that excluding invasive or

interventional radiology procedures

could result in certain referral

arrangements by physicians that might

pose some risk of patient or program

abuse. One of the commenters noted

that when interventional radiologists

perform invasive radiology procedures,

there is no risk of program or patient

abuse. This is because interventional

radiologists do not typically make

referrals; they merely perform the

invasive radiology procedures and

return the patient to the care of the

referring physician. The commenter

believes, however, that physicians other

than interventional radiologists may

have an incentive to self-refer.

Response: We agree with the

commenter that we were incorrect to

characterize interventional radiology as

‘‘secondary’’ to many procedures, when

it can in fact be a vital and integral part

of the invasive procedure being

performed. It is not the purpose of the

physician self-referral law to discourage

any physicians from furnishing their

own services, such as interventional

radiology, within their own practices,

provided the physicians are functioning

within the scope of their license to

practice.

Comment: Many commenters asserted

that all or particular invasive cardiology

services should be excluded from the

definition because they are not subject

to program or patient abuse. Another

commenter asked that we be consistent

with regard to all forms of cardiac

catheterizations and endoscopy

procedures. The commenter stated that

providers want to be able to perform all

endoscopy services or cardiac

catheterization services in the same

setting and not have to limit their

services.

Response: Cardiac catheterizations

and endoscopy procedures are not

included on the CPT code list that

defines the scope of ‘‘radiology and

certain other imaging services,’’ because

they do not involve imaging services

that are covered under any of the

categories in section 1877(h)(6)(D) of the

Act. These services may still constitute

DHS as inpatient or outpatient hospital

services.

Comment: Two commenters noted

that in the preamble to the January 1998

proposed rule (63 FR 1676), we stated

that percutaneous transluminal

angioplasty was an example of an

invasive radiology procedure that we

would exclude from the definition of

radiology. The commenters stated that

this procedure is not commonly

considered to involve ‘‘invasive

radiology.’’

Response: The commenters are correct

in stating that percutaneous

transluminal angioplasty is not

fundamentally radiological in nature; it

is predominantly a therapeutic

intervention. Our wording in the

examples for invasive radiology may

have been confusing. We intended to

convey that the imaging procedures

associated with percutaneous

transluminal angioplasty would be

considered integral to the performance

of the angioplasty. However, by using

specific CPT codes to define the scope

of services covered by section

1877(h)(6)(D) of the Act, we have now

narrowed the definition of radiology

services so that it does not include

radiology that is integral to

930 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

interventional procedures, such as

angioplasty.

Comment: One commenter supported

our proposal to exclude screening

mammography from the definition of

DHS. The commenter believes that we

should expand the exclusion to cover all

DHS for which we have specified

coverage or frequency limits. The

commenter stated that screening tests by

definition are not subject to

overutilization.

Response: We agree with this

commenter and have modified Phase I

of this rulemaking to exclude from the

reach of section 1877 of the Act certain

legislatively mandated preventive

screening and immunization services

that are subject to HCFA-imposed

frequency limits and are paid based on

a fee schedule. The preventive services

to which this exception applies are

identified in Appendix A. We will add

codes for new preventive screening tests

and immunizations, as appropriate,

through the annual updating of the

attachment to this final rule.

Comment: One commenter

recommended that all mammography be

excluded from the definition of

‘‘radiology services.’’ The commenter

argued that generally diagnostic

mammography procedures are

performed only when a woman has

clinical indications for a diagnostic

mammogram. Thus, any risk of program

or patient abuse is significantly reduced,

if not eliminated. The commenter also

mentioned that the quality-centered

requirements of the Mammography

Quality Standards Act of 1992 minimize

the risk of potential overutilization of

mammography services. Another

commenter recommended the exclusion

of ‘‘diagnostic’’ mammography services

because he stated that it is necessary to

perform the mammography on the same

equipment for purposes of comparing

the initial screening with the second

diagnostic mammography. To prohibit

patients from using the same facility

adds an unnecessary element of

potential error to the equation.

Response: Diagnostic mammography

is clearly a radiological service under

section 1877(h)(6)(D) of the Act, and it

could be subject to abuse. It is our

understanding that most women receive

mammography from a radiologist who is

requesting diagnostic radiology services.

These physicians have not made a

referral under section 1877(h)(5)(C) of

the Act if they request diagnostic

mammography as the result of a

consultation requested by another

physician. We are regarding this

exception as applying to diagnostic

mammography that results when a

radiologist has first performed a

screening mammography as the result of

a consultation, and then recommends

follow-up diagnostic mammography, or

begins his or her consultation with

diagnostic mammography. (The

physician who initiated the consultation

with the radiologist has made a referral

that could fall within the scope of the

physician self-referral law if he or she

has a financial relationship with the

radiology facility.)

Comment: A commenter asked if

stress tests are DHS. The commenter

noted that some stress tests use nuclear

medicine procedures.

Response: Stress tests are generally

considered to be a physician service that

does not involve radiology, and stress

tests are not specifically listed in the

law as DHS. Some stress tests use

nuclear medicine procedures to create

an image of the heart. Because these

services are not included on the

definitional CPT code list for radiology

or other imaging services, they are not

DHS.

Comment: One commenter stated that

unless changed or clarified, the

proposed regulations could inhibit the

development and application of

telemedicine technology to populations

covered by the physician referral rules.

Of specific concern was the area of

ultrasound and a ‘‘unified’’ payment

(that is, a combined payment for the

technical and professional components

of the service). The commenter asserted

that Medicare and many State Medicaid

programs provide a unified payment for

ultrasound. The commenter described

the problems of a unified payment with

an example of a community physician

performing the technical component of

an ultrasound service and a distant

tertiary hospital’s physician performing

the professional component. If the

tertiary provider billed for the

ultrasound service under a ‘‘unified’’

(that is, global) fee-for-service payment

to cover the professional component of

the ultrasound service, the tertiary

facility logically should determine a

payment for the technical component to

pay the community physician who

provides that service. However, since

the community physician would be

referring to the tertiary facility for the

ultrasound study, such a payment could

violate the physician referral regulations

(that is, it would not fall within an

exception).

At the time of the comment period for

the January 1998 proposed rule, the

commenter was aware that we were

considering the publication of a separate

proposed rule that would specify an

appropriate ‘‘split’’ of global payments

in the area of telemedicine; that is, it

would specify separate payment

amounts for the technical and

professional components of services.

The commenter suggested that if we did

issue those regulations, we should also

recognize in the physician referral rules

that payment by the tertiary provider to

the referring community physician for

providing the technical component of

an ultrasound service performed via

telemedicine should be exempted if it is

under a HCFA-designated, or insurerdesignated, allocation between the two

aspects of an otherwise ‘‘global’’

payment.

Response: We believe that Phase I of

this rulemaking addresses this issue

satisfactorily. The basic principle of

Phase I of this rulemaking is that any

payment from an entity furnishing a

designated health service to a referring

physician must be at fair market value,

not taking into account the volume or

value of any referrals or other business

generated by the referring physician

(when this latter language is included in

an exception). We are revising Phase I

of this rulemaking to make clear that

‘‘per service’’ payments are allowed,

even with respect to DHS ordered by the

physician, provided the payment meets

the fair market value standard. In the

situation described by the commenter,

the split is determined by the Medicare

program based on its independent view

of the value of the services provided. Of

course, any split between a referring

physician and another provider may

also raise concerns under the Federal

anti-kickback statute.

With respect to Medicare

reimbursement for telehealth services,

we published a proposed rule on June

22, 1998 (63 FR 33882) and final rule on

November 2, 1998 (63 FR 58814) to

implement section 4206 of the BBA

1997. Specifically, the November 1998

final rule permitted payment for

professional consultations via

interactive telecommunication systems

in rural HPSAs and established separate

payment amounts for the referring and

consulting practitioners of a

teleconsultation in a rural HPSA. As we

noted in the preamble (63 FR 58883) to

that November 1998 final rule, the rule

specifies that the consulting practitioner

must submit the claim for the

consultation service and must share 25

percent of the total payment with the

referring practitioner.

We clarified in the November 1998

telehealth final rule that these

provisions only apply to

teleconsultation services. Under

Medicare, a teleconsultation is a

consultation service delivered via

telemedicine. These services are

represented by CPT codes 99241

through 99275. Diagnostic ultrasound

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 931

(CPT code 76506) on the other hand, is

a radiology service and would not fall

within the purview of a teleconsultation

under Medicare. Therefore, the payment

methodology requiring the sharing of

payment between the consulting and

referring practitioners would not apply

to diagnostic ultrasound services. In the

case of diagnostic ultrasound, the

physician providing the interpretation

of the image typically would bill for the

interpretation, while the technical

component (that is, conducting the test)

is billed by the practitioner or facility

that captured the ultrasound image.

Medicare has no national rule stating

that the professional and technical

components of a service, including

ultrasound services, must be billed in a

‘‘global’’ manner. In fact, in the annual

update to the physician fee schedule,

separate codes for the professional

component as well as the technical

component of a service are listed,

including the diagnostic ultrasound

codes. Of course, in those cases in

which there is no technical component,

one code is used for Medicare payment

and billing.

G. Radiation Therapy

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

includes radiation therapy services and

supplies. In the January 1998 proposed

rule, we combined radiation therapy

with radiology in a single definition.

Because commenters found the

combined definition to be confusing, we

are amending the January 1998

proposed regulation so that radiology

services and radiation therapy services

are now separate categories (as in

section 1877 of the Act itself). This

change makes it clear that the two

categories are actually very separate

kinds of services. We are basing our

definition of radiation therapy services

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

Act. This provision includes, as

‘‘medical and other health services’’

covered by Medicare, ‘‘x-ray, radium,

and radioactive isotope therapy,

including materials and services of

technicians.’’ However, we want to

clarify that, for physician referral

purposes, the list of codes that defines

‘‘radiation therapy services and

supplies’’ in Phase I of this rulemaking

does not include nuclear medicine

services. While nuclear medicine

involves the injection of radioactive

isotopes directly into a patient’s

bloodstream, these services are not

generally regarded as radiation therapy,

they involve different equipment and

procedures, and physicians who

provide nuclear medicine have a

separate certification. We have included

in the attachment to this final rule a list

of codes that will define radiation

therapy services and supplies. This list

will be updated and reprinted in full

annually as part of the physician fee

schedule.

Comment: A commenter noted that

because the January 1998 proposed

regulations bundle radiology services

and radiation therapy and supplies into

a single category of DHS, the

professional component of radiation

therapy services has also been included

within the definition of DHS. The

commenter stated that some radiation

oncologists would effectively be

precluded from being paid on a

productivity basis for their services,

given that virtually all of the

professional services that some

physicians perform are radiation

therapy services for Medicare patients.

The commenter believes that the

Congress did not intend this result.

Response: The law excludes from the

definition of a ‘‘referral’’ any request by

a radiation oncologist for radiation

therapy if these services are furnished

by (or under the supervision of) the

radiation oncologist pursuant to a

consultation requested by another

physician. In addition, we are amending

the definition of a ‘‘referral’’ to exclude

any professional components personally

performed by referring physicians

themselves. Together, these provisions

should largely address the commenter’s

concerns.

Comment: Several commenters

recommended that we exclude prostate

brachytherapy from the definition of

radiation therapy. Prostate

brachytherapy is the placement of

radioactive sources into the prostate,

through ultrasound guidance, for the

purpose of treating prostate cancer. The

commenters argued that this procedure

should be excluded because it is

performed once and is only performed

on persons with a biopsy-proven

diagnosis of prostate cancer. They

advocated the use of physician

ownership of brachytherapy facilities

and equipment because it means that

the urologists and radiation oncologists

involved are actually performing the

procedure themselves in a facility

contracting with those physicians. The

design of this model includes the

supervision of every case by an

experienced brachytherapist present in

the operating room. According to the

commenter, physician ownership of the

equipment also ensures quality of

physician education and of surgical

technique.

The commenters asserted that we

should allow multiple physicians to

own brachytherapy equipment because

centralized planning for radiation

physics results in all cases being

planned in a controlled and uniform

fashion. Uniformity eliminates many

empirical physician decisions that in

the past led to dosimetry errors. In

addition, having two or more physicians

owning the equipment encourages

reporting of outcome data collection to

a central agency, resulting in a

continuous and rapid review of

treatment results and complications.

Commenters pointed out that experts

have published restrictive dose

guidelines for the various stages of

prostate cancer treated with

brachytherapy, so there is no risk of

overutilization. Also, brachytherapy is

less expensive and has a lower

complication rate than the other forms

of treatment (radical prostatectomy or

external beam radiation therapy).

The commenters believe that because

of all of these factors the procedure has

little potential for program or patient

abuse and should be exempt from the

physician self-referral prohibition.

Response: We are aware of no logical

or empirical evidence that physician

ownership improves quality of services

or physicians’ skills. On the other hand,

brachytherapy is one of several therapy

options for certain prostate conditions.

We believe that ownership of a

brachytherapy center by urologists

could well influence their

recommended therapy and, therefore,

affect utilization. In short, the

relationship is exactly the type of

financial relationship section 1877 of

the Act is intended to address. The law

excludes from the definition of a

‘‘referral’’ any request by a radiation

oncologist for radiation therapy if these

services are furnished by (or under the

supervision of) the radiation oncologist

pursuant to a consultation requested by

another physician. In addition, we have

amended the definition of a ‘‘referral’’ to

exclude any professional components

performed by referring physicians

themselves.

H. Durable Medical Equipment (DME)

In § 411.351 of the January 1998

proposed rule, we defined DME as

having the meaning given in section

1861(n) of the Act and § 414.202

(Definitions). In the preamble to the

January 1998 proposed rule (63 FR 1677

through 1678), we offered explanations

of the terms and a list of the general

DME categories. However, we stated in

the preamble (63 FR 1677) that because

the number of items considered to be

DME was so extensive, we could not in

the proposed rule identify all of them.

Commenters were concerned about our

failure to articulate a ‘‘bright-line’’

definition of DME. The commenters

932 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

stated that if we could not do that,

physicians would have to assume that

the dispensing of all DME falls under

the referral prohibition.

The most frequent complaint was the

difficulty the commenters had in

determining whether a given item was

DME or a prosthetic, prosthetic device

or orthotic. (The distinction is

significant since under section

1877(b)(2) of the Act prosthetics,

prosthetic devices, and orthotics may be

provided to a patient by a physician

under the in-office ancillary services

exception, while DME (other than

infusion pumps) cannot.) The easiest

way to determine the proper

classification of an item is to consult the

Durable Medical Equipment,

Prosthetics/Orthotics, and Supplies

(DMEPOS) fee schedule, which is

updated quarterly and available on the

internet under HCFA’s public use files

(www.hcfa.gov/stats/pufiles.htm).

Under the DMEPOS fee schedule, items

are identified by their HCPCS code and

also include a category designation that

identifies whether the item is DME,

prosthetics, orthotics, or prosthetic

devices. DME items include the

following categories:

CR, capped rental DME.

FS, DME requiring frequent and

substantial servicing.

IN, inexpensive or routinely

purchased DME.

OX, oxygen and oxygen equipment.

SU, DME supplies.

TE, transcutaneous electrical (or

electronic) nerve stimulator.

Additionally, DME includes the

HCPCS code E1399. This code covers a

number of miscellaneous DME items,

but does not appear on HCFA’s national

fee schedule. Each DMERC (regional

DME carrier) is responsible for creating

a fee schedule for individual items that

are not included on HCFA’s fee

schedule.

We note that Phase I of this

rulemaking does not change existing

definitions for DME, prosthetics,

prosthetic devices, or orthotics. Thus,

the existing classification of an item

(that is, its classification as either DME,

prosthetic, prosthetic device, or

orthotic) will remain the same.

In sum, if, after reviewing the

definitions and accompanying

explanations that we provided in the

January 1998 proposed rule, as well as

the DMEPOS fee schedule and the

HCPCS codes covering miscellaneous

items, physicians and their staffs still

have questions about whether a specific

item is considered to be DME, we would

suggest that they contact their local

carrier or DMERC for clarification.

Comment: One commenter asked for

clarification on whether prosthetic and

orthotic devices that seem to meet the

criteria for DME are considered DME

supplies and whether they could be

provided under the in-office ancillary

services exception. The commenter

expressed some confusion regarding

whether crutches are DME or a

prosthetic or orthotic device.

Response: The categories of

prosthetics, orthotics, prosthetic devices

or DME are mutually exclusive; no item

can fall into more than one of these

categories. If individuals are concerned

about a particular type of equipment or

a supply, we would suggest that they

review the HCPCS codes or DMEPOS

fee schedule or contact their local

carrier or DMERC for clarification.

Again, we note that DMERCs process

more than DME claims. They also are

responsible for claims for other types of

devices and supplies. Crutches are

DME.

Comment: A commenter

recommended that we exempt crutches

from the definition of DME. The

commenter suggested that crutches are

provided as peripheral parts of a major

service (that is, a diagnosis of a broken

leg) and that it is unlikely a physician

would over-prescribe crutches for a

diagnosis of a broken leg just so that the

physician can bill for the crutches. The

commenter believes that having the

physician provide the crutches and

instruct the patient on how to use them

helps to prevent further damage to the

patient and is essential to good patient

care.

Response: We believe that crutches

are clearly DME and therefore DHS

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

As we stated in the January 1998

proposed rule, although we cannot

justify excluding crutches as a

designated health service, we recognize

that including crutches could greatly

inconvenience patients if physicians

were barred from providing them to

patients who need them to ambulate

following treatment for an injury or an

incapacitating procedure. For this

reason, we proposed expanding the inoffice ancillary services exception to

cover crutches when furnished in a

manner that meets the in-office ancillary

services exception requirements and in

which the physician realizes no direct

or indirect profit from furnishing the

crutches. We have adopted the proposal

in an expanded and modified form—

without the proposed profit

restriction—as described in section

VI.B.1 of this preamble.

Comment: Several commenters

opposed the inclusion of DME as a

designated health service and argued

that the inclusion of DME will result in

additional delays in treatment and

barriers to access for the nation’s poor

and elderly populations. Two of the

commenters urged us to support a

legislative change to remove DME from

the DHS list, while others urged us to

revise the January 1998 proposed rule to

remove DME entirely as a designated

health service. Those commenters

argued that when DME is furnished as

an in-office service, it has not been

associated with program abuse and

offers little or no opportunity for

overutilization. One of the commenters

contended that an unintended effect of

the inclusion of DME on the DHS list

would be underutilization, because

physicians would be prohibited from

furnishing DME in their offices.

Response: We believe that we cannot

create a separate exception for DME

because we cannot guarantee that such

an exception would always be free from

program or patient abuse. The Congress

explicitly included DME as a designated

health service in section 1877(h)(6)(F) of

the Act; we have no authority to vitiate

that judgment. We note that physicians

would only be prohibited from

furnishing DME services when they

have an unexcepted financial

relationship with the DME supplier.

Moreover, although we are not removing

DME from the list of DHS, we are

substantially revising the manner in

which the in-office ancillary services

exception applies to DME. These

changes will expand the provision of

DME under the in-office ancillary

services exception as detailed in section

VI.B.1 of this preamble.

I. Parenteral and Enteral Nutrients,

Equipment and Supplies

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

includes as DHS the category of

parenteral and enteral nutrients,

equipment, and supplies (PEN). Enteral

and parenteral therapy as a Medicare

Part B benefit is provided under the

prosthetic device benefit provision in

section 1861(s)(8) of the Act. The

regulations cover prosthetic devices in

§ 410.36 (Medical suppliers, appliances,

and devices: Scope), paragraph (a)(2).

Details for enteral and parenteral

therapy are set forth in section 65–10,

‘‘Enteral and Parenteral Nutritional

Therapy Covered as Prosthetic Device,’’

of the Medicare Coverage Issues Manual

(HCFA Pub. 6). When the coverage

requirements for enteral or parenteral

nutritional therapy are met, Medicare

also covers related supplies, equipment,

and nutrients.

We proposed in § 411.351 of the

January 1998 rule to define ‘‘enteral

nutrients, equipment, and supplies’’ as

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 933

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. (See section 65–10, ‘‘Enteral

and Parenteral Nutritional Therapy

Covered as Prosthetic Device,’’ of the

Medicare Coverage Issues Manual

(HCFA Pub. 6) for additional

information.)

We proposed in § 411.351 to define

‘‘parenteral nutrients, equipment, and

supplies’’ as 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, ‘‘Enteral and

Parenteral Nutritional Therapy Covered

as Prosthetic Device,’’ of the Medicare

Coverage Issues Manual (HCFA Pub. 6).

We are clarifying in Phase I of this

rulemaking that this category includes

all HCPCS level 2 codes for these

services. We believe this list will

address any uncertainties that

physicians and providers might have

about what constitutes PEN, and is

consistent with our definition in the

proposed rule.

We also pointed out in the preamble

to the January 1998 proposed rule that,

like DME, section 1877(b)(2) of the Act

specifically excludes PEN as services

that can qualify for the in-office

ancillary services exception.

Comment: A physician representing

himself and an infusion therapy

association asserted that physicians

should be allowed to prescribe, provide,

and be reimbursed for parenteral

nutrition for their own patients as an

extension of their practices. The

commenter asserted that there has been

no evidence of abuse, while there have

been major problems with fraud and

abuse and excessive profits by

nonphysician home infusion providers,

which function essentially without

physician control and minimal input

from physicians. The commenter

believes that because patients with

increasingly complex medical problems

are sent home earlier from the hospital,

the role of the physician office-based

model is increasingly important. The

January 1998 proposed referral

regulations, the payment schedule for

medications, and the restriction on

physician reimbursement for

ambulatory infusion pumps all

discourage a physician’s involvement in

these services.

Response: Section 1877 of the Act

does not prohibit physicians from

prescribing enteral and parenteral

nutrition for their own patients; nor

does it prohibit infusion companies

from contracting with expert or

knowledgeable physicians for

consulting services provided the

remuneration is fair market value and

does not take into account referrals or

other business between the parties.

Section 1877 of the Act does, however,

prohibit a physician from furnishing

enteral and parenteral nutrition in his or

her own office and billing for it unless

the physician’s arrangement qualifies

for an exception, such as the rural

provider exception in section 1877(d)(2)

of the Act. The Congress specifically

excluded the provision of enteral and

parenteral nutrition and durable

medical equipment (DME, other than

infusion pumps) from the in-office

ancillary services exception in section

1877(b)(2)of the Act.

We have the authority to create

additional exceptions to the referral

prohibition for financial relationships

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

only if we determine that there is no

risk of program or patient abuse.

However, we believe that physicians

could potentially over-prescribe

parenteral nutrition if they have the

financial incentive to do so.

We only cover parenteral nutrition

when there is a permanent need (except

when covered under the home health

benefit). (See the Medicare Coverage

Issues Manual (HCFA Pub. 6), section

65–10, ‘‘Enteral and Parenteral

Nutritional Therapy Covered as

Prosthetic Device,’’ for additional

information. Because coverage of

nutritional therapy as a Part B benefit is

provided under the prosthetic device

benefit provision, the patient must have

a permanently inoperative internal body

organ or function.) We see no reason

why a patient should have to go to a

physician’s office regularly to receive

parenteral nutrition. Medicare already

covers parenteral nutrition delivered in

the home through the home health

benefit or the prosthetic device benefit.

Because enteral nutrition is widely

available through grocery stores, drug

stores, and other retail outlets, we see

no reason why a patient must purchase

enteral nutrition from a physician. A

patient can purchase certain more

specialized types of enteral nutrition

that are not widely available from a

DME supplier.

If a patient is to receive nutrition via

an infusion pump, the in-office ancillary

services exception cannot be used for

the furnishing of the pump, since this

exception only allows physicians’

offices to furnish infusion pumps that

are DME. See section VI.B.1 of this

preamble for more details about

infusion pumps. (To furnish an infusion

pump that is DME for use in the home,

a physician would have to meet all of

the supplier requirements in § 424.57.)

As for the commenter’s concerns

about the payment schedule for

medications, that issue is not addressed

by the physician referral regulation.

J. Prosthetics, Orthotics, and Prosthetic

Devices and Supplies

Prosthetics, orthotics, and prosthetic

devices and supplies are included as

DHS under section 1877(h)(6)(H) of the

Act. We proposed in the January 1998

rule to define ‘‘prosthetics’’ at § 411.351

as artificial legs, arms, and eyes, as

described in section 1861(s)(9) of the

Act. We defined ‘‘orthotics’’ as leg, arm,

back, and neck braces, as listed in

section 1861(s)(9) of the Act. We

proposed to define a ‘‘prosthetic device’’

as a device (other than a dental device)

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

that replaces all or part of an internal

body organ, including colostomy bags

and including one pair of conventional

eyeglasses or contact lenses furnished

subsequent to each cataract surgery with

insertion of an intraocular lens, as well

as services necessary to design the

device, select materials and

components, measure, fit, and align the

device, and instruct patients in its

proper usage. We proposed defining

‘‘prosthetic supplies’’ as ‘‘supplies that

are necessary for the effective use of a

prosthetic device (including supplies

directly related to colostomy care).’’

We are clarifying in Phase I of this

rulemaking that this category includes

all HCPCS level 2 codes for these

services that are covered under

Medicare. Physicians and other persons

can readily determine the classification

of an item by consulting the DMEPOS

fee schedule. However, as with DME,

there are several specific HCPCS codes

representing miscellaneous items

classified as prosthetics, orthotics, or

prosthetic devices that do not appear in

the fee schedule.

We explained in the preamble of the

January 1998 proposed rule (63 FR

1678) that Medicare regards intraocular

lenses (IOLs) used as part of cataract

surgery as prosthetic devices. We also

stated in the preamble that if these

lenses are implanted in an ASC, they

would be covered under the ASC

payment rate and would have been

excluded under the exception we

proposed to create in § 411.355(d). As

explained above, we are no longer

considering DHS that are included in a

bundled ASC payment to be DHS.

934 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

Accordingly, when an IOL is included

in an ASC bundled payment rate, it will

not be considered to be a designated

health service.

We are also addressing a number of

commenters’ requests by creating

exceptions (through our authority under

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

prosthetic devices that are implanted in

a Medicare-certified ASC and for

eyeglasses or contact lenses that are

prescribed after cataract surgery. We

explain our reasons for these exceptions

in our responses to specific comments.

Comment: One commenter asserted

that the final rule should allow

physicians to provide durable medical

equipment, orthotics, and prosthetics

directly to patients when they are

medically necessary. Physicians

currently supply splints, braces, or other

devices directly to patients who have

injuries, thereby ensuring that the

patient gets the appropriate device, that

the item is properly fitted, and that the

patient is properly instructed in its use.

To require a patient with an injury to

leave the office, go to a DME supplier,

purchase the necessary equipment, and

return to the physician’s office for fitting

or placement and instructions on use,

would be unwise, inconvenient, and

could frequently cause unnecessary

pain or further injury.

Response: The splints, casts, and

other devices used to treat fractures and

dislocations the commenter mentions

are covered under section 1861(s)(5) of

the Act, a benefit category that is

different from the benefit categories that

include DME, prosthetics, orthotics, and

prosthetic devices. They are therefore

not DHS under section 1877(h)(6) of the

Act. Leg, arm, back, and neck braces are

considered to be ‘‘orthotics’’ and are

thus included as DHS. These can be

provided by a physician within his or

her own practice under the in-office

ancillary services exception in section

1877(b)(2) of the Act, which excepts a

physician’s referral if the services meet

certain supervision, location, and billing

requirements. This exception could

apply to referrals for any prosthetics,

orthotics, or prosthetic devices. As

modified by these regulations, the inoffice ancillary exception could also

apply to referrals for certain DME

services. (See section VI.B.1 of this

preamble.)

Comment: A number of commenters

favored our proposal to exclude IOLs

implanted during cataract surgery

performed in an ASC because the IOLs

are included in the ASC payment rate.

The commenters asserted that a

substantial number of ASCs are owned

by the physicians who perform surgical

procedures in them and that these

physicians are not members of one

group practice. The commenters see the

ASCs as an extension of the physician’s

own office and believe they provide a

high quality, low cost setting for

outpatient surgery.

Commenters requested that we

exempt from the physician self-referral

prohibition other prosthetic devices

implanted in conjunction with surgical

procedures because the provision of the

prosthetic devices is incidental to the

provision of ASC facility services,

which are exempt from the physician

self-referral prohibition. The commenter

asserted that, as we noted in the January

1998 proposed rule, a physician would

not unnecessarily subject patients to a

surgical procedure to profit from the

implant. In addition, there is no risk of

program abuse because the Medicare

payment for prosthetic devices

implanted in conjunction with ASC

facility services is limited to the lower

of the actual charge for the device or a

fee schedule amount. Commenters

emphasized that the use of implanted

prosthetic devices in reconstructive

surgery is immensely beneficial to

patients.

Response: We agree with the

commenters that all prosthetic devices

implanted in a Medicare-certified ASC

by the referring physician or a member

of the referring physician’s group

practice should be excluded. We have

chosen this position because, if

surgeons refer to an ASC in which they

have an ownership interest, there will,

in many cases, be no exception that

would apply to their financial

relationship with the ASC. Implanted

prosthetic devices, implanted

prosthetics, and implanted DME are not

included in the bundled ASC payment

rate and thus would retain their

character as DHS even when implanted

in an ASC. As a practical matter, the

absence of an exception for all of these

items implanted in ASCs is likely to

result in these procedures moving to

more costly hospital outpatient settings.

We believe that the exclusion of these

implants from the reach of section 1877

of the Act (using our authority under

section 1877(b)(4)) will not increase the

risk of overutilization beyond what is

already presented by the surgeon’s Part

B physician fee and is consistent with

the Congress’s decision not to include

ambulatory surgical services as a

specific designated health service. We

are specifically providing that the

exception does not protect items

implanted in other settings. Nor does it

protect arrangements between

physicians and manufacturers or

distributors of implants where the

manufacturers or distributors furnish

DHS, for example, through subsidiaries

or affiliates. We are providing that the

arrangement for the provision of the

implant in the ASC may not violate the

anti-kickback statute and all billing and

claims submission must be proper.

Comment: Some commenters

recommended that we exclude some or

all implants to assure that there is no

chilling of the ability and opportunity of

Medicare patients to obtain the most

appropriate and up to date technology

that will be both effective and cost

efficient. In addition, commenters

pointed out that invasive surgery always

entails a risk to the patient and is not

undertaken without a physician

seriously evaluating that risk in relation

to the therapeutic or diagnostic benefit

likely to be brought by the device to be

implanted and determining what

specialized model and brand of device

will be most effective. Commenters

believe that including implants in the

definition of prosthetic devices will

have the counterproductive effect of

preventing surgeons from participating

in research and development of these

products, thereby curtailing research

activity and blunting future

development. This chilling effect would

dramatically affect the quality of patient

life and severely limit progress in

reducing the cost to patients.

Response: Surgeons should be able to

provide implants to their patients in any

appropriate setting by meeting

exceptions to the physician self-referral

law. As we described in responses to

earlier comments, we are creating an

exception for implants that are

performed in Medicare-certified ASCs.

As to implants in other settings or those

in ASCs that do not meet the new

exception, other exceptions may still

apply. Physicians who perform implants

within their own practices may be able

to use the in-office ancillary services

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

Act, which is discussed in section

VI.B.1 of this preamble. If a physician

performs the surgery in a hospital, and

the hospital bills for the implant, the

service would be a designated hospital

service, regardless of whether the

implant is a prosthetic or prosthetic

device. In these cases, any financial

relationship between the physician and

the hospital would have to fit in an

exception or the physician could not

perform the surgery, much less the

implant, since all hospital services are

DHS. There are several exceptions that

apply to referrals for hospital services.

The commenters seem to be under the

misapprehension that section 1877 of

the Act would prevent financial

relationships between the manufacturer

of an implant and a physician. These

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 935

financial relationships would not be

subject to section 1877 of the Act unless

the manufacturer were an entity that

bills Medicare directly. However,

arrangements between physicians and

manufacturers may be problematic

under other legal authorities, including,

for example, the Federal anti-kickback

statute.

Comment: One commenter believes

that we should not interpret the

definition of prosthetics, orthotics, and

prosthetic devices and supplies for

physician referral purposes to include

hip and knee implants. The commenter

believes that hip and knee implants do

not fall within the definitions of

prosthetics, orthotics, and prosthetic

devices and supplies that we included

in the January 1998 proposed rule. The

commenter pointed out that

‘‘prosthetics’’ is defined as artificial

legs, arms, and eyes, that ‘‘orthotics’’ is

defined as leg, arm, back and neck

braces, and ‘‘prosthetic devices’’ is

defined as devices that replace all or

part of an internal body organ. The

commenter believes that hip and knee

replacements do not fall under any of

these categories.

The commenter further stated that, if

hip and knee implants are somehow

considered as prosthetic devices under

Medicare, they should be excluded from

the referral prohibition on the basis that

they are only a component of a primary

surgical procedure meant to repair

damaged or painful joints. The

commenter believes physicians will not

ask patients to undergo painful and

debilitating surgery for the sake of

implanting an unnecessary artificial

knee or hip implant. Also, if these items

are billed as part of the hospital

diagnosis-related group (DRG) payment

for a surgical procedure, there is no

financial incentive to use more costly or

unnecessary implants and there is no

increased cost to the program if one

implant is chosen over another.

Response: Knee implants are

considered to be ‘‘prosthetics.’’ They are

components of the artificial legs that are

identified as prosthetics under section

1861(s)(9) of the Act. Artificial hips are

only furnished to hospital inpatients

under Medicare Part A, so we consider

them to be a component of an inpatient

hospital service. If a physician sends a

patient to a hospital for a hip or knee

implant or the insertion of a prosthetic

device, all the services billed by the

hospital would qualify as DHS under

section 1877(h)(6)(K) of the Act because

they are ‘‘inpatient or outpatient

hospital services.’’ The implants would

therefore be subject to the physician

self-referral law, even if we excluded

them from the separate category of

‘‘prosthetics, orthotics, or prosthetic

devices and supplies.’’

Comment: A commenter asserted that

we should exclude cochlear implants

from the definition of prosthetic

devices. In the January 1998 proposed

rule, we had indicated our concern that

a physician would choose a particular

device because he or she had supplied

it to the ASC where the patient’s

implant surgery was performed or

because the physician receives money

from a supplier for ordering the

particular device. The commenter stated

that the professional association he

represents is unaware of any abuses in

this area and, if there were abuses, they

would be subject to the anti-kickback

law.

Another commenter from an

association of audiologists agreed with

us that cochlear implants are a type of

prosthetic device that is properly within

the scope of the proposed rule. The

commenter regards a cochlear implant

as clearly being a prosthetic device

because it replaces all or part of an

internal body organ. A cochlear implant

is an electronic device specifically

designed to replace the function of a

damaged cochlea.

Response: We agree with the second

commenter that cochlear implants are

covered as prosthetic devices under

Medicare and are categorized as such in

the CPT codes in the attachment to this

final rule. As noted above, we are

excepting all implants performed in a

Medicare-certified ASC by the referring

physician or a member of the referring

physician’s group practice, subject to

certain conditions set forth in the

exception.

Comment: A commenter noted that in

the January 1998 proposed rule we

stated that a prosthetic device includes

services necessary to design the device,

select materials and components,

measure, fit, and align the device, and

instruct patients in its proper usage. The

commenter requested that we expressly

clarify that certain services provided to

patients after a cochlear implant are

subject to the physician self-referral

provisions. These services include

device mapping, aural rehabilitation

programs for adults to enable them to

learn to use the device, and aural

habilitation programs for children to

maximize speech and language

development.

The commenter asserted that these

postsurgical services are provided by

audiologists without physician

involvement or supervision of any kind.

In addition, the commenter stated that

cochlear rehabilitation services are not

included in the global fee for cochlear

implantation surgery. Instead, these

services are billed under a unique CPT

code, 92510.

Response: The Medicare definition of

a prosthetic device ordinarily includes

the services necessary to design the

device, select materials and

components, measure, fit, and align the

device, and instruct patients in its

proper usage. In fact, the costs of

delivery, fitting, measuring and

instructing the patient are bundled into

the fee schedule payment amount for

not only prosthetic devices, but for

DME, orthotics, and prosthetics as well.

However, cochlear implants are

somewhat unique. Because it can be

particularly difficult for a patient to

learn to use the implant, cochlear

rehabilitation services are categorized

separately as speech-language pathology

services. These services are billed under

CPT code 92510 (which is included as

a PT service because it is a speechlanguage pathology service). Therefore,

all of these services qualify as

‘‘designated health services,’’ but under

different categories.

Comment: A commenter pointed out

that items such as rib belts, slings, and

basic braces (those not custom-fitted)

are in the prosthetic/orthotic section of

the HCPCS. The commenter asked

whether these items would be

considered orthotics or DME, since the

patient would be wearing the item

home. The commenter believes that, in

either case, it would be inappropriate to

prevent a physician from supplying and

billing for these items when the patient

has come to the office with an injury.

The commenter asserted that requiring a

patient to leave the physician’s office to

purchase necessary equipment is

inconvenient and unwise because it

may result in unnecessary pain or injury

to the patient.

Response: The items described as ‘‘rib

belts’’ and ‘‘slings’’ are not included in

any DHS category. The items described

as ‘‘basic braces’’ are orthotics. Nothing

in Phase I of this rulemaking moves any

item or device from one coverage

category to another coverage category. If

the items qualify as in-office ancillary

services under section 1877(b)(2) of the

Act, a physician who supplies them in

his or her office in the course of seeing

a patient should be able to use the inoffice ancillary services exception in

order to provide them to the patient,

even if the patient takes the items home.

We regard the physician as ‘‘furnishing’’

an item in his or her office if the

physician dispenses the item to the

patient there.

Comment: Several commenters urged

us to exclude eyeglasses and contact

lenses from the definition of prosthetic

devices. Commenters noted that there is

936 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

no incentive to overutilize or abuse this

benefit because we acknowledge that

one pair of conventional eyeglasses or

contact lenses is medically necessary

after cataract surgery; Medicare coverage

is limited to one pair of conventional

eyeglasses or contact lenses; and

Medicare payment is on a reasonable

charge basis.

Response: We agree with the

commenters that eyeglasses and contact

lenses should be excluded from the

reach of section 1877 of the Act for

purposes of Medicare referrals. The

Medicare coverage of these items is

unique in that it is limited to one pair

of either item after each cataract surgery

and is available to any patient who has

had this surgery. In that respect, the

coverage is similar to the coverage of

preventive screening services that are

subject to frequency limits, as discussed

earlier in this section. In addition, the

Medicare-approved amount of payment

does not vary based on the expense of

a particular pair of glasses or contact

lenses. Medicare pays fixed amounts for

eyeglasses and contact lenses that are

single focal, and fixed amounts for

eyeglasses and contact lenses that are

bifocal. In sum, we see little opportunity

or incentive for a physician to either

under or overutilize these items in the

Medicare program. Accordingly, we are

creating a new exception under the

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

Act for eyeglasses and contact lenses

after cataract surgery. Like other section

1877(b)(4) exceptions, the new

exception is subject to there being no

violation of the anti-kickback statute or

any billing or claims submission law or

regulation.

K. Home Health Services

In the January 1998 proposed rule, we

proposed to define home health services

as the services described in section

1861(m) of the Act and part 409, subpart

E. We included in the preamble to that

rule (63 FR 1679), a discussion of how

we proposed to reconcile section 1877

of the Act and the physician

certification requirements for home

health services in § 424.22

(Requirements for home health

services), paragraph (d) (Limitations on

the performance of certification and

plan of treatment functions). In that

discussion, we explained that the home

health agency (HHA) rule and its

exceptions have been superseded by

section 1877 of the Act. Phase I of this

rulemaking reflects this change. Our

responses to comments mostly serve to

clarify how the modified home health

rule will work.

Comment: Four commenters

supported our proposal to reconcile the

physician self-referral law with the

physician certification requirements for

home health services contained in

§ 424.22(d). One commenter specifically

expressed agreement with our proposed

position that the exceptions to the

physician self-referral law would also

apply to physician certification

requirements for home health services.

Another commenter specifically

supported the proposed changes that

would eliminate the 5 percent

ownership and $25,000 financial or

contractual relationship limits and

replace them with the prohibition on

self-referral contained in section 1877 of

the Act. The commenter stated that this

change would allow HHAs to provide

for medical oversight by a salaried

physician as permitted under the

Medicare hospice benefit. (We believe

that commenter meant that the proposed

elimination of the $25,000 financial or

contractual relationship provision

would allow an HHA to pay a physician

medical director more than $25,000 as

long as the HHA meets relevant

ownership and compensation

exceptions described in the proposed

rule.) Another commenter asked that we

clarify whether the current $25,000

limit on financial or contractual

relationships as it relates to medical

directors of home care agencies will be

removed.

Response: We are removing the

current 5 percent ownership limit and

the $25,000 limit on financial or

contractual relationships from

§ 424.22(d). The new § 424.22(d)

appears exactly as we proposed it: ‘‘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, ‘Definitions,’

with that HHA, unless the physician’s

relationship meets one of the exceptions

in §§ 411.355 through 411.357 of this

chapter * * *.’’ The elimination of the

$25,000 financial or contractual

relationship provision will allow an

HHA to pay a physician medical

director more than $25,000 as long as

the financial relationship meets a

relevant ownership or compensation

exception under section 1877 of the Act.

Although we are delaying the

effective date for most of Phase I of this

rulemaking for 1 year, we are making

the change in § 424.22(d) effective

February 5, 2001. Having weighed the

alternatives, we believe an effective date

of February 5, 2001 for the revision of

§ 424.22(d) is desirable, even though the

revisions to §§ 411.355 and 411.357 will

not be effective until later. In the

interim, the references to §§ 411.355 and

411.357 will cross-refer to the statutory

exceptions set forth in section 1877 of

the Act. It is our view that during the

interim period, the exceptions set forth

in those sections would apply under

§ 424.22(d) for services other than

laboratory services.

Comment: One commenter requested

that we retain the provisions in

§ 424.22(e) (Exceptions to limitations),

(f) (Procedures for classification as a

sole community HHA) and (g) (Basis for

classification as a sole community HHA)

that except governmental entities and

sole community HHAs from the

prohibition on certification of need for

home health services by related

physicians. The commenter noted that

keeping this language would remove the

threat of unfair competition for agencies

that have historically been the sole

providers in their communities. The

commenter explained that the ‘‘rural

provider’’ exception to the physician

self-referral law would permit an urban

physician to establish a new HHA in a

rural area, as long as the agency’s

service population is at least 75 percent

rural. This would create new and unfair

competition for many rural agencies that

are small, nonprofit organizations.

Response: We realize that eliminating

the exceptions for governmental entities

and sole community HHAs in

combination with the ownership

exception for rural providers under the

physician self-referral law may create

new competition for small, nonprofit

HHAs. Nonetheless, we believe that we

do not have the legal authority to retain

these exceptions in any meaningful

way. As we pointed out in the preamble

to the January 1998 proposed rule (63

FR 1680), even if a physician and an

HHA are involved in an arrangement

that meets one of the home health

exceptions at issue, the arrangement

simultaneously remains subject to the

requirements in section 1877 of the Act.

That is, if an exception under the HHA

certification regulations is subsumed

within the exceptions in section 1877 of

the Act, a physician will be able to refer;

if it is not, the arrangement will

disqualify the physician from referring

in spite of § 424.22. Thus, the HHA

exceptions have been superseded by

section 1877 of the Act.

The Secretary does have the authority

to create additional exceptions to the

referral prohibition under section

1877(b)(4) of the Act, but only in

situations in which she determines that

there is no risk of program or patient

abuse. We believe that the fact that an

entity is run by the government or is a

sole community HHA does not

guarantee that there will be no

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 937

unnecessary referrals. In addition, it is

our view that we should treat all

providers equally and allow them an

equal opportunity to compete,

particularly in areas where there have

historically been too few providers. In

fact, the purpose of the ‘‘rural provider’’

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

Act is to encourage physicians to invest

in or remain invested in under-served

areas. (Note that hospitals do not have

similar exceptions for governmental

entities or sole community hospitals.)

Therefore, we do not intend to include

the exceptions for governmental entities

and sole community providers in the

revised HHA certification regulations

because we believe that our proposed

approach provides the best protection

against possible program abuse and

fulfills the intent of the law.

Comment: A commenter representing

home care physicians asked that we

clarify whether physicians making

home visits are providing services that

qualify as DHS under the January 1998

proposed regulations.

Response: Under the Medicare

program, when a physician performs a

physician service, including a visit to a

home health patient, the physician

service is billed as a physician service

and is not considered a home health

service. This is the case even when the

physician has an employment contract

with the HHA, such as when a

physician is employed as a medical

director. Thus, the commenter is correct

in noting that physician home visits are

not themselves on the list of DHS in

section 1877(h)(6) of the Act, and would

only qualify as such if the physician

was actually performing a specific

designated health service (for example,

performing physical therapy). In these

cases, the service would still be

protected if it is personally performed

by the referring physician, since it

would not be considered a referral

under the final rule. (See section III.B of

this preamble.) In addition, some inhome services provided by a home care

physician may qualify under the inoffice ancillary services exception. (See

section VI.B of this preamble.)

L. Outpatient Prescription Drugs

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

provides that ‘‘designated health

services’’ includes the category of

‘‘outpatient prescription drugs,’’ but

does not define this term. Because

Medicare does not cover a category of

services called ‘‘outpatient prescription

drugs,’’ we proposed to define this term

in the regulation. We proposed to

include only drugs (including

biologicals) defined or listed under

section 1861 (s) and (t) of the Act, and

in part 410, furnished under the

Medicare Part B benefit that patients can

obtain from a pharmacy with a

prescription, even if patients can only

receive the drug under medical

supervision. In the preamble to the

January 1998 proposed regulation (63

FR 1680), we included as an example

oncology drugs that are routinely

furnished in a physician’s office, under

the physician’s direct supervision,

provided the drugs could be obtained by

prescription from a pharmacy.

We proposed specifically to exclude

from the definition of ‘‘outpatient

prescription drugs’’ erythropoietin

(EPO) and other drugs furnished as part

of a dialysis treatment for an individual

who dialyzes at home or in a facility.

Upon further review of the law,

existing regulations, and the public

comments, we have concluded that our

proposed definition of ‘‘outpatient

prescription drugs’’ was not clear

enough. In Phase I of this rulemaking,

we are revising the definition of

outpatient prescription drugs to make

clear that it includes all prescription

drugs covered by Medicare Part B. We

are not excluding any outpatient

prescription drugs from the DHS

category of ‘‘outpatient prescription

drugs.’’ Including all outpatient

prescription drugs is consistent with our

policy throughout these final

regulations of avoiding carving services

out of DHS definitions through serviceby-service analyses of the potential for

fraud and abuse. Our definition of

outpatient prescription drugs provides

physicians and DHS entities with a

‘‘bright line,’’ common sense rule.

Moreover, the breadth of the definition

is ameliorated to a very large extent by

our expansion of the exception for inoffice ancillary services, which includes

much greater flexibility with respect to

the direct supervision requirement, and

our promulgation of a new limited

exception under section 1877(b)(4) of

the Act for the provision of EPO and

certain other dialysis-related drugs by or

in ESRD facilities (described in greater

detail below). Those changes, together

with the changes in the definition of

‘‘group practice’’ and ‘‘referral,’’ should

permit a physician to furnish patients

with covered drugs, either by

administering or dispensing the drugs to

patients in his or her office or, in the

case of EPO and other specific dialysis

drugs, by furnishing the drugs in or

through a physician-owned ESRD

facility. We wish to make clear that

nothing in this regulation affects, or is

intended to affect, current or future

coverage of any particular prescription

drug.

We are creating an exception for EPO

and certain other specific drugs that are

required for the efficacy of dialysis

when they are furnished by an ESRD

facility with which the referring

physician has a financial arrangement.

We are similarly excepting certain

vaccinations, immunizations, and

preventive screening tests that are

subject to HCFA-imposed frequency

limits. We are also clarifying that

physicians who provide drugs in their

own offices are not required to pass on

to Medicare discounts they receive in

purchasing these drugs, unless

otherwise required to do so by the

Medicare program. These issues are

discussed in detail below.

Comment: A number of commenters

raised the issue of whether drugs and

biologicals provided incident to

physician services are included in the

definition of outpatient prescription

drugs. The commenters pointed out that

most drugs and biologicals are covered

under Medicare Part B only if they

require administration by a physician,

and thus typically are covered in the

physician office setting only if furnished

as ‘‘incident to’’ physician services.

Thus, the resulting ‘‘self referral’’ is

effectively a requirement for Medicare

coverage. In the commenters’ view,

excluding drugs furnished incident to

physician services from the definition of

‘‘outpatient prescription drugs’’ would

ensure that the physician self-referral

law does not discourage the types of

‘‘referrals’’ that are prerequisites to

Medicare coverage.

One commenter asserted that drugs

that are covered under Medicare only as

a component of a physician service

should be excluded because physician

services were never intended to be

included within the referral prohibition.

Another commenter recommended that

we make all injectable drugs exempt

from the referral prohibition under the

in-office ancillary services exception.

Several commenters were particularly

concerned about antigens and serums

that a patient receives in a physician’s

office, stating that they should be

excluded from the category of outpatient

prescription drugs, along with

chemotherapy. Another commenter

pointed out that if our definition of

outpatient prescription drugs includes

drugs administered during a patient’s

office visit, patients could have serious

access problems to such drugs as

antibiotics, renal therapy, and vaccines.

Another commenter recommended that

we limit outpatient prescription drugs

to those that are self-administered, such

as oral cancer drugs, oral antiemetics,

and immunosuppressives, for which

there is Medicare coverage that does not

938 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

depend on administration in a

physician’s office.

Response: We believe the commenters

are conflating two issues: (1) What drugs

fit in the term ‘‘outpatient prescription

drugs’’ in section 1877(h)(6)(J) of the Act

and (2) the scope of the in-office

ancillary services exception in section

1877(b)(2) of the Act. Upon review, for

purposes of defining ‘‘outpatient

prescription drugs’’ under section

1877(h)(6)(J) of the Act, we can ascertain

no meaningful distinction between

prescription drugs dispensed by

pharmacies or those mixed and

administered in a physician’s office. To

the extent the latter is permitted, it is

through the vehicle of the in-office

ancillary services exception. The scope

of that exception is discussed in section

VI.B.1 of this preamble.

Comment: Many commenters stated

that oncology drugs administered to

patients by injection or infusion in a

physician’s office should be excluded

from the definition of outpatient drugs

because a patient essentially cannot

obtain these drugs from a pharmacy

before visiting his or her physician.

When a patient comes to a physician’s

office for chemotherapy, the patient

receives a series of blood tests to

determine the patient’s physiological

state. Based on these tests, the

chemotherapy agents are mixed and

tailored by the oncologist’s staff to

address the patient’s current health

status. Therefore, a patient cannot pick

up from a pharmacy the medication he

or she needs before visiting the

physician. We may have misunderstood

how chemotherapy drugs are actually

administered.

In addition, the commenters pointed

out that a great majority of retail

pharmacies are not currently prepared

to provide chemotherapeutic mixing

and dispensing services for infusion

drugs. That is because Federal

regulations and accepted standards of

practice for physicians, oncology

nurses, technicians, and pharmacists

require that the preparation, storage,

transportation, and disposal of

chemotherapy drugs and applicable

supportive agents be conducted under

the most rigorously controlled

circumstances.

Response: We agree that

chemotherapy agents are not commonly

available from retail pharmacies, but are

prepared for individual patients.

However, these drugs are outpatient

prescription drugs; they are available

only upon a physician’s order and are

provided in an outpatient setting.

(When provided in an inpatient setting,

they would be inpatient hospital

services under section 1877(h)(6)(K) of

the Act.) We believe these drugs are

usually administered in oncologists’

offices and typically should qualify for

the in-office ancillary services

exception. (See discussion in section

VI.B.1 of this preamble.)

Comment: Several commenters have

stated that in-office x-rays and

laboratory tests that are performed in

conjunction with the provision of

chemotherapy should be excluded from

the definition of DHS. The commenters

seemed particularly concerned that if

these services are regarded as DHS, a

physician would have to directly

supervise them. The commenters

expressed concern that requiring a

physician to be present during the times

these services are provided would run

directly counter to common practice in

oncology offices and would greatly

inconvenience patients.

These commenters asserted that it is

extremely unlikely that a physician

would refer a patient for chemotherapy

simply to obtain the revenue from the xray and laboratory tests that are

performed in conjunction with the

provision of chemotherapy. They regard

as a precedent for this exception our

proposals to exclude from the definition

of radiology certain invasive radiology

services in which an imaging modality

is used to guide a needle, probe, or

catheter properly and to exclude EPO

from the definition of outpatient

prescription drugs when EPO is

provided incidental to dialysis

treatment. We had proposed to exclude

these invasive radiology procedures and

EPO because they are merely furnished

incidental to, or secondary to, another

procedure that the physician has

ordered.

Response: The Congress has imposed

certain constraints on physicians’

financial arrangements with entities to

which they refer patients for DHS. The

provision of chemotherapy is a

designated health service, as is the

provision of radiology and clinical

laboratory services. In order for a

physician to refer patients to an entity

with which the referring physician has

a financial arrangement, the physician’s

financial relationship with the entity

must come within an exception to

section 1877 of the Act.

As discussed elsewhere, we are not

prepared to limit the scope of DHS

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

except in rare situations. We believe

that most arrangements for the provision

of chemotherapy and related ancillary

services by physicians to their patients

can be restructured to come within the

in-office ancillary services exception as

modified by this final rule. (See section

VI.B of this preamble.) As discussed

above, we are abandoning the

‘‘peripheral/incidental’’ test that was

proposed in the January 1998 proposed

rule; we point out that even under that

test, the primary procedure could not

itself be a designated health service.

Finally, we wish to clarify that we are

excepting EPO under certain

circumstances because we believe that

the Congress did not intend to preclude

physician ownership of ESRD facilities.

Commenters have noted that when the

Congress intended to cover specific

Medicare services, including composite

rate services, it did so expressly. We

agree. The Congress did not list ESRD

facility services under section

1877(h)(6) of the Act, while it did list

home health services and hospital

services. Therefore, we do not regard

services furnished under a composite

rate by an ESRD facility as DHS. Given

the high correlation between EPO and

ESRD services, the inclusion of EPO as

a DHS would vitiate the Congress’

apparent intent. Accordingly, we are

excepting from the reach of the statute

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

authority EPO or other drugs required

for dialysis when furnished in or by an

ESRD facility owned by physicians. The

list of these drugs is set forth in the

attachment to this final rule. Given the

strict utilization and coverage criteria

for EPO in particular and ESRD in

general, we conclude this narrow

exception presents no quantifiable risk

of fraud or abuse. We are not protecting

any physician investment in a home

dialysis supply company or other entity

that supplies EPO to ESRD facilities or

that supplies EPO to patients pursuant

to a contract with an ESRD facility; in

such situations, the physician’s

investment in the dialysis supply

company is no different from any other

investment in a DHS entity and there is

no indication in the legislative history

that home dialysis supply companies

were not meant to be covered by the

statute.

Comment: A substantial number of

commenters requested that we not

require physicians to pass on to

Medicare discounts they receive in

purchasing oncology drugs.

Commenters pointed out that the

proposed regulations appear to require

this result. Some commenters believe

that this proposed requirement conflicts

with section 1877(e)(8)(B) of the Act,

which excepts any payment made by a

physician for items and services if the

price is consistent with fair market

value.

Response: Nothing in this section

1877 of the Act or these regulations is

intended to impose on physicians a

requirement to pass discounts on drugs

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 939

on to the Medicare and Medicaid

programs; whether a discount must be

passed on to a Federal health care

program by physicians or others,

however, remains the subject of other

statutory and regulatory provisions.

Comment: One commenter asked that

we confirm that the definition of

‘‘outpatient prescription drugs’’ would

apply only to those drugs that are

furnished to ‘‘outpatients’’ of any

facility, including a SNF or nursing

facility. The commenter believes that if

the Congress had intended that the

statute cover drugs provided to

‘‘inpatients’’ of facilities, it could have

easily written the statute to do so. The

commenter pointed out that drugs

provided to ‘‘inpatients’’ are generally

covered under Medicare Part A and are

peripheral components of the services

being provided and billed for,

particularly under the prospective

payment system for SNFs under which

SNFs receive a per diem rate for

virtually all items and services

furnished to a Medicare Part A patient.

Response: In the January 1998

proposed rule, we proposed to include

only drugs furnished to an individual

under the Medicare Part B benefit and

to exclude drugs furnished by providers

under Medicare Part A. We have

reflected this in Phase I of this

rulemaking. A patient may reside in a

SNF under a Part A stay or a patient

may reside in a SNF without being

covered under Part A. If the stay is not

covered under Part A, it is possible that

the patient may receive some drugs

under the Part B benefit that are

considered ‘‘outpatient prescription

drugs’’ under these physician selfreferral provisions. In addition, under

section 1835(a) of the Act, a SNF may

furnish services to an individual who is

not a SNF inpatient. That is, it is

possible for a SNF to provide services to

an individual who does not reside in the

SNF. For example, a SNF with an x-ray

machine may furnish x-ray services to a

nonresident if the individual has a

referral for an x-ray and he or she

wishes to receive the x-ray at this

location. We assume the individuals

who receive these services are the

‘‘outpatients’’ to whom the commenter

is referring. (We note that drugs

provided to patients in a hospital setting

would be inpatient or outpatient

hospital services under section

1877(h)(6)(K) of the Act.)

Patients in nursing facilities are

typically covered under the Medicaid

program. We intend to address all

Medicaid-related physician referral

issues in a separate rulemaking.

Comment: A commenter requested

that we amend the January 1998

proposed rule to clarify that

immunizations are not DHS under the

definition of ‘‘outpatient prescription

drugs.’’ The commenter pointed out that

immunizations, particularly in pediatric

and family care practices, are often

personally administered by a physician

to his or her own patients or are

furnished on an ‘‘incident to’’ basis

under the physician’s direct

supervision. In the adult population,

there is also an increasing public

awareness of the need for preventive

immunizations, such as pneumococcal

vaccine and influenza vaccine. These

immunizations are widely and actively

promoted in this country as constituting

good preventive medicine. The

commenter believes that the January

1998 proposed regulation could

discourage immunizations because

under the proposed interpretation of

productivity bonuses in the group

practice definition, a physician would

be unable to share in a productivity

bonus based on his or her own

administration of, or direct supervision

of, these immunizations.

Response: The commenter raised

issues relating to immunizations that are

covered by Medicare under section

1861(s)(10) of the Act, which covers

pneumococcal vaccine and influenza

vaccine and their administration, as

well as hepatitis B vaccine and its

administration if furnished to an

individual who is at high or

intermediate risk of contracting

hepatitis B. Under our authority to

create additional exceptions in section

1877(b)(4), we are excluding from the

reach of section 1877 of the Act certain

immunizations and vaccines covered

under section 1861(s)(10) of the Act that

are subject to HCFA-imposed frequency

limits and that are paid by Medicare on

the basis of a fee schedule. We believe

that under the terms of the exception

the risk of abuse for these services is

extremely low and that this exclusion is

consistent with the statutory language

and structure and the expressed

Congressional intent to provide

preventive care to Medicare

beneficiaries.

In referring to drugs furnished in

pediatric and family practices, we

assume that the commenter was

interested in the definition of outpatient

prescription drugs under the Medicaid

program. We intend to address the

effects of the physician self-referral

prohibition on the Medicaid program in

Phase II of this rulemaking.

Comment: A commenter raised

questions about our decision to exclude

EPO and other drugs furnished as part

of a dialysis treatment from the

definition of ‘‘outpatient prescription

drugs.’’ The commenter considered this

exclusion ambiguous and requested

clarification about whether a particular

drug provided by a facility is ‘‘part of a

dialysis treatment.’’ The commenter

pointed out that EPO and other

pharmaceuticals are typically

administered during the course of

treatment to avoid the painful process of

injecting the patient multiple times, but

that it could be argued that these

pharmaceuticals are not ‘‘part of’’ the

treatment itself. Therefore, the

commenter requested that we revise the

exclusion of ‘‘other drugs furnished as

part of the dialysis treatment’’ to instead

apply to ‘‘other drugs furnished to an

individual who dialyzes at home or in

a facility, as part of an ESRD patient’s

plan of care.’’

Response: When we carved out of the

definition of ‘‘outpatient prescription

drugs, EPO and other drugs furnished as

part of the dialysis treatment,’’ we did

not aim to carve out the far broader

category of all ‘‘other drugs furnished

* * * as part of an ESRD patient’s plan

of care.’’ We regard ‘‘other drugs

furnished as part of the dialysis

treatment’’ to be those furnished so that

the dialysis treatment can be effective

and to counteract the problems that can

be caused directly by dialysis. For

example, dialysis makes some patients

anemic, so EPO is provided to deal with

this dialysis-related problem. In

addition, iron therapy is covered to

make EPO therapy effective and Vitamin

D hormone therapy is covered to correct

for bone density loss caused by dialysis.

Other drugs furnished to an individual

who dialyzes at home or in a facility

may include drugs that a patient uses

for reasons other than to make the

dialysis treatment effective. In fact,

these other drugs may have nothing

whatsoever to do with a patient’s renal

problems.

Comment: Another commenter agreed

with our proposal to exclude EPO in the

January 1998 proposed rule because it

would allow physicians who own a

dialysis facility to prescribe Medicarecovered medications to patients of the

dialysis facility on the basis that the

drugs are an integral part of the dialysis

procedure. The commenter asked that

we clarify that self-administered

medications for home dialysis such as

EPO can only be furnished by the

dialysis provider or a supplier that has

an agreement with the dialysis provider

(a Method II supplier) and cannot be

provided through the referring

physician’s office. The commenter

contended that teaching the home

dialysis patients to self-administer

medications and monitoring the effects

940 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

of self-administered medications is the

responsibility of the dialysis facility.

Response: We agree with the

commenter. As provided in § 414.335

(Payment for EPO furnished to a home

dialysis patient for use in the home),

medications for home dialysis can only

be furnished by the dialysis provider or

a Method II supplier that has an

agreement with a provider. If a referring

physician has a financial agreement

with a Method II supplier, the

arrangement must meet an exception.

Comment: A commenter asked that

immunosuppressant drugs prescribed

for patients following organ transplants

and covered by Medicare be excluded

from the definition of ‘‘outpatient

prescription drugs.’’ The commenter

believes that the rationale for excluding

these drugs is similar to the rationale for

excluding EPO, since the use of these

drugs is peripheral to the transplant

surgery, but medically integral to the

success of the surgery.

The commenter contended that

excluding immunosuppressants from

the definition will not provide an

opportunity for program or patient

abuse because their cost is an

economically minor, though medically

critical, part of a large and immensely

complicated treatment. In addition, the

commenter believes that physicians

have no motivation to overprescribe

these drugs, because the drugs are only

used for transplant patients according to

clinically accepted protocols that are

designed to prevent organ rejection

while avoiding unnecessarily high

levels of toxicity. The commenter

believes that the transplant community

adheres to the prevailing standards of

medical care with only minor

deviations. In addition, each transplant

center is required to report its transplant

survival rates to an HHS contractor.

Centers with survival rates below

established thresholds can lose their

certification.

Response: Immunosuppressant drugs

furnished in an outpatient setting are

‘‘outpatient prescription drugs’’ under

Phase I of this rulemaking. (They are

inpatient or outpatient hospital services

when furnished in a hospital setting.)

We are not persuaded that an exception

is appropriate or necessary. We believe

that to the extent physicians provide

transplant drugs to patients in their

offices, they will generally be able to do

so under the in-office ancillary services

exception. If a referring physician has

an ownership or investment interest in

a free-standing transplant pharmacy or

other pharmacy that provides transplant

drugs to his or her patients pursuant to

a referral, the financial relationship

would have to fit in an applicable

exception.

M. Inpatient and Outpatient Hospital

Services

In § 411.351 of the January 1998

proposed rule, we defined inpatient

hospital services as services that a

hospital provides for its patients that are

furnished either by the hospital or by

others ‘‘under arrangements’’ with the

hospital. For outpatient services, we

explained in the preamble of the

January 1998 proposed rule (63 FR

1683) that we would consider all

covered services (either diagnostic or

therapeutic) performed on hospital

outpatients that are billed by the

hospital to Medicare (including

arranged for services) as outpatient

hospital services. We have revised the

definition of outpatient hospital services

in the regulations text to clarify that it

includes services furnished ‘‘under

arrangements.’’ Inpatient services are

not coded by HCPCS codes. Any

outpatient hospital service, regardless of

the HCPCS code, is a designated health

service.

In the January 1998 proposed rule, we

requested comment on whether we

should exclude lithotripsy from the

definition of inpatient or outpatient

hospital services on the theory that it

could not be overutilized, since the

procedure itself apparently documents

the medical necessity to prescribe it.

Commenters were also concerned about

physician services that are ‘‘bundled’’

into hospital payments and about

services furnished by a hospital ‘‘under

arrangements’’ with an outside facility.

We discuss each of these topics below.

Comment: We received hundreds of

comments on the subject of lithotripsy,

mostly from urologists who have

ownership interests in a lithotriptor that

a hospital rents. These commenters

requested that lithotripsy be excluded

from the definition of inpatient and

outpatient hospital services so that they

could continue to refer to the hospitals

without being concerned about how the

hospital compensates them. According

to these commenters, urologist-owned

lithotriptors increased quality of care

and patient access without any risk of

overutilization of lithotripsy. We also

received comments on this topic from

individual hospitals, a State and

national hospital trade association, and

nonphysicians who rented lithotriptors

to hospitals in competition with

physician owners. These commenters

asserted that hospitals pay more for the

use of physician-owned lithotriptors

than hospitals pay for the use of their

own lithotriptors or lithotriptors owned

by nonphysicians and urged us to

include lithotripsy in the definition of

inpatient and outpatient hospital

services.

Response: We have determined that

there is no reason to treat lithotripsy any

differently than other inpatient or

outpatient hospital services. As we have

said elsewhere in the preamble, we

believe the Congress did not intend that

we make service-by-service decisions on

whether a service is a designated health

service based on the service’s potential

for overutilization. Even were we able to

determine that there is no potential for

overutilization of lithotripsy (including

comparisons to alternative treatments),

there is a substantial potential for

urologists who own lithotriptors to

extract higher than market rate rents for

their equipment or for the financial

arrangement between the lessor

urologists and the lessee hospital to

encourage overutilization of other

hospital services. Commenters provided

no evidence to support their claims that

physician ownership of lithotriptors

increased quality of care or access to

treatment.

In any event, the exclusion of

lithotripsy from the definition of

inpatient and outpatient services would

not obviate the need for the physicianowners to structure their rental

arrangements to comply with section

1877 of the Act. Whether lithotripsy is

a designated health service or not, the

rental arrangement itself would create a

financial relationship between the

physician-owners and the hospital.

Unless the financial relationship (that

is, the lithotriptor lease) fit into a

compensation exception (such as the

equipment rental exception), the

physicians could not refer any Medicare

patients to the hospital for any inpatient

or outpatient services. In short, the relief

sought by these commenters would be

illusory.

We believe that the changes we have

made in § 411.354(d) of these

regulations to the volume or value

standard (discussed in section V of this

preamble) will enable hospitals and

urologists to protect bona fide

arrangements either under an

equipment lease or a personal service

arrangements exception or under the

fair market value exception. Most

importantly, Phase I of this rulemaking

clarifies that ‘‘per service’’ or ‘‘per use’’

rental or services payments are

permitted, even for services performed

on patients referred by the urologistowner, provided the rental or services

payment is fair market value and does

not take into account any Federal or

private pay business generated between

the urologist and the hospital (and

provided all other conditions of an

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 941

exception are met). Because the

prevalence of physician ownership of

lithotriptors may distort pricing in the

marketplace, we believe valuation

methods that look to the prices charged

by persons not in a position to refer to

the hospital or that consider acquisition

cost and rate of return are especially

appropriate. We also are aware that

some manufacturers of lithotriptors

lease the machines to urologists on a

‘‘per use’’ basis with the urologists, in

turn, leasing the lithotriptors to

hospitals on a ‘‘per use’’ basis. In these

circumstances, any disparity in the ‘‘per

use’’ fee charged by the manufacturer to

the urologists and the ‘‘per use’’ fee

charged in turn by urologists to the

hospital would call into question

whether both sets of fees could be fair

market value.

Comment: Several commenters

suggested that section 1877 of the Act

was only intended to address diagnostic

procedures. Accordingly, they asked

that we exclude therapeutic treatments

such as lithotripsy from the definition of

inpatient or outpatient hospital services

in cases in which the referring urologist

or a member of his practice actually

treats the referred patient.

Response: The list of DHS in section

1877(h)(6) of the Act contains both

therapeutic and diagnostic types of

service (for example, physical therapy

services are therapeutic and clinical

laboratory services are diagnostic). This

indicates that the Congress believed that

both types of services could be subject

to abuse. We have concluded that when

a physician initiates a designated health

service and personally performs it him

or herself, that action would not

constitute a referral of the service to an

entity under section 1877 of the Act.

However, in the context of inpatient and

outpatient hospital services, there

would still be a referral of any hospital

service, technical component, or facility

fee billed by the hospital in connection

with the personally performed service.

Thus, for example, in the case of an

inpatient surgery, there would be a

referral of the technical component of

the surgical service, even though the

referring physician personally performs

the service. If the referring physician

has a financial relationship with the

hospital, that relationship must fit in an

exception. Potentially available

exceptions, depending on the

circumstances, include, for example, the

personal service arrangements

exception, the employee exception, the

space or equipment rental exception,

the whole hospital exception, and the

fair market value exception.

Comment: Several commenters stated

that the only reason extracorporeal

shock wave lithotripsy (ESWL) is even

subject to the physician self-referral

provisions is because Medicare only

pays for lithotripsy if it is billed through

a hospital, thus forcing the procedure

into the realm of inpatient or outpatient

hospital services. Many commenters

have cited debate language pertaining to

adopting the Conference Report for

OBRA ’93, which language suggests that

the sponsor of section 1877 of the Act,

Representative Stark, did not intend for

ESWL to come under the law.

Response: We believe that lithotripsy

was meant to be a ‘‘designated health

service’’ under the law, since the law

does not exclude any particular hospital

services, nor does the legislative history

indicate that the Congress meant to

exclude them. The House Report for the

first version of the physician selfreferral law mentioned a specific

exception for a facility providing

lithotripsy services performed

personally by the referring physician.

(See H. Rep. No. 101–247, 101st Cong.

1041 (1989).) This exception did not

apply to the hospital services at issue,

nor was it enacted. In adding hospital

services to the list of DHS, the

legislative history reveals that the

Congress was concerned about

increased admissions to hospitals,

regardless of the reason for the

admission. (We discuss this issue

further below, where we address

hospital services provided ‘‘under

arrangements.’’)

Comment: Another commenter

pointed out that we proposed excluding

from the definition of inpatient hospital

services those services performed by

physicians and other providers who bill

independently. The commenter asked

us to clarify whether physician and

individual professional services are

excluded from the definition of

inpatient hospital services when they

are billed by a hospital. Hospitals bill

for these services when they are part of

a global fee that covers both the

technical and professional components

of a service or when they bill on an

assignment (or reassignment) basis. This

commenter argued that if these services

are not excluded under section 1877 of

the Act, a hospital may not be able to

compensate a physician for services

performed in, and billed by, the

hospital, or to compensate a doctor who

supervises a nurse practitioner in a

hospital. The commenter also suggested

that we clarify that we will treat both

inpatient hospital services and

outpatient hospital services the same

way.

Response: Professional services that

Medicare pays independently of an

inpatient or outpatient hospital service

do not become DHS if they are billed by

a hospital under assignment or

reassignment; they remain physician

services and are not considered hospital

services. Any other service for which a

hospital bills is a hospital inpatient or

outpatient service, even though it may

consist of both a technical and

professional component. Therefore,

these services constitute DHS under

section 1877 of the Act. However, if a

hospital is paying the physician for his

or her professional services under either

a personal services contract or an

employment agreement, the physician

can still refer to the hospital as long as

the compensation arrangement meets an

exception, such as the exception that

applies to personal service arrangements

or the exception for employment

agreements. These exceptions require,

among other things, that the hospital

pay the physician an amount that is

based on a fair market value standard.

Comment: Several commenters

expressed concern with the effect the

definitions of inpatient and outpatient

hospital services may have when a

hospital purchases services ‘‘under

arrangements’’ from an entity owned in

whole or in part by a referring

physician. Commenters fear that if

services are deemed to be inpatient or

outpatient hospital services for the

purposes of 1877 of the Act when

furnished by a hospital ‘‘under

arrangements’’ with an entity owned by

a physician, physicians may be

unwilling to invest in equipment using

new technologies. One commenter

specifically proposed an exception that

would apply to any service that would

be exempt from the physician selfreferral prohibition if the physician

referred directly to the entity, outside of

the hospital context. According to

several commenters, it is the nature of

the service itself that should determine

whether or not a referral may be made,

not the inpatient or outpatient status of

the patient. Commenters were

concerned that a physician will not be

able to refer a patient to a hospital if the

hospital has an arrangement with an

entity that the physician owns. The

commenters believe that, as long as the

actual services are compensated at fair

market value, there should be no risk of

program or patient abuse.

Response: The Congress specifically

chose to include inpatient and

outpatient services as DHS under

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

Inpatient and outpatient hospital

services include any services that a

hospital provides to a hospital patient,

whether it provides them itself or

provides them by purchasing them from

another entity under arrangements; any

942 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

other policy would encourage hospitals

to purchase as many services as possible

under arrangements in order to avoid

the effects of the physician self-referral

provision. In light of the description of

‘‘volume or value’’ in Phase I of this

rulemaking, we believe that bona fide

‘‘under arrangements’’ relationships can

easily be structured to comply with the

personal service arrangements

exception, or, in some cases, the fair

market value exception. We believe this

approach is consistent with section

1877(e)(7) of the Act, which provides a

limited exception for certain ‘‘under

arrangements’’ relationships that were

established before 1989 and met several

other requirements.

We are concerned that the provision

of services ‘‘under arrangements’’ could

be used to circumvent the prohibition in

section 1877(c)(3) of the Act of

physician ownership of parts of

hospitals. We understand that some

hospitals are leasing hospital space to

physician groups, which the groups

then use to provide services ‘‘under

arrangements’’ that the hospital had

previously provided directly. These

arrangements, especially when they

involve particularly lucrative lines of

business, raise significant issues under

section 1877 of the Act, as well as the

anti-kickback statute.

However, we also recognize that

‘‘under arrangements’’ relationships are

pervasive in the hospital industry and

that many of the services being provided

by physician groups ‘‘under

arrangements’’ are services that the

physicians provide in physician-owned

facilities primarily to their own patients

who are hospital inpatients. In these

situations, an ‘‘under arrangements’’

relationship can avoid unnecessary

duplication of costs and

underutilization of expensive

equipment.

While we believe section 1877 of the

Act could reasonably be interpreted to

prohibit ‘‘under arrangements’’

relationships as constituting prohibited

ownership interests in a part of a

hospital, we decline to do so at this time

for several reasons. First, given the sheer

number of these arrangements, we think

prohibiting these arrangements would

seriously disrupt patient care. Second,

almost all these arrangements could be

restructured to fit into a combination of

the personal service arrangements and

equipment lease exceptions (or fair

market value exception), although this

restructuring will in some cases be

administratively burdensome. Third, we

believe there is precedent in the statute

for treating this situation solely as a

compensation arrangement. In section

1877(e)(7) of the Act, the Congress

created a specific compensation

exception for certain hospital services

provided by physician groups ‘‘under

arrangements.’’ Since, by definition, all

services protected under section

1877(e)(7) of the Act—and the resources

used to produce them—were ‘‘owned’’

by the physician groups, the Congress

would not have created a protected

compensation relationship unless it had

first determined that these arrangements

did not create a prohibited ownership or

investment interest in the hospitals.

Simply stated, the Congress would not

have excepted these relationships from

the compensation arrangement

restriction, if they were prohibited as an

ownership or investment interest.

In sum, for purposes of section 1877

of the Act, we will treat ‘‘under

arrangements’’ financial arrangements

between hospitals and physician-owned

entities as compensation and not

ownership relationships. These

arrangements can be protected provided

they meet an appropriate compensation

exception. We will, however, monitor

these arrangements and may reconsider

our decision if it appears that the

arrangements are abused. We also

caution physician groups and hospitals

that these arrangements remain subject

to the Federal anti-kickback statute.

Comment: One commenter requested

that we clarify how the physician selfreferral law applies in cases in which a

financial relationship arises solely

because of Medicare requirements. The

commenter discussed a situation in

which a radiation therapy group and a

radiation therapy facility (owned by

some or all of the group members) are

located in a medical office building

across the street from a hospital in a

nonrural area. The closest comparable

facility is over 35 miles away.

Occasionally, the hospital sends an

inpatient for radiation therapy to the

radiation facility, which provides the

services as ‘‘arranged for’’ inpatient

hospital services. The hospital pays the

facility for use of the radiation

equipment from money it receives from

Medicare for the inpatient hospital stay.

(The group practice bills Medicare for

the professional services of the radiation

oncologists.) The commenter

erroneously asserted that Medicare

requires the hospital to pay the

radiation facility for the amount that it

would have received under Medicare

Part B if the radiation therapy had been

provided as an outpatient service. The

commenter believes that the payment by

the hospital to the radiation therapy

facility creates a compensation

arrangement with the facility and, in

turn, the physicians.

Often, a radiation oncologist will refer

a patient of the radiation facility to the

hospital for certain tests and other

services. The radiation oncologist

receives no economic benefit for

referring patients to the hospital and

refers there for the patient’s

convenience, not because there is any

requirement to do so. The commenter

believes that, under our proposed rule,

the ‘‘under arrangements’’

compensation arrangement would

trigger the physician self-referral law,

preventing the radiation oncologists

from referring Medicare patients to the

hospital for services, even though this

financial relationship is not voluntary

and not subject to abuse.

The commenter requested

clarification whether the proposed

§ 411.355(d)(2), covering services

furnished under composite types of

payment rates that the Secretary

determines provide no financial

incentive for underutilization or

overutilization, or any other risk of

program or patient abuse, would apply.

The commenter also wished to know

whether we could include an additional

described compensation arrangement

exception under § 411.357(d) (the

personal service arrangements

exception) or clarify § 411.357(g) (the

exception for remuneration from a

hospital to a physician if the

remuneration does not relate to the

furnishing of DHS) to include the

arrangements the commenter

mentioned, or create some variation in

the fair market value exception in

§ 411.357(l)(3) that would allow

compensation determined on the basis

of the volume of services (that is, feefor-service payments as covered under

Medicare Part B) in the type of situation

the commenter described.

Response: As discussed above in

section VIII.A of this preamble, we have

determined not to include the proposed

§ 411.355(d)(2) in Phase I of this

rulemaking for DHS other than clinical

laboratory services. However, as

discussed in the preceding response, the

arrangement described by the

commenter would be a compensation

arrangement that could be structured to

fit in one of the compensation

exceptions, such as the equipment

rental, personal service arrangements, or

the new fair market value exceptions.

N. Other Definitions

1. Consultation

The definition of ‘‘consultation’’ is

addressed in section III.B.2 of this

preamble and in the regulations in

§ 411.351.

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 943

2. Entity

In § 411.351 of the August 1995 final

rule covering referrals for clinical

laboratory services, we defined the term

‘‘entity’’ broadly to cover a sole

proprietorship, trust, corporation,

partnership, foundation, not-for-profit

corporation, or unincorporated

association. We revised this definition

in the January 1998 proposed rule to

make it clear that the definition covers

a physician’s sole practice or a practice

of multiple physicians that provides for

the furnishing of DHS, or any other sole

proprietorship, trust, corporation,

partnership, foundation, not-for-profit

corporation, or unincorporated

association. We explained in the

preamble to the January 1998 proposed

rule at 63 FR 1706 that we regard an

‘‘entity’’ for purposes of the referral

prohibition as the business organization,

or other association that actually

furnishes, or provides for the furnishing

of, a service to a Medicare or Medicaid

patient and bills for that service (or

receives payment for the service from

the billing entity as part of an ‘‘under

arrangements’’ or similar agreement).

We explained that we meant that the

referral prohibition applies to a

physician’s referrals to any entity that

directly furnishes services to program

patients, or to any entity that arranges

for the furnishing of these services

under arrangements. We are clarifying

in Phase I of this rulemaking that, for

purposes of section 1877 of the Act, a

person or entity is considered to be

furnishing DHS if it is the person or

entity to which we make payment for

the DHS, directly or upon assignment

on the patient’s behalf, except that if the

person or entity has reassigned its right

to payment to (i) an employer pursuant

to § 424.80(b)(1); (ii) a facility pursuant

to § 424.80(b)(2); or (iii) a health care

delivery system, including clinics,

pursuant to § 424.80(b)(3) (other than a

health care delivery system that is a

health plan (as defined in § 1000.952(l)),

and other than any MCO, PSO, or IPA

with which a health plan contracts for

services provided to plan enrollees), the

person or entity furnishing DHS is the

person or entity to which payment has

been reassigned. Provided further, that 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) is the entity furnishing DHS for

any services provided by such supplier.

A number of commenters pointed out,

in various contexts, that they did not

believe a physician could make a

‘‘referral’’ to himself or herself. We agree

and discuss this issue in section III.B of

this preamble, which covers the

definition of a referral. In our analysis

of this issue, we also concluded that

when a physician is referring to himself

or herself, that act is not a referral to an

‘‘entity,’’ as we have defined it in

§ 411.351. However, when the physician

requests a service from another member

of his or her group practice or from the

practice’s staff, that would be a referral

to the practice for purposes of the

physician self-referral law. These

concepts are discussed in more detail in

our responses to specific comments on

the definition of a ‘‘referral’’ and on

some of the DHS.

In the preamble to the January 1998

proposed regulation (63 FR 1710), we

addressed the question of when the

owner of a DHS provider is considered

to be equivalent to the entity providing

DHS. We had proposed to equate a

referring physician with the entity when

the physician (or a family member) has

a significant ownership or controlling

interest that allows the physician to

determine how the entity conducts its

business and with whom. We used two

examples to illustrate this concept.

Commenters found both our analysis

and those examples to be confusing. As

a result, we have abandoned this

analysis and will simply apply the rules

related to indirect financial

relationships and indirect referrals as

described in detail in section III of this

preamble, which covers the general

referral prohibition under section

1877(a) of the Act. Section III.A of this

preamble includes a discussion about

when there is a financial relationship

between a physician and an entity.

Comment: A commenter suggested

that we clarify in both the preamble and

regulations text that a medical device

manufacturing company is not an

‘‘entity’’ for the purposes of section

1877 of the Act, and that the

manufacturer does not receive payments

from billings ‘‘under arrangements.’’

Another commenter requested that we

clarify that drug manufacturers are not

‘‘entities’’ for purposes of section 1877

of the Act, and that a referral for

outpatient prescription drugs only

occurs when a physician sends a patient

to a particular entity that actively

furnishes drugs, such as a pharmacy.

Response: We generally do not regard

manufacturers as entities that furnish

items or services directly to patients, or

as entities that furnish services ‘‘under

arrangements.’’ Thus, the commenters

are correct in stating that a medical

device manufacturer or a drug

manufacturer is unlikely to be an entity

furnishing DHS for purposes of section

1877 of the Act, while a pharmacy,

which delivers outpatient prescription

drugs directly to patients, would be one.

(We discuss this issue in more detail in

section VIII.B of this preamble.) A

person or entity is considered to be

furnishing DHS if it is the person or

entity to which we make payment for

the DHS, directly or upon assignment

on the patient’s behalf, except that if the

person or entity has reassigned its right

to payment to (i) an employer pursuant

to § 424.80(b)(1); (ii) a facility pursuant

to § 424.80(b)(2); or (iii) a health care

delivery system, including clinics,

pursuant to § 424.80(b)(3) (other than a

health care delivery system that is a

health plan (as defined in § 1000.952(l)),

and other than any MCO, PSO, or IPA

with which a health plan contracts for

services provided to plan enrollees), the

person or entity furnishing DHS is the

person or entity to which payment has

been reassigned. Provided further, that 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) is the entity furnishing DHS for

any services provided by such supplier.

Comment: A commenter asked us to

clarify that State governments and their

instrumentalities are not ‘‘entities’’ for

purposes of section 1877 of the Act. The

commenter noted that many State and

local governments create integrated

delivery systems and payment

arrangements in order to increase access

to and decrease the cost of publicly

provided care. If the governments or

their instrumentalities were to be

considered ‘‘entities,’’ the commenter

argued that State-sponsored clinics and

programs may cease to exist, thus

restricting access to, and raising the

costs of, public programs.

Response: The referral prohibition

applies whenever a physician has an

unexcepted financial relationship with

‘‘an entity’’ that furnishes DHS. The

statute makes no distinction between

private and governmental entities, nor

do we believe that we have the authority

to make such a distinction. We have no

basis for concluding that referrals to

governmental entities are always free

from potential patient or program abuse,

so we see no grounds for creating an

additional exception under section

1877(b)(4) of the Act. However, we

would assume that many governmental

entities have compensation

arrangements with physicians, rather

than being owned in any way by

physicians. If this is the case, there are

a number of compensation related

exceptions in the statute and regulations

that are designed to allow physicians

who receive fair compensation to

continue making referrals.

944 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

3. Fair Market Value

The term ‘‘fair market value’’ appears

in most of the compensation related

exceptions. These exceptions, among

other things, require that compensation

between physicians (or family members)

and entities be based on the fair market

value of the particular items or services

that these parties are exchanging. We

defined this term in the August 1995

final rule covering referrals for clinical

laboratory services by using the

definition that appears in section

1877(h)(3) of the Act. This provision

defines fair market value as the value in

arm’s-length transactions, consistent

with the general market value, with

other specific terms for rentals or leases.

In the January 1998 proposed rule, we

discussed what constitutes a value that

is ‘‘consistent with the general market

value.’’ We drafted the definition as

follows so that it applies to any

arrangements involving items or

services, including, but not limited to,

employment relationships, personal

service arrangements, and rental

agreements:

‘‘General market value’’ is the price that an

asset would bring, as the result of bona fide

bargaining between well-informed buyers

and sellers, or the compensation that would

be included in a service agreement, as the

result of bona fide bargaining between wellinformed parties to the agreement, on the

date of acquisition of the asset or at the time

of the service agreement. Usually the fair

market price is the price at which bona fide

sales have been consummated for assets of

like type, quality, and quantity in a particular

market at the time of acquisition, or the

compensation that has been included in bona

fide service agreements with comparable

terms at the time of the agreement.

The definition of ‘‘fair market value’’

in the proposed rule continued to

include the additional requirements in

section 1877(h)(3) of the Act for rentals

or leases. Among other things, the

statute defines the fair market value of

rental property as its value for general

commercial purposes, not taking into

account its intended use. Most of the

comments we received addressed the

question of how to establish the fair

market value of an asset or agreement

and how to value rental property ‘‘for

general commercial purposes.’’ We have

tried to clarify these concepts in our

responses.

Comment: Several commenters asked

that we clarify the documentation that

will sufficiently establish a transaction

as consistent with fair market value (and

general market value) for the exceptions

that apply to compensation

arrangements. The proposed definition

of fair market value states that ‘‘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.’’ One commenter stated that

using the word ‘‘usually’’ may create

ambiguities and suggested making clear

in the definition of fair market value

that the standard of comparable

transactions is only one potential means

of establishing fair market value.

Another commenter stated that the

January 1998 proposed rule is unclear

about the steps that must be taken to

confirm fair market value. The

commenter asked that we adopt the

position that a valuation from an

independent person experienced in the

valuation of health care operations is

sufficient as one approach (but not the

only approach) to establishing fair

market value. However, the commenter

further stated that, because sales of

medical practices are private and not

reported to any central data base, and

because there is often a lack of a

representative pool upon which to draw

comparisons, we should adopt the

position that confirmation of fair market

value does not necessarily require the

finding of comparable entities for

comparison. Another commenter stated

that the Internal Revenue Service (IRS)

guidelines for determining fair market

value with respect to tax exempt

organizations are too restrictive and are

inappropriate for application to forprofit entities.

Response: To establish the fair market

value (and general market value) of a

transaction that involves compensation

paid for assets or services, we intend to

accept any method that is commercially

reasonable and provides us with

evidence that the compensation is

comparable to what is ordinarily paid

for an item or service in the location at

issue, by parties in arm’s-length

transactions who are not in a position to

refer to one another. (As discussed in

section V of this preamble, in most

instances the fair market value standard

is further modified by language that

precludes taking into account the

‘‘volume or value’’ of referrals, and, in

some cases, other business generated by

the referring physician. Depending on

the circumstances, the ‘‘volume or

value’’ restriction will preclude reliance

on comparables that involve entities and

physicians in a position to refer or

generate business.) The amount of

documentation that will be sufficient to

confirm fair market value (and general

market value) will vary depending on

the circumstances in any given case;

that is, there is no rule of thumb that

will suffice for all situations. The

burden of establishing the ‘‘fairness’’ of

an agreement rests with the parties

involved in the agreement. Depending

on the circumstances, parties may want

to consider obtaining good faith, written

assurances as to fair market value from

the party paying or receiving the

compensation, although such written

assurances are not determinative.

For example, a commercially

reasonable method of establishing fair

market value (and general market value)

for the rental of office space can include

providing us with a list of comparables.

We would also find acceptable an

appraisal that the parties have received

from a qualified independent expert.

Although some transactions are not

subject to public scrutiny, we believe

generally that there should be sufficient

documentation of similar public

transactions that the parties can use as

a basis of comparison. In regions with

inadequate direct comparables, such as

rural areas, a reasonable alternative may

involve comparing institutions or

entities located in different, but similar,

areas where property is zoned for

similar use. For example, a hospital

affiliated with a university in one part

of the country could be comparable to

other hospitals affiliated with

universities that are located in similar

types of communities. In other cases, all

the comparables or market values may

involve transactions between entities

that are in a position to refer or generate

other business. For example, in some

markets, physician-owned equipment

lessors have driven out competitive

third-party lessors of similar equipment.

In such situations, we would look to

alternative valuation methodologies,

including, but not limited to, cost plus

reasonable rate of return on investment

on leases of comparable medical

equipment from disinterested lessors.

In contrast, there may be cases in

which finding a commercially

reasonable representation of fair market

value (or general market value) could be

as simple as consulting a price list. As

for using the IRS guidelines for

determining fair market value that

applies to tax exempt organizations, we

recognize that in some cases they may

not be appropriate for for-profit entities.

Nonetheless, it is our view that some

elements of the IRS guidelines could be

applied under certain circumstances,

depending upon the specifics of any

particular agreement. We do not wish to

either mandate their use or rule them

out if they can be appropriately used to

demonstrate fair market value.

Comment: One commenter noted that,

as part of our definition of ‘‘fair market

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 945

value,’’ we include the term ‘‘general

market value,’’ which applies to any

arrangement involving items and

services, including employment

relationships, personal service

arrangements, and rental agreements.

The commenter pointed out that in the

January 1998 proposed rule we do not

address the specific documentation

requirements necessary to verify and

document that the price of an asset or

the compensation for certain services

actually reflects the market rate. The

commenter requested that we confirm

that internally generated surveys are

sufficient for establishing the market

rate, and that there is no requirement to

use an independent valuation

consultant.

Response: We agree that there is no

requirement that parties use an

independent valuation consultant for

any given arrangement when other

appropriate valuation methods are

available. However, while internally

generated surveys can be appropriate as

a method of establishing fair market

value in some circumstances, due to

their susceptibility to manipulation and

absent independent verification, such

surveys do not have strong evidentiary

value and, therefore, may be subject to

more intensive scrutiny than an

independent survey.

Special Rule for Rental Property.

Under section 1877(h)(3) of the Act, 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 where the

lessor is a potential source of patient

referrals to the lessee. We incorporated

this provision into the August 1995 final

rule covering referrals for clinical

laboratory services and into the January

1998 proposed rule at § 411.351.

Commenters raised questions about the

meaning of the statutory provision.

Comment: With respect to the rental

of property, commenters questioned our

definition of fair market value as ‘‘the

value of rental property for general

commercial purposes (not taking into

account its intended use).’’ The

commenters believe this language is

problematic for appraising a medical

office building because it requires the

appraiser to compare the property to the

broad category of properties that are

‘‘used for general commercial

purposes.’’ This latter category can

include properties that are highly

dissimilar in character and value. For

example, the appraisal for medical

office property could include retail or

industrial rates. Such an approach

conflicts with the fundamental principle

that appraisals should be based on

comparing properties with similar

attributes.

Response: We believe that a rental

property meets the requirement that a

payment reflect the ‘‘value of property

for general commercial purposes, not

taking into account its intended use’’

when the payment takes into account

any costs that were incurred by the

lessor in developing or upgrading the

property, or maintaining the property or

its improvements, regardless of why the

improvements were added. That is, the

rental payment can reflect the value of

any similar commercial property with

improvements or amenities of a similar

value, regardless of why the property

was improved. On the other hand, we

also believe that rental payments would

specifically take into account the

intended use of the property if the

lessee paid inflated amounts solely to

enhance his or her medical practice. For

example, rental payments by a physical

therapist would not be fair market value

for purposes of section 1877 of the Act

if the physical therapist agreed to pay an

inflated rate that was not justified by

improvements or other amenities and

was higher than the rate paid by other,

similarly situated medical practitioners

in the same building just because the

building was occupied by several

orthopedic practices.

A rental payment cannot be adjusted

to reflect the additional value the

prospective lessee or lessor would

attribute to the proximity or

convenience to the lessor where the

lessor is a physician and a potential

source of patient referrals to the lessee.

We interpret this requirement to allow

rental payments that reflect the fair

market value of the area in which the

property is located, even if a lease is for

medical property in a ‘‘medical

community.’’ To qualify, the payments

should not reflect any additional value,

such as an amount that is above that

paid by other medical practitioners in

the same building or in the same or in

a similar location, just because the

lessor is a potential source of referrals

to the lessee. That is, the rental

payments should be roughly equivalent

to those charged to similarly situated

parties in arrangements in which

referrals are not an issue.

Also, the statute requires that the

rental payments not reflect the

additional value either party attributes

to the proximity or convenience to the

lessor where the lessor is a potential

source of patient referrals to the lessee.

The definition of a ‘‘referral’’ by a

‘‘referring physician’’ in section

1877(h)(5) of the Act focuses only on

actions and requests for services that are

initiated by physicians; it does not

include any requests for services

initiated by entities or other providers

or suppliers, nor does the referral

prohibition itself apply to anything but

physician referrals. Thus, we believe

that it is fair to interpret the limitation

in the fair market value definition as

confined to situations in which a

physician is the lessor and a potential

source of referrals to an entity lessee.

That limitation does not appear to us to

apply when an entity, such as a

hospital, is the lessor that rents space to

physicians, even if the hospital is in a

position to refer to the physicians. As a

result, we believe a hospital should

factor in the value of proximity when

charging rent to lessee physicians.

4. Group Practice

The definition of a group practice

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

addressed in this preamble at section

VI.C and in the regulations at § 411.352.

5. Health Professional Shortage Areas

The existing regulations covering

referrals for clinical laboratory services

define a health professional shortage

area (HPSA) for purposes of section

1877 of the Act as ‘‘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 42 CFR part 5,

appendix A, part I—Geographic Areas)’’

and, in addition, ‘‘an area designated as

a health professional shortage area

under section 332(a)(1)(A) of the Public

Health Service Act for dental

professionals, mental health

professionals, vision care professionals,

podiatric professionals, and pharmacy

professionals. We proposed no changes

to the existing rule.

The definition of a HPSA for purposes

of Phase I of this rulemaking is intended

to track the definition of a HPSA as

promulgated by the Health Resources

Services Administration (HRSA), which

administers the HPSA designation

process. HRSA has proposed revising

the existing HPSA regulations. (See 63

FR 46538; 64 FR 29831.) We have

modified the definition of a HPSA in

these regulations to track current HRSA

interpretations of the HPSA regulations

and to make clear that the definition

incorporates any future changes or

amendments to HRSA’s definition of a

HPSA, which is codified in 42 CFR part

5.

946 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

6. Employee

We defined an ‘‘employee’’ in the

existing regulation and in the January

1998 proposed regulation in § 411.351

by reiterating the statute. Section

1877(h)(2) of the Act specifically defines

an ‘‘employee’’ of an entity as an

individual who would be considered to

be an employee under the usual

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.

Comment: Two commenters

recommended an expansion of the

proposed definition of ‘‘employee’’ to

include ‘‘leased employees’’ to better

reflect the realities of the market place.

The current definition, which references

income tax law, limits an employee to

an individual who meets the definition

of a ‘‘common law’’ employee. But the

definition of a common law employee

does not include leased employees, who

are defined by State law and have a

quasi-common law status.

Response: We do not believe we have

the authority to expand the definition of

employee that appears in the law. It is

our understanding that leased

employees are essentially regarded by

the courts, the IRS, and Federal

legislators as ‘‘contingent employees.’’

Contingent workers are generally

described as workers who are not part

of the employer’s regular work force, but

are hired to meet certain needs. These

workers are technically employed by an

entity other than the one for whom the

services are performed. Other types of

contingent workers include

independent contractors and

consultants.

A leased employee is defined in

section 414(n) of the Internal Revenue

Service Code as an individual who

performs services under an agreement

between the service recipient and a

leasing/staffing organization; performs

services under the primary direction or

control of the service recipient; and

performs services for the service

recipient on a substantially full-time

basis for a 12-month period. The

labeling of a worker as a leased

employee under a leasing/staffing

arrangement does not mean that the

worker will be defined as a ‘‘leased

employee’’ under section 414(n) of the

Internal Revenue Code for employee

benefit plan purposes. The IRS

determines the common law

employment relationship between a

worker and an organization by

analyzing the facts and circumstances of

each particular situation. The IRS uses

guidelines, in the form of a list of

factors, for classifying workers as either

employees or independent contractors,

in order to determine whether there is

actually an employer/employee

relationship. We would regard any

leased employee that qualifies as an

‘‘employee’’ under the IRS test as an

employee for purposes of section 1877

of the Act.

7. Immediate Family Members

The referral prohibition in section

1877(a) of the Act states that if a

physician, or immediate family member,

has a financial relationship with an

entity, the physician cannot refer a

Medicare patient to that entity for the

furnishing of DHS, unless an exception

applies. In the August 1995 final rule,

we listed in § 411.351 the individuals

who qualify as a physician’s

‘‘immediate’’ family members. These

individuals include a husband or wife;

natural or adoptive parent, child, or

sibling; stepparent, stepchild,

stepbrother, or stepsister; father-in-law,

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

grandparent or grandchild; and spouse

of a grandparent or grandchild. We

adopted this definition without any

changes in the January 1998 proposed

rule.

We did not receive any comments on

this definition. We did receive

comments that relate to whether

physicians should be precluded from

referring to people who qualify as

members of their immediate family. We

have addressed these comments in

section VI.B of this preamble. To

conform to common usage, we have

amended the definition to substitute the

term ‘‘birth’’ for ‘‘natural’’ parent.

8. Referral

The definition of ‘‘referral’’ is

addressed in this preamble in section III

and in § 411.351 of the regulations.

9. Remuneration and the Exceptions in

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

The definition of ‘‘remuneration’’ in

section 1877(h)(1)(B) of the Act is

drafted broadly to include ‘‘any

remuneration, directly or indirectly, in

cash or in kind.’’ However, a

‘‘compensation arrangement’’ is defined

in paragraph (h)(1)(A) of section 1877 of

the Act to specifically exclude various

kinds of remuneration that are listed in

paragraph (h)(1)(C) of section 1877 of

the Act. These are arrangements

involving only the following

remuneration:

(i) the forgiveness of amounts owed for

inaccurate tests or procedures, mistakenly

performed tests or procedures, or the

correction of minor billing errors;

(ii) the provision of items, devices, or

supplies that are used solely to—

(I) collect, transport, process, or store

specimens for the entity furnishing the item,

device, or supply, or

(II) to order or communicate the results of

tests or procedures for such entity.

(iii) a payment made by an insurer or a

self-insured plan to a physician to satisfy a

claim, submitted on a fee for service basis, for

the furnishing of health services by that

physician to an individual who is covered by

a policy with the insurer or by the selfinsured 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 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,

(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, and

(IV) the payment meets such other

requirements as the Secretary may impose by

regulation as needed to protect against

program or patient abuse.

We incorporated these exclusions

from the definition of ‘‘remuneration’’

into the August 1995 final rule and into

the January 1998 proposed rule in

§ 411.351. We interpreted the exclusions

in the January 1998 proposed rule at 63

FR 1693 through 1694 to mean that the

portion of any business arrangement

that consists of the remuneration listed

in paragraph (h)(1)(C) of section 1877 of

the Act alone does not constitute a

compensation arrangement. The final

regulation adopts our proposed

regulations text and incorporates

expressly the interpretation applicable

to arrangements that include portions of

remuneration that meet the exclusions

in section 1877 (h)(1)(C) of the Act.

a. Minor Billing Errors.

Comment: One commenter, in

referring to the exclusion from

remuneration of forgiveness for amounts

due to corrections of minor billing

errors, stated that even a ‘‘minor’’ billing

error might have large dollar

consequences, particularly if the same

minor mistake were repeated on

numerous bills. This could easily

happen because virtually all bills are

now computer-generated. The

commenter stated that the term ‘‘minor’’

should refer to the type of error, rather

than the sum of money that may be

involved.

Response: We agree with the

commenter’s suggestion that a ‘‘minor’’

billing error could have large dollar

consequences, particularly in situations

in which bills are computer generated.

We also agree that the term ‘‘minor’’

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 947

should refer to the kind of billing error

rather than the sum of money involved.

Therefore, we are interpreting ‘‘minor

billing errors’’ to cover isolated or

infrequent instances in which an

administrative error, such as a

typographic, keying, or other

transcribing error, results in an incorrect

charge or bill. On the other hand, a

pattern of similar or consistent billing

error ‘‘corrections’’ may suggest

improper remuneration and subject the

business arrangement to scrutiny.

b. Medicare as an Insurer.

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

‘‘excepts’’ from the definition of a

compensation arrangement situations

involving payments made by an insurer

or self-insured plan to a physician. The

payments must satisfy a physician’s feefor-service claim for furnishing health

services to an individual who is covered

by a policy with the insurer or the selfinsured plan.

Comment: One commenter asked

whether the term ‘‘insurer’’ includes the

Medicare program. The commenter

believes that Medicare is included

within the meaning of the term

‘‘insurer,’’ and cited for support

references in the preamble, as well as

the designation of Medicare in the Act

as ‘‘Health Insurance for the Aged and

Disabled.’’

Response: In the preamble to the

January 1998 proposed rule at 63 FR

1694, we pointed out that we believed

this provision was designed for

situations in which an insurer is also

involved in the delivery of health care

services. If the insurer owns a health

care facility, a physician might

otherwise be precluded from referring to

that facility just because the physician

receives compensation from the insurer

in the form of payments that satisfy the

physician’s claims.

The Medicare program is not directly

involved in the delivery of services, but

is simply a payer of services; that is,

Medicare never actually furnishes

services to program patients but pays for

claims from providers and suppliers or

makes payments to managed care

organizations. The physician selfreferral law is only implicated if a

physician refers a patient to an entity for

DHS and the physician has an

ownership or investment interest in the

entity or receives direct or indirect

remuneration from the entity. Since a

physician would never refer a patient to

the Medicare program to receive a

designated health service, these

payments from Medicare to a physician

are totally irrelevant under this law.

c. Items, Devices, or Supplies Used

Solely To Collect Specimens.

Comment: One commenter thought

there was a possible inconsistency in

the preamble to the January 1998

proposed rule in the section discussing

whether biopsy needles are excluded

from the definition of remuneration

under section 1877(h)(1)(C)(ii) of the

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

covers items, devices, or supplies that

are used solely to collect, transport,

process, or store specimens for the

entity providing the items, devices, or

supplies. First, the commenter noted

our conclusion at 63 FR 1693 through

1694 that biopsy needles do not

function solely as specimen collection

devices and therefore are categorically

excluded from ‘‘items, devices, or

supplies that are used solely’’ for

specimen collection purposes. In other

words, biopsy needles may constitute

remuneration under section 1877 of the

Act. This discussion is followed in the

preamble by a statement that any items,

supplies, or devices provided to a

physician must be used solely in

connection with specimens sent by the

physician to the entity that supplied the

items, devices, or supplies. Accordingly,

the preamble indicates that the number

of items, supplies, or devices furnished

should not exceed the number of

specimens sent to the laboratory for

processing. The commenter suggested

that the proximity and sequence of these

discussions in the preamble has caused

confusion in the industry; some have

concluded that, regardless of the first

discussion and conclusion, biopsy

needles might not constitute

remuneration if the number of biopsy

needles provided by a laboratory were

to correlate to the number of biopsy

specimens sent to the laboratory.

The commenter urged us to adopt the

view that biopsy needles are surgical or

medical devices, rather than items,

devices, or supplies solely used for

specimen collection purposes in all

cases. The commenter noted that this

interpretation would be consistent with

statements made by the OIG that the free

provision of biopsy needles from a

laboratory to a physician would be

suspect under the anti-kickback statute

because the needles have independent

value to the physician as a surgical

device used in surgical procedures. (See

the letter dated August 4, 1997,

available on the OIG website at http://

www.dhhs.oig/gov.) A second

commenter concurred with this

conclusion, and suggested that the same

analysis should apply to other surgical

or medical devices that may be used

during a procedure to collect specimens,

but have independent value to

physicians, such as snares and reusable

aspiration and injection needles.

Response: We agree with the first

commenter that the proximity and

sequence of our discussion of this topic

in the preamble might have been

confusing. We wish to clarify our views

on the ‘‘items, devices, and supplies’’

provision here. First, in enacting section

1877(h)(1)(C)(ii) of the Act, we believe

that the Congress did not intend to

allow laboratories to supply physicians

with surgical instruments for free or

below fair market value prices. Rather,

we believe the Congress intended to

include in this section items, supplies,

and devices of low value, such as single

use needles, vials, and specimen cups,

that are primarily provided by

laboratories to physicians to ensure

proper collection of specimens for

processing at the laboratory and that

have little, if any, independent

economic value to the physicians who

receive them. In many cases, the cost of

these items may already be included in

the practice expense portion of the

Medicare payment made to the

physician. In addition, to the extent the

items are reusable, they may have value

unrelated to the collection of specimens

for processing by the laboratory

providing the items. The provision of

such items for free or below fair market

value poses a risk that the items may

constitute compensation from the

laboratories for the physician’s referrals

and increase the risk of overutilization.

Accordingly, biopsy needles and like

devices, such as snares and reusable

aspiration and injection needles, are

categorically excluded from the items,

devices, and supplies covered by

section 1877(h)(1)(C)(ii) of the Act,

although arrangements for providing

such items may be structured to fit into

the exception for payments by a

physician for items and services to an

entity if the items or services are

furnished at a price that is consistent

with fair market value. (See section

1877(e)(7) of the Act and § 411.357(i).)

This view is consistent with the

guidance published by the OIG noted in

the preceding comment.

The discussion of the correlation of

the number of supplies to the number of

specimens sent to the laboratory has no

application to biopsy needles and other

devices that fall outside section

1877(h)(1)(C)(ii) of the Act. As to those

single use, low value items, devices, and

supplies that come within the scope of

section 1877(h)(1)(C)(ii) of the Act, the

fact that the number of supplies

provided to a physician approximates

the number of specimens sent by the

physician to the laboratory providing

948 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

the supplies is merely one indicator that

the supplies have been provided in

connection with specimen collection for

the entity providing the supplies. The

numerical correlation is not a statutory

or regulatory requirement. However, the

provision of an excessive number of

supplies creates an inference that the

supplies are not provided solely to

collect, transport, process, or store

specimens for the entity providing

them.

Comment: A commenter noted that

certain supplies that are used in

connection with the collection of

specimens, such as gloves, can also be

used by a physician for other purposes.

Since the laboratory cannot guarantee

that the gloves it supplies are used by

the physician only for collecting

specimens, the commenter

recommended that the laboratory

monitor the volume of the items

supplied. The commenter asserted that

if the number of gloves supplied equals,

or is close to, the number needed for the

collection of specimens by this

physician, we should consider the

conditions in the exception in section

1877(h)(1)(C)(ii) of the Act to have been

met.

Response: While we recognize that

sterile gloves are essential to the proper

collection of specimens, we believe they

are not items, devices, or supplies used

solely to collect, transport, process, or

store specimens. To be sure, sterile

gloves are essential to the specimen

collection process, but their main

function is to prevent infection or

contamination. Also, sterile gloves are

fungible, general purpose supplies

typically found in a physician’s office

and used for a wide range of

examinations and procedures. We

believe it would be impractical for

physicians’ offices to monitor and

regulate the use of gloves so as to limit

their use to the collection of specimens

for the laboratory that provided them.

Accordingly, we believe the provision of

free gloves is remuneration subject to

the general prohibition of section 1877

of the Act, in the absence of an

applicable exception.

Comment: A commenter questioned

how a laboratory should measure the

volume of specimen collection supplies

it provides to a new physician or group

client with whom it has no experience.

In such a situation, the commenter

believes the laboratory should be

allowed to rely on the anticipated

volume of services, until an actual

pattern of referral can be established, to

meet the requirement that items

furnished by the laboratory be

consistent with the number of tests

referred to the laboratory.

Response: As noted above, there is no

explicit requirement in the statute that

the volume of supplies provided by a

laboratory correlate with the volume of

specimens sent to the laboratory for

processing. Rather, a correlation is one

indicator that the provision of the

supplies meets the requirement that

they be used to collect, transport,

process, or store specimens for the

laboratory that provided them and that

the supplies are not for the physician’s

general office use. We understand that

a laboratory may not have a pattern of

referrals on which to base the provision

of items, devices, and supplies to a new

physician or group practice client. In

these instances, the laboratory may elect

to provide supplies based on the

number of tests typically ordered by

physicians or group practices of like

type and size in that community until

the physician or group practice

establishes a pattern of referrals with the

laboratory sufficient to determine the

appropriate number of supplies. The

laboratory or physician should be

prepared to demonstrate that the items,

devices, or supplies were furnished

based on a community standard and to

describe the standard.

Comment: One commenter asked that

we clarify how section 1877 of the Act

applies to a clinical laboratory’s

provision of a phlebotomist to a

physician, group practice, or ESRD

facility without charge to the physician,

group, or ESRD facility.

Response: Under section 1877(h)(1)(B)

of the Act, remuneration includes ‘‘any

remuneration, directly or indirectly,

overtly or covertly, in cash or in kind,’’

with the exception of certain items of

potential value listed in section

1877(h)(1)(C) of the Act. The provision

of personnel, such as a phlebotomist,

does not fit in any category listed in

section 1877(h)(1)(C). Thus, the

provision of a phlebotomist, as

described by the commenter, may

constitute remuneration, and therefore

create a compensation arrangement, for

purposes of section 1877 of the Act.

Whether a particular phlebotomist

arrangement confers a benefit on a

physician or group practice depends on

the specific facts and circumstances.

(The provision of a phlebotomist to an

ESRD facility would not implicate

section 1877 of the Act, unless the

arrangement conferred a direct or

indirect benefit on a physician or

physician group; such laboratory-ESRD

facility arrangements may implicate the

anti-kickback statute.)

The OIG has issued a special fraud

alert addressing the provision of free

goods and services to physicians under

the anti-kickback statute, 59 FR 242

(December 9, 1994). We believe the

fraud alert is instructive here.

Discussing the issue of laboratory

phlebotomists placed in physicians’

offices, it observes:

When permitted by State law, a laboratory

may make available to a physician’s office a

phlebotomist who collects specimens from

patients for testing by the outside laboratory.

While the mere placement of a laboratory

employee in the physician’s office would not

necessarily serve as an inducement

prohibited by the anti-kickback statute, the

statute is implicated when the phlebotomist

performs additional tasks that are normally

the responsibility of the physician’s office

staff. These tasks can include taking vital

signs or other nursing functions, testing for

the physician’s office laboratory, or

performing clerical services. Where the

phlebotomist performs clerical or medical

functions not directly related to the

collection or processing of laboratory

specimens, a strong inference arises that he

or she is providing a benefit in return for the

physician’s referrals to the laboratory. In

such a case, the physician, the phlebotomist,

and the laboratory may have exposure under

the anti-kickback statute. This analysis

applies equally to the placement of

phlebotomists in other health care settings,

including nursing homes, clinics and

hospitals. Furthermore, the mere existence of

a contract between the laboratory and the

health care provider that prohibits the

phlebotomist from performing services

unrelated to specimen collection does not

eliminate the OIG’s concern, where the

phlebotomist is not closely monitored by his

[or her] employer or where the contractual

prohibition is not rigorously enforced.

Like the OIG, we believe that if the

phlebotomist is purely performing

laboratory functions for the laboratory

that places the phlebotomist, then there

would be no remuneration to the

physician or group practice (that is, no

compensation arrangement). Put another

way, there would be no services to the

physician or group for which they

should pay. However, if the

phlebotomist performs services that are

not directly related to the collection or

processing of laboratory specimens for

the laboratory that has provided the

phlebotomist, he or she may be

providing a benefit to the physician or

group practice, thus creating a

compensation arrangement between the

physician and the clinical laboratory

that furnished the phlebotomist. Such

arrangements may be structured to fit in

an exception to section 1877 of the Act,

such as the personal service

arrangements exception, the fair market

value exception, or the exception for

payments by physicians for items or

services.

Comment: Another commenter asked

that we establish a clear standard

governing the use by ESRD facilities of

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 949

personnel from a clinical laboratory.

The commenter recommended that

employees of clinical laboratories only

be allowed to perform duties directly

associated with collecting and preparing

specimens, and making test results

available to the ESRD facility. Activities

involved in ESRD facility

administration, patient care, or handling

of specimens or data from other

laboratories would not be allowed.

Response: As noted above, the

provision of a phlebotomist to an ESRD

facility would not implicate section

1877 of the Act unless the arrangement

benefits a physician or physician group.

Comment: One commenter inquired

whether a laboratory may provide

medical waste disposal supplies and

services to physicians free of charge.

The commenter asserted that the

services would be provided only for

medical waste generated in connection

with the collection, transportation,

processing, or storage of specimens.

Response: Section 1877(h)(1)(C)(ii) of

the Act excludes from the definition of

a compensation arrangement

remuneration that consists of ‘‘the

provision of items, devices, or supplies

that are used solely to—(I) collect,

transport, process, or store specimens

for the entity providing the item, device,

or supply * * *. ’’ The provision does

not specifically allow laboratories to

furnish physicians and group practices

with medical waste disposal supplies

and services at no charge. However, we

believe that supplies and the disposal of

items used solely in connection with the

collection of specimens for this clinical

laboratory are part of the process the

laboratory engages in when it collects,

transports, and processes specimens. If

a laboratory can provide a needle for

collection and it can take away the

specimen, we believe that the laboratory

can also take away the needle and other

items that are used in the process.

However, we do not believe this

exception covers the disposal of needles

or other waste items that have been used

by the physician practice for other

purposes.

IX. Collection of Information

Requirements

Under the Paperwork Reduction Act

of 1995 (PRA), agencies are required to

provide a 30-day notice in the Federal

Register and solicit public comment

when a collection of information

requirement is submitted to the Office of

Management and Budget (OMB) for

review and approval. To fairly evaluate

whether an information collection

should be approved by OMB, section

3506(c)(2)(A) of the PRA requires that

we solicit comments on the following

issues:

• Whether the information collection

is necessary and useful to carry out the

proper functions of the agency;

• The accuracy of the agency’s

estimate of the information collection

burden;

• The quality, utility, and clarity of

the information to be collected; and

• Recommendations to minimize the

information collection burden on the

affected public, including automated

collection techniques.

Therefore, we are soliciting public

comment on each of these issues for the

information collection requirements

discussed below.

Section 411.352 Group Practice

Paragraph (d) requires that, except as

provided in paragraphs (d)(2) and (d)(3)

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; the

amounts received must be treated as

receipts of the group; and ‘‘patient care

services’’ must be measured and

documented by any reasonable means

(including, but not limited to, time

cards, appointment schedules, or

personal diaries) or any alternative

measure that is reasonable, fixed in

advance of the performance of the

services being measured, uniformly

applied over time, verifiable, and

documented.

While this requirement is subject to

the PRA, the burden associated with it

is exempt from the PRA because it

meets the requirements set forth in 5

CFR 1320.3(b)(2) and/or (b)(3) and 5

CFR 1320.4(a).

Paragraph (i) requires that supporting

documentation verifying the method

used to calculate the profit shares or

productivity bonus under paragraphs

(i)(2) and (i)(3) of this section, and the

resulting amount of compensation, must

be made available to the Secretary upon

request.

While this requirement is subject to

the PRA, the burden associated with it

is exempt from the PRA because it

meets the requirements set forth in 5

CFR 1320.3(b)(2) and/or (b)(3) and 5

CFR 1320.4(a).

Section 411.354 Financial

Relationship, Compensation, and

Ownership or Investment Interest

Paragraph (d) requires that, when

special rules are applied to

compensation under section 1877 of the

Act and under these regulations in

subpart J of this part, the compensation

will be considered ‘‘set in advance’’ if

the aggregate compensation or a timebased or per unit of service-based

(whether per-use or per-service) amount

is set in advance in the initial

agreement, in writing, between the

parties in sufficient detail so that it can

be objectively verified, and meets the

terms and conditions of this section.

While this requirement is subject to

the PRA, the burden associated with it

is exempt from the PRA because it

meets the requirements set forth in 5

CFR 1320.3(b)(2) and/or (b)(3) and 5

CFR 1320.4(a).

Section 411.355 General Exceptions to

the Referral Prohibition Related to Both

Ownership/Investment and

Compensation

Paragraph (e) requires that the

relationship of the components of the

academic medical center must be set

forth in a written agreement that has

been adopted by the governing body of

each component.

While this requirement is subject to

the PRA, the burden associated with it

is exempt from the PRA because it

meets the requirements set forth in 5

CFR 1320.3(b)(2) and/or (b)(3) and 5

CFR 1320.4(a).

Section 411.357 Exceptions to the

Referral Prohibition Related to

Compensation Arrangements

Paragraph (l) requires that

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 § 411.351) for the provision of

items or services by the physician (or an

immediate family member) or group

practice to the entity, must be set forth

in an agreement, be in writing, and meet

the conditions of the section.

While this requirement is subject to

the PRA, the burden associated with it

is exempt from the PRA because it

meets the requirements set forth in 5

CFR 1320.3(b)(2) and/or (b)(3) and 5

CFR 1320.4(a).

Paragraph (p) requires that, for

indirect compensation arrangements, as

defined in § 411.354(c)(2), the

compensation described in

§ 411.354(c)(2)(ii) is part of an

arrangement that is set out in writing

and meets all of the conditions and

requirements set forth in this section.

While this requirement is subject to

the PRA, the burden associated with it

is exempt from the PRA because it

meets the requirements set forth in 5

950 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

CFR 1320.3(b)(2) and/or (b)(3) and 5

CFR 1320.4(a).

We have submitted a copy of this final

rule to OMB for its review of the

information collection requirements in

§§ 411.352, 411.354, 411.355, and

411.357. These requirements are not

effective until they have been approved

by OMB.

If you have any comments on any of

these information collection and record

keeping requirements, please mail the

original and 3 copies within 30 days of

this publication date directly to the

following:

Office of Information and Regulatory

Affairs, Office of Management and

Budget, Room 10235, New Executive

Office Building, Washington, DC

20503, Attn: Allison Heron Eydt,

HCFA Desk Officer; and

Health Care Financing Administration,

Office of Information Services,

Information Technology Investment

Management Group, Division of

HCFA Enterprise Standards, Room

N2–14–26, 7500 Security Boulevard,

Baltimore, MD 21244–1850, Attn:

John Burke HCFA–1809.

X. Regulatory Impact Statement

A. Overall Impact

We have examined the impacts of

Phase I of this rulemaking as required

by Executive Order 12866 (September

1993, Regulatory Planning and Review)

and the Regulatory Flexibility Act (RFA)

(Pub. L. 96–354, enacted September 19,

1980). Executive Order 12866 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

annually). We do not believe that Phase

I of this rulemaking is a major rule that

will have an economically significant

effect. We have no way of determining

with any certainty the aggregate amount

of savings or costs Phase I of this

rulemaking will impose, but do not

believe it will approach $100 million or

more annually.

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 by nonprofit status or by

having revenues of $5 million or less

annually. For purposes of the RFA, most

physician practices are considered to be

small entities. Individuals and States are

not included in the definition of a small

entity.

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 50

beds. We do not believe Phase I of this

rulemaking will have a significant

impact on the operations of a substantial

number of small rural hospitals.

Section 202 of the Unfunded

Mandates Reform Act of 1995 also

requires that agencies assess anticipated

costs and benefits before issuing any

rule that may result in an expenditure

in any 1 year by State, local, or tribal

governments, in the aggregate, or by the

private sector, of $100 million. Phase I

of this rulemaking will not have such an

effect on the governments mentioned,

and we do not believe the private sector

costs will meet the $100 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 I of this

rulemaking will have a substantial effect

on State or local governments.

B. Anticipated Effects

We stated in the impact analysis in

the January 1998 proposed rule that any

estimate of the individual or aggregate

economic impact of the provisions of

the final rule would be purely

speculative. We explained that we could

not gauge with any certainty the number

of physicians and entities that would be

affected, or the extent of any changes

they would have to make to comply

with the rule. As we noted in the

January 1998 proposed rule at 63 FR

1716, various studies have indicated

that the degree of conflict of interest

presented by a physician’s investment

in entities to which he or she refers

patients is unknown. We pointed out

that ownership information or

information on the compensation

arrangements between physicians and

all of their immediate family members

and the entities that furnish any of 11

DHS constitutes an enormous amount of

data that is continually subject to

change. We also expected that the

American Medical Association’s

declaration that self-referrals are

unethical outside of a physician’s

practice, in conjunction with State laws

restricting or qualifying self-referrals

and the referral prohibition under

section 1877 of the Act itself, have

already led to a decline in self-referral

activity and financial relationships

between physicians and entities.

However, we lack the data necessary to

either confirm or refute this

supposition. We also lack data that

would tell us how many of the financial

relationships that physicians have with

a furnishing entity would already be

exempted under the statute.

We stated that, although the

provisions in the rule do not lend

themselves to a quantitative impact

estimate, we did not anticipate that they

would have a significant economic

impact on a substantial number of small

entities. We based this assessment on

the many exceptions in the rule

(including a broad exception for

ownership in rural entities), as well as

the actions parties can take to revise

their business arrangements to avoid the

referral prohibition. We still believe this

to be the case. In fact, we expect that

Phase I of this rulemaking will have a

much smaller impact than the

provisions that we proposed. However,

because Phase I of this rulemaking may

have significant effects on some health

care practitioners, or be viewed as

controversial, we wish to inform the

public of what we regard as the possible

major effects of Phase I of this

rulemaking.

We stated in the January 1998

proposed rule that we expected that

physicians who refer Medicare patients

for DHS and entities that furnish DHS,

including hospitals, would be the

parties that are primarily affected by

this rule. In response to comments on

the January 1998 proposed rule, we

have liberalized a wide variety of the

provisions that could affect these

parties. We have tried to create a more

manageable regulation that includes

‘‘bright line’’ rules to help the health

care community determine more easily

when a physician’s referrals are in

compliance with the law. We have made

numerous changes to the rule to try to

mold it around existing business

practices, and have attempted to

reinterpret the law so that it has a more

practical and realistic effect on

physicians and the entities that provide

DHS. The result, we believe, is an

overall approach that should have far

less impact on the business

relationships of individuals and entities

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 951

than the provisions of the January 1998

proposed rule. We discuss below some

of the major issues affecting physicians

and furnishing entities. We also briefly

discuss the effects of the rule on

Medicare beneficiaries.

1. Effects on Physicians

A physician can be financially related

to an entity either through an ownership

or investment interest in the entity, or

through a compensation arrangement

with the entity. A physician who has (or

whose immediate family member has) a

financial relationship with an entity that

does not qualify for an exception is

prohibited from referring Medicare

patients to that entity for the provision

of DHS. Also, when a physician with

such a relationship makes a prohibited

referral, there is a risk that the entity

will receive no Medicare payment for

those DHS. These provisions can have a

significant effect on the business

arrangements in which a physician will

participate and the manner in which the

physician will structure his or her

practice.

The potential impact of the regulation

on physicians and other individual

parties was revealed to us by the

voluminous comments from the public

and health care community we received

in response to the January 1998

proposed rule. 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

in many respects was counter to our

other longstanding policies on coverage

and similar issues; that the rule was

unclear in many areas and that in light

of the severe penalty (that is, payment

denial), ‘‘bright line’’ rules were

essential; 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 believe Phase I of this rulemaking

substantially addresses the concerns

raised by the commenters and yet is

consistent with the statute. Phase I of

this rulemaking clarifies the definitions

of DHS; substantially broadens the inoffice ancillary services exception

(which allows physicians to refer within

their own practices) by easing the

criteria for qualifying as a group practice

and conforming the supervision

requirements to our coverage and other

payment policies; permits shared

facilities in the same building where

physicians routinely provide services

that are neither Federal nor private pay

DHS; excludes from the definition of

‘‘referral’’ services personally performed

by the referring physician; expands the

in-office ancillary services exception to

cover certain DME provided to patients

in physicians’ offices; creates a new

exception for compensation of faculty in

academic medical centers; and clarifies

when a managed care organization

(MCO) is an entity furnishing DHS. All

of these issues are described in greater

detail elsewhere in the preamble, along

with a number of lesser issues that

could affect physicians.

2. Effects on Other Providers

As we stated above, Phase I 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 can also be subject to

various other sanctions, including fines

and exclusion from Federal health care

programs if they knowingly submit a

claim in violation of the prohibition. We

lack the data to determine the number

of entities that could be affected by

Phase I of this rulemaking. However, we

believe they will be fewer in number

than we had anticipated in the January

1998 proposed rule because, as we

described above, physicians will have

far more leeway to refer.

3. Effects on the Medicare and Medicaid

Programs

Section 1877 of the Act was enacted

primarily to address overutilization of

health care services covered by

Medicare. We have tried to focus Phase

I of this rulemaking on financial

relationships that may result in

overutilization. We expect that Phase I

of this rulemaking will result in savings

to the program by providing physicians

and entities with ‘‘bright line’’ rules on

how to avoid the prohibited referrals

that can result in overutilization of

covered services. We cannot gauge with

any certainty the extent of these savings

to the program at this time. (We will

discuss the effects on the Medicaid

program in Phase II of this rulemaking.)

4. Effects on Beneficiaries

Some commenters thought the

January 1998 proposed regulations

exceeded our statutory authority and

imposed unnecessary and costly

burdens on physicians that would harm

patient access to health care facilities

and services. In Phase I of this

rulemaking, we have tried to ensure that

the rule will not adversely impact the

medical care of Federal health care

beneficiaries or other patients. Where

we have determined that Phase I of this

rulemaking may impact 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 could

continue to receive the care in the same

location. In almost all cases, we believe

Phase I of this rulemaking should not

require substantial changes in delivery

arrangements, although it may affect the

referring physician’s or group practice’s

ability to bill for the care.

In addition, we have significantly

expanded the scope of services

potentially included in the in-office

ancillary services exception and thus

readily available to a referring

physician’s patients by: (1) Making clear

that outpatient prescription drugs may

be ‘‘furnished’’ in the office, even if they

are used by the patient at home; (2)

explicitly permitting external

ambulatory infusion pumps that are

DME to be provided under the in-office

ancillary services exception; (3) making

clear 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.

C. Alternatives Considered

In drafting the January 1998 proposed

rule covering a physician’s referrals for

DHS, we attempted to interpret the

statute strictly and literally. After

reviewing the voluminous number of

comments we received, we have

considered many alternative ways to

interpret the statute to accommodate the

practical problems that commenters

raised, while still fulfilling the intent of

the law. For example, we revised the

‘‘same building’’ requirements in the inoffice ancillary services exception to

address commenters’ concerns. Under

section 1877(b)(2)(A)(ii)(I) of the Act,

services qualify for the in-office

ancillary services exception if they are

furnished ‘‘in a building in which the

referring physician (or another

physician who is a member of the same

group practice) furnishes physician

services unrelated to the furnishing of

designated health services.’’ In the

January 1998 proposed rule, we made it

clear that we regarded the building

requirement of the in-office ancillary

services exception, in combination with

the supervision and billing

requirements, as the Congress’s attempt

to circumscribe the exception so that it

applies only to services provided within

the referring physician’s actual sphere

952 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

of practice. Without these requirements,

physicians could refer to, and profit

from, almost any entity, with the claim

that somehow the referred services are

‘‘in-office’’ services that are being

supervised from some remote place.

Notwithstanding, we now realize that

our proposed definition of a ‘‘building’’

that attempted to define a building in

architectural terms could cause practical

problems for some physicians and that

a clearer, ‘‘bright line’’ rule would be

preferable. Accordingly, having

considered the various alternatives

suggested by the commenters, we

concluded that for purposes of Phase I

of this rulemaking, we would define a

‘‘building’’ as a structure with, or

combination of structures that share, a

single street address as assigned by the

U.S. Postal Service. A building would

be considered as one building for all

suites or room numbers located inside

that are required by the U.S. Postal

Service to use the same street address,

regardless of the suite number. Under

Phase I of this rulemaking, suites used

by the same group practice or solo

physician in buildings with separate

street addresses will be treated as

separate buildings for the purposes of

the in-office ancillary services

exception. While we recognize that this

mailing address rule may result in an

occasional anomaly, we are persuaded

that it creates a ‘‘bright line’’ rule that

will be easy to apply and will produce

fair results in the vast majority of cases.

We have also responded to the

commenters’ numerous concerns that

the space in the building in which the

DHS are provided must be adjacent to

the space in which services that are not

DHS are provided. We have revised the

regulation so that an adjacent space is

no longer necessary (subject to the

dictates of any Medicare or Medicaid

payment or coverage supervision rules).

Shared facilities in the same building

are now permitted to the extent they

comply with the supervision, location,

and billing requirements of the in-office

ancillary services exception. However,

because of the increased risk of abuse in

this expansion, we felt that we could

not protect DHS provided by mobile

vans or other mobile facilities under the

in-office ancillary services exception,

except in very limited circumstances.

As these examples demonstrate, our

approach in Phase I of this rulemaking

was to address as many of the industry’s

concerns as possible. We considered a

variety of suggestions and alternatives,

selecting only those that were consistent

with the statute’s goals and directives,

and that would protect Federal health

care program beneficiaries’ access to

services.

D. Conclusion

For the reasons stated above, we are

not preparing analyses for either the

RFA or section 1102(b) of the Act

because we have determined, and we

certify, that Phase I of this rulemaking

will not have a significant economic

impact on a substantial number of small

entities or a significant impact on the

operations of a substantial number of

small rural hospitals.

In accordance with the provisions of

Executive Order 12866, Phase I 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, HCFA amends 42 CFR

chapter IV as set forth below:

PART 411—EXCLUSIONS FROM

MEDICARE AND LIMITATIONS ON

MEDICARE PAYMENT

A. Part 411 is amended as follows:

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

Exclusions of Particular Services

2. In § 411.1, paragraph (a) is revised

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—Physician Ownership of,

and Referral of Patients or Laboratory

Specimens to, Entities Furnishing

Clinical Laboratory or Other Health

Services

3. Section 411.350 is revised to read

as follows:

§ 411.350 Scope of subpart.

(a) This subpart implements section

1877 of the Act, which generally

prohibits a physician from making a

referral under Medicare for designated

health services to an entity with which

the physician or a member of the

physician’s immediate family has a

financial relationship.

(b) This subpart does not provide for

exceptions or immunity from civil or

criminal prosecution or other sanctions

applicable under any State laws or

under Federal law other than section

1877 of the Act. For example, although

a particular arrangement involving a

physician’s financial relationship with

an entity may not prohibit the physician

from making referrals to the entity

under this subpart, the arrangement may

nevertheless violate another provision

of the Act or other laws administered by

HHS, the Federal Trade Commission,

the Securities and Exchange

Commission, the Internal Revenue

Service, or any other Federal or State

agency.

(c) This subpart requires, with some

exceptions, that certain entities

furnishing covered services under

Medicare Part A or Part B report

information concerning their

ownership, investment, or

compensation arrangements in the form,

manner, and at the times specified by

HCFA.

4. Section 411.351 is revised to read

as follows:

§ 411.351 Definitions.

As used in this subpart, unless the

context indicates otherwise:

Centralized building means all or part

of a building, including, for purposes of

this definition 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

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 953

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 (for example, a

diagnostic imaging facility) is not a

centralized building for purposes of this

rule. This provision does not preclude

a group practice from providing services

to other providers (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

CPT and HCPCS codes posted on the

HCFA web site, http://www.hcfa.gov,

(and in annual updates published in the

Federal Register and posted on the

HCFA web site), except as specifically

excluded on the HCFA web site and in

annual updates. All services identified

on the HCFA web site and in annual

updates are clinical laboratory services

for purposes of these regulations. Any

service not specifically identified on the

HCFA web site, as amended from time

to time and published in the Federal

Register, is not a clinical laboratory

service for purposes of these

regulations.

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 these

regulations, the term ‘‘designated health

services (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 (that is, all services provided as

home health services or inpatient and

outpatient hospital services are DHS).

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 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. For purposes of this

definition, an entity does not include

the referring physician himself or

herself, but does include his or her

medical practice. A person or entity is

considered to be furnishing DHS if it is

the person or entity to which HCFA

makes payment for the DHS, directly or

upon assignment on the patient’s behalf,

except that if the person or entity has

reassigned its right to payment to an

employer pursuant to § 424.80(b)(1) of

this chapter; a facility pursuant to

§ 424.80(b)(2) of this chapter; or a health

care delivery system, including clinics,

pursuant to § 424.80(b)(3) of this chapter

(other than a health care delivery system

that is a health plan (as defined in

§ 1000.952(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), the person or entity

furnishing DHS is the person or entity

to which payment has been reassigned.

Provided further, that 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 is the entity furnishing DHS

for any services provided by such

supplier.

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 wellinformed 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. With respect to the rentals

and leases described in § 411.357(a) and

(b), ‘‘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

954 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

this section, a rental payment does not

take into account intended use if it takes

into account costs incurred by the lessor

in developing or upgrading the property

or maintaining the property or its

improvements.

Home health services means the

services described in section 1861(m) of

the Act and part 409, subpart E of this

chapter.

Hospital means any entity that

qualifies as a ‘‘hospital’’ under section

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

hospital’’ under section 1861(f) of the

Act, or as a ‘‘rural primary care

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 and

section 2050 of the Medicare Carriers

Manual (HCFA Pub. 14–3), Part 3—

Claims Process. (Those wishing to

subscribe to program manuals should

contact either the Government Printing

Office (GPO) or the National Technical

Information Service (NTIS) at the

following addresses: Superintendent of

Documents, Government Printing

Office, ATTN: New Orders, P.O. Box

371954, Pittsburgh, PA 15250–7954,

Telephone (202) 512–1800, Fax number

(202) 512–2250 (for credit card orders);

or National Technical Information

Service, Department of Commerce, 5825

Port Royal Road, Springfield, VA 22161,

Telephone (703) 487–4630. In addition,

individual manual transmittals and

Program Memoranda can be purchased

from NTIS. Interested parties should

identify the transmittal(s) they want.

GPO or NTIS can give complete details

on how to obtain the publications they

sell. Additionally, all manuals are

available at the following Internet

address: http://www.hcfa.gov/

pubforms/progman.htm.)

Inpatient hospital services means

those services as defined in section

1861(b) of the Act and § 409.10(a) and

(b) of this chapter and includes

inpatient psychiatric hospital services

listed in section 1861(c) of the Act and

inpatient rural primary care 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. These

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 a

hospital provides for its patients that are

furnished either by the hospital or by

others under arrangements with the

hospital. ‘‘Inpatient hospital services’’

do not include professional services

performed by physicians, physician

assistants, nurse practitioners, clinical

nurse specialists, certified nurse

midwives, and certified registered nurse

anesthetists and qualified psychologists

if Medicare reimburses the services

independently and not as part of the

inpatient hospital service (even if they

are billed by a hospital under an

assignment or reassignment).

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 Used to

Describe Certain Designated Health

Services Under the Physician Referral

Provisions (Section 1877 of the Social

Security Act) means the list of certain

designated health services under section

1877 of the Act initially posted on the

HCFA web site and updated annually

thereafter in an addendum to the

physician fee schedule final rule and on

the HCFA web site.

Member of the group means, for

purposes of this rule, 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.

‘‘Locum tenens physician’’ means a

physician who substitutes (that is,

‘‘stands in the shoes’’) in exigent

circumstances for a regular physician

who is a member of the group, in

accordance with applicable

reassignment rules and regulations,

including section 3060.7 of the

Medicare Carriers Manual (HCFA Pub.

14–3), Part 3—Claims Process.

Outpatient hospital services means

the therapeutic, diagnostic, and partial

hospitalization services listed under

sections 1861(s)(2)(B) and (C) of the Act;

outpatient services furnished by a

psychiatric hospital, as defined in

section 1861(f) of the Act; and

outpatient rural primary care hospital

services, as defined in section

1861(mm)(3) of the Act. Emergency

services covered in nonparticipating

hospitals are excluded under the

conditions described in section 1835(b)

of the Act and subpart G of part 424 of

this chapter. ‘‘Outpatient hospital

services’’ includes services that a

hospital provides for its patients that are

furnished either by the hospital or by

others under arrangements with the

hospital. ‘‘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).

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 955

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

(HCFA Pub. 6); 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

(HCFA Pub. 6).

Patient care services means any tasks

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

identified by the CPT and HCPCS codes

on the HCFA web site (and in annual

updates published in the Federal

Register). All services identified on the

HCFA web site and in annual updates

are physical therapy, occupational

therapy, and speech-language pathology

services for purposes of these

regulations. Any service not specifically

identified on the HCFA web site, as

amended from time to time and

published in the Federal Register, is not

a physical therapy, occupational

therapy, or speech-language pathology

service for purposes of these

regulations. The list of codes identifying

physical therapy, occupational therapy,

and speech-language pathology services

for purposes of these regulations

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

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) to

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 fits

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 (HCFA

Pub. 14–3), Part 3—Claims Process).

Referrals from an independent

contractor who is a physician in the

group 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 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.

Prosthetics, Orthotics, and Prosthetic

Devices and Supplies means the

following services (including all HCPCS

level 2 codes for these 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 identified by the CPT and

HCPCS codes on the HCFA web site and

in annual updates published in the

Federal Register. All services identified

on the HCFA web site and in annual

updates are radiation therapy services

and supplies for purposes of these

regulations. Any service not specifically

identified on the HCFA web site, as

amended from time to time and

published in the Federal Register, is not

a radiation therapy service or supply for

purposes of these regulations. The list of

codes for radiation therapy services and

supplies identified on the HCFA web

site and in annual updates is based on

956 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

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

identified by the CPT and HCPCS codes

on the HCFA web site and in annual

updates published in the Federal

Register (except as otherwise

specifically excluded on the HCFA web

site and in annual updates). All services

identified on the HCFA web site and in

annual updates are radiology and

certain other imaging services for

purposes of these regulations. Any

service not specifically identified on the

HCFA web site, as amended from time

to time and published in the Federal

Register, is not a radiology or certain

other imaging service for purposes of

these regulations. The list of radiology

and certain other imaging services set

forth on the HCFA web site and in

annual updates 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 ultrasonic

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, and

performed during, nonradiological

medical procedures; and

(3) 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

(ii) The tests or services are furnished

by or under the supervision of 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.

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 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 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 parking garages. For purposes of

this rule, the ‘‘same building’’ does not

include a mobile vehicle, van, or trailer.

5. Section 411.352 is added to read as

follows:

§ 411.352 Group practice.

For purposes of this subpart, a group

practice is a physician practice that

meets the following conditions:

(a) Single legal entity. The group

practice must consist of a single legal

entity formed 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-forprofit 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 not be organized or owned (in

whole or in part) by another medical

practice that is an operating physician

practice (regardless of whether the

medical practice meets the conditions

for a group practice under this section).

For purposes of this rule, 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

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 957

single legal entity may itself own

subsidiary entities.

(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 this section.

(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.

(d) Services furnished by group

practice members. (1) Except as

provided in paragraphs (d)(2) and (d)(3)

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 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’’ 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 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 when an existing group

practice reorganizes.

(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 rule prevents a

group practice from adjusting its

compensation methodology

prospectively, subject to restrictions on

the distribution of revenue from DHS

under paragraph (i) of this section.

(f) Unified business. (1) The group

practice must be a unified business

having at least the following features:

(i) Centralized decision-making by a

body representative of the group

practice that maintains effective control

over the group’s assets and liabilities

(including, but not limited to, budgets,

compensation, and salaries).

(ii) Consolidated billing, accounting,

and financial reporting.

(iii) Centralized utilization review.

(2) Location and specialty-based

compensation practices are permitted

with respect to revenues derived from

services that are not DHS and may be

permitted with respect to revenues

derived from DHS under paragraph (i) of

this section.

(g) Volume or value of referrals. No

physician who is a member of the group

practice directly or indirectly receives

compensation based on the volume or

value of referrals by the physician,

except as provided in paragraph (i) of

this section.

(h) Physician-patient encounters.

Members of the group must personally

conduct no less than 75 percent of the

physician-patient encounters of the

group practice.

(i) Special rule for productivity

bonuses and profit shares. (1) A

physician in 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. 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.

(iv) Overall profits are divided in a

reasonable and verifiable manner that is

not directly related to the volume or

value of the physician’s referrals of

DHS.

(3) A productivity bonus for

personally performed services

(including services ‘‘incident to’’ those

personally performed services as

defined in § 411.351) 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.

(iv) The bonus is calculated in a

reasonable and verifiable manner that is

not directly related to the volume or

value of the physician’s referrals of

DHS.

(4) Supporting documentation

verifying the method used to calculate

the profit shares or productivity bonus

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

section, and the resulting amount of

958 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

compensation, must be made available

to the Secretary upon request.

6. Section 411.353 is revised to read

as follows:

§ 411.353 Prohibition on certain referrals

by physicians and limitations on billing.

(a) Prohibition on referrals. Except as

provided in this subpart, a physician

who has a direct or indirect financial

relationship with an entity, or who has

an immediate family member who has

a direct or indirect financial

relationship with the entity, may not

make a referral to that entity for the

furnishing of DHS for which payment

otherwise may be made under Medicare.

A physician’s prohibited financial

relationship with an entity that

furnishes DHS is not imputed to his or

her group practice or its members or its

staff; however, a referral made by a

physician’s group practice, its members,

or its staff may be imputed to the

physician, if the physician directs the

group practice, its members, or its staff

to make the referral or if the physician

controls referrals made by his or her

group practice, its members, or its staff.

(b) Limitations on billing. An entity

that furnishes DHS pursuant to a referral

that is prohibited by paragraph (a) of

this section may not present or cause to

be presented a claim or bill to the

Medicare program or to any individual,

third party payer, or other entity for the

DHS performed pursuant to the

prohibited referral.

(c) Denial of payment. Except as

provided in paragraph (e) of this

section, no Medicare payment may be

made for a designated health service

that is furnished pursuant to a

prohibited referral.

(d) Refunds. An entity that collects

payment for a designated health service

that was performed 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 laws, rules,

and regulations.

7. Section 411.354 is added to read as

follows:

§ 411.354 Financial relationship,

compensation, and ownership or

investment interest.

(a) Financial relationships. (1)

Financial relationship means—

(i) A direct or indirect ownership or

investment interest (as defined in

paragraph (b) of this section) in any

entity that furnishes DHS; or

(ii) A direct or indirect compensation

arrangement (as defined in paragraph (c)

of this section) with an entity that

furnishes DHS.

(2) 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 (not

including an agent of the physician, the

immediate family member, or the entity

furnishing DHS).

(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, 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 until the stock options are

exercised or the convertible securities

are converted to equity (before this time

they 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’’ to the

hospital.

(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, interest payments on secured

obligations, or the like.

(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 between them; and

(B) The entity furnishing DHS has

actual knowledge of, or acts in reckless

disregard or deliberate ignorance of, the

fact that the referring physician (or

immediate family member) has some

ownership or investment interest

(through any number of intermediary

ownership or investment interests) in

the entity furnishing the DHS.

(ii) The entity furnishing DHS need

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.

(c) Compensation arrangement. A

compensation arrangement can be 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 any of the following:

(i) 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.)

(ii) Payments made by a consultant to

a referring physician under § 414.65(e)

of this chapter.

(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

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 959

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. 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 value or

volume 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 these regulations in subpart

J of this part.

(1) Compensation will be considered

‘‘set in advance’’ if the aggregate

compensation or a time-based or per

unit of service-based (whether per-use

or per-service) amount is set in advance

in the initial agreement between the

parties in sufficient detail so that it can

be objectively verified. The payment

amount must be fair market value

compensation for services or items

actually provided, not taking into

account the volume or value of referrals

or other business generated by the

referring physician at the time of the

initial agreement or during the term of

the agreement. Percentage compensation

arrangements do not constitute

compensation that is ‘‘set in advance’’

in which the percentage compensation

is based on fluctuating or indeterminate

measures or in which the arrangement

results in the seller receiving different

payment amounts for the same service

from the same purchaser.

(2) Compensation (including timebased 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) Compensation (including timebased 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

and does not vary during the term of the

agreement in any manner that takes into

account referrals or other business

generated by the referring physician,

including private pay health care

business.

(4) A physician’s compensation may

be conditioned on the physician’s

referrals to a particular provider,

practitioner, or supplier, so long as the

compensation arrangement—

(i) Is fixed 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) Complies with an applicable

exception under §§ 411.355 or 411.357;

and

(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

judgement.

8. Section 411.355 is revised to read

as follows:

§ 411.355 General exceptions to the

referral prohibition related to both

ownership/investment and compensation.

The prohibition on referrals set forth

in § 411.353 does not apply to the

following types of services:

(a) Physician services. (1) Physician

services as defined in § 410.20(a) of this

chapter that are furnished—

(i) Personally by another physician

who is a member of the referring

physician’s group practice or is a

physician in the same group practice (as

defined 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, ‘‘physician services’’

includes 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 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—

(A) The referring physician (or

another physician who is a member of

the same group practice) furnishes

substantial physician services that are

unrelated to the furnishing of DHS

payable by Medicare, any other Federal

960 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

health care payer, or a private payer,

even though the unrelated services may

lead to the ordering of DHS;

(B) The physician services that are

unrelated to the furnishing of DHS in

paragraph (b)(2)(i)(A) of this section

must represent substantially the full

range of physician services unrelated to

the furnishing of DHS that the referring

physician routinely provides (or, in the

case of a referring physician who is a

member of a group practice, the full

range of physician services that the

physician routinely provides for the

group practice); and

(C) The receipt of DHS (whether

payable by a Federal health care

program or a private payer) is not the

primary reason the patient comes in

contact with the referring physician or

his or her group practice.

(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 must be 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’’ (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,

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 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, a

private home does not include a

nursing, long-term care, or other facility

or institution.

(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 HCFA under

section 1876 of the Act and part 417,

subparts J through M of this chapter,

which set forth qualifying conditions for

Medicare contracts; enrollment,

entitlement, and disenrollment under

Medicare contracts; Medicare contract

requirements; and change of ownership

and leasing of facilities: effect on

Medicare contracts.

(2) A health care prepayment plan in

accordance with an agreement with

HCFA 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 HCFA

under section 1857 of the Act and part

422 of this chapter.

(d) Clinical laboratory services

furnished in an ambulatory surgical

center (ASC) or end-stage renal disease

(ESRD) facility, or by a hospice if

payment for those services is included

in the ASC rate, the ESRD composite

rate, or as part of the per diem hospice

charge, respectively.

(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. (‘‘Components’’ of an

academic medical center means an

affiliated medical school, faculty

practice plan, hospital, teaching facility,

institution of higher education, or

departmental professional corporation.);

(B) Is licensed to practice medicine in

the State;

(C) Has a bona fide faculty

appointment at the affiliated medical

school; and

(D) Provides either substantial

academic or substantial clinical

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 961

teaching services for which the faculty

member receives compensation as part

of his or her employment relationship

with the academic medical center.

(ii) The total compensation paid for

the previous 12-month period (or fiscal

year or calendar year) from 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 a written

agreement that has been adopted by the

governing body of each component.

(C) All money paid to a referring

physician for research must be used

solely to support bona fide research.

(iv) The referring physician’s

compensation arrangement does not

violate the anti-kickback statute, section

1128B(b) of the Act.

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

purposes of this section consists of—

(i) An accredited medical school

(including a university, when

appropriate);

(ii) An affiliated faculty practice plan

that is a 501(c)(3) or (c)(4) of the Internal

Revenue Code nonprofit, tax-exempt

organization under IRS regulations (or is

a part of such an organization under an

umbrella designation); and

(iii) One or more affiliated hospital(s)

in which a majority of the hospital

medical staff consists of physicians who

are faculty members and a majority of

all hospital admissions are made by

physicians who are faculty members.

(f) Implants in an ASC. Implants,

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 furnished 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

performed in the same ASC where the

implant is furnished.

(3) The arrangement for the furnishing

of the implant does not violate the

Federal anti-kickback statute, section

1128B(b) of the Act.

(4) Billing and claims submission for

the implants complies with all Federal

and State laws and regulations.

(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

outpatient prescription drugs furnished

in or by an ESRD facility. EPO and other

dialysis-related outpatient prescription

drugs that are identified by the CPT and

HCPCS codes on the HCFA web site,

http://www.hcfa.gov, and in annual

updates published in the Federal

Register and 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,

‘‘furnished’’ means that the EPO or

drugs are either administered or

dispensed to a patient in or by the ESRD

facility, even if the EPO or drugs are

furnished to the patient at home.

‘‘Dialysis-related drugs’’ means certain

drugs required for the efficacy of

dialysis, as identified on the HCFA web

site and in annual updates.

(2) The arrangement for the furnishing

of the EPO and other dialysis-related

drugs does not violate the Federal antikickback statute, section 1128B(b) of the

Act.

(3) Billing and claims submission for

the EPO and other dialysis related drugs

complies with all Federal and State laws

and regulations.

(4) The exception set forth in this

paragraph (g) does not apply to any

financial relationships 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 are

covered by Medicare and identified by

the CPT and HCPCS codes included on

the HCFA web site and in annual

updates published in the Federal

Register and that meet the following

conditions:

(1) The preventive screening tests,

immunizations, and vaccines are subject

to HCFA-mandated frequency limits.

(2) The preventive screening tests,

immunizations, and vaccines are

reimbursed by Medicare based on a fee

schedule.

(3) The arrangement for the provision

of the preventive screening tests,

immunizations, and vaccines does not

violate the Federal anti-kickback statute,

section 1128B(b) of the Act.

(4) Billing and claims submission for

the preventive screening tests,

immunizations, and vaccines complies

with all Federal and State laws and

regulations.

(5) To qualify under this exception,

the preventive screening tests,

immunizations, and vaccines must be

covered by Medicare and must be listed

on the HCFA web site and in annual

updates.

(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 Federal anti-kickback

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

(3) Billing and claims submission for

the eyeglasses or contact lenses

complies with all Federal and State laws

and regulations.

9. In § 411.357, paragraph (j) is added

and reserved, and paragraphs (k), (l),

(m), (n), (o), and (p) are added to read

as follows:

§ 411.357 Exceptions to the referral

prohibition related to compensation

arrangements.

* * * * *

(j) [Reserved]

(k) Non-monetary compensation up to

$300. 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:

(1) 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.

(2) The compensation may not be

solicited by the physician or the

physician’s practice (including

employees and staff members).

(3) The compensation arrangement

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

Act.

(l) Fair market value compensation.

Compensation resulting from an

962 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

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 § 411.351) for the provision of

items or services by the physician (or an

immediate family member) or group

practice to the entity, if the arrangement

is set forth in an agreement that meets

the following conditions:

(1) It is in writing, signed by the

parties, and covers only identifiable

items or services, all of which are

specified in the agreement.

(2) It 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) It specifies the compensation that

will be provided under the arrangement.

The compensation must be set in

advance, be consistent with fair market

value, and not be determined in a

manner that takes into account the

volume or value of any referrals or any

other business generated by the referring

physician.

(4) It involves a transaction that is

commercially reasonable (taking into

account the nature and scope of the

transaction) and furthers the legitimate

business purposes of the parties.

(5) It meets a safe harbor under the

anti-kickback statute in § 1001.952 of

this title, has been approved by the OIG

under a favorable advisory opinion

issued in accordance with part 1008 of

this title, or does not violate the antikickback provisions in section 1128B(b)

of the Act.

(6) The services to be performed

under the arrangement do not involve

the counseling or promotion of a

business arrangement or other activity

that violates a 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 offered to all

members of the medical staff without

regard to the volume or value of

referrals or other business generated

between the parties.

(2) The compensation is offered only

during periods when the medical staff

members are making rounds or

performing other duties 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.

(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 consistent

with the types of benefits offered to

medical staff members—

(i) By other hospitals within the same

local region; or

(ii) If no such hospitals exist within

the same local region, by comparable

hospitals in comparable regions.

(6) 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).

(7) 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.

(8) The compensation arrangement

does not violate the Federal antikickback provisions in section 1128B(b)

of the Act.

(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

Federal anti-kickback statute, section

1128B(b) of the Act, or any 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 a hospital to a

physician (or the physician’s immediate

family member) who practices in the

hospital’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) or specific training regarding

the requirements of Federal health care

programs (for example, billing, coding,

reasonable and necessary services,

documentation, unlawful referral

arrangements).

(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 not taking 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 or any laws or regulations

governing billing or claims submission.

PART 424—CONDITIONS FOR

MEDICARE PAYMENT

B. Part 424 is amended as follows:

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 revised

to read as set forth below, and

paragraphs (e), (f), and (g) are removed.

§ 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

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 963

1CPT codes, descriptions and other data only are

copyright 2000 American Medical Association. All

Rights Reserved. Applicable FARS/DFARS Clauses

Apply.

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; Program No. 93.774, MedicareSupplementary Medical Insurance Program;

and Program No. 93.778, Medical Assistance

Program)

Dated: October 6, 2000.

Michael M. Hash,

Acting Administrator, Health Care Financing

Administration.

Dated: October 16, 2000.

Donna E. Shalala,

Secretary.

Note: The following attachment will not

appear in the Code of Federal Regulations.

Attachment

List of CPT1/HCPCS Codes Used To

Describe Certain Designated Health

Services Under the Physician Referral

Provisions (Section 1877 of the Social

Security Act)

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

86915 Bone marrow/stem cell prep

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 HCPCS level 2 codes for other

clinical laboratory services:

G0001 Drawing blood for specimen

G0026 Fecal leukocyte examination

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–G0145 Scr c/v cyto, thinlayer,

rescr

G0147 Scr c/v cyto, automated sys

G0148 Scr c/v cyto, autosys, rescr

P2028 Cephalin floculation test

P2029 Congo red blood test

P2031 Hair analysis

P2033 Blood thymol turbidity

P2038 Blood mucoprotein

P3000 Screen pap by tech w md supv

P3001 Screening pap smear by phys

P7001 Culture bacterial urine

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/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

97014 Electric stimulation 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

97703 Prosthetic checkout

97750 Physical performance test

97799 Physical medicine procedure

Include CPT codes for physical

therapy/occupational therapy/speechlanguage pathology services not in the

97000 series:

64550 Apply neurostimulator

90901 Biofeedback train, any meth

90911 Biofeedback peri/uro/rectal

92506 Speech/hearing evaluation

92507–92508 Speech/hearing therapy

92510 Rehab for ear implant

92526 Oral function therapy

93797 Cardiac rehab

93798 Cardiac rehab/monitor

94667–94668 Chest wall manipulation

94762 Measure blood oxygen level

95831 Limb muscle testing, manual

95832 Hand muscle testing, manual

95833–95834 Body muscle testing,

manual

95851–95852 Range of motion

measurements

96105 Assessment of aphasia

96110 Developmental test, lim

96111 Developmental test, extend

96115 Neurobehavior status exam

Include HCPCS level 2 codes for the

following physical therapy/occupational

therapy/speech-language pathology

services:

G0193 Endoscopic study swallow

functn

G0194 Sensory testing endoscopic

stud

G0195 Clinical eval swallowing funct

G0196 Eval of swallowing with

radioopa

G0197 Eval of pt for prescip speech

devi

G0198 Patient adapation & train for

spe

G0199 Reevaluation of patient use

spec

G0200 Eval of patient prescip of voice

p

G0201 Modi for training in use voice

pro

Q0086 Physical therapy evaluation/

Radiology

Include the following radiology and

certain other imaging services in the

CPT 70000 series:

70100–70110 X-ray exam of jaw

70120–70130 X-ray exam of mastoids

70134 X-ray exam of middle ear

70140–70150 X-ray exam of facial

bones

70160 X-ray exam of nasal bones

70190–70200 X-ray exam of eye

sockets

70210–70220 X-ray exam of sinuses

70240 X-ray exam, pituitary saddle

70250–70260 X-ray exam of skull

70300–70310 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

964 Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations

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

71010–71022 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

71120–71130 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

72010–72020 X-ray exam of spine

72040–72052 X-ray exam of neck

spine

72069 X-ray exam of trunk spine

72070–72074 X-ray exam of thoracic

spine

72080–72090 X-ray exam of trunk

spine

72100–72120 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

72170–72190 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

72200–72202 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

73020–73030 X-ray exam of shoulder

73050 X-ray exam of shoulders

73060 X-ray exam of humerus

73070–73080 X-ray exam of elbow

73090 X-ray exam of forearm

73092 X-ray exam of arm, infant

73100–73110 X-ray exam of wrist

73120–73130 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

73500–73510 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

73600–73610 X-ray exam of ankle

73620–73630 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 joint of lwr extre w/o d

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

74000–74020 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 dy

74210 Contrst x-ray exam of throat

74220 Contrast x-ray, esophagus

74230 Cinema x-ray, throat/esoph

74240–74245 X-ray exam, upper gi

tract

74246–74249 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

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

76061–76062 X-rays, bone survey

76065 X-rays, bone evaluation

76066 Joint(s) survey, single film

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 Cinematic x-rays

76125 Cinematic x-rays add-on

76150 X-ray exam, dry process

76370 CAT scan for therapy guide

76375 3d/holograph reconstr add-on

76380 CAT scan follow-up study

76390 Mr spectroscopy

76400 Magnetic image, bone marrow

76499 Radiographic procedure

76506 Echo exam of head

76511–76512 Echo exam of eye

76513 Echo exam of eye, water bath

76516–76519 Echo exam of eye

76536 Echo exam of head and neck

76604 Echo exam of chest

76645 Echo exam of breast(s)

76700–76705 Echo exam of abdomen

76770–76775 Echo exam abdomen

back wall

76778 Echo exam kidney transplant

76800 Echo exam spinal canal

76805–76815 Echo exam of pregnant

uterus

76816 Echo exam follow-up/repeat

76818 Fetl biophys profil w/stress

76819 Fetl biophys profil w/o strs

76825–76828 Echo exam of fetal heart

76830 Echo exam, transvaginal

76831 Echo exam, uterus

76856–76857 Echo exam of pelvis

76870 Echo exam of scrotum

76872 Echo exam, transrectal

76873 Echograp trans r, pros study

76880 Echo exam of extremity

76885–76886 Echo exam, infant hips

76970 Ultrasound exam follow-up

76977 Us bone density measure

76999 Echo examination procedure

Include the following CPT codes for

echocardiography and vascular

ultrasound:

Federal Register / Vol. 66, No. 3 / Thursday, January 4, 2001 / Rules and Regulations 965

93303–93304 Echo transthoracic

93307–93308 Echo exam of heart

93320–93321 Doppler echo exam,

heart, if used in conjunction with

93303–93308

93325 Doppler color flow add-on, if

used in conjunction with 93303–

93308

93875–93882 Extracranial study

93886–93888 Intracranial study

93922–93924 Extremity study

93925–93926 Lower extremity study

93930–93931 Upper extremity study

93965–93971 Extremity study

93975–93979 Vascular study

93980–93981 Penile vascular study

93990 Doppler flow testing

Include miscellaneous other HCPCS

level 2 codes for radiology and certain

other imaging services:

G0050 Residual urine by ultrasound

G0131–132 CT scan, bone density

study

G0188 Xray lwr extrmty-full lngth

R0070 Transport portable x-ray

R0075 Transport port x-ray multipl

Radiation Therapy Services and

Supplies

Include CPT codes for all radiation

therapy services and supplies in the

CPT 70000 series:

77261–77263 Radiation therapy

planning

77280–77295 Set radiation therapy

field

77299 Radiation therapy planning

77300–77315 Radiation therapy dose

plan

77321 Radiation therapy port plan

77326–77328 Radiation therapy dose

plan

77331 Special radiation dosimetry

77332–77334 Radiation treatment

aid(s)

77336–77370 Radiation physics

consult

77399 External radiation dosimetry

77401–77416 Radiation treatment

delivery

77417 Radiology port film(s)

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

77600–77620 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 iterstit radiat compl

77781–77784 High intensity

brachytherapy

77789 Apply surface radiation

77790 Radiation handling

77799 Radium/radioisotope therapy

Include CPT codes for radiation

therapy classified elsewhere:

31643 Diag bronchoscope/catheter

50559 Renal endoscopy/radiotracer

55859 Percut/needle insert, pros

61770 Incise skull for treatment

61793 Focus radiation beam

Preventive Screening Tests,

Immunizations and Vaccines

The following CPT and HCPCS codes

are excluded under § 411.355(h) as

screening tests:

76092 Mammogram, screening

76977 Us bone density measure

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–G0145 Scr c/v cyto, thin layer,

rescr

G0147 Scr c/v cyto, automated sys

G0148 Scr c/v cyto, autosys, rescr

P3000 Screen pap by tech w md supv

P3001 Screening pap smear by phys

The following CPT codes are

excluded under § 411.355(h) as

vaccines:

90657 Flu vaccine, 6–35 mo, im

90658 Flu vaccine, 3 yrs, im

90659 Flu vacine, whole, im

90732 Pneumococcal vacc, adult/ill

90744 Hepb vacc ped/adol 3 dose im

90746 Hep b vaccine, adult, im

90747 Hepb vacc, ill pat 4 dose im

90748 Hep b/hib vaccine, im

Drugs Used by Patients Undergoing

Dialysis

The following HCPCS codes are

excluded under § 411.355(g) as EPO and

other dialysis related outpatient

prescription drugs furnished in or by an

ESRD facility:

J0635 Calcitriol injection

J0895 Deferoxamine meslyate inj

J1750 Iron dextran

J2915 NA Ferric Gluconate Complex

J2997 Alteplase recombinant

Q9920 Epoetin with hct <=20

Q9921 Epoetin with hct = 21

Q9922 Epoetin with hct = 22

Q9923 Epoetin with hct = 23

Q9924 Epoetin with hct = 24

Q9925 Epoetin with hct = 25

Q9926 Epoetin with hct = 26

Q9927 Epoetin with hct = 27

Q9928 Epoetin with hct = 28

Q9929 Epoetin with hct = 29

Q9930 Epoetin with hct = 30

Q9931 Epoetin with hct = 31

Q9932 Epoetin with hct = 32

Q9933 Epoetin with hct = 33

Q9934 Epoetin with hct = 34

Q9935 Epoetin with hct = 35

Q9936 Epoetin with hct = 36

Q9937 Epoetin with hct = 37

Q9938 Epoetin with hct = 38

Q9939 Epoetin with hct = 39

Q9940 Epoetin with hct >= 40

[FR Doc. 01–4 Filed 1–3–01; 8:45 am]

BILLING CODE 4120–03–P