Department of Health and Human Services - CMS...Financing Administration, Department of Health and Human Services, Attn: HCFA–1809–FC, P.O. Box 8013, Baltimore, MD 21244–8013

Thursday,

January 4, 2001

Part II

Department ofHealth and HumanServicesHealth Care Financing Administration42 CFR Parts 411 and 424Medicare and Medicaid Programs;Physicians’ Referrals to Health CareEntities With Which They Have FinancialRelationships; Final Rule

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

DEPARTMENT OF HEALTH ANDHUMAN 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 CareEntities With Which They HaveFinancial Relationships

AGENCY: Health Care FinancingAdministration (HCFA), HHS.ACTION: Final rule with comment period.

SUMMARY: This final rule with 90-daycomment period (Phase I of thisrulemaking) incorporates intoregulations the provisions in paragraphs(a), (b), and (h) of section 1877 of theSocial Security Act (the Act). Undersection 1877, if a physician or a memberof a physician’s immediate family has afinancial relationship with a health careentity, the physician may not makereferrals to that entity for the furnishingof designated health services (DHS)under the Medicare program, unless anexception applies. The followingservices are DHS: clinical laboratoryservices; physical therapy services;occupational therapy services; radiologyservices, including magnetic resonanceimaging, computerized axialtomography scans, and ultrasoundservices; radiation therapy services andsupplies; durable medical equipmentand supplies; parenteral and enteralnutrients, equipment, and supplies;prosthetics, orthotics, and prostheticdevices and supplies; home healthservices; outpatient prescription drugs;and inpatient and outpatient hospitalservices.

In addition, section 1877 of the Actprovides that an entity may not presentor cause to be presented a Medicareclaim or bill to any individual, thirdparty payer, or other entity for DHSfurnished under a prohibited referral,nor may we make payment for adesignated health service furnishedunder a prohibited referral.

Paragraph (a) of section 1877 of theAct includes the general prohibition.Paragraph (b) of the Act includesexceptions that pertain to bothownership and compensationrelationships, including an in-officeancillary services exception. Paragraph(h) includes definitions that are usedthroughout section 1877 of the Act,including the group practice definitionand the definitions for each of the DHS.

We intend to publish a second finalrule with comment period (Phase II of

this rulemaking) shortly addressing, tothe extent necessary, the remainingsections of the Act. Phase II of thisrulemaking will address commentsconcerning the ownership andinvestment exceptions in paragraphs (c)and (d) and the compensationexceptions in paragraph (e) of section1877 of the Act. Phase II of thisrulemaking will also address commentsconcerning the reporting requirementsand sanctions provided by paragraphs(f) and (g) of the Act, respectively, andinclude further consideration of thegeneral exception to the referralprohibition related to both ownership/investment and compensation forservices furnished in an ambulatorysurgical center (ASC), end-stage renaldialysis facility, or by a hospice in§ 411.355(d) of the regulations (thisexception presently is in force and effectas to clinical laboratory services). Inaddition, Phase II of this rulemakingwill address section 1903(s) of the Act,which extends aspects of the referralprohibition to the Medicaid Program.Phase II will also address commentsreceived in response to this rulemaking,as appropriate, and certain proposals fornew exceptions to section 1877 of theAct not included in the 1998 proposedrulemaking, but suggested in the publiccomments.

DATES: Effective date: The regulationsdelineated in Phase I of this rulemakingare effective on January 4, 2002 exceptfor § 424.22(d), which is effective onFebruary 5, 2001.

Comment date: We will considercomments if we receive them at theappropriate address, as provided below,no later than 5 p.m. on April 4, 2001.

ADDRESSES: Mail written comments (oneoriginal and three copies) to thefollowing address only: Health CareFinancing Administration, Departmentof Health and Human Services, Attn:HCFA–1809–FC, P.O. Box 8013,Baltimore, MD 21244–8013.

Since comments must be received bythe date specified above, please allowsufficient time for mailed comments tobe received timely in the event ofdelivery delays. If you prefer, you maydeliver your written comments (oneoriginal and three copies) by courier toone of the following addresses: Room443–G, Hubert H. Humphrey Building,200 Independence Avenue, SW.,Washington, DC 20201, or C5–15–03,Central Building, 7500 SecurityBoulevard, Baltimore, MD 21244–1850.Comments mailed to the two addressesprovided in this paragraph may bedelayed and received too late to beconsidered.

Because of staffing and resourcelimitations, we cannot accept commentsby facsimile (FAX) transmission. Incommenting, please refer to file codeHCFA–1809–FC.

Comments received timely will beavailable for public inspection as theyare received, generally beginningapproximately 3 weeks after publicationof a document, in Room 443–G of theDepartment’s offices at 200Independence Avenue, SW.,Washington, DC 20201, on Mondaythrough Friday of each week from 8:30a.m. to 5 p.m. (phone: (202) 690–7890).

Copies: To order copies of the FederalRegister containing this document, sendyour request to: New Orders,Superintendent of Documents, P.O. Box371954, Pittsburgh, PA 15250–7954.Specify the date of the issue requestedand enclose a check or money orderpayable to the Superintendent ofDocuments, or enclose your Visa orMaster Card number and expirationdate. Credit card orders can also beplaced by calling the order desk at (202)512–1800 or by faxing to (202) 512–2250. The cost for each copy is $8. Asan alternative, you can view andphotocopy the Federal Registerdocument at most libraries designatedas Federal Depository Libraries and atmany other public and academiclibraries throughout the country thatreceive the Federal Register.FOR FURTHER INFORMATION CONTACT:Joanne Sinsheimer, (410) 786–4620.SUPPLEMENTARY INFORMATION: ThisFederal Register document is alsoavailable from the Federal Registeronline database through GPO Access, aservice of the U.S. Government PrintingOffice. Free public access is available ona Wide Area Information Server (WAIS)through the Internet and viaasynchronous dial-in. Internet users canaccess the database by using the WorldWide Web; the Superintendent ofDocuments home page address ishttp://www.access.gpo.gov/nara_docs/,by using local WAIS client software, orby telnet to swais.access.gpo.gov, thenlogin as guest (no password required).Dial-in users should usecommunications software and modemto call (202) 512–1661; type swais, thenlogin as guest (no password required).

At the time that we forward ourregulations and notices to the Office ofthe Federal Register (OFR) forpublication, we announce them on ourInternet website (http://www.hcfa.gov/regs/regsnotices.htm) as a service to thepublic. We began providing this serviceon May 30, 2000. We note that the OFRmay make minor editorial changes to adocument before publishing it. While


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

we provide a document on our website,the document that we publish in theFederal Register is the official HCFApublication.

To help readers locate information inthis final rule, we are providing thefollowing Table of Contents:I. Background

A. Legislative and Regulatory History1. Section 1877 of the Act2. Section 1903(s) of the ActB. Regulations History1. Regulations Published by HCFA and the

Office of the Inspector General (OIG)Relating to Section 1877 of the Act

2. Details about Prior Related RegulationsII. Development of Phase I of this Final

RulemakingA. Technical Explanation of Bifurcation of

the RegulationB. General Comments Regarding the

January 1998 Proposed Rule andResponses

III. General Prohibition Under Section 1877of the Act

A. When Is There a Financial RelationshipBetween the Physician and the Entity?

B. When Does a Physician Make a Referral?1. ‘‘Referral’’2. ‘‘Consultation’’

IV. Physician Compensation Under Section1877 of the Act: An Overview

V. ‘‘Volume or Value’’ of Referrals and‘‘Other Business Generated’’ Standards:An Overview

VI. Exceptions Applicable to Ownership andCompensation Arrangements (Section1877(b) of the Act)

A. Physician Services (Section 1877(b)(1)of the Act)

B. In-office Ancillary Services (Section1877(b)(2) of the Act)

1. Scope of Designated Health ServicesThat Can Be In-office Ancillary Services

2. Direct Supervision3. The Building Requirements4. The Billing RequirementC. Group Practice Definition (Section

1877(h)(4) of the Act)1. General Comments2. Single Legal Entity Requirement3. Members of the Group4. The ‘‘Full Range of Services Test’’5. The ‘‘Substantially All Test’’6. The ‘‘Seventy-five Percent Physician-

Patient Encounters Test’’7. The ‘‘Unified Business Test’’8. Profit Shares and Productivity Bonuses9. Group Practice AttestationsD. Prepaid Plans (Section 1877(b)(3) of the

Act)VII. New Regulatory Exceptions

A. Academic Medical CentersB. 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 HealthServices

A. General PrinciplesB. General Comment: Professional Services

as Designated Health ServicesC. Clinical Laboratory ServicesD. Physical Therapy ServicesE. Occupational Therapy Services

F. Radiology and Certain Other ImagingServices

G. Radiation TherapyH. Durable Medical Equipment (DME)I. Parenteral and Enteral Nutrients,

Equipment, and SuppliesJ. Prosthetics, Orthotics, and Prosthetic

Devices and SuppliesK. Home Health ServicesL. Outpatient Prescription DrugsM. Inpatient and Outpatient Hospital

ServicesN. Other Definitions1. Consultation2. Entity3. Fair Market Value4. Group Practice5. Health Professional Shortage Areas6. Employee7. Immediate Family Members8. Referral9. Remuneration and the Exceptions in

Section 1877(h)(1)(C) of the ActIX. Collection of Information RequirementsX. Regulatory Impact Statement

A. Overall ImpactB. Anticipated Effects1. Effects on Physicians2. Effects on Other Providers3. Effects on the Medicare and Medicaid

Programs4. Effects on BeneficiariesC. Alternatives ConsideredD. Conclusion

Regulations TextAttachment

I. Background

A. Legislative and Regulatory History

1. Section 1877 of the Act

Section 6204 of the Omnibus BudgetReconciliation Act of 1989 (Pub. L. 101–239) (OBRA 1989), enacted onDecember 19, 1989, added section 1877to the Act. Section 1877 of the Actprohibited a physician from referring apatient to an entity for clinicallaboratory services for which Medicaremight otherwise pay, if the physician orthe physician’s immediate familymember had a financial relationshipwith the entity. The statute defined‘‘financial relationship’’ as anownership or investment interest in theentity or a compensation arrangementbetween the physician (or thephysician’s immediate family member)and the entity. The statute provided forseveral exceptions to the prohibition.Some applied to ownership/investmentinterests and compensationarrangements; others applied only toownership/investment interests or onlyto compensation arrangements.

The statute further prohibited anentity from presenting or causing to bepresented a Medicare claim or bill toany individual, third party payer, orother entity for clinical laboratoryservices furnished under a prohibitedreferral. Additionally, the statute

mandated refunding any amountcollected under a bill for an item orservice furnished under a prohibitedreferral. Finally, the statute imposedreporting requirements and provided forsanctions, including civil monetarypenalty provisions. Section 1877 of theAct became effective on January 1, 1992.

Section 4207(e) of the OmnibusBudget Reconciliation Act of 1990 (Pub.L. 101–508) (OBRA 1990), enacted onNovember 5, 1990, amended certainprovisions of section 1877 of the Act toclarify definitions and reportingrequirements relating to physicianownership and referral and to providean additional exception to theprohibition.

Several subsequent laws furtherchanged section 1877 of the Act. Section13562 of the Omnibus BudgetReconciliation Act of 1993 (Pub. L. 103–66) (OBRA 1993), enacted on August 10,1993, expanded the referral prohibitionto cover 10 ‘‘designated healthservices,’’ in addition to clinicallaboratory services, modified some ofthe existing statutory exceptions, andadded new exceptions. Section 152 ofthe Social Security Act Amendments of1994 (SSA 1994) (Pub. L. 103–432),enacted on October 31, 1994, amendedthe list of designated services, effectiveJanuary 1, 1995, changed the reportingrequirements at section 1877(f) of theAct, and modified some of the effectivedates established by OBRA 1993. Someprovisions relating to referrals forclinical laboratory services wereeffective retroactively to January 1,1992, while other provisions becameeffective on January 1, 1995.

2. Section 1903(s) of the ActTitle XIX of the Act established the

Medicaid program to provide medicalassistance to individuals who meetcertain income and resourcerequirements. The States operateMedicaid programs in accordance withFederal laws and regulations and witha State plan that we approve. ThoughStates administer the Medicaidprograms, the Federal and Stategovernments jointly finance them. Wecall the Federal government’s share ofmedical assistance expenditures‘‘Federal financial participation’’ (FFP).

Until OBRA 1993, there were nostatutory or regulatory requirementsaffecting a physician’s referrals forservices covered under the Medicaidprogram. Section 13624 of OBRA 1993,entitled ‘‘Application of Medicare RulesLimiting Certain Physician Referrals,’’added a new paragraph (s) to section1903 of the Act, that extends aspects ofthe Medicare prohibition on physicianreferrals to Medicaid. This provision



bars FFP in State expenditures for DHSfurnished to an individual based on aphysician referral that would result in adenial of payment for the services underthe Medicare program if Medicarecovered the services to the same extentand under the same terms andconditions as under the State Medicaidplan. The statute also made certainreporting requirements in section1877(f) of the Act and a civil monetarypenalty provision in section 1877(g)(5)(related to the reporting requirements)applicable to providers of DHS forwhich payment may be made underMedicaid in the same manner as theyapply to providers of such services forwhich payment may be made underMedicare. Section 1903(s) of the Actapplies to a physician’s referrals madeon or after December 31, 1994.

B. Regulations History

1. Regulations Published by HCFA andthe Office of the Inspector General (OIG)Relating to Section 1877 of the Act

The following is a summary of theseries of regulations we have publishedin the Federal Register over the pastseveral years to implement theprovisions of section 1877 of the Act, asamended, and section 1903(s) of theAct:

• On December 3, 1991, we issued aninterim final rule with comment period(54 FR 61374) to set forth the reportingrequirements under section 1877(f) ofthe Act.

• On March 11, 1992, we issued aproposed rule (57 FR 8588) toimplement the self-referral prohibitionand exceptions related to referrals forclinical laboratory services establishedby section 1877 of the Act, andamended by OBRA 1990.

• On August 14, 1995, we issued afinal rule with comment period (60 FR41914) incorporating the provisions ofOBRA 1993 and SSA 1994 that relate toreferrals for clinical laboratory servicesunder section 1877 of the Act, effectiveJanuary 1, 1992, and revising the March11, 1992 proposal based on the publiccomments we received.

• On January 9, 1998, we issued aproposed rule (63 FR 1659) to amendthe provisions of the August 1995 finalrule and to reflect other changes insection 1877 of the Act enacted byOBRA 1993 and SSA 1994 that wereeffective January 1, 1995. These include,among other changes, the expansion ofthe referral prohibition to the 10additional DHS, and the Medicaidexpansion.

• On January 9, 1998, we published afinal rule with comment period (63 FR1846) incorporating into our regulations

the specific procedures we will use toissue advisory opinions, as requiredunder section 1877(g)(6) of the Act.Section 1877(g)(6) of the Act requiresthat we issue written advisory opinionsto outside parties concerning whetherthe referral of a Medicare patient by aphysician for DHS (other than clinicallaboratory services) is prohibited undersection 1877 of the Act.

We also note that on October 20,1993, the OIG published a proposed rule(58 FR 54096) to implement the civilmoney penalty provisions undersections 1877(g)(3) and (g)(4) of the Act.The OIG followed with publication of afinal rule with comment period (60 FR16580) on March 31, 1995.

2. Details About Prior RelatedRegulations

On August 14, 1995, we published inthe Federal Register a final rule withcomment period (60 FR 41914) thatincorporated into regulations theprovisions of section 1877 of the Actprohibiting physician referrals forclinical laboratory services under theMedicare program. That ruleincorporated certain expansions andexceptions created by OBRA 1993, andthe amendments in SSA 1994. Itincluded only the expansions and otherchanges that related to prohibitedreferrals for clinical laboratory servicesthat were retroactively effective toJanuary 1, 1992, and interpreted thenew provisions only in a few limitedinstances in which it was essential toimplement the law. That rule alsoincluded our responses to the publiccomments we received on both theDecember 3, 1991 interim final rulewith comment period (56 FR 61374) thatestablished the reporting requirementsunder section 1877(f) of the Act, and theMarch 11, 1992 proposed rule (57 FR8588) that covered section 1877 of theAct, as amended by OBRA 1990, andrelated to referrals for clinical laboratoryservices.

Because the August 1995 ruleaddressed only those changes made byOBRA 1993 and SSA 1994 that had aretroactive effective date of January 1,1992, we explained our intent to laterpublish a proposed rule to fullyimplement the extensive revisions tosection 1877 of the Act made by OBRA1993 and SSA 1994, and to interpretthose provisions when necessary. In thelater proposed rule, we intended toinclude the revisions that relate toreferrals for the additional DHS(including clinical laboratory services)that became effective January 1, 1995,and to implement the Medicaidexpansion in section 1903(s) of the Act

that became effective for referrals madeon or after December 31, 1994.

As intended, on January 9, 1998, wepublished the proposed rule (63 FR1659). The rule was organized asfollows: In section I (63 FR 1661through 1663), we summarized theproblems associated with physician self-referrals and the relevant legislative andregulatory background. In section II (63FR 1663 through 1673), part A, wesummarized the provisions of ourproposed rule and described how weproposed to alter the final regulationcovering referrals for clinical laboratoryservices to apply it to the additionalDHS and to reflect the statutory changesin section 1877 of the Act that wereeffective on January 1, 1995. In sectionII, part B, we described the changes weproposed to make to the Medicaidregulations to incorporate section1903(s) of the Act. In section III (63 FR1673 through 1705), we discussed indetail how we proposed to interpret anyprovisions in sections 1877 and 1903(s)of the Act that we believed wereambiguous, incomplete, or thatprovided us with discretion. We alsodiscussed policy changes orclarifications we proposed to make tothe August 1995 rule covering referralsfor clinical laboratory services. SectionIV (63 FR 1705 through 1715) of theproposed rule included our responses tosome of the most common questionsconcerning physician referrals that wereceived from physicians, providers,and others in the health carecommunity. We included ourinterpretations of how the law appliesin the situations described to us. SectionV (63 FR 1715 through 1719) includeda Regulatory Impact Analysis, andsection VI (63 FR 1719 through 1720)covered our policy on responding tocomments. The proposed regulation textappeared at 63 FR 1720 through 1728.

In the January 1998 proposed rule, weproposed to incorporate the Medicaidexpansion in section 1903(s) of the Actinto § 435.1012(a) (Limitation to FFPrelated to prohibited referrals). Section435.1012(a) stated that no FFP wasavailable for a State’s expenditures forcertain DHS, as they are defined inproposed § 411.351, furnished to anindividual under the State plan. No FFPis available if the services are thosefurnished on the basis of a physicianreferral that would, if Medicareprovided for coverage of the services tothe same extent and under the sameterms and conditions as under the Stateplan, result in the denial of Medicarepayment for the services under§§ 411.351 through 411.360. In§ 435.1012(c), we included a crossreference to the procedures we



established for individuals or entities torequest advisory opinions from us onwhether a physician’s referrals relatingto DHS (other than clinical laboratoryservices) are prohibited under section1877 of the Act. Although theseadvisory opinions were meant to reflectour interpretation of section 1877 of theAct, they can potentially affect FFPpayments to States under the Medicaidprogram.

Section 1877(b)(3) of the Act exceptsfrom the referral prohibition servicesfurnished to enrollees of certain‘‘prepaid’’ health plans; however, theseexceptions extend only to servicesfurnished to Medicare beneficiariesunder Medicare contracts anddemonstration projects. As a result, theexception for prepaid arrangementsdoes not apply to physicians who wishto refer in the context of the Medicaidprogram. In order to give effect to thisexception in the Medicaid context, weincluded, in the January 1998 proposedrule, in § 435.1012(b) an exception forDHS furnished by managed care entitiesanalogous to the Medicare entitiesexcepted under section 1877(b)(3) of theAct. The new exception was meant tocover entities that provide services toMedicaid-eligible enrollees undercontract with State Medicaid agenciesand under certain demonstrationprojects. (We discussed these analogousentities in detail in the proposed rule at63 FR 1697.)

To accommodate the Congress’ssubsequent creation of theMedicare+Choice (M+C) Program in theBalanced Budget Act of 1997 (Pub. L.105–33) (BBA 1997), we included anamendment to the physician referralregulations as part of the June 26, 1998interim final rule with comment period(63 FR 35066) establishing the M+CProgram. We amended the finalphysician self-referral regulationscovering referrals for clinical laboratoryservices by adding an exception in§ 411.355(c)(5) for services furnished toprepaid enrollees by a coordinated careplan. We defined a coordinated careplan as such a plan, within the meaningof section 1851(a)(2)(A) of the Act,offered by an organization in accordancewith a contract with us under section1857 of the Act and the M+Cregulations. We are reprinting thatprovision in Phase I of this rulemaking.

II. Development of Phase I of This FinalRulemaking

A. Technical Explanation of Bifurcationof the Regulation

Phase I of this rulemaking implementssubsections (a) and (b) of section 1877of the Act, and related definitions, as

applied to the Medicare program. Weintend to issue Phase II of thisrulemaking to cover the remainder ofsection 1877 of the Act, including itsapplication to the Medicaid program,shortly.

Phase I of This Rulemaking

Given the importance of subsections(a) and (b), and the substantial changeswe are making to the January 1998proposed rule, we are proceeding withthe issuance of Phase I of thisrulemaking at this time. Further, we areissuing Phase I for comment anddelaying its effective date for 1 year toallow individuals and entities engagedin business arrangements affected byPhase I time to restructure thosearrangements to comply with theprovisions of Phase I, except for§ 424.22(d), which is effective February5, 2001. The statutory provisionsinterpreted by Phase I remain in effect,as they have been since 1989 for clinicallaboratory services and 1993 for allother DHS.

Phase I of this rulemaking differssubstantially from the January 1998proposed rule in several major respects,which include the following:

• Clarification of the definitions ofDHS.

• Clarification of the concept of‘‘indirect financial relationship’’ andcreation of a new exception for indirectcompensation arrangements.

• Substantial broadening of the in-office ancillary services exception byeasing the criteria for qualifying as agroup practice and conforming thesupervision requirements to HCFAcoverage and payment policies for thespecific services.

• Expansion of the in-office ancillaryservices exception to cover certain DMEprovided in physicians’ offices topatients to assist them in ambulating,and blood glucose monitors.

• Allowance of shared facilities in thesame building where physiciansroutinely provide services that are inaddition to Federal and private payDHS.

• Exclusion of services personallyperformed by the referring physicianfrom the definition of ‘‘referral.’’

• Creation of a new exception forcompensation of faculty in academicmedical centers.

• Addition of a new ‘‘risk-sharing’’exception for commercial and employer-sponsored managed care plans.

• Interpretation of the ‘‘volume orvalue’’ standard for purposes of section1877 of the Act as permitting unit ofservice or unit of time-based payments,so long as the unit of service or unit oftime-based payment is fair market value

and does not vary over time. (Thedetails of these and other changes areexplained at length in section VI of thispreamble.)

• Creation of an exception whereDHS are furnished by entities that didnot know of or have reason to suspectthe identity of the referring physician.

In developing Phase I of thisrulemaking, we have carefullyreconsidered the January 1998 proposedrule given both the history and structureof section 1877 of the Act and theextensive comments we received on theJanuary 1998 proposed regulation. Webelieve that Phase I of this rulemakingaddresses many of the industry’sprimary concerns, is consistent with thestatute’s goals and directives, andprotects beneficiaries of Federal healthcare programs.

Our paramount concern is toimplement section 1877 of the Actconsistent with congressional intent.Prior to enactment of section 1877, therewere a number of studies, primarily inacademic literature, that consistentlyfound that physicians who hadownership or investment interests inentities to which they referred orderedmore services than physicians withoutthose financial relationships (some ofthese studies involved compensation aswell). Increased utilization occurredwhether the physician owned shares ina separate company that providedancillary services or owned theequipment and provided the services aspart of his or her medical practice. Thiscorrelation between financial ties andincreased utilization was the impetusfor section 1877 of the Act.

The approach chosen by the Congressin enacting section 1877 of the Act ispreventive because it essentiallyprohibits many financial arrangementsbetween physicians and entitiesproviding DHS. Specifically, section1877 of the Act imposes a blanketprohibition on the submission ofMedicare claims (and payment to theStates of FFP under the Medicaidprogram) for certain DHS when theservice provider has a financialrelationship with the referringphysician, unless the financialrelationship fits into one of severalrelatively specific exceptions.Significantly, no wrongful intent orculpable conduct is required. Theprimary remedy is simply nonpaymentby the program, without penalties. Inother words, the basic remedy isrecoupment of overpayments by theprogram. (Of course, wrongful conduct,such as knowingly submitting a claim inviolation of the prohibition, can bepunished through recoupment ofoverpayments and imposition of



penalties, the False Claims Act, andother Federal statutory and common lawremedies.)

The effect of this statutory scheme isthat failure to comply with section 1877of the Act can have a substantialfinancial result. For example, if ahospital has a $5,000 consultingcontract with a surgeon and the contractdoes not fit in an exception, every claimsubmitted by the hospital for Medicarebeneficiaries admitted or referred bythat surgeon is not payable, since allinpatient and outpatient hospitalservices are DHS.

While the statutory scheme of thephysician self-referral prohibition is, inlarge part, the key to its effectiveness, itobligates us to proceed carefully indetermining the scope of activities thatare prohibited. In Phase I of thisrulemaking, we have attempted tominimize the impact of the rule onmany common physician groupgovernance and compensationarrangements.

The potential impact of the regulationwas further confirmed by thevoluminous comments we receivedfrom the public and health carecommunity in response to the January1998 proposed rule. In addition tospecific complaints and objectionsabout the January 1998 proposed rule,the commenters expressed severalgeneral concerns, which include thefollowing:

• The rule inappropriately intrudedinto the organization and delivery ofmedical care within physicians’ offices.

• The rule, in many respects, wascounter to our other long-standingpolicies on coverage and similar issues.

• The rule was unclear in many areasand that given the potentially seriousconsequences (for example, paymentdenial), ‘‘bright line’’ rules wereessential.

• Some aspects of the rule, such as itstreatment of indirect financialrelationships, were administrativelyimpractical or would have beenprohibitively costly in terms ofmonitoring compliance.

With these overall considerations inmind, we have developed severalcriteria for evaluating our regulatoryoptions. First, we have tried in Phase Iof this rulemaking to interpret theprohibitions narrowly and theexceptions broadly, to the extentconsistent with the statutory languageand intent. As a practical matter, webelieve that, while the statute must beimplemented to achieve its intent, weshould be cautious in interpreting itsreach so broadly as to prohibitpotentially beneficial financialarrangements. Accordingly, we have

tried to focus the regulation on financialrelationships that may result inoverutilization, which we believe wasthe main abuse at which the statute wasaimed. Some provisions of the January1998 proposed rule did not appear toaddress overutilization so much as otherpotential abuses, such as unfaircompetition. At the same time, we donot believe the Congress intended us toreview every possible designated healthservice to determine its potential foroverutilization. The Congress hasalready made that determination, andwe believe that compliance with theexceptions in Phase I of this rulemakingshould not cause undue disruption ofthe health care delivery system.

Second, a corollary of the aboveinterpretation is that the Congress onlyintended section 1877 of the Act toestablish a minimum threshold foracceptable financial relationships, andthat potentially abusive financialrelationships that may be permittedunder section 1877 of the Act could stillbe addressed through other statutes thataddress health care fraud and abuse,including the anti-kickback statute(section 1128B(b) of the Act). In someinstances, financial relationships thatare permitted by section 1877 of the Actmight merit prosecution under section1128B(b) of the Act. Conversely,conduct that may be proscribed bysection 1877 of the Act may not violatethe anti-kickback statute.

Third, we have attempted to ensurethat Phase I of this rulemaking will notadversely impact the medical care ofFederal health care beneficiaries orother patients. In those instances inwhich we have determined that theprovisions of Phase I of this rulemakingmay impact current arrangements underwhich patients are receiving medicalcare, we have attempted to verify thatthere are other ways available tostructure the arrangement so thatpatients could continue to receive thecare in the same location. In almost allcases, we believe the provisions ofPhase I of this rulemaking should notrequire substantial changes in deliveryarrangements, although they may affectthe referring physician’s or grouppractice’s ability to bill for the care. Inother words, while the provisions ofPhase I of this rulemaking may affect aphysician’s ability to profit financiallyfrom the provision of some services,there should be alternative providersavailable to provide the services in thesame setting or alternative businessstructures that would permit theservices to be provided (again, possiblywithout physician financial interest).

Fourth, we have revised theprovisions of our January 1998 proposed

rule to conform, as much as possible, toour other policies that affect the same orsimilar activity. For example, we aredropping the requirement that an in-office ancillary service be supervisedunder the strict ‘‘direct supervision’’standards of the ‘‘incident to’’ billingrules in favor of requiring the level ofsupervision that is mandated underMedicare payment and coverage rulesapplicable to particular DHS.

Fifth, we have attempted, as much aspossible, to establish ‘‘bright line’’ rulesso that physicians and health careentities can ensure compliance andminimize administrative costs. We agreewith the commenters that as a paymentrule, the regulations implementingsection 1877 of the Act should establishclear standards, and we have attemptedto do so within the constraints of thestatutory and regulatory scheme.

We believe Phase I of this rulemakingsubstantially addresses the concernsraised by the commenters and, yet, isconsistent with the statute. Given thebreadth of the statute and the myriad offinancial relationships to which itapplies, it is impossible to satisfy allconcerns in all instances. We haveattempted to read the statute narrowlyto avoid adversely impacting potentiallybeneficial arrangements. However, wewill continue to monitor financialarrangements in the health care industryand will revisit particular regulatorydecisions if we determine there is abuseor overutilization.

B. General Comments Regarding theJanuary 1998 Proposed Rule andResponses

Comment: Many commenters echoedthe general views expressed by a majorphysician trade association. The tradeassociation noted that section 1877 ofthe Act significantly impacts themanner in which physicians deliverhealth care services and the manner inwhich they relate to one another and toother health care providers. The tradeassociation urged us to give physiciansand other providers clear direction onhow to structure their financialarrangements, while providingsufficient flexibility for physicians andproviders practicing in numerous andvarying arrangements throughout thehealth care industry. The tradeassociation and other commentersexpressed concern that the January 1998proposed rule failed to reflect thefundamental changes occurring in thehealth care marketplace—especially theconsolidation and integration ofphysician practices, hospitals, and otherhealth care entities. Indeed, thecommenters perceived the proposedregulations as hostile to those changes.



The trade association and others believethat section 1877 of the Act and ourregulations should focus on passiveownership and referral arrangementsand not on partially and fully integratedpractices demanded by the currentcompetitive marketplace.

In addition, some commenters,including the trade association, thoughtthat the provisions of the January 1998proposed rule exceeded our statutoryauthority and imposed unnecessary andcostly burdens on physicians that wouldharm patient access to health carefacilities and services, with no apparentpublic benefit. In their view, theprovisions of the January 1998 proposedrule (1) micro-managed physicianpractices in situations that do not posea real potential for abuse, (2) limitedproper and reasonable managementpractices, and (3) inappropriatelyinterfered with the practice of medicine.Finally, a number of commenterssuggested that, instead of promulgatinga set of regulations that micro-managethe business of medicine, we couldbetter control overutilization of DHS bymonitoring the medical necessity ofsuch services and the competency ofthose providing them.

Response: In developing Phase I ofthis rulemaking, we have been mindfulof the criticism that the provisions ofthe January 1998 proposed ruleinappropriately micro-managedphysician practices. Given the purpose,structure, and scope of section 1877 ofthe Act, some impact on physicianpractices is inevitable and, frankly,intended. In Phase I of this rulemaking,we have endeavored to create ‘‘brightline’’ rules that are easily applied, whileproviding the health care industry withas much flexibility as possible. Wherepossible, we have tried to simplify therequirements in Phase I of thisrulemaking, consistent with the clearcongressional mandate to prohibitcertain physician referrals tainted byphysician financial self-interest. Webelieve Phase I of this rulemaking offersadequate flexibility to physicianpractices as they integrate andconsolidate. For example, the revisedunified business test, in the grouppractice definition, no longer bars cost-center or location-based distribution ofa group practice’s revenues fromservices that are not DHS. Anotherexample: the in-office ancillary servicesexception covers certain ancillaryservices provided in facilities shared bypractitioners in the same building inwhich they practice.

The provisions of Phase I of thisrulemaking do not prevent physiciansfrom directly providing their patientswith convenient, cost-effective DHS.

Consistent with the purpose of thestatute, however, the provisions ofPhase I of this rulemaking do restrict thecircumstances under which physicianscan financially benefit from DHS theyorder that are provided by others. Thisdistinction is important. Section 1877 ofthe Act regulates the financialrelationship between referringphysicians and the provider of the DHS.If a physician determines not to provideaccess to such services in the absence ofpersonal profit, the decision is thephysician’s, not the statute’s. Nothing insection 1877 of the Act restricts patientaccess to those services.

Finally, we cannot agree with theclaim that medical necessity reviews arealways an effective control onoverutilization. Medical necessityreviews alone cannot controlunnecessary utilization and containhealth care costs. These reviews arecostly and only effective in controllingthe most aberrant behavior. Mostimportantly, the statute does not permitus—nor would we choose—to overridethe Congress’ judgement by substitutingmedical necessity reviews for existingstatutory standards.

Comment: Other commentersexpressed concern that neither thestatute nor the January 1998 proposedrule goes far enough in preventingabusive referral arrangements. Severalcommenters complained that allowingphysicians to provide ancillary servicescompetitively disadvantagesindependent ancillary servicesproviders that are not owned orcontrolled by physicians. Thesecommenters believe that an obviousreferral-for-profit scheme occurs when aphysician employs his or her ownancillary personnel. While mostcommenters who expressed this viewwere independent ancillary servicesproviders, one physician alsocomplained about fellow physicianswho ‘‘churn’’ patients through CT/MRImachines in their offices, resulting inwhat the commenter termed, a ‘‘cashspigot.’’ The commenter expressed theview that such machines are notstandard in a physician’s office and aresolely added to physicians’ offices togenerate profits. Commenters alsoexpressed concern that, in some cases,physicians do not have appropriateoversight or credentialing for theancillary services they provide. Onecommenter suggested that physiciansshould only be permitted to provideancillary services if no other provider isavailable in the area.

Response: While we believe thecommenters raised valid concerns aboutabuses in the health care system, theplain language of the statute makes clear

that the Congress did not intend section1877 of the Act to bar all physician-owned ancillary services facilities. Tothe contrary, these facilities areexpressly allowed under certain specificcircumstances (see sections 1877(b), (c),and (d) of the Act). Simply stated, thelaw is meant to prevent only the mostegregious financial relationships; it doesnot address every potential act of fraudand abuse. As we caution throughoutthis preamble, section 1877 of the Actprovides only a threshold check againstfraud and abuse; many arrangementsthat are lawful under section 1877 of theAct may still violate other fraud andabuse laws, including the Federal anti-kickback statute (section 1128B(b) of theAct).

Comment: Several commentersbelieve that section 1877 of the Act andimplementing regulations would notpermit patients to receive services, suchas x-rays, physical therapy, or crutches,at a physician’s office or in a long termcare facility where the patient resides.The commenters observed that requiringpatients to seek services related to theirdiagnoses or treatment at severaldifferent locations is an inconvenienceto patients and may require them totravel long distances to obtain services,thus, discouraging elderly or disabledpatients from seeking needed healthcare services.

Response: The commentersmisunderstand section 1877 of the Act.Section 1877 of the Act regulatesfinancial relationships; it does notregulate the delivery of services. Section1877 of the Act does not bar theprovision of ancillary services in aphysician’s office, in a long term carefacility, or at nearby, convenientlocations. The law only imposesrestrictions on a physician who makesa referral for a designated health serviceif he or she has a financial relationshipwith the ancillary services provider,such as an employment contract, anoffice space lease, or an ownershipinterest. Depending on the structure ofthe financial relationship, the physicianmay be able to profit from orderingancillary services, thereby creating arisk that his or her orders may bemotivated, in part, by personal financialconsiderations. Statutory and regulatoryexceptions are designed to enablephysicians to make ancillary servicesavailable on-site to their own patients,provided they meet the conditions setforth in the applicable exception.However, nothing in the law preventsphysicians from making availableconvenient ancillary services when thephysician has no financial interest inthe provision of the services. Forexample, a physician may arrange for a



diagnostic services provider to performdiagnostic tests in the physician’s officefor which the diagnostic servicesprovider bills, provided that any rentalarrangement meets the rental exceptionin § 411.357(b) and does not violate theanti-kickback statute. Section 1877 ofthe Act reflects the Congress’unmistakable intent to recognize andaccommodate the traditional role playedby physicians in the delivery ofancillary services to their patients,while constraining the abuse of thepublic fisc that results when physicianreferrals are driven by financialincentives. These regulations reflect thatpolicy balance.

Comment: One commenter stated thatwe had not informed Medicarebeneficiaries about the potentialrestrictions on their access to care undersection 1877 of the Act and itsregulations, or informed Medicareproviders about the potentialrestrictions on their ability to provideancillary services.

Response: Once both Phase I andPhase II of this rulemaking arepublished, we intend to educateproviders further about the newregulations. Providers have been onnotice as to section 1877 of the Actsince 1989 with respect to clinicallaboratory services and 1993 withrespect to all other DHS. We intend toprovide general information tobeneficiaries as well. However, we donot believe beneficiaries will face therestrictions on access that thecommenters contemplate. Indeed, theseregulations do not restrict the provisionof services to Medicare beneficiaries. Ifa physician chooses not to makeservices available to patients if he or shecannot personally benefit financiallyfrom services he or she orders, butwhich are provided by others, thephysician is responsible for restrictingaccess. Finally, Phase I of thisrulemaking is being, and Phase II of thisrulemaking will be, published in theFederal Register and noted on theDepartment’s website, which serves asnotice to the affected community. Webelieve most providers will also beinformed through their trade press,trade associations, and other sources.

Comment: Two commentersexpressed concern that section 1877 ofthe Act and associated regulationswould criminalize common conduct inphysicians’ offices.

Response: Section 1877 of the Act isa civil, not a criminal, statute. Aviolation of section 1877 of the Actresults in nonpayment of claims andmonetary sanctions. Criminal penaltiesor deprivation of liberty are notauthorized by section 1877 of the Act.

Comment: Given the allegedcomplexity of the physician self-referrallaw and regulations and their impact onphysicians’ traditional businesspractices, several commenters requestedthat the effective date of the regulationbe delayed to allow a reasonable timefor physicians to familiarize themselveswith the law and that the regulations beapplied prospectively only. Onecommenter asked that we issuecompliance guidelines. Anothercommenter inquired about penalties ifphysicians ignore the physician self-referral law.

Response: We agree with thecommenters that the health careproviders engaged in businessarrangements affected by Phase I of thisrulemaking may need time torestructure those arrangements tocomply with Phase I of this rulemakingwhere it proscribes conduct notpreviously prohibited. We are, therefore,delaying the effective date of Phase I ofthis rulemaking for 1 year, except for§ 424.22(d), which is effective February5, 2001. In the meantime, the statute, inits entirety, remains in full force andeffect with respect to all DHS listed insection 1877(h)(6) of the Act. Until theeffective date of these new finalregulations, the August 1995 final rulecovering referrals for clinical laboratoryservices remains in full force and effectwith respect to clinical laboratoryservices referrals and claims forservices. Any party or parties who donot comply with the provisions of thestatute, the August 1995 final rulecovering referrals for clinical laboratoryservices, or the provisions of Phase I ofthis rulemaking (when it becomeseffective one year from the date ofpublication of this Federal Registernotice) are subject to all applicablepenalties and sanctions, including thosethat appear in section 1877(g) of the Act.(Section 1877(g)(3) and (g)(4) sanctionsare covered in an OIG regulation thatwas published at 60 FR 16580 on March31, 1995.)

Because of the significant changes weare making in Phase I of thisrulemaking, we are publishing theseregulations in final form with a 90-daycomment period. We are interested inthe industry’s views as to the changeswe have incorporated into theseregulations. Any further changes wedeem necessary based on comments willbe addressed in Phase II of thisrulemaking or shortly thereafter.

Regarding the issue of complianceguidelines, we often issue guidelines inthe form of manual provisions oroperational policy letters when we findthat the statute and regulations do not

address particular issues in sufficientdetail.

Comment: A number of commentersobjected to what they perceived asdisparate treatment of solo and grouppractitioners. One commenter, forexample, complained that under theproposed rule, a solo practitioner couldprovide, and keep the profits from,unlimited ancillary services provided tohis or her patients, regardless of howmuch the physician self-refers in his orher own office, whereas a grouppractitioner could not.

Response: Certain disparities betweenthe treatment of group and solopractitioners are inherent in thestatutory language and structure. Forexample, the Congress expressly limitedprofit shares for group practice membersto methodologies that do not directlytake into account the member’s DHSreferrals. For obvious reasons, solopractitioners cannot be similarlylimited. On the other hand, the statuteallows group practices greater flexibilityin terms of the locations where they canprovide DHS to their patients and stillcome within the in-office ancillaryservices exception. To the extentpossible, and consistent with thestatute, we have tried in Phase I of thisrulemaking to minimize the regulatorydisparities between group and solopractitioners.

Comment: In noting that the January1998 proposed regulation interpretedthe statute to minimize any risk of fraudor abuse, several commenters stated thatthe marginal anti-fraud benefit of thisapproach is low because of additionalpost-1993 fraud and abuse legislation,the implementation of the anti-kickbackstatute, computer claims payment editsinstituted by our carriers, and thecreation of the National PractitionersData Bank. The Health InsurancePortability and Accountability Act of1996 (HIPAA) increased funding forMedicare program safeguards such asincreased coordination between Federal,State, and local authorities;investigations, audits, and inspections;and guidance to the industry. HIPAAalso established the Medicare IntegrityProgram to encourage private entities toengage in anti-fraud activities. The BBAin 1997 also created more severecriminal penalties for health care fraud.The commenters stated that the January1998 proposed regulation prohibitsmany otherwise appropriaterelationships in order to deter a smallproportion of inappropriate practices.The commenters asked that the finalrule be more flexible and notovercompensate for potential risksbecause the commenters believe thatpost-1993 legislation and enforcement



efforts can address any inappropriatepractices that may or may not bedeterred by the physician self-referrallaw.

Response: As described above, theapproach taken by the Congress inenacting section 1877 of the Act resultsin important differences between it andother anti-fraud and abuse measures,especially the criminal anti-kickbackstatute (section 1128B(b) of the Act).The laws are complementary and,although overlapping in some aspects,not redundant. We believe the Congressintended to create an array of fraud andabuse authorities to enable thegovernment to protect the public fisc,beneficiaries of Federal programs, andhonest health care providers from thecorruption of the health care system byunscrupulous providers. We haverevisited the January 1998 proposed rulein significant respects that minimizeany unnecessary impact on providers.

Comment: A number of commentersobjected to the inclusion in several ofthe proposed regulatory exceptions,such as the exception for fair marketvalue transactions, of a requirement thatthe transaction be in compliance withthe anti-kickback statute. According tothe commenters, the two statutes areseparate and, since the anti-kickbackstatute is intent-based, it would beimpossible to determine with certaintywhether a transaction meets theexceptions.

Response: We recognize that section1877 of the Act and the anti-kickbackstatute, section 1128B(b) of the Act, aredifferent statutes and compliance withone does not depend on compliancewith the other in most situations.Notwithstanding, the Secretary’sauthority to create additional regulatoryexceptions to section 1877 of the Act islimited by the requirement in section1877(b)(4) that she determine that theexcepted financial relationship ‘‘doesnot pose a risk of program or patientabuse.’’ Section 1877 of the Act sets aminimum standard for acceptablefinancial relationships; manyrelationships that may not merit blanketprohibition under section 1877 of theAct can, in some circumstances andgiven necessary intent, violate the anti-kickback statute. If the requirement thata financial relationship comply with theanti-kickback statute were dropped,unscrupulous physicians and entitiescould potentially protect intentionalunlawful and abusive conduct bycomplying with the minimalrequirements of a regulatory exceptioncreated under section 1877(b)(4) of theAct. (By contrast, the statutoryexceptions require no finding by theSecretary and, thus, carry no

presumptive protection under the anti-kickback statute.) In addition, somearrangements may pose a risk ofimproper billing or claims submission.

As a practical matter, the statutorylanguage authorizing exceptions leavesus two choices: (1) we can limit theexceptions to those situations that poseno risk of fraud or abuse—a verystringent standard that few, if any, of theproposed regulatory exceptions meet; or(2) we can protect arrangements that, inmost situations, would not pose a risk,and rely on the anti-kickback statute orother fraud and abuse laws to addressany residual risk. Given thecommenters’ expressed preference forflexibility, we have chosen the latteralternative. Moreover, since the partiesshould be in compliance with the anti-kickback statute, the additionalregulatory burden is minimal. In theinterest of simplification, we areconsidering an additional exceptionunder section 1877 of the Act for anyarrangement that fits squarely in an anti-kickback ‘‘safe harbor’’ (section1001.952 (Exceptions)) and plan toaddress the matter further in Phase II ofthis rulemaking.

III. The General Prohibition UnderSection 1877 of the Act

Section 1877(a) of the Act establishesthe basic structure and elements of thestatutory prohibition: A physiciancannot (1) refer patients to an entity (2)for the furnishing of DHS (3) if there isa financial relationship between thereferring physician (or an immediatefamily member of the referringphysician) and the entity, (4) unless thefinancial relationship fits within one ofthe specific exceptions in the statute orregulations issued by the Secretary.(DHS are defined in § 411.351 anddiscussed at length in section VIII.A ofthis preamble.) In this section, wediscuss our interpretations of whatconstitutes a financial relationship,especially an indirect financialrelationship, and what constitutes areferral, including an indirect referral.

Existing Law: Subject to certainexceptions, section 1877(a)(1) of the Actprohibits a physician from making areferral to an entity for the furnishing ofDHS for which Medicare wouldotherwise pay, if the physician (or animmediate family member) has afinancial relationship with the DHSentity, and prohibits the DHS entityfrom billing Medicare or any individual(including, but not limited to, thebeneficiary), third party payer, or otherentity for those services. A financialrelationship is (i) either an ownership orinvestment interest in the DHS entity (orin another entity that holds an

ownership or investment interest in theentity) or (ii) a compensationarrangement with the DHS entity, eitherdirectly or indirectly. An ownership orinvestment interest may exist throughequity, debt, or other means.

As defined by section 1877(h)(5) ofthe Act, a ‘‘referral’’ means a request bya physician for an item or service forwhich payment may be made underMedicare Part B, including a request fora consultation (including any tests orprocedures ordered or performed by theconsulting physician or under thesupervision of the consultingphysician), and the request orestablishment of a plan of care by aphysician that includes the furnishingof DHS, with certain exceptions forconsultations by pathologists, diagnosticradiologists, and radiation oncologists.

Proposed Rule: In general, weproposed interpreting the concept of‘‘indirect financial relationship’’ verybroadly. In the January 1998 proposedrule, we proposed including within thereach of section 1877 of the Act anyownership or investment interest,including ownership or investmentinterests through intermediate entities,no matter how indirect, and weproposed to include indirectcompensation relationships by tracingcompensation paid by an entityfurnishing DHS through other entities,regardless of how the compensationmight be transformed.

We similarly proposed a broadinterpretation of the phrase ‘‘referral toan entity.’’ As defined in the statute, areferral is a ‘‘request’’ by a physician fora DHS. We proposed defining a‘‘request’’ as any step taken after aphysician performs an initialexamination or a physician service on apatient that indicates that the physicianbelieves the DHS is necessary. Underthis broad reading, a referral could beeither written or oral, made on medicalcharts or records, or indicated by aprescription or written order. We alsoproposed that a referral could be director indirect, meaning that a physicianwould be considered to have made areferral if he or she caused the referralto have been made by someone else (forexample, an employee, a hospitaldischarge planner, or a staff member ofa company that the physician owns orcontrols). We interpreted ‘‘referrals’’ toinclude DHS services subsequentlyperformed by the referring physician.

The Final Rule: Given the significanceof the general prohibition, we receivedmany comments related to variousaspects of the January 1998 proposedrule. In particular, commenters soughtclarification of fundamental statutoryconcepts, including direct and indirect



compensation and ownership orinvestment arrangements. In addition,many commenters took issue with ourinterpretation of several of the keyterms, including ‘‘referral,’’‘‘consultation,’’ and ‘‘furnishing.’’

We are making a number ofsignificant changes to the generalprohibition sections in Phase I of thisrulemaking. These revisions include thefollowing:

• Clarification as to what constitutesa ‘‘direct’’ versus an ‘‘indirect’’ financialarrangement, including the addition of a‘‘knowledge’’ element for indirectfinancial relationships.

• Creation of a new exception forindirect compensation arrangements.

• Clarification that paymentobligations that are secured, includingthose secured by a revenue stream, areamong the relationships considered tobe ownership or investment interests.

• Revision of the definition of‘‘referral’’ to exclude services personallyperformed by the referring physician.

• Creation of an exception undersection 1877 of the Act for entitiessubmitting claims for DHS that did notknow of and did not have reason tosuspect the identity of the physicianwho made the DHS referral to the entity.

These changes are discussed ingreater detail below. First, we addressthe definition of a ‘‘financialrelationship;’’ second, we address thedefinition of ‘‘referral.’’ These twoaspects of the general prohibition undersection 1877 of the Act are analyticallydistinct and require separate analyses.In general, we believe a sensibleapproach is to ask two questions: (1) Isthere a direct or indirect financialrelationship between the referringphysician and the entity furnishingDHS? (2) Is there a referral for DHS fromthe physician to the entity? If theanswer to both questions is affirmative,section 1877 of the Act is violated,unless an exception applies.

A. When Is There a FinancialRelationship Between the Physician andthe Entity?

The existence of a financialrelationship between the referringphysician (or an immediate familymember) and the entity furnishing DHSis the factual predicate for triggering theapplication of section 1877 of the Act.Section 1877(a)(2) defines a financialrelationship as: (1) An ownership orinvestment interest of a referringphysician (or immediate familymember) in the entity furnishing DHS,or (2) a compensation arrangementbetween the referring physician (or animmediate family member) and theentity furnishing DHS. Any financial

relationship between the referringphysician and the DHS entity triggersapplication of the statute, even if thefinancial relationship is whollyunrelated to a designated health servicepayable by Medicare. In many instances,the financial relationship will not relateto DHS. Unless the financialrelationship fits into a statutory orregulatory exception, however, referralsfor DHS are prohibited.

The statute expressly contemplatesthat ‘‘financial relationships’’ includeboth direct and indirect ownership andinvestment interests and direct andindirect compensation arrangementsbetween referring physicians and DHSentities (sections 1877(a)(2) and1877(h)(1) of the Act, respectively). Weconsider a ‘‘direct’’ financialrelationship to be an arrangementbetween the entity furnishing DHS anda referring physician or immediatefamily member with no person or entity(other than agents) interposed betweenthem. While some commenters inquiredwhether particular arrangements orrelationships, such as stock options orvesting in retirement plans, could becharacterized as ownership orcompensation arrangements, there wereno substantive comments as to theunderlying definition of a directfinancial relationship. The specificquestions raised by the commenters areaddressed in the comments andresponses that follow.

With respect to ‘‘indirect’’ financialrelationships, in the preamble to theJanuary 1998 proposed rule, weproposed to include as an ‘‘indirect’’financial relationship any ownership orinvestment interest, includingownership or investment intereststhrough intermediate entities, no matterhow indirect, and we proposed toinclude indirect compensationrelationships by tracing compensationpaid by an entity furnishing DHSthrough other entities, regardless of howthe compensation might be transformed.In short, we proposed very broadinterpretations of indirect financialrelationships.

We have generally adopted the overallinterpretations of ‘‘financialrelationship’’ in the January 1998proposed rule, with the importantexception of ‘‘indirect’’ financialrelationships. Many commentersobjected to the discussions in thepreamble to the January 1998 proposedregulations relating to indirect financialrelationships on the grounds that thediscussions were confusing,inconsistent, administrativelyimpracticable, or unfair. We haveresponded to the commenters bysubstantially revising the regulations

pertaining to indirect financialrelationships, especially indirectcompensation arrangements. Asdescribed in the paragraphs that follow,we have added a knowledge element tothe definitions of ‘‘indirect’’ financialrelationships. We have also made othersignificant changes in the treatment ofindirect compensation arrangements.

Knowledge Element for Establishing theExistence of an Indirect FinancialArrangement

We are amending the definitions of (i)‘‘indirect ownership or investmentinterest’’ and (ii) ‘‘indirectcompensation arrangement’’ in§ 411.354 to include a knowledgeelement. Many commenters expressedconcern that by extending liability forindirect financial relationships torelationships involving any number ofintermediate persons or entities, theJanuary 1998 proposed regulationimposed an unfair burden on entitiesfurnishing DHS affirmatively to ferretout and discover potential indirectfinancial relationships or else risksubmitting improper claims because ofrelationships they knew nothing about.While we believe that, in mostcircumstances, the referring physician(or his or her immediate family member)will only be one or two degrees ofseparation from the entity furnishing theDHS, we have nevertheless modified theJanuary 1998 proposed regulation to adda ‘‘knowledge’’ element in cases ofindirect financial relationships. Thismodification limits exposure undersection 1877 of the Act to thosecircumstances in which the entityfurnishing DHS has actual knowledge ofan indirect financial relationship or actsin reckless disregard or deliberateignorance as to the existence of anindirect financial relationship. (Wesometimes refer to this ‘‘actualknowledge or reckless disregard ordeliberate ignorance’’ standard in thispreamble by the shorthand phrase‘‘knows or has reason to suspect.’’) Wedefine the ‘‘knowledge’’ element in amanner consistent with Federal law, asdescribed below.

In order to satisfy this ‘‘knowledge’’element in the case of an indirectownership or investment interest, theDHS entity need only know or havereason to suspect that the referringphysician (or immediate familymember) has some ownership orinvestment interest in the entityfurnishing the DHS (or in an entity thatholds an ownership or investmentinterest in the DHS entity). Likewise, tosatisfy this ‘‘knowledge’’ element in thecase of an indirect compensationarrangement, the DHS entity need only



know or have reason to suspect that thereferring physician (or immediate familymember) is receiving some aggregatecompensation that varies with, orotherwise reflects, the volume or valueof referrals or other business generatedby the referring physician for the entityfurnishing DHS. In other words, we arenot requiring that the DHS entity haveknowledge of every link in the chain ofentities having financial relationshipsthat connects the DHS entity to thereferring physician (or immediate familymember).

Specifically, we are providing that, inthe case of indirect financialrelationships, referrals will only beprohibited (and claims disallowed) ifthe DHS entity (i) has actual knowledgethat the referring physician (orimmediate family member) has anindirect financial relationship (that is,that the referring physician orimmediate family member (a) has someownership or investment interest in theDHS entity or (b) receives aggregatecompensation that takes into account orotherwise reflects referrals or otherbusiness generated by the referringphysician for the entity furnishingDHS), or (ii) acts in reckless disregard ordeliberate ignorance of whether such anindirect financial relationship exists.Essentially, we are adopting a‘‘knowledge’’ element comparable to thescienter standard in the Civil MonetaryPenalty Law, section 1128A of the Act.This ‘‘knowledge’’ element generallyimposes a duty of reasonable inquiry onproviders. In the specific context ofindirect financial relationships undersection 1877 of the Act, we wish tomake clear that, given theimpracticability of investigating everypossible indirect financial relationshipinvolving a referring physician, theknowledge element does not impose anaffirmative obligation to inquire as toindirect financial relationships. A dutyof reasonable inquiry does require,however, that providers in possession offacts that would lead a reasonableperson to suspect the existence of anindirect financial relationship takereasonable steps to determine whethersuch a financial relationship exists and,if so, whether that indirect financialrelationship falls within an exception tothe statute (such as the new exceptionfor certain indirect compensationarrangements in § 411.354) or whetherthe DHS being furnished fall within anexception (such as the in-office ancillaryservices exception) before submitting aclaim for the referred item or service ormaking a referral. The reasonable stepsto be taken will depend on thecircumstances. Reasonable steps may

include the DHS entity obtaining, ingood faith, a good faith, writtenassurance from the referring physician(or immediate family member, asapplicable) or the entity from which thereferring physician (or immediate familymember) receives direct compensationthat the physician’s or immediate familymember’s aggregate compensation is fairmarket value for services furnished anddoes not take into account or otherwisereflect referrals or other businessgenerated by the referring physician forthe DHS entity, so as to qualify underthe new exception for certain indirectfinancial relationships in § 411.354(discussed below). A written assuranceis not determinative, however,especially if the DHS entity hasknowledge of, or reason to suspect,other, contradictory evidence orinformation.

The addition of a knowledgerequirement as an element of animproper indirect financial relationshipaddresses the concerns expressed bymany commenters that it would beimpossible continuously to investigateand uncover indirect financialrelationships of every referringphysician and his or her immediatefamily members. While the ‘‘knowing’’element we are adopting may allowmore claims to be paid than arequirement that would interpret thestatute to impose an absolute duty toinvestigate (and may impose a higherevidentiary burden on the governmentin an enforcement action), we believethat incorporating a knowledge elementin the definition of indirect financialrelationships more fairly balances theburden of compliance against the risk ofabuse the statute was intended toprevent. We iterate that for purposes ofsection 1877 of the Act, the DHS entityhas no affirmative duty to inquire orinvestigate whether an indirect financialrelationship with a referring physician(or immediate family member) exists,absent some information that would puta reasonable person on alert, and thatthe duty that is imposed is one ofreasonable inquiry in the circumstances.

Indirect Compensation ArrangementsWe have substantially revised the

January 1998 proposed regulations byrestructuring our approach to indirectcompensation arrangements. In theJanuary 1998 proposed regulation, wehad proposed to trace compensationpaid by an entity furnishing DHSthrough any number of other persons orentities, regardless of how thecompensation might be transformed.Many commenters complained that theexamples provided in different parts ofthe preamble to the January 1988

proposed rule were inconsistent orunclear. Upon reviewing the commentsand the preamble, we understand thecommenters’ confusion and haverevised the provisions that apply toindirect compensation arrangements by:

• Defining ‘‘indirect compensationarrangement’’ to establish a ‘‘brightline’’ test, including the ‘‘knowing’’element described above; and

• Creating a new exception undersection 1877(b)(4) of the Act for certainindirect compensation arrangementsthat is generally consistent with the new‘‘fair market value’’ exception for directcompensation arrangements.

This treatment of indirectcompensation arrangements moreclearly parallels the analysis andregulatory treatment of directcompensation arrangements by (i)defining the universe of financialrelationships that potentially triggersdisallowance of claims (that is, thedefinition of ‘‘indirect compensationarrangement’’); and (ii) creating anexception for the subset of ‘‘indirectcompensation arrangements’’ that willnot trigger disallowance. The standardsin the new exception for indirectcompensation arrangements are based inlarge part on the standards found in thevarious statutory and proposedregulatory exceptions for directcompensation arrangements, especiallythe fair market value exceptionproposed in the January 1998 proposedregulations, which was receivedfavorably by the commenters and hasbeen incorporated into the finalregulations in § 411.354(d).

The definition of an ‘‘indirectcompensation arrangement’’ and thenew exception are discussed in detailbelow.

• Definition of ‘‘IndirectCompensation Arrangement.’’ We havedeveloped a simple test to identifywhether an indirect compensationrelationship exists. We are adopting inPhase I of this rulemaking, a definitionof ‘‘indirect compensation arrangement’’that has three elements: (1) There mustexist between the referring physician (orimmediate family member) and the DHSentity an unbroken chain of persons orentities that have financial relationshipsbetween them (that is, each link in thechain has either an ownership orinvestment interest or compensationarrangement with the preceding link);(2) the aggregate compensation receivedby the referring physician (or immediatefamily member) from the person orentity in the chain with which thephysician has a direct financialrelationship varies with, or otherwisereflects, the volume or value of referralsor other business generated by the



referring physician for the entityfurnishing DHS; and (3) the DHS entitymust have actual knowledge that theaggregate compensation received by thereferring physician (or immediate familymember) from the entity with which thephysician has a direct financialrelationship varies with, or otherwisereflects, the volume or value of referralsor other business generated by thereferring physician for the entityfurnishing DHS, or act in recklessdisregard or deliberate ignorance of theexistence of such relationship.

The first element of the indirectcompensation arrangement definition ismet if there is an unbroken chain offinancial relationships from the DHSentity to the referring physician (orimmediate family member), regardlessof the form or purpose of the paymentsor their relationship to the DHSreferrals. This element is relativelystraightforward. The unbroken chainthat creates an indirect compensationarrangement can consist of anycombination of excepted or unexceptedfinancial relationships, whetherownership or investment interests orcompensation arrangements.

One issue raised by severalcommenters was whether an ownershipor investment interest could also createa compensation arrangement. Anownership or investment interest createsa direct compensation arrangementbetween the owner/investor and theowned/investment entity, since theownership or investment establishes anarrangement for the distribution of anyprofits or other benefits (for example,tax benefits in the case of a pass-throughentity) from the venture to the owners/investors. However, when theownership or investment interest itselfmeets a specific statutory exceptionunder section 1877 of the Act, anyanticipated return on investment orother remuneration flowing from theownership or investment is similarlyexcepted, provided the return or otherremuneration is bona fide and not asham (sham returns would include, forexample, use of loan proceeds to makedistributions in the absence of bona fideprofits from the venture).

An excepted financial relationshipmay still constitute a link in a chain thatestablishes an indirect compensationarrangement between a referringphysician and a DHS entity. Forexample, if a referring physician ownsan interest in a hospital that meets theexception under section 1877(d)(3) ofthe Act (which allows a referringphysician to own an interest in ahospital as a whole, but not in asubdivision of the hospital), and thehospital contracts for services with a

clinical laboratory to which thephysician refers, there would exist achain of persons or entities havingfinancial relationships between thereferring physician and the DHS entity(referring physician ‰ whole hospital‰ clinical laboratory), even though thefinancial relationship between thereferring physician and the hospital fitsin an exception. We address this issuefurther in the responses to commentsthat follow.

The second element of the definitionof indirect compensation arrangement isthat the aggregate compensationreceived by the referring physician (orimmediate family member) from theperson or entity in the chain with whichthe referring physician (or immediatefamily member) has a direct financialrelationship varies with, or otherwisereflects, the value or volume of referralsor other business generated by thereferring physician for the entityfurnishing DHS. For the purpose of thedefinition of indirect compensationarrangements, we are looking at whetheraggregate compensation in the directfinancial relationship varies with, orotherwise reflects, the value or volumeof referrals or other business generatedby the referring physician for the entityfurnishing DHS. Accordingly, forpurposes of this element, any ‘‘perservice’’ or ‘‘per use’’ paymentarrangement between the physician andthe person or entity with which thephysician has the direct relationshipthat is based, in whole or in part, onreferrals or other business generated forthe DHS entity would satisfy thiselement. So too, any payment or otherremuneration conditioned moregenerally on referrals or businessgenerated for the DHS entity wouldsatisfy this element of the definition of‘‘indirect compensation arrangement,’’except as described in § 411.354(d)(5)(describing limited circumstances whenan entity may condition compensationon referrals). (For a discussion of§ 411.354(d)(5), see section V of thispreamble).

If the financial arrangement betweenthe physician (or immediate familymember) and the person or entity in thechain with which the physician has thedirect financial relationship is anownership or investment interest, wewill look at the relationship betweenthat person or entity (that is, the‘‘owned entity’’) and the next person orentity in the chain with which theowned entity has a direct financialrelationship (if that financialrelationship is also an ownership orinvestment interest, we will look to thenext direct financial relationship in thechain, and so forth, until we reach a

compensation arrangement with an‘‘unowned’’ entity with which there isa compensation arrangement—a chainconsisting entirely of owned entities isan indirect ownership or investmentinterest, not an indirect compensationarrangement). The inquiry then becomeswhether the aggregate compensation theowned entity receives varies with, orotherwise reflects, the volume or valueof referrals or other business generatedby the referring physician for the entityfurnishing DHS.

The third element in the definition ofindirect compensation arrangement isthat the entity furnishing DHS mustknow or have reason to suspect that thereferring physician’s (or immediatefamily member’s) aggregatecompensation varies with, or otherwisereflects, the value or volume of referralsor other business generated by thereferring physician for the entityfurnishing the DHS. As discussed above,reason to suspect a financialrelationship will trigger a duty to makean inquiry into the relationship that isreasonable in the circumstances. In thecontext of indirect compensationarrangements, in most cases, thereferring physician (or immediate familymember) will have knowledge of thebasis for his or her compensation and bein the best position to assurecompliance with section 1877 of theAct. Thus, as noted above, reasonableinquiry by the DHS entity may includeobtaining, in good faith, a good faith,written assurance from the referringphysician (or immediate familymember, as applicable) or the entityfrom which the referring physician (orimmediate family member) receivesdirect compensation that the physician’sor immediate family member’s aggregatecompensation falls within the indirectcompensation arrangement exception in§ 411.354 (that is, the compensation isfair market value for services furnishedand does not take into account orotherwise reflect referrals or otherbusiness generated by the referringphysician for the DHS entity). Asdiscussed below, we are creating a newexception for indirect compensationarrangements, for which we believemost nonabusive indirect compensationarrangements can readily qualify.

• Exception for IndirectCompensation Arrangements. While thedefinition of an ‘‘indirect compensationarrangement’’ identifies the universe ofpotentially improper arrangements, werecognize that many of those indirectcompensation arrangements may besubstantially similar to directcompensation arrangements that fit inone of the existing statutory exceptionsin section 1877 of the Act or one of the



regulatory exceptions we proposed inJanuary 1998. However, many of theseindirect compensation arrangementscannot fit in those direct compensationarrangement exceptions, because thearrangements are with persons orentities that are not the person or entityfurnishing DHS. Accordingly, we arecreating a new exception, using theSecretary’s authority under section1877(b)(4) of the Act, to provide anexception for certain indirectcompensation arrangements. The newexception would protect an indirectcompensation arrangement if thefollowing conditions are satisfied:

• The compensation received by thereferring physician (or immediate familymember) from the person or entity inthe chain with which the referringphysician (or immediate familymember) has the direct financialrelationship is fair market value for theitems or services provided under thearrangement and does not take intoaccount the value or volume of referralsor other business generated by thereferring physician for the entityfurnishing DHS;

• The compensation arrangementbetween the referring physician (orimmediate family member) and theperson or entity in the chain with whichthe physician (or immediate familymember) has the direct financialrelationship is set out in writing, signedby the parties, and specifies the servicescovered by the arrangement (in the caseof a bona fide employment relationship,the arrangement need not be set out ina written contract, but it must be foridentifiable services and becommercially reasonable even if noreferrals are made to the employer);

• The compensation arrangementdoes not violate the anti-kickbackstatute or any laws or regulationsgoverning billing or claims submission.

Where the financial relationshipbetween the physician and the person orentity with whom he or she has a directfinancial relationship is an ownershipor investment interest, we will apply therequirements of this exception to thefirst compensation arrangement in thechain of relationships between thephysician and the entity furnishingDHS.

For purposes of the new exception, indetermining whether compensationtakes into account the value or volumeof referrals or other business generatedby the referring physician for the DHSentity, we will apply the tests for‘‘volume or value of referrals’’ and‘‘other business generated’’ that arediscussed in section V of this preambleand set forth in § 411.354(d) of theseregulations. This is consistent with our

determination to interpret those phrasesuniformly in all exceptions in whichthey appear. Thus, ‘‘per service’’ or ‘‘peruse’’ compensation arrangements can fitin the new exception for indirectcompensation arrangements, providedthe ‘‘per use’’ or ‘‘per service’’ paymentsare fair market value for the items orservices provided (and do not includeany additional amount that might beattributable to the volume or value ofreferrals or other business generatedbetween the referring physician and theentity furnishing DHS) and thepayments do not vary during the termof the compensation arrangement in anymanner that takes into account referralsto the DHS entity.

Some of the statutory and regulatoryexceptions operate to exclude certaincategories of services from the reach ofsection 1877 of the Act, when certaincriteria are satisfied. In effect, servicesdescribed in these exceptions are notDHS for purposes of the statute. Theseservice-based exceptions include thephysicians’ services exception, in-officeancillary services exception, prepaidplans exception, and academic medicalcenter exception, in § 411.355 of theseregulations. Thus, even if there is anindirect compensation arrangementbetween a referring physician and anentity furnishing DHS, these exceptionsmay apply to referrals of the particularservices described in the exception.Referrals of DHS that do not fit in aservices-based exception would beprohibited unless the indirectcompensation arrangement fits in thenew exception for indirectcompensation arrangements.

Finally, we are not adopting ourinterpretation in the January 1998proposed rule with regard to commonownership or investment in the sameentity (which is not the entityfurnishing DHS) by the referringphysician (or immediate familymember) and the entity furnishing DHS.In the January 1998 proposed rule, weproposed that such common ownershipwould not create a compensationarrangement between the referringphysician and the DHS entity. However,in the light of our modified and morelimited definitions of indirect financialrelationships, we have revisited theissue of common ownership. We believethat such relationships should beanalyzed in the same manner as anyindirect financial relationship.

We are also making the followingchanges in the general prohibitionsections of the regulations:

• Clarification that an ownership orinvestment interest in a subsidiarycorporation will not be considered adirect ownership or investment interest

in the parent or a sibling corporation.However, an owner of a subsidiarycorporation may have an indirectfinancial relationship with the parent orsibling company that could trigger aviolation of section 1877 of the Act.

• Treatment of stock options ascreating a compensation relationshipand not an ownership interest untilsuch time as the options are exercised.

• Clarification that paymentobligations that are secured, includingthose that are secured by a revenuestream, are considered ownership orinvestment interests.

In the following paragraphs, weaddress the specific comments wereceived on the discussion andproposed interpretations of financialrelationships set out in the January 1998proposed rule and our responses tothem.

Comment: A number of commentersobjected to the concept of ‘‘tracing’’compensation from, and ownership orinvestment interests in, an entityfurnishing DHS through any number ofintermediate entities to a referringphysician. According to thesecommenters, the administrative burdenof trying to comply would be costly andultimately impossible. Thesecommenters believe that our proposedinterpretation would place the entitiesfurnishing the services, as well asphysicians making referrals, at risk forwhat was unknowable given potentiallycomplex business arrangements. Onecommenter suggested that we keep thesame definition of financial relationshipas the August 1995 final rule, which thecommenter stated was limited to directownership and compensationarrangements.

Response: The commenter whosuggested that the August 1995 finalrule was limited to direct financialrelationships is mistaken. In the August1995 final rule, we defined financialrelationship to include indirectfinancial relationships. We did not,however, expand on how we wouldinterpret and apply the term ‘‘indirect.’’We believe that limiting the statutoryprohibition to direct ownership andcompensation arrangements wouldseriously weaken the statute.Unscrupulous physicians and entitiesfurnishing DHS would simply interposeentities between themselves and funnelthe money through them. Furthermore,as we stated in the preamble to theJanuary 1998 proposed rule, the statute,by its terms, applies to indirectownership and investment interests andcompensation arrangements.

As discussed above, we have revisedthe treatment of indirect compensationarrangements. First, we are no longer



requiring any tracing of payments. Theinitial screen is simply whether there isan unbroken chain of persons or entitieshaving financial relationships betweenthe referring physician (or an immediatefamily member) and the entityfurnishing DHS, regardless of the natureof the payments or financialrelationships. Second, we have limitedliability to instances in which the DHSentity knows or has reason to suspectthat aggregate compensation received bythe referring physician (or immediatefamily member) varies with, orotherwise reflects, the volume or valueof referrals or other business generatedfor the DHS entity. Finally, we havemade clear that absent information thatwould put a reasonable person on alert,a DHS entity has no affirmative duty toinquire or investigate sucharrangements.

Comment: A major trade associationrepresenting physicians (and othercommenters) claimed that ourexplanations of how we would treatseveral types of situations involvingindirect financial relationshipsappeared inconsistent. Specifically, theassociation referred to the example of ahospital contracting with a grouppractice to furnish physician servicesand to staff the hospital, and thehospital paying the group practice forthese services, and with the grouppractice, in turn, compensating thephysicians through salaries that ‘‘insome way’’ reflect the hospital services.According to the January 1998 proposedrule, the physicians would have anindirect compensation relationship withthe hospital that would require anexception. The commenter complainedthat this position is inconsistent withanother example in the preamble inwhich we stated that, when a physicianwho owned a physical therapy (PT)company referred patients for treatmentincluding PT to a skilled nursing facility(SNF) that contracted with thephysician’s PT company, we wouldequate the physician with the PTprovider.

Response: We believe the newprovisions for indirect compensationarrangements address the commenters’concerns.

In the example cited by thecommenter involving the payments by ahospital to a group practice that, in turn,pays its employees a salary, we wouldnot require evidence that the salary is‘‘in some way’’ related to the hospitalpayment. It is enough that the hospitalhas a financial relationship (that is, apersonal services contract) with themedical group, which, in turn, has afinancial relationship with itsemployees. Since there is an unbroken

chain of financial relationships betweenthe referring physician and the DHSentity, the first element in the indirectcompensation definition is satisfied.

The second element of the definitionof an indirect compensationarrangement would be satisfied if theaggregate compensation to the referringphysician from the medical groupvaried with, or otherwise reflected, thevolume or value of referrals or otherbusiness generated by the referringphysician for the DHS entity (that is, thehospital)—a fact that should berelatively easy to establish.

The final element in the definition ofan indirect compensation relationshiprequires that the hospital (that is, theDHS entity) (i) have actual knowledge orreason to suspect that the referringphysician is receiving compensationfrom the medical group (that is, theentity in the chain with which thereferring physician has a direct financialrelationship) that varies with, orotherwise reflects, the volume or valueof referrals or other business generatedfor the hospital.

Indirect compensation arrangementsthat do not fit in the new exception forsuch arrangements can be restructuredor abandoned. Arrangements underwhich a referring physician receivescompensation tied to the volume orvalue of his or her referrals or otherbusiness generated for a DHS entity arethe very arrangements at which section1877 of the Act is targeted.

Commenters claimed that ourdiscussion at 63 FR 1710 in thepreamble of the January 1998 proposedrule was confusing because of the waywe described a physician’s referrals to aSNF, which, in turn, referred thepatients to a PT company in which thereferring physician had an ownershipinterest and which billed Medicaredirectly for services to SNF patients. Inthat example, the referring physicianhad a direct financial relationship(ownership) with the PT company.There was no indirect financialrelationship involving the SNF. Rather,the referring physician had a referralarrangement with the SNF, but not afinancial relationship, and the SNF hada referral arrangement with the PTprovider, but not a financialrelationship. We think the issue in theexample is whether, by sending patientsto the SNF, the physician is makingreferrals to the PT provider, with whichthe physician has a direct financialrelationship. We discuss that issue inthe following section on referrals.

However, we think it useful toreconsider the example in light ofconsolidated billing for SNFs. (We notethat consolidated billing should not be

confused with composite rate payments.Consolidated billing is a process forsubmitting claims while composite ratepayment constitutes a distinct paymentmethodology.) Under consolidatedbilling, the SNF in the example will bebilling the PT services directly toMedicare. In this situation, there wouldbe an indirect compensationrelationship between the SNF—which isnow the DHS entity—and the referringphysician. Since the SNF would bepurchasing PT services from the PTcompany owned by the referringphysician, a financial relationshipwould exist between the SNF and thePT company, and the physician’sownership interest in the PT companywould complete the chain (SNF‰ PTcompany‰ referring physician). Thus,the first element of the definition of anindirect compensation arrangementwould be satisfied. With respect to thesecond element, the financialrelationship between the referringphysician and the person or entity inthe chain with which the referringphysician has a direct financialrelationship (that is, the PT company) isan investment interest. Accordingly, welook to the compensation paid by theSNF to the owned entity (that is, the PTcompany) in order to see if the secondelement is satisfied. Since the PTcompany is compensated on a perservice basis that reflects referrals by thereferring physician to the SNF, thesecond element is met. Assumingknowledge on the part of the SNF, therewould be an indirect compensationarrangement, and the issue becomeswhether the indirect compensationarrangement satisfies the new exceptionfor indirect compensation arrangementsin § 411.354.

Comment: Several commenters statedthat when there is a chain of paymentsthat begins with a payment by aprovider of DHS to another entitycontrolled by it, the first paymentoutside the entities under commoncontrol should be the arrangement thathas to meet an exception. For example,in looking at payments from a hospitalto a physician group practice that iswholly owned by the hospital forhospital staffing and subsequentpayments from the group to itsemployed physicians, the payments thatwould need to qualify for an exceptionare the payments to the employedphysicians. One commenter proposedthat when tracing indirect financialrelationships, the inquiry should endany time a payment in the chain meetsan exception.

Response: The first commenters’suggested approach is problematicbecause the ‘‘volume or value’’ standard



for the employed physician’scompensation is measured based onreferrals to the physician’s employer,the medical group. Applying thecommenters’ proposed test to theexample, the medical group could paythe physician employees based on thevolume and value of referrals andbusiness generated for the hospital andstill comply with the employmentexception. Phase I of this rulemakingwould require that the compensation tothe physicians not vary with orotherwise reflect either referrals to thegroup (to comply with the employeeexception) or referrals to, or otherbusiness generated for, the hospital (sothat it does not qualify as an indirectcompensation relationship). To theextent that the compensation paid to thephysicians did vary based on referrals orother business generated for thehospital, the arrangement would still beprotected if it complied with the newindirect compensation arrangementsexception in § 411.354.

We also considered, but ultimatelyrejected, the second commenter’sproposal that the inquiry end any timea financial relationship fits in anexception. The fact that one financialarrangement meets an exception doesnot necessarily prevent the referringphysician from receiving paymentsbased on DHS referrals to a DHS entity.For example, if a person or entity ownsboth a group practice and a DHS entity,a compensation arrangement with aphysician employee of the grouppractice could fit in an exception solong as it did not take into accountreferrals between the employee and thegroup practice. The exception wouldnot, however, prevent the compensationarrangement from taking into accountreferrals or other business generated bythe physician employee for the DHSentity.

Having considered the several viewsof the commenters, we believe thatPhase I of this rulemaking strikes abalance that protects the Medicareprogram while limiting the reach of theregulation to abusive relationships.Under Phase I of this rulemaking, therewould be an unbroken chain of financialrelationships (the DHS entity ‰ theowner ‰ medical group ‰ referringphysician). However, unless thecompensation received by the employedphysician varies with or otherwisereflects his or her referrals to, or otherbusiness generated for, the DHS entity,and the DHS entity has the requisiteknowledge, there would not be anindirect compensation arrangement. Ifthere were, the arrangement would haveto meet an applicable exception.

Comment: One commenter askedwhether there would be an indirectcompensation arrangement if anemployed physician refers patients forDHS to an entity that has an ownershipor investment interest in the physician’semployer.

Response: There may be an indirectcompensation arrangement if aphysician refers patients for DHS to anentity that has an ownership orinvestment interest in the physician’semployer, since the physician would bereferring to a DHS entity that has afinancial relationship (ownership orinvestment) with an entity that has afinancial relationship (compensation)with the physician. If the referringphysician’s compensation from his orher employer reflected DHS referrals orother business generated by the referringphysician for the entity providing theDHS, and the DHS entity had actualknowledge or reason to suspect that thephysician’s aggregate compensationreflected the volume or value of referralsor other business for the DHS entity,there would be an indirectcompensation arrangement. Unless thearrangement fit in the new indirectcompensation arrangements or anotherexception, referrals to the entity wouldbe prohibited.

Comment: Another commenter askedwhether a physician’s referrals would beprohibited in a situation involving aphysician practice managementcompany (PPMC). Specifically, thecommenter asked about a referringphysician who has an ownership orinvestment interest in a PPMC, which,in turn, controls a captive professionalcorporation (PC) through a web of legalagreements, including a long-termmanagement contract. The physicianrefers patients for DHS to the captiveprofessional corporation.

Response: In the scenario describedby the commenter, there is very likelyan indirect compensation arrangement,since the captive PC has a financialrelationship with the PPMC (themanagement contract), which has afinancial relationship (ownership orinvestment) with the referringphysician. Since the financialrelationship between the physician andthe entity in the chain of financialrelationships with which the physicianhas a direct financial relationship (thatis, the PPMC) is an ownership orinvestment interest, we look to thecompensation arrangement between theowned entity (that is, the PPMC) and thenext entity in the chain, in this case, thecaptive PC, to determine whether thesecond element of the test for anindirect compensation arrangement ismet. Accordingly, if the entity

furnishing the DHS (the captive PC inthis example) knows or has reason tosuspect that the PPMC’s compensationfrom the captive PC varies with, orotherwise reflects, the value or volumeof the captive PC’s business (andconsequently varies, in the aggregate,based on the referring physician’s DHSreferrals to the captive PC), there wouldbe an indirect financial relationshipbetween the captive PC and the referringphysician. Unless the indirectcompensation arrangement fits in thenew indirect compensationarrangements or another exception, thephysician could not refer DHS to thecaptive PC, and the captive PC couldnot submit claims for those DHSreferrals.

Comment: Several commentersobjected to our proposal that aphysician can receive indirectcompensation through a nonprofitenterprise if the enterprise is controlledby an individual who is in a position to‘‘influence’’ the physician’s referrals.The example was the owner of a clinicallaboratory who is also the director ofresearch at a nonprofit research facilitythat could provide physician researchgrants in exchange for referrals to thelaboratory.

Response: The issue is whether thereis a prohibited indirect financialrelationship between the DHS entity(the clinical laboratory) and thereferring physician. Assuming there is afinancial relationship between theowner of the clinical laboratory and thenonprofit research facility, there wouldbe a chain of persons or entities withfinancial relationships (clinicallaboratory ‰ research director ‰ not-for-profit ‰ referring physician), andthe issues become (i) whether theaggregate amount of the research grantsto the referring physician varies with, orotherwise reflects, the value or volumeof referrals or other business generatedby the referring physician for theclinical laboratory, (ii) whether theclinical laboratory knows of or hasreason to suspect that the referringphysician’s aggregate compensationunder the research grants varies with, orotherwise reflects, the volume or valueof referrals or other business generatedfor the clinical laboratory, and (iii) ifthere is an indirect financialrelationship, whether an exceptionapplies. Of course, even if there is nofinancial relationship between theclinical laboratory and the nonprofitresearch facility, there could be aviolation of the anti-kickback statute,section 1128B(b) of the Act, in thesituation described in the comment.

Comment: Several commenters statedthat compensation derived from an



ownership or investment interest (forexample, a return on an investmentinterest or a dividend) should not giverise to indirect compensation. Tosupport this position, they referred todiscussions in the preamble to theJanuary 1998 proposed rule and in thepreamble to the August 1995 finalregulations, in which we stated thatcompensation derived from, or ancillaryto, an investment interest that qualifiedfor an investment exception undersections 1877 (b) through (d) of the Actwould not also have to meet acompensation exception.

Response: We agree with thecommenters that dividends or profitdistributions from an ownership orinvestment interest that qualifies for anownership or investment interestexception under sections 1877(b)through (d) of the Act do not also haveto meet a separate compensationexception. In other words, theownership and investment exceptionsin the statute protect the ownership orinvestment interest and anycorresponding return on the exceptedinvestment. Our discussion in thepreamble to the January 1998 proposedrule specifically referenced and clarifiedthe August 1995 final rule preamblediscussion, which was limited to theissue of whether distributions from anexcepted investment interest (that is, anownership or investment interestprotected under sections 1877(b)through (d) of the Act) had to meet anadditional exception for compensationarrangements. Nothing in eitherpreamble discussion was intended to beinterpreted as saying that any otherownership or investment interests (thatis, ownership or investment intereststhat are not specifically excepted) arenot compensation arrangements. Webelieve that an ownership or investmentinterest (including distributions fromthe interest) creates a compensationarrangement, as defined in section1877(h)(1)(A) of the Act, between theowner/investor and the owned/investment entity and can be part of achain of persons or entities havingfinancial relationships that create anindirect compensation arrangement.

Without this interpretation,unscrupulous physicians could evadesection 1877 of the Act by simplyinterposing a shell entity, which theyown, between themselves and the DHSentity (which they do not own) andtaking out the compensation asdividends. In short, they would simplylaunder the compensation through theshell investment entity.

Comment: Another commentersuggested that a loan and any interestpayments should be treated as either

ownership or compensation, but notboth.

Response: We agree with thecommenter. If a loan qualifies as aprotected ownership or investmentinterest, the interest payments do notcreate a separate compensationarrangement. Accordingly, the interestpayments need not satisfy a separatecompensation exception.

Comment: A number of commentersasked that we clarify that an investmentin a subsidiary that does not furnishDHS is not necessarily an ownershipinterest in the parent or a siblingcorporation.

Response: An ownership orinvestment interest in a subsidiarycompany is neither an ownership orinvestment interest in the parentcompany, nor in any other subsidiary ofthe parent, unless the subsidiarycompany itself has an ownership orinvestment interest in the parent or suchother subsidiaries. However, an ownerof a subsidiary company may have anindirect financial relationship with theparent or sibling company that couldtrigger a violation of section 1877 of theAct.

Comment: One commenter objected tothe suggestion in the preamble to theJanuary 1998 proposed rule that aninterest in a retirement plan might betreated as an ownership or investmentinterest. Another commenter stated thatan unsecured loan that wassubordinated to an entity’s creditfacility should not be treated as anownership or investment interest.

Response: We are persuaded by thelogic of the commenter and,accordingly, we withdraw the statementin the preamble to the January 1998proposed rule that an interest in aretirement plan might be treated as anownership or investment interest forpurposes of section 1877 of the Act. Wewill consider contributions (includingemployer contributions) to retirementplans to be part of an employee’s overallcompensation arrangement with his orher employer. We also agree that anunsecured loan that is subordinated toa credit facility is a compensationarrangement and not an ownership orinvestment interest for purposes ofsection 1877 of the Act.

Comment: Another commenter statedthat secured debt given by a not-for-profit hospital, as part of its acquisitionof medical practices, should not betreated as an ownership or investmentinterest in the hospital, but ascompensation.

Response: Section 1877(a)(2) of theAct provides that ‘‘an ownership orinvestment interest * * * may bethrough equity, debt or other means.’’

Accordingly, we believe that loans,bonds, or other financial instrumentsthat are secured with an entity’sproperty or revenue, or a portionthereof, constitute investment interestswithin the meaning of section 1877 ofthe Act. In addition, a contrary readingwould result in disparate treatment ofentities based on their organizationalstatus.

Comment: One commenter assertedthat stock options should be treated aseither ownership or investment interestsor compensation arrangements, but notboth. Another commenter stated thatstock options should be treated ascompensation and not ownership sincethey do not carry voting rights or theright to dividends and must be soldupon conversion.

Response: In Phase I of thisrulemaking, we are revising the rule totreat stock options as compensation atthe time they are awarded. At the timethey are exercised or converted, theycreate an ownership or investmentinterest and must meet an appropriateexception. Any dividends or profitdistributions derived from an exceptedstock ownership or investment interestwould not have to meet a separatecompensation exception.

Comment: Another commenter statedthat stock options could be structured todiscourage referrals for DHS.

Response: The fact that a particularfinancial arrangement might bestructured to discourage referrals doesnot provide a basis for creating anexception. The statute is intended toremove incentives to overutilize byprohibiting certain financialrelationships. If application of thestatute required a case-by-caseexamination to determine the effect ofthe financial relationship, the statute’sefficacy would be undermined.

Comment: One commenter suggestedthat the determination of whether aconvertible security is a compensationarrangement or an ownership orinvestment interest should depend onwhich party has the right to convert thesecurity. According to the commenter, ifthe DHS entity has the right to convertthe security, the interest should betreated as compensation untilconversion.

Response: We are applying the sameapproach to convertible securities as weare applying to stock options, and wewill classify them as compensation untilthey are converted into equity.However, many convertible securitiesare bonds that can be converted intostock. Since bonds are typically secureddebt, bonds will be treated as anownership or investment interest.



B. When Does a Physician Make aReferral?

As defined by section 1877(h)(5) ofthe Act, a ‘‘referral’’ means a request bya physician for an item or service forwhich payment may be made underMedicare Part B, including a request fora consultation (including any tests orprocedures ordered or performed by theconsulting physician or under thesupervision of the consultingphysician), and the request orestablishment of a plan of care by aphysician that includes the furnishingof DHS, with certain exceptions forconsultations by pathologists, diagnosticradiologists, and radiation oncologists.In the January 1998 proposed rule, weinterpreted ‘‘referral’’ to mean anyrequest by a physician for a service,including services subsequentlyperformed by the physician. Weproposed defining a ‘‘request’’ as anystep taken after a physician performs aninitial examination or a physicianservice on a patient that indicates thatthe physician believes the service isnecessary. Under this broad definition,a referral could be either written or oral,made on medical charts or records, orindicated by a prescription or writtenorder. We also proposed that a referralcould be direct or indirect, meaning thata physician would be considered tohave made a referral if he or she causedthe referral to have been made bysomeone else (for example, anemployee, a hospital discharge planner,or a staff member of a company that thephysician owns or controls). As ageneral principle, we proposed that aphysician may ‘‘cause’’ a referral to bemade if he or she has the ability tocontrol or influence the individual whoselects the entity that furnishes theDHS.

In response to the public comments,we are making several significantchanges to the definition of ‘‘referral’’ inPhase I of this rulemaking. Thesechanges include the following:

• Revision of the definition of‘‘referral’’ to exclude services performedpersonally by the referring physician.Simply stated, we are persuaded that aphysician cannot make a ‘‘request’’ ofhimself or herself for services he or shepersonally performs. However, aphysician can make a ‘‘request’’ ofothers, including, without limitation,his or her employees, co-workers, orindependent contractors. These requestsare ‘‘referrals’’ under section 1877 of theAct (although many of them will fit inan exception). We continue to believethat a referral can occur in a widevariety of formats, written, oral, or

electronic, depending on the particularservice.

• Adding an exception using ourregulatory authority under section1877(b)(4) of the Act for certain referralsof DHS to an entity with which thereferring physician has a prohibitedfinancial relationship that are ‘‘indirect’’referrals (for example, when a physicianhas caused a referral to be made bysomeone else or has directed or routeda referral through an intermediary) orare oral referrals (that is, no writtenrequest or other documentation thatwould identify the referring physician isrequired). A claim by the entityfurnishing the DHS may be paid forpurposes of section 1877 of the Act ifthe entity did not know or have reasonto suspect the identity of the referringphysician. In these circumstances, thereis minimal risk of patient or programabuse by the entity submitting the claim(provided that the claim is otherwisevalid).

• Clarification of the definition of a‘‘consultation.’’ In light of theclarifications relating to indirect andoral referrals described above, thepractical significance of the definition ofa ‘‘consultation’’ is substantiallyreduced.

We believe that these changes addressmany of the concerns expressed bycommenters. In particular, we haveendeavored to respond to the perceivedharshness of section 1877 of the Act bycreating a narrow exception under oursection 1877(b)(4) authority. If the entityfurnishing DHS knows of or has reasonto suspect the identity of the physicianwho prescribed or ordered the DHS ormade the referral, the DHS entity maynot submit a claim for the services. Ifthe physician who prescribes or ordersa DHS is someone with whom the DHSentity has a prohibited financialrelationship, we think a reasonable DHSentity should suspect that the physicianreferred the patient to the entity, absentsome credible evidence to the contrary.

In the following paragraphs, wediscuss and respond to the commentswe received on the proposedinterpretations of ‘‘referral’’ and‘‘consultation’’ as published in theJanuary 1998 proposed rule.

1. ‘‘Referral’’Comment: Many commenters objected

to our interpretation in the January 1998proposed rule that a service ordered andpersonally performed by a physician isa referral within the meaning of section1877 of the Act. Commenters asked usto clarify that there is no referral if thereferring physician personally performsthe service. Similarly, some commenterssought clarification that there is no

referral if the services are ‘‘incident to’’services personally performed by thereferring physician.

Response: We are persuaded by thecommenters that a physician does notmake a ‘‘request,’’ in the ordinary senseof that term, if he or she personallyperforms a designated health service.We agree it does not make sense toconsider work that a referring physicianinitiates and personally performs as areferral to an entity. Thus, we areamending our definition of ‘‘referral’’ toexclude services that are personallyperformed by the referring physician(that is, the referring physicianphysically performs the service), and weare revising our definition of ‘‘entity’’ toclarify that the referring physicianhimself or herself is not an entity forpurposes of section 1877 of the Act(although the physician’s practice is anentity). All other Medicare-covered DHSperformed at the request of a referringphysician are ‘‘referrals’’ for purposes ofsection 1877 of the Act. A serviceperformed by a hospital for which thehospital bills the technical or facilitycomponent of the charge would be areferred service. In such circumstances,however, the physician’s serviceperformed at the hospital for which thephysician would bill Part B would notbe a referred service.

With respect to services performed byothers, including a physician’semployees, we think the issue is morecomplicated. Services performed byothers are reasonably considered to beperformed as a result of a ‘‘request.’’Moreover, the statutory language insection 1877(h)(4)(B)(i) of the Actindicates that the Congress consideredthere to be a difference betweenpersonally performed services andservices performed by others. Onbalance, we have chosen to includeservices performed by others, includinga physician’s employees, in thedefinition of referral. We are concernedthat a blanket rule exempting servicesperformed by a physician’s employeesfrom the definition of ‘‘referral’’ could,in some circumstances, undermine theintent of section 1877 of the Act. Forexample, by stationing employees in off-site DHS facilities, a physician practicecould circumvent the statutory‘‘building’’ requirements of the in-officeancillary services exception.

Even the more limited suggestionmade by some commenters that thereshould be no ‘‘referral’’ if an employee’sservices are properly billable as‘‘incident to’’ a physician’s personallyperformed services could result incircumvention of the ‘‘building’’requirements in some cases.



However, we believe the definition of‘‘referral’’ we are adopting here—inconjunction with the in-office ancillaryservices exception—strikes anappropriate balance. Under the finalrule, services performed by anyoneother than the referring physician(whether an employee, a staff member,or a member of the physician’s grouppractice) is a ‘‘referral’’ for purposes ofsection 1877 of the Act. Thus, servicesperformed by a physician’s employeeswill be considered ‘‘referrals’’. However,in most cases, such referrals will bepermitted under the in-office ancillaryservices exception, which issubstantially broader in this final rulethan in the 1998 proposed rule. Servicesperformed by employees that do notmeet the ‘‘same building’’ or‘‘centralized building’’ tests (asapplicable, depending on whether thephysician is a solo or group practitioner)will be prohibited unless anotherexception applies.

We recognize that, in many cases,services performed by a physician’semployees are, for practical purposes,tantamount to services performed by thephysician (for example, a physician’sassistant applying a neck brace orderedby a physician for an individual whohas been in an auto accident, when theface-to-face encounter with the patient,including the physical examination bythe physician, indicates the need for aproperly adjusted neck brace.) Whilesuch services are included in thedefinition of ‘‘referral’’ under this finalrule, given the significance of this issue,we are soliciting comments as towhether, and under what conditions,services performed by a physician’semployees could be treated as thephysician’s personally performedservices under section 1877 of the Act.

Comment: A commenter asked thatwe clarify that a plan of care thatincludes the provision of DHS by thephysician establishing the plan of careis not a referral. If not clarified assuggested, the commenter believes thatthe physician would effectively bebarred from treating his or her ownpatients.

Response: If the DHS are personallyperformed by the physician whoestablished the plan of care, there wouldbe no referral as to those personallyperformed services.

Comment: Some commenters objectedto our proposed presumption that aphysician has referred his or her patientto an entity for the furnishing of DHS ifthe patient obtains the services from theentity with which the physician has afinancial relationship. One commenterdescribed the following scenario: Aphysician orally tells a patient or

another person that the patient needs adesignated health service. The patientobtains the service from an entity withwhich the physician has a prohibitedfinancial relationship. The entity doesnot know (and cannot know) that thephysician orally told the patient (orother person) that the service wasneeded. The commenter soughtclarification as to the application ofsection 1877 of the Act in thesecircumstances.

Response: We are establishing anexception for indirect and oral referrals.When there is no written order or otherdocumentation of the referral, the issueis whether the DHS provider knows orhas reason to suspect the identity of thephysician who prescribed or ordered theDHS or made the referral.

Comment: Several commenters soughtclarification that a physician’s ordering,dispensing, or prescribing of drugs doesnot constitute a referral to themanufacturer of the drugs. Thecommenters noted that themanufacturers are not entities thatfurnish DHS (that is, outpatientprescription drugs) to patients. Rather,furnishing of DHS is performed byphysicians, pharmacies, hospitals, andclinics.

Response: We agree that, in mostcases, drug manufacturers are notentities that furnish DHS to patients forpurposes of section 1877 of the Act,and, therefore, the ordering, dispensing,or prescribing of drugs would notconstitute a referral to the manufacturerof the drugs. However, manufacturer-owned or -affiliated retail pharmacyoperations, or other health careproviders may be entities for purposesof section 1877 of the Act, if theyfurnish DHS to patients.

Comment: A commenterrecommended that activities that a solopractitioner performs as a customaryand integral part of patient treatmentshould not be considered a ‘‘referral.’’

Response: We find the commenter’sproposed language too vague to be usedin creating a standard. We believe ourrevised definition of ‘‘referral’’ thatexcludes personally performed servicesand our changes to the in-officeancillary services exception (see sectionVII.B.1 of this preamble) adequatelyaddress the commenter’s concerns.

Comment: A commenter stated thatreferrals for DHS by a nonphysicianprofessional employee of a grouppractice, such as a nurse practitioner ora physician assistant, should not beimputed to a physician member of thegroup practice, when the nonphysicianis authorized and licensed to prescribetreatment on his or her own and canmake independent decisions regarding

referrals. For example, if a nursepractitioner, staffing a group practiceoffice without a physician memberpresent, orders and performs a plain x-ray, the referral for the x-ray should notbe imputed to a physician member ofthe group practice. If the referral isimputed, the service may not qualifyunder the in-office ancillary servicesexception, because it is not personallyperformed by the referring physician,another physician in the group practice,or a person who is directly supervisedby the referring physician or anothergroup practice physician. Alternatively,the commenter suggested that wemodify the ‘‘direct supervision’’standard to mirror our payment andcoverage requirements to enable‘‘imputed’’ referrals by a nursepractitioner and a physician assistant tofit in the in-office ancillary servicesexception.

Response: As previously stated, weare revising the ‘‘direct supervision’’standard in the in-office ancillaryservices exception to mirror ourpayment and coverage requirements.(See discussion in section VI.B.2 of thispreamble.) This change should addressthe concern identified by thecommenter.

We believe that the question ofwhether a referral by a nursepractitioner or a physician assistantshould be imputed to an employerphysician will depend on the facts andcircumstances of the referral. Theinquiry is whether the physiciancontrols or influences thenonphysician’s referral. The Congressand HHS have recognized that manynurse practitioners and physicianassistants are independent providersauthorized and licensed to prescribetreatment and make independentdecisions regarding referrals. However,these practitioners do not always actindependently of their employers. Forexample, sometimes services of anonphysician practitioner are billed‘‘incident to’’ a physician service ratherthan directly under the nonphysician’sindependent billing number. In short,we are concerned that physicians couldattempt to circumvent section 1877 ofthe Act by funneling referrals throughnonphysician practitioners. We believethe change in the supervisionrequirement affords sufficient protectionfor legitimate arrangements.

Comment: Several commenters wereconfused by our discussion in thepreamble to the January 1998 proposedrule at 63 FR 1710 of a situation inwhich a physician who owned aphysical therapy (PT) company referredpatients for treatment, including PT, toa skilled nursing facility (SNF) that



contracted with the physician’s PTcompany. In the preamble, we indicatedthat we would analyze the arrangementas an indirect compensationarrangement and equate the physicianwith the PT provider.

Response: In the preamble of theJanuary 1998 proposed rule, wesuggested that the critical factor wouldbe the degree of control the physicianhad over the PT provider and the extentof the PT provider’s relationship withthe SNF. We are abandoning thatanalysis. We think the proper focus iswhether the physician is making areferral to the PT provider within themeaning of section 1877 of the Act. Inother words, we believe that a physiciancan make a referral of DHS ‘‘to anentity’’ even though the referral is firstdirected or routed through anotherperson or entity, provided the physicianhas reason to know the identity of theactual provider of the service. In theSNF/PT provider example, the relevantinquiry is whether the physician hasmade a referral, directly or indirectly, tothe entity furnishing DHS, in otherwords, whether he or she is referring‘‘to’’ that entity. Accordingly, if thephysician referring the patient to theSNF knows that the PT company inwhich he or she has an investmentinterest will furnish DHS to the patientor could reasonably be expected toknow that the PT company will actuallyfurnish DHS to the patient, the referralis a referral ‘‘to the entity’’ and isprohibited, unless an exception applies.Similarly, where the PT companyknows or has reason to suspect that thereferral for DHS came from a referringphysician with whom the PT companyhas a prohibited financial relationship,the PT company cannot submit theclaim for the DHS. The PT/SNF examplewill be affected by the advent of fullconsolidated billing for SNFs, asdescribed above in the responses tocomments on indirect compensationarrangements.

To trigger section 1877 of the Act, thedirection or steering of a patient ‘‘to anentity’’ does not need to be in writing,nor does it have to be absolute; it needonly be reasonably intended to result inthe patient receiving the service fromthe entity. Thus, for example, when aphysician provides an order orprescription for a DHS to a patient thatostensibly can be filled by any of anumber of entities and then suggests orinforms the patient that the order can beserviced by a particular entity, therewould be a referral ‘‘to’’ that entity.Given the administrative burden onentities presenting claims, in the contextof an indirect financial relationship, webelieve a claim for DHS should be

subject to nonpayment unless the entitydoes not know that, and does not havereason to suspect that, the referringphysician had directed the patient to theentity.

2. ConsultationThe Existing Law: Section

1877(h)(5)(C) of the Act excepts fromthe definition of a ‘‘referral’’ by a‘‘referring physician’’ a request by apathologist for clinical laboratory testsor pathological examination services, arequest by a radiologist for diagnosticradiology services, and a request by aradiation oncologist for radiationtherapy, if the services are furnished by,or under the supervision of, thespecialist, pursuant to a consultationrequested by another physician. Section1877(h)(5)(C) creates a narrow exceptionfrom the definition of ‘‘referral’’ for asmall subset of services provided orordered by certain specialists pursuantto a consultation requested by anotherphysician (the referring physician).

The Proposed Rule: In the preamble tothe 1998 proposed rule, we referred tothe interpretation of consultation thatappeared in the March 1992 proposedrule for clinical laboratory services (57FR 8595). There, we interpreted aconsultation to be:

A professional service furnished to apatient by a physician (the consultant) at therequest of the patient’s attending physician.A consultation includes the history andexamination of the patient as well as awritten report that is transmitted to theattending physician for inclusion in thepatient’s permanent record. If, in the courseof that consultation, the consulting physiciandeems it necessary to order clinicallaboratory services, those services may not beordered from a laboratory in which thereferring [attending] physician has a financialinterest. Other referrals, such as sending apatient to a specialist who assumesresponsibility for furnishing the appropriatetreatment, or providing a list of referrals fora second opinion, are not ‘‘consultations’’ or‘‘referrals’’ that would trigger the [physicianreferral provision].

We did not add anything to thisdefinition in the August 1995 final ruleconcerning referrals for clinicallaboratory services.

Commenters to the 1998 proposedrule took issue with this interpretationfor several reasons, including therequirement that the consultingphysician examine and take a history ofthe patient, and the interpretation’sfailure to demarcate clearly when aconsultant takes over treatment of thepatient.

The Final Rule: The final rule adoptsa very broad interpretation of aconsultation. We want to make clearthat this definition is only for the very

limited purpose of determining when apathologist’s, diagnostic radiologist’s, orradiation oncologist’s ordering of DHSfrom a facility with which he or she hasan otherwise prohibited financialrelationship will not prohibitsubmission of a claim to Medicare. Mostimportantly, this definition is notintended to, and has no bearing on,coverage or payment rules relating toconsultations. Coverage and paymentrules related to consultations raise manyissues that are irrelevant for the verylimited application of the term insection 1877 of the Act. Simply put,while there may be many difficult issuesin determining when certain specialtyservices are consultations, as opposed toroutine treatment, such difficulties arerelatively rare in the context of the threeexceptions in section 1877(h)(5)(C) ofthe Act (namely, a request by apathologist for clinical laboratoryservices or pathological examinationservices, a request by a radiologist fordiagnostic radiology services, or arequest by a radiation oncologist forradiation therapy).

As a preliminary matter, we think itimportant to recognize that section 1877of the Act defines referrals very broadly.Section 1877(h)(5) specifically includesreferrals or requests for services madeby the referring physician, as well asany DHS provided pursuant to aconsultation with another physician,including DHS provided by theconsulting physician or any DHSordered by the consulting physician.

Section 1877(h)(5)(A) of the Acthaving established that a referralincludes all DHS ordered by aconsulting physician, section1877(h)(5)(C) then carves out: (i) Arequest by a pathologist for clinicallaboratory services or pathologicalexamination services, (ii) a request by aradiologist for diagnostic radiologyservices, and (iii) a request by aradiation oncologist for radiationtherapy, if the services are furnished by,or under the supervision of, thepathologist, radiologist, or radiationoncologist pursuant to a consultationrequested by another physician.

The final rule adopts the followingcriteria to identify a consultation forpurposes of section 1877:

(1) A consultation is provided by aphysician whose opinion or adviceregarding evaluation and/ormanagement of a specific medicalproblem is requested by anotherphysician.

(2) The request and need for theconsultation is documented in thepatient’s medical record.

(3) After the consultation is provided,the consulting physician prepares a



written report of his or her findings,which is provided to the physician whorequested the consultation.

(4) With respect to radiation therapyservices provided by a radiationoncologist, a course of radiationtreatments over a period of time will beconsidered to be pursuant to aconsultation, provided the radiationoncologist communicates with thereferring physician on a regular basisabout the patient’s course of treatmentand progress.

Finally, we want to make clear thatthe exception in section 1877(h)(5)(C) ofthe Act only protects the referral of DHSfrom the pathologist, diagnosticradiologist, or radiation oncologist tothe DHS provider. If the DHS provider—(1) knows or has reason to suspect thatthe referral originated from the referringphysician, and (2) has a direct orindirect financial relationship with thereferring physician, the DHS providercannot submit a claim to Medicare forthe DHS unless the financialrelationship fits into an exception.Moreover, the referring physician maynot make the referral to the consultantif he or she knows or has reason tosuspect that the consultant will orderDHS from an entity with which thereferring physician has a direct orindirect financial relationship to whichno exception applies.

Comment: A commenter suggestedthat the ‘‘diagnostic radiology’’exception should be expanded toinclude other DHS performed orsupervised by nonradiologist physiciansto assure quality of care and access toa broad variety of services. Thecommenter asked that we broaden theconsultation exception to include allDHS used to diagnose disease that areordered pursuant to a consultationinitiated by another physician.

Response: We agree that section1877(h)(5)(C) of the Act creates anexception for the referrals of somespecialists and not others. However, theCongress specifically excepted therequests of radiologists for diagnosticradiology services if the services arefurnished by, or under the supervisionof, the radiologist, pursuant to aconsultation requested by anotherphysician. It is our view that theCongress regarded most radiologists inthis situation and the other exceptedspecialists as physicians who were notinstigating a referral for services, butmerely implementing the request ofanother physician who has alreadydetermined that the patient is likely toneed radiology services. The Congressbelieves that, in general, a radiologist inthis situation would not be likely tooverutilize services.

We do not believe that we have theauthority to extend this exception toother specialists, some of whom provideseparate physician services to patientsand would be in a position to instigatethe referral for radiology.

Comment: One commenter wasconcerned about our willingness toexempt pathologists, radiologists, andradiation oncologists, yet require otherarrangements and physicians to altertheir referral methods. The commenterasserted that pathologists will orderfurther stains or studies on specimens toaid in a diagnosis. Radiologists, notinfrequently, recommend further studiesas part of their interpretation, again tohelp make a diagnosis. The commenterstated that given the current medico-legal atmosphere, it is rare that he doesnot follow the suggestions of theseconsultants. In addition, the commenterstated that he has seen cancer patientswith new or progressive diseases whoare being treated by radiationoncologists without any direct inputfrom attending or primary carephysicians. In the commenter’s view,these examples are standard medicalpractice and self-serving. Sinceradiologists often have an ownershipinterest in the diagnostic facility andpathologists in a laboratory facility, theyare doubly benefitted by the referral.

Response: The statute clearlyestablishes special rules for diagnosticradiologists, pathologists, and radiationoncologists.

Comment: A number of commentersexplained their problems withdistinguishing a consultation from areferral based on their particularspeciality area. For example, onecommenter stated that during an activephase of an oncologic, hematologic, orpneumatologic illness, the care of thepatient specific to that illness may bemanaged by the subspecialist and theoverall care of the patient may bemanaged by the referring physicianusing the information obtained from theconsultation. This commenter believesthat a referral would occur only if thetotal care of the patient were transferred.

Another commenter asserted thatrarely does a treating physiciancompletely give up the care of a patientto another physician, and rarely doesthe treating physician completely retainresponsibility for the care of the patient.Rather, a physician will send a patientto a specialist for testing, diagnosis, andinitial treatment, and then theoriginating physician will take over thecare of the patient.

Representing specialists whofrequently perform consultations andassume the neurological care of patientsat the request of referring physicians,

one commenter asserted that it isappropriate to bill for a consultationwhen care is transferred, rather than alower-paying evaluation andmanagement visit, because of the extrawork for the consulting physicianinvolved in preparing a report for theattending physician.

Response: We agree with thecommenters that it can be difficult todetermine whether a first physicianinitiating a visit to a second physicianshould constitute a referral to anotherphysician or the request for aconsultation with that physician.However, as discussed above, in thethree specific instances identified in thestatute, we think there will be littledisagreement in determining when thereis a consultation. In any event, forpurposes of section 1877(h)(5)(C) of theAct, we are adopting a broaderinterpretation of a consultation than isin the coverage rules. Finally, paymentand coverage for consultations are notaddressed or affected by this rule.

Comment: One commenter,representing an association ofradiologists, discussed the case of whathappens when a patient is sent to aradiation oncologist for treatment of atumor. The commenter stated thatradiation oncology treatment occursover a period of weeks or months, andis provided within a continuum of careinvolving the radiation oncologist, thereferring physician, and even otherphysicians.

Response: We agree with thecommenter and have clarified thedefinition to recognize that radiationtherapy may extend over a prolongedperiod of time and still be considered tobe pursuant to a consultation, providedthe radiation oncologist regularlycommunicates with the referringphysician as to the patient’s care.

Comment: Commenters stated thatwhen a referring physician sends apatient to a radiation oncologist forradiation therapy, the referringphysician may not see the patient forsome time. The radiation oncologistmay decide during this time that thepatient needs services other thanradiation therapy services. Thecommenter asked whether the radiationoncologist’s referrals for nonradiationtherapy services falls within the scopeof the consultation exception.

Response: Under section 1877(h)(5)(C)of the Act, for radiation oncology, onlya request for radiation therapy by aradiation oncologist is not considered tobe a referral. We understand that insome situations when a patient isundergoing radiation therapy, thepatient’s care is not supervised by aphysician other than the radiation



oncologist. However, the radiationoncologist cannot send the patient forDHS other than radiation therapyservices to an entity with which theradiation oncologist has a financialrelationship without meeting anappropriate exception.

Comment: Section 1877(h)(5)(C) of theAct excepts DHS provided by consultingpathologists, diagnostic radiologists,and radiation oncologists if the servicesare furnished by, or under thesupervision of, the consultingphysician. A commenter inquiredwhether the required supervision couldbe delegated to a member of theconsulting physician’s group practice.

Response: The plain language ofsection 1877(h)(5)(C) of the Act does notallow for supervision by anyone otherthan the consulting physician. However,we are broadly interpreting thesupervision requirement in this sectionto be consistent with the supervisionrequirements elsewhere in theseregulations. Thus, the level ofsupervision required is whatever level isrequired under the applicable Medicarepayment and coverage requirements.Furthermore, the in-office ancillaryservices exception may be available forservices supervised by a physician inthe consulting physician’s grouppractice.

Comment: A commenter stated thatneither diagnostic radiologists norpathologists perform physicalexaminations on patients. Anassociation representing certainspecialists stated that the definition of aconsultation should be modified so asnot to require a patient history andphysical examination except whenappropriate; for example, diagnosticradiologists and nuclear medicinephysicians generally do not take apatient’s history or perform a medicalexamination. However, a nuclearmedicine physician would perform ahistory and physical examination whena patient is referred for therapy. Inaddition, an association representingclinical laboratories declared that it isunlikely that a pathologist would eversee a patient or take a history from apatient. An association representingradiologists asserted that diagnosticradiologists generally do not take apatient’s history or conduct a medicalexamination; therefore, we shouldclarify that a history and examination ofthe patient is not required as part of aradiologic consultation.

Response: For purposes of section1877 of the Act, we agree that aconsultation does not necessarilyinclude either taking the history of apatient or performing a physicalexamination. Certainly, pathologists

would rarely see a patient. We do expectthat, on occasion, a consultingphysician, such as a radiologist, mightinterview a patient to gain additionalinformation about the patient’scondition, but this might not amount toa full scale history. Similarly, theradiologist might examine a patient, butfocus only on a particular area ofconcern. We are amending ourdescription of a ‘‘consultation’’ to clarifythat there is no requirement that thesesteps be performed.

Comment: A commenter askedwhether the prohibition under section1877 of the Act is triggered when aphysician, who has no financialrelationship with a diagnostic imagingcenter, initiates a referral to the imagingcenter rather than to a particularradiologist.

Response: We understand thecommenter to be asking whether theconsultation exception set forth insection 1877(h)(5)(C) of the Act appliesif the request for the consultation ismade to the entity that employs orcontracts with a consulting radiologistrather than to the consulting radiologist.The commenter’s main concern seemedto be whether a subsequent request bythe employed or contractor radiologistfor diagnostic radiology servicesfurnished by the imaging center wouldbe protected under section 1877(h)(5)(C)of the Act. We believe that undersection 1877(h)(5)(C) of the Act, therequest for a consultation can be madeto either a particular radiologist or anentity. Also, if the referring physiciandoes not have a financial relationshipwith the diagnostic imaging center, thereferral to the center is not prohibitedunder the general prohibition in section1877(a) of the Act.

IV. Physician Compensation UnderSection 1877 of the Act: An Overview

Many public comments addressedphysician compensation issues. Thestatute touches on physiciancompensation in several places: thedefinition of group practice, theemployee exception, and the personalservices exception. The interplay ofsection 1877 of the Act and physiciancompensation is one of the mostsignificant aspects of the self-referrallaw.

Obviously, the issue of physiciancompensation is of critical importanceto the physician community. As astarting point, we do not believe that theCongress intended section 1877 of theAct to regulate physician compensationpractices, except as necessary tominimize financial incentives to referDHS to entities with which thephysicians have financial relationships.

Having carefully studied the publiccomments and having reconsidered thestatutory provisions, the legislativehistory, and our January 1998 regulatoryproposals, we believe the followinggeneral principles govern theapplication of the statute to the mannerin which physicians are paid:

• First, as explained in section III.B ofthis preamble, for purposes of section1877 of the Act, the term ‘‘referral’’ doesnot include DHS that are personallyperformed by the physician. As apractical matter, the statutory languageand structure indicate Congressionalrecognition that physicians arecommonly compensated based onproductivity with respect to servicesthey personally perform.

• Second, with respect to grouppractices, the Congress intended toconfer group practice status on bonafide group practices and not on looseconfederations of physicians who cometogether as a ‘‘group’’ substantially inorder to capture the profits of DHSunder the in-office ancillary servicesexception to section 1877 of the Act. Tothat end, we proposed adding a ‘‘unifiedbusiness’’ standard to the group practicedefinition, using the statutory authoritythe Congress conferred on the Secretaryto impose additional standards on grouppractices. However, in response tocomments, we have reconsidered thetest for a ‘‘unified business’’; the finalregulations under Phase I of thisrulemaking adopt a considerably moreflexible approach to the same end.Under Phase I of this rulemaking, one ofseveral characteristics of a ‘‘unifiedbusiness’’ is that the group’s physiciancompensation methodologies areestablished by the centralizedmanagement of the group practice. Forthe limited purposes of establishing thata group practice is a unified business,we think it is appropriate to look atphysician compensation derived fromall sources, not just from DHS. However,location- and specialty-basedcompensation practices are expresslypermitted with respect to thedistribution of revenues derived fromservices that are not DHS. Suchpractices may also be allowed for DHS,depending on the circumstances. (Seethe discussion of the group practicedefinition in section VI.C of thispreamble.)

• Third, except for the limitedpurpose of determining whether a grouppractice is a unified business, thephysician compensation provisions forgroup practices under section 1877 ofthe Act only affect the distribution ofrevenues derived from DHS. In general,these revenues are likely to comprise arelatively small portion of the total



revenues of most group practices. As weindicated in 1998, section 1877 of theAct does not affect the distribution ofmonies earned from other services.From a practical business standpoint,however, some group practices may findit impractical to segregate DHSrevenues. These parties may find itmore expedient to allocatecompensation in accordance with themethods permitted for DHS revenuesunder section 1877 of the Act.

• Fourth, the statute implicitlyrecognizes that solo practitioners willkeep all the profits from DHS that fit inthe in-office ancillary servicesexception, whether performedpersonally or by others.

• Fifth, section 1877 of the Actcontemplates that physicians—whethergroup practice members, independentcontractors, or employees—can be paidin a manner that directly correlates totheir own personal labor, includinglabor in the provision of DHS. In otherwords, ‘‘productivity,’’ as used in thestatute, refers to the quantity andintensity of a physician’s own work, butdoes not include the physician’sfruitfulness in generating DHSperformed by others (that is, the fruitsof passive activity). ‘‘Incident to’’services are not included inproductivity bonuses under the statuteunless the services are incident toservices personally performed by areferring physician who is in a bona fidegroup practice. (‘‘Incident to’’ servicesmust meet the requirements of section1861(s)(2)(A) of the Act and section2050, ‘‘Services and Supplies,’’ of theMedicare Carriers Manual (HCFA Pub.14–3), Part 3—Claims Process.) In thecase of independent contractors underthe personal service arrangementsexception and employees under thebona fide employment exception, theamount of compensation for personalproductivity is limited to fair marketvalue for the services they personallyperform. The fair market value standardin these exceptions acts as an additionalcheck against inappropriate financialincentives. (The personal servicearrangements exception, as well asseveral other exceptions, containsadditional restrictions on compensationthat varies based on the volume or valueof referrals. The volume or valuestandard is discussed in section V ofthis preamble.)

• Sixth, the Congress recognized thatin the case of group practices, revenuesderived from DHS must be distributedto the group practice members in somefashion, even though the membersgenerate the DHS revenue. However, theCongress wished to minimize theeconomic incentives to generate

unnecessary referrals of DHS.Accordingly, the Congress permittedgroup practice members (andindependent contractors who qualify as‘‘physicians in the group practice’’) toreceive shares of the overall profits ofthe group, so long as those shares do notdirectly correlate to the volume or valueof referrals generated by the member or‘‘physician in the group practice’’ forDHS performed by someone else. Inaddition, the Congress permitted groupsto pay their physicians productivitybonuses based directly on personalproductivity (including servicesincident to personally performedservices), but precluded groups frompaying group practice physicians anyproductivity bonus based directly onreferrals of DHS performed by someoneelse. As detailed below, we areestablishing under Phase I of thisrulemaking certain methodologies thatdescribe compensation practices thatwill be deemed to be indirectly relatedto the volume or value of DHS referralsfor purposes of section 1877(h)(4)(B)(i)of the Act and therefore allowable undersection 1877 of the Act. Groups are freeto develop their own indirectmethodologies, but such methodologiesare subject to case-by-case review.

V. ‘‘Volume or Value’’ of Referrals and‘‘Other Business Generated’’ Standards:An Overview

Many of the exceptions in section1877 of the Act covering specific kindsof compensation arrangements includeas one element of the exception arequirement that the compensation nottake into account the volume or value ofany referrals and, in some of theexceptions, the further requirement thatthe compensation not take into accountother business generated between theparties.

In the preamble to the January 1998proposed regulation, we had interpretedthis volume or value standard asfollows:

• Compensation could be based onunits of service (for example, ‘‘per use’’equipment rentals) so long as the unitsof service did not include servicesprovided to patients who were referredby the physician receiving the payment.For example, a physician who owned alithotripter could rent it to a hospital ona per procedure basis, except forlithotripsies for patients referred by thephysician-owner; payments for the useof the lithotripter for those patientswould have to use a methodology thatdid not vary with referrals.

• The language ‘‘or other businessgenerated between the parties’’ meantthat the payment in an arrangement hadto be fair market value for the services

expressly covered by the arrangementand could not include any payment forservices not covered by thearrangement.

• Physician compensationarrangements that were fixed in amountbut conditioned either expressly orimplicitly on the physicians referringpatients to a particular provider orsupplier took into account the value orvolume of referrals within the meaningof the statute.

After reviewing the commentsreceived, we are substantially revisingthe regulation with respect to the scopeof the volume or value standard. Mostimportantly, we are permitting time-based or unit-of-service-basedpayments, even when the physicianreceiving the payment has generated thepayment through a DHS referral. Wehave reviewed the legislative historywith respect to the exception for spaceand equipment leases and concludedthat the Congress intended that time-based or unit-of-service-based paymentsbe protected, so long as the payment perunit is at fair market value at inceptionand does not subsequently changeduring the lease term in any mannerthat takes into account DHS referrals. Inthe case of those exceptions that includethe additional restriction that thepayment not take into account ‘‘otherbusiness generated between theparties,’’ the per unit payment also maynot take into account any otherbusiness, including non-Federal healthcare business, generated by the referringphysician. We are interpreting thephrase ‘‘generated between the parties’’to mean business generated by thereferring physician for purposes ofsection 1877 of the Act.

Applying Phase I of this rulemakingto the lithotripter example noted above,the ‘‘per use’’ rental payments would beprotected, even for lithotripsiesperformed on patients referred by thephysician-owner, provided that the ‘‘peruse’’ rental payment was at fair marketvalue, did not vary over the lease term,and met the other requirements of therental exception. In other words, if the‘‘per use’’ payment is fair market value,we will not require a separate paymentarrangement for use of the equipment onpatients referred by the physician-owner. In determining whether theinitial ‘‘per use’’ payment is at ‘‘fairmarket value,’’ we will generally look tothe price a hospital would pay to rentthe equipment from a company that didnot have any physician ownership orinvestment (and thus was not in aposition to generate referrals or otherbusiness—DHS or otherwise—for thehospital) in an arm’s-length transaction.In some cases, all the available



comparables or market values mayinvolve transactions between entitiesthat are in a position to refer or generateother business. In such situations, wewould look to alternative valuationmethodologies, including, but notlimited to, cost plus reasonable rate ofreturn on investment on leases ofcomparable medical equipment fromdisinterested lessors. (The definition offair market value is discussed in moredetail in section VII.B of this preamble.)

In the light of our interpretation of thevolume or value standard as permittingunit of service or unit of time-basedpayments, we have determined that theadditional limiting phrase ‘‘not takinginto account * * * other businessgenerated between the parties’’ meanssimply that the fixed, fair market valuepayment cannot take into account, orvary with, referrals of Medicare orMedicaid DHS or any other businessgenerated by the referring physician,including other Federal and private paybusiness. Simply stated, section 1877 ofthe Act establishes a straightforward testthat compensation arrangements shouldbe at fair market value for the work orservice performed or the equipment orspace leased—not inflated tocompensate for the physician’s ability togenerate other revenues.

In order to establish a ‘‘bright line’’rule, we are applying this interpretationof the volume or value standarduniformly to all provisions undersection 1877 of the Act and part 411where the language appears (forexample, the employee, personal servicearrangements, rental of office space/equipment, fair market value, non-monetary compensation under $300,hospital medical staff benefits, academicmedical center exceptions, indirectcompensation arrangements, and thegroup practice definition). The ‘‘otherbusiness generated’’ restriction appliesonly to those exceptions in which itexpressly appears.

Consistent with this interpretation,we have determined that we will notconsider the volume or value standardimplicated by otherwise acceptablecompensation arrangements forphysician services solely because thearrangement requires the physician torefer to a particular provider as acondition of payment. So long as thepayment is fixed in advance for the termof the agreement, is consistent with fairmarket value for the services performed(that is, the payment does not take intoaccount the volume or value of theanticipated or required referrals), andotherwise complies with therequirements of the applicableexception, the fact that an employer ora managed care contract requires

referrals to certain providers will notvitiate the exception. Any such contract,however, must expressly provideexceptions (1) when the patientexpresses a different choice, (2) whenthe patient’s insurer determines theprovider, or (3) when the referral is notin the best medical interest of thepatient in the physician’s judgment. Wecaution that these mandatoryarrangements could still implicate theanti-kickback statute, depending on thefacts and circumstances.

Finally, we want to clarify thatownership or investment interests thatare not protected under sections 1877(b)through (d) of the Act (and are thereforecompensation arrangements undersection 1877(h)(1)(A) of the Act) aredeemed to take into account the valueor volume of referrals. We believe thisview is consistent with the generalprohibition on investment andownership interests in the statute.

Our responses to comments followbelow:

Comment: One commenter asked usto clarify the statement in the preambleof the January 1998 proposed rule at 63FR 1780 that the volume or valuestandard that is in the compensationand other exceptions is uniformly meantto cover (and thus exclude from anexception) other business generatedbetween the parties. Anothercommenter asked us to clarify that therequirement that the compensation nottake into account the volume or value ofreferrals or other business generatedbetween the parties refers only toreferrals of DHS.

Response: The discussion of thephrase ‘‘other business generatedbetween the parties’’ in the preamble tothe January 1998 proposed rule causedconfusion. Based on our review of thelegislative history, we believe that theCongress intended the language to be alimitation on the compensation orpayment formula parallel to thestatutory and regulatory prohibition ontaking into account referrals of DHSbusiness. Simply stated, in theprovisions in which the phrase appears,affected payments cannot be based oradjusted in any way on referrals of DHSor on any other business referred by thephysician, including other Federal andprivate pay business.

Comment: One commenter urged usto amend the language of the regulationto correspond to the extensivediscussion of the volume or valuestandard in the preamble.

Response: We are modifying theregulation to clarify the meaning of thevolume or value standard.

Comment: One commenter asked usto clarify that a valuation of a

physician’s practice could include thevalue of self-generated DHS in thepurchase price as long as the purchaseagreement was not contingent on futurereferrals.

Response: For purposes of section1877 of the Act, the valuation of aphysician practice could include thevalue of DHS in the purchase price ifthe DHS provided by the sellingphysician fit into an exception, such asthe in-office ancillary servicesexception, and the purchase agreement(and purchase price) is not contingenton future referrals. Depending on theidentity of the purchaser, however, theinclusion of the value of ancillaryrevenues could implicate the anti-kickback statute.

Comment: Several commenters askedus to clarify that the language requiringthat the payment be fixed in advanceand not be determined in a manner thattakes into account the value or volumeof referrals or other business generatedbetween the parties does not requirethat the aggregate compensation beestablished in advance, but only that themethodology (for example, a rental peruse, or payment per service) be fixed inadvance.

Response: We are modifying theregulation to make it clear that theaggregate payment need not be specifiedin advance. However, if the aggregateamount is not specified, the amount ofthe payment on a ‘‘per use,’’ ‘‘perservice,’’ or ‘‘per time period’’ basismust be fixed in advance. For example,a contract could include a fee schedulefor services, provided the fee scheduleis uniformly applied to all servicesprovided to the contracting party. Inaddition, the payment must be fairmarket value compensation not takinginto account the volume or value ofreferrals or other business generated bythe referring physician either atinception or during the term of theagreement.

Comment: Commenters also wishedus to clarify whether the followingarrangements take into account thevolume or value of referrals or otherbusiness generated between the parties:(1) Payments based on a percentage ofgross revenues; (2) payments based on apercentage of collections; (3) paymentsbased on a percentage of expenses; and(4) payments based on a percentage ofa fee schedule.

Response: A compensationarrangement does not take into accountthe volume or value of referrals or otherbusiness generated between the partiesif the compensation is fixed in advanceand will result in fair market valuecompensation, and the compensationdoes not vary over the term of the



arrangement in any manner that takesinto account referrals or other businessgenerated. The first three arrangementsdescribed by the commenters are neitheraggregate fixed compensation amounts,nor fixed ‘‘per service,’’ ‘‘per use,’’ or‘‘per time period’’ payment amounts.Percentage compensation that isdetermined by calculating a percentageof a fluctuating or indeterminateamount, such as revenues, collections,or expenses, is not fixed in advance.Accordingly, the first threearrangements do not meet therequirement that compensation be fixedin advance. Whether the fourtharrangement mentioned by thecommenters—a percentage of a feeschedule—is fixed in advancecompensation depends on thecircumstances. If the percentagepayments are based on a single feeschedule, such that there is, in effect, asingle fixed fee for each service, thearrangement meets the requirement thatthe compensation be fixed in advance.However, a percentage of fee schedulearrangement that bases payments onmultiple fee schedules, such that theremay be different fees for a particularservice depending on the ultimatepayer, is not fixed in advance. Thus, forexample, if a physician has a contractfor services with a hospital that has achargemaster for all services, thephysician can be paid a fixed percentageof that chargemaster fee schedule foreach service. However, when thehospital accepts different paymentamounts from different payers for aservice, the physician cannot be paid apercentage of those varying amounts.

Comment: Several commentersrequested that the final rule make clearthat payments based on ‘‘per use’’ or‘‘per service’’ meet the volume or valuestandard in the exceptions so long as thepayments are at fair market value andthe ‘‘per use’’ or ‘‘per service’’ amountdoes not change over the term of thecontract based on the value or volumeof referrals of DHS. The commentersstated that their position was consistentwith the intent of the Congress andsupported their position with languagefrom the Conference Committee report.

Response: As described above, we aremodifying the regulation to reflect theConference Committee report, H. Rep.No. 213, 103rd Cong., 1st Sess. 814(1993). The ‘‘per use,’’ ‘‘per service,’’ or‘‘per time period’’ amount must reflectfair market value at inception not takinginto account the volume or value ofreferrals and must not change over theterm of the contract based on thevolume 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 commenterspecifically objected to our proposedinterpretation that a ‘‘per use’’ paymentwas acceptable except when thepayment was for a referral from aphysician with an ownership orinvestment interest in the equipment.According to the commenter, thephysician’s ownership or investmentinterest should not matter so long as thephysician does not have a controllinginterest.

Response: We believe equipmentrental arrangements are subject to abusewhether the payment received is only asmall portion of the rental or the entireamount. Control is irrelevant; it is thefinancial incentive that has been shownrepeatedly to result in overutilization.Despite the obvious potential for abuse,given the clearly expressedcongressional intent in the legislativehistory, we are permitting ‘‘per use’’payments even when the physician isgenerating the referrals. We wish tomake clear that these arrangements mayviolate the anti-kickback statute.

Comment: A commenter asked thatwe clarify that a hospital can leaseequipment on a ‘‘per use’’ basis to aphysician for use in the physician’spractice.

Response: A hospital can leaseequipment to a physician for use in thephysician’s practice on a ‘‘per use’’basis, provided the lease arrangementotherwise fits in the rental exception. Asnoted above, these arrangements mayviolate the anti-kickback statute.

Comment: Many commenters objectedto our proposed interpretation in thepreamble that fixed payments to aphysician could be determined to takeinto account the volume or value ofreferrals if a condition or requirementfor receiving the payment was that thephysician refer DHS to a given entity,such as an employer or an affiliatedentity. A number of commenters statedthat we did not have statutory authorityfor our proposed interpretation. Somecommenters said these arrangementswere necessary to develop integratednetworks and ensure quality control.Another commenter stated that theproposal would interfere with exclusivehospital-based physician relationships.One commenter argued that theproposed interpretation wasinconsistent with the employeeexception, while yet another stated theposition was inconsistent with thecommon law duty of loyalty owed by anemployee to his or her employer and theemployer’s right to set the terms andconditions of employment. Anothercommenter stated that the proposed

interpretation would adversely impactmanaged care arrangements by, in effect,requiring all managed care arrangementsto meet the physician incentive planregulations. Finally, a commenterproposed that we allow entities torequire physicians to refer to aparticular provider as part of a contract,except (1) when the patient expresses adifferent choice, (2) when the patient’sinsurer determines the provider, or (3)when the referral is against thephysician’s judgment.

Response: While we believe thatpayments tied to referral requirementscan be abused, we agree that theproposed interpretation potentiallywould have had far-reaching effects,especially for managed carearrangements and group practices. Weare adopting in modified form the onecommenter’s suggestion for appropriateconditions listed in the last sentence ofthe comment. We believe the suggestedconditions will not impose a significantburden, since they are likely to berequired anyway under existing laws,professional codes, and most contracts.Thus, so long as the referral requirementdoes not apply if a patient expresses adifferent choice, the patient’s insurerdetermines the provider, or the referralis not in the best medical interest of thepatient in the physician’s judgment andthe payment to the physician is fixed inadvance at fair market value for theservices actually rendered and does notvary based on referrals or, whenapplicable, other business generated bythe physician, the fact that referrals maybe required to be made to specificproviders will not nullify an exception.

Comment: One commenter stated thatthe final rule should not prohibitprimary care case managementarrangements.

Response: As discussed in thepreceding comment, we are no longerviewing these arrangements as violatingthe volume or value standard simplybecause referrals may be required to bemade to certain providers. Thearrangement would have to meet theother provisions of an exception.

Comment: According to twocommenters, many covenants not tocompete could be called into questionby the proposed interpretation that fixedpayments tied to referral requirementscan violate the volume or valuestandard, a component of many of theexceptions. The commenters argued thatthese covenants are necessary adjunctsto many business acquisitions andpersonal services or managementarrangements and urged us to affirmtheir legitimacy.

Response: The commenters wereunclear as to how the proposed



interpretation would have adverselyimpacted covenants not to compete. Arequirement to refer to a specificprovider is different from an agreementnot to establish a competing business. Inother words, a covenant not to competemight prevent a physician from settingup a private practice or offering servicesthat compete with the entity thatpurchased his or her practice. If anagreement also included therequirement that the physician referbusiness to the purchaser, the agreementwould be suspect under the anti-kickback statute.

Comment: One commenter asked usto clarify that the discussion in thepreamble about the volume or valuestandard applies not only to itsinterpretation in the context of thecompensation exceptions, but also to itsinterpretation in the other exceptions inwhich the same language appears.

Response: The meaning of the volumeor value standard as set forth in thepreamble and regulations text underPhase I of this rulemaking applies to thestandard wherever it appears in thestatute and regulations.

Comment: One commenter stated thatthe interpretation of the volume or valuestandard in the January 1998 proposedrule at 63 FR 1701 would permithospitals to pressure physicians to referto network and other providers that thehospitals own or control.

Response: It is not clear from thecomment what aspect of the proposedrule would lead the commenter tobelieve that this kind of coercion wouldoccur. Nonetheless, section 1877 of theAct is limited in its application anddoes not address every abuse in thehealth care industry. The fact that aparticular arrangement is not prohibitedby section 1877 of the Act does notmean that the arrangement is notabusive; it simply means that a referraland submission of a claim for DHS isnot prohibited under section 1877 of theAct.

VI. Exceptions Applicable toOwnership and CompensationArrangements (Section 1877(b) of theAct)

A. Physician Services (Section1877(b)(1) of the Act)

The Existing Law: Section 1877(b)(1)of the Act specifies that the generalprohibition under section 1877 of theAct does not apply to services furnishedon a referral basis, if the services arephysician services, as defined in section1861(q) of the Act, and are furnished (1)personally by another physician in thesame group practice as the referringphysician or (2) under the personal

supervision of another physician in thesame group practice as the referringphysician. Section 1861(q) defines‘‘physicians’ services’’ as ‘‘professionalservices performed by physicians,including surgery, consultation, andhome, office, and institutional calls (butnot including services described insubsection (b)(6) [certain intern andresident services]).’’ A physician isdefined in the Act as a duly licensedand authorized doctor of medicine orosteopathy, doctor of dental surgery ordental medicine, doctor of podiatricmedicine, doctor of optometry, orchiropractor who meets certainqualifications specified in the Act. (Seesection 1861(r) of the Act.)

The August 1995 final ruleincorporated this provision in § 411.355(General exceptions to the referralprohibition related to both ownership/investment and compensation),paragraph (a) (Physician services),covering physician services as definedin § 410.20 (Physicians’ services),paragraph (a) (Included services). Thedefinition of a physician service in§ 410.20(a) generally parallels thedefinition in section 1861(r) of the Act,with the addition of diagnosis andtherapy services. Under the August 1995final rule, physician services need notbe performed in any specific location.

The Proposed Rule: The January 1998proposed rule retained § 411.355(a) asset forth in the August 1995 final rule.In the preamble to the January 1998proposed rule, we noted that theexception would apply to physicianservices that constitute DHS undersection 1877 of the Act and regulationsand that the exception in the Medicarecontext would not apply to servicesperformed by nonphysicians, eventhough furnished under a physician’ssupervision, such as ancillary or‘‘incident to’’ services. We interpreted‘‘personal supervision’’ to mean that thegroup practice physician must be legallyresponsible for monitoring the results ofany test or other designated healthservice and must be available to assistthe individual who is furnishing theservice, even though the group practicephysician need not be present while theservice is being furnished.

The Final Rule: In general, we believethat the physician services exception isof limited application. However, thephysician services exception does affordprotection for referrals of the narrowclass of physician services that areincluded in the definitions of DHS,especially in the area of radiology. (Seediscussion in section VIII.A of thispreamble.) The physician servicesexception enables physicians in grouppractices to make referrals for physician

services that are DHS within their grouppractices. In addition, the in-officeancillary services exception may alsoapply, depending on the circumstances.We are interpreting the physicianservices exception to apply to referralsto (or referral services supervised by) amember of the group practice or anindependent contractor who qualifies asa ‘‘physician in the group’’ as defined in§ 411.351 (Definitions).

In particular, we are incorporating thephysician services exception in§ 411.355(a) as proposed in our January1998 proposed rule, with the followingmodifications:

First, we are interpreting ‘‘personalsupervision’’ to correspond with ourrevised interpretation of ‘‘directsupervision’’ in the context of the in-office ancillary services exception. (Seediscussion in section VI.B.2 of thispreamble.) We can discern nocompelling reason to have separate andpotentially inconsistent supervisionstandards in the exceptions undersection 1877 of the Act. Accordingly,the level of supervision required underthe physician services exception is thelevel of supervision required under thepayment and coverage rules applicableto the particular physician service atissue.

Second, as noted above, we areexpressly interpreting the exception toapply to referrals to (or physician’sservices supervised by) a member of thegroup practice or an independentcontractor who qualifies as a ‘‘physicianin the group’’ as defined in § 411.351.

Finally, as many have pointed out, thephysician services exception (unlike thein-office ancillary services exception)does not cover referred services that areperformed by the referring physician.We believe this narrower scope of thephysician services exception is evidencethat personally performed physicianservices fall outside the scope of section1877 of the Act. For this and otherreasons expressed elsewhere in thispreamble, in § 411.351 of Phase I of thisrulemaking, we are defining a ‘‘referral’’for purposes of section 1877 of the Actto exclude referrals for work personallyperformed by the referring physician,and we have made clear that a referringphysician is not himself or herself anentity to which he or she makesreferrals.

Comment: A commenter asked thatthe regulations include a clear provisionfor providing compensation forprofessional reading fees within anoutpatient group practice for diagnosticprocedures such as EKG, pulmonaryfunction testing, EEG, etc.

Response: To the extent that theprofessional reading fees mentioned by



the commenter are DHS (see § 411.351),the rules set forth in these regulationsapply. (We note, however, thatpulmonary function testing and EKGsand ECGs typically will not be DHSunless furnished in a hospital setting.)First, if the professional reading isperformed personally by the referringphysician, no referral occurs forpurposes of section 1877 of the Act(though there may still be a referral ofthe technical component). Second, if theprofessional reading is performed by aphysician other than the referringphysician, the physician services andin-office ancillary services exceptionsare available. In the case of a grouppractice, physician compensation willbe governed by the rules in § 411.352(Group practice). Subject to those rules,the physician performing theprofessional reading may be paiddirectly based on his or her personalperformance of professional services.

Comment: A commenter expressedthe view that all physician services areexcluded from the scope of section 1877of the Act. The commenter asserted thatno evidence exists that the Congressintended to include in section 1877 ofthe Act physician services within themeaning of section 1861(s)(1) of the Act.The commenter, therefore, concludedthat including professional componentsof services is beyond the scope ofsection 1877 and our regulatoryauthority.

Response: We disagree. A number ofthe DHS enumerated by the Congress insection 1877(h)(6) of the Act includesubstantial physician servicescomponents, and the Congress providedno exclusion or carve out. Indeed, webelieve the physician services exceptionitself clearly evidences the Congress’srecognition that the DHS categories setforth in section 1877(h)(6) of the Actinclude some physician services. At thevery least, the Congress anticipated thatthere might be situations in which itwould be difficult to demarcate clearlyprofessional and technical componentsof the DHS. For those situations, theCongress provided an exception thatmakes clear that group practicephysicians may refer physician serviceswithin their group practices when theconditions of the exception are satisfied.

Comment: A commenter inquiredwhether the physician servicesexception applies to services performedby a nonphysician. In the commenter’sview, if the exception does not apply tothese services, the exception wouldconflict directly with our other rules onthe practice parameters applicable tononphysician practitioners.

Response: We are cognizant of theexpanding and evolving role of

nonphysician practitioners in the healthcare delivery system for Medicarebeneficiaries. Notwithstanding, we arenot persuaded that an expansion of thephysicians’ services exception isappropriate or, in the light of otherinterpretations set forth in theseregulations, necessary to accommodatethe commenter’s concerns.

Section 1877(b)(1) expressly appliesonly to physicians’ services as definedin section 1861(q) of the Act. Section1861(q) of the Act provides thatphysician services are ‘‘professionalservices performed by physicians.’’ TheAct provides for Medicare coverage forcertain services that would bephysicians’ services if furnished by aphysician when such services areperformed by a physician assistant(under the supervision of a physician)or a nurse practitioner or clinical nursespecialist (working in collaboration witha physician) (see sections 1861(s)(K)(i)and (s)(K)(ii) of the Act.) However,while such services may be identical tophysicians’ services, they are notphysicians’ services under section1861(q) of the Act. Congress hasprovided for separate treatment of suchservices under the payment rules. Todefine nonphysician services asphysician services for purposes ofsection 1877(b)(1) of the Act woulddistort Medicare’s overall payment andcoverage scheme.

We are also concerned that expandingthe physicians’ services exception,which has no building or billingrequirements, to include nonphysicianpractitioners’ services would permitgroup practices to circumvent therequirements of the in-office ancillaryservices exception.

However, while we are not includingnonphysician services under section1877(b)(1) of the Act, we have madeother changes in the regulations thataddress the commenter’s concerns.Specifically, we have interpreted thedirect supervision requirement of the in-office ancillary services exception asrequiring the level of supervisionmandated under the relevant Medicarepayment and coverage rules. See sectionVII.B.2 of this preamble. In other words,in the case of nonphysicianpractitioners, the supervisionrequirement of the in-office ancillaryservices exception corresponds to thesupervision requirements applicable tosuch practitioners. Thus, the in-officeancillary services exception will covermost referral DHS provided bynonphysician practitioners in a grouppractice setting (provided theexception’s building and billingrequirements are also satisfied), without

imposing additional supervisionrequirements on such practitioners.

Moreover, referrals made bynonphysician practitioners generally donot implicate section 1877 of the Act,which focuses exclusively on referralsby physicians. However, if a referralmade by a physician assistant or nursepractitioner (or other nonphysician) isdirected or controlled by a physician,we are treating the referral as an indirectreferral made by the directing orcontrolling physician, who is, in fact,the ‘‘referring physician.’’ Thisinterpretation is necessary to preventthe use of nonphysician practitioners tocircumvent section 1877 of the Act.

We believe these interpretationsadequately address the commenter’sconcerns and are consistent with thestatutory language and structure.However, we invite public comments asto the need for a further exception forreferred DHS performed bynonphysician practitioners in a grouppractice setting.

Comment: A commenter soughtclarification as to the treatment of‘‘incident to’’ services under thephysicians’ services exception. Thecommenter believed that unless‘‘incident to’’ services are included inthe exception, the exception wouldconflict with other payment andcoverage rules.

Response: We are interpreting thephysicians’ services exception to applyonly to ‘‘incident to’’ services (asdefined in § 411.351) that are physicianservices under section 1861(q). All other‘‘incident to’’ services would need toqualify under the in-office ancillaryservices or another exception.

Comment: A commenter suggestedthat the term ‘‘physician’’ should bedefined in the regulations.

Response: The Act defines‘‘physician’’ in section 1861(r). We agreethat it would be helpful to incorporatethis definition into these regulationsand are doing so.

B. In-office Ancillary Services (Section1877(b)(2) of the Act)

The Existing Law: We have dividedour discussion of the in-office ancillaryservices exception into four subsectionsthat correspond with the statutorystructure: DHS included in the in-officeancillary services exception,supervision, building requirements, andbilling requirements. The relevantprovisions of the existing law aredescribed in each subsection below.

The Proposed Rule: The relevantprovisions of the proposed rule aredescribed in each subsection below.

The Final Rule: Many commenterswere highly critical of the January 1998



proposed rule’s interpretation of theexception for in-office ancillaryservices, contending that the rule wasarbitrary, inconsistent with our existingpolicies, and inefficient. We haverevisited the premises of the January1998 proposed rule, reexamined thestatutory language and legislativehistory, and restructured the exception.The in-office ancillary servicesexception in Phase I of this rulemakingis consistent with the language ofsection 1877 of the Act and theorganization and operation of manymodern physicians’ offices. While inmost respects the exception is broaderand administratively simpler than theproposed exception, we havesubstantially limited the ability of grouppractices to use part-time arrangementsto provide DHS in buildings or facilitiesin which they do not routinely providea wide range of services other thanFederal or private pay DHS.

In revising the exception, we werecognizant of several key considerations.First, the Congress clearly wasconcerned with regulating physicians’ordering of DHS, even in the context oftheir own practices; otherwise, adetailed exception would not have beennecessary. Second, the Congressintended to protect some in-officeancillary services provided they weretruly ancillary to the medical servicesbeing provided by the physician orgroup; otherwise, the Congress wouldnot have created the exception. Finally,we believe the boundaries of theexception as intended by the Congressare best expressed in the buildingrequirement in section 1877(b)(2)(A)(ii)of the Act, which permits DHS to beprovided in the same building wherethe physicians provide their regularmedical services, or, in the case of agroup practice, in a central DHSbuilding.

Based on those considerations, wehave revised the in-office ancillaryservices exception to permit theprovision of DHS in the same buildingin which a group or a physicianroutinely provides the full range of thegroup’s or physician’s medical serviceswith a minimum of restrictions. Ingeneral, the final exception will protectshared DHS facilities, so long as thephysicians or groups that share thefacility also routinely provide their fullrange of services in the same building.Moreover, in certain circumstances,part-time practitioners would bepermitted to share the DHS facility, aslong as they are also providing medicalservices they routinely provide that arenot DHS (whether Federal or privatepay). Coupled with a relaxation of theproposed supervision requirement

described below, we believe the finalexception captures what the Congressintended to protect.

What will not be protected by PhaseI of this rulemaking are a number ofpart-time, intermittent arrangementsthat functionally are nothing more thanshared off-site facilities. Many of thesepart-time, off-site ancillary servicesarrangements are inconvenient forpatients both as to location and time,and are created by physiciansprincipally to capture revenue ratherthan to enhance patient care. Topreclude such arrangements, and as acounter-balance to allowing certainshared facilities, we have interpretedthe same building requirement asincluding a ‘‘full range of services’’condition, and the centralized buildingrequirement as requiring exclusivity.These interpretations are consistentwith the statutory language andstructure. To the extent the January1998 proposed rule would havepermitted these arrangements, it is nolonger operative. To qualify under the‘‘centralized building’’ standard, Phase Iof this rulemaking will require, amongother things, the group practice to ownor lease and use the space exclusivelyon a full-time basis.

In addition to the changes to the‘‘building’’ requirements, the exceptionfor in-office ancillary services underPhase I of this rulemaking contains anumber of other significant changes (alldescribed in more detail in the relevantcomments and responses sections thatfollow):

• Significantly expanding the scopeof services potentially included in thein-office ancillary services exceptionby—(1) making clear that outpatientprescription drugs may be ‘‘furnished’’in the office, even if they are used by thepatient at home; (2) explicitlypermitting external ambulatory infusionpumps that are DME to be providedunder the in-office ancillary servicesexception; (3) making clear thatchemotherapy infusion drugs may beprovided under the in-office ancillaryservices exception through theadministration or dispensing of thedrugs to patients in the physician’soffice; and (4) creating a new exceptionfor certain items of durable medicalequipment (DME) furnished in aphysician’s office for the convenience ofthe physician’s patients.

• Substantially modifying the ‘‘directsupervision’’ requirement to conform itto relevant Medicare and Medicaidpayment and coverage rules for thespecific service, in keeping with ourpremise that the Congress did notintend to revamp radically the provision

of ancillary services in physicians’offices.

• Allowing independent contractorsto provide the requisite supervision,provided they are ‘‘physicians in thegroup practice,’’ meaning that they havecontracted with the group practice totreat group practice patients on grouppremises and have reassigned theirclaims to the group under § 424.80 ofthese regulations (as further explainedin section 3060, ‘‘Reassignment,’’ of theMedicare Carriers Manual (HCFA Pub.14–3), Part 3—Claims Process).

Additional revisions andmodifications to the rule are addressedin the discussion below. The discussionis divided into four subparts: the scopeof DHS, supervision, buildingrequirements, and billing requirements.The discussion of each subpart containssummaries of public comments and ourresponses to them.

1. Scope of Designated Health ServicesThat Can Be In-Office Ancillary Services

The Existing Law: As a thresholdmatter, the DHS that are potentiallyprotected by the in-office ancillaryservices exception are any of the DHSenumerated in section 1877(h)(6) of theAct, except DHS specifically excludedfrom the exception under section1877(b)(2) of the Act. Excluded are allparenteral and enteral nutrients,equipment, and supplies (PEN) andDME (except for infusion pumps, whichremain eligible for the exception).Referrals—in-office or otherwise—forservices that are not DHS need not fit inthe exception, since they do notimplicate the statute. The scope ofservices that are considered to be DHSis discussed in section VIII.A of thispreamble.

The Proposed Rule: We proposed thatDHS would be considered furnished inthe location where the service wasactually performed or where a patientreceives and begins using an item. Wealso proposed expanding the category ofDHS included in the in-office ancillaryservices exception to include crutches,provided the physician does not markup the cost of the crutches.

The Final Rule: First, we are revisingthe rule to provide that services will beconsidered ‘‘furnished’’ for purposes ofthe exception (1) in the location wherethe service is actually performed upona patient or (2) when an item isdispensed to a patient in a manner thatis sufficient to meet Medicare billingand coverage rules. This change willmake application of the rule clearer inthe case of outpatient prescription drugsand ambulatory infusion pumps that areDME. Second, in the interests of patientconvenience, we are using our



regulatory authority under section1877(b)(4) of the Act to expand theexception to include certain DME,including crutches, canes, walkers, andfolding manual wheelchairs, that meetconditions set forth in the regulations.(Braces and collars are orthotics and,thus, may already qualify under thestatute for the in-office ancillaryservices exception.) These conditionsgenerally will require that—(1) the itemsare DME, such as canes, crutches,walkers, and folding wheelchairs, that apatient uses to ambulate in order toleave the physician’s office; (2) theitems are furnished in a building thatmeets the ‘‘same building’’ requirementsof section 1877(b)(2) of the Act and§ 411.355(b)(2)(i) as part of the treatmentfor the specific condition for which thephysician-patient encounter occurred;(3) the items must be furnishedpersonally by the physician whoordered the DME, by another physicianin the group practice, or by an employeeof the physician or the group practice;(4) the physician who furnishes theDME must meet all DME supplierstandards; (5) the arrangement does notviolate the anti-kickback statute; (6) thebilling and claims submission for theDME complies with all applicable lawsand regulations; and (7) all otherrequirements of the in-office ancillaryservices exception are satisfied. We aresimilarly excepting blood glucosemonitors.

We are withdrawing our proposal thatphysicians not mark up these itemswhen provided in-office to theirpatients; we believe the current DMERegional Carrier (DMERC)reimbursement provisions providesufficient cost containment controls. Webelieve these limited modifications tothe DME exclusion will promote qualityof patient care without any significantincreased risk of patient or programabuse.

Finally, with respect to infusionpumps (other than pumps that are PENequipment or supplies), we areincluding, under Phase I of thisrulemaking, the furnishing of externalambulatory infusion pumps as in-officeancillary services covered by theexception (which uses the generic term‘‘infusion pumps’’), provided all otherconditions of the exception are satisfied.Because they are specifically includedin the statutory exception, externalambulatory infusion pumps need notmeet the added requirements for DMEoutlined in the preceding paragraph.

Comment: A hospital-basedpathologist in a hospital with a full-service laboratory urged that the in-office ancillary services exceptionshould not protect laboratories based in

physicians’ offices. The pathologistasserted that these laboratories aremerely enterprises that enablephysicians to profit from referrals forlaboratory tests and create unfaircompetition for pathology laboratoriesthat are not owned by physicians. Thepathologist expressed skepticism aboutthe justification proffered by manyphysicians that in-office laboratoriesexist for the convenience of patients,noting that, in his case, his hospitallaboratory is located directly across thestreet from the offices of physicianswith in-office laboratories.

Response: Despite the fact thatphysician-owned or controlledlaboratories and other DHS facilitiesmay competitively disadvantage entitiesthat do not have physician ownership orcontrol, the Congress made a policydetermination not to apply theprohibition under section 1877 of theAct to DHS referrals that occur withinthe parameters of a physician’s or grouppractices’ own medical practice,provided these referrals fit squarely inan exception under section 1877 of theAct.

Comment: The in-office ancillaryservices exception applies to DHS thatare ‘‘furnished’’ in accordance withcertain statutory conditions. A numberof commenters objected to ourinterpretation that the term ‘‘furnished’’excluded items provided to a patient (ordelivered to a patient’s home) that aremeant to be used at home rather than inthe physician’s office. The commentersobserved that such a rule does not makesense in the case of outpatientprescription drugs, which arecommonly dispensed to patients forlater consumption at home.

Response: In general, we believe theCongress intended to exclude from thereach of the statute only items andservices provided (or used, as the casemay be) in the physician’s office.However, we believe that our definitionof those circumstances can be simplifiedto accommodate the provision ofoutpatient prescription drugs, as well asambulatory infusion pumps that areDME. Accordingly, we are revising therule to provide that services will beconsidered ‘‘furnished,’’ for purposes ofthe exception, in the location where theservice is actually performed upon apatient or where an item is dispensed toa patient in a manner that is sufficientto meet the Medicare billing andcoverage rules.

Comment: One commenter suggestedthat we should make clear that so longas the in-office ancillary servicesexception is met, discounts on drugs donot need to be passed on to Medicare.

Response: Nothing in section 1877 ofthe Act or these regulations is intendedto require physicians to pass discountson to the Medicare program. Whether adiscount must be passed on to theprogram by physicians or othersremains the subject of other statutoryand regulatory provisions.

Comment: Commenters requestedclarification that the furnishing ofchemotherapy drugs can meet the in-office ancillary services exception.Commenters also sought clarificationwith respect to chemotherapy-relatedlaboratory tests, x-rays, and prescriptiondrugs that are secondary to theprovision of chemotherapy.

Response: Chemotherapy infusiondrugs and ancillary laboratory tests, x-rays, and prescription drugs are DHS forpurposes of section 1877 of the Act thatmay be provided by physicians as in-office ancillary services if all of theconditions of the exception are satisfied.In light of the changes we are making inPhase I of this rulemaking—includingrevisions to the definition of ‘‘furnish’’and to the supervision requirement in§ 411.355(b)(5)—we believe theexception is sufficiently broad toaccommodate virtually all existingarrangements for the provision ofchemotherapy drugs and relatedservices to patients in physicians’offices. Under Phase I of thisrulemaking, referrals for chemotherapyinfusion drugs may be protected by thein-office ancillary services exception ifthey are administered or dispensed topatients in the referring physician’soffice (or through the referringphysician’s group practice) inaccordance with the supervisionrequirements already imposed by theMedicare program. We anticipate noappreciable disruption of chemotherapyservices to Medicare or other patients asa result of Phase I of this rulemaking.

Comment: A commenter soughtclarification whether the furnishing ofallergen treatment sets would beprotected under the in-office ancillaryservices exception.

Response: The provision of allergentreatment sets is protected by the in-office ancillary services exception solong as all of the conditions of theexception are satisfied. We believe thatthe changes in Phase I of thisrulemaking to the definition of‘‘furnish’’ in § 411.355(b)(5) and thesupervision requirements make clearthat allergen treatment sets may befurnished to patients under the in-officeancillary services exception.

Comment: A number of commentersquestioned the scope of our proposedextension of the in-office ancillaryservices exception to include the



furnishing of crutches (DME beingotherwise excluded by statute). Theproposed extension would permitphysicians to provide crutches if theymake no profit on them and otherwisemeet certain criteria. We proposed thatthe physician could bill only for the costof acquiring and supplying the crutches.Commenters were confused as to howthese costs would be determined andfound the proposal to be unnecessarilyrestrictive. In addition, commenterswondered why crutches were included,but not canes, walkers, collars, splints,and the like. Other commentersvariously sought inclusion of otherDME, including DME forrheumatological conditions, orthopedicDME, and blood glucose monitors.Commenters suggested variousmeasures for determining when DMEshould be permitted as an in-officeancillary service. One commenterproposed that whatever test we adoptshould take into account the following:(1) the intended use of the item (that is,whether the item is an integral elementin the customary continuum of patientcare); (2) the cost of the item (that is, fairmarket value or a dollar cap); (3) thelife-expectancy of the item (that is,whether items are limited to one-timeprescriptions for 5 or 6 weeks); and (4)physician instruction (that is, whethersome physician instruction in the use ofthe item is required). Other commentersproposed dollar caps as a means ofexcluding from the exception physician-directed sales of expensive wheelchairs,beds, and other pieces of equipment onwhich markups are significant.

Response: In the interest of patientconvenience, we are using ourregulatory authority under section1877(b)(4) of the Act to expand the in-office ancillary services exception toinclude certain DME, includingcrutches, canes, walkers, and foldingwheelchairs, that meet conditions setforth in the regulation (in our January1998 proposed rule, we proposed amore limited exception for crutchesonly). (Braces and collars are classifiedas orthotics and already potentiallyqualify under the statute for the in-officeancillary services exception; splints arecovered under section 1861(s)(5) of theAct and are not included in anycategory of DHS.) In doing so, we areconcerned primarily with enabling thepatient to depart from the physician’soffice. The narrow scope of thisexpansion and the fact that the need forambulation equipment is objectivelyverifiable mitigate the potential foroverutilization.

For somewhat different reasons, weare also creating an exception to permitblood 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’ssupply) to be provided under the in-office ancillary services exception(under the authority granted in section1877(b)(4) of the Act). In light of section4105 of the BBA 1997, which added aMedicare benefit for diabetes self-management training services, we donot believe that the Congress intendedthe physician self-referral law tointerfere with a physician’s efforts toprovide blood glucose monitors topatients. Therefore, the in-officeancillary services exception may beused by a physician or group practice tofurnish a blood glucose monitor and astarter set of strips and lancets if thephysician or group furnishes outpatientdiabetes self-management training topatients for whom the blood glucosemonitors are furnished.

While commenters sought theinclusion in this exception of variousother items of DME, we decline toextend the in-office ancillary servicesexception further. To do so would, inessence, vitiate the congressionaldetermination to exclude DME from thein-office ancillary services exception.We do not find—and we believe that theCongress did not find—that the in-officefurnishing of other DME would pose norisk of fraud or abuse, as required undersection 1877(b)(4) of the Act.

Having considered the varioussuggestions made by the commenters,we are adopting the followingconditions for DME provided as an in-office ancillary service (these conditionsbeing in addition to all other conditionsof the exception):

• The item is one that a patientrequires for the purposes of ambulating,uses in order to depart from thephysician’s office, or is a blood glucosemonitor (including one starter set of teststrips and lancets).

• The item is furnished in a buildingthat meets the ‘‘same building’’requirements in the in-office ancillaryservices exception as part of thetreatment for the specific condition forwhich the physician-patient encounteroccurred.

• The item is furnished personally bythe physician who ordered the DME, byanother physician in the group practice,or by an employee of the physician orthe group practice.

• A physician or group practice thatfurnishes the DME meets all DMEsupplier standards located in paragraph(c) of § 424.57 (Special payment rulesfor items furnished by DMEPOSsuppliers and issuance of DMEPOSsupplier billing numbers).

• The arrangement does not violatethe anti-kickback statute or any law orregulation governing billing and claimssubmission. (This condition is necessaryto meet the ‘‘no risk of fraud or abuse’’standard in 1877(b)(4) of the Act.)

• All other requirements of the in-office ancillary services exception aresatisfied.

We agree with the commenters thatour proposal with respect to notmarking up costs was confusing andunnecessarily restrictive, and we are notadopting it. While we find thecommenters’ suggestions for dollar capson DME items attractive, we haveconcluded that it is not feasible todevise dollar caps that wouldappropriately include low-value DMEand exclude high-value DME in all cases(for example, a $150 limit might be highfor some types of DME and low forothers). Upon further reflection, webelieve the current DMERCreimbursement provisions providesufficient cost containment controls,with respect to these items of DME weare including in the exception. Webelieve the modifications to the DMEexclusion that we are making willpromote quality of patient care withoutany significant increased risk of patientor program abuse.

Finally, we note with respect to DMEfurnished in physicians’ offices thatthese arrangements remain subject toour conditions of participation for DMEsuppliers and other applicable paymentand coverage rules.

Comment: A commenter asked thatthe final rule address whether the use ofconsignment closets as a means ofproviding DME in a physician’s officeimplicates section 1877 of the Act. Forexample, a surgeon enters into anarrangement for a DME supplier to rentspace (for example, a closet) in thesurgeon’s office at fair market valueunder a lease that meets the rentalexception. The technician whomeasures for braces or DME supplies isa shared employee of the surgeon’spractice and the supplier, with thesupplier paying for the time thetechnician spends measuring the bracesand supplying DME. The billing is doneby the supplier. The commenterasserted that in this example, there is nofinancial relationship because thesurgeon does not bill Medicare.

Response: If the lease fits squarely inthe rental exception and thearrangement for the personal services ofthe technician fits squarely in thepersonal service arrangementsexception, the ‘‘consignment closet’’arrangement described in the precedingcomment may not create a prohibitedfinancial relationship under section



1877 of the Act. We wish to clarify thatthis result does not depend on whetherthe physician bills Medicare. To thecontrary, the essential prohibition undersection 1877 of the Act is on physiciansmaking referrals to entities with whichthey have prohibited financialrelationships and on those entitiesbilling Medicare. Nothing in this rule isintended to, or should be interpreted as,legitimizing consignment closetarrangements. These arrangements raisesignificant questions under other legalauthorities, including the anti-kickbackstatute and our supplier standards.Physicians and suppliers who areconsidering ‘‘consignment closet’’arrangements would be well-advised toread the OIG’s Special Fraud Alert onthe Rental of Physician Office Space byPersons or Entities to Which They Referpublished in the Federal Register onFebruary 24, 2000 (65 FR 9274).

Comment: One commenter expressedconcern about the interaction of section1877 of the Act and the proposed suretybond rule that would exempt physiciansfrom the surety bond requirement ifthey provide DME incident to patientcare. Specifically, the commenter askedwhether we believe that physicians areallowed to disburse DME, orthotics, andprosthetics incident to patient carewithout violating the provisions ofsection 1877 of the Act and whetherthese provisions are applicable if aphysician has a surety bond.

Response: Section 1877 requirementsunder the exception exist wholly apartfrom other requirements of law that mayapply. In addition, the commenter ismistaken in asserting that we proposedto exempt physicians who furnish DMEin their offices from the proposed suretybond requirements that would apply toall suppliers. We assume that thecommenter is referring to our proposedrule concerning supplier standards thatwas published on January 20, 1998 (63FR 2926). Such an exception is notincluded in the proposed rule.

Comment: Oncologists complainedthat the proposed regulations—whichinterpreted the in-office ancillaryservices exception as applying only toinfusion pumps that are implanted in aphysician’s office—would prohibit themfrom furnishing external ambulatoryinfusion pumps to their patients,contravening clear congressional intentand causing substantial inconvenienceto patients. External ambulatoryinfusion pumps are used to administerchemotherapy agents and painmedication to cancer patients. Thepumps are typically filled in theoncologist’s office, and the drug flow isordinarily initiated before the patientleaves the office. The statutory in-office

ancillary services exception excludesDME (which typically is used bypatients in their homes), but includes‘‘infusion pumps.’’ Thus, thecommenters asserted that the plainlanguage of the exception indicates clearcongressional intent to authorizephysicians to furnish a certain categoryof DME—infusion pumps—to patients,even though those pumps will be usedat home.

Response: We agree. The statute usesthe general term ‘‘infusion pumps.’’ Weare revising the regulation in§ 411.355(b) to make clear that the in-office ancillary services exceptionprotects external ambulatory infusionpumps (other than pumps that are PENequipment or supplies) that are filled orserviced in the physician’s office, eventhough the patient uses them at home.However, the in-office ancillary servicesexception does not protect an infusionpump that is used to deliver PENbecause that pump is not classified asDME, but is considered PEN. PEN iscategorically excluded from theexception under section 1877(b)(2) ofthe Act. The statutory languageaddressing infusion pumps in the in-office ancillary services exceptionapplies only to DME.

Comment: Two commenters requestedclarification as to the application of thein-office ancillary services exception tohome care physicians who primarilytreat patients in their homes. Thesecommenters asserted that home carephysicians play an important role in thedelivery of cost-effective, quality care topatients and provide services that, insome cases, preclude the need for moreexpensive hospitalizations. Thesecommenters believe that section 1877 ofthe Act should not apply to home visits.In the alternative, these commentersrequested clarification of the followingissues:

• Are DHS performed in a patient’shome concurrently with theperformance of a physician serviceincluded in the in-office ancillaryservices exception (for example, aphysician uses a hand-held portablelaboratory during a physician visit inthe home)? Can a technicianaccompanying the physician performthe DHS during the home visit?

• What is the application of section1877 of the Act to group practices thatown home health agencies that in turnprovide DHS to group patients?

• Are referrals from medical directorsof home health agencies protected bythe employee or another exception?

Response: We find nothing in thestatute that excludes referrals for DHSby home care physicians from the reachof the statute. To the contrary, the

Congress expressly included homehealth services as a designated healthservice. That said, we generally agreewith the commenters that the provisionof DHS in a patient’s home should beprotected by the in-office ancillaryservices exception, provided that all ofthe conditions of the exception aresatisfied. However, in many cases,services provided by home carephysicians will not fit neatly into the in-office ancillary services exception. Forexample, under the ‘‘same building’’requirements, we are requiring thatphysicians provide substantialphysician services unrelated to DHS inthe building and that the servicesprovided there be the full range of thephysicians’ services. We believe that ahome care physician meets these ‘‘samebuilding’’ tests if his or her principalmedical practice consists of treatingpatients in their private homes (forpurposes of determining whether aphysician is principally a home carephysician, private homes do not includenursing, long term care, or otherfacilities), and the physician (or a staffmember accompanying him or her)provides a designated health service ina private home contemporaneously witha physician service (provided by thereferring physician) that is not adesignated health service and the otherexception requirements are met. (DHSprovided in facilities, such as nursinghomes, by home care or otherphysicians may qualify under the in-office ancillary services exception if allconditions of the exception aresatisfied.) We have concluded that itmay be appropriate to developadditional rules for home carephysicians under the in-office ancillaryservices exception. We are expresslysoliciting comments on this issue andwill consider it further in Phase II ofthis rulemaking.

As to the commenter’s secondquestion, section 1877 of the Act appliesto a group practice’s ownership of ahome health agency in the same mannerit applies to the ownership by a grouppractice of any DHS entity. Referrals tothe entity by the group practice or bymembers of the group must qualifyunder an ownership exception, such asthe in-office ancillary servicesexception. In general, we do not believethat the furnishing of most home healthservices will meet the requirements ofthe in-office ancillary servicesexception. Unless a physician in thegroup personally conducts the homevisit and provides a physician serviceunrelated to the furnishing of DHS, the‘‘same building’’ requirements will notbe satisfied (we see no plausible way for



home health services to qualify underthe ‘‘centralized building’’ option undersection 1877(b)(2)(A)(ii)(II) of the Act).In some cases, the ‘‘rural provider’’exception may apply (that exceptionwill be discussed in the Phase IIrulemaking).

Finally, with respect to referrals frommedical directors of home healthagencies, these referrals may beprotected by the employee exception orthe personal service arrangementsexception, depending on the facts andcircumstances of the medical director’srelationship with the home healthagency. However, if the medical directoris an owner of a group practice thatowns the home health agency, anownership exception would still need toapply.

Comment: A commenter soughtclarification as to whether a referral toa physician spouse in another grouppractice, who subsequently orders adesignated health service for thereferred patient, could come within thein-office ancillary services exception.The commenter observed that there aremany two-physician marriages in thehealth care industry and that manyspouses engage in different specialitiesand practice in different grouppractices. The commenter argued thatthe referrals between physician spousesto each other’s group practices shouldnot constitute prohibited referrals, solong as either the referring physician orthe physician spouse accepting thereferral complies with an exception. Inour January 1998 proposed rule, we tookthe position that a physician in onegroup practice will be prohibited fromreferring to his or her physician spousein another group practice because thereferring physician cannot meet the in-office ancillary services exception. Thecommenter found this interpretationoverly restrictive and narrow. In thecommenter’s view, if the physicianreceiving the referral meets the in-officeancillary services exception, he or sheshould be able to accept the referral,because the accepting spouse and notthe referring spouse is ordering thedesignated health service.

Response: On reconsideration, wegenerally agree with the commenter,with one important distinction. Webelieve that the referral to a spouseshould be allowed, if the referral is fora physician service unrelated to thefurnishing of a designated health service(that is, a designated health service isnot the reason for the referral) and anysubsequent DHS referrals by the spousefit within the in-office ancillary servicesexception with respect to the spousereceiving the referral. We recognize thatthere may be some circumstances,

particularly in underserved areas, wherea spouse may be the only qualifiedprovider of a particular DHS. We areconsidering whether a limitedadditional exception is warranted andwill address the issue further in PhaseII of this rulemaking. We invitecomments on this issue.

2. Direct Supervision

The Existing Law: Section 1877(b)(2)of the Act provides an exception for in-office ancillary services. To qualify asin-office ancillary services, the servicesmust, among other things, be furnishedpersonally by a referring physician oranother physician member in the samegroup practice, or be furnished byindividuals who are ‘‘directlysupervised’’ by the referring physicianor another physician in the grouppractice. The August 1995 final rulecovering referrals for clinical laboratoryservices defined ‘‘direct supervision’’ in§ 411.351 as supervision by a physicianwho is present in the office suite andimmediately available to provideassistance and direction throughout thetime services are being performed.

The Proposed Rule: The January 1998proposed rule retained this definition,with several clarifications and changes.In the preamble to the January 1998proposed regulation, we expressed ourview that the Congress intended the in-office ancillary services exception toapply to services that are closelyattached to the activities of the referringphysician. Consistent with thisinterpretation, we used the definition of‘‘direct supervision’’ that appears insection 2050, ‘‘Services and Supplies,’’of the Medicare Carriers Manual (HCFAPub. 14–3), Part 3—Claims Process,which describes services that areincident to a physician’s professionalservices under section 1861(s)(2)(A) ofthe Act. Under this rule, supervisionmust be provided by a physician who ispresent in the office suite in which theservices are being furnished, throughoutthe time they are being furnished, andwho is immediately available to provideassistance and direction. The definitionin the proposed rule also clarified themeaning of the term ‘‘present in theoffice suite’’ to mean that the physicianis actually physically present. However,we would still have considered thephysician ‘‘present’’ during briefunexpected absences, as well as duringroutine absences of a short duration(such as during a lunch break), providedthe absences occur during time periodsin which the physician is otherwisescheduled and ordinarily expected to bepresent and the absences do not conflictwith any other requirements in the

Medicare program for a particular levelof physician supervision.

The Final Rule: Our interpretation ofthe ‘‘direct supervision’’ standardproduced the largest number of publiccomments about the in-office ancillaryservices exception, virtually allsuggesting that our proposal would beoverly burdensome, result in enigmatictechnical rules, and require wastefuland inefficient practices.

We have revisited the directsupervision requirement and are nowinterpreting ‘‘directly supervised’’ in thestatute to mean that the supervisionmeets the supervision requirementsunder applicable Medicare andMedicaid payment or coverage rules forthe specific services at issue. Uponfurther review and consideration, weconcluded that the Congress did not usethe phrase ‘‘directly supervised’’ in anytechnical sense. Rather, the Congresssought to establish a nexus between thereferring physician and the individualperforming the ancillary services inorder to limit the exception to servicesthat are truly ‘‘ancillary’’ to the referringphysician’s medical practice. Webelieve that the Congress did not intendsection 1877 of the Act to supersede orreplicate existing statutory andregulatory structures that addresssupervision of services from theperspective of quality of care or patientsafety. This interpretation is consistentwith the often cited legislative historyfor section 1877 of the Act indicatingthat the Congress did not intend torequire physicians to be present at alltimes that ancillary services were beingperformed. (See Conference Report forOBRA 1993, H. Rep. No. 213, 103dCongress 810 (1993).) Instead, webelieve a sensible approach is to deferto existing Medicare and Medicaidsupervision requirements. (Those rulesare not addressed in Phase I of thisrulemaking.)

In our January 1998 proposed rulewith respect to the group practicedefinition, we proposed eliminatingindependent contractors as members ofthe group practice. This created theprospect that independent contractorswould not be able to provide thesupervision required under the in-officeancillary services exception. The statuteprovides that physicians ‘‘in the grouppractice’’ may supervise the furnishingof ancillary services to patients of areferring physician who is a member ofthe group practice. Under Phase I of thisrulemaking, physicians ‘‘in the grouppractice’’ include owners of the grouppractice, employees of the grouppractice, and independent contractorswho are ‘‘in the group practice.’’Owners and employees may also be



members of the group; independentcontractors may not. We will consideran independent contractor physician tobe ‘‘in the group practice’’ if he or shehas a contractual arrangement toprovide services to the group’s patientsin the group practice’s facilities and theindependent contractor’s arrangementwith the group complies with thereassignment rules in § 424.80(b)(3) ofthese regulations and in section 3060.3,‘‘Payment to Health Care DeliverySystem,’’ of the Medicare CarriersManual (HCFA Pub. 14–3), Part 3—Claims Process. Independent contractorswho qualify as physicians ‘‘in the grouppractice’’ may receive overall profitshares and productivity bonusesdescribed in section 1877(h)(4)(B)(i) ofthe Act, as implemented by theseregulations, and may provide thesupervision required under the in-officeancillary services exception.

Comment: Many commenters raisedconcerns about the level of supervisionrequired under the in-office ancillaryservices exception. Many commentersobjected to our proposed interpretationof the direct supervision requirement,which would have adopted thesupervision requirement applicable to‘‘incident to’’ services in section 2050,‘‘Services and Supplies,’’ of theMedicare Carriers Manual (HCFA Pub.14–3), Part 3—Claims Process, includinga ‘‘present in the office suite’’requirement, with an exception for briefabsences by the physician. Thesecommenters variously found the‘‘presence’’ requirement overlyburdensome, impractical, confusing,and unclear. Commenters believe that ageneral requirement of a physician’sphysical presence for all ancillaryservices would create unnecessaryinefficiencies in the delivery of healthcare services, drive up costs, andinconvenience patients. For example,some commenters noted that tests areoften scheduled in the mornings whenphysicians are making rounds orattending hospital meetings, with thephysicians interpreting the tests whenthey arrive later at the office. Somecommenters observed that they coulddiscern no obvious connection betweendirect supervision and curtailing fraudand abuse. Others noted that a strictdirect supervision requirement does notguarantee that DHS are medicallyappropriate and are not simply beingperformed for financial gain.

Commenters suggested variousalternative standards, including‘‘appropriate supervision,’’‘‘professional responsibility,’’ ‘‘generalsupervision,’’ and ‘‘employee status.’’The vast majority of commenters,however, urged that the in-office

ancillary services exception ‘‘directsupervision’’ requirement be interpretedto comport with the applicablesupervision requirements under ourother payment and coverage rules.These commenters stressed that theserules adequately take into accountquality concerns and the health andsafety of patients and that there is nojustification for imposing an additionallayer of supervision requirements.

Response: Upon further review andconsideration of the statute, thelegislative history, and the publiccomments, we have concluded that theCongress did not use the phrase‘‘directly supervised’’ in any technicalsense in the statute. Rather, we believethe Congress sought to establish a nexusbetween the referring physician and theindividual performing the ancillaryservices in order to limit the exceptionto services that are truly ‘‘ancillary’’ tothe referring physician’s medicalpractice. We believe that the Congressdid not intend section 1877 of the Actto supersede or replicate existingstatutory and regulatory structures thataddress supervision of services from theperspective of quality of care or patientsafety. This interpretation is consistentwith the often cited legislative historyindicating that the Congress did notintend in the context of section 1877 ofthe Act to require physicians to bepresent at all times that ancillaryservices were being performed (‘‘Theconferees intend that the requirementfor direct supervision by a physicianwould be met if the lab is in thephysician’s office which is personallysupervised by a lab director, or aphysician, even if the physician is notalways on site’’ (H. Rep. No. 213, 103dCong. 810 (1993)). We are persuadedthat a more sensible approach is to deferto existing Medicare and Medicaidsupervision requirements. (Those rulesare not addressed in Phase I of thisrulemaking.) Thus, the in-officeancillary services exception supervisionrequirements will be satisfied if thelevel of supervision provided meets allapplicable Medicare or Medicaidpayment and coverage requirements.

Comment: One commenter viewed thestrict ‘‘direct supervision’’ standardestablished in the August 1995 final ruleas an important check on inappropriatereferrals and objected to anyliberalization of the requirement,arguing that it would allow theconnection between a physician’sactivities and DHS to ‘‘grow too thin.’’The commenter believes it isappropriate for us to impose higherstandards of care to protect patients whoare referred for DHS, because theseservices have been determined to

present a particularly high risk ofinappropriate referrals. The commenterfurther noted that as the health andsafety rationale for supervision declines(supervision being less necessary forcertain low-risk services), the risk ofunnecessary referrals andoverutilization increases. Thecommenter recommended that we retainthe ‘‘incident to’’ direct supervisionstandard. In the alternative, thecommenter proposed a ‘‘sphere ofservice’’ test under which a physicianwould be allowed to refer a patient forservices only if that physician, and notanother licensed practitioner, normallywould perform the services. Accordingto the commenter, this approach wouldeliminate physician incentives toestablish ‘‘backroom’’ practices toprovide services that could be providedmore efficiently elsewhere.

Response: We share this commenter’sconcerns about inappropriate financialincentives driving the provision of DHS.We are concerned that heighteneddownward pressure on physicianincomes will generate increased upwardpressure to expand in-office ancillaryservices as a means of offsetting incomelosses. However, we believe theCongress clearly articulated a policydetermination to allow in-officeancillary services that meet certainstatutory criteria. While the stricter‘‘incident to’’ supervision standardmight serve to reduce the risk ofoverutilization somewhat, on balance,we believe that using section 1877 of theAct to superimpose a separatesupervision requirement on existingregulatory structures governingappropriate levels of supervision wouldbe overly burdensome, inefficient, andinconsistent with the overall design ofthe statute. We note, however, thatphysicians wishing to bill DHS‘‘incident to’’ (and group practicephysicians wishing to obtainproductivity bonuses for servicesincident to their personally performedphysician services) must comply withthe ‘‘incident to’’ supervisionrequirements, including the ‘‘presentand available’’ requirement and theemployee requirement, as set forth insection 2050, ‘‘Services and Supplies,’’of the Medicare Carriers Manual (HCFAPub. 14–3), Part 3—Claims Process.

Comment: One commenter askedwhether technicians must be directlysupervised if a group practice providestechnician services to a hospital. If so,the commenter requested that we clarifywhether the group practice must followself-referral supervision standards orhospital supervision standards.

Response: If a hospital is billing forthe services, as this commenter implied,



the in-office ancillary services exceptiondoes not apply (along with itssupervision requirement). Any hospitalstandards would always apply, sinceany requirement for supervision undersection 1877 of the Act is separate anddistinct from other supervisionrequirements under the Medicare andMedicaid statute and regulations.

Comment: While many commentersapproved of our proposal to excludeindependent contractors as members ofa group practice for purposes ofcomplying with the definitional tests fora group practice (making it easier formany groups, especially smaller groups,to qualify as a group practice forpurposes of section 1877 of the Act),many commenters also urged thatindependent contractors be included asmembers of a group practice forpurposes of the direct supervisionrequirement of the in-office ancillaryservices exception. Many commentersexpressed concern that our bar on directsupervision by independent contractorswould undercut the ability of grouppractices to deliver necessary healthcare services in situations in whichemployment of the physician is notpossible or desirable. To support theirclaim that the statute does not requirethat the direct supervision be providedby a ‘‘member’’ of the group,commenters observed that section1877(b)(2)(A)(i) of the Act only requiressupervision ‘‘by the [referring]physician or by another physician in thegroup.’’ One commenter noted that thislanguage is consistent with section3060.3, ‘‘Payment to the Health CareDelivery System,’’ of the MedicareCarriers Manual (HCFA Pub. 14–3), Part3—Claims Process, which treatsindependent contractors as ‘‘in thegroup’’ for reassignment purposes.Another commenter suggested that anindependent contractor could properlybe considered ‘‘in the group’’ if thephysician provides services to the grouppractice’s patients in the grouppractice’s facility under a contract withthe group, and the services are billed bythe group.

Response: Having reviewed thecomments and reconsidered thestatutory language, we are persuadedthat independent contractors may bephysicians ‘‘in the group’’ for purposesof the in-office ancillary servicesexception. We are considering anindependent contractor physician to be‘‘in the group practice’’ if (1) he or shehas a contractual arrangement toprovide services to the group’s patientsin the group practice’s facilities, (2) thecontract contains compensation termsthat are the same as those that apply togroup members under section

1877(h)(4)(iv) of the Act or the contractfits in the personal services exception,and (3) the contract complies with thereassignment rules at § 424.80(b)(3) ofthese regulations and in section 3060.3,‘‘Payment to the Health Care DeliverySystem,’’ of the Medicare CarriersManual (HCFA Pub. 14–3), Part 3—Claims Process, so that his or herservices are billed by the group practice.We are codifying this new test in§ 411.351 of the regulations. This latterrequirement presents a technicalproblem under the plain language of thestatute, which we address as follows.The billing requirements under section1877(b)(2)(B) of the Act do not providefor billing by the group practice whena supervising physician is ‘‘a physicianin the group practice,’’ rather than amember of the group. Given thestatutory structure and language,particularly the language of the directsupervision requirement under section1877(b)(2)(A)(i)of the Act, we areinterpreting the billing requirements toextend to billing by the group practicewhen the supervising physician is ‘‘inthe group practice’’ in order toeffectuate the direct supervisionrequirement. Independent contractorswho qualify as ‘‘physicians in the grouppractice’’ may receive overall profitshares and productivity bonusesdescribed in section 1877(h)(4)(B)(i) ofthe Act, as implemented by theseregulations. As discussed in sectionVI.C.3 of this preamble, independentcontractors are not ‘‘members’’ of thegroup.

Comment: Several commenters soughtclarification with respect to theapplication of the in-office ancillaryservices exception to referrals for DHSfrom an independent contractor to thegroup practice with which he or shecontracts (for example, referrals from anindependent contractor to the group’sin-office laboratory).

Response: Independent contractorphysicians will have compensationrelationships with the group practiceswith which they contract. In order foran independent contractor to refer DHSto the group practice, an exception mustapply. Possible exceptions, dependingon the circumstances, include the in-office ancillary services exception forindependent contractors who are‘‘physicians in the group’’, thephysicians’’ services exception, thepersonal service arrangementsexception, or the risk-sharing exceptionfor services provided to certain managedcare enrollees. We note that under thein-office ancillary services exception,the furnishing of DHS would have totake place in a ‘‘same building’’ locationunder section 1877(b)(2)(A)(ii)(I) of the

Act, as the ‘‘centralized building’’provision (section 1877(b)(2)(A)(ii)(II) ofthe Act) only applies to referringphysicians who are group members.

Comment: Several practitioners ofultrasonography commented that adirect supervision requirement thatmandates physician presence for in-office ancillaries unfairly benefitsradiologists, who are generally availableon-site because they do not have‘‘patients’’ to see or otherresponsibilities, while disadvantagingvascular laboratories that operatewithout physicians on-site. Thecommenters suggested that the rulerequire that ultrasound examinationsand interpretations be performed inaccordance with standards set byindependent professional associations.However, another commenter—radiologist—urged us to retain the directsupervision requirement in the interestof patient health and safety.

Response: As noted above, we aremodifying the direct supervisionrequirement under the in-officeancillary services exception to apply therequisite supervision requirementsunder Medicare and Medicaid paymentand coverage rules.

3. The Building RequirementsThe Existing Law: Under section

1877(b)(2)(A)(ii) of the Act, in-officeancillary services must be furnished ina building in which the referringphysician, or another physician who isa member of the same group practice,furnishes physician services unrelatedto the furnishing of DHS. Alternatively,in the case of a referring physician whois a member of a group practice, the in-office ancillary services can befurnished in another building that isused by the group practice for theprovision of some or all of the group’sclinical laboratory services, or for thecentralized provision of the group’sDHS (other than clinical laboratoryservices). (The existing regulationsaddress the same and other buildingrequirements only with respect toclinical laboratory services.)

The Proposed Rule: In our January1998 proposed rule, we proposeddefining the ‘‘same building’’ in§ 411.355(b)(2)(i) as the same physicalstructure, with one address, and notmultiple structures connected bytunnels or walkways.

The Final Rule: The buildingrequirements are designed to ensure thatthe DHS qualifying for the exception aretruly ‘‘in-office’’ (that is, part of thephysician’s routine medical officepractice) and not provided as part of aseparate business enterprise. Thelocation requirements do not pertain to



the furnishing of DHS that are notpayable by Medicare or Medicaid; theseservices may be furnished anywhere,subject to any restrictions in otherapplicable Federal, State, or local laws.

In general, the structure of thestatutory language suggests that theCongress had two main objectives:permitting the provision of in-officeancillary services for the convenience ofpatients during their patient visits and,in the group practice context, permittingthe provision of in-office ancillaryservices in a dedicated building used forthese services (for example, a centralclinical laboratory). By contrast, webelieve the Congress did not intend toprotect part-time rentals of ancillaryservices facilities under this exception.

Upon further consideration, webelieve that the Congress did not intendthe application of the in-office ancillaryservices exception to turn on thenuances of architectural design. Thus,for purposes of Phase I of thisrulemaking, a ‘‘building’’ is defined asa structure with, or combination ofstructures that share, a single streetaddress as assigned by the U.S. PostalService. For purposes of this rule, the‘‘same building’’ does not includeexterior spaces, such as courtyards,lawns, driveways, or parking lots, orinterior parking garages. The buildingcould include a SNF or other facility ora patient’s home, provided all otherconditions of the exception are satisfied.A mobile van or trailer is not a buildingor a part of a building.

The statute implements congressionalintent by offering two location options:the ‘‘same building’’ option, available tosolo practitioners and group practices,and the ‘‘centralized building’’ option,available only to groups. (See section1877(b)(2)(A)(ii)(I) and (b)(2)(A)(ii)(II) ofthe Act.)

‘‘Same Building’’Under section 1877(b)(2)(A)(ii)(I) of

the Act, services qualify for the in-officeancillary services exception if they arefurnished ‘‘in a building in which thereferring physician (or anotherphysician who is a member of the samegroup practice) furnishes physicianservices unrelated to the furnishing ofdesignated health services.’’ We believethe underlying intent of this provisionis to allow physicians to furnish DHSthat are ancillary to the physician’s coremedical practice in the location wherethe core medical services are routinelydelivered. We believe the Congress didnot intend to permit the wholesaleprovision of DHS in locations in whichphysicians perform only token servicesthat are not related to the furnishing ofDHS (that is, only token physician

services that are not Federal or privatepay DHS). Simply stated, the DHSshould be ancillary to physicianservices that are not DHS, and not theother way around. The exception wasintended as an accommodation tophysicians’ customary practice ofmedicine and not as a loophole forphysicians and group practices tooperate DHS enterprises that areunconnected—or only marginallyconnected—to their medical practices.In addition, the significant easing of the‘‘direct supervision’’ requirementdescribed above necessitates asomewhat stricter interpretation of thelocation standards than we proposed inour January 1998 proposed rule, inorder to ensure an adequate nexusbetween in-office ancillary DHS and thephysician’s core medical practice. Thus,we are making the following changes(except where noted) in the ‘‘samebuilding’’ requirements:

• In our January 1998 proposed rule,we proposed interpreting the rule asallowing any quantity of servicesunrelated to DHS to be furnished in thesame building. We are revising the ruleto require that the referring physician(or another physician who is a memberof the same group practice) must furnishin the same building substantialphysician services unrelated to thefurnishing of Federal or private payDHS. We are defining the phrase‘‘services unrelated to the furnishing ofdesignated health services’’ to meanphysician services that are neitherFederal nor private pay DHS, even if thephysician service leads to the orderingof DHS. In addition, to preclude single-service DHS enterprises from the in-office ancillary services exception, weare requiring that the unrelatedphysician services furnished in thebuilding represent substantially the fullrange of physician services unrelated tothe furnishing of DHS that the physicianroutinely provides (or, in the case of amember of a group practice, the fullrange of physician services that thephysician routinely provides for thegroup practice).

• We are adding a requirement thatthe DHS furnished in the building befurnished to patients whose primarynexus with the referring physician (orhis or her group practice) is the receiptof physician services unrelated to thefurnishing of DHS. Simply stated,obtaining DHS should not be the mainreason the patient has contact with thereferring physician (or his or her grouppractice). Again, this standard willensure that self-referred DHS areancillary and not primary services forthe patients who receive them. Thus, forexample, a physician who provides

physician services and DHS for his orher patients in a nursing home may notalso provide token physician services toother nursing home patients in order toprovide DHS under the in-officeancillary services exception.

• The space in the building in whichthe DHS are provided need not beadjacent to the space in which servicesthat are not DHS are provided (subjectto the dictates of any Medicare orMedicaid payment or coveragesupervision rules).

• Shared facilities in the samebuilding are permitted to the extent theycomply with the supervision, location,and billing requirements of the in-officeancillary services exception; we are not,however, creating a broader shared-facility exception.

• We believe that a home carephysician whose principal medicalpractice consists of treating patients intheir private homes meets the ‘‘samebuilding’’ requirements if the physician(or a staff member accompanying thephysician) provides a designated healthservice contemporaneously with aphysician service (provided by thereferring physician) that is not adesignated health service in thepatient’s private home and the otherexception requirements are met.Because the location requirements of thein-office ancillary services exceptionmay disadvantage home carephysicians, we are considering whetherspecial rules should be developed underthe ‘‘same building’’ requirements forphysicians who primarily practice ashome care physicians. We are solicitingcomments on that issue and intend toaddress it further in Phase II of thisrulemaking.

‘‘Centralized Building’’Under section 1877(b)(2)(A)(ii)(II) of

the Act, in the case of a referringphysician who is a member of a grouppractice, services qualify for the in-office ancillary services exception ifthey are furnished ‘‘in another buildingwhich is used by the group practice* * * for the provision of some or allof the group’s clinical laboratoryservices, or * * * for the centralizedprovision of the group’s designatedhealth services (other than clinicallaboratory services).’’ We believe thatthis statutory provision—which allowsgroup practices to have ‘‘off-site’’ DHSlocations—was intended toaccommodate the concerns of grouppractices with multiple office locationsthat wanted to consolidate DHSoperations for cost containmentpurposes. However, in permitting grouppractices to provide centralized DHS,the Congress did not intend to



eviscerate the ‘‘in-office’’ element of theexception. We are therefore interpretingthe ‘‘centralized building’’ standard asfollows:

• The space (whether an entirebuilding, subpart of a building, ormobile unit) used for the provision ofthe group practice’s clinical laboratoryservices or centralized DHS qualifies forthe exception only if it is usedexclusively by the group, that is, it iswholly owned by the group practice orleased by the group practice on a full-time basis (that is, 24 hours per day, 7days per week). To preclude part-timearrangements in the form of one-dayrentals, we are requiring that thecentralized building be owned or leasedexclusively by the group practice for atleast 6 months. This rule precludesfacilities shared by group practices inoff-site buildings.

• Part-time ‘‘centralized’’ DHSarrangements are precluded. Forexample, a group practice may not renta magnetic resonance imaging (MRI)facility 1 day per week and treat thatfacility as a ‘‘centralized’’ buildingunder section 1877(b)(2)(A)(ii)(II) of theAct.

• Under the authority granted to theSecretary in the unnumbered paragraphthat follows section1877(b)(2)(A)(ii)(II)(bb) of the Act (thatallows the Secretary to determine otherterms and conditions related to section1877(b)(2)(A)(ii)(II)(bb) under which theprovision of DHS does not present a riskof program or patient abuse), we aredetermining that a mobile facility (forexample, an x-ray van) owned and usedexclusively by a group practice (24hours per day, 7 days per week, for atleast six months) will be considered tomeet the ‘‘centralized building’’standard, even though a mobile facilityis not a building.

• Group practices may lease orsublease DHS facility space (includingmobile units) to or from other grouppractices or solo practitioners on a part-time basis, but DHS provided to patientsof part-time lessee or sublessee grouppractices will not fit in the in-officeancillary services exception, unless the‘‘same building’’ requirements are met.

• Referrals for ancillary services fromother physicians or group practices thatare not affiliated with the group practiceproviding the DHS do not implicatesection 1877 of the Act, provided thereare no impermissible financialrelationships between the parties. Areferral for a designated health servicedoes not create a financial relationship.

These building rules are designed togive physicians and group practices ameaningful opportunity to provide bonafide in-office ancillary DHS to their

patients, while preventing grouppractices from using the in-officeancillary services exception to operateenterprises that are functionally nothingmore than self-referred DHS enterprises,providing minimal services that are notDHS so as to comply nominally with theexception and capture DHS profits. Webelieve the Congress did not intend theexception to include these operations.Far from promoting patient convenienceand quality of care, these arrangementspose a significant risk of overutilizationof services and shuttling of patients toDHS locations for the economicbetterment of the physicians, withoutregard to the patient’s best interests.

Comment: Many commenters foundthe proposed regulations andinterpretations of the ‘‘building’’requirements to be confusing, overbroad, potentially contradictory, and, inthe words of one commenter,‘‘metaphysical.’’ With respect to ourproposed ‘‘physical structure’’requirements, many commenters urgedus not to place the agency or physiciansinto surveying real estate to determinewhether a structure is one building.Commenters variously observed thatwhile some walkways or tunnelsbetween commercial medical officebuildings may be sidewalks betweendistinct and separate buildings, otherwalkways or tunnels are part of themodern architecture of these buildingsor are required to comply with zoning,land use, open space, or other real estatelaws or to surmount natural barrierspresent on the site of the building.

There were a number of suggestionsfor revising the requirement. One groupof commenters urged us to adopt amailing address rule stating that abuilding would be considered as onebuilding for all suites or room numberslocated inside that are required by theU.S. Postal Service to use the samestreet address, regardless of suitenumber. Under this rule, suites operatedby the same group practice or solophysician in buildings that use separatestreet addresses would be treated asseparate buildings for the purposes ofthe in-office ancillary servicesexception. Other commenters objectedto a street address test, noting thatphysicians have no control over themanner in which their buildings areassigned street addresses and that theparameters for assigning street addressesmay vary by State and locality. Onecommenter expressed concern aboutbuildings located on corner lots thatmight have two street addresses.

A second approach proposed by onecommenter was to revise the regulationsto allow connected buildings or portionsof buildings that are owned or

controlled by the same group practice.Still other commenters claimed that theemphasis should be on the proximity ofthe supervising physician to the patientduring the performance of DHS. Underthis view, the location requirement ofthe in-office ancillary services exceptionshould focus on whether the physicianis ‘‘immediately available’’ to thesupport personnel and not on anartificially imposed physical designconstraint. Along these lines, severalcommenters proposed that services beconsidered in the ‘‘same building’’ if thephysician is within a certain number ofminutes (for example, 10 minutes) fromthe patient or if the physician is ‘‘closeat hand.’’

Response: We regard the buildingrequirement of the in-office ancillaryservices exception, in combination withthe supervision and billingrequirements, as the Congress’s attemptto circumscribe the exception so that itapplies only to services provided withinthe referring physician’s actual sphereof practice. Without these requirements,physicians could refer to, and profitfrom, almost any entity, with the claimthat somehow the referred services are‘‘in-office’’ services that are beingsupervised from some remote place.

Notwithstanding, we realize that ourproposed definition of a ‘‘building’’—which attempted to define a building inarchitectural terms—could causepractical problems for some physiciansand that a clearer, ‘‘bright line’’ rulewould be preferable. Accordingly,having considered the variousalternatives suggested by thecommenters, we have concluded that forpurposes of Phase I of this rulemaking,we are defining a ‘‘building’’ as astructure with, or combination ofstructures that share, a single streetaddress as assigned by the U.S. PostalService. A building will be consideredas one building for all suites or roomnumbers located inside that are requiredby the U.S. Postal Service to use thesame street address, regardless of thesuite number. Under this rule, suitesused by the same group practice or solophysician in buildings with separatestreet addresses will be treated asseparate buildings for the purposes ofthe in-office ancillary servicesexception. While we recognize that thismailing address rule may result in anoccasional anomaly, we are persuadedthat it creates a ‘‘bright line’’ rule thatwill be easy to apply and will producefair results in the vast majority of cases.Questionable cases may be appropriatecandidates for an advisory opinion.

The space in the building in whichthe DHS are provided need not beadjacent to the space in which services



that are not DHS are provided (subjectto the dictates of any Medicare orMedicaid payment or coveragesupervision rules). Shared facilities inthe same building are permitted undersection 1877 of the Act to the extentthey comply with the supervision,location, and billing requirements of thein-office ancillary services exception;we are not creating a broader sharedfacility exception.

Because of the increased risk of abuse,we do not intend to protect DHSprovided by mobile vans or othermobile facilities under the in-officeancillary services exception, except invery limited circumstances described insection VI.B.3 of this preamble. Thus,we wish to make clear that for purposesof this rule, a ‘‘building’’ does notinclude exterior spaces, such ascourtyards or parking lots, nor does itinclude interior parking garages. Forpurposes of the in-office ancillaryservices exception, a building consistsof usable professional office space andcommon areas such as lobbies,corridors, elevator banks, and restrooms.

In light of the changes we are makingin the supervision standard, we believeit is necessary to revisit the buildingstandards in order to effectuatecongressional intent to limit the scopeof the in-office ancillary servicesexception to services that are trulyancillary to physician services and arenot a primary business of the practice.Thus, we are revising the ‘‘samebuilding’’ requirements to moredefinitively tie in-office ancillaryservices to the referring physician’s coremedical practice. Simply stated, wewant to ensure that services covered bythe exception are, in fact, furnished ‘‘inoffice.’’ Under section1877(b)(2)(A)(ii)(I) of the Act, servicesqualify for the in-office ancillaryservices exception if they are furnished‘‘in a building in which the referringphysician (or another physician who isa member of the same group practice)furnishes physicians’ services unrelatedto the furnishing of designated healthservices.’’ We believe the underlyingintent of this provision is to allowphysicians to furnish DHS that areancillary to the physician’s core medicalpractice in the location where the coremedical practice occurs. We believe theCongress did not intend to permit thewholesale provision of DHS in locationsin which physicians perform only tokenservices unrelated to the furnishing ofDHS. Thus, we are interpreting the‘‘same building’’ requirements asfollows:

• The referring physician (or anotherphysician who is a member of the samegroup practice) must furnish in the same

building substantial physician servicesunrelated to the furnishing of DHS. Inaddition, we are requiring that theunrelated physician services furnishedin the building represent substantiallythe full range of physician servicesunrelated to the furnishing of DHS thatthe physician routinely provides (or, inthe case of a member of a grouppractice, the full range of physicianservices that the physician routinelyprovides for the group practice).Independent contractors are notmembers of a group practice forpurposes of section 1877 of the Act;thus, their activities do not count forpurposes of compliance with thesubstantial physician services test or thefull range of services test under the‘‘same building’’ requirements, unlessthey are the referring physician. (Seediscussion in section VI.B.3 of thispreamble.)

• For purposes of this exception, weare defining the phrase ‘‘servicesunrelated to the furnishing ofdesignated health services’’ to meanphysician services that are neitherFederal nor private pay DHS, even if theservices might generate orders orreferrals of DHS. Thus, for example, acardiologist who examines a patient andthereafter orders a diagnostic radiologytest has performed a service unrelated tothe furnishing of DHS. On the otherhand, a cardiologist who reads theresults of a diagnostic radiology test(such as, for example, a transthoracicechocardiography for congenital cardiacanomalies, CPT code 93303) (whetherfor a Federal or private pay patient) hasperformed a service that is related to thefurnishing of DHS.

• The DHS furnished in the buildingare furnished to patients whose primarynexus with the referring physician (orthe group practice of which the referringphysician is a member) is the receipt ofphysician services unrelated to thefurnishing of DHS. Thus, for example, aphysician who provides physicianservices and DHS for his or her patientsin a nursing home may not also providetoken physician services to othernursing home patients in order toprovide those services under the in-office ancillary services exception.

Comment: One commenter believesthat our proposed interpretation of the‘‘same building’’ requirementscontradicts the purpose of section1877(b)(2)(A)(ii) of the Act. Thecommenter focused on the part of thisprovision that requires that ancillaryservices be furnished in a building ‘‘inwhich the referring physician * * *furnishes physicians’ services unrelatedto the furnishing of designated healthservices.’’ The proposed rule regarded a

physician’s examination and diagnosisof a patient that leads to the physicianrequesting a designated health service asacts that are ‘‘unrelated to the furnishingof designated health services.’’ Thecommenter is concerned that thisinterpretation would allow a physician’soffice to be a single specialty ‘‘mill’’ inwhich the physician could quicklygenerate a large quantity of referrals forprofit. In other words, the exceptioncould apply to a physician who doeslittle more than conduct cursoryevaluations and refer patients for aparticular designated health service (forexample, physical therapy). Thecommenter believes that, instead, thephysician’s office is meant to be alocation in which the physicianprovides bona fide diagnostic andcurative services to individualspresenting a variety of conditions.

Response: We share the commenter’sgeneral concern about inappropriateDHS arrangements, although we believethat the statute does not require us toinclude in the in-office ancillaryservices exception only services referredby physicians who treat a variety ofconditions. The focus of the exception,in our view, is the requirement that theservices be provided or performed inconjunction with a physician’s ownprofessional activities or as adjuncts tophysician services, in a location inwhich the physician (or a member of hisor her group practice) practices. If wewere to limit this exception as thecommenter suggested, some physicianspecialists might be prohibited fromreferring within their own practices. Onthe other hand, we agree that somerestriction in the definition isappropriate to preclude physicians fromproviding virtually nothing more thanreferrals for DHS. Thus, as discussedabove, in Phase I of this rulemaking, weare requiring that the unrelatedphysician services furnished in thebuilding represent substantially the fullrange of physician services unrelated tothe furnishing of DHS that the physicianroutinely provides (or, in the case of amember of a group practice, the fullrange of physician services that thephysician routinely provides for thegroup practice).

Comment: Several commentersbelieve that our proposal to have ourregional carriers determine whether thebuilding requirements are satisfied wasunworkable and impractical and wouldresult in inequitable application of thelaw. Commenters noted that localcarriers are often reluctant to expressopinions on these issues anddisinclined to provide written opinions.If the proposal survives, one commenterurged us, at a minimum, to give carriers



explicit authority and direction to issuethese written opinions.

Response: We have endeavored todevelop regulations that providesufficiently clear rules so that partiescan determine compliance withoutresorting to a regional carrier’sdetermination.

Comment: A commenter expressedconcern about DHS performed byphysicians who travel to see patients.The commenter is a physician in agroup practice of six physiatrists whoperform electromyography and nerveconduction studies in a midwesternState. The group travels to ruralcounties in the State in which itpractices to evaluate patients formusculoskeletal and neurologicproblems. The patients often need nervetesting, and the group’s physiatrists areoften the only health care professionalsin the county able to perform thistesting. The commenter expressedconcern that the regulations wouldprohibit the physiatrists from providingneeded medical assessment and care topatients in these circumstances.

Response: Electromyography andnerve conduction studies are notphysical therapy services under ourdefinition in § 411.351; therefore,referrals for these services do notimplicate section 1877 of the Act.Nonetheless, we wish to address thecommenter’s underlying questionregarding traveling practitioners.Assuming that the physiatrist groupmeets the definition of a group practiceunder section 1877(h)(4) of the Act andthe DHS are performed in the samebuilding where the physiatrist (or amember of the group) also performssubstantial physician services unrelatedto the furnishing of Federal or privatepay DHS, we believe the in-officeancillary services exception may applyin the situation described by thecommenter. As noted elsewhere, we aresoliciting comments on problems facedby physicians who principally practicein patients’ homes and may bedisadvantaged by the locationrequirements of the in-office ancillaryservices exception. We note also that therural provider exception (to beaddressed in Phase II of thisrulemaking) may apply in the situationdescribed by the commenter.

Comment: A commenter asked thatwe make clear that if a solo practitionerprovides a designated health service forhis or her own patients in the solopractitioner’s own office, then the solopractitioner is not in violation of section1877 of the Act.

Response: In the vast majority ofsituations we can envision, if a solopractitioner provides a designated

health service for his or her ownpatients in the solo practitioner’s ownoffice, then the solo practitioner will notviolate section 1877 of the Act. First, weare revising the definition of a ‘‘referral’’for purposes of section 1877 of the Actto exclude DHS personally performedby the referring physician. Second, withrespect to DHS performed by employeesof the solo practitioner (including‘‘incident to’’ services), we believe theCongress intended for the in-officeancillary services exception to apply tosolo practitioners as well as grouppractices. Thus, so long as a solopractitioner’s provision of DHS meetsthe in-office ancillary servicesexception, section 1877 of the Actwould not be violated.

Comment: Commenters were dividedabout the provision of ancillary servicesthrough mobile units. Some believe thatthe use of mobile units and equipmentleads to abusive arrangements. Othercommenters supported the use ofmobile units as cost-efficient means ofsharing expensive DHS resources,particularly in rural areas. Onecommenter noted that State certificate ofnecessity (CON) volume requirementswould be nearly impossible to meetwithout mobile units. The samecommenter argued that sharingequipment is a critical part of costcontainment, because idle equipmentmay lead to overutilization. Onecommenter pointed out that Federalantitrust agencies approve jointownership of high technologyequipment and that Blue Cross/BlueShield has many policy provisionsrequiring joint ownership. Thesecommenters generally advocated thatmobile units be permitted and thatmobile units qualify as a centralizedlocation for the provision of DHS. Acommenter observed that under theJanuary 1998 proposed rule, a grouppractice could move any piece ofequipment from office to office and,applying the ‘‘same building’’requirements, use that piece ofequipment for the provision of DHS. Inlight of this, the commenter questionedwhether it made sense for the grouppractice to be prohibited fromtransporting the piece of equipment ina mobile vehicle to the various practicesites and using the equipment in thevehicle, if the mobile unit wereexclusively used by the group practiceand is not leased to any other healthcare provider. The commenter requestedclarification that in these circumstances,the mobile unit would meet either the‘‘same building’’ requirements or‘‘centralized building’’ standard. Othercommenters urged a broader exception

for mobile units, for example, includingthem if they are parked in the parkinglot of a physician’s medical officebuilding or treating the units themselvesas buildings.

Response: The treatment of mobileunits presents difficult questions undersection 1877 of the Act. On the onehand, we have serious concerns aboutthe potential for fraud and abuse whenservices are provided with mobile units.These are the same concerns we have(and believe the Congress shares) aboutall shared physician-owned orcontrolled ancillary services facilities.We believe that section 1877 of the Actis aimed at arrangements that enablephysicians to profit from referrals tofree-standing, money-making servicesventures that are not central to theirmedical practices. On the other hand,we agree that the statute clearly permitsservices provided by mobile units thatqualify under the ‘‘same building’’requirements. Thus, we agree with thecommenter that a group practice canmove any piece of equipment fromoffice to office and use that ‘‘in-office’’piece of equipment for the provision ofDHS in a location that meets the ‘‘samebuilding’’ requirements. Because we aredefining ‘‘building’’ narrowly to excludeparking lots and interior parkinggarages, services provided in mobilevans or trailers will not comply with the‘‘same building’’ requirements. Webelieve it reasonable to conclude thatthese services are not ‘‘in-office’’ whena van circulates among variousphysicians’ offices and is rented seriallyby each. These arrangements wouldseem to be calculated to enhancephysician revenues, rather than patientconvenience, since patients wouldlikely be encouraged, if not required, toschedule appointments on the day thatthe physician stands to profit from theservices.

That said, we believe that mobileservices can constitute an importantpart of the health care delivery systemfor many patients. Nothing in the statuteor these regulations precludes aphysician or group practice fromarranging for a mobile provider to treatthe physician’s patients at his or heroffice location, so long as the financialarrangement, if any, between thephysician or group practice and theancillary services provider fits in anexception under section 1877 of the Act.In addition, in rural areas, the ‘‘ruralprovider’’ exception (to be addressed inPhase II of this rulemaking) may applyto protect some physician-ownedmobile service providers. Finally, weare persuaded that the risk is low if agroup practice exclusively owns anduses its own mobile van or trailer that



circulates among its group practicelocations. In that limited circumstance,we are treating the mobile unit as akinto a ‘‘centralized’’ building undersection 1877(b)(2)(A)(ii)(II) of the Act.

Comment: Several commenters soughtclarification in the regulations text thatgroup practices can have more than onecentralized location for the provision ofDHS. However, one commenter offereda contrary view. This commenterexpressed the view that the Congressintended that the in-office ancillaryservices exception be interpretednarrowly with respect to centralized,free-standing locations. Specifically, thecommenter cites the Conference Reportfor OBRA 1993 in H. Rep. No. 213, 1stSess., 810 (1993), which states: ‘‘Theconference agreement includes anexception for clinical laboratory servicesprovided by a group practice withmultiple office locations. For all otherDHS the exception for group practicesapplies only if the services are providedin a centralized location’’ (emphasisadded). Based on this language, thecommenter believes that the Congressintended to permit group practices tohave a single centralized location toprovide DHS, but not to permit grouppractices to establish multiple whollyowned locations or franchises for DHS.

Response: Under section1877(b)(2)(A)(ii)(II) of the Act, in thecase of a referring physician who is amember of a group practice, servicesqualify for the in-office ancillaryservices exception if they are furnished‘‘in another building which is used bythe group practice * * * for theprovision of some or all of the group’sclinical laboratory services, or * * * forthe centralized provision of the group’sdesignated health services (other thanclinical laboratory services).’’ Neitherthe statute nor the legislative history forthis provision specifically requires onesingle centralized location for a group toprovide DHS. In addition, we see nocompelling reason to impose such arequirement. We are interpreting theword ‘‘centralized’’ to apply when agroup practice has established aseparate facility for furnishing DHS topatients, without the requirement that itservice all of the practice’s offices orprovide all of the practice’s DHS. We areincorporating this interpretation into theregulations text.

If we were to require only onecentralized facility for DHS, a grouppractice could be in the position ofhaving to send patients from someoffices to inconvenient locations or tohouse a variety of different kinds ofancillary services in one location, suchas combining all physical therapy,laboratory services, and x-rays in one

building. It may be entirely impracticalfor a group practice to house theequipment and staff for such diverseservices in one location. We believe theCongress meant to allow groups to usethis kind of ‘‘central’’ or dedicatedlocation in situations in which thefacility is convenient to some of thedifferent offices, but as a result may notbe physically attached to any one ofthem. Thus, the facility is ‘‘central’’ tomultiple offices, rather than attached tojust one.

Comment: Several commenters soughtclarification that a group practice witha single office location for the deliveryof services that are not DHS can have aseparate, centralized building for thedelivery of DHS.

Response: While we believe that the‘‘centralized building’’ provision—which allows group practices to have‘‘off-site’’ DHS locations—was intendedto accommodate the concerns of grouppractices with multiple office locationsthat wanted to consolidate DHSoperations for cost containmentpurposes, we can discern nothing in thestatute or legislative history that wouldprevent a group practice with only oneoffice location from using a centralizedbuilding for the provision of DHS.

However, we are concerned thatallowing single and multi-office grouppractices to have multiple off-sitelocations for DHS would effectively gutthe in-office ancillary services exceptionwithout additional controls.Accordingly, we are modifying the‘‘centralized building’’ standard toensure that DHS referrals protected bythe in-office ancillary services exceptionare truly part of the group practice’smedical practice. First, we are requiringthat the centralized office space(whether an entire building, subpart ofa building, or mobile unit) used for theprovision of the group practice’s clinicallaboratory services or DHS qualifies forthe exception only if it is usedexclusively by the group practice orgroup practice physicians, that is, it iswholly owned by the group practice(other than a security interest held by anunrelated lender or mortgagor) or isleased or subleased by the grouppractice on a full-time basis (that is, 24hours per day, 7 days per week, for atleast 6 months). This rule precludesgroup practice shared facilities in off-site buildings. Second, part-time‘‘centralized’’ DHS arrangements areprecluded. For example, a grouppractice may not rent an MRI facilityone day per week and treat that facilityas a ‘‘centralized’’ building. Third, amobile facility (for example, an x-rayvan) owned and used exclusively by the

group practice will be considered a‘‘centralized building.’’

Notwithstanding, group practices maylease or sublease DHS facility space(including mobile units) to or from othergroup practices or solo practitioners ona part-time basis. However, DHSprovided to patients of part-time lesseeor sublessee group practices will not fitin the in-office ancillary servicesexception, unless the ‘‘same building’’requirements are met. Finally, referralsfor ancillary services to a group practicefrom physicians not in the grouppractice or other group practices do notimplicate section 1877 of the Act,provided there are no impermissiblefinancial relationships between theparties. A referral for a designatedhealth service does not create a financialrelationship.

Comment: Many commenters urgedus to establish a separate exception forshared facilities. Several commentersargued that shared facilities pose nogreater risk of overutilization than DHSfurnished by solo practices or grouppractices. Moreover, commentersbelieve that shared facilities overseen byreferring physicians are likely to bemore convenient, efficient, andaccountable than other facilities. Anumber of commenters suggested thatfailure to protect shared facilities woulddisrupt existing arrangements that arewidespread in the industry (as onecommenter stated, shared facilities arethe ‘‘reality of what’s going on’’), leavingmany solo practitioners with only twooptions: merge with others to formgroup practices or disband their sharedfacilities. One physician commenterbelieves that if his shared radiology andclinical laboratory facilities are notpermitted, the result would be a shift ofincome to commercial laboratoryventures, pathologists, and radiologists,further ‘‘dichotomizing’’ the incomes ofprimary care physicians and specialists.The physician claimed that his incomewould drop by 25 percent and that hewould have to fire employees anddefault on a lease. Commentersrepresenting the interests of solopractitioners asserted that there is nomeaningful distinction between DHSfacilities shared by solo practitionersand group practice-owned DHSfacilities.

A physician-oriented tradeassociation and other commenters urgedus to add a new exception to allow thelegitimate use of shared office facilitiesby physicians modeled on languageincluded in BBA 1997, but neverenacted. Other commenters offereddifferent formulations, includingallowing shared facilities if they are inthe same building or complex of



buildings as the solo practitioners’ officepractices.

Response: In the August 1995 finalrule and the preamble to the January1998 proposed regulation, we observedthat the in-office ancillary servicesexception would allow certain sharedfacility arrangements among solopractitioners who do not wish tobecome a group practice. For example,we noted that two solo practitionerswho share an office and jointly own alaboratory can continue to refer to thatlaboratory, as long as each physician (1)furnishes physician services unrelatedto the furnishing of DHS in the office(that is, the arrangement meets the‘‘same building’’ requirements), (2)directly supervises the laboratoryservices for his or her own Medicare orMedicaid patients while they are beingfurnished, and (3) bills for the services.We further noted that if only one of thesolo practitioners owns the laboratory ina shared office, the nonowningphysician can refer to the laboratory aslong as he or she is not receivingcompensation from the owner inexchange for referrals. We solicitedcomments on the effects of section 1877of the Act on other shared facilityarrangements.

After careful review of the publiccomments, we are persuaded that ouroriginal approach in the January 1998proposed regulations is most consistentwith the purposes of section 1877 of theAct. Under that approach, sharedfacilities are permitted if they complywith the supervision, location, andbilling requirements of the in-officeancillary services exception. Withrespect to the location of the sharedfacility, Phase I of this rulemakingpermits shared facilities that meet the‘‘same building’’ requirements.(However, shared facilities do notqualify under the ‘‘centralized building’’standard because they will not meet theexclusively used requirement). Thus, asnoted above, two solo practitioners whoshare an office and jointly own alaboratory can continue to refer to thatlaboratory, as long as each physicianfurnishes substantial physician servicesunrelated to the furnishing of DHS inthe building where the laboratory islocated, provides (directly or through anindependent contractor if permittedunder applicable payment and coveragerules) the appropriate level ofsupervision for DHS for his or her ownMedicare or Medicaid patients, and billsfor the services. We believe therelaxation of the direct supervisionrequirement under these regulationswill enable additional shared facilitiesto come within the exception.Additionally, if only one of the solo

practitioners owns the laboratory in ashared facility arrangement, thenonowning physician can refer to thelaboratory as long as he or she is notcompensated by the owner in exchangefor referrals.

We are not persuaded, however, thata separate exception for shared facilitiesis warranted. The BBA 1997 languagethat several commenters profferedwould apply to services that arefurnished—

• Personally by the referringphysician who is a shared facilityphysician or personally by anindividual directly employed or underthe general supervision of such aphysician;

• By a shared facility in a building inwhich the referring physician furnishessubstantially all of the services of thephysician that are unrelated to thefurnishing of shared facility services;

• To a patient of a shared facilityphysician; and

• That are billed by the referringphysician or a group practice of whichthe physician is a member.

Given that we are revising thesupervision standards under the in-office ancillary services exception, webelieve that the in-office ancillaryservices exception will cover most, ifnot all, of the nonabusive shared facilityarrangements that would have beenprotected by this commenter’s proposedadditional exception.

Comment: A commenter questionedthe application of the proposedregulations if physicians who share abuilding, but for legal or personalreasons are not formally organized intoa professional structure (that is, a‘‘single legal entity’’), form a jointventure to establish a clinical laboratoryor other ancillary service provider.

Response: As explained above, solopractitioners may own and operateshared DHS facilities so long as they fitin the in-office ancillary servicesexception. If the practitioners form aseparate joint venture to provide theservices, they may run into problemscomplying with the billing requirementsof the in-office ancillary servicesexception, if the joint venture does thebilling (that is, the joint venture will notqualify as a wholly owned entity and,therefore, will not fit into any of the in-office ancillary billing requirementsunder section 1877(b)(2)(B) of the Act or§ 411.355(b)).

4. The Billing Requirement

The Existing Law: To qualify for thein-office ancillary services exceptionunder the statute, the DHS must bebilled by one of the following:

• The physician performing orsupervising the service;

• The group practice of which suchphysician is a member, under that grouppractice’s billing number; or

• An entity that is wholly owned bythe referring or supervising physician orthe referring or supervising physician’sgroup practice.

The Proposed Rule: In the proposedregulation, we interpreted the billingrequirements to allow a single group tobill under more than one billing numberassigned to the group and to allow anagent to bill for the group in the group’sname, using the group’s number,provided the billing arrangement meetsthe requirements in § 424.80(b)(6). Wefurther interpreted the ‘‘wholly owned’’entity provision to mean that aphysician or group practice canestablish a wholly owned provider ofDHS that can bill Medicare or Medicaidon its own behalf, under its own billingnumber that is not a group billingnumber.

The Final Rule: As with the otherrequirements in this exception, thebilling requirements serve to tie theancillary services for which self-referrals will be permitted to thephysician’s routine medical practice.Phase I of this rulemaking incorporatesthe OBRA 1993 amendment clarifyingthat in-office ancillary services that arebilled by a group practice of which thereferring or supervising physician is amember must be billed under a billingnumber assigned to the group practice.However, group practices may have, andbill under, multiple group practicebilling numbers, subject to anyapplicable Medicare or Medicaidprogram restrictions. Wholly ownedentities that qualify to do the billingunder the rule may use their own billingnumbers and need not use a numberassigned to the physician or grouppractice that owns them. The entitiesmust be wholly owned either by thephysician performing or supervising theservices or by the group practice; jointventures between group practices andindividual group practice physicians orthat include other providers or investorsdo not qualify as wholly owned entities.

Billing may be done by independentthird party billing companies if they areacting as agents of a solo practitioner,group practice, or entity, but the billingmust be done under billing numbersassigned to the solo practitioner, grouppractice, or entity, and the services maynot be separately billed under a billingcompany’s number. The billingarrangements must meet therequirements of § 424.80(b)(6).

The express billing requirements ofsection 1877(b)(2)(B) of the Act contain



no billing method applicable tosupervising independent contractorphysicians who are ‘‘physician in thegroup’’ under section 1877(b)(2)(A)(i) ofthe Act and § 411.351, but who are notmembers of the group under § 411.351(these physicians cannot bill themselvesas the supervising physician becausethey are required to reassign theirbilling rights to the group in order toqualify as ‘‘physicians in the group’’).We believe the Congress intended thebilling requirements of section1877(b)(2)(B) of the Act to correspondwith the supervision requirements ofsection 1877(b)(2)(a)(i) of the Act andthat this omission was simply alegislative drafting oversight.Accordingly, we are interpreting thebilling requirements to be consistentwith the supervision requirements,which permit supervision by a‘‘physician in the group.’’ Therefore, thebilling conditions will be satisfied if theDHS are billed by the group practicewhen the supervising physician is a‘‘physician in the group.’’

In summary, under the regulations inPhase I of this rulemaking, to qualify forthe in-office ancillary servicesexception, DHS must be billed by one ofthe following:

• The physician performing orsupervising the service.

• The group practice of which suchphysician is a member, under that grouppractice’s billing number.

• The group practice if the physicianis a ‘‘physician in the group practice,’’under that group practice’s billingnumber.

• An entity that is wholly owned bythe referring or supervising physician orthe referring or supervising physician’sgroup practice.

Comment: One commenter objected toour interpretation of the ‘‘whollyowned’’ entity provision as unsupportedby the statute. The commenter believesthat allowing separate and distinctentities to provide services and bill ontheir own behalf would frustrate effortsto detect fraud and abuse, because theprovider numbers of the physicianmaking the referral and the entityproviding the DHS would not be clearlylinked on a claim form. The commenterbelieves that the Congress likelyintended to exempt only wholly ownedentities that primarily provideadministrative and billing services.

Response: We find nothing in thestatutory language that would limitwholly owned entities under section1877(b)(2)(B) of the Act to entities thatprovide only administrative and billingservices. Rather, we believe the whollyowned entity provision can be readreasonably to permit group practices to

provide DHS and bill through theseentities. A narrower interpretationwould seem to imply that the grouppractices could only bill using thirdparty billing companies if thesecompanies were wholly owned by thegroup. We believe it unlikely that theCongress intended such aninterpretation.

Comment: A commenter suggestedthat the billing provisions in the in-office ancillary services exception bechanged to include billing by a hospitalfor physician services furnished underarrangements. This change would allowphysician services for hospital patientsto come within the in-office ancillaryservices exception.

Response: The in-office ancillaryservices exception is designed toexempt from the referral prohibitioncertain DHS that are provided within agroup practice. As discussed in sectionVIII of this preamble, DHS providedunder arrangements with a hospital areinpatient or outpatient hospital servicesfor purposes of the statute. We believethe Congress did not intend to protectinpatient and outpatient hospitalservices under the in-office ancillaryservices exception. In fact, in describingthe in-office ancillary services exceptionin H. Rep. No. 111, 103d Congress, 1stSess. 546 (1993), the Congress pointedout that services provided by a hospitalor other provider ‘‘under arrangement’’with a group practice are not protectedunder the general exception for in-officeancillary services. ‘‘Underarrangements’’ issues are furtherdiscussed in section VIII.M of thispreamble.

C. Group Practice Definition (Section1877(h)(4) of the Act)

The Existing Law: As defined insection 1877(h)(4) of the Act, a ‘‘grouppractice’’ is a group of two or morephysicians legally organized as apartnership, professional corporation,foundation, not-for-profit corporation,faculty practice plan, or similarassociation, that meets certainconditions. Section 1877(h)(4) of the Actwas promulgated as part of the originalsection 1877 law and later amended byOBRA 1993. The current law containsthe following conditions applicable to‘‘group practices’’ for purposes ofsection 1877 (those conditions added byOBRA 1993 are so noted):

• Each physician member of thegroup furnishes substantially the fullrange of services that the physicianroutinely furnishes, including medicalcare, consultation, diagnosis, ortreatment, through the joint use ofshared office space, facilities,

equipment, and personnel (the ‘‘fullrange of services’’ test).

• Substantially all of the services ofthe physician members of the group arefurnished through the group, are billedunder a billing number assigned to thegroup, and amounts so received aretreated as receipts of the group (the‘‘substantially all test’’) (revised byOBRA 1993).

• The overhead expenses of and theincome from the practice are distributedin accordance with methods previouslydetermined (modified by OBRA 1993).

• No physician member of the groupdirectly or indirectly receivescompensation based on the volume orvalue of referrals by the physician, withthe exception of certain profits andproductivity bonuses (added by OBRA1993).

• Members of the group personallyconduct at least 75 percent of thephysician-patient encounters of thegroup practice (the ‘‘75 percentphysician-patient encounters test’’)(added by OBRA 1993).

• The group practice complies withall other standards established by theSecretary in regulations.

In addition, section 1877(h)(4)(B) ofthe Act establishes two ‘‘SpecialRules’’—

• A physician in a group practice maybe paid a share of the overall profits ofthe group, or a productivity bonus basedon services personally performed orservices incident to the personallyperformed services, so long as the shareor bonus is not determined in anymanner that is directly related to thevolume or value of referrals by thephysician (added by OBRA 1993); and

• In the case of a faculty practice planassociated with a hospital, institution ofhigher education, or medical schoolwith an approved medical residencytraining program in which physicianmembers may furnish a variety ofdifferent specialty services and furnishprofessional services both within andoutside the group, as well as performother tasks such as research, theconditions contained in the definition of‘‘group practice’’ apply only withrespect to the services furnished withinthe faculty practice plan.

Our August 1995 final rule coveringclinical laboratory services referralsdefined ‘‘group practice’’ at § 411.351based on the statute as it read effectiveJanuary 1, 1992. At that time, weinterpreted the ‘‘substantially all test’’ tomean that at least 75 percent of thepatient care services (defined as servicesaddressing the medical needs of specificpatients) of the group practice membersmust be furnished through the group.We interpreted members of the group to



include owners, employees, andindependent contractors. We requiredthat the group practice be ‘‘a single legalentity.’’ Finally, we stated that the‘‘substantially all test’’ would not applyto any group practice that is locatedsolely in a health professional shortagearea (HPSA). For group practices locatedoutside of a HPSA, the rule providedthat any time spent by group practicemembers providing services in a HPSAwould not be used to calculate whetherthe group practice located outside theHPSA had met the ‘‘substantially alltest.’’

The Proposed Rule: We proposedseveral changes to the definition of‘‘group practice’’ in § 411.351 toincorporate OBRA 1993 changes. Wealso proposed several other significantchanges. First, we proposed a ‘‘unifiedbusiness test’’—targeted at sham grouppractices—that would require grouppractices to exhibit ‘‘centralizeddecision making, a pooling of expensesand revenues, and a distribution systemthat is not based on each satellite officeoperating as if it were a separateenterprise.’’ Second, we proposedexcluding independent contractors asmembers of the group to easecompliance with the ‘‘substantially alltest.’’ Third, we proposed expandingour definition of ‘‘patient care services’’to include any of a physician’s tasks thataddress the medical needs of specificpatients or patients in general or thatbenefit the group practice.

Final Rule: As with the in-officeancillary services exception, we havebeen guided in developing the finaldefinition of ‘‘group practice’’ by twingoals: (1) To minimize the regulatoryintrusiveness of the definition whilegiving meaning to the statutory languageand intent; and (2) to provide clearguidance as to what constitutes a ‘‘grouppractice’’ for purposes of section 1877 ofthe Act. We understand the importanceof group practice status to physicians:simply stated, it allows group membersto refer patients to one another (or to thegroup itself) for DHS payable byMedicare or Medicaid, and it allowsgroup members to share in profitsderived from such DHS. Section 1877 ofthe Act recognizes that referrals withingroups are commonplace and may beappropriate adjuncts to a group’s coremedical practice.

As an initial matter, the definition of‘‘group practice’’ promulgated in thestatute and these regulations appliesonly for purposes of section 1877 of theAct and may have little or no bearing forpurposes of other Medicare or Medicaidprovisions. For example, the definitionof a ‘‘physician group’’ under thephysician incentive plan rules is

broader than the definition of ‘‘grouppractice’’ under section 1877 of the Act.

A common complaint about ourJanuary 1998 proposed regulation wasthat it would exclude many bona fidegroup practices, intrude too far into thebusiness and financial operations ofphysician practices, and chill grouppractice integration that is crucial in anincreasingly managed care environment.We have been mindful of these concernsin developing Phase I of thisrulemaking. It is not our intent to micro-manage group practices or dictate theirorganization or operation; rather, ourintent is to define ‘‘group practice’’ soas to create, consistent with ourunderstanding of the statutory intent, ameaningful exception to the generalreferral prohibition under section 1877of the Act, an exception that permitscertain traditional and commonplacereferral patterns within group practices,without permitting the exception toswallow the rule. In general, Phase I ofthis rulemaking is more expansive thanour January 1998 proposed rule andaffords physicians substantial flexibilityin designing and managing theirmedical practices (subject, of course, toany other legal impediments imposedby Federal or State law).

We believe the group practicedefinition set forth in section 1877(h)(4)of the Act is premised on twoassumptions. First, internal grouppractice referrals should only beprotected under the physician servicesor in-office ancillary services exceptions(both of which apply in specific ways togroup practices) if the group practice isa bona fide group practice and not aloose confederation of individualphysicians bound together primarily toprofit from DHS referrals. We believethe Congress intended a true grouppractice to consist of physicians whosepractices are fully integrated, medicallyand economically. In short, thephysicians practice medicine together ina single group, not separately, and theirfinancial prospects are interdependent.Thus, the Congress imposed certaintests that demonstrate the requisiteintegration and gave the Secretaryregulatory authority to imposeadditional tests. If true integration ispresent, we do not believe the Congressotherwise intended to regulate theformal structure and operation of thegroup. Second, the financial incentivesfor group practice physicians to generatereferrals of Medicare or Medicaidpayable DHS for the group should beattenuated. Thus, the group practicedefinition provides that group practicephysicians may not be paid directly orindirectly based on the volume or valueof DHS referrals, unless the

compensation is a profit share orproductivity bonus that is onlyindirectly related to those referrals.

With these precepts in mind, Phase Iof this rulemaking incorporates thefollowing significant revisions:

• Broadening of the types ofarrangements that qualify as a ‘‘singlelegal entity’’ to include, among otherthings, multi-entity legal structures andstructures owned by a single physician.

• Adoption of our proposal toexclude independent contractors fromthe definition of a ‘‘member of thegroup.’’ However, independentcontractors who meet the conditions setforth at § 411.351 may qualify as‘‘physicians in the group practice’’ whomay receive profit shares andproductivity bonuses under section1877(h)(4)(B)(i) of the Act.

• Adoption of our proposedexpanded definition of ‘‘patient careservices’’ so that patient care servicesinclude all services a physicianperforms that address the medical needsof specific patients or patients in generalor benefit the group practice (forexample, administrative services for thegroup).

• Expansion of our 1998 proposal togauge compliance with the‘‘substantially all test’’ by measuring aphysician’s actual time spent on patientcare services by permitting groups toadopt other reasonable methods fordetermining compliance.

• Creation of a substantially moreflexible definition of a ‘‘unifiedbusiness’’ that will permit grouppractices to use cost- and location-basedaccounting with respect to services thatare not DHS, and, in some cases, withrespect to services that are DHS if thecompensation method is not directlyrelated to the volume or value of thephysician’s referrals and otherconditions are satisfied.

• Revision of the productivity bonusrules so that group practices may paymember physicians and independentcontractors who qualify as ‘‘physiciansin the group’’ productivity bonusesbased directly on the physician’spersonal productivity (includingservices incident to such personallyperformed services that meet therequirements of section 1861(s)(2)(A) ofthe Act and section 2050 of theMedicare Carriers Manual, Part 3), butmay not pay such physicians any bonusbased directly on their referrals of DHSthat are performed by someone else.

• Promulgation of specific methodsfor ensuring that compensation for DHSis only indirectly related to referralincome. In addition, parties may useother methods that are reasonable anddocumented.



• Elimination of the group practiceattestation requirement.

These revisions and others arediscussed in the comments andresponses that follow. Each commentand response section begins with anoverview of the relevant provision inthe group practice definition and asummary of the final rule relating to thatprovision. The sections are divided asfollows: General comments, the singlelegal entity requirement, members of thegroup, 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 tradeassociation, criticized the proposedregulations for group practices as overlyintrusive into the internal operations ofphysician practices, unnecessarilycomplex, and incapable ofimplementation in a fair and reasonablemanner. The association and othercommenters believe that the Congressintended the group practice provisionsin the law predominately to regulate theexternal ownership, compensation, andreferral arrangements of physicians andnot the inner workings of grouppractices themselves. The associationand other commenters protested that therules create arbitrary distinctions amongdifferent types of physicians. Thesecommenters contended that no tenablereason exists to treat group practices,pathologists, radiologists, and radiationoncologists—all of whom are permittedunder the statute or various exceptionsto make referrals to entities with whichthey have financial relationships undercertain circumstances—differently thanother physicians, since they have anequal incentive to self-refer.

Response: As indicated above, inpreparing Phase I of this rulemaking, wehave been mindful of the commenters’concerns about the intrusiveness of theproposed rule, and have sought tominimize the regulatory impact of thegroup practice definition and to provideclear guidance as to what constitutes a‘‘group practice’’ for purposes of section1877 of the Act. We do not intend to usethese regulations to micro-manage grouppractices or to dictate their organizationor operation, except as is necessary togive effect to the statutory intent of theCongress to create a limited exception tothe general referral prohibition for DHSreferrals by physicians within their owngroup practices. In general, Phase I ofthis rulemaking is broader than theJanuary 1998 proposed rule and affordsphysicians substantial flexibility in

designing and managing their medicalpractices.

While we have endeavored to applythese rules as equally as possible to soloand group practitioners and amongvarious types of practitioners, somedifferences in regulation and outcomesare unavoidable, and in some casesdesired, given the wide array ofarrangements to which the statuteapplies and the distinctions inherent inthe statutory scheme. For example, theCongress included a specific exceptionfor referrals by consulting pathologists,diagnostic radiologists, and radiationoncologists that does not apply in thecase of other consulting physicians. TheCongress intended disparate treatmentof these consulting physicians,reasonably, we believe, because of thelimited ability of pathologists,diagnostic radiologists, and radiationoncologists to generate patient referralsof services they either perform orsupervise. Similarly, the Congressjudged referrals within group practices(and solo practices) deserving of specialconsideration based, we believe, on arecognition of physicians’ traditionalpractice of delivering DHS in their ownoffices to their own patients.

Comment: A commenter soughtclarification as to whether a grouppractice was exempt from section 1877of the Act. Several commentersobserved that group practice status doesnot, by itself, protect against the risk ofoverutilization of ancillary servicesprovided by the group.

Response: A group practice is notexempt from section 1877 of the Act byvirtue of being a ‘‘group practice’’ underthe definition in section 1877(h)(4) ofthe Act and § 411.352 of theseregulations. A relevant exception, suchas the in-office ancillary services or thephysician services exceptions, must stillapply.

Comment: Several commenterssuggested that section 1877 of the Actand the regulations should focus onreferrals of medically unnecessary teststo entities with which physicians haveprohibited financial relationships. Somecommenters suggested that we use ourutilization data to develop norms foreach physician specialty that could bethe basis for measuring appropriateutilization and preventing inappropriatereferrals.

Response: We disagree that section1877 of the Act should apply only toreferrals of unnecessary items andservices. While overutilization is aprincipal concern of the statute, and aprimary focus of this rule, nothing inthe statute suggests that the Congressintended to limit the statute’s reach toreferrals of medically unnecessary tests

or procedures. Rather, the statuteapplies to all referrals of DHS to entitieswith which a referring physician has aprohibited financial relationship. Thestatute is designed to create a bright linethat prohibits a high risk category offinancial relationships and relieves thegovernment from having to ‘‘lookbehind’’ every physician referral.

2. Single Legal Entity RequirementThe Existing Law: Under the statute,

a group practice must consist of ‘‘two ormore physicians who are legallyorganized as a partnership, professionalcorporation (PC), foundation, not-for-profit corporation, faculty practice plan,or similar association.’’ The August1995 final rule took the position that agroup practice could consist of only onelegal entity and that any individual orentity could organize, operate, orcontrol a group practice, as long as twoor more physicians had a role inproviding services and the group met allof the other specific requirements forbeing a group practice under section1877 of the Act. Thus, for example, ahospital could ‘‘own or operate’’ a grouppractice, provided no State lawprohibited it.

The Proposed Rule: The January 1998proposed regulations retained theinterpretation of the single legal entityrequirement from the August 1995 rule,requiring the legally organized grouppractice to consist of a ‘‘single legalentity’’, that is, one legal entityidentified as the group practice thatmeets all of the group practicedefinitional tests. In addition, theJanuary 1998 proposed regulationsproposed allowing individualphysicians who are incorporated asindividual professional corporations toform a group practice, subject tomeeting the remaining conditions of thegroup practice definition.

The Final Rule: We are retaining andincorporating into the regulations textthe ‘‘bright line’’ rule that a grouppractice must be a single legal entity.The single legal entity can assume anyform recognized by the State in whichthe entity achieves its legal status,including, but not limited to, acorporation (for-profit, professional, ornonprofit), partnership, foundation,faculty practice plan, or limited liabilitycompany. The single legal entity can belegally organized by any party orparties, including, but not limited to,physicians, health care facilities, orother persons or entities. The singlelegal entity must be formed primarilyfor the purpose of being a physiciangroup practice. Hence, for example, ahospital that employs physicians is nota ‘‘group practice’’ for purposes of



section 1877 of the Act, although thehospital can form or acquire a grouppractice that is a separate single legalentity. The following structures areamong those that may qualify underPhase I of this rulemaking, assuming allother requirements of the group practicedefinition are satisfied:

• A partnership between two or morephysicians.

• A partnership between onephysician and another party, providedthat the partnership employs at leastone other physician. (Similarly, apartnership between two nonphysicianparties can qualify if it employs at leasttwo physicians).

• A corporation or limited liabilitycompany with one or more physicianshareholders or members, provided thata corporation or limited liabilitycompany with only one physicianshareholder or member employs at leastone other physician.

• A corporation or limited liabilitycompany owned by nonphysicians,provided it employs at least twophysicians.

• A single legal entity owned by twoor more physicians through theirindividual professional corporations.

• A solo practitioner who isorganized as a legal entity (for example,a professional corporation) and employsat least one other full-time physician.

• A single legal entity (whether acorporation, limited liability company,or other form) owned by one or moreother legal entities (that is, a multi-entity arrangement) that involves two ormore physicians through employmentor indirect ownership, provided that the‘‘investing’’ or ‘‘owner’’ entities are notthemselves functioning group practices.(In other words, existing groups may notband together to form a group practiceprimarily to share in-office ancillaryreferrals.) It is our understanding thatthe prevalent practice in these kinds ofarrangements is for the physicians whoown the investing entities to becomeemployees of the new group practice,and for the investing entities themselvesto cease functioning as group practices.

This list is illustrative only, and othervariations are possible. What is essentialis that there must be one identifiablelegal entity that is a bona fide grouppractice of two or more physicians. Thedefinition of group practice does notinclude a loose confederation ofphysicians, a substantial purpose ofwhich is to share profits from referrals(sometimes referred to as a ‘‘grouppractice without walls’’), or separategroup practices under commonownership or control through aphysician practice management

company, hospital, or health caresystem, or other entity or organization.

We have responded to publiccomments regarding problems faced byfaculty practice plans under section1877 of the Act by using our regulatoryauthority under section 1877(b)(4) of theAct to create a new exception applicableto faculty practice plans. This newexception is discussed in section VII.Aof this preamble.

While several commenters requestedaccommodation in the group practicedefinition for bifurcated foundation-model group practices (that is,arrangements between a nonprofit entitythat provides health care services and aphysician group, typically used inStates that restrict the corporate practiceof medicine), we have determined thatthose arrangements are better addressedby the personal service arrangementsexception. As noted elsewhere in thispreamble, we intend to apply ouruniform interpretation of the volume orvalue standard to all exceptions inwhich it appears. (See the discussion insection V of this preamble.)

Comment: Many commentersconcurred with our position that agroup practice can be organized by anyindividual or entity, but took issue withother aspects of our group practiceorganizational tests. As a thresholdmatter, a number of commentersmaintained that the statute does notrequire a ‘‘single legal entity.’’ Thesecommenters generally fell into threecategories: (1) Commenters seekingprotection for foundation model‘‘groups’’ in States that follow thecorporate practice of medicine doctrine,(2) commenters seeking protection forphysician ‘‘groups’’ practicing inacademic medical settings, and (3)commenters seeking protection for‘‘groups’’ that are under commonownership or control, but that are notbound together in a single legal entity.Comments on the first two issues—foundation models and academicmedical settings—are summarized andaddressed elsewhere in this section andin section VII.A of this preamble.

As to the third category—commonownership and control—commentersgenerally requested that we recognizeorganizations under common control asa single unit or group practice, as we doin our definition of ‘‘hospital’’ in§ 411.351 (Definitions) of theregulations. (Section 411.351 reads asfollows: ‘‘Hospital * * * refers to anyseparate legally-organized operatingentity plus any subsidiary, relatedentity, or other entities that performservices for the hospital’s patients andfor which the hospital bills.’’)Specifically, the commenters suggested

we interpret this portion of the grouppractice definition as covering a singlelegal entity that includes any separate,legally-organized operating entity plusany subsidiary, related entity, or otherentities that perform services for thegroup practice’s patients and for whichthe group practice bills. Somecommenters noted that the ability tohave subsidiaries is important forgroups for valid, nonabusive businessreasons, such as to operate in more thanone State when States have differentcorporate requirements, to organizecomponents of the continuum of caresuch as home health or skilled nursingcare, and to operate as multi-entityintegrated delivery systems. Somecommenters indicated that some Statelaws require physicians to practice in adifferent entity when working in abordering State. Also noted was thatcomplex corporate structures aresometimes required for a variety of otherlegitimate business reasons, such asallowing groups to meet State licensingrequirements, to allocate the risk ofliability, to comply with inconsistentState regulations, or to meet corporatepractice of medicine requirements.Similarly, these commenters maintainedthat an aggregation of groups managedby the same physician practicemanagement company or multiplegroups owned by the same hospitalshould be considered a ‘‘group practice’’for purposes of section 1877 of the Act.

Response: Having considered thecomments, we iterate our view that agroup practice must be a ‘‘single legalentity.’’ A standard that would allowentities under common ownership orcontrol to be a group practice undersection 1877(h)(4) of the Act does notsufficiently protect against sham grouppractice arrangements or looseconfederations of physicians operatingas a group practice substantially forpurposes of profiting from DHSreferrals. We find nothing in the statutethat suggests that the Congress intendedfor a ‘‘group practice’’ to be so broadlyconstrued as to include multiple grouppractices that happen to use the servicesof the same management company orthat happen to be affiliated with thesame health system. Single legal entitiesowned by multiple entities arepermitted, as discussed in the responseto the next comment. We address thespecial needs of foundation-basedpractices and faculty practice plans inthis section and in section VII.A of thispreamble, respectively.

Comment: Many commentersconsidered our proposed parameters forthe composition of the ‘‘single legalentity’’ too restrictive, taking issue, inparticular, with our statement that ‘‘the



statute specifically requires that apartnership consist of two or morephysicians who are partners and that aPC consist of two or more physicianswho are incorporated together.’’ Whileseveral commenters commended ourproposal to allow group practices toinclude individual professionalcorporations that employ their ownshareholders, commenters generallyespoused expanding the group practicedefinition to include any physiciangroup (regardless of its ownership) thatis organized as a distinct legal entityand that employs more than onephysician, provided that all of the othergroup practice definitional tests are met.

In these commenters’ view,prohibiting a sole practitioner fromowning a group practice that employsmultiple physicians is unfair,inconsistent, anticompetitive, and notsupported by the statutory language.The commenters pointed out that, underour January 1998 proposed rule, ahospital could own a group practice, butan individual physician could not.Commenters believe that the otherrequirements for meeting the grouppractice definition prevent any shampractice arrangements and that aninterpretation requiring directownership by two physicians does notfurther Federal fraud and abuse policy.

A number of commenters asked thatwe clarify that a group practice may beowned by any legal corporate structureor arrangement including, but notlimited to, limited liability companies,multi-member professionalcorporations, sole physician shareholdercompanies that employ at least onephysician, hospitals that employphysicians, entities owned jointly byphysicians and a hospital (for example,a physician hospital organization(PHO)), or general corporations thatemploy two physicians without anyphysician ownership. Thisinterpretation is consistent with theAugust 1995 final rule. In particular,several commenters observed that grouppractices commonly are formed throughthe merger of existing group practices.The merging practices typicallycontribute assets and transfer physiciansand other employees to the new grouppractice entity, which bills for thephysician services under a group billingnumber and treats amounts received asreceipts of the new group practice, andwhich meets the other group practicedefinitional requirements. Thecommenter urged that the new grouppractice entity should qualify for grouppractice status, without having todissolve the merging shareholderentities, which are often maintained for

tax or other purposes unrelated toMedicare or the fraud and abuse laws.

To prevent sham group practices, onecommenter suggested that, in the case ofa new group practice formed by themerger of existing group practices orprofessional corporations, we shouldrequire the new group practice toemploy its members rather thanallowing the multiple professionalcorporations (PCs) that formed the newgroup to continue employing practicemembers (except in the case of anindividual professional corporation thatemploys a physician and owns a stakein a group practice). Similarly, anothercommenter recommended requiring allgroup practices (regardless of layers ofcomposition) to be fully integrated intoa single operating medical business atthe top or ‘‘group’’ level. A grouppractice would be deemed fullyintegrated if it met the group practicedefinitional tests and presented itself asa single medical business whose equityholders operate as a single business bysharing such things as contracts,liability, facilities, equipment, supportpersonnel, management, and a pensionplan. A fully-integrated group would berequired to employ or contract with allphysicians at the group level so thatphysician compensation and accountsreceivable of all members of the groupwould be ‘‘at risk’’ in the event of lossesdue to poor management of the group orin the event of a malpractice claimagainst any member of the group.

Response: We generally agree with thecommenters. We have reconsidered thestatutory language and believe that theprovision requiring ‘‘a group of 2 ormore physicians legally organized as apartnership, professional corporation,foundation, not-for-profit corporation,faculty practice plan, or similarassociation—’’ can be interpreted inseveral ways. It can reasonably be readto mean that a group must consist ofsome kind of legally organized entity,owned by virtually any combination ofindividuals or other entities, providedthat there are at least two physiciansproviding services to patients as grouppractitioners. We have amended thedefinition of a group practiceaccordingly in § 411.351. We believethis interpretation allows us to treat allpractices, regardless of who owns oroperates them, more uniformly. Theintroduction to this section provides anillustrative list of possible grouppractice organizational structures.

We are adopting the commenters’suggestion that no entity that owns allor part of a group practice (that is, noequity holder in the group) may itselffunction 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 newgroup practice formed through themerger of existing group practices, themerging or defunct group practices maynot themselves operate as medical grouppractices (that is, they may not furnishor bill for health care services);however, the defunct practices are notrequired to dissolve. The merging grouppractices should transfer all medicalassets to the new group practice, and thenew group practice should employ thephysicians and bill for their services,treating receipts as receipts of the newgroup practice.

We also generally agree that a grouppractice should consist of a singlemedical business whose equity holdersoperate as a single business by sharingsuch things as contracts, liability,facilities, equipment, support personnel,management, and a pension plan. Thisaspect of a group practice is addressedby the unified business test in § 411.352of the regulations. (See section VI.C.7 ofthis preamble for additionalinformation).

Comment: Commenters questionedwhether a hospital could qualify as the‘‘single legal entity’’ needed to establishgroup practice status. In the August1995 regulations, we stated that ‘‘* * *if a clinic (or other facility) is legallyorganized to include two or morephysicians and provides the services ofphysicians, it is a group practice, evenif it is established, operated, andcontrolled by a nonphysician group orcorporation. This would be so regardlessof who employs the physicians (in thescenario presented by the commenter,the clinic physicians were employed bythe hospital that established theclinic).’’ (60 FR 41937) One commenterinterpreted this language to mean that ahospital, which is itself a legal entity,could employ physicians and, therefore,qualify as a group practice if the otherrequirements of the group practicedefinition were met. Thus, the hospitalwould not need to establish a separatelegal entity for its employed physiciansto be considered a group practice. Arelated concern was whether a singlehospital could encompass multiplegroup practices. According to thecommenter, the ability of hospitals toestablish multiple groups is especiallyimportant for a hospital entity that mayoperate several campuses in differentcities as unincorporated divisions, asituation likely to increase as providersconsolidate into regional networks.

Response: We believe thecommenter’s interpretation wouldstretch the meaning of a ‘‘grouppractice’’ too far. We do not believe thata hospital can reasonably be construed



as a ‘‘group practice.’’ We find no basisto conclude that the Congress thoughtotherwise. The statement from theAugust 1995 regulations was made inresponse to a comment regarding anarrangement in which a tax-exempthospital had affiliated group practicesand established a separate tax-exemptphysician-directed clinic as the grouppractice’s operating entity, butemployed the physicians in theaffiliated groups directly. In respondingto the comment, we attempted to maketwo points: (1) That a group practiceneed not be legally organized byphysicians; and (2) that a physician-directed clinic could qualify as a grouppractice.

We iterate that a group practice maybe legally organized by a hospital orother nonphysician person or entity;however, neither the hospital itself norany other facility the primary purpose ofwhich is something other than tooperate a physician group medicalpractice, can be a group practice. Ahospital may establish multiple grouppractices through subsidiaries oraffiliated entities that are separate legalentities. Each entity may be a grouppractice for purposes of section 1877 ofthe Act, although the aggregation ofgroups will not be. Exceptions, such asthe in-office ancillary servicesexception, would only apply to referralswithin one of those groups and notacross multiple groups within the samehospital entity.

Comment: A commenter noted thatthe August 1998 proposed rule clearlystates that a hospital may own andoperate a group practice (assuming thereis no State law impediment to suchownership) and that physicians mayown a group indirectly throughindividual professional corporations. Inlight of these statements, the commentersought clarification on three points: (1)Whether a single legal entity ownedjointly by physicians and the parentcompany of a hospital could qualify asa group practice, provided all of theother conditions in the definition weresatisfied; (2) whether the ‘‘single legalentity’’ test could be met by a limitedliability company; and (3) whetherseveral physicians organized as alimited liability company could, in turn,own another entity (for example, asecond limited liability company) thatcould qualify as a group practice.

Response: In responding to thecommenter’s questions, we apply theprinciples described above. First, asingle legal entity owned jointly byphysicians and the parent company of ahospital could qualify as a grouppractice, provided all of the otherconditions in the definition were

satisfied. Second, a limited liabilitycompany duly organized underapplicable State law could qualify as a‘‘single legal entity.’’ Third, severalphysicians organized as a limitedliability company could, in turn, ownanother entity that could qualify as agroup practice provided that the firstlimited liability company is not, anddoes not operate as, a group practice. Inthis last case, the physician members ofthe first limited liability companywould be considered members of thegroup by virtue of their indirectownership interest in the second entity.

Comment: Commenters note thathealth systems, management companies,hospitals, and other nonprofit and for-profit corporations must comply withState laws governing the corporatepractice of medicine. In some States,these laws restrict or prohibit acorporation from directly employingphysicians. In some cases, thecorporations form a ‘‘captive’’ or‘‘friendly’’ professional corporation withone physician owner who holds theownership rights to the professionalcorporation in trust for the corporation.The friendly professional corporationdirectly employs physicians who thenform the group practice. Thecorporation manages the business of thegroup practice, with the sole physicianshareholder acting primarily as a‘‘figurehead.’’ The arrangement ensuresthat the corporation only indirectlyemploys the physicians and does notviolate the corporate practice ofmedicine rules. Commenters noted thattypically only one physician is ashareholder in the friendly professionalcorporation so that day-to-daytransactions are less cumbersome.

Response: Since we have amendedthe group practice definition to covergroups that consist of one physicianowner and one or more physicianemployees, we believe that the types of‘‘captive’’ or ‘‘friendly’’ professionalcorporations described in the commentcan both meet our definition andcomply with corporate practice ofmedicine requirements. Groups mustcontinue to meet all of the other criteriain the group practice definition insection 1877(h)(4) of the Act and§ 411.351.

Comment: Several commenters askedthat we clarify whether the ‘‘single legalentity’’ requirement precludes a grouppractice from having subsidiary entitiesthat, for example, own real estate orequipment, provide billing services, oroperate ancillary services.

Response: As we noted in the August1995 final regulations, we believe thatthe statute does not preclude a singlegroup practice from owning other legal

entities for the purposes of providingservices to the group practice. Thus, tocite the example in the August 1995final regulation at 60 FR 41936, a grouppractice could wholly own andseparately incorporate a laboratoryfacility that provides laboratory servicesto a group practice or other patients.The physicians could qualify for the in-office ancillary services exceptionprovided they meet the requirements forsupervision, location, and billing. Thebilling requirement in section1877(b)(2)(B) of the Act allows servicesto be billed by the referring orsupervising physician, the grouppractice, or an entity wholly owned bythe group practice. The exceptionappears to anticipate that a grouppractice may wholly own separate legalentities for billing or for providingancillary services. Parties should beaware, however, that the group practicesafe harbor under the anti-kickbackstatute (§ 1001.952(p) of this title), doesnot protect group practice ownership ofancillary services; for purposes of theanti-kickback statute, thesearrangements are evaluated on a case-by-case basis.

3. Members of the GroupThe Existing Law: Under the August

1995 final regulations, owners,employees, and independent contractorswere all considered ‘‘members of agroup’’ practice for purposes of thegroup practice definitional tests.

The Proposed Rule: The proposedregulations proposed modifying thedefinition of the term ‘‘members of thegroup’’ to include only physicianpartners, shareholders, and full-timeand part-time physician employees.Independent contractors would nolonger be considered members of thegroup. This change was proposed to aidgroup practices attempting to complywith the 75 percent ‘‘substantially alltest.’’ Physicians would be consideredmembers of the group during the timethat they furnish patient care services tothe group.

The Final Rule: We are adopting ourJanuary 1998 proposal to define amember of a group practice as anyphysician who owns, or is employed by,the group practice. In the case of a grouppractice owned by professionalcorporations or defunct group practices,the physicians who own those entitieswill be considered members of thegroup practice. Also, those physicianswho own all or part of the grouppractice through their own professionalcorporations and who are employed bytheir own professional corporations(which contract with the group practiceto provide physician services) will be



considered members of the group.Physicians are members of the groupduring the time they furnish ‘‘patientcare services’’ (as defined at § 411.351)to patients of the group or for the benefitof the group, even if those servicescannot be billed by the group (forexample, certain administrativeservices, pro bono services).

Independent contractors and leasedemployees will not be consideredmembers of the group. The exclusion ofindependent contractors is intended toaid many group practices in complyingwith the ‘‘substantially all test’’described below. Although not grouppractice members, under certaincircumstances, independent contractorsmay provide the required supervisionfor the in-office ancillary servicesexception, as described in section VI.B.2of this preamble.

While nonphysicians, such as nursepractitioners and physicians assistants,may be group practice ‘‘members’’ forgeneral purposes under section 1877 ofthe Act, their membership will have nopractical effect, since they are not‘‘physicians’’ for purposes of the threegroup practice ‘‘tests’’ (the ‘‘full range ofservices,’’ ‘‘substantially all,’’ and ‘‘75percent physician-patient encounters’’test), nor for purposes of the profits andproductivity bonuses provisions. Whilereferrals by nurse practitioners andphysician assistants generally do nottrigger section 1877 of the Act, whichapplies only to physicians (as defined atsection 1861(r) of the Act), referralsmade by nonphysician health careprofessionals may implicate the statuteif those referrals are directed orcontrolled by a physician. In otherwords, a physician or group practicecannot channel referrals through a nursepractitioner, physician assistant, orother nonphysician health careprofessional in order to circumvent theprohibition under section 1877, and anychanneled referrals would be imputedto the responsible physician.

Comment: Many commenterssupported our proposal to count ownersand employees as members of the group,but not independent contractors. Thischange would facilitate compliancewith the group practice definition bygroup practices that use part-timeindependent contractor physicians tosupplement and expand the range ofservices the group offers to patients.Some commenters recommended thatindependent contractors be excludedonly for purposes of the ‘‘substantiallyall test,’’ but not for other purposes,including the direct supervisionrequirement of the in-office ancillaryservices exception and the 75 percentphysician-patient encounters test. Some

commenters objected to excludingindependent contractors from thedefinition of ‘‘members of the group’’because they perceived that suchexclusion would prevent grouppractices from paying independentcontractors productivity bonuses for thework they personally perform undersection 1877(h)(4)(B)(i) of the Act.

Response: We are retaining ourproposal to exclude independentcontractors from the definition of‘‘members of the group practice.’’ Onbalance, we believe this change willbenefit many group practices that wishto qualify for group practice status. Asto the other concerns raised bycommenters, we believe those concernshave largely been addressed by otherchanges in these regulations. We haveliberalized the direct supervisionstandard in the in-office ancillaryservices exception to permit supervisionby independent contractors who meetcertain conditions that establish that theindependent contractors are ‘‘physiciansin the group practice.’’ (See discussionin section VI.B.2 of this preamble). Asdiscussed below, in greater detail, weare permitting group practices to payproductivity bonuses to independentcontractors who are ‘‘physicians in thegroup practice.’’ (See discussion insection VI.C.8 of this preamble).

Comment: A number of commentersadvocated a flexible approach to thedefinition of ‘‘member of the group,’’urging that groups be permitted to electwhether to include independentcontractors as members on an annual orother basis. These elections wouldapply uniformly for purposes ofqualifying under all of the grouppractice definitional tests and the in-office ancillary services exception, andwould be reported to us.

Response: The election processdescribed by the commenters strikes usas unnecessary given the significantchanges in this final rule with respect tothe treatment of independentcontractors under the in-office ancillaryservices exception and the grouppractice productivity bonus provisions.In our view, an election process wouldimpose an additional administrativeburden on groups and the government,with minimal offsetting benefit.

Comment: To accommodate multi-entity group arrangements, a commentersuggested that ‘‘members of a group’’should include owners of the group,employees of the group, and owners ofany sole or multiple shareholderprofessional corporation that has anownership interest in the group (that is,indirect owners).

Response: For purposes of thedefinition of ‘‘members of the group,’’

we are including any physician ownersof a sole or multiple shareholder PC orother entity that has an ownershipinterest in the group. In essence, weintend to ‘‘look through’’ any corporateor entity owners to the ultimatephysician owners. Thus, members of thegroup include physicians who areowners (directly or indirectly) and bonafide employees of the group.

Comment: Several commenterssuggested that independent contractorsbe permitted to qualify as group practicemembers on a locum tenens basis. Thus,for example, a group would be allowedto use independent contractors toprovide coverage when a member of thegroup is ill and unable to practicemedicine temporarily. Other reasons touse locum tenens physicians couldinclude death or disability of aphysician, resignation of a physician,accommodating seasonal increases inpatient loads, and ‘‘trial runs’’ ofphysicians being recruited to join apractice. According to commenters,locum tenens providers are typicallypaid on a fee-for-time basis by thestaffing organizations with which theyare affiliated. Thus, they typically haveno direct financial relationships withany of the health care entities to whichthey are assigned. The health careentities retain all patient receipts and,when possible, Medicare payments arereassigned to the health care entity.

Response: Nothing in section 1877 ofthe Act or these regulations prevents theuse of locum tenens physicians insituations like those described in thecomments. The issue raised, however, ishow these physicians should be treatedfor purposes of a group practice’scompliance with the group practicedefinition and how referrals by suchphysicians should be treated under thegeneral prohibition under section 1877.As to the first issue, we believe anappropriate use of locum tenensphysicians in exigent situations shouldnot prevent a group practice thatotherwise complies with the definitionat section 1877(h)(4) and § 411.352 ofthese regulations from qualifying forgroup practice status. We are applyingthe rules at section 3060‘‘Reassignment,’’ of the MedicareCarrier’s Manual (HCFA Pub. 14–3), Part3—Claims Process (the reassignmentprovisions) as the test for whether aphysician is a locum tenens physician.A locum tenens physician will beconsidered as ‘‘standing in the shoes’’ ofthe regular physician (as defined insection 3060.7) if he or she replaces theregular physician in accordance withsection 3060.7. We note that section3060.7 does not treat a physician hired



on a ‘‘trial run’’ basis as a locum tenensphysician.

Comment: One commenter soughtclarification that on-call physicians whoare independent contractors would beexempted from the group member andgroup practice requirements but wouldbe able to provide and supervise care onbehalf of a group member. On-callphysicians for one group may bemembers of other group practices. Theymay or may not be compensated fortheir services or bill under the grouppractice billing number of the group forwhich they are serving in an on-callcapacity. According to the commenter,on-call arrangements are commonplace,especially among groups that do nothave sufficient numbers of specialists tocover for each other. The commenterrequested a specific exemption underthe statute so that on-call physicians donot impede groups from meeting thegroup practice definition and are notprecluded from ordering DHS whenthey are serving in an on-call capacity.The commenter suggested an on-callphysician be treated as ‘‘standing in theshoes’’ of the member while providingon-call services for purposes of the‘‘substantially all test,’’ the 75 percentphysician-patient encounters test, andthe supervision requirement of the in-office ancillary services exception.

Response: We agree that it isappropriate to treat on-call physiciansas ‘‘standing in the shoes’’ of themember while providing on-callservices for purposes of the‘‘substantially all test,’’ the 75 percentphysician-patient encounters test, andthe supervision requirement of the in-office ancillary services exception,provided that the services are billed bythe practice for which the physician isserving on an on-call basis.

Comment: Several commentersquestioned whether nurse practitioners,physician assistants, or othernonphysician providers could be groupmembers, and if so, whether theirservices would count in the calculationof the 75 percent physician-patientencounters test.

Response: We perceive nothing in thestatute that would prevent grouppractices from admitting nursepractitioners, physician assistants, orothers as members of the group forpurposes other than section 1877 of theAct. However, the definition of a ‘‘grouppractice’’ in section 1877(h)(4) of theAct contains several requirements thatapply specifically to physician membersof the group. Provisions of the in-officeancillary services exception and thephysician services exception also referspecifically to physician members orphysicians in the same group practice.

The term ‘‘physician’’ is specificallydefined under the Medicare statute atsection 1861(r) of the Act and does notinclude nurse practitioners or physicianassistants. Any services that theseindividuals provide are not countedunder the ‘‘substantially all test’’ orunder any other part of the grouppractice requirements or exceptions thatapply to physician members.

The referral prohibition in section1877 of the Act applies only to referralsthat are made by a physician to an entitywith which that physician, or animmediate family member, has afinancial relationship. If a nonphysicianpractitioner is referring a physician’spatients at the physician’s suggestion orin lieu of the treating physician, wewould impute the referrals to thephysician. Simply stated, physiciansmay not delegate their own referrals toavoid the referral prohibition. On theother hand, we would not impute thereferrals if the nurse practitioner or thephysician assistant is independentlytreating the patients and initiates thereferrals on his or her own. We think thedetermination will depend on thespecific facts and circumstances.

Comment: One commenter asked thatwe exclude from the definition ofmembers of the group any employeeswho provide interpretation orsupervision services only and are nototherwise involved in patient care.

Response: Given the revisions wehave made in Phase I of this rulemakingto the in-office ancillary servicesexception and the group practicedefinition, we see no need for a specialexclusion for physicians who provideinterpretation or supervision servicesonly. We recognize that thesephysicians may affect, among otherthings, a group practice’s ability tocomply with the 75 percent physician-patient encounters test because theygenerally do not see patients. But toexclude physicians who generally donot see patients would undermine thepurpose of the test, which is to ensurethat group practices are first, andforemost, joint medical practices for theprovision of physician services topatients and not primarily designatedhealth care services enterprises. TheCongress addressed the specialcircumstances of pathologists,diagnostic radiologists, and radiationoncologists in a separate provision. (Seediscussion of section 1877(h)(5)(C) insection III.B of this preamble).

Comment: A commenter soughtclarification that physicians who areemployees of their own individualprofessional corporations instead of thegroup practice are considered ‘‘groupmembers.’’ The definition of a group

member in § 411.351 already includesphysicians whose ownership interest inthe group is held through an individualprofessional corporation. Manyphysicians wish to not only holdownership interests in an individualprofessional corporation, but to beemployees of these corporations forpension and tax reasons. To avoidpotential abuse, the commentersuggested that we add the followingparenthetical to the definition of‘‘member of group’’ in § 411.351:‘‘(including physicians who areemployed by an individual professionalcorporation, as long as the group haslegal authority over the terms of thephysician’s employment and is legallyresponsible for services provided by thephysician on the group’s behalf).’’

Response: We agree with thecommenter that these physicians are‘‘members’’ of the group. If a physicianalready qualifies as an ‘‘owner’’ of thegroup through his or her individualprofessional corporation, then his or herstatus as an employee or contractor isirrelevant for purposes of qualifying forgroup practice status. The amendatorylanguage proposed by the commenter isnot necessary, although we are revisingthe regulations text to clarify that aphysician who is employed by anindividual professional corporation thathas an ownership interest in the grouppractice is a ‘‘member of the group.’’Physicians who are employed by theirown individual professionalcorporations and who have noownership interest in the group (directlyor through an individual professionalcorporation), but provide services to thegroup, are independent contractors andtherefore not members of the group.

Comment: A commenter suggestedthat a physician who opts out of, and isnot receiving any payments from, theMedicare program should not be boundby the limitations in section 1877 of theAct, and, thus, should be able to referto entities with which he or she has afinancial relationship. The commenteralso asked that we clarify whether aphysician who opts out of the Medicareprogram pursuant to the privatecontracting authority in the BBA 1997,but continues to practice with aparticular group of physicians, is agroup ‘‘member’’ for purposes of thephysician self-referral law. Thecommenter reported that we haveelsewhere stated that a groupphysician’s opting out does not affectthe ability of the rest of the groupmembers to provide and bill for servicesthey furnish to Medicare beneficiaries.The commenter stated that physicianswho reassign benefits to organizationsthat participate in Medicare may not opt



out, and that consequently physicianswho belong to groups that participate inMedicare and who opt out may not billand accept payments from Medicarebeneficiaries through the group practiceunless the entire group practice optsout. Thus, a physician who opts outwould have to bill under his or her ownname instead of through the group.

The commenter also questionedwhether a physician’s time spenttreating Medicare beneficiaries that isbilled through the physician’s ownname must be counted against theamount of time the physician has spenttreating other patients of the grouppractice. (We assume this means that,for the ‘‘substantially all test,’’ thecommenter wishes to know whether thephysician’s private billing constitutes‘‘patient care services’’ provided outsidethe group context that would affectwhether the physician providessubstantially all of his or her servicesthrough the group and billssubstantially all of his or her servicesunder a billing number assigned to thegroup.)

The commenter urged that weconsider physicians who have opted outas ‘‘members’’ of the group practice onlyfor those services furnished through thegroup, but not count the physicianservices in calculating whether thegroup has met the ‘‘substantially alltest.’’

Response: We agree with thecommenter that a physician who optsout of the Medicare program and is notreceiving any payments from theMedicare program is not bound by thelimitations in section 1877 of the Actand, therefore, can refer to entities withwhich he or she has a financialrelationship. Section 1877 prohibitsonly referrals for services ‘‘for whichpayment otherwise may be made underMedicare,’’ and Medicare would nototherwise pay for services under aprivate contract. The commenter also iscorrect in stating that when a groupphysician has opted out, it does notaffect the ability of the rest of the groupmembers to furnish and bill for servicesthey furnish to Medicare beneficiaries.

The commenter is not correct,however, that when a group physicianhas opted out, the group may not bill inits own name for services provided bythe opt-out physician under a privatecontract. The Medicare statute does notprevent an opt-out physician’s group—regardless of whether the group has aparticipation agreement withMedicare—from billing payers otherthan Medicare for services furnishedunder a private contract. Of course,neither the physician nor the group isallowed to bill Medicare for services

furnished under a private contract.Thus, a physician who opts out canremain a group member during the timehe or she provides services to grouppatients, provided the services are billedthrough the group practice to payersother than Medicare. We believe therequirements in the group practicedefinition are meant to demonstrate thatthe physicians involved in the group areactually practicing medicine together. Aphysician can demonstrate a significantlevel of participation by treating eitherprogram or nonprogram patients, as longas they are group patients.

We also believe that any services thephysician bills in his or her own nameare not group services and, therefore,should be factored into the‘‘substantially all test’’ as outsidepatient care services.

Comment: Several commenters wereconcerned about the proposed rule’seffects on nonprofit medicalfoundations, particularly in light of ourstatement that a group practice canconsist of only one legal entity. Onecommenter was specifically concernedabout medical foundations in California,where such entities are established sothat practices can comply with thecorporate practice of medicineprohibition. One of the key exceptionsto the prohibition allows nonphysician(‘‘lay’’) participation in arranging for thedelivery of physician services if thenonphysician is a qualified medicalfoundation. (These entities are nonprofitand exempt from Federal incometaxation under section 501(c)(3) of theInternal Revenue Code). In California,for example, these foundations providepatient care through a separate,contracted medical group that iscomprised of at least 40 physicians whocollectively practice in at least 10specialty areas. A chief concern was thatour proposed rules would prevent thenonprofit foundation-model grouppractice from furnishing DHS under thein-office ancillary services exceptionbecause it has no employed physiciansor physician owners who can qualify as‘‘members of the group’’ for purposes ofthe group practices definitional tests.

The commenter considers theCalifornia nonprofit medical foundationto be, in essence, one bifurcated medicalservices provider that should be treatedas a ‘‘single legal entity’’ for purposes ofsection 1877 of the Act. That is, underCalifornia law, the medical foundationis itself a health care provider; yet thiscan only work if the medical foundationencompasses the physicians whocontract to provide the professionalservices. The IRS currently regards thephysician-foundation relationship ascomprising an integrated whole and

grants tax-exempt status to those trulyintegrated foundations as providers ofprofessional medical care. Thefoundation operates and owns allelements of the practice, but cannotprovide the physician services, and thephysicians have agreed to furnish allpatient care services through thefoundation model; it is the foundation,and not the physicians, who own themedical practice.

The commenter stated that entitiessuch as management serviceorganizations do not merit tax-exemptstatus because they support theprovision of services, but do notactually provide services, while thefoundations actually provide services.The IRS scrutinizes the entirefoundation relationship to assure that itsinterdependent functions andoperations comply with thefundamental requirements for taxexemption.

Response: As an initial matter, that anarrangement is subject to IRS regulationis not determinative under section 1877of the Act. The IRS’s goals in regulatingbusiness structures do not necessarilytake into account preventing fraud andabuse in the Medicare and Medicaidprograms. As to foundation-modelpractices in corporate practice ofmedicine States, we recognize that theypresent special problems under section1877 of the Act. On the one hand,section 1877(h)(4)(A) clearly authorizesgroup practices that are ‘‘foundations.’’On the other hand, in the typicalfoundation-model arrangement, thephysicians are not legally organized asa ‘‘foundation.’’

In reviewing the statute andlegislative history, we have reached thefollowing conclusions. First, theCongress used the term ‘‘foundation’’ inthe group practice definition in ageneric sense to cover any situations inwhich the single legal entity, that is, thegroup practice, consists of a foundation;the reference was not necessarilyintended to encompass bifurcatedfoundation-model arrangements.Second, the Congress intended forfoundation-model arrangements to beexcepted under the personal servicearrangements exception. The OBRA1993 Conference Report states that the‘‘conferees intend that this exception[personal service arrangements] wouldapply to payments made by a nonprofitMedical Foundation under a contractwith physicians to provide health careservices and which conducts medicalresearch.’’ H. Rep. No. 213, 103d Cong.,1st Sess. 814 (1993).

The personal service arrangementsexception should provide foundation-model arrangements with additional



flexibility in structuring theirarrangements and that most foundation-model arrangements will be able to fitin the exception, in accordance with thecongressional intent. The ‘‘volume orvalue of referrals’’ and ‘‘other businessgenerated’’ standards will applyuniformly to all exceptions in whichthey are included. (See the discussion insection V of this preamble and theregulations at § 411.354(d).)

Comment: Several commenters notedthat another arrangement commonlyused in corporate practice of medicineStates is the use of ‘‘friendly’’ or‘‘captive’’ PCs to create hospital-affiliated group practices in States thatprohibit hospitals from employingphysicians directly. For example, acommenter explained that in Ohio, asingle physician may own stock in a PC,but hold the stock in trust for a hospitalor other nonprofit corporation. The PCitself employs physicians who operateas a group practice and would fulfill allof the other group practicerequirements. The commenter suggestedthat this arrangement would satisfysection 1877 of the Act if the rule werechanged to permit groups to be ownedby a single physician owner.

Response: As noted in section VI.C.2of this preamble, we have made thechange suggested by the commenter.Group practices may be owned by asingle physician provided that the grouppractice employs at least one otherphysician. Therefore, we believe that‘‘friendly’’ or ‘‘captive’’ PCs can qualifyas group practices if they meet all of theother conditions of the group practicedefinition.

Comment: Several commenters notedthat the sole owner of the ‘‘captive’’ or‘‘friendly’’ PC may be a hospital-basedphysician who does not practicemedicine as part of the group. Thesecommenters wondered whether anonparticipating physician ownerwould be a member of the group forpurposes of the group practicedefinitional tests, particularly the‘‘substantially all test.’’

Response: We believe that a hospital-based physician, who does not practicemedicine as part of the group, is not amember of the group practice forpurposes of the definitional tests.However, that means that the physicianis not a member for any other purposeeither. Thus, for example, a captive orfriendly PC owned by such a physicianwould need to employ at least twophysicians to qualify as a grouppractice. In addition, the sole physicianowner described in the comment wouldnot be eligible for sharing in overallprofits or productivity bonuses under

section 1877(h)(4)(B)(i) of the Act and§ 411.352(i) of the regulations.

Comment: Commenters generallysupported our position in the proposedregulations that a physician’s financialrelationship with an entity undersection 1877 of the Act would not beimputed to his or her group practice.Thus, other members of the grouppractice could continue to makereferrals to the entity, provided that themembers did not have financialrelationships with the entity and thephysician with the financialrelationship was not in a position tocontrol the referrals of other groupmembers. However, one commentersuggested that we include as members(who could continue to make referrals)physicians who are employed by theirown PC (instead of the group) as longas the group has legal authority over theterms of the physician’s employmentand is legally responsible for servicesprovided by the physician on behalf ofthe group. This commenter noted thatfor tax and pension reasons, manyphysicians prefer to be employed bytheir PCs rather than the group practiceentity.

Response: We are adopting theposition we discussed in the proposedregulations, that is, that a physician’sfinancial relationship with an entityunder section 1877 of the Act will notbe imputed to his or her group practice.Thus, other members of the grouppractice can continue to make referralsto the entity, provided that the membersdo not have financial relationships withthe entity and the physician with thefinancial relationship is not in aposition to control the referrals of othergroup members. As we have indicatedelsewhere in this preamble, physicianswho are employed by their ownindividual PCs are considered membersof the group if the PC has an ownershipinterest in the group. If not, thephysician would be considered anindependent contractor who is not amember of the group.

4. The ‘‘Full Range of Services Test’’Existing Law: The definition of a

group practice in section1877(h)(4)(A)(i) of the Act provides that,among other requirements, eachphysician who is a member of the groupmust provide substantially the full rangeof services that the physician routinelyprovides, including medical care,consultation, diagnosis, or treatment,through the joint use of shared officespace, facilities, equipment, andpersonnel. In the August 1995 final rulecovering referrals for clinical labservices, we required physicianmembers to furnish the full range of

‘‘patient care services,’’ defined asservices addressing the medical needs ofspecific patients.

The Proposed Rule: In the January1998 proposed rule, we proposedexpanding ‘‘patient care services’’ toinclude any physician’s tasks thataddress the medical needs of specificpatients or patients in general or thatbenefit the practice. These activitiescould include, for example, time spenttraining group staff members, arrangingfor equipment, or performingadministrative or management tasks, aslong as these activities benefit theoperation of the group practice. Serviceswholly outside the group’s medicalpractice, such as teaching, do not countas patient care services. This proposedtest was designed to ensure that aphysician is actually practicingmedicine as he or she ordinarily wouldas part of the group and has not simplyjoined the group in name only. It furtherensures that physicians are practicing aspart of the group and not simply usingthe group to profit from DHS referrals.

The Final Rule: We are promulgatingthe test as proposed in the January 1998proposed rule.

Comment: Commenters generallyfavored our proposal to revise thedefinition of ‘‘patient care services’’ toinclude any physician task thataddresses the medical needs of specificpatients or patients in general, or thatbenefits the group practice. However,commenters requested clarificationwhether activities that are conductedoutside the group practice, such asteaching, overseeing residents, orconducting medical research, but thatnonetheless benefit patients in general,are covered within the definition. Othersimilar activities might includeadministrative positions within hospitalsystems or independent physicians’associations that involve oversight ofpatients beyond those of the grouppractice.

Response: It does not appear to us thatthe activities listed by the commenterwould particularly benefit grouppractice patients, except possibly in avery attenuated way. (The answer mightchange if the group itself was contractedto perform these ‘‘outside’’ tasks.)Therefore, we would generally notregard them as patient care servicesperformed for the group. Instead, theymight qualify as patient care servicesprovided outside of the group. Forexample, the physician could besupervising residents in a hospital whilethe residents treat patients, thevolunteer activities might involvetreating indigent patients, or theadministrative work could involve



overseeing the efficient delivery of careto patients.

If the physician furnishes patient careservices exclusively within the group,then whatever services he or shefurnishes should constitute the fullrange of that physician’s routine patientcare services. If the physician furnishespatient care services both inside andoutside of the group, then the servicesfor the group’s patients should becomparable in scope to those providedoutside of the group setting. Any of aphysician’s services that do not involvecaring for patients should not affect thistest. For example, if a physician teachesmedicine outside of the practice, butdoes not oversee patient care, we wouldnot expect that the physician would alsobe performing teaching services as partof his or her group services.

5. The ‘‘Substantially All Test’’The Existing Law: Under the

definition of a ‘‘group practice’’ insection 1877(h)(4)(A)(ii) of the Act,substantially all of the services of thephysician members must be providedthrough the group and billed under abilling number assigned to the group,and amounts so received must betreated as receipts of the group. In§ 411.351, we interpreted ‘‘substantiallyall’’ to mean at least 75 percent of thetotal patient care services of the grouppractice’s members. We promulgatedspecial rules for group practices locatedsolely in HPSAs and for physicianmembers’ time spent providing servicesin HPSAs.

The Proposed Rule: We proposedmeasuring patient care services (usingthe same definition of ‘‘patient careservices’’ applied in the full range ofservices test described above) by the‘‘total patient care time’’ each memberspends on these services. We concludedthat patient care time was the moststraightforward and least burdensomemethod for measuring a physician’spatient care services, but we solicitedcomments on other viablemethodologies. Again, this test ensuresthat physicians who are members of thegroup practice are economically boundto the group for other than DHS referralsand are not just members of the groupfor purposes of profiting from DHSreferrals.

The Final Rule: We are promulgatingthis test as proposed in our January1998 proposed rule, except as discussedin this preamble. As proposed in ourJanuary 1998 proposed rule, the‘‘substantially all test’’ could bemeasured based on the memberphysician’s actual time spentperforming patient care services,whether performed inside or outside the

group practice. Having reviewed thecomments regarding alternativemethods for meeting the test, we areamending the ‘‘substantially all test’’ toallow group practices greater flexibility.While ‘‘actual time spent’’ remains thedefault standard, group practices mayadopt alternative measures, providedthose measures are reasonable, fixed inadvance of the performance of theservices being measured (that is, no expost facto methods), uniformly appliedover time, verifiable, and documented.Independent contractors and leasedemployees are not defined under thefinal rule as members of the group;therefore, their services need not becounted for purposes of complying withthe ‘‘substantially all test.’’

Comment: Many commentersappreciated our expansion of thedefinition of patient care services toinclude services that benefit grouppatients in general or the group practiceitself, but suggested that group practicesbe allowed to adopt alternative methodsfor measuring compliance with the 75percent ‘‘substantially all test,’’depending on the particularcircumstances of the group and the mostreasonable manner available for thegroup. These commenters pointed outthat many physicians do not maintaintime records and to do so would createan unnecessary administrative burden.Additionally, some commenters believethat it would be difficult or misleadingto calculate the exact number of patientcare hours as we suggested in theproposed regulations because many full-time physicians tend to work more than40 hours per week. (Data submitted bya major physician trade associationreflected that the ‘‘average’’ physicianworks 57.9 hours a week, with 53.2hours spent on patient care activities).For example, one physician in a practicemay work a full-time schedule of 40hours per week for the group andanother 60 hours per week; it would beinconsistent to count both as furnishingthe same 100 percent of their time to thepractice. Alternatively, a physician maywork a full 40-hour week at his or herpractice and then an additional 20 hoursat a hospital or clinic. To count thisphysician as working only two-thirdstime for the group, based on a straightcalculation of hours, would beunreasonable. One commenter thoughtthat the regulations should establish apresumption that 40 hours per week ofpatient care time for physicians equals100 percent of such time for purposes ofcalculating the 75 percent ‘‘substantiallyall test’’; any hours spent beyond 40hours on professional patient care timewould fall outside of the 75 percent

‘‘substantially all test.’’ Some groupsexpressed a preference for using relativevalue units (RVUs) to measure patientcare services, while others preferred arevenue based calculation or a testbased on patient encounters furnishedand billed through the group. Onecommenter thought that the ‘‘patientcare time’’ standard was ambiguous andnot objectively verifiable, sincephysician timekeeping often does notaccount for time spent on activities notinvolving direct patient care.

Response: We are persuaded that itwould be appropriate to permit grouppractices additional flexibility inmeasuring compliance with the‘‘substantially all test’’ based on theirunique circumstances. The ‘‘actual timespent’’ standard described in thepreamble of the January 1998 proposedrule remains the default standard.Group practices that employ thatstandard can be assured that they areappropriately measuring ‘‘patient careservices.’’ As we noted in the January1998 proposed rule, we are notrequiring that physicians use detailedtime sheets or time cards; in most cases,appointment calendars, personalschedules, billing records, or otherexisting sources will be sufficient toestablish the time spent on patient careservices. Group practices may adoptalternative means of satisfying the‘‘substantially all test,’’ provided themeans used are (1) reasonable, (2) fixedin advance of the performance of theservices being measured (that is, no expost facto methods), (3) uniformlyapplied over time, and (4) verifiable.The data used to calculate compliancewith the ‘‘substantially all test’’ andsupporting documentation must bemade available to the Secretary uponrequest.

Comment: Several commenters soughtclarification whether the 75 percent‘‘substantially all test’’ for patient careservices is measured based on totalpatient services across all specialities ina group or whether it is measured on aspecialty-by-specialty basis.

Response: Section 1877(h)(4)(A)(ii) ofthe Act provides that a group practice isa legally organized entity ‘‘for whichsubstantially all of the services of thephysicians who are members * * * areprovided through the group * * * .’’ In§ 411.351, we interpreted ‘‘substantiallyall’’ to mean at least 75 percent of thetotal patient care services of each of thegroup practice’s members. It is our viewthat a group practice should aggregateall of the patient care services that eachof its members provides, both insideand outside of the practice, including allvarieties of patient care services, todetermine whether 75 percent of those



services are furnished through thegroup. However, any services that areprovided by a group throughindependent contractors would not befigured into the test. The test is designedto demonstrate that the activities of eachmember are conducted through thegroup. Services performed byindependent contractors would have nobearing on this measure.

Comment: One commenter soughtclarification in applying the 75 percentrule to new group practices that may beowned by, or employ, part-timephysicians who are practicing elsewhereduring the group’s initial 12-monthstart-up period. In some cases, thesegroups will not meet the group practicedefinition during the start-up period.

Response: We agree with thecommenter that some accommodationshould be made for new group practices.Nothing in the statutory languageprecludes such accommodation.Accordingly, the final regulationsprovide that during the ‘‘start up’’period for a new group practice (not toexceed 12 months), a group practicemust make a reasonable, good faitheffort to ensure that the group practicecomplies with the ‘‘substantially alltest’’ as soon as practicable, but no laterthan 12 months from the date of theinitial formation of the group practice.This ‘‘start up’’ provision does not applywhen an existing group practice admitsa new member or when an existinggroup practice reorganizes.

Comment: A commenter related thefollowing scenario: A specialistprovides professional services for ahospital outpatient under a contractwith the hospital that allows a hospitalemployee to perform the technicalcomponent of the service. The specialistreassigns his or her payments for theprofessional services to the hospital.The hospital then bills Medicare for aglobal payment that includes theprofessional and technical components.Under this arrangement, the hospitalpays the specialist a contractual amountfor the professional component. Thecommenter requested that we explicitlypermit the professional component ofthese types of services to be counted aspart of the 75 percent requirement forpurposes of the ‘‘substantially all test,’’even though the hospital and not thegroup practice bills Medicare for thespecialist’s services. Alternatively,commenters recommended that wechange the two compensationexceptions that deal with hospitals(located in regulations in §§ 411.357(g)and (h)) to exclude compensation paidto a physician for professional services.

Response: We agree that a grouppractice should be able to count the

professional component of servicesprovided by a member physician undera global payment when calculating the‘‘75 percent of patient care servicesrequirement’’ for purposes of the‘‘substantially all test,’’ even though thehospital actually bills Medicare directlyfor the physician services. We regard the‘‘substantially all test’’ as designed toguarantee that a physician is providinga substantial amount of his or her ownservices through the group practice. Ifthe group’s business includes providingprofessional services to another entity,which, in turn, pays the group for thoseservices, it is our view that these areservices that should count as services aphysician provides through the group.We are, therefore, interpreting therequirement that substantially all of aphysician’s services be providedthrough the group and be billed ‘‘undera billing number assigned to the group’’and amounts so received treated asreceipts of the group to include anyphysicians’ professional services billedby a group under any group billingnumber regardless of the payer of theservices, provided the receipts aretreated as receipts of the group. In otherwords, the phrase ‘‘billed under abilling number assigned to the group’’ insection 1877(h)(4)(A)(ii) of the Act doesnot refer exclusively to Medicare orMedicaid billing numbers.

Comment: Several commentersobjected to the proposed regulationbecause they believe it would requiregroups to bill under a group billingnumber and would force physicians ina group to bill individually when apatient has been seen in the hospital.

Response: While we are somewhatunclear as to the commenters’ concern,we see nothing in these regulations thataffects how group practice physiciansbill for services provided to their ownpatients seen in a hospital.

6. The ‘‘Seventy-Five Percent Physician-Patient Encounters Test’’

The Existing Law: Under section1877(h)(4)(A)(v) of the Act, physicianmembers of a group practice mustpersonally conduct at least 75 percent ofthe group practice’s patient encounters(measured per capita, not by time). Thetest ensures that the group practice is alegitimate medical practice and notprimarily a business for the provision oflucrative ancillary services.

The Proposed Rule: The proposedrule would exclude independentcontractors or leased employees fromthe test because they would not beconsidered members of the group.

The Final Rule: We are promulgatingthis test as proposed in our January1998 proposed rule.

Comment: A commenter requestedconfirmation that bona fide employedphysicians count for purposes of the 75percent physician-patient encounterstest.

Response: As discussed in sectionVI.C.3 of this preamble, members of agroup practice include employedphysicians. Thus, patient encounters bybona fide employed physicians countfor purposes of the 75 percentphysician-patient encounters test.

7. Unified Business TestThe Existing Law: For purposes of the

group practice definition, section1877(h)(4)(A)(iii) of the Act requires that‘‘the overhead expenses of and theincome from the group practice aredistributed in accordance with methodspreviously determined.’’

The Proposed Rule: In our January1998 proposed rule, we proposedexercising our discretion under section1877(h)(4)(vi) of the Act to impose anadditional standard under the definitionof group practice that would requiregroups to be a ‘‘unified business.’’ Ourpurpose was to ensure that grouppractices are substantially integratedbusiness operations and that theirallocation of group expenses andincome to members reflect this. Absenta unified business test, we areconcerned about the development ofsham groups that are formed primarilyfor the purpose of profiting from self-referrals, but not for other, bona fidepurposes. Thus, in the proposedregulations, we interpreted section1877(h)(4)(A)(iii) of the Act as requiringthat the group’s overhead expenses andincome be distributed according tomethods that are—

• Determined prior to the time periodduring which the group has earned theincome or incurred the costs, and

• Distributed according to methodsindicating that the group practice is aunified business.

We indicated that the methods mustreflect ‘‘centralized decision making, apooling of expenses and revenues, anda distribution system that is not basedon each satellite office operating as if itwere a separate enterprise.’’

The Final Rule: The statute requiresthat the overhead expenses of, andincome from, the group practice bedistributed in accordance with methods‘‘previously determined.’’ Unlike theJanuary 1998 proposed rule, whichinterpreted ‘‘previously determined’’ asmeaning before the group earned theincome or incurred the cost, the finalrule treats a distribution methodology as‘‘previously determined’’ if it isdetermined prior to receipt of paymentfor the services giving rise to the



overhead expense or producing theincome. Apart from this limitation, therule does not prevent group practicesfrom adjusting their compensationmethodologies prospectively asfrequently as they desire (subject to therestrictions on the distribution of DHSrevenues in section 1877(h)(4)(B)(i) ofthe Act).

Commenters were nearly uniform intheir criticism of the proposed unifiedbusiness test, claiming that itinvalidated many bona fide andcommon group practice compensationstructures and discouraged beneficialintegration of group practices. Reflectingthese comments, Phase I of thisrulemaking retains the general unifiedbusiness test, but offers groupsconsiderable additional flexibility insatisfying the requirement. Importantly,Phase I of this rulemaking permits manyforms of cost center and location-basedaccounting, provided that compensationformulae with respect to DHS revenuesotherwise meet the requirements of thelaw. To meet the unified business test,a group practice must be organized andoperated on a bona fide basis as a singleintegrated business enterprise with legaland organizational integration. Essentialelements are: (1) Centralized decisionmaking by a body representative of thepractice that maintains effective controlover the group’s assets and liabilities(including budgets, compensation, andsalaries); (2) consolidated billing,accounting, and financial reporting; and(3) centralized utilization review (forexample, utilization review conductedon a group-wide basis). We designed therule to preclude group practice statusfor loose confederations of physiciansthat are group practices in name, but notoperation. As adopted in Phase I of thisrulemaking, the unified business testsets general parameters indicative ofintegration, but does not dictate specificcompensation practices. Compensation,with respect to DHS, is subject toseparate limitations described in theseregulations.

Comment: Many commenters objectedto our proposal to interpret the phrase‘‘previously determined’’ to mean thatthe methodology for setting groupmembers’’ compensation must be fixedbefore the group has earned the incomeor incurred the costs of providing thedesignated health care services. Onecommenter stated that this proposedinterpretation would overly restrict agroup practice’s ability to adjustphysician compensation periodically toreflect a physician’s contribution to thegroup practice or to pay discretionarybonuses. Some commenters observedthat groups have traditionally used adhoc compensation systems that allow

groups to ‘‘wait and see how the yeargoes.’’ These systems afford groupsflexibility to deal with business realitiesas they occur without, in thecommenters’ view, increasing the risk ofself-referral compensation. In lieu of ourproposed ‘‘prior to incurrence’’ rule, anumber of commenters favored a ‘‘priorto distribution’’ rule. One commenterrecommended coupling a ‘‘prior todistribution’’ rule with a requirementthat distributions not relate to thevolume or value of Medicare orMedicaid DHS referrals and thatdistributions not be retroactivelyadjusted in a manner that establishes arelationship between compensation andreferrals. Another commenter suggestedthat ‘‘previously determined’’ beinterpreted to mean that thecompensation formula must be reportedat the same time groups report theirfinancial relationships to us.

Response: It is a statutory requirementthat a group’s compensationmethodology be determined in advance.Unrestricted ad hoc compensationsystems would allow groups tocompensate physicians directly basedon the number of designated health careservices referrals they generate—thevery conduct the statute is intended toprohibit. A ‘‘prior to distribution’’ rulewould be circular, since anydistribution scheme would bedetermined prior to the distribution. Weagree, however, that groups should havesome flexibility in designing andimplementing compensation systemsthat are responsive to changingcircumstances. It is our understandingthat most groups operate on a cashbasis. In the final rule, we are requiringthat group practices determine themethodology for distributing overheadexpenses of, and income from, theprovision of designated health careservices prior to the receipt of paymentfor those services. The methodologymay be determined at any time untilpayment has been received, even if theincome has been earned or costsincurred. This rule permits groups toadjust their methodologies prospectivelyas often as they deem appropriate. Webelieve Phase I of this rulemakingprovides groups with sufficientflexibility to respond to businessrealities, while complying with thestatutory requirement that thedistribution system be ‘‘previouslydetermined.’’

Section 1877(h)(4)(A)(iv) of the Actprohibits a physician member of thegroup from being compensated in amanner that takes into account thevolume or value of DHS referrals, exceptas provided in section 1877(h)(4)(B)(i) ofthe Act. Thus, a compensation method

that directly relates to the volume orvalue of Medicare referrals or isretroactively adjusted would violatesection 1877(h)(4)(A)(iv) of the Act.

Comment: A commenter askedwhether a group practice can distributeunexpected income which, by itsnature, was not ‘‘previously’’ part of thegroup’s distribution methodology. Thecommenter cited as an example a grouppractice opening a new site withoutspecifically determining in advancehow revenues or profits would bedistributed to group members.

Response: We are unclear as to thecircumstances under which a grouppractice would open a new officewithout considering distribution of therevenues or profits from that new office.We see no reason to deviate from the‘‘prior to payment’’ rule established inthese regulations for ‘‘unexpectedincome.’’

Comment: Although manycommenters generally recognized theappropriateness of precluding grouppractice status for groups that aremerely confederations of independent,unintegrated medical groups, manycommenters expressed concerns aboutthe unified business requirementpromulgated in the proposedregulations. First, commentersquestioned our legal authority to graftthis new condition onto the statutorygroup practice definition. Second,commenters expressed the view that theunified business standard as proposedwould have a chilling effect onlegitimate group practices anddiscourage beneficial integration. Ofparticular concern was the perceptionthat the regulations would completelyprohibit or unduly complicate the grouppractices’ use of profit and cost centeror location-based accounting anddistribution of expenses and income. Inthis regard, many commenters arguedthat site-specific or specialty-specificaccountability encourages efficientmanagement of expenses and practicepatterns and eliminates a ‘‘free rider’’problem that impedes cost effectiveintegration, which groups findincreasingly important with the growthof managed care. One commenter,representing a physician practicemanagement company, noted that onereason groups prefer cost centeraccounting is that many physicians innewly-acquired group practices want tominimize changes in income levels theyhave historically realized; cost centeraccounting facilitates more absoluteintegration over time.

Instead of barring cost center orlocation-based accounting anddistribution of expenses and income,commenters encouraged us to rely on



other indicators of integration. Onecommenter suggested that we couldaddress our concern about looseconfederations of groups by revising therule to require that a group practice beorganized and operated on a bona fidebasis as a single business enterpriseintegrated legally and operationally.According to the commenters, whilemany legitimately integrated medicalpractices allow their satellite offices tomake day-to-day, local practicedecisions, almost all significantdecisions, such as hiring and firingphysicians and approval of annualoperating budgets, are made by theentire practice’s governing body.Moreover, the costs of central businessactivities such as billing, collections,managed care contracting, andpurchasing of some products andservices are, in most cases, shared by allpractice sites, either per capita or basedon a generally applied formula.Commenters offered numeroussuggestions as to relevant criteria forascertaining that a group practice is aunified business.

Response: Our statutory authority toimpose a unified business test resides insection 1877(h)(4)(A)(vi) of the Act,which vests in the Secretary the abilityto impose additional standards on grouppractices by regulation. Upon furtherconsideration, we agree with thecommenters that our proposed unifiedbusiness test was too restrictive. Theunified business test was designed toensure that group practices aresubstantially integrated businessoperations and that their distribution ofgroup expenses and income to membersreflects this. The unified business testguards against the development of shamgroups formed primarily for the purposeof profiting from self-referrals.

Phase I of this rulemaking, describedin detail above, retains the generalunified business test, but offers groupsconsiderable flexibility in satisfying therequirement. Importantly, many formsof cost center and location-basedaccounting are permitted, provided thatcompensation formulae with respect tothe distribution of DHS revenuesotherwise meet the requirements of thelaw.

Comment: A physician tradeassociation asked whether groups thatcompensate their physicians undermore than one methodology can qualifyas a ‘‘unified business.’’ This issue isespecially significant for larger groupsthat have expanded through theacquisition of other existing grouppractices, each of which may havenegotiated different compensationarrangements. Typically, themethodology for compensating each

new physician who joins the group isset in advance, based on thenegotiations between the parties andapproved by the governing body of theacquiring group (or an authorizedcommittee of the governing body).

Response: We see no impediment inthe revised unified business test togroups like those described in thecomment from qualifying as a unifiedbusiness. In order to qualify for grouppractice status, the group would have tomeet all of the other group practicetests, including the limitations oncompensation based directly orindirectly on the volume or value ofreferrals and the restrictions on profitsharing and productivity bonuses. (Seethe discussion in section VI.C.8 of thispreamble.)

Comment: One commenter expressedconcern that the proposed unifiedbusiness standard could be interpretedto prevent integrated medical practicesfrom compensating their physicians onan individual collections minusexpenses basis. A commenter urged thatgroups be allowed to compensatephysicians based on their ownproductivity (excluding any revenue orexpense related to the group’s DHS),and that it be permissible to calculatethe physician’s compensation byallocating to the physician all of thephysician’s direct medical expenses ofpractice (including, but not limited to,for example, malpractice insurance,continuing medical education, spacecost, supplies) and his or her pro ratashare of general overhead not based onany volume or value of his or herreferrals (for example, administrativeand management costs). Similarly,another commenter stated that it iscommon practice for groups tocompensate their members according toformulae that take into account ‘‘officeprofits,’’ described as collected revenuesattributable to a physician’s medicalservices performed by that physician orpersonnel under his supervision, notincluding revenues for DHS or direct orindirect expenses of that physician.

Response: Distribution of grouppractice revenues derived from DHS issubject to the compensation rules setforth at § 411.352. With respect toincome derived from other sources,groups are free to divide it in anymanner they choose, provided they candemonstrate that they are a unifiedbusiness under the three principlesdiscussed in section VI.C.7 of thispreamble. Depending on individualcircumstances, we believe that most ofthe compensation methodologiesdescribed in the comment can beaccommodated within the parameters ofthe revised unified business test.

Comment: One commenter questionedwhether a total contingent revenue pool,distributed on an aggregate basis (aftersubtracting expenses that includeallocated central practice or ‘‘homeoffice’’ expenses) to the practitioners ina given branch or satellite office of alarger statewide PC according to apredetermined formula, would meet therequirements of the unified businesstest.

Response: Whether the describedscheme fits in the exception woulddepend on whether the three factorsdescribed above are present. Thescheme would also have to meet therequirements of sections1877(h)(4)(A)(iv) (compensation forgroup members) and (h)(4)(B)(i) (profitsand productivity bonuses) of the Actwith respect to DHS. In particular,under the overall profit shares rule asset forth in Phase I of this rulemaking,as discussed in section VI.C.8, overallprofit shares must be derived fromaggregations of the entire practice or acomponent of the practice consisting ofat least five physicians.

Comment: A commenter soughtclarification as to whether the financialallocation requirements under theunified business standard apply solelyto the DHS furnished by the group orwhether they extend more broadly to allhealth care services furnished by thegroup. The commenter viewed the latterapproach as beyond the statutoryauthority, which applies only tofurnishing DHS, and as contrary to ourown statements in the preamble to theproposed regulations that compensationarrangements for services that are notDHS are outside the scope of the statuteand regulations.

Response: The Congress specificallyconferred on the Secretary in section1877(h)(4)(A)(vi) of the Act authority toimpose additional standards in thedefinition of a group practice. For thelimited purposes of establishing that agroup practice is a unified business, webelieve it is appropriate to consider thegroup practice’s methods of distributingrevenues derived from all sources, notjust DHS. Group practices can distributethe revenues from services that are notMedicare-DHS in any manner theywish. However, if the payment methodsdo not indicate a unified business (orindicate a business that is unified solelywith respect to the provision of DHS),the group may not qualify as a grouppractice under section 1877(h)(4) of theAct and § 411.352. Compensation paidto a physician creates a compensationarrangement within the meaning of§ 411.354, even if the compensationrelates only to services that are not DHS.Absent an applicable exception (for



example, the in-office ancillary servicesor employee exceptions), thiscompensation arrangement triggers theself-referral prohibition as to any of thephysician’s referrals of DHS.

8. Profit Shares and ProductivityBonuses

The Existing Law: In general, thestatute provides that a physician who isa member of the group may not becompensated directly or indirectlybased on the volume or value of his orher referrals of DHS. In addition, thestatute provides that a ‘‘physician in agroup practice’’ may receive shares ofoverall profits of the group or aproductivity bonus based on servicespersonally performed or incident tosuch personally performed services,provided the share or bonus is notdetermined in a manner that is directlyrelated to the volume or value ofreferrals by such physician. In otherwords, group practice compensationformulae that are only indirectly relatedto the volume or value of referrals ofDHS are permissible.

The Proposed Rule: We proposed tointerpret the statute to mean thatproductivity bonuses could only relateto work personally performed by thephysician that results from referralsfrom other physicians in the group, andcould not relate (directly or indirectly)to work that results from self-referrals orDHS referrals to other physicians andother office personnel. Thus, we saidthat a physician could only receivecompensation for his or her own DHSreferrals through the aggregation thatoccurs as part of the overall sharing ofgroup profits. As to the overall sharingof profits, we indicated that profits mustbe aggregated at the group level and notat a component level.

The Final Rule: In section IV of thispreamble, we provide an overview ofthe physician compensation provisionsof section 1877 of the Act. In general, agroup practice can segregate its DHSrevenues from its other revenues forpurposes of compensating physicians;section 1877 of the Act applies only toa practice’s DHS revenues. Generally,this income is likely to comprise arelatively small portion of the totalrevenues of most practices.

Under Phase I of this rulemaking,group practices may pay memberphysicians and independent contractorswho qualify as ‘‘physicians in thegroup’’ productivity bonuses baseddirectly on the physician’s personalproductivity (including servicesincident to such personally performedservices that meet the requirements ofsection 1861(s)(2)(A) of the Act andsection 2050 of the Medicare Carriers

Manual, Part 3), but may not pay thesephysicians any bonus based directly ontheir referrals of DHS that are performedby someone else. The statute alsopermits group practice members (andindependent contractors who qualify as‘‘physicians in the group’’) to receiveshares of the overall profits of the group,so long as those shares do not directlycorrelate to the volume or value of DHSreferrals generated by the physician thatare provided by someone else. We aredefining ‘‘share of overall profits’’ asmeaning a share of the entire profits ofthe entire group or any component ofthe group that consists of at least 5physicians derived from DHS.

Under the statutory scheme, revenuesgenerated by DHS may be distributed togroup practice members and physiciansin the group in accordance withmethods that indirectly take intoaccount DHS referrals. In general, webelieve a compensation structure doesnot directly take into account thevolume or value of referrals if there isno direct correlation between the totalamount of a physician’s compensationand the volume or value of thephysician’s DHS referrals (regardless ofwhether the services are personallyperformed). Phase I of this rulemakingcontains specific methodologies thatdescribe compensation methods that aredeemed to be indirect. In addition,Phase I of this rulemaking containsadditional provisions that allow grouppractices to devise other reasonableindirect compensation methodologies.

The distribution methods for overallprofit shares are as follows:

1. A per capita (that is, per physician)division of the overall profits.

2. A distribution of DHS revenuesbased on the distribution of the grouppractice’s revenues attributable toservices that are not DHS payable byFederal or private payers.

3. Any distribution of DHS revenuesif the group practice’s DHS revenues areless than 5 percent of the grouppractice’s total revenues and nophysician’s allocated portion of thoserevenues is more than 5 percent of thephysician’s total compensation from thegroup practice.

The methods for productivity bonusesare as follows:

1. A productivity bonus based on thephysician’s total patient encounters orRVUs.

2. A productivity bonus based on theallocation of the physician’scompensation that is attributable toservices that are not DHS payable byFederal or private payers.

3. Any productivity bonus thatincludes DHS revenues if the grouppractice’s DHS revenues are less than 5

percent of the group practice’s totalrevenues and no physician’s allocatedportion of those revenues is more than5 percent of the physician’s totalcompensation from the group.

Comment: Many commenters objectedto our proposed interpretation of thestatute to mean that productivitybonuses can relate only to workpersonally performed that results fromreferrals from other physicians in thegroup, and cannot relate (directly orindirectly) to work that results from self-referrals. Commenters protested thatthis interpretation barred anycompensation based on a physician’spersonal productivity for self-referredDHS and was, therefore, contrary toclear statutory intent. Severalcommenters explained that ourinterpretation would produceanomalous results in somecircumstances. For example, an internistrefers a patient with a gastrointestinalcomplaint to a gastrointestinalspecialist, and the specialist evaluatesthe patient at an initial visit. Thespecialist subsequently performs anendoscopy on the patient. Under theproposed January 1998 regulations, theendoscopy would be a self-referral bythe specialist, and the specialist couldnot receive a productivity bonus forperforming the endoscopy. However, ifthe specialist referred the patient toanother physician in the same grouppractice for the endoscopy, thespecialist could receive compensationindirectly based on that endoscopy.Thus, in the commenter’s view, the rulecreates a disincentive to performservices and an incentive to refer (whichmay be contrary to good patient careand not cost effective). The commenterfurther noted that specialists whoperform substantial amounts of DHS aredisadvantaged by the proposedinterpretation because they cannot berewarded for personal productivity,while their counterparts, for whom theperformance of DHS is a less significantpart of their practices, can.

Commenters suggested aninterpretation that would permitproductivity bonuses for DHSpersonally performed by the referringphysician, but not for DHS referred toothers. The commenters generallyrequested that the final rule allow grouppractices to compensate members of thegroup based upon the volume or valueof DHS, so long as the services arepersonally performed by the physicianor are incident to the physician’spersonally performed services. Onecommenter noted that ancillary services(including ‘‘incident to’’ services)performed for one’s own patients aremore ‘‘personal’’ to the ordering or



supervising physician than are serviceshe or she performs on colleagues’patients. Commenters also complainedthat our proposed interpretation wouldlead to disparate treatment of solo andgroup practitioners, since solopractitioners could receive the profitsfrom personally performed DHS thatthey self-refer, whereas grouppractitioners could not. One commenterthought that this discrepancy wouldmake solo practitioners reluctant to joingroup practices, thereby discouragingbeneficial market integration.

Finally, some commenters noted thatmany group practices have insufficientinformation technology systems to trackwhether a service performed by aphysician resulted from a self-referral ora referral from another physician.Commenters asserted that our proposedinterpretation would impose asignificant additional administrativeburden on those groups.

Response: In light of the comments,the changes we have made to ourinterpretation of the definition of a‘‘referral’’ and the volume or valuestandard, and our further review of thestatutory language, we are persuadedthat our proposed interpretation of thescope of productivity bonuses wasunnecessarily restrictive. Accordingly,we have revised the regulation to makeclear that group practices may paymember physicians (and independentcontractors who qualify as ‘‘physiciansin the group’’) productivity bonusesbased directly on the physician’spersonal productivity (includingservices ‘‘incident to’’ such personallyperformed services that meet therequirements of section 1861(s)(2)(A) ofthe Act and section 2050, ‘‘Services andSupplies,’’ of the Medicare Carrier’sManual (HCFA Pub. 14–3), Part 3—Claims Process), but may not pay thesephysicians any bonus based directly ontheir referrals of DHS that are performedby someone else.

Comment: Commenters soughtclarification about the treatment ofproductivity bonuses for ‘‘incident to’’services. One commenter observed thataccording to long-standing regulatorypolicies, ‘‘incident to’’ services areservices that are an incidental althoughintegral part of a physician’s personal,professional service to a patient. Thus,in the commenter’s view, there cannotbe a referral for ‘‘incident to’’ services inany ordinary sense, since what theancillary service provider does is part ofthe physician’s service itself. Severalcommenters expressed their belief thatone purpose of the productivity bonusprovision was to allow physicians toreceive ‘‘credit’’ for ‘‘incident to’’services in their compensation. One

commenter pointed out that it would behard to exclude ‘‘incident to’’ servicesin the calculation of productivitybonuses since claim forms typically donot indicate who performed the‘‘incident to’’ service (that is, whetherthe service was performed by thesupervising physician or someone else).Other commenters interpreted thestatutory reference as equating ‘‘incidentto’’ services with ‘‘in-office ancillary’’services. Under this view, commentersasserted that the statutory languageplainly allows productivity bonusesbased indirectly on the volume or valueof the physician’s in-office ancillaryservices and opposed our proposedinterpretation that prohibited anycompensation based on referrals for in-office ancillary services.

Response: We agree with the essenceof these comments with respect to grouppractices. Under the final regulation,group practice physicians can receivecompensation directly related to thephysician’s personal productivity and toservices incident to the physician’spersonally performed services, providedthe ‘‘incident to’’ services comply withthe requirements of section1861(s)(2)(A) of the Act and section2050, ‘‘Services and Supplies,’’ of theMedicare Carrier’s Manual (HCFA Pub.14–3), Part 3—Claims Process, and anysubsequent or additional HHS rules orregulations affecting ‘‘incident to’’billing. This means that the ‘‘incidentto’’ services must be directly supervisedby the physician. In other words, thephysician (or another clinic physicianin the case of a physician-directedclinic) must be present in the officesuite and immediately available toprovide assistance and direction.Moreover, the person performing the‘‘incident to’’ services must be anemployee of the physician (or thephysician-directed clinic). We believethat the heightened supervisionrequirement imposed by the ‘‘incidentto’’ rules provides some assurance thatthe ‘‘incident to’’ DHS will not be theprimary incentive for the self-referral.However, we may revisit the issue ofcompensation tied to ‘‘incident to’’services if we find that abuses areoccurring, especially in the area ofphysician-directed clinics.

Comment: We received a number ofcomments seeking clarification relatedto the methods of paying compensationthat are not directly based on thevolume or value of referrals. First,commenters urged that we allowpooling of revenues that are not DHSrevenues, because such revenues are notgoverned by the statute. Second, anumber of commenters objected to ourposition in the proposed regulations

that overall profits are not profits that‘‘belong only to a particular specialty orsubspecialty group’’ (even if the groupis located in several States or has severallocations in one State) because ‘‘thenarrower the pooling, the more likely itwill be that a physician will receivecompensation for his or her ownreferrals.’’ Commenters urged thatpooling at practice sites with more thana few physicians should not result inany individual’s compensation beingdirectly related to the volume or valueof his or her referrals, even if DHSrevenues are included in the pool.Commenters generally advocated thatwe allow pooling if at least threephysicians are included in the pool andthe distribution formula is not related toDHS referrals. Third, commentersoffered a variety of suggestions abouthow to calculate ‘‘indirect’’compensation. For example, onecommenter suggested that compensationbe considered ‘‘indirect’’ if the referralshave no mathematical effect oncompensation. Others suggested thatcompensation be considered ‘‘indirect’’if it is based on per capita calculations,RVUs, patient encounters, hoursworked, ownership shares in thepractice, or seniority.

Response: First, we are persuaded thatwe should permit some additionalflexibility related to the distribution ofshares of overall profits by grouppractices. Thus, we are defining a‘‘share of overall profits’’ to mean ashare of the entire profits derived fromDHS of the entire group practice or anycomponent of the group that consists ofat least five physicians. We believe athreshold of at least five physicians islikely to be broad enough to attenuatethe ties between compensation andreferrals. We are rejecting the suggestionto use a threshold of three physiciansbecause we believe that the lesserthreshold would result in pooling thatwould be too narrow and, therefore,potentially too closely related to DHSreferrals. Second, we recognize the needfor clear guidance as to appropriateindirect compensation methodologies.For that reason, we are including inPhase I of this rulemakingmethodologies that describecompensation distribution systems thatwe deem to be indirect. In other words,if a group practice wants absoluteassurance that its productivity bonusesor profit shares are not directly relatedto referrals, the group practice mayemploy one of the regulatorymethodologies set forth in § 411.352 ofthe regulations. Group practices are notrequired, however, to use thesemethods. The regulations clarify that



other methods (including distributionsbased on ownership interests orseniority) are acceptable so long as theyare reasonable, objectively verifiable,and indirectly related to referrals. Thesecompensation methods should beadequately documented and supportinginformation must be made available tothe Secretary upon request. Under thislatter ‘‘catch-all’’ provision, the grouppractice essentially bears the risk ofnoncompliance.

Comment: Several commenters soughtclarification as to whether anindependent contractor could becompensated under the productivitybonus provision of the group practicedefinition as a ‘‘physician in the group’’,even though independent contractorsare not members of the group.

Response: Independent contractorswho qualify as ‘‘physicians in thegroup’’ under the provisions of§ 411.351 can receive productivitybonuses under section 1877(h)(4)(B)(i)of the Act.

Comment: One commenter soughtclarification as to how providers shouldtreat capitation payments that covermore than one service for purposes ofallocating profit shares and productivitybonuses.

Response: In general, we believe thatcapitation payments are not likely tolead to increased utilization. Partiesmay use any reasonable allocationmethod with respect to such payments.

Comment: On page 1691 of thepreamble to the January 1998 proposedregulations, we explained our view that‘‘profits should not be pooled anddivided between group members so thatthey relate directly to the number ofdesignated health services for Medicareor Medicaid patients physicians referredto themselves or the value of those self-referrals (such as a value based oncomplexity of the service).’’ Acommenter objected to the parentheticalstatement, asserting that barringconsideration of the complexity of theservice is contrary to other Medicarepayment provisions, which take intoconsideration the level of trainingnecessary to perform, and difficulty of,certain procedures.

Response: Given our revisedinterpretation, we believe theparenthetical statement (‘‘such as valuebased on complexity of the service’’) isno longer relevant to these regulations.Group practice members can becompensated directly based on theirpersonal productivity (that is, the fruitsof their own labors), but not on theirproductivity in generating referrals.They may only be compensated basedindirectly on DHS referrals to otherphysicians or providers. So long as the

compensation is only indirectly relatedto the volume or value of DHS referrals,we believe it makes little difference ifthe value of the DHS referrals reflectsthe complexity of the services.

Comment: A commenter soughtclarification that when a physician is amember of a group practice and is alsoan employee of the group practice, hisor her compensation may be determinedunder the group practice’s rules withoutregard to the employee exception.

Response: We agree that when aphysician is a member of a grouppractice, his or her compensation needonly comply with the group practicerules. Meeting the group practicedefinition allows physicians in thegroup to refer within the group underthe in-office ancillary services exceptionor the physicians’ services exception.However, nothing prevents a physicianand group practice from using theemployee exception instead. It isimportant to remember that referrals ofDHS are only permitted if an exception,such as the in-office ancillary servicesexception or employee exception,applies.

Comment: Several commenters wereconfused by our use of the terms‘‘revenues’’ and ‘‘profits’’ throughoutthe preamble to the January 1998proposed regulations. For example, onpage 1691 we stated that ‘‘the referringphysician can receive a portion of thegroup’s overall pooled revenues fromthese services as long as the group doesnot share these profits in a manner thatrelates directly to who made thereferrals for them.’’ Similarly, on thesame page we stated that we ‘‘regard‘over-all profits of the group’ to mean allof the profits or revenues a group candistribute in any form to group members* * *.’’ These commenters requestedthat the terms ‘‘profits’’ and ‘‘revenues’’be used in a manner that is consistentwith their generally accepted meaningsor that definitions of the terms beprovided in the regulations.

Response: We agree that the terms‘‘revenues’’ and ‘‘profits’’ were usedinconsistently in the January 1998proposed regulation. In Phase I of thisrulemaking, we have endeavored to usethose terms consistent with theirgenerally accepted meanings.

9. Group Practice AttestationsThe Existing Law: In § 411.360 of the

August 1995 final rule covering referralsfor clinical laboratory services, weincluded the requirement that grouppractices provide their carriers with awritten statement annually to attest that,during the most recent 12-month period,75 percent of the total patient careservices of group members was

furnished through the group. Any groupthat intended to meet the definition ofa group practice in order to qualify forone of the exceptions provided in theregulations was required to submit therequired attestation to its carrier byDecember 12, 1995. On December 11,1995, we published in the FederalRegister, at 60 FR 63438, a final rulethat delays the date by which a groupof physicians must file an attestationstatement. The December final ruleamended § 411.360 to require that agroup that intends to meet the definitionof a group practice must submit anattestation statement to its carrier nolater than 60 days after the groupreceives attestation instructions from itscarrier. The preamble to the Decemberrule points out that a group could regarditself as a group practice in the interimperiod before it receives attestationinstructions, provided the groupbelieves that it meets the definition ofa group practice under § 411.351.

The Proposed Rule: The proposedrule retained § 411.360, as amended bythe December 1995 final rule, withseveral minor changes.

The Final Rule: We have eliminatedthe attestation requirement.

Comment: One commenter suggestedthat group practice attestations not berequired until 1 year after finalregulations are published, while anotherrecommended 11⁄2 years afterpublication of the final rule. Otherwise,the commenter stated, a group practicewould have to attest to membershiprequirements for the previous 12months, without benefit of having hadthe membership requirements publishedin advance and an opportunity tocomply with them.

One commenter also questionedwhether we will actually use theinformation gained from group practiceattestations. The commenter believesthat imposing a civil money penalty forfailing to submit an attestation is overlyharsh when compared to the minimalbenefit that may be derived from theattestations. The commenterrecommended that we remove therequirement for attestations or, at least,reduce the related penalties.

Response: We agree with thecommenters. After reviewing theattestation requirement, we haveconcluded that it would impose anunwarranted burden on group practices.We intend instead to allow groups totreat the information they need toestablish that they are a group practicein the same manner as any informationa furnishing entity must provide to usunder the reporting requirements in§ 411.361. In order to make reportingrequirements more manageable, we



intend to develop a streamlined‘‘reporting’’ system that does not requireentities to retain and submit largequantities of data. We believe insteadthat entities should retain enoughrecords to demonstrate, in the event ofan audit, that particular relationshipsare excepted under the law. In the caseof the in-office ancillary servicesexception and physician servicesexceptions in section 1877(b)(1) and(b)(2), an entity may need to establishthat the services it provided werereferred by members of a genuine grouppractice. Thus, a group should retainrecords that demonstrate that it meetsthe requirements in section 1877(h)(4)of the Act and § 411.351.

D. Prepaid Plans (Section 1877(b)(3) ofthe Act)

The Existing Law: In the August 1995final rule, we interpreted the prepaidplan exception, section 1877(b)(3) of theAct, as creating an exception to thegeneral prohibition on referrals forservices furnished by certain prepaidhealth plans to their enrollees,including Federally qualified healthmaintenance organizations (HMOs) orprepaid health care organizations with acontract or agreement under sections1876 or 1833(a)(1)(A) of the Act, ororganizations participating indemonstration projects under section402(a) of the Social SecurityAmendments of 1967 or section 222(a)of the Social Security Amendments of1972. The August 1995 final ruleincorporated section 1877(b)(3) into theregulations in § 411.355(c), concerningclinical laboratory services furnished byan organization (or its contractors orsubcontractors) to enrollees of theseprepaid health plans (not includingservices provided to enrollees in anyother plan or line of business offered oradministered by the same organization).

The Proposed Rule: The January 1998proposed rule proposed an additionalexception for services provided byorganizations participating in theMedicaid program that are analogous tothose cited in section 1877(b)(3) of theAct, including managed careorganizations (MCOs) that contract withMedicaid under section 1903(m) of theAct, entities operating under ademonstration project under section1115(a) of the Act, prepaid health planscontracting with a State, and healthinsuring organizations furnishingservices as managed care contractors.(Although we proposed includingdemonstration projects under section1115(a) of the Act in the preamble of theJanuary 1998 proposed rule at 63 FR1697, they were not listed in proposed§ 435.1012 as the result of a drafting

error. We will include a technicalcorrection for this section in Phase II ofthis rulemaking.) In addition, the ruleproposed to extend the protection ofsection 1877(b)(3) of the Act toproviders, suppliers, and other entitiesthat provided services to enrollees of theprotected organizations under contractswith these organizations, either directlyor indirectly.

The January 1998 proposed rule alsotook a number of other positions thatdirectly affected physicians’ financialrelationships with managed care entitiesand plans other than Medicare andMedicaid managed care plans. Mostimportantly, we proposed that MCOswould be deemed to be entities‘‘furnishing’’ DHS provided by otherentities if the MCOs billed Medicare forDHS provided to Medicare patients byproviders and suppliers pursuant to acontractual arrangement with the MCOs(other than services under a planprotected under section 1877(b)(3) ofthe Act or other protected arrangement).

The preamble of the January 1998proposed rule also discussed whetheran MCO network physician could referprivate fee-for-service patients to otherphysicians and providers that wereparticipating in an MCO network.According to the preamble, a physicianwho had a contractual relationship withan MCO could refer a nonenrolledMedicare fee-for-service patient for adesignated health service to anotherphysician who also had a contract withthe MCO provided that the physician towhom he or she referred the patient wasnot otherwise affiliated with the MCO.However, if the same physician referredthe same patient to a laboratory ownedby the MCO, the general prohibitionwould apply and the financialarrangement between the MCO and thephysician would have to qualify for anexception. In other words, the referringphysician would not have a financialrelationship with the second physician,but he would have one with thelaboratory. Of course, the arrangementcould still be protected under thepersonal service arrangementsexception.

The M+C interim final rule (63 FR35066) amended § 411.355(c) of theregulations covering referrals for clinicallaboratory services to include a newparagraph (5). This paragraph added tothe list of prepaid plans coordinatedcare plans (within the meaning ofsection 1851(a)(2)(A) of the Act) offeredby an organization in accordance with acontract with us under section 1857 ofthe Act. Section 1877(b)(3) of the Actwas also amended by section 524(a) ofthe Balanced Budget Refinement Act of1999 (BBRA) (Pub. L. 106–113, enacted

on November 29, 1999), which added anew paragraph (E). Paragraph (E)includes in the prepaid plans exceptionservices referred by a physician to anorganization that is an M+Corganization under Part C that isoffering a coordinated care plandescribed in section 1851 of the Act [42U.S.C. 1395w–21(a)(2)(A)] to anindividual enrolled with theorganization.

The Final Rule: Virtually allcommenters agreed with our decision tointerpret the prepaid plan exception toprotect any referrals by physicians forDHS covered by the listed Medicaremanaged care plans to an MCO that hasa Medicare managed care contract orany entity, provider, or supplierfurnishing these services under acontract or subcontract with the MCO,directly or indirectly (‘‘downstreamproviders’’). Several commenters askedthat we amend the regulations text toreflect the interpretation. We areamending the text of § 411.355(c) tomake clear that downstream providersare protected.

We are not finalizing at this time theproposed new § 435.1012 (Limitation onFFP related to prohibited referrals),paragraph (b) (Exception for servicesfurnished to enrollees on apredetermined, capitated basis), whichwould have extended the protection tocertain prepaid plans under Medicaid.A number of commenters agreed withour proposed exception for servicesprovided by organizations analogous tothose cited in section 1877(b)(3) of theAct. These and other commenterssuggested that a number of otherMedicare or Medicaid arrangements beincluded in the exception, includingM+C coordinated care plans, Medicaidmanaged care plans under the BBA1997, Medicaid managed care entitiesoperating under a waiver pursuant tosection 1115 of the Act, anydemonstration project approved by us,including primary care casemanagement programs (PCCMs) andmanaged long term care programs(MLTCs), programs of all-inclusive carefor the elderly (PACE), capitatedMedicare demonstration programs(including social health maintenanceorganizations (SHMOs), the Medicaresubvention demonstration, and theMedicare prepaid competitive pricingdemonstration). The commenterspointed out that although the preambleto the January 1998 proposed rule hadproposed to include some of the aboveprograms in the new exception, theyhad not been referenced in theregulations text. We agree with thecommenters on adding the Medicaidorganizations that are analogous to those



in section 1877(b)(3) of the Act asdescribed in the January 1998 proposedrule and on some of the other listedareas; however, we will addressMedicaid managed care, and potentiallyother suggestions related to Medicaidmanaged care raised by the commenters,in Phase II of this rulemaking.

We are also revising in Phase I of thisrulemaking the proposed regulations inresponse to comments expressingconcerns about the impact of theJanuary 1998 proposed rule oncommercial and employer-providedmanaged care arrangements. First, weare creating a new compensationexception for remuneration pursuant toa bona fide ‘‘risk-sharing arrangement’’between a physician and a health planfor the provision of items or services toenrollees of the health plan, even whensuch an arrangement does not fallwithin existing statutory exceptions.(We note that the new risk-sharingarrangement exception differs from theshared risk exception to the anti-kickback statute at §§ 1001.952(t) and(u); for example, unlike the anti-kickback exception, the new exceptionunder section 1877 of the Act containsno conditions related to the volume ofMedicare beneficiaries enrolled in thehealth plan or the quantification of thefinancial risk.) Physicians generally arecompensated for services to managedcare enrollees in one of three ways, thefirst two of which do not vary based onthe volume or value of referrals: (1) Asalary in the case of a physician who isan employee, (2) a ‘‘fee-for-service’’contractual arrangement under whichthe physician assumes no risk, or (3) arisk-sharing arrangement, under whichthe physician assumes risk for the costsof services, either through a capitationarrangement, or through a withhold,bonus, or risk-corridor approach. Thefirst two compensation arrangements areeligible for the statutory exceptions forbona fide employment relationships andpersonal service arrangements, whilethe third is potentially eligible for thenew risk-sharing arrangement exceptionwe are creating in this final rule in§ 411.357(n).

Second, we are revising the definitionof ‘‘entity’’ in § 411.351 to permitphysician ownership of network-typeHMOs, MCOs, provider-sponsoredorganizations (‘‘PSOs’’) andindependent practice associations(‘‘IPAs’’). Specifically, we are clarifyingthe definition of entity furnishing DHS,to provide that a person or entity isconsidered to be furnishing DHS if it isthe person or entity to which we makepayment for the DHS, directly or uponassignment on the patient’s behalf,except that if the person or entity has

reassigned its right to payment to (i) anemployer 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 caredelivery system that is a health plan (asdefined in § 1000.952(l)), and other thanany MCO, PSO, or IPA with which ahealth plan contracts for servicesprovided to plan enrollees), the personor entity furnishing DHS is the personor entity to which payment has beenreassigned. We are providing furtherthat a health plan, MCO, PSO, or IPAthat employs a supplier or operates afacility that could accept reassignmentfrom a supplier pursuant to§§ 424.80(b)(1) and (b)(2) is the entityfurnishing DHS for any servicesprovided by such supplier.

We believe these changes address thecomments we received from thecommercial and employer-sponsoredmanaged care plans.

Comment: While commentersuniformly welcomed the broadprotection given in the January 1998proposed rule to referrals for servicescovered by Medicare prepaid healthplans, several commenters stated thatwe interpreted several provisions of thestatute in a manner that, taken together,would severely limit MCOs’ use ofphysician incentive plans, whetherunder commercial or Medicarecontracts. The commenters stronglyobjected to our statement that theprohibition on DHS referrals applies toreferrals to entities that arrange for thefurnishing of the DHS to Medicare orMedicaid patients by contracting withother providers, whenever the arrangingentity also bills Medicare or Medicaidfor the services. (See 63 FR 1706.) Thecommenters explained that this view,when joined with our interpretation ofsection 1877(e)(3)(B) of the Act (thephysician incentive plan provision inthe personal service arrangementsexception), could effectively precludethe use of risk-sharing arrangementswith physicians in any health plan,including commercial plans. Thecommenters explained the problem asfollows:

• Physicians that participate in amanaged care network will have acompensation arrangement with theMCO for payment for services to theMCO’s enrollees. That paymentarrangement will create a financialrelationship for purposes of section1877 of the Act. (Even participation inthe network of an organization eligiblefor the Medicare prepaid plansexception would not entirely avoid thisresult, since the prepaid plans exceptiononly protects referrals for DHS

furnished to beneficiaries enrolledunder the Medicare contract). Many ofthese compensation arrangements usewithholds, capitation, bonuses, or othermethodologies that take into account,directly or indirectly, the volume orvalue of referrals or other businessgenerated by the referring physician.

• Most, if not all, commercial oremployer-provided group health plansoffered by MCOs include some enrolleeswho are Medicare beneficiaries.Typically, these enrollees either areretired employees who have expandedbenefits under an employer-providedplan (in which case Medicare is theprimary insurer and the employer plansecondary) or are beneficiaries whohave group health plan coverage basedon current employment status (in whichcase the employer plan is the primaryinsurer and Medicare secondary). Eventhe MCOs that have Medicare managedcare lines of business that are protectedby the prepaid plans exceptioncommonly have commercial lines ofbusiness that include some Medicarebeneficiaries who are not enrolled underthe organization’s Medicare contract(that is, Medicare’s payment is made ona fee-for-service basis under thetraditional Medicare program).

• When a Medicare beneficiary isenrolled in a commercial or employer-provided group health plan, Medicareoften pays for services provided by theplan to the beneficiary/enrollee on a fee-for-service basis. In such a case, ifMedicare is the primary insurer, it willreimburse the provider according to thesame provisions as any fee-for-serviceprovider; if Medicare is the secondaryinsurer, it will pay based on a formulaprescribed by law.

• Generally, if an enrollee of acommercial or employer-providedhealth plan has primary coverage underMedicare, the network physician orsupplier (not the MCO) will submit theclaim to Medicare directly, sinceMedicare is the primary insurance.However, many, if not all, such MCOswill occasionally bill Medicare forservices provided by network providersto these Medicare beneficiaries. Mostoften, the purpose of the billing is tocoordinate with Medicare whenMedicare is the secondary payer.Occasionally, the MCOs may billMedicare as the primary payer; forexample, when there has been a recentchange in beneficiary status, such aswhen a beneficiary’s group health plancoverage ceases being based on currentemployment status because thebeneficiary retires and Medicarebecomes the primary insurer. Of course,MCOs may bill and be paid by Medicareonly where the MCO meets the criteria



for direct payment, assignment ofbenefits or reassignment of benefits.(See §§ 424.73 and 424.80 of theseregulations.)

• Accordingly, under theinterpretation in the January 1998proposed rule, a physician in the MCOnetwork will be deemed to make areferral to the MCO for the provision ofa DHS whenever the physician refers anenrollee of the MCO’s commercial planwho also happens to be a Medicarebeneficiary to another network providerfor DHS. (Referrals of enrollees in anyof the excepted prepaid plans would notbe affected since they are not referralsof DHS by virtue of the prepaid plansexception.)

• As a result, unless all of the MCO’spayment arrangements with networkphysicians, regardless of the line ofbusiness, fit in an exception undersection 1877 of the Act, the referral ofany enrollee with primary or secondarycoverage under Medicare for adesignated health service would beprohibited.

• The only kinds of physiciancompensation arrangements that areprotected by the personal servicearrangements exception in the proposedrule are (1) fixed per-service paymentsbased on fair market value (for example,discounted fee-for-service arrangements)or (2) payment arrangements thatincorporate risk-sharing elements, suchas bonuses or withholds, provided theyqualify as a physician incentive planunder section 1877(e)(3)(B) of the Act.

• However, many paymentarrangements in commercial oremployer-provided health plans containrisk-sharing elements that take intoaccount a physician’s referrals or thevolume of services provided but that donot currently comply with the physicianincentive plan regulations. Thesearrangements would have to berestructured. Moreover, even ifrestructured, the physician incentiveplan regulations contain a number ofrequirements that would requirerevision if they are to be implementedwith respect to non-M+C plans.

• Lastly, in the preamble to ourJanuary 1998 proposed rule, we statedthat section 1877(e)(3)(B) of the Act onlyapplied to compensation arrangementsdirectly between the ‘‘entity’’ (that is,the MCO) and the physician; anycompensation arrangements between aphysician and party other than theMCO, such as an IPA or othersubcontractor, would not qualify as aphysician incentive plan.

The commenters asserted that the neteffect of our interpretation in theJanuary 1998 proposed rule of when anentity was furnishing DHS provided by

another entity would be the totaldisruption of commercial and employer-provided health plans. The only way anMCO could assure that its physiciancompensation arrangements were incompliance with section 1877 of the Actwould be to restructure all its paymentarrangements to pay all physicians forall lines of business on a discounted fee-for-service basis. Moreover, since theMCOs and, in many instances,subcontractors such as IPAs would alsobe entities furnishing DHS, anyphysician ownership of such entitieswould be a prohibited investmentinterest unless an appropriate exceptionapplied.

Response: Nothing in the legislativehistory suggests that section 1877 of theAct was intended by the Congress torequire the wholesale restructuring ofcommercial managed care arrangementswith physicians. Accordingly, we aremaking two major changes to theJanuary 1998 proposed rule that webelieve will address the commenters’concerns. First, as noted above, we arecreating a new compensation exceptionfor bona fide risk-sharing arrangementsbetween a health plan and providers forservices provided to plan enrollees thatdo not otherwise qualify for an existingstatutory exception. This exception willaddress concerns related to theprohibition on compensationarrangements in section 1877 of the Act.Second, we are revising our definitionof ‘‘entity’’ to clarify that a person orentity is considered to be furnishingDHS if it is the person or entity to whichwe make payment for the DHS, directlyor upon assignment on the patient’sbehalf, except that if the person or entityhas 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 caredelivery system that is a health plan (asdefined in § 1000.952(l)), and other thanany MCO, PSO, or IPA with which ahealth plan contracts for servicesprovided to plan enrollees), the personor entity furnishing DHS is the personor entity to which payment has beenreassigned. We are providing furtherthat a health plan, MCO, PSO, or IPAthat employs a supplier or operates afacility that could accept reassignmentfrom a supplier pursuant to§§ 424.80(b)(1) and (b)(2) is the entityfurnishing DHS for any servicesprovided by such supplier. We believethis change should address the possibleadverse impact on physician ownershipof MCOs and IPAs.

With respect to the first change, weare creating in § 411.357(n) a new

exception under section 1877(b)(4) ofthe Act for bona fide risk-sharingcompensation arrangements between anMCO and a physician (either directly orindirectly through a subcontractor) forservices to enrollees of a health plan.(For purposes of the new exception, weare incorporating the definitions of‘‘health plan’’ and ‘‘enrollees’’ found in§ 1001.952(l).) The vast majority ofMedicare and Medicaid beneficiaries inmanaged care plans are either in M+Cplans or Medicaid managed care plans,both of which are already required tocomply with the physician incentiveplan regulations. As to the relativelysmall number of Medicare beneficiariesin commercial or employer-sponsoredplans that do not necessarily satisfyphysician incentive plan requirements,or otherwise qualify for an existingexception under section 1877 of the Act,we are not currently aware of any fraudor abuse involving the Medicareprogram or Medicare beneficiariesarising from physician risk-sharingarrangements in these commercial oremployer-provided health plans. Giventhe potential for the unintendeddisruption of these arrangementsdescribed by the commenters and theadministrative need for ‘‘bright line’’rules, we believe the new physicianrisk-sharing arrangements exception tosection 1877 of the Act is needed. Wewill continue to monitor thesearrangements for possible abuse and, ifnecessary, may revisit the issue in thefuture.

With respect to the second change,the potential impact of the January 1998proposed rule on physician ownershipof MCOs and IPAs was attributable toour interpretation that an MCO or IPAwas an entity furnishing DHS providedby another entity whenever it billed forthe services provided by another entitypursuant to a contract with the MCO orIPA. As noted above, in response to theabove comment, we are amending thedefinition of ‘‘entity’’ in § 411.351 toclarify that a health plan, or an MCO,PSO, or IPA with which the plancontracts directly or indirectly forservices to plan enrollees, will only beconsidered to be furnishing DHS whenthe health plan, MCO, PSO, or IPAfurnishes the services directly (that is,through an employee), or otherwise isthe entity to which we make paymentfor the DHS, either directly or uponassignment on the patient’s behalf, orpursuant to a valid reassignment underthe 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



§ 424.80(b)(3) (other than a health caredelivery system that is a health plan (asdefined in § 1000.952(l)), and other thanany MCO, PSO, or IPA with which ahealth plan contracts for servicesprovided to plan enrollees). We areproviding further that a health plan,MCO, PSO, or IPA that employs asupplier or operates a facility that couldaccept reassignment from a supplierpursuant to §§ 424.80(b)(1) and (b)(2) isthe entity furnishing DHS for anyservices provided by such supplier.

We believe this change should allowfor physician ownership of most typesof network IPAs and MCOs. Ownershipor investment interests in entities,including MCOs and IPAs, that provideDHS directly would still be prohibited(absent an applicable exception).Moreover, any indirect financialarrangements between physicians andthe entities directly providing DHSwould need to be analyzed to ensurethere are no prohibited indirectfinancial relationships. For example, anMCO may have an investment interestin a lab, and a physician that contractswith that MCO may refer a Medicarebeneficiary to that lab for DHS, forwhich Medicare is billed on a fee-for-service basis. While the MCO would notbe considered to be furnishing the DHSfor purposes of section 1877 of the Act,the lab in which the MCO has aninvestment interest would be furnishingDHS. Since the physician has a financialrelationship with the MCO, and theMCO has an investment interest in thelab, there may be an indirect financialrelationship that would then have to fitin an exception, most likely the indirectcompensation arrangement exception orthe risk-sharing arrangement exception.(See discussion in section III.A of thispreamble.)

Finally, in Phase II of this rulemaking,we expect to amend the January 1998proposed regulations for the personalservice arrangements exception toreflect that risk-sharing compensationarrangements between entitiesdownstream of a Medicare MCO canqualify as physician incentive planswithin the meaning of section1877(e)(3)(B) of the Act; thisinterpretation is consistent with ourinterpretation in the Medicare physicianincentive plan regulations in §§ 422.208and 422.210.

We believe these provisions willaddress the commenters’ concerns.

Comment: One commenter stated thateven if the MCO itself directly providedDHS pursuant to a physician referral,the MCO’s compensation arrangementwith the referring physician should notbe deemed to take into account thevolume or value of referrals for DHS

unless the risk-sharing arrangement wasbased in part on the utilization or costof the DHS provided directly by theMCO.

Response: For purposes of thepersonal service arrangementsexception, the compensation from theMCO does not take into account ‘‘thevolume or value of referrals or otherbusiness generated between the parties’’unless the compensation varies basedon the volume or value of the MCO’sbusiness that is generated by thephysician. (See the discussion of‘‘volume or value’’ and ‘‘other businessgenerated’’ in section V of thispreamble.) We have addressed the issueof physician risk-sharing arrangements(including, but not limited to, capitationpayments, bonuses, and withholds) withcommercial and employer-sponsoredmanaged care plans by creating a newexception under section 1877(b)(4) ofthe Act for bona fide risk-sharingcompensation arrangements between anMCO and a physician (either directly orindirectly through a subcontractor) forservices to enrollees of a health plan.

Comment: Several commenters wereunclear whether physicians whoparticipate in a managed care networkwould be prohibited from referringMedicare fee-for-service patients whoare not enrollees of a managed care planfor DHS to other providers in themanaged care network simply becauseboth providers had contractualrelationships with the same MCO.

Response: Physicians who participatein a managed care network would not beprohibited from referring Federal fee-for-service patients who are notenrollees of a managed care plan forDHS to other providers with contractualrelationships with the same MCO solelyon the basis of the parallel contractualarrangement with the MCO. In otherwords, two physicians who contractwith an MCO do not have a financialrelationship with each other forpurposes of section 1877 of the Act onthat basis alone. However, they mayhave other financial relationships(including indirect financialrelationships) that would bar theirreferrals (in the absence of an applicableexception).

Comment: Several commenters askedthat we create an exception fornongovernment plans that include anysignificant cost-sharing elements. Thisexception would be similar to theexception in the Federal anti-kickbackstatute for risk-sharing arrangements.

Response: As discussed earlier, wehave created a new exception for bonafide risk-sharing compensationarrangements between health plans andphysicians. The exception we are

creating is substantially broader thanthe shared risk exception in the Federalanti-kickback statute.

Comment: Another commenter askedthat we create an exception to permitpublic hospitals to enter into incentivearrangements with physician groups forthe treatment of the public hospital’spatients. One commenter also suggestedthat we create an exception forcommercial managed care product linesthat serve fewer than 20 percentMedicare patients as part of the groupand that are not marketed directly toMedicare patients.

Response: As described above, wehave created a risk-sharingarrangements exception in § 411.357(n)that should address the commenter’sconcern regarding commercial managedcare arrangements. With respect to therequest to create an exemption forpublic hospital patients, the commenterprovided no explanation of the types ofarrangements proposed to be excepted,and we see no reason why thesearrangements could not be subject toabuse.

Comment: Two commenters asked usto clarify that the prepaid planexception protects any DHS provided toany enrollee of any plan (includingcommercial or employer-sponsoredplans) offered by an entity that either isa Federally-qualified HMO or has acontract under one of the programs citedin section 1877(b)(3) of the Act. One ofthe commenters asked us to clarify thatservices to persons covered under anemployer self-funded health plan that isadministered by an entity with aqualified contract under section1877(b)(3) of the Act and uses theMCO’s network of providers would alsobe exempt under the prepaid planexception.

Response: We believe that theCongress intended that the exception insection 1877(b)(3) of the Act protectonly the financial arrangements forservices to enrollees of the prepaidplans identified in section 1877(b)(3).We see no basis for concluding thatbecause an entity has one contractcovering a specific population, there isany protection against abusiverelationships in other product lines.Accordingly, we are clarifying theregulation to state that the protectionextends only to financial arrangementsfor the services to enrollees of the plansspecifically identified in the regulationand does not protect enrollees in anyother plan or line of business furnishedby the MCO or to which the MCOprovides administrative services.

Comment: One commenter suggestedthat we use the definition of health planand enrollee set forth in the managed



care safe harbor regulations to theFederal anti-kickback statute, § 1001.952(Exceptions), paragraph (l) (Increasedcoverage, reduced cost-sharing amounts,or reduced premium amounts offered byhealth plans). The commenter statedthat it was unclear from the preamble ofthe January 1998 proposed rule whetheremployees covered by an employer self-funded plan that utilized a commercialinsurer to administer the plan would beconsidered ‘‘enrollees’’ of thecommercial insurer for purposes of theprepaid plan exception and forapplication of the physician incentiveplan provision of the personal servicearrangements exception.

Response: We agree that employerself-funded plans should be able toqualify for protection of their physiciancompensation arrangements. We believethe new risk-sharing compensationexception will address the commenters’concerns. For purposes of the newexception, we are incorporating thedefinitions of ‘‘health plan’’ and‘‘enrollee’’ from the safe harborregulations for certain health plans setforth in § 1001.952(l)(2). This definitionwould result in equal treatment for self-funded plans and insured plans.

Comment: One commenter requestedthat we interpret section 1877 of the Actto ‘‘grandfather’’ any pre-existingmanaged care arrangements. The samecommenter asked that we broaden theexception for personal servicearrangements to protect quality-relatedincentive plans that take into accountthe volume or value of DHS referrals.

Response: The statutory provisionsclearly envision their application tomanaged care plans. Accordingly, ablanket ‘‘grandfather’’ provision forthese plans is inappropriate. Withrespect to the request for protection ofquality-related incentive plans, thecommenter did not provide any detailsas to the kind of incentives beingdescribed. We do not perceive anyimpediment in the regulation thatwould preclude basing compensation onquality measures unrelated to the valueor volume of DHS referrals or otherbusiness generated by the physician.However, absent further clarification,we are not inclined to protect anyarrangement that takes into accountreferrals or business generated by thephysician.

Comment: One commenter requestedthat we create a new exception forpayer-directed services. According tothe commenter, in managed carearrangements, the payer is the party thatdirects the referrals for DHS and not thephysician who is contractually obligatedto refer in the network. Anothercommenter stated that, in the managed

care environment, our proposedpresumption in the January 1998proposed rule that a physician hasreferred a patient to an entity withwhich he or she has a financialrelationship if the patient, in fact,procures the services from this entity—even if there is no order or written planof care—should not be applied.

Response: We believe the changes wehave made to accommodate variousfinancial relationships betweenmanaged care organizations andphysicians should address the referralissues in the managed careenvironment.

Comment: Several commenters askedthat the provision in the group practicedefinition permitting employees toreceive productivity bonuses beexpanded to permit remuneration basedon volume or value of DHS referrals ifthe arrangement complies with thephysician incentive plan regulations aspermitted in the personal servicearrangements exception. Thecommenters noted that in somearrangements, the employed physicianshave separate contracts with the MCO,while in others the contract is betweenthe MCO and the group, making itimportant to permit the group toincentivize its employed physicians.According to the commenters,employers should have at least as muchlatitude in structuring theircompensation arrangements withemployees as with independentcontractors. The commenters suggestedthat the group practice definitionalready expressly permits productivitybonuses indirectly tied to referrals—agreater concern since overutilization isthe primary concern of section 1877 ofthe Act. In light of that provision, onecommenter believes it is incongruous toprohibit physician incentive planarrangements that discourage utilizationif they comply with the physicianincentive plan regulations.

Response: We agree that, at least inthe managed care environment, there islittle reason to impose a more restrictiverequirement on compensationarrangements between a group and itsemployees than on arrangementsbetween the group and its independentcontractors. However, this concern isonly one aspect of the broaderrelationship between the group practice,personal service arrangement, and bonafide employment relationshipexceptions that is discussed in sectionsIV and VI.C.8 of this preamble.

Comment: Several commenters askedthat we clarify the reporting obligationsof plans that are not technically subjectto the physician incentive planregulations, since they are not Medicare

or Medicaid managed care plans (orM+C plans), but that are complying withthe regulations to qualify their financialarrangements with physicians for thepersonal service arrangements exceptionin section 1877 of the Act.

Response: The various reportingrequirements associated with, ortriggered by, the regulation will beaddressed in Phase II of this rulemaking.

VII. New Regulatory ExceptionsThis section describes new regulatory

exceptions that are not in the statute,but which appeared in the January 1998proposed rule or that we have created inresponse to comments and pursuant tostatutory authority conferred on theSecretary. The new exceptionsdiscussed here include: Academicmedical centers, fair market value, andnon-monetary compensation up to $300(and medical staff benefits). Other newexceptions described elsewhere in thispreamble include: Implants in an ASC(§ 411.355(e); section VIII.J of thispreamble); EPO and other dialysis-related drugs (§ 411.355(f); section VIII.Lof this preamble); preventive screeningtests, immunizations, and vaccines(§ 411.355(h); section VIII.L of thispreamble); risk-sharing arrangements(§ 411.357(n); section VI.D of thispreamble); compliance trainingprograms (§ 411.357(o); section VII.C ofthis preamble); eyeglasses and contactlenses (§ 411.355(i); section VIII.J of thispreamble); and indirect compensationarrangements (§ 411.354(c)(3); sectionIII.A of this preamble).

A. Academic Medical CentersThe Existing Law: Section 1877(h)(4)

of the Act contains a special rule forfaculty practice plans. The rule providesthat ‘‘in the case of a faculty practiceplan associated with a hospital,institution of higher education, ormedical school with an approvedmedical residency training program inwhich physician members may providea variety of different specialty servicesand provide professional services bothwithin and outside the group, as well asperform other tasks such as research,subparagraph (A) [the definition of‘‘group practice’’] shall be applied onlywith respect to the services providedwithin the faculty practice plan.’’

Several commenters to the August1995 final rule suggested that we createa separate exception for faculty practiceplans, since these plans are typicallyinvolved in complex organizationalarrangements that do not fitcomfortably—or at all—in the grouppractice definition. At the time of theAugust 1995 final rule, we rejected thesuggestion for a new exception based on



our view that the personal servicearrangements exception and theemployment exception would providephysicians in academic medical settingswith appropriate protection undersection 1877 of the Act.

The Proposed Rule: We proposed nochanges.

The Final Rule: We have revisited ourprior position. The comments havepersuaded us that academic medicalpractices raise numerous questionsunder section 1877 of the Act that arenot adequately addressed by existingexceptions.

Though the relevant provision in thegroup practice definition is somewhatobscure, we believe it demonstratescongressional intent to address thecircumstances of physicians practicingin academic medical settings. We do notbelieve, however, that the core problemof how to treat academic medicalpractices under section 1877 of the Actis amenable to resolution under thegroup practice definition; the problemlies elsewhere.

Academic medical settings ofteninvolve multiple affiliated entities thatjointly deliver health care services topatients (for example, a faculty practiceplan, medical school, teaching hospital,outpatient clinics). There are frequentreferrals and monetary transfersbetween these various entities, andthese relationships raise the possibilityof indirect remuneration for referrals.The exceptions under section 1877 ofthe Act do not easily apply. Forexample, faculty practice planphysicians refer patients for ancillaryservices to entities that are outside of(and not wholly owned by) the singlelegal entity in which they conduct theirmedical practices (that is, the ‘‘grouppractice’’), but with which they mayhave direct or indirect compensationrelationships (for example, part of thephysician’s compensation may comefrom an affiliated medical school orteaching hospital). These referralstypically will not qualify under the in-office ancillary services exception, andit may be difficult to structurecompensation relationships for facultypractice plan physicians that securely fitin the personal service arrangementsexception because the physician’scompensation often comes directly orindirectly from several separate sources.

Having reviewed the comment lettersaddressing the problems facing facultypractice plans under section 1877 of theAct, we believe the fundamental need offaculty practice plans is for a separatecompensation exception for payments tofaculty of academic medical centers thattakes into account the uniquecircumstances of a faculty practice,

including the symbiotic relationshipamong faculty, medical centers, andteaching institutions, and theeducational and research roles of facultyin these settings. Therefore, we areusing our regulatory authority undersection 1877(b)(4) of the Act to create aseparate compensation exception forpayments to faculty of academicmedical centers that meet certainconditions that ensure that thearrangement poses essentially no risk offraud or abuse. This exception is inaddition to other exceptions that mayapply in particular circumstances; anarrangement need only fit in oneavailable exception.

The conditions applicable under thenew exception in § 411.355(e)(1)(i) arethat the referring physician is a bonafide employee of a component of anacademic medical center on a full-timeor substantial part-time basis, islicensed to practice medicine in theState, has a bona fide facultyappointment at the affiliated medicalschool, and provides either substantialacademic or substantial clinicalteaching services for which the facultymember receives compensation as partof his or her employment relationshipwith the academic medical center. Thepurpose of this condition is to ensurethat protected physicians are trulyengaged in an academic medicalpractice. The exception does not applyto payments to physicians who provideonly occasional academic or clinicalteaching services or who are principallycommunity rather than academicmedical center practitioners.

Under the new exception in§ 411.355(e)(1)(i)(A), a ‘‘component’’ ofan academic medical center means anaffiliated medical school, facultypractice plan, hospital, teaching facility,institution of higher education, ordepartmental professional corporation.For purposes of this exception, anacademic medical center may havesome, but need not have all, of thesecomponents. As indicated in thepreceding provision, however, theminimum requirements are a medicalschool, a faculty practice plan, and ahospital.

Under the new exception in§ 411.355(e)(1)(ii), the totalcompensation paid for the previous 12-month period (or fiscal year or calendaryear) from all academic medical centercomponents to the referring physician isset in advance and, in the aggregate,does not exceed fair market value for theservices provided, and is notdetermined in a manner that takes intoaccount the volume or value of anyreferrals or other business generatedwithin the academic medical center. As

with the corresponding provisions inthe personal service arrangements,employee, and fair market valueexceptions, this provision requires thatremuneration to physicians be for bonafide services provided by the physiciansand not for referrals. In determining fairmarket value for services in an academicmedical practice, we believe therelevant comparison is aggregatecompensation paid to physicianspracticing in similar academic settingslocated in similar environments.Relevant factors include geographiclocation, size of the academicinstitutions, scope of clinical andacademic programs offered, and thenature of the local health caremarketplace. Nothing in this regulationis intended to preclude productivitybonuses paid to academic medicalcenter physicians on the basis ofservices they personally perform.

Under the new exception in§ 411.355(e)(2), the ‘‘academic medicalcenter’’ for purposes of this section shallconsist of—(1) an accredited medicalschool (including a university, whenappropriate); (2) an affiliated facultypractice plan that is a nonprofit, tax-exempt organization under section501(c)(3) or (c)(4) of the InternalRevenue Code (or is a part of such anorganization under an umbrelladesignation); and (3) one or moreaffiliated hospital(s) in which a majorityof the hospital medical staff consists ofphysicians who are faculty members,and where a majority of all hospitaladmissions are made by physicians whoare faculty members. This provisionensures that the exception only protectsphysician compensation in genuineacademic medical settings. This newexception reflects our view that thepredominant purpose of an academicmedical center is to teach newphysicians and to run medical practicesthat support the teaching mission.

To fit within the new exception in§ 411.355(e)(3), the academic medicalcenter must meet the followingconditions:

• All transfers of money betweencomponents of the academic medicalcenter must directly or indirectlysupport the missions of teaching,indigent care, research, or communityservice. This provision ensures that theacademic medical center is bona fideand that transfers of funds are notinappropriate payments of indirectcompensation for referrals. We believethat patient care is integral to anacademic medical center’s communityservice mission.

• The relationship of the componentsof the academic medical center must beset forth in a written agreement that has



been adopted by the governing body ofeach component. This provisionrequires a bona fide affiliation betweenthe medical center components.

• All money paid to a referringphysician for research must be usedsolely to support bona fide research. Weare concerned that research fundingcould be used to disguise additionalpayments for referrals. We are includingthis provision to ensure that moneyearmarked (intended or designated) forresearch is used solely for researchpurposes.

Under the new exception in§ 411.355(e)(4), the referring physician’scompensation arrangement must notviolate the anti-kickback statute (section1128B(b) of the Act) and billing andclaims submission must be proper. Aswith all exceptions created undersection 1877(b)(4) of the Act, thisprovision is necessary to ensure that thearrangement poses no risk of fraud orabuse.

Comment: As noted above,commenters pointed out that thestructure of faculty practice plans can bevery complicated; for example,physicians in a faculty practice planmay be compensated by one entity, butconduct their medical practice througha separate entity and order laboratoryand other ancillary services fromadditional related entities (for example,the teaching hospital, the university’sresearch laboratory for highlyspecialized testing, in-office laboratorieswithin the faculty departments that mayor may not be incorporated asprofessional corporations). As a result,arrangements between and among thevarious sub-entities of such facultypractice plans can raise a number ofissues under section 1877 of the Act. Inparticular, the question arises whethereach separate legal entity andrelationship among legal entities mustmeet an exception under section 1877 ofthe Act.

Commenters appealed for a separateexception for faculty practice plans,insisting that faculty practice plans posea minimal risk of abuse under section1877 of the Act. First, they asserted thatphysicians in faculty practice plans areless likely to make abusive referrals thantheir more entrepreneurial counterpartsin private practice because they practicein a setting that focuses on academicpursuits and patient care at affiliatedteaching hospitals and clinics. Second,they stated that many faculty practiceplans include not-for-profitorganizations that are regulated underIRS rules that forbid private inurementand private benefit.

Response: As explained in theintroduction to this section of the

preamble, we have revisited the issue ofacademic medical practices and arepersuaded that academic medicalpractices present unique concerns undersection 1877 of the Act that warrant aseparate exception. Our new exceptionis described in the introduction. Webelieve that faculty practice plans willpose little risk of fraud or abuse underthe conditions set forth in the newexception. We are not persuaded thatphysicians in faculty practice plans arenecessarily less economically-motivatedthan their private practice counterpartsor that regulation under IRS rules,though beneficial, is sufficient toprevent fraud or abuse.

Comment: A commenter suggestedthat the group practice definition andthe requirements of the in-officeancillary services exception or personalservice arrangements exception shouldbe applied only at the level of the‘‘umbrella’’ organization (that is, theorganization that encompasses all thephysicians within the faculty practiceplan) for the entire faculty practice, thusobviating the need for each legal entitywithin the same academic setting tomeet the provisions of section 1877 ofthe Act.

Response: In light of the newexception, we see no need to create newrules under existing exceptions forfaculty practice plans. Parties may usethe new exception or existingexceptions, depending on theirindividual circumstances.

Comment: As an alternative to aseparate exception for faculty practiceplans, one commenter urged that facultypractice plans be permitted to haveindependent contractors as ‘‘members’’during the time they are providingservices to the group. The commenterexpressed the view that this solutionwould be preferable to requiring thefaculty practice plan to employ suchindividuals.

Response: In light of the newcompensation exception for physiciansin faculty practice plans, we see no needto alter the definition of ‘‘member of thegroup’’ for academic medical practices.The definition of a ‘‘group practice’’expressly includes a ‘‘faculty practiceplan,’’ and any faculty practice plan thatfits in the definition is a ‘‘grouppractice’’ for purposes of section 1877 ofthe Act.

Comment: A commenter observed thatunder section 1877(b)(4)(B)(ii) of the Acta faculty practice plan qualifies as agroup practice based solely on theservices provided and revenuegenerated by the participatingphysicians within the faculty practiceplan, regardless of the outside activitiesof those physicians. The commenter

sought clarification that the conversewould also be true, that time andrevenue allocable to a physician’sfaculty practice would not count againstthe ‘‘group practice’’ status of hisoutside medical group.

Response: The outside medical groupmust qualify for group practice statusunder the tests described in section1877(h)(4) of the Act (§ 411.352 of theregulations) and in this preamble atVI.C. Time and revenue allocable to aphysician’s faculty practice would betreated as all other outside time andrevenue for purposes of those tests. Inother words, such time and revenuewould be treated no differently thantime group practice physicians who arenot in faculty practice plans spendsupervising residents or conductingresearch.

B. Fair Market Value (§ 411.357(l))The Proposed Rule. This proposed

rule created an exception forcompensation relationships that arebased upon fair market value and meetcertain other criteria. This exception isavailable for compensationarrangements between an entity andeither a physician (or immediate familymember) or any group of physicians(even if the group does not meet thedefinition of group practice set forth in§ 411.351), as long as the compensationarrangement—

• Is in writing, is signed by theparties, and covers only identifiableitems or services, all of which arespecified in the agreement;

• Covers all of the items and servicesto be provided by the physician (orimmediate family member) to the entityor, alternatively, cross refers to anyother agreements for items or servicesbetween these parties;

• Specifies the time frame for thearrangement, which can be for anyperiod of time and contain a terminationclause, provided the parties enter intoonly one arrangement covering the sameitems or services during the course of ayear. An arrangement made for less than1 year may be renewed any number oftimes if the terms of the arrangementand the compensation for the sameitems or services do not change;

• Specifies the compensation thatwill be provided under the arrangement,which has been set in advance. Thecompensation must be consistent withfair market value and not be determinedin a manner that takes into account thevolume or value of any referrals (asdefined in § 411.351), payment forreferrals for medical services that arenot covered under Medicare orMedicaid, or other business generatedbetween the parties;



• Involves a transaction that iscommercially reasonable and furthersthe legitimate business purposes of theparties; and

• Meets a safe harbor under the anti-kickback statute or otherwise is incompliance with the anti-kickbackprovisions in section 1128B(b) of theAct.

The Final Rule: Except for therevisions described below, Phase I ofthis rulemaking adopts the proposedregulation. The revisions include:

• Elimination of the requirement thatthe written document cross-referenceother agreements between the parties.

• Revision of the ‘‘set in advance’’language to conform the exception toother exceptions in which that languageappears. ‘‘Set in advance,’’ as used inthe fair market value exception, willhave the uniform meaning described insection V of this preamble and§ 411.354(d) of the regulations.

• Revision of § 411.357(l)(3) toconform to our uniform interpretation ofthe volume or value standard in§ 411.354(d) (discussed at section V ofthis preamble).

• Revision of the proposal in§ 411.357(l)(5) that required‘‘compliance with’’ the anti-kickbackstatute. Under the final regulations, thecompensation arrangement must—(1)not violate the anti-kickback statute, (2)comply with a statutory or regulatoryanti-kickback safe harbor, or (3) havebeen approved by the OIG pursuant toa favorable advisory opinion issued inaccordance with part 1008 (AdvisoryOpinions of the OIG) of this chapter. Inaddition, billing and claims submissionmust be proper.

• Addition of a provision to mirrorsection 1877(e)(3)(A)(vi) of the Act,which clarifies that the servicesperformed under the agreement cannotinvolve the counseling or promotion ofa business arrangement or other activitythat violates Federal or State law. Whilewe believe this condition is impliedthroughout the statute, we areconforming the new fair market valueexception to the Congress’s inclusion ofthis same standard in the personalservice arrangements exception.

Comment: Several commentersobjected to the requirement that anarrangement must meet a safe harborunder the anti-kickback statute orotherwise be in compliance with theanti-kickback provisions in section1128B(b) of the Act. First, commenterspointed out that the anti-kickbackstatute is an intent-based statute thatprohibits certain knowing and willfulconduct, whereas section 1877 of theAct is not based upon intent. Inaddition, one commenter was concerned

that a violation of the anti-kickbackstatute by one party would precludeboth parties from using the fair marketvalue exception. Thus, the innocentparty who might be unaware of theother party’s violation of the anti-kickback statute and relying on the fairmarket value exception couldunknowingly violate section 1877 of theAct. Second, several commenters statedthat few arrangements would meet therequirements necessary to obtain safeharbor protection under the anti-kickback statute. Therefore, sucharrangements would be excepted fromsection 1877 of the Act only if they metthe standard of being ‘‘in compliancewith the anti-kickback statute.’’ Thesecommenters were concerned that ‘‘beingin compliance with the anti-kickbackstatute’’ was a nebulous standard thatcould only be accomplished withcertainty by obtaining an OIG advisoryopinion.

Response: In response to the concernsof commenters, we have revised§ 411.357(l)(5) of the regulations tomake it clear that for a compensationarrangement to qualify for the fairmarket value exception, it must meetone of the following criteria:

• It must not violate the anti-kickbackstatute.

• It must comply with a statutory orregulatory anti-kickback safe harbor.

• It must have been approved by theOIG pursuant to a favorable advisoryopinion issued in accordance with part1008 of this title.

This revision is both a clarification ofthe text set forth in the January 1998proposed rule and an expansion of thetypes of arrangements that may qualifyfor the fair market value exception. Inparticular, we are changing therequirement from ‘‘being in compliancewith’’ the anti-kickback statute torequiring that the arrangement notviolate the anti-kickback statute. Therevised language is more appropriatewith respect to a criminal statute, suchas the anti-kickback statute. In addition,since the broad statutory language of theanti-kickback statute technically coverssome relatively innocuous commercialarrangements, and since the OIG haspromulgated regulations granting safeharbor protection for some of thesearrangements (§ 1001.952 of this title),we are revising the criteria to permitcompensation arrangements that complyfully with a regulatory safe harbor.Arrangements that comply with thestatutory exceptions at section1128B(b)(3) of the Act also satisfy thenew criteria. Finally, any compensationarrangement that has been approved bythe OIG pursuant to a favorable advisory

opinion issued in accordance with part1008 of this title would meet the criteriaof § 411.357(l)(5). (We caution, however,that only the requestor of an OIGadvisory opinion may rely on theopinion for any purposes, including,without limitation, the fulfillment ofthis criteria. Therefore, all parties thatintend to rely on the advisory opinionshould be included as requestors.)

Finally, we address the scenariowhere only one party has the requisiteintent (that is, acting knowingly andwillfully) to violate the anti-kickbackstatute. In such a case, only the partywith the requisite intent would haveviolated the anti-kickback statute.However, if both parties relied onmeeting the ‘‘not in violation of the anti-kickback statute’’ standard to qualify forthe fair market value exception, the anti-kickback statute violation wouldpreclude the use of the fair market valueexception to section 1877 of the Act andboth parties would have violated section1877 of the Act. Although weunderstand the dilemma, we believethat it would be unusual that only oneparty to a compensation arrangementwould have the requisite intent forviolation of the anti-kickback statute. Ifany one purpose of remuneration is toinduce or reward referrals of Federalhealth care program business, thestatute is violated. (See United States v.Kats, 871 F.2d 105 (9th Cir. 1989);United States v. Greber, 760 F.2d 68 (3dCir.), cert. denied, 474 U.S. 988 (1985).)Also, if the ‘‘innocent’’ party knows thatthe compensation arrangement wouldviolate the anti-kickback statute but forthe lack of the requisite intent, thatparty should be aware of the risk he orshe is facing and take action to ensurethat prohibited payments are not made.In that situation, we would advisestructuring the arrangement to fit withina safe harbor, if possible, or obtaining anOIG advisory opinion.

For a discussion on the differencesbetween section 1877 of the Act and theanti-kickback statute, together with ananalysis of the impact that the anti-kickback statute has on these regulatoryexceptions, see section II of thispreamble.

Comment: Some commentersrequested clarification regardingwhether services provided by an entityto a physician would fit within the fairmarket value exception. One commenterwas confused by the fact that thepreamble to the January 1998 proposedrule implied that the exception wouldcover any compensation arrangementsbased upon fair market value, but therule itself implied that it only coveredarrangements where the physician (or



immediate family member) provideditems or services.

Response: This fair market valueexception only covers items or servicesprovided by a physician or anyimmediate family member to an entity.Depending on the facts, payments madeby a physician to an entity for items orservices furnished by the entity mightqualify for the exception for paymentsby a physician which is set forth under§ 411.357(i), provided that thecompensation is consistent with fairmarket value and the payments are notspecifically excepted under anotherprovision in §§ 411.355 through411.357.

Comment: One commenter requestedclarification regarding whether thisexception would be available if anotherexception could apply.

Response: In the preamble to theJanuary 1998 proposed rule, we statedthat parties involved in a compensationarrangement should use the fair marketvalue exception if they have doubtsabout whether they meet therequirements in the other exceptionslisted in § 411.357. We havereconsidered our position. The partiesmay use the fair market value exceptioneven if another exception potentiallyapplies. We believe that the safeguardsagainst overutilization included in thefair market value exception aresufficient to cover various types ofcompensation arrangements, includingsome arrangements that are covered byother exceptions.

Comment: A couple of commentersexpressed concern regarding theapplication of the fair market valueexception to legitimate physicianrecruitment practices that do nototherwise qualify for exception underthe physician recruitment exception setforth at § 411.357(e). One commenterwas concerned that in order to meet the‘‘commercially reasonable’’ and‘‘legitimate business purposes’’prerequisites, hospitals would be forcedto obtain costly experts’ reportsregarding recruiting incentives providedin comparable situations. Anothercommenter sought clarificationregarding whether the ‘‘commerciallyreasonable’’ prerequisite was basedupon the specific business in which theparties are involved or business ingeneral. This commenter was concernedthat some arrangements (for example,loan forgiveness programs) might becommercially reasonable in the contextof hospital/physician relationships, butmight not be commercially reasonablefrom a general business perspective.

Response: Physician recruitmentarrangements might be covered by thisfair market value exception or the

physician recruitment exception,depending on the specific factsinvolved. However, we recognize thatmany physician recruitmentarrangements that offer ‘‘extra’’payments to induce physicians torelocate will not be covered by the fairmarket value exception, becausecompensation offered for thephysician’s services exceeds the fairmarket value for such services. We willconsider the comments on therecruitment exception in Phase II of thisfinal rule.

With respect to determining what is‘‘commercially reasonable,’’ anyreasonable method of valuation isacceptable, and the determinationshould be based upon the specificbusiness in which the parties areinvolved, not business in general. Inaddition, we strongly suggest that theparties maintain good documentationsupporting valuation. Finally, withrespect to difficult cases, the partiescould seek an advisory opinion undersection 1877 of the Act. (See § 411.370.)However, we cannot express opinionson whether compensation representsfair market value. (See § 411.370(c)(1).)For further discussion of ‘‘fair marketvalue’’, see section VIII.B.3 of thispreamble.

Comment: One commenter thoughtthat it would be burdensome to requireinclusion of all items and servicesprovided by the physician (orimmediate family member) or a crossreference to other pertinent agreements.First, the commenter noted that theremay be no written agreement for certainbona fide employment arrangements.Therefore, if an immediate familymember of a physician is employed bythe entity and there is no writtenemployment agreement, the physician’scompensation arrangement with theentity could not satisfy this requirementof the fair market value exception.Second, the commenter stated thatarrangements between an entity and aphysician (or immediate familymember) may change from time to timeas a result of new arrangements,terminations, renewals, etc. Therefore,the list of other agreements wouldbecome outdated quickly. Third, thecommenter asserted that therequirement duplicated the informationthat was already required under thereporting requirements. To rectify theforegoing problems, the commentersuggested that the exception shouldonly require a reference to a master listof contracts that could be updatedperiodically. Finally, the commenterrequested clarification regarding whatcontracts must be cross-referenced whenthere is a compensation arrangement

between an entity and a member of aphysician group practice. Thecommenter questioned, with respect toa contract between an entity and animmediate family member of aphysician who is a member of a grouppractice, whether the contract mustcross-reference arrangements betweenthe entity and—(1) the group practice,(2) each member of that group practice,and (3) any family member of a memberof the group practice.

Response: We agree that it isburdensome to require that the writtenagreement either cover all items andservices to be provided by the physicianor immediate family member to theentity, or cross refer to any otheragreements for items or servicesbetween any of these parties. Toalleviate this burden, we are eliminatingthe requirement that the agreementcross refer to any other agreements.Nevertheless, we note that cross-referencing other agreements andarrangements is a good practice and willenable contracting entities, as well asauditors, to review more efficiently thefull scope of a physician’s relationshipto the entity. In cases where a physicianor an immediate family member of aphysician is employed by the entity andthere is no written employmentagreement, the commenter’s conclusionthat the physician’s compensationarrangement with the entity could notsatisfy this requirement of the fairmarket value exception is correct.Another exception, such as theemployment exception, may apply,since it does not require a writtenagreement.

Comment: Some commenters wereconcerned that by requiring that thecompensation not be related to thevolume or value of program referrals,non-program referrals, or other businessgenerated between the parties, we hadundermined the usefulness of the fairmarket value exception, as well as manyother exceptions which are subject tothe same restriction. One commentersuggested that an arrangement shouldnot pose a risk of abuse as long as thecompensation does not reflect thevolume or value of the physician’s ownreferrals.

Response: For a discussion of the‘‘value or volume of referrals’’ standard,refer to the discussion at section V ofthis preamble. We are conforming thelanguage of the new fair market valueexception to our uniform interpretationof the standard, which is discussed atsection V of this preamble.



C. Non-Monetary Compensation up to$300 (and Medical Staff Benefits(§§ 411.357(k) and (m))

The Proposed Rule. Physicians andtheir immediate family members areoften given noncash items or servicesthat have a relatively low value and arenot part of a formal, written agreement.For example, a physician might receivefree samples of certain drugs orchemicals from a laboratory or freecoffee mugs or note pads from ahospital. Although these free ordiscounted items and services fallwithin the definition of ‘‘compensationarrangement,’’ we believe that suchcompensation is unlikely to causeoverutilization, if held withinreasonable limits. Therefore, weproposed a new exception, titled DeMinimis Compensation, forcompensation from an entity in the formof items or services that would notexceed $50 per gift and an aggregate of$300 per year. In addition, to qualify forthe proposed exception, the entityproviding the compensation would haveto make it available to all similarlysituated individuals, regardless ofwhether these individuals refer patientsto the entity for services, and thecompensation could not be determinedin any way that would take into accountthe volume or value of the physician’sreferrals to the entity.

The Final Rule. Except for therevisions discussed below, theregulations in Phase I of this rulemakingare the same as the proposed rule:

• Changing the name of thisexception from ‘‘De MinimisCompensation’’ to ‘‘Non-MonetaryCompensation Up To $300’’ to avoidany unintentional implication that thedollar limits set forth in the exceptionare minimal or inconsequential in allcircumstances. That is, although the$300 dollar limit may be relatively lowwhen compared to the averagephysician’s annual income, we believethe amount could be sufficient to inducereferrals. However, we believe that thedollar limit, together with the otherconditions of the exception, aresufficient to protect against abuse.

• Elimination of the $50 per gift limit.Therefore, if the other conditions of theexception are met, an entity can give aphysician one noncash gift per yearvalued up to $300 or two or morenoncash gifts per year, as long as theannual aggregate value of the gifts doesnot exceed $300.

• Addition of a provision thatprecludes protection for gifts solicitedby physicians to prevent physiciansfrom making such gifts a condition orexpectation of doing business.

• Elimination of the ‘‘similarlysituated’’ standard. This standard wasdesigned to ensure that compensationwas not paid primarily to reward highreferrers. To ensure the same end, weare augmenting the standard thatprohibits compensation that takes intoaccount the volume or value of referralsby also prohibiting compensation thattakes into account the volume or valueof any other business generated betweenthe parties.

• Addition of a new exception(§ 411.357(m)) to allow certainincidental benefits of low valueprovided by hospitals to their medicalstaffs.

Comment: Several commenters arguedthat section 1877 of the Act does notapply to relationships betweenphysicians and drug manufacturers,because a drug manufacturer is not an‘‘entity’’ that furnishes health services towhich a physician purchasing drugsmakes a ‘‘referral’’ under section 1877 ofthe Act. Applying this interpretation,commenters concluded that free drugsamples, free training, and other gifts(for example, pens, notepads, and otheritems) provided to physicians by drugmanufacturers are not prohibited bysection 1877 of the Act, and, therefore,do not need to qualify for any of theexceptions. Also, many expressedconcern that, if section 1877 of the Actis interpreted as applying to physicians’relationships with drug manufacturers,then free drug samples and trainingprovided to physicians bypharmaceutical companies would beprohibited, because they would exceedthe proposed per gift and annual dollarlimits of the de minimis exception. Theyreasoned that free drug samples shouldbe exempt from section 1877 of the Act,because they are extensively regulatedby Federal law that restricts their useand prohibits their sale, and, therefore,free drug samples pose little risk ofabuse. They also stressed that freetraining given in connection with freesamples should be exempt, because it ispart of the sales effort which benefitspatients, as well as physicians.

Response: We agree that drugmanufacturers typically are not‘‘entities’’ that furnish health services towhich physicians purchasing drugsmake ‘‘referrals’’ under section 1877 ofthe Act. (See section VIII.B of thispreamble.) Therefore, as a general rule,neither free drugs, free training, nor giftsprovided to physicians by drugmanufacturers are prohibited by section1877 of the Act. We caution, however,that free or discounted items or servicesprovided by drug manufacturers tophysicians must be scrutinized toensure compliance with other

applicable laws and regulations,including, without limitation, the anti-kickback statute and the Federal lawsrestricting the sale and distribution ofdrug samples, 21 U.S.C. § 353(c) through(d).

Comment: Many commentersexpressed concern regarding the per giftand annual dollar limits. In particular,they stated that the dollar limits were solow that they precluded protection formany legitimate compensationarrangements. For example, manycommenters were concerned that noprotection would be provided for free ordiscounted benefits provided by ahospital for its medical staff.Commenters believe that free ordiscounted benefits (for example, free ordiscounted meals and refreshments, freeor discounted parking, free continuingmedical education or other training, freecomputer/Internet access, freelaboratory coats, free or discountedmalpractice insurance, free transcriptionof medical records, and freephotocopying) would add up andexceed the dollar limits quickly.Concern was also expressed about theadministrative burden of tracking theexact dollar amounts for benefitsprovided to each medical staffphysician.

Finally, one commenter questionedwhether, with respect to grouppractices, the dollar limit would applyto each individual member of the groupor to the group as a whole. Anothercommenter suggested that the dollarlimits should be indexed for inflation.

Response: First, we have added a newexception (§ 411.357(m)) for incidentalbenefits given to a hospital’s medicalstaff members. The question ofincidental benefits given by a hospital tomembers of its medical staff wasaddressed previously in the preamble tothe January 1998 proposed rule at 63 FR1713–1714. In particular, we noted that:

Entities, such as hospitals, often providephysicians with certain incidental benefits,such as their malpractice insurance, or withreduced or free parking, meals or otherincidental benefits. We believe the answer tothis question hinges on the nature of anyother financial relationship the physician haswith the entity. For example, if a physicianreceives free ‘‘extras’’ such as malpracticeinsurance, parking, or meals while he or sheserves as the entity’s employee, then theseextras might qualify as part of thecompensation that the physician receivesunder a bona fide employment relationship,provided they are specified in theemployment agreement. If the physician orentity can demonstrate that the extrasconstitute part of the payment that suchentities typically provide to physicians,regardless of whether they make referrals tothe entity, the extras constitute payment that



is consistent with fair market value, and thatfurthers the entity’s legitimate businesspurposes. If an incidental benefit cannotmeet the requirements under a statutoryexception or the new general exception forcompensation arrangements we haveincluded in § 411.357(l), it might still meetthe de minimis exception we have includedin § 411.357(k) if it has limited value. Wehave also been asked about parking spacesthat a hospital provides to physicians whohave privileges to treat their patients in thehospital. It is our view that, while aphysician is making rounds, the parkingbenefits both the hospital and its patients,rather than providing the physician with anypersonal benefit. Thus, we do not intend toregard parking for this purpose asremuneration furnished by the hospital to thephysician, but instead as part of thephysician’s privileges. However, if a hospitalprovides parking to a physician for periodsof time that do not coincide with his or herrounds, that parking could constituteremuneration.

We recognize that many of theincidental benefits that hospitalsprovide to medical staff members do notqualify for the employment exceptionbecause most members of a hospital’smedical staff are not hospitalemployees, and do not qualify for thefair market value exception because, tothe extent that the medical staffmembership is the only relationshipbetween the hospital and certainphysicians, there is no writtenagreement between the parties to whichthese incidental benefits could beadded. While we still believe thatmedical staff incidental benefits couldbe structured in a way that wouldreward physicians for referrals and,thereby, lead to overutilization, we alsorecognize that many medical staffincidental benefits are customaryindustry practices that are intended tobenefit the hospital and its patients. Forexample, free computer/Internet accessbenefits the hospital and its patients byfacilitating the maintenance of up-to-date, accurate medical records and theavailability of cutting edge medicalinformation. Consequently, we haveadded a new exception (§ 411.357(m)),which provides that medical staffincidental benefits are excepted fromsection 1877 of the Act, if the benefitsin question are—

• Offered by a hospital to all membersof the medical staff without regard tothe volume or value of referrals or otherbusiness generated between the parties;

• Offered only during periods whenthe medical staff members are makingrounds or performing other duties thatbenefit the hospital and its patients;

• Provided by the hospital and usedby the medical staff members only onthe hospital’s campus;

• Reasonably related to the provisionof, or designed to facilitate directly orindirectly the delivery of, medicalservices at the hospital;

• Consistent with the types ofbenefits offered to medical staffmembers by other hospitals within thesame local region or, if no suchhospitals exist, by comparable hospitalslocated in comparable regions; and

• Of low value (that is, less than $25)with respect to each occurrence of thebenefit (for example, each benefit mustbe of low value).Regardless of compliance with theforegoing, we caution that medical staffincidental benefits should be reviewedto ensure compliance with otherapplicable laws and regulations,including, without limitation, the anti-kickback statute.

Medical staff incidental benefits thatdo not meet the foregoing conditionscould constitute prohibitedremuneration and, therefore, would bepermitted under section 1877 of the Actonly if an exception applies. Forexample, malpractice insurance offeredby a hospital only to its emergency roomphysicians would not meet theforegoing conditions. Therefore, to beexempt from section 1877 of the Act, itwould have to qualify for one of theexceptions. Malpractice insurancewould not qualify for the exception fornon-monetary compensation up to $300,because it would exceed the applicabledollar limits. Nor would it qualify forthe exception for remunerationunrelated to the provision of DHS,because such payments would berelated to the provision of emergencyservices, which are included in thedefinition of inpatient hospital servicesand, therefore, are DHS. Malpracticeinsurance provided to emergency roomphysicians might qualify for theemployee exception if the physician isemployed by the hospital and theinsurance is part of the employmentagreement. Similarly, we do not believemedical transcription services are anincidental benefit of nominal value.

We are aware that some hospitals areoffering compliance training programsfor physicians on their medical staffs orin their local communities. Because webelieve such programs are beneficialand do not pose a risk of fraud or abuse,we are creating a new exception forsuch compliance training programs.

We intentionally set the dollar limitsin the proposed exception at a low levelto decrease the likelihood that the itemsor services would influence utilization.However, in response to the comments,we have eliminated the $50 per giftdollar limit. Therefore, under the final

rule, an entity could give a physicianeither one noncash gift per year of upto $300 in value or two or more noncashgifts per year, as long as the annualaggregate value of the gifts does notexceed $300. This change permits largerone-time gifts. For example, a noncashgift valued at $150 would haveexceeded the per gift dollar limit of theproposed rule, but would be permittedunder the final rule, as long as theannual aggregate does not exceed $300and the other conditions of theexception are met.

The exception for non-monetarycompensation up to $300 only protectsgifts to individual physicians. Thus,gifts given to a group practice would notqualify for this exception. Noncash giftscould, however, be given to onemember, several individual members, oreach member of a group practice, if eachsuch gift meets all of the conditions ofthe exception for non-monetarycompensation up to $300. We caution,however, that the exception will notapply to gifts, such as holiday parties oroffice equipment or supplies, that arevalued at not more than $300 perphysician in the group, but are, in effect,given or used as a group gift.Notwithstanding the foregoing, werecognize that the aggregate dollaramount could be substantial for gifts toindividual physician members of verylarge groups. For example, if a groupconsists of 50 physicians, eachphysician of the group could be givenan aggregate of $300 in non-cash giftswithin a given year, equaling a total of$15,000 from one entity. Such a largegift could provide an economicincentive for overutilization. Therefore,to counter-balance the removal of the$50 per gift limit and to further guardagainst abuse, we have added aprovision that excludes gifts solicited bythe receiving physicians or their grouppractice. This change also serves toclarify that our use of the term ‘‘gift’’refers to the ordinary meaning of theterm; that is, a gift must involve avoluntary transfer made withoutconsideration or compensation expectedor received in return. This newprovision prevents members of grouppractices, as well as solo practitioners,from making noncash gifts a conditionof doing business with a particularentity. We intend to monitor theprovision of gifts to group practicephysicians under this exception andmay revisit our position if abuses occur.Such gifts remain subject to the anti-kickback statute.

Finally, we have decided not to indexthe $300 annual aggregate dollar limitfor inflation. Removal of the per giftdollar limit gives entities much greater



flexibility with respect to the value ofnoncash gifts. That is, under theproposed rule, a single gift could notexceed $50; whereas, under the finalrule, the value of a single gift could beup to $300, as long as the otherconditions are met. We believe that thisrevision decreases the need foradjustment for inflation. In addition, wethink it would create confusion as to theactual limit in succeeding years if wewere to provide for an inflation adjuster.The rule as it stands creates an easy-to-follow bright line. However, we willcontinue to monitor the effect of the$300 limit and may revisit the limit inthe future.

Comment: One commenter asked forclarification regarding the relationshipbetween the de minimis exception andthe statute’s exception for remunerationprovided by a hospital to a physician ‘‘ifsuch remuneration does not relate to theprovision of designated healthservices.’’ (See section 1877(e)(4) of theAct.)

Response: The exception for non-monetary compensation up to $300 andthe statutory exception for remunerationunrelated to the provision of DHS aretotally separate exceptions withdifferent criteria. The determination asto which of these exceptions, if any, isapplicable depends on the facts andcircumstances of the case involved.

Comment: One commenter questionedwhether the requirement thatcompensation must be made available toall similarly situated individuals wouldprohibit hospitals from hosting meals ona person-to-person basis. Anothercommenter suggested that the similarlysituated requirement should beeliminated because the type ofpromotional items that would becovered by the exception wouldprobably be provided only to referrers orpotential referrers, and such minimalgifts were unlikely to causeoverutilization.

Response: We agree that, on balance,the ‘‘similarly situated’’ test does notadd significantly to the protections ofthe exception. Accordingly, we haveeliminated the ‘‘similarly situated’’standard. This standard was designed toensure that compensation was not paidprimarily to reward high referrers. Toensure the same end, we are augmentingthe standard that prohibitscompensation that takes into accountthe volume or value of referrals by alsoprohibiting compensation that takes intoaccount the volume or value of anyother business generated by the referringphysician.

Comment: Two commentersquestioned how professional courtesydiscounts (that is, free or discounted

services provided to physicians) wouldbe handled under section 1877 of theAct. One of the commenters suggestedthat professional courtesy discountsshould not violate section 1877 of theAct, because they fall within the non-monetary compensation up to $300exception or they do not constitute‘‘remuneration.’’

Response: The term ‘‘professionalcourtesy’’ is used (or misused) todescribe a number of analyticallydifferent practices, including thepractice by a physician of waiving theentire fee for services provided to thephysician’s office staff, otherphysicians, and/or their families (thetraditional meaning); the waiver ofcoinsurance obligations or other out-of-pocket expenses for physicians or theirfamilies (that is, insurance only billing);and similar payment arrangements byhospitals or other institutions forservices provided to their medical staffsor employees. Therefore, we cannotgeneralize about the application ofsection 1877 of the Act to sucharrangements. Some such arrangementsmay fit in an existing exception,depending on the circumstances (forexample, the non-monetarycompensation up to $300 exception ifthe value of the courtesy services is lessthan $300 and the other conditions ofthe exception are satisfied). However,some such arrangements may not fit inan exception. We are consideringwhether an exception could bedeveloped for such arrangements andwill address the matter further in PhaseII of this rulemaking. We are solicitingcomments about appropriate conditionsfor such an exception and anappropriate definition of ‘‘professionalcourtesy.’’ In addition to conducting ananalysis of professional courtesyarrangements under section 1877 of theAct, these arrangements must beanalyzed with respect to other fraud andabuse, as well as payment, authorities,including the anti-kickback statute, theFalse Claims Act (31 U.S.C. § 3729 etseq.), and the prohibition ofinducements to beneficiaries (section1128A(a)(5) of the Act).

VIII. Definitions of the DesignatedHealth Services

A. General Principles

Basis for the DefinitionsAs we pointed out in the preamble to

the January 1998 proposed rule (63 FR1673), section 1877(h)(6) of the Act liststhe DHS, but does not define them.Moreover, the list in section 1877(h)(6)of the Act does not necessarilycorrespond to specific service categoriesas they are defined under either

Medicare or Medicaid. For example,section 1877(h)(6)(D) of the Act uses thephrase, ‘‘[r]adiology services, includingmagnetic resonance imaging,computerized axial tomography scans,and ultrasound services,’’ althoughultrasound is not usually considered aradiology service. In defining the DHSin § 411.351 of the January 1998proposed rule, we stated that we chose,as much as possible, to base thedefinitions in section 1877 of the Act onexisting definitions in the Medicareprogram. We also explained that insituations in which it was not clearwhether a service was included, wewould look to the intent of the statute.In general, we believe the Congressmeant to include specific services thatare or could be subject to abuse.

Because we had received a number ofinquiries from individuals who wereconfused about whether a particularservice fell under one of the DHScategories, we proposed defining theDHS whenever we could by cross-referencing existing definitions in theMedicare statute, regulations, ormanuals or by including specificlanguage whenever we believed thedefinitions should deviate fromstandard Medicare definitions.

Many of the comments we receivedon the proposed rule reflected thatcommenters were still unclear aboutwhich services fall under the DHScategories. Many commentersspecifically requested that we establisha ‘‘bright line’’ test for identifying theseservices, and suggested that we base theservices on an established list, such asthe Current Procedural Terminology(CPT) codes. We agree that more precisedefinitions will make it much easieradministratively for physicians andentities to comply with the law.

Accordingly, we have determined thatwe will define certain DHS (clinicallaboratory services, physical therapy,occupational therapy, radiology andcertain other imaging services, andradiation therapy services (sections1877(h)(6)(A)through (h)(6)(E) of theAct) by publishing specific lists of CPTand HCFA Common Procedure CodingSystem (HCPCS) codes that physiciansand providers most commonly associatewith a given designated health service.The lists of codes will define the entirescope of the designated servicescategory for purposes of section 1877 ofthe Act. While the definitions section ofthe regulations will contain a generalexplanation of the principles used toselect the codes, in all cases thepublished list of codes will becontrolling.

For services described in section1877(h)(6) of the Act, paragraphs (F)



through (K), we will not be publishinga service-by-service list. The codes forthese services may be just onecomponent used for identifying theservice; the codes may be all those thatappear in a specific ‘‘level,’’ such as allHCPCS level 2 codes, for a service; orthe service is not defined using HCPCScodes at all. The definitions for theservices in paragraphs (F) through (K)are explained in detail below undereach service category.

The HCPCS is a collection of codesand descriptors that representprocedures, supplies, products, andservices that may be provided toMedicare beneficiaries and toindividuals enrolled in private healthinsurance programs. We believe thatthese codes will already be familiar tomany in the health care industry. Thesecodes must be used when billingMedicare for Part B services andsupplies. The codes are divided intothree levels, the first two of which areused in this final rule and are describedbelow; they are listed in HCPCS 2001:

Level I: Codes and descriptorscopyrighted by the American MedicalAssociation in its Current ProceduralTerminology, Fourth Edition (CPT–4).These are 5-position numeric codesprimarily representing physicianservices.

Level II: These are 5-position alpha-numeric codes representing primarilyitems and nonphysician services thatare not represented in the level I codes.Included are codes and descriptorscopyrighted by the American DentalAssociation’s Current DentalTerminology, Second Edition (CDT–2).These are 5-position alpha-numericcodes comprising the ‘‘D’’ series. Allother level II codes and descriptors areapproved and maintained jointly by thealpha-numeric editorial panel(consisting of HCFA, the HealthInsurance Association of America, andthe Blue Cross and Blue ShieldAssociation).

Because these specific codes changeand can quickly become out-of-date, weare not including the lists of DHS codesin the regulations text, but rather in anaccompanying attachment. Thedefinitions of specific services in theregulations text will cross refer to acomprehensive table that will appearinitially in the Federal Register alongwith Phase I of this rulemaking andthereafter in an addendum to the annualfinal rule concerning payment policiesunder the physician fee schedule rule.This list titled, ‘‘List of CPT/HCPCSCodes Used to Describe CertainDesignated Health Services Under thePhysician Referral Provisions (Section1877 of the Social Security Act),’’ will

also be posted on the HCFA web site athttp://www.hcfa.gov on the date ofFederal Register publication of thisfinal rule. The table published each yearwill be a comprehensive listing of allcodes for DHS and not merely a listingof changes to the prior year’s table. Theupdates will also be posted on theHCFA web site. The physician feeschedule rule is generally published inlate October or early November. We willconsider comments on each year’srevised list if we receive them duringthe applicable comment period for thatrule. If any changes are made, we willthen publish a revised table andrespond to any public comments thatwe receive. This approach will providean annual comprehensive list of codesfor those DHS noted above (sections1877(h)(6)(A)through (h)(6)(E) of theAct).

We are not providing lists of codes forthe following categories of DHS(sections 1877(h)(6)(F) through (h)(6)(K)of the Act): Durable medical equipmentand supplies; parenteral and enteralnutrients, equipment, and supplies;prosthetics, orthotics, and prostheticdevices and supplies; home healthservices; outpatient prescription drugs;or inpatient and outpatient hospitalservices. We believe the definitions inPhase I of this rulemaking for these DHSprovide sufficiently clear ‘‘bright line’’rules.

In the preamble to the January 1998proposed rule, we had stated that webelieved the Congress intended toinclude specific services that are orcould be subject to abuse and that wewould attempt to define the servicesaccordingly. In the January 1998proposed rule preamble and regulationstext, we then attempted in some casesto include or exclude services or typesof services based on our view as to theirpotential for abuse. Many commentersdisagreed with our views aboutparticular services (for example,lithotripsy), and many more argued thatthe particular service they providedshould also be excluded because it wasnot overutilized. In light of thesecomments and upon further review ofthe statutory scheme, we have decidedthat the Congress did not intend that wecategorize DHS by determining thepotential for overutilization or abuse ona service-by-service basis. Accordingly,in Phase I of this rulemaking, we areincluding all services that we believecome within the general categories; wehave created limited exceptions for afew specific cases (that is, implants inambulatory surgical centers,legislatively mandated preventivescreening tests and immunizationssubject to frequency limits, eyeglasses

and contact lenses subject to frequencylimits, and erythropoietin (EPO)provided by end-stage renal disease(ESRD) facilities) for which we believean exception poses a limited risk ofabuse and is necessary to avoid needlessdisruption of patient care. However,even for those rare exceptions, we willcontinue to monitor the services forabuse and, if necessary, revisit theexclusions.

We also stated in the preamble to theJanuary 1998 proposed rule (63 FR1673) that we consider a service to bea designated health service, even if it isbilled as something else or is subsumedwithin another service category by beingbundled with other services for billingpurposes. We gave as an exampleskilled nursing facility (SNF) services,which can encompass a variety of DHS,such as physical therapy (PT),occupational therapy (OT), or laboratoryservices. Commenters complained thatthis interpretation would result in anexpansion of the DHS beyond theservices specifically listed in the law.According to the commenters, when theCongress intended to cover specificMedicare services (including compositerate services, such as hospital or homehealth services), it did so expressly.Upon review, we agree with thecommenters. Under the final rule,services that would otherwise constituteDHS, but that are paid by Medicare aspart of a composite payment for a groupof services as a separate benefit (forexample, ambulatory surgical center(ASC) or SNF rate), are not DHS forpurposes of section 1877 of the Act. (Asexpressly provided in section 1877(h)(6)of the Act, hospital and home healthservices remain DHS although they arepaid through a composite rate.) We note,however, that because of SNFconsolidated billing, most, if not all,SNFs will also be considered entitiesproviding DHS (for example, PT or OT)under Part B to SNF patients who haveexhausted their Part A benefit or toother nursing home residents (that is,patients for whom the services are notcovered as part of a composite rate). Theconsolidated billing requirement placeswith the SNF the Medicare billingresponsibility for most of the servicesthat a SNF resident receives (except forcertain practitioner services and alimited number of other services) underPart A and under Part B. (Presently,consolidated billing is in effect only forpatients in a covered Part A stay, butwill become effective for Part B servicesin the near future.) Accordingly, aphysician will not be able to referMedicare patients who will require DHSto a SNF in which he or she has an



ownership or investment interest,unless the interest is protected under anexception to section 1877 of the Act.

In the August 1995 final rule relatingto clinical laboratory services, wecreated an exception for laboratoryservices furnished in an ASC or ESRDfacility or by a hospice if the serviceswere included in a composite rate or perdiem hospice charge. (See § 411.355(d)).In the January 1998 proposed rule, wehad proposed extending this compositerate exception to include all DHSfurnished in an ASC or ESRD facility orby a hospice if payment is included inthe ASC payment rate, the ESRDcomposite payment rate, or as part ofthe hospice payment rate. This proposalwas intended to address problems facedby ASCs, ESRD facilities, and hospicesin the light of our proposed stance onDHS subsumed by bundled payments.However, since under the final rule DHSthat are subsumed by a bundledpayment do not implicate section 1877of the Act, we have not adopted ourproposal to extend § 411.355(d) beyondclinical laboratory services. Moreover,given our final interpretation, we arereconsidering the need for § 411.355(d)as applied to clinical laboratory servicesand intend to address the matter furtherin Phase II of this rulemaking. We aresoliciting comments on this issue.

B. General Comment: ProfessionalServices as Designated Health Services

Comment: Many commentersexpressed the view that the professionalcomponent of DHS (particularly clinicallaboratory and radiology services)should not implicate section 1877 of theAct. Commenters asserted that theCongress did not intend for professionalservices to come within the physicianself-referral law prohibition and that weexceeded our authority to promulgateregulations by including them.Commenters also contended thatlimiting DHS under section 1877 of theAct solely to the technical componentsof services would sufficiently controlthe risk of program or patient abuse.Other commenters stated that if weincluded professional components ofsome DHS, we should do so for all DHS.The commenters pointed out that ourproposed position on productivitybonuses (that is, that they may notreflect the volume or value of any DHSreferrals) would require specialbookkeeping to segregate professionalfees when calculating bonuses that willburden practices, without serving apublic policy purpose.

Response: We believe that it was notthe intent of the statute to exclude allprofessional services from the list ofDHS. Many of the DHS, such as

radiology and radiation therapy, havesubstantial physician servicecomponents. If the Congress intended toexclude them, we would expect thestatute to specifically do so. While someservices are not viewed as having aprofessional component that is paidseparately, Medicare still requiresprofessional supervision of them toqualify for Medicare payment.

We agree to some extent that limitingreferrals for the technical component ofa service should greatly reduce thenumber of unnecessary referrals.Nonetheless, there are some DHS thatconsist only of a professionalcomponent (for example, some radiationtherapy services) or are primarilyprofessional in nature, and these wouldnot otherwise be subject to the law if wecarved out all professional components.

We agree with the commenters thatwe should include professionalcomponents when relevant in all DHScategories. Therefore, we have revisedthe definitions of each of the DHS toinclude the professional components ineach case in which a professionalcomponent is included in the CPT orHCPCS codes that represent one of thoseservices.

We understand that these rules mayimpose an administrative burden onsome group practices, depending onhow they choose to comply with section1877 of the Act. We think Phase I of thisrulemaking has a number of substantivechanges that will ease theadministrative burden of compliance,including the exception from thedefinition of ‘‘referral’’ for personallyperformed services and the greaterflexibility afforded group practices overtheir distribution of revenues. As apractical matter, the professionalcomponent of many of these serviceswill be excluded from the definition ofa referral as services personallyperformed by the referring physician.

Individual Designated Health ServicesWe discuss below each designated

health service category in the order inwhich it appears in section 1877(h)(6) ofthe Act. Each discussion includes ageneral summary of the category,summaries of the relevant publiccomments, and our responses.

C. Clinical Laboratory ServicesIn the August 1995 final rule covering

a physician’s referrals for clinicallaboratory services, we defined theseservices in § 411.351 as—

The biological, microbiological,serological, chemical, immunohematological,hematological, biophysical, cytological,pathological, or other examination ofmaterials derived from the human body for

the purpose of providing information for thediagnosis, prevention, or treatment of anydisease or impairment of, or the assessmentof the health of, human beings. Theseexaminations also include procedures todetermine, measure, or otherwise describethe presence or absence of various substancesor organisms in the body.

We had stated in the August 1995final rule, in response to a commenterwho requested a definition of clinicallaboratory services, that we believed themost appropriate way for a physician orclinical laboratory to determine if adiagnostic test is a clinical laboratorytest subject to the requirements ofsection 1877 of the Act, is to find outif the test is subject to categorizationunder the Clinical LaboratoryImprovement Act (CLIA). We pointedout that there is a list of clinicallaboratory test systems, assays, andexaminations categorized by complexityand published by the Center for DiseaseControl (CDC). We also stated that,given this definition, CPT codes wouldnot be the sole references to identifyclinical laboratory services for physicianreferral purposes.

Commenters also had asked about theprofessional components of laboratoryservices. We stated that we believed thatCLIA covers the actual examination ofmaterials, their analysis, and anyinterpretation and reporting of theresults that are performed by a facilitythat qualifies as a laboratory, as definedin § 493.2 (Definitions). However, if alaboratory sent test results to anindependent physician, anyinterpretation performed by thephysician would not be performed bythe laboratory facility. As a result, theservices would not constitute part of theclinical laboratory test.

We stated in the January 1998proposed rule covering referrals for theother DHS that we would retain thedefinition of clinical laboratory servicesthat was incorporated into ourregulations by the August 1995 finalrule. However, in line with our revisedapproach for identifying the DHS in thisfinal rule, we have amended the rule torefer specifically to CPT and HCPCScodes. We have included as DHS theprofessional components of laboratorytests when they are listed as such in thecodes. It is our belief that thespecification of the codes in theattachment to this final rule isconsistent with, although not identicalto, the definition of clinical laboratoryservices in our January 1998 proposedrule.

D. Physical Therapy Services

We proposed to define physicaltherapy services in § 411.351 as those



outpatient physical therapy services(including speech-language pathologyservices) described at section 1861(p) ofthe Act and in § 410.100 (Includedservices), paragraphs (b) and (d). Undersection 1861(p) of the Act, the term‘‘outpatient physical therapy services’’specifically includes speech-languagepathology services. Because section1877(h)(6) of the Act lists physicaltherapy services in general, and not justoutpatient services, we also included inthe definition any other services withthe characteristics described in§ 410.100(b) and (d) that are coveredunder Medicare Part A or Part B,regardless of who provides them, thelocation in which they are provided, orhow they are billed.

We pointed out that services that areessentially the same as ‘‘outpatientphysical therapy services’’ are alsocovered by Medicare in other contextsand in different settings, and may bebilled under different categories. Forexample, we have a longstanding policyof covering physical therapy andoccupational therapy as diagnostic ortherapeutic inpatient hospital services.Similarly, these services can also becovered as SNF services, and can befurnished as ‘‘incident to’’ physicianservices under section 1861(s)(2)(A) ofthe Act. (Section 1877 implications forDHS provided by SNFs are discussedearlier in this section.)

It was our view in the January 1998proposed rule that covered outpatientphysical therapy services basicallyincluded three types of services, whichwere best described in § 410.100(b)(which specifically concerns servicesprovided by a comprehensiverehabilitation facility (CORF)). Thisdefinition covers the testing andmeasurement of the function ordysfunction of the neuromuscular,musculoskeletal, cardiovascular, andrespiratory systems; assessment andtreatment related to dysfunction causedby illness or injury and aimed atpreventing or reducing disability or painand restoring lost function; and theestablishment of a maintenance therapyprogram for an individual whoserestoration has been reached. Manycommenters asserted that the proposeddefinition was imprecise or improperlyincluded some procedures that are notgenerally considered physical therapyservices.

We have responded to these concernsby redefining physical therapy services,as some commenters suggested, by usinga list of HCPCS codes. We believe thelist is limited to services that are moretraditionally regarded as physicaltherapy. In general, these services aredescribed in the ‘‘Physical Medicine

and Rehabilitation’’ section (the 97000series) of the CPT and in other relevantsections of the HCPCS.

In the January 1998 proposed rule, wealso included speech-languagepathology services as a designatedhealth service since section 1861(p) ofthe Act includes ‘‘speech-languagepathology services’’ in the definition of‘‘outpatient physical therapy services.’’These services are defined in section1861(ll)(1) of the Act as speech,language, and related functionassessment and rehabilitation servicesfurnished by a qualified speech-language pathologist as this pathologistis legally authorized to perform underState law (or the State regulatorymechanism) as would otherwise becovered if furnished by a physician.Section 1861(ll)(3) of the Act defines a‘‘qualified speech-languagepathologist.’’

We used in the proposed rule the briefdescription of speech-languagepathology services in § 410.100(d),which applies to services provided inCORFs, as those services that arenecessary for the diagnosis andtreatment of speech and languagedisorders that create difficulties incommunication. In an effort to furnisha ‘‘bright line’’ test, we are defining theservices in Phase I of this rulemaking bythe specific codes that correspond to theservices that we consider to be speech-language pathology services.

As we developed the list of CPT andHCPCS codes relevant to speech-language pathology, we realized that ourproposed definition, which cross-refersto the CORF definition in § 410.100(d),did not encompass the full range ofservices that are commonly consideredto be speech-language pathologyservices. It failed to recognize thatspeech-language difficulties can becaused by cognitive disorders and failedto recognize that speech-languagepathology may be used to treatswallowing and other oral-motordysfunctions. Therefore, in developingthe list of codes for speech pathology inPhase I of this rulemaking, we includedthe diagnosis and treatment of cognitivedisorders including swallowing andother oral-motor dysfunctions.

Finally, because of the overlapbetween physical therapy, occupationaltherapy, and speech-language pathologyservices, we are listing the codes for allthree services together. We believe thatthis set of HCPCS codes represents whatmost clinicians would define as PT/OT/speech therapy services that are coveredby the Medicare program. The list is setout in the attachment to this final rule.

Comment: A number of commenterswere particularly concerned that the

proposed definition of physical therapyservices implies that physical therapistscan perform diagnostic testing andmeasurements, such aselectromyography tests (EMGs). Thesetests are used primarily to providemedical diagnostic informationregarding neuromuscular diseases andoccasionally to measure neuromuscularfunction. Although some States permitphysical therapists to perform thesetests, the commenters believe that EMGsare typically performed by a physicianas part of a physical examination todetermine whether a patient is asurgical candidate or if some othercourse of treatment is warranted.

In addition, other commenters statedthat the proposed definition of physicaltherapy services could be interpreted toinclude therapeutic procedures such asnerve blocks and arthrocentesis that thecommenters believe are physicianservices. One commenter, a physicianwho practices physical medicine andrehabilitation, asserted that ourproposed definition of physical therapyincluded services that could beadministered by physicians andphysical therapists. He feared that thiscould prohibit him from treatingpatients he diagnoses. Severalcommenters responded to the inclusionin the definition of physical therapy ofany ‘‘assessment and treatment’’designed to alleviate pain or disability.The commenters asserted that thisphrase captures a large portion ofmodern medicine, given that pain is themost common presenting symptom in aphysician’s office, and virtually anyassessment or treatment followingtherefrom would have as its purpose thealleviation of that pain.

Response: Nothing in the proposeddefinition affected the scope of anypractitioner’s practice. We agree withthe commenters that only in certainStates are physical therapists licensed toperform EMGs. Additionally, we agreethat therapeutic procedures such asnerve blocks and arthrocentesis aretypically performed by a physician andare not generally considered to be a partof physical therapy. These proceduresare not included on the list of codes thatdefines the scope of physical therapy forpurposes of section 1877(h)(6)(B) of theAct. In the January 1998 proposed rule,we did not intend to convey themessage that what is generallyconsidered physical therapy wouldchange. We proposed to use an existingdefinition of physical therapy (in§ 410.100(b), which covers physicaltherapy services in CORFs) preciselybecause we did not want to change theexisting perception of physical therapy.



In order to avoid confusion, we arerevising our proposed definition byproviding a list of CPT and HCPCScodes that are, collectively, the PT/OT/speech-language therapy DHS. This listof codes defines the entire scope of PT/OT/speech-language therapy services forpurposes of section 1877 of the Act.Finally, we note that under Phase I ofthis rulemaking, if a physicianpersonally provides a designated healthservice to his or her patient, there is no‘‘referral’’ for purposes of section1877(a)(1) of the Act. See section III.B ofthis preamble.

Comment: One commenter assertedthat pulmonary function tests are for themeasurement of the function of therespiratory system and have nothing todo with physical therapy. However,another commenter recommended thatthe definition of physical therapyinclude the neuromuscular andpulmonary function tests that test forfunctional capacity ratings and that areusually performed by a physicaltherapist without the direct supervisionof a physician.

Response: We agree with thecommenter that pulmonary functiontests for the measurement of thefunction of the respiratory system arenot physical therapy. The onlypulmonary function test that may beconsidered to be a physical therapyservice is pulse oximetry testing, CPTcode 94762, when it is used to test forfunctional capacity ratings. A pulseoximetry test that is performed todetermine whether a patient has enoughoxygen to perform certain activities ofdaily living is, for example, a physicaltherapy service.

Comment: One commenterrecommended that we define physicaltherapy as those therapeutic exercisesand physical medicine modalitiesdescribed in the 97000 series of the CPTcodes, included in the patient’s writtenplan of physical therapy treatment, andprovided by a physical therapist orphysical therapy aide.

Response: We agree with thecommenter that PT services should bebased on the CPT codes and havemodified the rule accordingly. Withrespect to which professionals canprovide a given service, we defer in thisrule to existing Medicare policy. Manyof these DHS can be provided byphysicians.

Comment: A number of commentersopposed the inclusion of speech-language pathology services in thedefinition of physical therapy services.The commenters stated that theCongress did not intend to include theseservices within the ban on physicianreferrals and asserted that including

these services as DHS is unnecessary(although they did not state why thiswould be the case). One commenterasserted that when the Congressintended to include outpatient speech-language pathology services within thecategory of outpatient physical therapyservices, the Congress enacted explicitlanguage that made that intention clear.The commenter pointed to section4541(a)(1) of the BBA 1997, whichadded paragraph (8)(A) to section1833(a) of the Act. That provision statesthat, for covered individuals, amountswill be paid from the Medicare TrustFund for ‘‘outpatient physical therapyservices (which includes outpatientspeech-language pathology services) andoutpatient occupational therapy servicesfurnished—’’ * * * by certain entities.

Response: The definition of‘‘outpatient physical therapy services’’in section 1861(p) of the Act specificallystates that ‘‘the term ‘outpatientphysical therapy services’ also includesspeech-language pathology servicesfurnished by a provider of services, aclinic, rehabilitation agency, or by apublic health agency, or by others.* * *’’ Thus, by definition, speech-language pathology services are a subsetof outpatient physical therapy servicesunder the Medicare statute. We believethat the parenthetical language underthe BBA 1997 simply confirms ourinterpretation.

E. Occupational Therapy ServicesIn the January 1998 proposed

regulations text, we proposed to includethose OT services described in section1861(g) of the Act and the CORFregulations in § 410.100(c). Weproposed that occupational therapyservices would also include any otherservices with the characteristicsdescribed in § 410.100(c) that arecovered under Medicare Part A or PartB, regardless of who furnishes them, thelocation in which they are furnished, orhow they are billed. In proposed§ 411.351, OT services included thefollowing:

• Teaching of compensatorytechniques to permit an individual witha physical impairment or limitation toengage in daily activities.

• Evaluation of an individual’s levelof independent functioning.

• Selection and teaching of task-oriented therapeutic activities to restoresensory-integrative function.

• Assessment of an individual’svocational potential, except when theassessment is related solely tovocational rehabilitation.

As discussed in the preceding section,we are revising our proposed definitionby providing a list of CPT and HCPCS

codes that collectively are the PT/OT/speech therapy DHS. Also, as describedabove, we are excluding from thedefinition of DHS any designated healthservice that is paid for as part of a‘‘bundled’’ payment (for example,services covered by the SNF Part A rateor the ASC rate), unless the statuteotherwise provides that a ‘‘bundled’’ setof services is itself a designated healthservice (for example, home healthservices and inpatient and outpatienthospital services).

Comment: A major OT associationasserted that the definition of OT is toonarrow because it does not adequatelycapture the scope of the OT benefit. Forexample, OT is furnished to patientswith cognitive impairments as well as topatients with physical impairments andlimitations. As another example, OTmay also be furnished in partialhospitalization programs for patientswith a psychiatric illness. Thecommenter believes that it is importantfor the definition in § 411.351 to be ascomplete and accurate as possible toassure appropriate compliance with thelaw, and that § 410.100(c) is too narrowto be used as the complete definition ofOT services for purposes of theseregulations. The commenter suggestedthat we broaden the definition byadding to it the coverage guidelinesstated in section 3101.9, ‘‘OccupationalTherapy Furnished by the Hospital orby Others under Arrangements with theHospital and under its Supervision,’’ ofthe Medicare Intermediary Manual(HCFA Pub. 13–3), Part 3— ClaimsProcess, and section 2217, ‘‘CoveredOccupational Therapy,’’ of the MedicareCarriers Manual (HCFA Pub. 14–3), Part3—Claims Process. The commenterrecommended that we use the followingdefinition for OT in § 411.351:

Occupational therapy services means thoseservices described at section 1861(g) of theAct, § 410.100(c) of this chapter, and in theoccupational therapy coverage guidelinescontained in section 3101.9 of the MedicareIntermediary Manual and section 2217 of theMedicare Carriers Manual. Occupationaltherapy services also include any otherservices with the characteristics described in§ 410.100(c) and the occupational therapycoverage guidelines that are covered underMedicare Part A or B, regardless of whofurnishes them, the location in which theyare furnished, or how they are billed.

Response: We agree with thecommenter that the proposed definitiondoes not clearly recognize that OT isfurnished to patients with cognitiveimpairments. As we have statedpreviously in this preamble, we did notintend to change what is commonlyregarded as OT. We referred to theexisting definition in § 410.100(c) so



that we would not be proposing anychange. However, as the commenterpointed out, the existing definition at§ 410.100(c) is not complete. Therefore,we are expanding the proposeddefinition by including codes for the‘‘teaching of compensatory techniquesto permit an individual with a physicalor cognitive impairment or limitation toengage in daily activities.’’

However, the commenter is correctthat a partial hospitalization programmay provide OT services. This is inaccordance with section 1861(ff) of theAct, which defines ‘‘partialhospitalization services’’ andspecifically includes OT as a partialhospitalization service. However, withrespect to partial hospitalization, wehave determined that services providedas part of a group of services paid undera bundled rate are not DHS. Partialhospitalization services are paid undera bundled rate. Therefore, partialhospitalization services (including OTservices provided as part of the partialhospitalization benefit) furnished by acommunity mental health center are notDHS. However, partial hospitalizationservices furnished by a hospital areoutpatient hospital services, which is acategory of DHS.

In order to eliminate any confusionthe January 1998 proposed regulationsmay have caused and to make Phase Iof this rulemaking clear, we are definingOT by a list of specific HCPCS/CPTcodes. In light of the changes we havemade in Phase I of this rulemaking, it isnot necessary for us to include thereferences to the intermediary andcarrier manuals that the commentersuggested.

Occupational therapy services may befurnished by an occupational therapist,an occupational therapy aide who issupervised by an occupational therapist,or by a physician. Section 1861(r) of theAct allows a physician to furnish anymedical service that his or her Stateallows the physician to furnish.

F. Radiology and Certain Other ImagingServices

In the January 1998 proposed rule, wecombined the DHS in section1877(h)(6)(D) of the Act—‘‘radiologyservices, including magnetic resonanceimaging, computerized axialtomography, and ultrasound services’’—and 1877(h)(6)(E) of the Act—‘‘radiationtherapy services and supplies’’ into thefollowing definition:

Radiology services and radiation therapyand supplies means any diagnostic test ortherapeutic procedure using X-rays,ultrasound or other imaging services,computerized axial tomography, magneticresonance imaging, radiation, or nuclear

medicine, and diagnostic mammographyservices, 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 theprofessional component of these services, butexcluding any invasive radiology procedurein which the imaging modality is used toguide a needle, probe, or a catheteraccurately.

Commenters found the proposeddefinition to be confusing in two mainrespects:

• The definition both combined twodifferent categories of radiology-relatedservices (that is, radiology and radiationtherapy and supplies) and includedother services not commonly consideredto be radiology-related (ultrasound andnuclear medicine). Many commentersthought that all services not strictlyconsidered radiology should beexcluded.

• At different places in the January1998 proposed regulation preamble, westated that we were excluding DHS thatwere peripheral, incidental, orsecondary to a nondesignated healthservice. In the proposed definition,however, we only excluded imagingmodalities used to ‘‘guide a needle,probe, or catheter.’’ Many commentersthought the scope of excluded radiologyand other imaging services should bebroader than just guidance, while othersthought the distinction between primaryand secondary services would bedifficult to apply in practice.

Based on the comments, we haveredefined this category of DHS in amanner that should provide greaterclarity. First, we have segregatedradiation therapy and supplies fromradiology and other imaging servicesand returned them to a separatecategory, as in the statute. (We discusscomments relating to radiation therapyservices in section VIII.G of thispreamble). Second, we are excludingnuclear medicine since those servicesare not commonly considered to beradiology. Third, for purposes of theseregulations we have renamed thecategory of services covered by section1877(h)(6)(D) of the Act ‘‘Radiology andCertain Other Imaging Services’’ tomake clear the Congress’s intent toinclude in subsection (D) some imagingservices other than radiology. Fourth,consistent with the approach we arefollowing with several other of the DHScategories, we are defining the entirescope of covered services under section1877(h)(6)(D) of the Act by using lists ofCPT and HCPCS codes, which listscontrol in all circumstances. The listsinclude those services typicallyconsidered as radiology or ultrasoundservices, or as constituting an MRI or acomputerized axial tomography (CAT)

scan. Fifth, we have excluded certaincovered preventive screeningprocedures, such as screeningmammography, that are subject toHCFA-imposed frequency limits thatmitigate the potential for abuse. In thesecircumstances, we believe the Congressdid not intend the physician self-referrallaw to interfere with a physician’s orentity’s attempts to provide thesepreventive procedures to Medicarepatients.

Sixth, based on the comments wereceived, we concluded that the terms‘‘invasive’’ radiology and radiology‘‘incidental’’ or ‘‘secondary’’ to a non-DHS procedure used in our proposeddefinition of ‘‘radiology services’’created confusion and uncertainty. Weagree with commenters that ‘‘invasive’’radiology includes more than just thoseprocedures used to ‘‘guide a needle,probe or catheter.’’ Consequently, weare revising our definition of radiologyand certain other imaging services toexclude from the definitional list ofcodes x-ray, fluoroscopy, andultrasound services that are themselvesinvasive procedures that require theinsertion of a needle, catheter, tube, orprobe. Thus, cardiac catheterizationsand endoscopies will not fall within thescope of ‘‘radiology services’’ forpurposes of section 1877 of the Act. AllMRIs or CAT scans, however, are withinthe scope of DHS because excludingsome on the basis that they are‘‘invasive’’ tests would have the effect ofexcluding all MRIs and CAT scans thatuse contrast injection. The use ofcontrast is not mandatory for theperformance of a scan, as it is for theperformance of a barium enema,excretory urogram, or traditionalvascular angiography. Thus, anexclusion from the DHS definition ofcontrast for MRIs and CAT scans couldhave the effect of encouraging the use ofcontrast when it is not necessary.

In addition, we have concluded thatradiology procedures that are integral tothe performance of, and performedduring, a nonradiology medicalprocedure are not within the scope ofDHS. The list of codes that defines thescope of ‘‘radiology and certain otherimaging services’’ will make thisdistinction clear. Examples of theseintegral services include, but are notlimited to, imaging guidance proceduresand radiology procedures used todetermine, during surgery, whethersurgery is being conducted successfully.In the CPT, these radiology proceduresare identified as cross-references to theprinciple procedures with which theyare associated. A radiology procedure,such as a CAT scan or a chest x-ray,performed before or after another



procedure, such as a lung cancerresection, is considered to be adiagnostic radiology procedure that isnot integral to the principle procedure(that is, the lung cancer resection).While these radiology procedures areessential to the performance of theprinciple procedure, physicians havediscretion in choosing which entityprovides the radiology serviceindependent of the entity providing theprinciple surgical service. Thesenonconcurrent services are DHS.

Regardless of our definition of‘‘radiology and certain other imagingservices,’’ some services that are notwithin the scope of that definition maystill be DHS if they are inpatient oroutpatient hospital services, a separatecategory of DHS under section1877(h)(6)(K) of the Act. These serviceswould be subject to the physicianreferral rule if the referring physicianhas a financial relationship with thehospital. We anticipate most of thesefinancial arrangements will meet anexception under section 1877 of the Act(for example, the exception for hospitalownership or either the employment orpersonal service arrangementsexception).

We address comments related to thedefinition of services covered by section1877(h)(6)(D) of the Act below. To theextent some commenters raised issuessuch as the general effects of section1877 of the Act on physicians’ practicesor on medicine in general, those issuesare addressed elsewhere in thepreamble, where relevant.

Comment: Several commentersasserted that the proposed definition of‘‘radiology services’’ that included allsound-based or imaging-basedtechnologies is contrary to congressionalintent. The commenters argued that theCongress intended to limit thedefinition by removing originallanguage that included the phrase‘‘other diagnostic services’’ along withradiology services.

Response: The phrase ‘‘radiology, orother diagnostic services’’ was added insection 1877(h)(6)(D) of the Act byOBRA 1993 as one of the categories ofDHS the Congress chose to cover inaddition to clinical laboratory services.This one set of services appeared toinclude the extremely broad category of‘‘other diagnostic services,’’ in additionto radiology services. The Congressnarrowed this category in section 152 ofthe Social Security Act Amendments of1994 (SSA 1994), Public Law 103–432,enacted on October 31, 1994, perhapsbecause it realized the huge scope of‘‘diagnostic services.’’ The amendmentsrevised 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, andultrasound services.’’ While all of theseservices might not be subsumed in thecategory ‘‘radiology services,’’ theCongress clearly intended to includethem as DHS. We have renamed thecategory ‘‘radiology and certain otherimaging services’’ to reflect theCongress’s intent.

Comment: One commenter questionedwhy cardiac, vascular, and obstetricultrasound procedures could not bereferred. The commenter stated that inmost institutions these procedures arenot considered radiology proceduressince radiologists may never superviseor interpret them. Another commenterargued that although echocardiographyis a type of ultrasound procedure, itshould not be considered a radiologyservice because echocardiography is aservice developed and performedprimarily by cardiologists, billed undercardiology CPT codes, and furnished tocardiac patients. As a result, thecommenter argued that it is inaccurateand inappropriate to includeechocardiography within the definitionof radiology services.

Response: Cardiac, vascular, andobstetric ultrasound procedures aresubject to the physician self-referralprovisions because section 1877(h)(6)(D)of the Act specifically includesultrasound as a designated healthservice, not because they are ordinarilyconsidered to be ‘‘radiology services.’’Simply stated, the term ‘‘radiologyservices’’ as applied to the servicesdescribed by section 1877(h)(6)(D) of theAct is a misnomer. Section1877(h)(6)(D) of the Act includes anyservices that are traditionally regardedas ‘‘radiology’’ services, as well as MRIs,CAT scans, and ultrasound services.Cardiac echography and vascularechography are clearly ultrasoundservices. Nothing in the regulationwould prohibit a vascular surgeon,neurologist, or other specialist fromordering a particular service from anentity with which he or she has noprohibited financial relationship.

Comment: Several commenters wereopposed to our proposal to exclude as‘‘invasive’’ radiology only thoseinvasive procedures used to guide aneedle, probe, or catheter accurately.Two of the commenters were concernedthat invasive radiology procedures,which use an imaging modality not onlyto guide a needle, probe or catheter, butalso to record an accurate picture of theareas of the body being probed orcatheterized, would be included in thedefinition of radiology. (An example ofthis would be an ultrasound device

placed at the end of a catheter orendoscope.)

Response: We agree and have notincluded x-ray, fluoroscopy, andultrasound services that require theinsertion of a needle, catheter, tube, orprobe on the list of HCPCS/CPT codesthat defines the full scope of radiologyand other imaging services for purposesof section 1877 of the Act. Some of theseservices may still be DHS when they fallwithin the category of inpatient andoutpatient hospital services.

Comment: Several commentersobjected to our proposal to excluderadiology services that were ‘‘merelyincidental or secondary’’ to anotherprocedure that the physician hasordered. (See our January 1998proposed rule, 63 FR 1676.) Somecommenters noted that it is generallynot possible to establish, based on theCPT code used, whether or not theprimary purpose of the procedure wasthe interventional procedure itself (withthe imaging being an adjunct procedure)or whether the primary purpose was totake a picture with an imaging modality.Because it is extremely difficult andimpractical in the commenters’ view toseparate the radiology component fromthe underlying procedure, thecommenters recommended that weexclude all invasive radiology services,encompassing those procedures thatmay include an adjunct radiologyprocedure performed at the same timeas the interventional procedure. Othercommenters thought that the definitionof radiology services should alsoexclude imaging services when they areperformed before and/or after a surgicalprocedure. For example, a commenterrequested that we add language to theproposed definition of radiology toexclude any radiology procedure inwhich the imaging modality is used toplan the invasive procedure. Thecommenter noted that for many invasiveprocedures, an ultrasound before theactual procedure might be routinelynecessary in order to plan the mannerin which the needle, catheter, or probewould be guided during the actualinvasive procedure. In thesecircumstances, the patient already hasreceived the diagnosis that the invasiveprocedure is necessary. The commenterbelieves that we should maintain theview that a physician would not refer apatient for these procedures in order toprofit from unnecessary radiologyservices. Another commenter stated thatunder our proposed interpretation ofinvasive procedures, an echocardiogramthat showed a need for bypass surgerywould be a designated health service,while one that ruled out surgery wouldnot, since there would be no surgical



procedure to which the imaging servicewould be ‘‘incidental.’’ Finally, aneurologist commented that there are anumber of radiology proceduresperformed by neurologists that areincidental to other procedures,particularly certain surgical services.One of the examples given by thecommenter was carotid duplex ortranscranial Doppler ultrasound, whichare tests performed after carotidendarterectomy to look for clots. Thecommenter believes these radiologyservices should be excluded.

Response: We agree with thecommenter that the ‘‘incidental/secondary’’ test in the January 1998proposed rule has led to some confusionand uncertainty and have abandoned itin Phase I of this rulemaking. Webelieve the list of codes set forth inPhase I of this rulemaking (and annuallythereafter in the physician fee schedulerule) will create a ‘‘bright line’’ test thatwill ease compliance. In selecting thecodes for radiology and ultrasound, weare not including any codes forradiology or ultrasound procedures thathave an invasive component; that is,that include the insertion of a needle,catheter, tube, or probe through the skinor into a body orifice. (‘‘Invasive’’ wouldencompass radiology services involvingcontrast that must be injected, but notcontrast materials that are ingested bythe patients themselves.) In addition, weare not including radiology andultrasound procedures that are integralto and performed during the time anonradiology procedure is beingperformed, such as ultrasound used toprovide guidance for biopsies and majorsurgical procedures or used todetermine, during surgery, whethersurgery is being conducted successfully.Phase I of this rulemaking requires thatto be considered integral to anonradiology procedure (and thereforenot a radiology or other imaging servicefor purposes of section 1877(h)(6)(D) ofthe Act), the imaging procedure must beperformed during the nonradiologyprocedure. A radiology or ultrasoundprocedure performed before or afteranother procedure (for example, a scanor a chest x-ray before a lung cancerresection, an echocardiogram before abypass, or a duplex carotid ultrasoundbefore or after surgery) is a diagnosticradiology procedure that is not integralto another procedure and therefore is aradiology or other imaging service undersection 1877(h)(6)(D) of the Act. In thecase of services performed before orafter a procedure, referring physicianshave discretion in choosing the entitythat provides the radiology serviceindependent of the entity providing the

surgical service. Depending on the facts,referrals for these services to entitieswith which the referring physician hasa financial relationship may beprotected under the various exceptionsto the statute.

In all cases, the definitional list ofcodes controls in determining whether aservice falls within the scope of‘‘radiology or certain other imagingservices’’ for purposes of section 1877 ofthe Act.

Comment: Two commenters wereopposed to our proposal to exclude‘‘invasive’’ or ‘‘interventional’’ radiologyprocedures from the definition ofradiology services. The commentersbelieve that these procedures should beincluded as DHS in order to safeguardagainst overutilization and ensure thatappropriately trained physiciansperform the services. One commenterargued that as a clinical matter,‘‘invasive’’ or ‘‘interventional’’ radiologyservices rarely are performed in anoffice setting. Typically, interventionalradiologists perform such procedures asangiography or angioplasty in a hospitalbecause they involve significant anddelicate work on a patient’scardiovascular system. Patients whoundergo invasive procedures must thenbe monitored for a period of time in anappropriate medical setting.Consequently, that commenter, as wellas another, objected to our statement inthe preamble to the January 1998proposed rule (63 FR 1676) that invasiveprocedures ordinarily are ‘‘merelyincidental or secondary to anotherprocedure that the physician hasordered.’’ One of the commenters statedthat the radiology services are neitherincidental nor secondary, but a vital andintegral part of the invasive procedureperformed. The procedures are as muchradiological as they are any otherportion. One commenter stated that ifinvasive procedures occur in an office,they should be performed by aradiologist. The commenter believesthat excluding invasive orinterventional radiology procedurescould result in certain referralarrangements by physicians that mightpose some risk of patient or programabuse. One of the commenters notedthat when interventional radiologistsperform invasive radiology procedures,there is no risk of program or patientabuse. This is because interventionalradiologists do not typically makereferrals; they merely perform theinvasive radiology procedures andreturn the patient to the care of thereferring physician. The commenterbelieves, however, that physicians otherthan interventional radiologists mayhave an incentive to self-refer.

Response: We agree with thecommenter that we were incorrect tocharacterize interventional radiology as‘‘secondary’’ to many procedures, whenit can in fact be a vital and integral partof the invasive procedure beingperformed. It is not the purpose of thephysician self-referral law to discourageany physicians from furnishing theirown services, such as interventionalradiology, within their own practices,provided the physicians are functioningwithin the scope of their license topractice.

Comment: Many commenters assertedthat all or particular invasive cardiologyservices should be excluded from thedefinition because they are not subjectto program or patient abuse. Anothercommenter asked that we be consistentwith regard to all forms of cardiaccatheterizations and endoscopyprocedures. The commenter stated thatproviders want to be able to perform allendoscopy services or cardiaccatheterization services in the samesetting and not have to limit theirservices.

Response: Cardiac catheterizationsand endoscopy procedures are notincluded on the CPT code list thatdefines the scope of ‘‘radiology andcertain other imaging services,’’ becausethey do not involve imaging servicesthat are covered under any of thecategories in section 1877(h)(6)(D) of theAct. These services may still constituteDHS as inpatient or outpatient hospitalservices.

Comment: Two commenters notedthat in the preamble to the January 1998proposed rule (63 FR 1676), we statedthat percutaneous transluminalangioplasty was an example of aninvasive radiology procedure that wewould exclude from the definition ofradiology. The commenters stated thatthis procedure is not commonlyconsidered to involve ‘‘invasiveradiology.’’

Response: The commenters are correctin stating that percutaneoustransluminal angioplasty is notfundamentally radiological in nature; itis predominantly a therapeuticintervention. Our wording in theexamples for invasive radiology mayhave been confusing. We intended toconvey that the imaging proceduresassociated with percutaneoustransluminal angioplasty would beconsidered integral to the performanceof the angioplasty. However, by usingspecific CPT codes to define the scopeof services covered by section1877(h)(6)(D) of the Act, we have nownarrowed the definition of radiologyservices so that it does not includeradiology that is integral to



interventional procedures, such asangioplasty.

Comment: One commenter supportedour proposal to exclude screeningmammography from the definition ofDHS. The commenter believes that weshould expand the exclusion to cover allDHS for which we have specifiedcoverage or frequency limits. Thecommenter stated that screening tests bydefinition are not subject tooverutilization.

Response: We agree with thiscommenter and have modified Phase Iof this rulemaking to exclude from thereach of section 1877 of the Act certainlegislatively mandated preventivescreening and immunization servicesthat are subject to HCFA-imposedfrequency limits and are paid based ona fee schedule. The preventive servicesto which this exception applies areidentified in Appendix A. We will addcodes for new preventive screening testsand immunizations, as appropriate,through the annual updating of theattachment to this final rule.

Comment: One commenterrecommended that all mammography beexcluded from the definition of‘‘radiology services.’’ The commenterargued that generally diagnosticmammography procedures areperformed only when a woman hasclinical indications for a diagnosticmammogram. Thus, any risk of programor patient abuse is significantly reduced,if not eliminated. The commenter alsomentioned that the quality-centeredrequirements of the MammographyQuality Standards Act of 1992 minimizethe risk of potential overutilization ofmammography services. Anothercommenter recommended the exclusionof ‘‘diagnostic’’ mammography servicesbecause he stated that it is necessary toperform the mammography on the sameequipment for purposes of comparingthe initial screening with the seconddiagnostic mammography. To prohibitpatients from using the same facilityadds an unnecessary element ofpotential error to the equation.

Response: Diagnostic mammographyis clearly a radiological service undersection 1877(h)(6)(D) of the Act, and itcould be subject to abuse. It is ourunderstanding that most women receivemammography from a radiologist who isrequesting diagnostic radiology services.These physicians have not made areferral under section 1877(h)(5)(C) ofthe Act if they request diagnosticmammography as the result of aconsultation requested by anotherphysician. We are regarding thisexception as applying to diagnosticmammography that results when aradiologist has first performed a

screening mammography as the result ofa consultation, and then recommendsfollow-up diagnostic mammography, orbegins his or her consultation withdiagnostic mammography. (Thephysician who initiated the consultationwith the radiologist has made a referralthat could fall within the scope of thephysician self-referral law if he or shehas a financial relationship with theradiology facility.)

Comment: A commenter asked ifstress tests are DHS. The commenternoted that some stress tests use nuclearmedicine procedures.

Response: Stress tests are generallyconsidered to be a physician service thatdoes not involve radiology, and stresstests are not specifically listed in thelaw as DHS. Some stress tests usenuclear medicine procedures to createan image of the heart. Because theseservices are not included on thedefinitional CPT code list for radiologyor other imaging services, they are notDHS.

Comment: One commenter stated thatunless changed or clarified, theproposed regulations could inhibit thedevelopment and application oftelemedicine technology to populationscovered by the physician referral rules.Of specific concern was the area ofultrasound and a ‘‘unified’’ payment(that is, a combined payment for thetechnical and professional componentsof the service). The commenter assertedthat Medicare and many State Medicaidprograms provide a unified payment forultrasound. The commenter describedthe problems of a unified payment withan example of a community physicianperforming the technical component ofan ultrasound service and a distanttertiary hospital’s physician performingthe professional component. If thetertiary provider billed for theultrasound service under a ‘‘unified’’(that is, global) fee-for-service paymentto cover the professional component ofthe ultrasound service, the tertiaryfacility logically should determine apayment for the technical component topay the community physician whoprovides that service. However, sincethe community physician would bereferring to the tertiary facility for theultrasound study, such a payment couldviolate the physician referral regulations(that is, it would not fall within anexception).

At the time of the comment period forthe January 1998 proposed rule, thecommenter was aware that we wereconsidering the publication of a separateproposed rule that would specify anappropriate ‘‘split’’ of global paymentsin the area of telemedicine; that is, itwould specify separate payment

amounts for the technical andprofessional components of services.The commenter suggested that if we didissue those regulations, we should alsorecognize in the physician referral rulesthat payment by the tertiary provider tothe referring community physician forproviding the technical component ofan ultrasound service performed viatelemedicine should be exempted if it isunder a HCFA-designated, or insurer-designated, allocation between the twoaspects of an otherwise ‘‘global’’payment.

Response: We believe that Phase I ofthis rulemaking addresses this issuesatisfactorily. The basic principle ofPhase I of this rulemaking is that anypayment from an entity furnishing adesignated health service to a referringphysician must be at fair market value,not taking into account the volume orvalue of any referrals or other businessgenerated by the referring physician(when this latter language is included inan exception). We are revising Phase Iof this rulemaking to make clear that‘‘per service’’ payments are allowed,even with respect to DHS ordered by thephysician, provided the payment meetsthe fair market value standard. In thesituation described by the commenter,the split is determined by the Medicareprogram based on its independent viewof the value of the services provided. Ofcourse, any split between a referringphysician and another provider mayalso raise concerns under the Federalanti-kickback statute.

With respect to Medicarereimbursement for telehealth services,we published a proposed rule on June22, 1998 (63 FR 33882) and final rule onNovember 2, 1998 (63 FR 58814) toimplement section 4206 of the BBA1997. Specifically, the November 1998final rule permitted payment forprofessional consultations viainteractive telecommunication systemsin rural HPSAs and established separatepayment amounts for the referring andconsulting practitioners of ateleconsultation in a rural HPSA. As wenoted in the preamble (63 FR 58883) tothat November 1998 final rule, the rulespecifies that the consulting practitionermust submit the claim for theconsultation service and must share 25percent of the total payment with thereferring practitioner.

We clarified in the November 1998telehealth final rule that theseprovisions only apply toteleconsultation services. UnderMedicare, a teleconsultation is aconsultation service delivered viatelemedicine. These services arerepresented by CPT codes 99241through 99275. Diagnostic ultrasound



(CPT code 76506) on the other hand, isa radiology service and would not fallwithin the purview of a teleconsultationunder Medicare. Therefore, the paymentmethodology requiring the sharing ofpayment between the consulting andreferring practitioners would not applyto diagnostic ultrasound services. In thecase of diagnostic ultrasound, thephysician providing the interpretationof the image typically would bill for theinterpretation, while the technicalcomponent (that is, conducting the test)is billed by the practitioner or facilitythat captured the ultrasound image.Medicare has no national rule statingthat the professional and technicalcomponents of a service, includingultrasound services, must be billed in a‘‘global’’ manner. In fact, in the annualupdate to the physician fee schedule,separate codes for the professionalcomponent as well as the technicalcomponent of a service are listed,including the diagnostic ultrasoundcodes. Of course, in those cases inwhich there is no technical component,one code is used for Medicare paymentand billing.

G. Radiation TherapySection 1877(h)(6)(E) of the Act

includes radiation therapy services andsupplies. In the January 1998 proposedrule, we combined radiation therapywith radiology in a single definition.

Because commenters found thecombined definition to be confusing, weare amending the January 1998proposed regulation so that radiologyservices and radiation therapy servicesare now separate categories (as insection 1877 of the Act itself). Thischange makes it clear that the twocategories are actually very separatekinds of services. We are basing ourdefinition of radiation therapy servicesand supplies on section 1861(s)(4) of theAct. This provision includes, as‘‘medical and other health services’’covered by Medicare, ‘‘x-ray, radium,and radioactive isotope therapy,including materials and services oftechnicians.’’ However, we want toclarify that, for physician referralpurposes, the list of codes that defines‘‘radiation therapy services andsupplies’’ in Phase I of this rulemakingdoes not include nuclear medicineservices. While nuclear medicineinvolves the injection of radioactiveisotopes directly into a patient’sbloodstream, these services are notgenerally regarded as radiation therapy,they involve different equipment andprocedures, and physicians whoprovide nuclear medicine have aseparate certification. We have includedin the attachment to this final rule a list

of codes that will define radiationtherapy services and supplies. This listwill be updated and reprinted in fullannually as part of the physician feeschedule.

Comment: A commenter noted thatbecause the January 1998 proposedregulations bundle radiology servicesand radiation therapy and supplies intoa single category of DHS, theprofessional component of radiationtherapy services has also been includedwithin the definition of DHS. Thecommenter stated that some radiationoncologists would effectively beprecluded from being paid on aproductivity basis for their services,given that virtually all of theprofessional services that somephysicians perform are radiationtherapy services for Medicare patients.The commenter believes that theCongress did not intend this result.

Response: The law excludes from thedefinition of a ‘‘referral’’ any request bya radiation oncologist for radiationtherapy if these services are furnishedby (or under the supervision of) theradiation oncologist pursuant to aconsultation requested by anotherphysician. In addition, we are amendingthe definition of a ‘‘referral’’ to excludeany professional components personallyperformed by referring physiciansthemselves. Together, these provisionsshould largely address the commenter’sconcerns.

Comment: Several commentersrecommended that we exclude prostatebrachytherapy from the definition ofradiation therapy. Prostatebrachytherapy is the placement ofradioactive sources into the prostate,through ultrasound guidance, for thepurpose of treating prostate cancer. Thecommenters argued that this procedureshould be excluded because it isperformed once and is only performedon persons with a biopsy-provendiagnosis of prostate cancer. Theyadvocated the use of physicianownership of brachytherapy facilitiesand equipment because it means thatthe urologists and radiation oncologistsinvolved are actually performing theprocedure themselves in a facilitycontracting with those physicians. Thedesign of this model includes thesupervision of every case by anexperienced brachytherapist present inthe operating room. According to thecommenter, physician ownership of theequipment also ensures quality ofphysician education and of surgicaltechnique.

The commenters asserted that weshould allow multiple physicians toown brachytherapy equipment becausecentralized planning for radiation

physics results in all cases beingplanned in a controlled and uniformfashion. Uniformity eliminates manyempirical physician decisions that inthe past led to dosimetry errors. Inaddition, having two or more physiciansowning the equipment encouragesreporting of outcome data collection toa central agency, resulting in acontinuous and rapid review oftreatment results and complications.Commenters pointed out that expertshave published restrictive doseguidelines for the various stages ofprostate cancer treated withbrachytherapy, so there is no risk ofoverutilization. Also, brachytherapy isless expensive and has a lowercomplication rate than the other formsof treatment (radical prostatectomy orexternal beam radiation therapy).

The commenters believe that becauseof all of these factors the procedure haslittle potential for program or patientabuse and should be exempt from thephysician self-referral prohibition.

Response: We are aware of no logicalor empirical evidence that physicianownership improves quality of servicesor physicians’ skills. On the other hand,brachytherapy is one of several therapyoptions for certain prostate conditions.We believe that ownership of abrachytherapy center by urologistscould well influence theirrecommended therapy and, therefore,affect utilization. In short, therelationship is exactly the type offinancial relationship section 1877 ofthe Act is intended to address. The lawexcludes from the definition of a‘‘referral’’ any request by a radiationoncologist for radiation therapy if theseservices are furnished by (or under thesupervision of) the radiation oncologistpursuant to a consultation requested byanother physician. In addition, we haveamended the definition of a ‘‘referral’’ toexclude any professional componentsperformed by referring physiciansthemselves.

H. Durable Medical Equipment (DME)In § 411.351 of the January 1998

proposed rule, we defined DME ashaving the meaning given in section1861(n) of the Act and § 414.202(Definitions). In the preamble to theJanuary 1998 proposed rule (63 FR 1677through 1678), we offered explanationsof the terms and a list of the generalDME categories. However, we stated inthe preamble (63 FR 1677) that becausethe number of items considered to beDME was so extensive, we could not inthe proposed rule identify all of them.Commenters were concerned about ourfailure to articulate a ‘‘bright-line’’definition of DME. The commenters



stated that if we could not do that,physicians would have to assume thatthe dispensing of all DME falls underthe referral prohibition.

The most frequent complaint was thedifficulty the commenters had indetermining whether a given item wasDME or a prosthetic, prosthetic deviceor orthotic. (The distinction issignificant since under section1877(b)(2) of the Act prosthetics,prosthetic devices, and orthotics may beprovided to a patient by a physicianunder the in-office ancillary servicesexception, while DME (other thaninfusion pumps) cannot.) The easiestway to determine the properclassification of an item is to consult theDurable Medical Equipment,Prosthetics/Orthotics, and Supplies(DMEPOS) fee schedule, which isupdated quarterly and available on theinternet under HCFA’s public use files(www.hcfa.gov/stats/pufiles.htm).Under the DMEPOS fee schedule, itemsare identified by their HCPCS code andalso include a category designation thatidentifies whether the item is DME,prosthetics, orthotics, or prostheticdevices. DME items include thefollowing 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 anumber of miscellaneous DME items,but does not appear on HCFA’s nationalfee schedule. Each DMERC (regionalDME carrier) is responsible for creatinga fee schedule for individual items thatare not included on HCFA’s feeschedule.

We note that Phase I of thisrulemaking does not change existingdefinitions for DME, prosthetics,prosthetic devices, or orthotics. Thus,the existing classification of an item(that is, its classification as either DME,prosthetic, prosthetic device, ororthotic) will remain the same.

In sum, if, after reviewing thedefinitions and accompanyingexplanations that we provided in theJanuary 1998 proposed rule, as well asthe DMEPOS fee schedule and theHCPCS codes covering miscellaneousitems, physicians and their staffs stillhave questions about whether a specificitem is considered to be DME, we wouldsuggest that they contact their localcarrier or DMERC for clarification.

Comment: One commenter asked forclarification on whether prosthetic andorthotic devices that seem to meet thecriteria for DME are considered DMEsupplies and whether they could beprovided under the in-office ancillaryservices exception. The commenterexpressed some confusion regardingwhether crutches are DME or aprosthetic or orthotic device.

Response: The categories ofprosthetics, orthotics, prosthetic devicesor DME are mutually exclusive; no itemcan fall into more than one of thesecategories. If individuals are concernedabout a particular type of equipment ora supply, we would suggest that theyreview the HCPCS codes or DMEPOSfee schedule or contact their localcarrier or DMERC for clarification.Again, we note that DMERCs processmore than DME claims. They also areresponsible for claims for other types ofdevices and supplies. Crutches areDME.

Comment: A commenterrecommended that we exempt crutchesfrom the definition of DME. Thecommenter suggested that crutches areprovided as peripheral parts of a majorservice (that is, a diagnosis of a brokenleg) and that it is unlikely a physicianwould over-prescribe crutches for adiagnosis of a broken leg just so that thephysician can bill for the crutches. Thecommenter believes that having thephysician provide the crutches andinstruct the patient on how to use themhelps to prevent further damage to thepatient and is essential to good patientcare.

Response: We believe that crutchesare clearly DME and therefore DHSunder section 1877(h)(6)(F) of the Act.As we stated in the January 1998proposed rule, although we cannotjustify excluding crutches as adesignated health service, we recognizethat including crutches could greatlyinconvenience patients if physicianswere barred from providing them topatients who need them to ambulatefollowing treatment for an injury or anincapacitating procedure. For thisreason, we proposed expanding the in-office ancillary services exception tocover crutches when furnished in amanner that meets the in-office ancillaryservices exception requirements and inwhich the physician realizes no director indirect profit from furnishing thecrutches. We have adopted the proposalin an expanded and modified form—without the proposed profitrestriction—as described in sectionVI.B.1 of this preamble.

Comment: Several commentersopposed the inclusion of DME as adesignated health service and argued

that the inclusion of DME will result inadditional delays in treatment andbarriers to access for the nation’s poorand elderly populations. Two of thecommenters urged us to support alegislative change to remove DME fromthe DHS list, while others urged us torevise the January 1998 proposed rule toremove DME entirely as a designatedhealth service. Those commentersargued that when DME is furnished asan in-office service, it has not beenassociated with program abuse andoffers little or no opportunity foroverutilization. One of the commenterscontended that an unintended effect ofthe inclusion of DME on the DHS listwould be underutilization, becausephysicians would be prohibited fromfurnishing DME in their offices.

Response: We believe that we cannotcreate a separate exception for DMEbecause we cannot guarantee that suchan exception would always be free fromprogram or patient abuse. The Congressexplicitly included DME as a designatedhealth service in section 1877(h)(6)(F) ofthe Act; we have no authority to vitiatethat judgment. We note that physicianswould only be prohibited fromfurnishing DME services when theyhave an unexcepted financialrelationship with the DME supplier.Moreover, although we are not removingDME from the list of DHS, we aresubstantially revising the manner inwhich the in-office ancillary servicesexception applies to DME. Thesechanges will expand the provision ofDME under the in-office ancillaryservices exception as detailed in sectionVI.B.1 of this preamble.

I. Parenteral and Enteral Nutrients,Equipment and Supplies

Section 1877(h)(6)(G) of the Actincludes as DHS the category ofparenteral and enteral nutrients,equipment, and supplies (PEN). Enteraland parenteral therapy as a MedicarePart B benefit is provided under theprosthetic device benefit provision insection 1861(s)(8) of the Act. Theregulations cover prosthetic devices in§ 410.36 (Medical suppliers, appliances,and devices: Scope), paragraph (a)(2).Details for enteral and parenteraltherapy are set forth in section 65–10,‘‘Enteral and Parenteral NutritionalTherapy Covered as Prosthetic Device,’’of the Medicare Coverage Issues Manual(HCFA Pub. 6). When the coveragerequirements for enteral or parenteralnutritional therapy are met, Medicarealso covers related supplies, equipment,and nutrients.

We proposed in § 411.351 of theJanuary 1998 rule to define ‘‘enteralnutrients, equipment, and supplies’’ as



items and supplies needed to provideenteral nutrition to a patient with afunctioning gastrointestinal tract who,due to pathology to or nonfunction ofthe structures that normally permit foodto reach the digestive tract, cannotmaintain weight and strengthcommensurate with his or her generalcondition. (See section 65–10, ‘‘Enteraland Parenteral Nutritional TherapyCovered as Prosthetic Device,’’ of theMedicare Coverage Issues Manual(HCFA Pub. 6) for additionalinformation.)

We proposed in § 411.351 to define‘‘parenteral nutrients, equipment, andsupplies’’ as items and supplies neededto provide nutriment to a patient withpermanent, severe pathology of thealimentary tract that does not allowabsorption of sufficient nutrients tomaintain strength commensurate withthe patient’s general condition, asdescribed in section 65–10, ‘‘Enteral andParenteral Nutritional Therapy Coveredas Prosthetic Device,’’ of the MedicareCoverage Issues Manual (HCFA Pub. 6).

We are clarifying in Phase I of thisrulemaking that this category includesall HCPCS level 2 codes for theseservices. We believe this list willaddress any uncertainties thatphysicians and providers might haveabout what constitutes PEN, and isconsistent with our definition in theproposed rule.

We also pointed out in the preambleto the January 1998 proposed rule that,like DME, section 1877(b)(2) of the Actspecifically excludes PEN as servicesthat can qualify for the in-officeancillary services exception.

Comment: A physician representinghimself and an infusion therapyassociation asserted that physiciansshould be allowed to prescribe, provide,and be reimbursed for parenteralnutrition for their own patients as anextension of their practices. Thecommenter asserted that there has beenno evidence of abuse, while there havebeen major problems with fraud andabuse and excessive profits bynonphysician home infusion providers,which function essentially withoutphysician control and minimal inputfrom physicians. The commenterbelieves that because patients withincreasingly complex medical problemsare sent home earlier from the hospital,the role of the physician office-basedmodel is increasingly important. TheJanuary 1998 proposed referralregulations, the payment schedule formedications, and the restriction onphysician reimbursement forambulatory infusion pumps alldiscourage a physician’s involvement inthese services.

Response: Section 1877 of the Actdoes not prohibit physicians fromprescribing enteral and parenteralnutrition for their own patients; nordoes it prohibit infusion companiesfrom contracting with expert orknowledgeable physicians forconsulting services provided theremuneration is fair market value anddoes not take into account referrals orother business between the parties.Section 1877 of the Act does, however,prohibit a physician from furnishingenteral and parenteral nutrition in his orher own office and billing for it unlessthe physician’s arrangement qualifiesfor an exception, such as the ruralprovider exception in section 1877(d)(2)of the Act. The Congress specificallyexcluded the provision of enteral andparenteral nutrition and durablemedical equipment (DME, other thaninfusion pumps) from the in-officeancillary services exception in section1877(b)(2)of the Act.

We have the authority to createadditional exceptions to the referralprohibition for financial relationshipsunder section 1877(b)(4) of the Act, butonly if we determine that there is norisk of program or patient abuse.However, we believe that physicianscould potentially over-prescribeparenteral nutrition if they have thefinancial incentive to do so.

We only cover parenteral nutritionwhen there is a permanent need (exceptwhen covered under the home healthbenefit). (See the Medicare CoverageIssues Manual (HCFA Pub. 6), section65–10, ‘‘Enteral and ParenteralNutritional Therapy Covered asProsthetic Device,’’ for additionalinformation. Because coverage ofnutritional therapy as a Part B benefit isprovided under the prosthetic devicebenefit provision, the patient must havea permanently inoperative internal bodyorgan or function.) We see no reasonwhy a patient should have to go to aphysician’s office regularly to receiveparenteral nutrition. Medicare alreadycovers parenteral nutrition delivered inthe home through the home healthbenefit or the prosthetic device benefit.Because enteral nutrition is widelyavailable through grocery stores, drugstores, and other retail outlets, we seeno reason why a patient must purchaseenteral nutrition from a physician. Apatient can purchase certain morespecialized types of enteral nutritionthat are not widely available from aDME supplier.

If a patient is to receive nutrition viaan infusion pump, the in-office ancillaryservices exception cannot be used forthe furnishing of the pump, since thisexception only allows physicians’

offices to furnish infusion pumps thatare DME. See section VI.B.1 of thispreamble for more details aboutinfusion pumps. (To furnish an infusionpump that is DME for use in the home,a physician would have to meet all ofthe supplier requirements in § 424.57.)

As for the commenter’s concernsabout the payment schedule formedications, that issue is not addressedby the physician referral regulation.

J. Prosthetics, Orthotics, and ProstheticDevices and Supplies

Prosthetics, orthotics, and prostheticdevices and supplies are included asDHS under section 1877(h)(6)(H) of theAct. We proposed in the January 1998rule to define ‘‘prosthetics’’ at § 411.351as artificial legs, arms, and eyes, asdescribed in section 1861(s)(9) of theAct. We defined ‘‘orthotics’’ as leg, arm,back, and neck braces, as listed insection 1861(s)(9) of the Act. Weproposed to define a ‘‘prosthetic device’’as a device (other than a dental device)listed in section 1861(s)(8) of the Actthat replaces all or part of an internalbody organ, including colostomy bagsand including one pair of conventionaleyeglasses or contact lenses furnishedsubsequent to each cataract surgery withinsertion of an intraocular lens, as wellas services necessary to design thedevice, select materials andcomponents, measure, fit, and align thedevice, and instruct patients in itsproper usage. We proposed defining‘‘prosthetic supplies’’ as ‘‘supplies thatare necessary for the effective use of aprosthetic device (including suppliesdirectly related to colostomy care).’’

We are clarifying in Phase I of thisrulemaking that this category includesall HCPCS level 2 codes for theseservices that are covered underMedicare. Physicians and other personscan readily determine the classificationof an item by consulting the DMEPOSfee schedule. However, as with DME,there are several specific HCPCS codesrepresenting miscellaneous itemsclassified as prosthetics, orthotics, orprosthetic devices that do not appear inthe fee schedule.

We explained in the preamble of theJanuary 1998 proposed rule (63 FR1678) that Medicare regards intraocularlenses (IOLs) used as part of cataractsurgery as prosthetic devices. We alsostated in the preamble that if theselenses are implanted in an ASC, theywould be covered under the ASCpayment rate and would have beenexcluded under the exception weproposed to create in § 411.355(d). Asexplained above, we are no longerconsidering DHS that are included in abundled ASC payment to be DHS.



Accordingly, when an IOL is includedin an ASC bundled payment rate, it willnot be considered to be a designatedhealth service.

We are also addressing a number ofcommenters’ requests by creatingexceptions (through our authority undersection 1877(b)(4) of the Act) forprosthetic devices that are implanted ina Medicare-certified ASC and foreyeglasses or contact lenses that areprescribed after cataract surgery. Weexplain our reasons for these exceptionsin our responses to specific comments.

Comment: One commenter assertedthat the final rule should allowphysicians to provide durable medicalequipment, orthotics, and prostheticsdirectly to patients when they aremedically necessary. Physicianscurrently supply splints, braces, or otherdevices directly to patients who haveinjuries, thereby ensuring that thepatient gets the appropriate device, thatthe item is properly fitted, and that thepatient is properly instructed in its use.To require a patient with an injury toleave the office, go to a DME supplier,purchase the necessary equipment, andreturn to the physician’s office for fittingor placement and instructions on use,would be unwise, inconvenient, andcould frequently cause unnecessarypain or further injury.

Response: The splints, casts, andother devices used to treat fractures anddislocations the commenter mentionsare covered under section 1861(s)(5) ofthe Act, a benefit category that isdifferent from the benefit categories thatinclude DME, prosthetics, orthotics, andprosthetic devices. They are thereforenot DHS under section 1877(h)(6) of theAct. Leg, arm, back, and neck braces areconsidered to be ‘‘orthotics’’ and arethus included as DHS. These can beprovided by a physician within his orher own practice under the in-officeancillary services exception in section1877(b)(2) of the Act, which excepts aphysician’s referral if the services meetcertain supervision, location, and billingrequirements. This exception couldapply to referrals for any prosthetics,orthotics, or prosthetic devices. Asmodified by these regulations, the in-office ancillary exception could alsoapply to referrals for certain DMEservices. (See section VI.B.1 of thispreamble.)

Comment: A number of commentersfavored our proposal to exclude IOLsimplanted during cataract surgeryperformed in an ASC because the IOLsare included in the ASC payment rate.The commenters asserted that asubstantial number of ASCs are ownedby the physicians who perform surgicalprocedures in them and that these

physicians are not members of onegroup practice. The commenters see theASCs as an extension of the physician’sown office and believe they provide ahigh quality, low cost setting foroutpatient surgery.

Commenters requested that weexempt from the physician self-referralprohibition other prosthetic devicesimplanted in conjunction with surgicalprocedures because the provision of theprosthetic devices is incidental to theprovision of ASC facility services,which are exempt from the physicianself-referral prohibition. The commenterasserted that, as we noted in the January1998 proposed rule, a physician wouldnot unnecessarily subject patients to asurgical procedure to profit from theimplant. In addition, there is no risk ofprogram abuse because the Medicarepayment for prosthetic devicesimplanted in conjunction with ASCfacility services is limited to the lowerof the actual charge for the device or afee schedule amount. Commentersemphasized that the use of implantedprosthetic devices in reconstructivesurgery is immensely beneficial topatients.

Response: We agree with thecommenters that all prosthetic devicesimplanted in a Medicare-certified ASCby the referring physician or a memberof the referring physician’s grouppractice should be excluded. We havechosen this position because, ifsurgeons refer to an ASC in which theyhave an ownership interest, there will,in many cases, be no exception thatwould apply to their financialrelationship with the ASC. Implantedprosthetic devices, implantedprosthetics, and implanted DME are notincluded in the bundled ASC paymentrate and thus would retain theircharacter as DHS even when implantedin an ASC. As a practical matter, theabsence of an exception for all of theseitems implanted in ASCs is likely toresult in these procedures moving tomore costly hospital outpatient settings.We believe that the exclusion of theseimplants from the reach of section 1877of the Act (using our authority undersection 1877(b)(4)) will not increase therisk of overutilization beyond what isalready presented by the surgeon’s PartB physician fee and is consistent withthe Congress’s decision not to includeambulatory surgical services as aspecific designated health service. Weare specifically providing that theexception does not protect itemsimplanted in other settings. Nor does itprotect arrangements betweenphysicians and manufacturers ordistributors of implants where themanufacturers or distributors furnish

DHS, for example, through subsidiariesor affiliates. We are providing that thearrangement for the provision of theimplant in the ASC may not violate theanti-kickback statute and all billing andclaims submission must be proper.

Comment: Some commentersrecommended that we exclude some orall implants to assure that there is nochilling of the ability and opportunity ofMedicare patients to obtain the mostappropriate and up to date technologythat will be both effective and costefficient. In addition, commenterspointed out that invasive surgery alwaysentails a risk to the patient and is notundertaken without a physicianseriously evaluating that risk in relationto the therapeutic or diagnostic benefitlikely to be brought by the device to beimplanted and determining whatspecialized model and brand of devicewill be most effective. Commentersbelieve that including implants in thedefinition of prosthetic devices willhave the counterproductive effect ofpreventing surgeons from participatingin research and development of theseproducts, thereby curtailing researchactivity and blunting futuredevelopment. This chilling effect woulddramatically affect the quality of patientlife and severely limit progress inreducing the cost to patients.

Response: Surgeons should be able toprovide implants to their patients in anyappropriate setting by meetingexceptions to the physician self-referrallaw. As we described in responses toearlier comments, we are creating anexception for implants that areperformed in Medicare-certified ASCs.As to implants in other settings or thosein ASCs that do not meet the newexception, other exceptions may stillapply. Physicians who perform implantswithin their own practices may be ableto use the in-office ancillary servicesexception in section 1877(b)(2) of theAct, which is discussed in sectionVI.B.1 of this preamble. If a physicianperforms the surgery in a hospital, andthe hospital bills for the implant, theservice would be a designated hospitalservice, regardless of whether theimplant is a prosthetic or prostheticdevice. In these cases, any financialrelationship between the physician andthe hospital would have to fit in anexception or the physician could notperform the surgery, much less theimplant, since all hospital services areDHS. There are several exceptions thatapply to referrals for hospital services.

The commenters seem to be under themisapprehension that section 1877 ofthe Act would prevent financialrelationships between the manufacturerof an implant and a physician. These



financial relationships would not besubject to section 1877 of the Act unlessthe manufacturer were an entity thatbills Medicare directly. However,arrangements between physicians andmanufacturers may be problematicunder other legal authorities, including,for example, the Federal anti-kickbackstatute.

Comment: One commenter believesthat we should not interpret thedefinition of prosthetics, orthotics, andprosthetic devices and supplies forphysician referral purposes to includehip and knee implants. The commenterbelieves that hip and knee implants donot fall within the definitions ofprosthetics, orthotics, and prostheticdevices and supplies that we includedin the January 1998 proposed rule. Thecommenter pointed out that‘‘prosthetics’’ is defined as artificiallegs, arms, and eyes, that ‘‘orthotics’’ isdefined as leg, arm, back and neckbraces, and ‘‘prosthetic devices’’ isdefined as devices that replace all orpart of an internal body organ. Thecommenter believes that hip and kneereplacements do not fall under any ofthese categories.

The commenter further stated that, ifhip and knee implants are somehowconsidered as prosthetic devices underMedicare, they should be excluded fromthe referral prohibition on the basis thatthey are only a component of a primarysurgical procedure meant to repairdamaged or painful joints. Thecommenter believes physicians will notask patients to undergo painful anddebilitating surgery for the sake ofimplanting an unnecessary artificialknee or hip implant. Also, if these itemsare billed as part of the hospitaldiagnosis-related group (DRG) paymentfor a surgical procedure, there is nofinancial incentive to use more costly orunnecessary implants and there is noincreased cost to the program if oneimplant is chosen over another.

Response: Knee implants areconsidered to be ‘‘prosthetics.’’ They arecomponents of the artificial legs that areidentified as prosthetics under section1861(s)(9) of the Act. Artificial hips areonly furnished to hospital inpatientsunder Medicare Part A, so we considerthem to be a component of an inpatienthospital service. If a physician sends apatient to a hospital for a hip or kneeimplant or the insertion of a prostheticdevice, all the services billed by thehospital would qualify as DHS undersection 1877(h)(6)(K) of the Act becausethey are ‘‘inpatient or outpatienthospital services.’’ The implants wouldtherefore be subject to the physicianself-referral law, even if we excludedthem from the separate category of

‘‘prosthetics, orthotics, or prostheticdevices and supplies.’’

Comment: A commenter asserted thatwe should exclude cochlear implantsfrom the definition of prostheticdevices. In the January 1998 proposedrule, we had indicated our concern thata physician would choose a particulardevice because he or she had suppliedit to the ASC where the patient’simplant surgery was performed orbecause the physician receives moneyfrom a supplier for ordering theparticular device. The commenter statedthat the professional association herepresents is unaware of any abuses inthis area and, if there were abuses, theywould be subject to the anti-kickbacklaw.

Another commenter from anassociation of audiologists agreed withus that cochlear implants are a type ofprosthetic device that is properly withinthe scope of the proposed rule. Thecommenter regards a cochlear implantas clearly being a prosthetic devicebecause it replaces all or part of aninternal body organ. A cochlear implantis an electronic device specificallydesigned to replace the function of adamaged cochlea.

Response: We agree with the secondcommenter that cochlear implants arecovered as prosthetic devices underMedicare and are categorized as such inthe CPT codes in the attachment to thisfinal rule. As noted above, we areexcepting all implants performed in aMedicare-certified ASC by the referringphysician or a member of the referringphysician’s group practice, subject tocertain conditions set forth in theexception.

Comment: A commenter noted that inthe January 1998 proposed rule westated that a prosthetic device includesservices necessary to design the device,select materials and components,measure, fit, and align the device, andinstruct patients in its proper usage. Thecommenter requested that we expresslyclarify that certain services provided topatients after a cochlear implant aresubject to the physician self-referralprovisions. These services includedevice mapping, aural rehabilitationprograms for adults to enable them tolearn to use the device, and auralhabilitation programs for children tomaximize speech and languagedevelopment.

The commenter asserted that thesepostsurgical services are provided byaudiologists without physicianinvolvement or supervision of any kind.In addition, the commenter stated thatcochlear rehabilitation services are notincluded in the global fee for cochlearimplantation surgery. Instead, these

services are billed under a unique CPTcode, 92510.

Response: The Medicare definition ofa prosthetic device ordinarily includesthe services necessary to design thedevice, select materials andcomponents, measure, fit, and align thedevice, and instruct patients in itsproper usage. In fact, the costs ofdelivery, fitting, measuring andinstructing the patient are bundled intothe fee schedule payment amount fornot only prosthetic devices, but forDME, orthotics, and prosthetics as well.However, cochlear implants aresomewhat unique. Because it can beparticularly difficult for a patient tolearn to use the implant, cochlearrehabilitation services are categorizedseparately as speech-language pathologyservices. These services are billed underCPT code 92510 (which is included asa PT service because it is a speech-language pathology service). Therefore,all of these services qualify as‘‘designated health services,’’ but underdifferent categories.

Comment: A commenter pointed outthat items such as rib belts, slings, andbasic braces (those not custom-fitted)are in the prosthetic/orthotic section ofthe HCPCS. The commenter askedwhether these items would beconsidered orthotics or DME, since thepatient would be wearing the itemhome. The commenter believes that, ineither case, it would be inappropriate toprevent a physician from supplying andbilling for these items when the patienthas come to the office with an injury.The commenter asserted that requiring apatient to leave the physician’s office topurchase necessary equipment isinconvenient and unwise because itmay result in unnecessary pain or injuryto the patient.

Response: The items described as ‘‘ribbelts’’ and ‘‘slings’’ are not included inany DHS category. The items describedas ‘‘basic braces’’ are orthotics. Nothingin Phase I of this rulemaking moves anyitem or device from one coveragecategory to another coverage category. Ifthe items qualify as in-office ancillaryservices under section 1877(b)(2) of theAct, a physician who supplies them inhis or her office in the course of seeinga patient should be able to use the in-office ancillary services exception inorder 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 thephysician dispenses the item to thepatient there.

Comment: Several commenters urgedus to exclude eyeglasses and contactlenses from the definition of prostheticdevices. Commenters noted that there is



no incentive to overutilize or abuse thisbenefit because we acknowledge thatone pair of conventional eyeglasses orcontact lenses is medically necessaryafter cataract surgery; Medicare coverageis limited to one pair of conventionaleyeglasses or contact lenses; andMedicare payment is on a reasonablecharge basis.

Response: We agree with thecommenters that eyeglasses and contactlenses should be excluded from thereach of section 1877 of the Act forpurposes of Medicare referrals. TheMedicare coverage of these items isunique in that it is limited to one pairof either item after each cataract surgeryand is available to any patient who hashad this surgery. In that respect, thecoverage is similar to the coverage ofpreventive screening services that aresubject to frequency limits, as discussedearlier in this section. In addition, theMedicare-approved amount of paymentdoes not vary based on the expense ofa particular pair of glasses or contactlenses. Medicare pays fixed amounts foreyeglasses and contact lenses that aresingle focal, and fixed amounts foreyeglasses and contact lenses that arebifocal. In sum, we see little opportunityor incentive for a physician to eitherunder or overutilize these items in theMedicare program. Accordingly, we arecreating a new exception under theauthority in section 1877(b)(4) of theAct for eyeglasses and contact lensesafter cataract surgery. Like other section1877(b)(4) exceptions, the newexception is subject to there being noviolation of the anti-kickback statute orany billing or claims submission law orregulation.

K. Home Health ServicesIn the January 1998 proposed rule, we

proposed to define home health servicesas the services described in section1861(m) of the Act and part 409, subpartE. We included in the preamble to thatrule (63 FR 1679), a discussion of howwe proposed to reconcile section 1877of the Act and the physiciancertification requirements for homehealth services in § 424.22(Requirements for home healthservices), paragraph (d) (Limitations onthe performance of certification andplan of treatment functions). In thatdiscussion, we explained that the homehealth agency (HHA) rule and itsexceptions have been superseded bysection 1877 of the Act. Phase I of thisrulemaking reflects this change. Ourresponses to comments mostly serve toclarify how the modified home healthrule will work.

Comment: Four commenterssupported our proposal to reconcile the

physician self-referral law with thephysician certification requirements forhome health services contained in§ 424.22(d). One commenter specificallyexpressed agreement with our proposedposition that the exceptions to thephysician self-referral law would alsoapply to physician certificationrequirements for home health services.Another commenter specificallysupported the proposed changes thatwould eliminate the 5 percentownership and $25,000 financial orcontractual relationship limits andreplace them with the prohibition onself-referral contained in section 1877 ofthe Act. The commenter stated that thischange would allow HHAs to providefor medical oversight by a salariedphysician as permitted under theMedicare hospice benefit. (We believethat commenter meant that the proposedelimination of the $25,000 financial orcontractual relationship provisionwould allow an HHA to pay a physicianmedical director more than $25,000 aslong as the HHA meets relevantownership and compensationexceptions described in the proposedrule.) Another commenter asked that weclarify whether the current $25,000limit on financial or contractualrelationships as it relates to medicaldirectors of home care agencies will beremoved.

Response: We are removing thecurrent 5 percent ownership limit andthe $25,000 limit on financial orcontractual relationships from§ 424.22(d). The new § 424.22(d)appears exactly as we proposed it: ‘‘Theneed for home health services to beprovided by an HHA may not becertified or recertified, and a plan oftreatment may not be established andreviewed, by any physician who has afinancial relationship, as defined in§ 411.351 of this chapter, ‘Definitions,’with that HHA, unless the physician’srelationship meets one of the exceptionsin §§ 411.355 through 411.357 of thischapter * * *.’’ The elimination of the$25,000 financial or contractualrelationship provision will allow anHHA to pay a physician medicaldirector more than $25,000 as long asthe financial relationship meets arelevant ownership or compensationexception under section 1877 of the Act.

Although we are delaying theeffective date for most of Phase I of thisrulemaking for 1 year, we are makingthe change in § 424.22(d) effectiveFebruary 5, 2001. Having weighed thealternatives, we believe an effective dateof February 5, 2001 for the revision of§ 424.22(d) is desirable, even though therevisions to §§ 411.355 and 411.357 willnot be effective until later. In the

interim, the references to §§ 411.355 and411.357 will cross-refer to the statutoryexceptions set forth in section 1877 ofthe Act. It is our view that during theinterim period, the exceptions set forthin those sections would apply under§ 424.22(d) for services other thanlaboratory services.

Comment: One commenter requestedthat we retain the provisions in§ 424.22(e) (Exceptions to limitations),(f) (Procedures for classification as asole community HHA) and (g) (Basis forclassification as a sole community HHA)that except governmental entities andsole community HHAs from theprohibition on certification of need forhome health services by relatedphysicians. The commenter noted thatkeeping this language would remove thethreat of unfair competition for agenciesthat have historically been the soleproviders in their communities. Thecommenter explained that the ‘‘ruralprovider’’ exception to the physicianself-referral law would permit an urbanphysician to establish a new HHA in arural area, as long as the agency’sservice population is at least 75 percentrural. This would create new and unfaircompetition for many rural agencies thatare small, nonprofit organizations.

Response: We realize that eliminatingthe exceptions for governmental entitiesand sole community HHAs incombination with the ownershipexception for rural providers under thephysician self-referral law may createnew competition for small, nonprofitHHAs. Nonetheless, we believe that wedo not have the legal authority to retainthese exceptions in any meaningfulway. As we pointed out in the preambleto the January 1998 proposed rule (63FR 1680), even if a physician and anHHA are involved in an arrangementthat meets one of the home healthexceptions at issue, the arrangementsimultaneously remains subject to therequirements in section 1877 of the Act.That is, if an exception under the HHAcertification regulations is subsumedwithin the exceptions in section 1877 ofthe Act, a physician will be able to refer;if it is not, the arrangement willdisqualify the physician from referringin spite of § 424.22. Thus, the HHAexceptions have been superseded bysection 1877 of the Act.

The Secretary does have the authorityto create additional exceptions to thereferral prohibition under section1877(b)(4) of the Act, but only insituations in which she determines thatthere is no risk of program or patientabuse. We believe that the fact that anentity is run by the government or is asole community HHA does notguarantee that there will be no



unnecessary referrals. In addition, it isour view that we should treat allproviders equally and allow them anequal opportunity to compete,particularly in areas where there havehistorically been too few providers. Infact, the purpose of the ‘‘rural provider’’exception in section 1877(d)(2) of theAct is to encourage physicians to investin or remain invested in under-servedareas. (Note that hospitals do not havesimilar exceptions for governmentalentities or sole community hospitals.)Therefore, we do not intend to includethe exceptions for governmental entitiesand sole community providers in therevised HHA certification regulationsbecause we believe that our proposedapproach provides the best protectionagainst possible program abuse andfulfills the intent of the law.

Comment: A commenter representinghome care physicians asked that weclarify whether physicians makinghome visits are providing services thatqualify as DHS under the January 1998proposed regulations.

Response: Under the Medicareprogram, when a physician performs aphysician service, including a visit to ahome health patient, the physicianservice is billed as a physician serviceand is not considered a home healthservice. This is the case even when thephysician has an employment contractwith the HHA, such as when aphysician is employed as a medicaldirector. Thus, the commenter is correctin noting that physician home visits arenot themselves on the list of DHS insection 1877(h)(6) of the Act, and wouldonly qualify as such if the physicianwas actually performing a specificdesignated health service (for example,performing physical therapy). In thesecases, the service would still beprotected if it is personally performedby the referring physician, since itwould not be considered a referralunder the final rule. (See section III.B ofthis preamble.) In addition, some in-home services provided by a home carephysician may qualify under the in-office ancillary services exception. (Seesection VI.B of this preamble.)

L. Outpatient Prescription DrugsSection 1877(h)(6)(J) of the Act

provides that ‘‘designated healthservices’’ includes the category of‘‘outpatient prescription drugs,’’ butdoes not define this term. BecauseMedicare does not cover a category ofservices called ‘‘outpatient prescriptiondrugs,’’ we proposed to define this termin the regulation. We proposed toinclude only drugs (includingbiologicals) defined or listed undersection 1861 (s) and (t) of the Act, and

in part 410, furnished under theMedicare Part B benefit that patients canobtain from a pharmacy with aprescription, even if patients can onlyreceive the drug under medicalsupervision. In the preamble to theJanuary 1998 proposed regulation (63FR 1680), we included as an exampleoncology drugs that are routinelyfurnished in a physician’s office, underthe physician’s direct supervision,provided the drugs could be obtained byprescription from a pharmacy.

We proposed specifically to excludefrom the definition of ‘‘outpatientprescription drugs’’ erythropoietin(EPO) and other drugs furnished as partof a dialysis treatment for an individualwho dialyzes at home or in a facility.

Upon further review of the law,existing regulations, and the publiccomments, we have concluded that ourproposed definition of ‘‘outpatientprescription drugs’’ was not clearenough. In Phase I of this rulemaking,we are revising the definition ofoutpatient prescription drugs to makeclear that it includes all prescriptiondrugs covered by Medicare Part B. Weare not excluding any outpatientprescription drugs from the DHScategory of ‘‘outpatient prescriptiondrugs.’’ Including all outpatientprescription drugs is consistent with ourpolicy throughout these finalregulations of avoiding carving servicesout of DHS definitions through service-by-service analyses of the potential forfraud and abuse. Our definition ofoutpatient prescription drugs providesphysicians and DHS entities with a‘‘bright line,’’ common sense rule.Moreover, the breadth of the definitionis ameliorated to a very large extent byour expansion of the exception for in-office ancillary services, which includesmuch greater flexibility with respect tothe direct supervision requirement, andour promulgation of a new limitedexception under section 1877(b)(4) ofthe Act for the provision of EPO andcertain other dialysis-related drugs by orin ESRD facilities (described in greaterdetail below). Those changes, togetherwith the changes in the definition of‘‘group practice’’ and ‘‘referral,’’ shouldpermit a physician to furnish patientswith covered drugs, either byadministering or dispensing the drugs topatients in his or her office or, in thecase of EPO and other specific dialysisdrugs, by furnishing the drugs in orthrough a physician-owned ESRDfacility. We wish to make clear thatnothing in this regulation affects, or isintended to affect, current or futurecoverage of any particular prescriptiondrug.

We are creating an exception for EPOand certain other specific drugs that arerequired for the efficacy of dialysiswhen they are furnished by an ESRDfacility with which the referringphysician has a financial arrangement.We are similarly excepting certainvaccinations, immunizations, andpreventive screening tests that aresubject to HCFA-imposed frequencylimits. We are also clarifying thatphysicians who provide drugs in theirown offices are not required to pass onto Medicare discounts they receive inpurchasing these drugs, unlessotherwise required to do so by theMedicare program. These issues arediscussed in detail below.

Comment: A number of commentersraised the issue of whether drugs andbiologicals provided incident tophysician services are included in thedefinition of outpatient prescriptiondrugs. The commenters pointed out thatmost drugs and biologicals are coveredunder Medicare Part B only if theyrequire administration by a physician,and thus typically are covered in thephysician office setting only if furnishedas ‘‘incident to’’ physician services.Thus, the resulting ‘‘self referral’’ iseffectively a requirement for Medicarecoverage. In the commenters’ view,excluding drugs furnished incident tophysician services from the definition of‘‘outpatient prescription drugs’’ wouldensure that the physician self-referrallaw does not discourage the types of‘‘referrals’’ that are prerequisites toMedicare coverage.

One commenter asserted that drugsthat are covered under Medicare only asa component of a physician serviceshould be excluded because physicianservices were never intended to beincluded within the referral prohibition.Another commenter recommended thatwe make all injectable drugs exemptfrom the referral prohibition under thein-office ancillary services exception.

Several commenters were particularlyconcerned about antigens and serumsthat a patient receives in a physician’soffice, stating that they should beexcluded from the category of outpatientprescription drugs, along withchemotherapy. Another commenterpointed out that if our definition ofoutpatient prescription drugs includesdrugs administered during a patient’soffice visit, patients could have seriousaccess problems to such drugs asantibiotics, renal therapy, and vaccines.Another commenter recommended thatwe limit outpatient prescription drugsto those that are self-administered, suchas oral cancer drugs, oral antiemetics,and immunosuppressives, for whichthere is Medicare coverage that does not



depend on administration in aphysician’s office.

Response: We believe the commentersare conflating two issues: (1) What drugsfit in the term ‘‘outpatient prescriptiondrugs’’ in section 1877(h)(6)(J) of the Actand (2) the scope of the in-officeancillary services exception in section1877(b)(2) of the Act. Upon review, forpurposes of defining ‘‘outpatientprescription drugs’’ under section1877(h)(6)(J) of the Act, we can ascertainno meaningful distinction betweenprescription drugs dispensed bypharmacies or those mixed andadministered in a physician’s office. Tothe extent the latter is permitted, it isthrough the vehicle of the in-officeancillary services exception. The scopeof that exception is discussed in sectionVI.B.1 of this preamble.

Comment: Many commenters statedthat oncology drugs administered topatients by injection or infusion in aphysician’s office should be excludedfrom the definition of outpatient drugsbecause a patient essentially cannotobtain these drugs from a pharmacybefore visiting his or her physician.When a patient comes to a physician’soffice for chemotherapy, the patientreceives a series of blood tests todetermine the patient’s physiologicalstate. Based on these tests, thechemotherapy agents are mixed andtailored by the oncologist’s staff toaddress the patient’s current healthstatus. Therefore, a patient cannot pickup from a pharmacy the medication heor she needs before visiting thephysician. We may have misunderstoodhow chemotherapy drugs are actuallyadministered.

In addition, the commenters pointedout that a great majority of retailpharmacies are not currently preparedto provide chemotherapeutic mixingand dispensing services for infusiondrugs. That is because Federalregulations and accepted standards ofpractice for physicians, oncologynurses, technicians, and pharmacistsrequire that the preparation, storage,transportation, and disposal ofchemotherapy drugs and applicablesupportive agents be conducted underthe most rigorously controlledcircumstances.

Response: We agree thatchemotherapy agents are not commonlyavailable from retail pharmacies, but areprepared for individual patients.However, these drugs are outpatientprescription drugs; they are availableonly upon a physician’s order and areprovided in an outpatient setting.(When provided in an inpatient setting,they would be inpatient hospitalservices under section 1877(h)(6)(K) of

the Act.) We believe these drugs areusually administered in oncologists’offices and typically should qualify forthe in-office ancillary servicesexception. (See discussion in sectionVI.B.1 of this preamble.)

Comment: Several commenters havestated that in-office x-rays andlaboratory tests that are performed inconjunction with the provision ofchemotherapy should be excluded fromthe definition of DHS. The commentersseemed particularly concerned that ifthese services are regarded as DHS, aphysician would have to directlysupervise them. The commentersexpressed concern that requiring aphysician to be present during the timesthese services are provided would rundirectly counter to common practice inoncology offices and would greatlyinconvenience patients.

These commenters asserted that it isextremely unlikely that a physicianwould refer a patient for chemotherapysimply to obtain the revenue from the x-ray and laboratory tests that areperformed in conjunction with theprovision of chemotherapy. They regardas a precedent for this exception ourproposals to exclude from the definitionof radiology certain invasive radiologyservices in which an imaging modalityis used to guide a needle, probe, orcatheter properly and to exclude EPOfrom the definition of outpatientprescription drugs when EPO isprovided incidental to dialysistreatment. We had proposed to excludethese invasive radiology procedures andEPO because they are merely furnishedincidental to, or secondary to, anotherprocedure that the physician hasordered.

Response: The Congress has imposedcertain constraints on physicians’financial arrangements with entities towhich they refer patients for DHS. Theprovision of chemotherapy is adesignated health service, as is theprovision of radiology and clinicallaboratory services. In order for aphysician to refer patients to an entitywith which the referring physician hasa financial arrangement, the physician’sfinancial relationship with the entitymust come within an exception tosection 1877 of the Act.

As discussed elsewhere, we are notprepared to limit the scope of DHSunder section 1877(h)(6) of the Actexcept in rare situations. We believethat most arrangements for the provisionof chemotherapy and related ancillaryservices by physicians to their patientscan be restructured to come within thein-office ancillary services exception asmodified by this final rule. (See sectionVI.B of this preamble.) As discussed

above, we are abandoning the‘‘peripheral/incidental’’ test that wasproposed in the January 1998 proposedrule; we point out that even under thattest, the primary procedure could notitself be a designated health service.

Finally, we wish to clarify that we areexcepting EPO under certaincircumstances because we believe thatthe Congress did not intend to precludephysician ownership of ESRD facilities.Commenters have noted that when theCongress intended to cover specificMedicare services, including compositerate services, it did so expressly. Weagree. The Congress did not list ESRDfacility services under section1877(h)(6) of the Act, while it did listhome health services and hospitalservices. Therefore, we do not regardservices furnished under a compositerate by an ESRD facility as DHS. Giventhe high correlation between EPO andESRD services, the inclusion of EPO asa DHS would vitiate the Congress’apparent intent. Accordingly, we areexcepting from the reach of the statuteunder our section 1877(b)(4) of the Actauthority EPO or other drugs requiredfor dialysis when furnished in or by anESRD facility owned by physicians. Thelist of these drugs is set forth in theattachment to this final rule. Given thestrict utilization and coverage criteriafor EPO in particular and ESRD ingeneral, we conclude this narrowexception presents no quantifiable riskof fraud or abuse. We are not protectingany physician investment in a homedialysis supply company or other entitythat supplies EPO to ESRD facilities orthat supplies EPO to patients pursuantto a contract with an ESRD facility; insuch situations, the physician’sinvestment in the dialysis supplycompany is no different from any otherinvestment in a DHS entity and there isno indication in the legislative historythat home dialysis supply companieswere not meant to be covered by thestatute.

Comment: A substantial number ofcommenters requested that we notrequire physicians to pass on toMedicare discounts they receive inpurchasing oncology drugs.Commenters pointed out that theproposed regulations appear to requirethis result. Some commenters believethat this proposed requirement conflictswith section 1877(e)(8)(B) of the Act,which excepts any payment made by aphysician for items and services if theprice is consistent with fair marketvalue.

Response: Nothing in this section1877 of the Act or these regulations isintended to impose on physicians arequirement to pass discounts on drugs



on to the Medicare and Medicaidprograms; whether a discount must bepassed on to a Federal health careprogram by physicians or others,however, remains the subject of otherstatutory and regulatory provisions.

Comment: One commenter asked thatwe confirm that the definition of‘‘outpatient prescription drugs’’ wouldapply only to those drugs that arefurnished to ‘‘outpatients’’ of anyfacility, including a SNF or nursingfacility. The commenter believes that ifthe Congress had intended that thestatute cover drugs provided to‘‘inpatients’’ of facilities, it could haveeasily written the statute to do so. Thecommenter pointed out that drugsprovided to ‘‘inpatients’’ are generallycovered under Medicare Part A and areperipheral components of the servicesbeing provided and billed for,particularly under the prospectivepayment system for SNFs under whichSNFs receive a per diem rate forvirtually all items and servicesfurnished to a Medicare Part A patient.

Response: In the January 1998proposed rule, we proposed to includeonly drugs furnished to an individualunder the Medicare Part B benefit andto exclude drugs furnished by providersunder Medicare Part A. We havereflected this in Phase I of thisrulemaking. A patient may reside in aSNF under a Part A stay or a patientmay reside in a SNF without beingcovered under Part A. If the stay is notcovered under Part A, it is possible thatthe patient may receive some drugsunder the Part B benefit that areconsidered ‘‘outpatient prescriptiondrugs’’ under these physician self-referral provisions. In addition, undersection 1835(a) of the Act, a SNF mayfurnish services to an individual who isnot a SNF inpatient. That is, it ispossible for a SNF to provide services toan individual who does not reside in theSNF. For example, a SNF with an x-raymachine may furnish x-ray services to anonresident if the individual has areferral for an x-ray and he or shewishes to receive the x-ray at thislocation. We assume the individualswho receive these services are the‘‘outpatients’’ to whom the commenteris referring. (We note that drugsprovided to patients in a hospital settingwould be inpatient or outpatienthospital services under section1877(h)(6)(K) of the Act.)

Patients in nursing facilities aretypically covered under the Medicaidprogram. We intend to address allMedicaid-related physician referralissues in a separate rulemaking.

Comment: A commenter requestedthat we amend the January 1998

proposed rule to clarify thatimmunizations are not DHS under thedefinition of ‘‘outpatient prescriptiondrugs.’’ The commenter pointed out thatimmunizations, particularly in pediatricand family care practices, are oftenpersonally administered by a physicianto his or her own patients or arefurnished on an ‘‘incident to’’ basisunder the physician’s directsupervision. In the adult population,there is also an increasing publicawareness of the need for preventiveimmunizations, such as pneumococcalvaccine and influenza vaccine. Theseimmunizations are widely and activelypromoted in this country as constitutinggood preventive medicine. Thecommenter believes that the January1998 proposed regulation coulddiscourage immunizations becauseunder the proposed interpretation ofproductivity bonuses in the grouppractice definition, a physician wouldbe unable to share in a productivitybonus based on his or her ownadministration of, or direct supervisionof, these immunizations.

Response: The commenter raisedissues relating to immunizations that arecovered by Medicare under section1861(s)(10) of the Act, which coverspneumococcal vaccine and influenzavaccine and their administration, aswell as hepatitis B vaccine and itsadministration if furnished to anindividual who is at high orintermediate risk of contractinghepatitis B. Under our authority tocreate additional exceptions in section1877(b)(4), we are excluding from thereach of section 1877 of the Act certainimmunizations and vaccines coveredunder section 1861(s)(10) of the Act thatare subject to HCFA-imposed frequencylimits and that are paid by Medicare onthe basis of a fee schedule. We believethat under the terms of the exceptionthe risk of abuse for these services isextremely low and that this exclusion isconsistent with the statutory languageand structure and the expressedCongressional intent to providepreventive care to Medicarebeneficiaries.

In referring to drugs furnished inpediatric and family practices, weassume that the commenter wasinterested in the definition of outpatientprescription drugs under the Medicaidprogram. We intend to address theeffects of the physician self-referralprohibition on the Medicaid program inPhase II of this rulemaking.

Comment: A commenter raisedquestions about our decision to excludeEPO and other drugs furnished as partof a dialysis treatment from thedefinition of ‘‘outpatient prescription

drugs.’’ The commenter considered thisexclusion ambiguous and requestedclarification about whether a particulardrug provided by a facility is ‘‘part of adialysis treatment.’’ The commenterpointed out that EPO and otherpharmaceuticals are typicallyadministered during the course oftreatment to avoid the painful process ofinjecting the patient multiple times, butthat it could be argued that thesepharmaceuticals are not ‘‘part of’’ thetreatment itself. Therefore, thecommenter requested that we revise theexclusion of ‘‘other drugs furnished aspart of the dialysis treatment’’ to insteadapply to ‘‘other drugs furnished to anindividual who dialyzes at home or ina facility, as part of an ESRD patient’splan of care.’’

Response: When we carved out of thedefinition of ‘‘outpatient prescriptiondrugs, EPO and other drugs furnished aspart of the dialysis treatment,’’ we didnot aim to carve out the far broadercategory of all ‘‘other drugs furnished* * * as part of an ESRD patient’s planof care.’’ We regard ‘‘other drugsfurnished as part of the dialysistreatment’’ to be those furnished so thatthe dialysis treatment can be effectiveand to counteract the problems that canbe caused directly by dialysis. Forexample, dialysis makes some patientsanemic, so EPO is provided to deal withthis dialysis-related problem. Inaddition, iron therapy is covered tomake EPO therapy effective and VitaminD hormone therapy is covered to correctfor bone density loss caused by dialysis.Other drugs furnished to an individualwho dialyzes at home or in a facilitymay include drugs that a patient usesfor reasons other than to make thedialysis treatment effective. In fact,these other drugs may have nothingwhatsoever to do with a patient’s renalproblems.

Comment: Another commenter agreedwith our proposal to exclude EPO in theJanuary 1998 proposed rule because itwould allow physicians who own adialysis facility to prescribe Medicare-covered medications to patients of thedialysis facility on the basis that thedrugs are an integral part of the dialysisprocedure. The commenter asked thatwe clarify that self-administeredmedications for home dialysis such asEPO can only be furnished by thedialysis provider or a supplier that hasan agreement with the dialysis provider(a Method II supplier) and cannot beprovided through the referringphysician’s office. The commentercontended that teaching the homedialysis patients to self-administermedications and monitoring the effects



of self-administered medications is theresponsibility of the dialysis facility.

Response: We agree with thecommenter. As provided in § 414.335(Payment for EPO furnished to a homedialysis patient for use in the home),medications for home dialysis can onlybe furnished by the dialysis provider ora Method II supplier that has anagreement with a provider. If a referringphysician has a financial agreementwith a Method II supplier, thearrangement must meet an exception.

Comment: A commenter asked thatimmunosuppressant drugs prescribedfor patients following organ transplantsand covered by Medicare be excludedfrom the definition of ‘‘outpatientprescription drugs.’’ The commenterbelieves that the rationale for excludingthese drugs is similar to the rationale forexcluding EPO, since the use of thesedrugs is peripheral to the transplantsurgery, but medically integral to thesuccess of the surgery.

The commenter contended thatexcluding immunosuppressants fromthe definition will not provide anopportunity for program or patientabuse because their cost is aneconomically minor, though medicallycritical, part of a large and immenselycomplicated treatment. In addition, thecommenter believes that physicianshave no motivation to overprescribethese drugs, because the drugs are onlyused for transplant patients according toclinically accepted protocols that aredesigned to prevent organ rejectionwhile avoiding unnecessarily highlevels of toxicity. The commenterbelieves that the transplant communityadheres to the prevailing standards ofmedical care with only minordeviations. In addition, each transplantcenter is required to report its transplantsurvival rates to an HHS contractor.Centers with survival rates belowestablished thresholds can lose theircertification.

Response: Immunosuppressant drugsfurnished in an outpatient setting are‘‘outpatient prescription drugs’’ underPhase I of this rulemaking. (They areinpatient or outpatient hospital serviceswhen furnished in a hospital setting.)We are not persuaded that an exceptionis appropriate or necessary. We believethat to the extent physicians providetransplant drugs to patients in theiroffices, they will generally be able to doso under the in-office ancillary servicesexception. If a referring physician hasan ownership or investment interest ina free-standing transplant pharmacy orother pharmacy that provides transplantdrugs to his or her patients pursuant toa referral, the financial relationship

would have to fit in an applicableexception.

M. Inpatient and Outpatient HospitalServices

In § 411.351 of the January 1998proposed rule, we defined inpatienthospital services as services that ahospital provides for its patients that arefurnished either by the hospital or byothers ‘‘under arrangements’’ with thehospital. For outpatient services, weexplained in the preamble of theJanuary 1998 proposed rule (63 FR1683) that we would consider allcovered services (either diagnostic ortherapeutic) performed on hospitaloutpatients that are billed by thehospital to Medicare (includingarranged for services) as outpatienthospital services. We have revised thedefinition of outpatient hospital servicesin the regulations text to clarify that itincludes services furnished ‘‘underarrangements.’’ Inpatient services arenot coded by HCPCS codes. Anyoutpatient hospital service, regardless ofthe HCPCS code, is a designated healthservice.

In the January 1998 proposed rule, werequested comment on whether weshould exclude lithotripsy from thedefinition of inpatient or outpatienthospital services on the theory that itcould not be overutilized, since theprocedure itself apparently documentsthe medical necessity to prescribe it.Commenters were also concerned aboutphysician services that are ‘‘bundled’’into hospital payments and aboutservices furnished by a hospital ‘‘underarrangements’’ with an outside facility.We discuss each of these topics below.

Comment: We received hundreds ofcomments on the subject of lithotripsy,mostly from urologists who haveownership interests in a lithotriptor thata hospital rents. These commentersrequested that lithotripsy be excludedfrom the definition of inpatient andoutpatient hospital services so that theycould continue to refer to the hospitalswithout being concerned about how thehospital compensates them. Accordingto these commenters, urologist-ownedlithotriptors increased quality of careand patient access without any risk ofoverutilization of lithotripsy. We alsoreceived comments on this topic fromindividual hospitals, a State andnational hospital trade association, andnonphysicians who rented lithotriptorsto hospitals in competition withphysician owners. These commentersasserted that hospitals pay more for theuse of physician-owned lithotriptorsthan hospitals pay for the use of theirown lithotriptors or lithotriptors ownedby nonphysicians and urged us to

include lithotripsy in the definition ofinpatient and outpatient hospitalservices.

Response: We have determined thatthere is no reason to treat lithotripsy anydifferently than other inpatient oroutpatient hospital services. As we havesaid elsewhere in the preamble, webelieve the Congress did not intend thatwe make service-by-service decisions onwhether a service is a designated healthservice based on the service’s potentialfor overutilization. Even were we able todetermine that there is no potential foroverutilization of lithotripsy (includingcomparisons to alternative treatments),there is a substantial potential forurologists who own lithotriptors toextract higher than market rate rents fortheir equipment or for the financialarrangement between the lessorurologists and the lessee hospital toencourage overutilization of otherhospital services. Commenters providedno evidence to support their claims thatphysician ownership of lithotriptorsincreased quality of care or access totreatment.

In any event, the exclusion oflithotripsy from the definition ofinpatient and outpatient services wouldnot obviate the need for the physician-owners to structure their rentalarrangements to comply with section1877 of the Act. Whether lithotripsy isa designated health service or not, therental arrangement itself would create afinancial relationship between thephysician-owners and the hospital.Unless the financial relationship (thatis, the lithotriptor lease) fit into acompensation exception (such as theequipment rental exception), thephysicians could not refer any Medicarepatients to the hospital for any inpatientor outpatient services. In short, the reliefsought by these commenters would beillusory.

We believe that the changes we havemade in § 411.354(d) of theseregulations to the volume or valuestandard (discussed in section V of thispreamble) will enable hospitals andurologists to protect bona fidearrangements either under anequipment lease or a personal servicearrangements exception or under thefair market value exception. Mostimportantly, Phase I of this rulemakingclarifies that ‘‘per service’’ or ‘‘per use’’rental or services payments arepermitted, even for services performedon patients referred by the urologist-owner, provided the rental or servicespayment is fair market value and doesnot take into account any Federal orprivate pay business generated betweenthe urologist and the hospital (andprovided all other conditions of an



exception are met). Because theprevalence of physician ownership oflithotriptors may distort pricing in themarketplace, we believe valuationmethods that look to the prices chargedby persons not in a position to refer tothe hospital or that consider acquisitioncost and rate of return are especiallyappropriate. We also are aware thatsome manufacturers of lithotriptorslease the machines to urologists on a‘‘per use’’ basis with the urologists, inturn, leasing the lithotriptors tohospitals on a ‘‘per use’’ basis. In thesecircumstances, any disparity in the ‘‘peruse’’ fee charged by the manufacturer tothe urologists and the ‘‘per use’’ feecharged in turn by urologists to thehospital would call into questionwhether both sets of fees could be fairmarket value.

Comment: Several commenterssuggested that section 1877 of the Actwas only intended to address diagnosticprocedures. Accordingly, they askedthat we exclude therapeutic treatmentssuch as lithotripsy from the definition ofinpatient or outpatient hospital servicesin cases in which the referring urologistor a member of his practice actuallytreats the referred patient.

Response: The list of DHS in section1877(h)(6) of the Act contains boththerapeutic and diagnostic types ofservice (for example, physical therapyservices are therapeutic and clinicallaboratory services are diagnostic). Thisindicates that the Congress believed thatboth types of services could be subjectto abuse. We have concluded that whena physician initiates a designated healthservice and personally performs it himor herself, that action would notconstitute a referral of the service to anentity under section 1877 of the Act.However, in the context of inpatient andoutpatient hospital services, therewould still be a referral of any hospitalservice, technical component, or facilityfee billed by the hospital in connectionwith the personally performed service.Thus, for example, in the case of aninpatient surgery, there would be areferral of the technical component ofthe surgical service, even though thereferring physician personally performsthe service. If the referring physicianhas a financial relationship with thehospital, that relationship must fit in anexception. Potentially availableexceptions, depending on thecircumstances, include, for example, thepersonal service arrangementsexception, the employee exception, thespace or equipment rental exception,the whole hospital exception, and thefair market value exception.

Comment: Several commenters statedthat the only reason extracorporeal

shock wave lithotripsy (ESWL) is evensubject to the physician self-referralprovisions is because Medicare onlypays for lithotripsy if it is billed througha hospital, thus forcing the procedureinto the realm of inpatient or outpatienthospital services. Many commentershave cited debate language pertaining toadopting the Conference Report forOBRA ’93, which language suggests thatthe sponsor of section 1877 of the Act,Representative Stark, did not intend forESWL to come under the law.

Response: We believe that lithotripsywas meant to be a ‘‘designated healthservice’’ under the law, since the lawdoes not exclude any particular hospitalservices, nor does the legislative historyindicate that the Congress meant toexclude them. The House Report for thefirst version of the physician self-referral law mentioned a specificexception for a facility providinglithotripsy services performedpersonally by the referring physician.(See H. Rep. No. 101–247, 101st Cong.1041 (1989).) This exception did notapply to the hospital services at issue,nor was it enacted. In adding hospitalservices to the list of DHS, thelegislative history reveals that theCongress was concerned aboutincreased admissions to hospitals,regardless of the reason for theadmission. (We discuss this issuefurther below, where we addresshospital services provided ‘‘underarrangements.’’)

Comment: Another commenterpointed out that we proposed excludingfrom the definition of inpatient hospitalservices those services performed byphysicians and other providers who billindependently. The commenter askedus to clarify whether physician andindividual professional services areexcluded from the definition ofinpatient hospital services when theyare billed by a hospital. Hospitals billfor these services when they are part ofa global fee that covers both thetechnical and professional componentsof a service or when they bill on anassignment (or reassignment) basis. Thiscommenter argued that if these servicesare not excluded under section 1877 ofthe Act, a hospital may not be able tocompensate a physician for servicesperformed in, and billed by, thehospital, or to compensate a doctor whosupervises a nurse practitioner in ahospital. The commenter also suggestedthat we clarify that we will treat bothinpatient hospital services andoutpatient hospital services the sameway.

Response: Professional services thatMedicare pays independently of aninpatient or outpatient hospital service

do not become DHS if they are billed bya hospital under assignment orreassignment; they remain physicianservices and are not considered hospitalservices. Any other service for which ahospital bills is a hospital inpatient oroutpatient service, even though it mayconsist of both a technical andprofessional component. Therefore,these services constitute DHS undersection 1877 of the Act. However, if ahospital is paying the physician for hisor her professional services under eithera personal services contract or anemployment agreement, the physiciancan still refer to the hospital as long asthe compensation arrangement meets anexception, such as the exception thatapplies to personal service arrangementsor the exception for employmentagreements. These exceptions require,among other things, that the hospitalpay the physician an amount that isbased on a fair market value standard.

Comment: Several commentersexpressed concern with the effect thedefinitions of inpatient and outpatienthospital services may have when ahospital purchases services ‘‘underarrangements’’ from an entity owned inwhole or in part by a referringphysician. Commenters fear that ifservices are deemed to be inpatient oroutpatient hospital services for thepurposes of 1877 of the Act whenfurnished by a hospital ‘‘underarrangements’’ with an entity owned bya physician, physicians may beunwilling to invest in equipment usingnew technologies. One commenterspecifically proposed an exception thatwould apply to any service that wouldbe exempt from the physician self-referral prohibition if the physicianreferred directly to the entity, outside ofthe hospital context. According toseveral commenters, it is the nature ofthe service itself that should determinewhether or not a referral may be made,not the inpatient or outpatient status ofthe patient. Commenters wereconcerned that a physician will not beable to refer a patient to a hospital if thehospital has an arrangement with anentity that the physician owns. Thecommenters believe that, as long as theactual services are compensated at fairmarket value, there should be no risk ofprogram or patient abuse.

Response: The Congress specificallychose to include inpatient andoutpatient services as DHS undersection 1877(h)(6)(K) of the Act.Inpatient and outpatient hospitalservices include any services that ahospital provides to a hospital patient,whether it provides them itself orprovides them by purchasing them fromanother entity under arrangements; any



other policy would encourage hospitalsto purchase as many services as possibleunder arrangements in order to avoidthe effects of the physician self-referralprovision. In light of the description of‘‘volume or value’’ in Phase I of thisrulemaking, we believe that bona fide‘‘under arrangements’’ relationships caneasily be structured to comply with thepersonal service arrangementsexception, or, in some cases, the fairmarket value exception. We believe thisapproach is consistent with section1877(e)(7) of the Act, which provides alimited exception for certain ‘‘underarrangements’’ relationships that wereestablished before 1989 and met severalother requirements.

We are concerned that the provisionof services ‘‘under arrangements’’ couldbe used to circumvent the prohibition insection 1877(c)(3) of the Act ofphysician ownership of parts ofhospitals. We understand that somehospitals are leasing hospital space tophysician groups, which the groupsthen use to provide services ‘‘underarrangements’’ that the hospital hadpreviously provided directly. Thesearrangements, especially when theyinvolve particularly lucrative lines ofbusiness, raise significant issues undersection 1877 of the Act, as well as theanti-kickback statute.

However, we also recognize that‘‘under arrangements’’ relationships arepervasive in the hospital industry andthat many of the services being providedby physician groups ‘‘underarrangements’’ are services that thephysicians provide in physician-ownedfacilities primarily to their own patientswho are hospital inpatients. In thesesituations, an ‘‘under arrangements’’relationship can avoid unnecessaryduplication of costs andunderutilization of expensiveequipment.

While we believe section 1877 of theAct could reasonably be interpreted toprohibit ‘‘under arrangements’’relationships as constituting prohibitedownership interests in a part of ahospital, we decline to do so at this timefor several reasons. First, given the sheernumber of these arrangements, we thinkprohibiting these arrangements wouldseriously disrupt patient care. Second,almost all these arrangements could berestructured to fit into a combination ofthe personal service arrangements andequipment lease exceptions (or fairmarket value exception), although thisrestructuring will in some cases beadministratively burdensome. Third, webelieve there is precedent in the statutefor treating this situation solely as acompensation arrangement. In section1877(e)(7) of the Act, the Congress

created a specific compensationexception for certain hospital servicesprovided by physician groups ‘‘underarrangements.’’ Since, by definition, allservices protected under section1877(e)(7) of the Act—and the resourcesused to produce them—were ‘‘owned’’by the physician groups, the Congresswould not have created a protectedcompensation relationship unless it hadfirst determined that these arrangementsdid not create a prohibited ownership orinvestment interest in the hospitals.Simply stated, the Congress would nothave excepted these relationships fromthe compensation arrangementrestriction, if they were prohibited as anownership or investment interest.

In sum, for purposes of section 1877of the Act, we will treat ‘‘underarrangements’’ financial arrangementsbetween hospitals and physician-ownedentities as compensation and notownership relationships. Thesearrangements can be protected providedthey meet an appropriate compensationexception. We will, however, monitorthese arrangements and may reconsiderour decision if it appears that thearrangements are abused. We alsocaution physician groups and hospitalsthat these arrangements remain subjectto the Federal anti-kickback statute.

Comment: One commenter requestedthat we clarify how the physician self-referral law applies in cases in which afinancial relationship arises solelybecause of Medicare requirements. Thecommenter discussed a situation inwhich a radiation therapy group and aradiation therapy facility (owned bysome or all of the group members) arelocated in a medical office buildingacross the street from a hospital in anonrural area. The closest comparablefacility is over 35 miles away.Occasionally, the hospital sends aninpatient for radiation therapy to theradiation facility, which provides theservices as ‘‘arranged for’’ inpatienthospital services. The hospital pays thefacility for use of the radiationequipment from money it receives fromMedicare for the inpatient hospital stay.(The group practice bills Medicare forthe professional services of the radiationoncologists.) The commentererroneously asserted that Medicarerequires the hospital to pay theradiation facility for the amount that itwould have received under MedicarePart B if the radiation therapy had beenprovided as an outpatient service. Thecommenter believes that the payment bythe hospital to the radiation therapyfacility creates a compensationarrangement with the facility and, inturn, the physicians.

Often, a radiation oncologist will refera patient of the radiation facility to thehospital for certain tests and otherservices. The radiation oncologistreceives no economic benefit forreferring patients to the hospital andrefers there for the patient’sconvenience, not because there is anyrequirement to do so. The commenterbelieves that, under our proposed rule,the ‘‘under arrangements’’compensation arrangement wouldtrigger the physician self-referral law,preventing the radiation oncologistsfrom referring Medicare patients to thehospital for services, even though thisfinancial relationship is not voluntaryand not subject to abuse.

The commenter requestedclarification whether the proposed§ 411.355(d)(2), covering servicesfurnished under composite types ofpayment rates that the Secretarydetermines provide no financialincentive for underutilization oroverutilization, or any other risk ofprogram or patient abuse, would apply.The commenter also wished to knowwhether we could include an additionaldescribed compensation arrangementexception under § 411.357(d) (thepersonal service arrangementsexception) or clarify § 411.357(g) (theexception for remuneration from ahospital to a physician if theremuneration does not relate to thefurnishing of DHS) to include thearrangements the commentermentioned, or create some variation inthe fair market value exception in§ 411.357(l)(3) that would allowcompensation determined on the basisof the volume of services (that is, fee-for-service payments as covered underMedicare Part B) in the type of situationthe commenter described.

Response: As discussed above insection VIII.A of this preamble, we havedetermined not to include the proposed§ 411.355(d)(2) in Phase I of thisrulemaking for DHS other than clinicallaboratory services. However, asdiscussed in the preceding response, thearrangement described by thecommenter would be a compensationarrangement that could be structured tofit in one of the compensationexceptions, such as the equipmentrental, personal service arrangements, orthe new fair market value exceptions.

N. Other Definitions

1. Consultation

The definition of ‘‘consultation’’ isaddressed in section III.B.2 of thispreamble and in the regulations in§ 411.351.



2. EntityIn § 411.351 of the August 1995 final

rule covering referrals for clinicallaboratory services, we defined the term‘‘entity’’ broadly to cover a soleproprietorship, trust, corporation,partnership, foundation, not-for-profitcorporation, or unincorporatedassociation. We revised this definitionin the January 1998 proposed rule tomake it clear that the definition coversa physician’s sole practice or a practiceof multiple physicians that provides forthe furnishing of DHS, or any other soleproprietorship, trust, corporation,partnership, foundation, not-for-profitcorporation, or unincorporatedassociation. We explained in thepreamble to the January 1998 proposedrule at 63 FR 1706 that we regard an‘‘entity’’ for purposes of the referralprohibition as the business organization,or other association that actuallyfurnishes, or provides for the furnishingof, a service to a Medicare or Medicaidpatient and bills for that service (orreceives payment for the service fromthe billing entity as part of an ‘‘underarrangements’’ or similar agreement).We explained that we meant that thereferral prohibition applies to aphysician’s referrals to any entity thatdirectly furnishes services to programpatients, or to any entity that arrangesfor the furnishing of these servicesunder arrangements. We are clarifyingin Phase I of this rulemaking that, forpurposes of section 1877 of the Act, aperson or entity is considered to befurnishing DHS if it is the person orentity to which we make payment forthe DHS, directly or upon assignmenton the patient’s behalf, except that if theperson or entity has reassigned its rightto payment to (i) an employer pursuantto § 424.80(b)(1); (ii) a facility pursuantto § 424.80(b)(2); or (iii) a health caredelivery system, including clinics,pursuant to § 424.80(b)(3) (other than ahealth care delivery system that is ahealth plan (as defined in § 1000.952(l)),and other than any MCO, PSO, or IPAwith which a health plan contracts forservices provided to plan enrollees), theperson or entity furnishing DHS is theperson or entity to which payment hasbeen reassigned. Provided further, that ahealth plan, MCO, PSO, or IPA thatemploys a supplier or operates a facilitythat could accept reassignment from asupplier pursuant to §§ 424.80(b)(1) and(b)(2) is the entity furnishing DHS forany services provided by such supplier.

A number of commenters pointed out,in various contexts, that they did notbelieve a physician could make a‘‘referral’’ to himself or herself. We agreeand discuss this issue in section III.B of

this preamble, which covers thedefinition of a referral. In our analysisof this issue, we also concluded thatwhen a physician is referring to himselfor herself, that act is not a referral to an‘‘entity,’’ as we have defined it in§ 411.351. However, when the physicianrequests a service from another memberof his or her group practice or from thepractice’s staff, that would be a referralto the practice for purposes of thephysician self-referral law. Theseconcepts are discussed in more detail inour responses to specific comments onthe definition of a ‘‘referral’’ and onsome of the DHS.

In the preamble to the January 1998proposed regulation (63 FR 1710), weaddressed the question of when theowner of a DHS provider is consideredto be equivalent to the entity providingDHS. We had proposed to equate areferring physician with the entity whenthe physician (or a family member) hasa significant ownership or controllinginterest that allows the physician todetermine how the entity conducts itsbusiness and with whom. We used twoexamples to illustrate this concept.Commenters found both our analysisand those examples to be confusing. Asa result, we have abandoned thisanalysis and will simply apply the rulesrelated to indirect financialrelationships and indirect referrals asdescribed in detail in section III of thispreamble, which covers the generalreferral prohibition under section1877(a) of the Act. Section III.A of thispreamble includes a discussion aboutwhen there is a financial relationshipbetween a physician and an entity.

Comment: A commenter suggestedthat we clarify in both the preamble andregulations text that a medical devicemanufacturing company is not an‘‘entity’’ for the purposes of section1877 of the Act, and that themanufacturer does not receive paymentsfrom billings ‘‘under arrangements.’’Another commenter requested that weclarify that drug manufacturers are not‘‘entities’’ for purposes of section 1877of the Act, and that a referral foroutpatient prescription drugs onlyoccurs when a physician sends a patientto a particular entity that activelyfurnishes drugs, such as a pharmacy.

Response: We generally do not regardmanufacturers as entities that furnishitems or services directly to patients, oras entities that furnish services ‘‘underarrangements.’’ Thus, the commentersare correct in stating that a medicaldevice manufacturer or a drugmanufacturer is unlikely to be an entityfurnishing DHS for purposes of section1877 of the Act, while a pharmacy,which delivers outpatient prescription

drugs directly to patients, would be one.(We discuss this issue in more detail insection VIII.B of this preamble.) Aperson or entity is considered to befurnishing DHS if it is the person orentity to which we make payment forthe DHS, directly or upon assignmenton the patient’s behalf, except that if theperson or entity has reassigned its rightto payment to (i) an employer pursuantto § 424.80(b)(1); (ii) a facility pursuantto § 424.80(b)(2); or (iii) a health caredelivery system, including clinics,pursuant to § 424.80(b)(3) (other than ahealth care delivery system that is ahealth plan (as defined in § 1000.952(l)),and other than any MCO, PSO, or IPAwith which a health plan contracts forservices provided to plan enrollees), theperson or entity furnishing DHS is theperson or entity to which payment hasbeen reassigned. Provided further, that ahealth plan, MCO, PSO, or IPA thatemploys a supplier or operates a facilitythat could accept reassignment from asupplier pursuant to §§ 424.80(b)(1) and(b)(2) is the entity furnishing DHS forany services provided by such supplier.

Comment: A commenter asked us toclarify that State governments and theirinstrumentalities are not ‘‘entities’’ forpurposes of section 1877 of the Act. Thecommenter noted that many State andlocal governments create integrateddelivery systems and paymentarrangements in order to increase accessto and decrease the cost of publiclyprovided care. If the governments ortheir instrumentalities were to beconsidered ‘‘entities,’’ the commenterargued that State-sponsored clinics andprograms may cease to exist, thusrestricting access to, and raising thecosts of, public programs.

Response: The referral prohibitionapplies whenever a physician has anunexcepted financial relationship with‘‘an entity’’ that furnishes DHS. Thestatute makes no distinction betweenprivate and governmental entities, nordo we believe that we have the authorityto make such a distinction. We have nobasis for concluding that referrals togovernmental entities are always freefrom potential patient or program abuse,so we see no grounds for creating anadditional exception under section1877(b)(4) of the Act. However, wewould assume that many governmentalentities have compensationarrangements with physicians, ratherthan being owned in any way byphysicians. If this is the case, there area number of compensation relatedexceptions in the statute and regulationsthat are designed to allow physicianswho receive fair compensation tocontinue making referrals.



3. Fair Market ValueThe term ‘‘fair market value’’ appears

in most of the compensation relatedexceptions. These exceptions, amongother things, require that compensationbetween physicians (or family members)and entities be based on the fair marketvalue of the particular items or servicesthat these parties are exchanging. Wedefined this term in the August 1995final rule covering referrals for clinicallaboratory services by using thedefinition that appears in section1877(h)(3) of the Act. This provisiondefines fair market value as the value inarm’s-length transactions, consistentwith the general market value, withother specific terms for rentals or leases.

In the January 1998 proposed rule, wediscussed what constitutes a value thatis ‘‘consistent with the general marketvalue.’’ We drafted the definition asfollows so that it applies to anyarrangements involving items orservices, including, but not limited to,employment relationships, personalservice arrangements, and rentalagreements:

‘‘General market value’’ is the price that anasset would bring, as the result of bona fidebargaining between well-informed buyersand sellers, or the compensation that wouldbe included in a service agreement, as theresult of bona fide bargaining between well-informed parties to the agreement, on thedate of acquisition of the asset or at the timeof the service agreement. Usually the fairmarket price is the price at which bona fidesales have been consummated for assets oflike type, quality, and quantity in a particularmarket at the time of acquisition, or thecompensation that has been included in bonafide service agreements with comparableterms at the time of the agreement.

The definition of ‘‘fair market value’’in the proposed rule continued toinclude the additional requirements insection 1877(h)(3) of the Act for rentalsor leases. Among other things, thestatute defines the fair market value ofrental property as its value for generalcommercial purposes, not taking intoaccount its intended use. Most of thecomments we received addressed thequestion of how to establish the fairmarket value of an asset or agreementand how to value rental property ‘‘forgeneral commercial purposes.’’ We havetried to clarify these concepts in ourresponses.

Comment: Several commenters askedthat we clarify the documentation thatwill sufficiently establish a transactionas consistent with fair market value (andgeneral market value) for the exceptionsthat apply to compensationarrangements. The proposed definitionof fair market value states that ‘‘usuallythe fair market price is the price at

which bona fide sales have beenconsummated for assets of like type,quality, and quantity in a particularmarket at the time of acquisition or thecompensation that has been included inbona fide service agreements withcomparable terms at the time of theagreement.’’ One commenter stated thatusing the word ‘‘usually’’ may createambiguities and suggested making clearin the definition of fair market valuethat the standard of comparabletransactions is only one potential meansof establishing fair market value.

Another commenter stated that theJanuary 1998 proposed rule is unclearabout the steps that must be taken toconfirm fair market value. Thecommenter asked that we adopt theposition that a valuation from anindependent person experienced in thevaluation of health care operations issufficient as one approach (but not theonly approach) to establishing fairmarket value. However, the commenterfurther stated that, because sales ofmedical practices are private and notreported to any central data base, andbecause there is often a lack of arepresentative pool upon which to drawcomparisons, we should adopt theposition that confirmation of fair marketvalue does not necessarily require thefinding of comparable entities forcomparison. Another commenter statedthat the Internal Revenue Service (IRS)guidelines for determining fair marketvalue with respect to tax exemptorganizations are too restrictive and areinappropriate for application to for-profit entities.

Response: To establish the fair marketvalue (and general market value) of atransaction that involves compensationpaid for assets or services, we intend toaccept any method that is commerciallyreasonable and provides us withevidence that the compensation iscomparable to what is ordinarily paidfor an item or service in the location atissue, by parties in arm’s-lengthtransactions who are not in a position torefer to one another. (As discussed insection V of this preamble, in mostinstances the fair market value standardis further modified by language thatprecludes taking into account the‘‘volume or value’’ of referrals, and, insome cases, other business generated bythe referring physician. Depending onthe circumstances, the ‘‘volume orvalue’’ restriction will preclude relianceon comparables that involve entities andphysicians in a position to refer orgenerate business.) The amount ofdocumentation that will be sufficient toconfirm fair market value (and generalmarket value) will vary depending onthe circumstances in any given case;

that is, there is no rule of thumb thatwill suffice for all situations. Theburden of establishing the ‘‘fairness’’ ofan agreement rests with the partiesinvolved in the agreement. Dependingon the circumstances, parties may wantto consider obtaining good faith, writtenassurances as to fair market value fromthe party paying or receiving thecompensation, although such writtenassurances are not determinative.

For example, a commerciallyreasonable method of establishing fairmarket value (and general market value)for the rental of office space can includeproviding us with a list of comparables.We would also find acceptable anappraisal that the parties have receivedfrom a qualified independent expert.Although some transactions are notsubject to public scrutiny, we believegenerally that there should be sufficientdocumentation of similar publictransactions that the parties can use asa basis of comparison. In regions withinadequate direct comparables, such asrural areas, a reasonable alternative mayinvolve comparing institutions orentities located in different, but similar,areas where property is zoned forsimilar use. For example, a hospitalaffiliated with a university in one partof the country could be comparable toother hospitals affiliated withuniversities that are located in similartypes of communities. In other cases, allthe comparables or market values mayinvolve transactions between entitiesthat are in a position to refer or generateother business. For example, in somemarkets, physician-owned equipmentlessors have driven out competitivethird-party lessors of similar equipment.In such situations, we would look toalternative valuation methodologies,including, but not limited to, cost plusreasonable rate of return on investmenton leases of comparable medicalequipment from disinterested lessors.

In contrast, there may be cases inwhich finding a commerciallyreasonable representation of fair marketvalue (or general market value) could beas simple as consulting a price list. Asfor using the IRS guidelines fordetermining fair market value thatapplies to tax exempt organizations, werecognize that in some cases they maynot be appropriate for for-profit entities.Nonetheless, it is our view that someelements of the IRS guidelines could beapplied under certain circumstances,depending upon the specifics of anyparticular agreement. We do not wish toeither mandate their use or rule themout if they can be appropriately used todemonstrate fair market value.

Comment: One commenter noted that,as part of our definition of ‘‘fair market



value,’’ we include the term ‘‘generalmarket value,’’ which applies to anyarrangement involving items andservices, including employmentrelationships, personal servicearrangements, and rental agreements.The commenter pointed out that in theJanuary 1998 proposed rule we do notaddress the specific documentationrequirements necessary to verify anddocument that the price of an asset orthe compensation for certain servicesactually reflects the market rate. Thecommenter requested that we confirmthat internally generated surveys aresufficient for establishing the marketrate, and that there is no requirement touse an independent valuationconsultant.

Response: We agree that there is norequirement that parties use anindependent valuation consultant forany given arrangement when otherappropriate valuation methods areavailable. However, while internallygenerated surveys can be appropriate asa method of establishing fair marketvalue in some circumstances, due totheir susceptibility to manipulation andabsent independent verification, suchsurveys do not have strong evidentiaryvalue and, therefore, may be subject tomore intensive scrutiny than anindependent survey.

Special Rule for Rental Property.Under section 1877(h)(3) of the Act, fairmarket value means the value of rentalproperty for general commercialpurposes (not taking into account itsintended use). In the case of a lease ofspace, this value may not be adjusted toreflect the additional value theprospective lessee or lessor wouldattribute to the proximity orconvenience to the lessor where thelessor is a potential source of patientreferrals to the lessee. We incorporatedthis provision into the August 1995 finalrule covering referrals for clinicallaboratory services and into the January1998 proposed rule at § 411.351.Commenters raised questions about themeaning of the statutory provision.

Comment: With respect to the rentalof property, commenters questioned ourdefinition of fair market value as ‘‘thevalue of rental property for generalcommercial purposes (not taking intoaccount its intended use).’’ Thecommenters believe this language isproblematic for appraising a medicaloffice building because it requires theappraiser to compare the property to thebroad category of properties that are‘‘used for general commercialpurposes.’’ This latter category caninclude properties that are highlydissimilar in character and value. Forexample, the appraisal for medical

office property could include retail orindustrial rates. Such an approachconflicts with the fundamental principlethat appraisals should be based oncomparing properties with similarattributes.

Response: We believe that a rentalproperty meets the requirement that apayment reflect the ‘‘value of propertyfor general commercial purposes, nottaking into account its intended use’’when the payment takes into accountany costs that were incurred by thelessor in developing or upgrading theproperty, or maintaining the property orits improvements, regardless of why theimprovements were added. That is, therental payment can reflect the value ofany similar commercial property withimprovements or amenities of a similarvalue, regardless of why the propertywas improved. On the other hand, wealso believe that rental payments wouldspecifically take into account theintended use of the property if thelessee paid inflated amounts solely toenhance his or her medical practice. Forexample, rental payments by a physicaltherapist would not be fair market valuefor purposes of section 1877 of the Actif the physical therapist agreed to pay aninflated rate that was not justified byimprovements or other amenities andwas higher than the rate paid by other,similarly situated medical practitionersin the same building just because thebuilding was occupied by severalorthopedic practices.

A rental payment cannot be adjustedto reflect the additional value theprospective lessee or lessor wouldattribute to the proximity orconvenience to the lessor where thelessor is a physician and a potentialsource of patient referrals to the lessee.We interpret this requirement to allowrental payments that reflect the fairmarket value of the area in which theproperty is located, even if a lease is formedical property in a ‘‘medicalcommunity.’’ To qualify, the paymentsshould not reflect any additional value,such as an amount that is above thatpaid by other medical practitioners inthe same building or in the same or ina similar location, just because thelessor is a potential source of referralsto the lessee. That is, the rentalpayments should be roughly equivalentto those charged to similarly situatedparties in arrangements in whichreferrals are not an issue.

Also, the statute requires that therental payments not reflect theadditional value either party attributesto the proximity or convenience to thelessor where the lessor is a potentialsource of patient referrals to the lessee.The definition of a ‘‘referral’’ by a

‘‘referring physician’’ in section1877(h)(5) of the Act focuses only onactions and requests for services that areinitiated by physicians; it does notinclude any requests for servicesinitiated by entities or other providersor suppliers, nor does the referralprohibition itself apply to anything butphysician referrals. Thus, we believethat it is fair to interpret the limitationin the fair market value definition asconfined to situations in which aphysician is the lessor and a potentialsource of referrals to an entity lessee.That limitation does not appear to us toapply when an entity, such as ahospital, is the lessor that rents space tophysicians, even if the hospital is in aposition to refer to the physicians. As aresult, we believe a hospital shouldfactor in the value of proximity whencharging rent to lessee physicians.

4. Group Practice

The definition of a group practiceunder section 1877(h)(4) of the Act isaddressed in this preamble at sectionVI.C and in the regulations at § 411.352.

5. Health Professional Shortage Areas

The existing regulations coveringreferrals for clinical laboratory servicesdefine a health professional shortagearea (HPSA) for purposes of section1877 of the Act as ‘‘an area designatedas a health professional shortage areaunder section 332(a)(1)(A) of the PublicHealth Service Act for primary medicalcare professionals (in accordance withthe criteria specified in 42 CFR part 5,appendix A, part I—Geographic Areas)’’and, in addition, ‘‘an area designated asa health professional shortage areaunder section 332(a)(1)(A) of the PublicHealth Service Act for dentalprofessionals, mental healthprofessionals, vision care professionals,podiatric professionals, and pharmacyprofessionals. We proposed no changesto the existing rule.

The definition of a HPSA for purposesof Phase I of this rulemaking is intendedto track the definition of a HPSA aspromulgated by the Health ResourcesServices Administration (HRSA), whichadministers the HPSA designationprocess. HRSA has proposed revisingthe existing HPSA regulations. (See 63FR 46538; 64 FR 29831.) We havemodified the definition of a HPSA inthese regulations to track current HRSAinterpretations of the HPSA regulationsand to make clear that the definitionincorporates any future changes oramendments to HRSA’s definition of aHPSA, which is codified in 42 CFR part5.



6. Employee

We defined an ‘‘employee’’ in theexisting regulation and in the January1998 proposed regulation in § 411.351by reiterating the statute. Section1877(h)(2) of the Act specifically definesan ‘‘employee’’ of an entity as anindividual who would be considered tobe an employee under the usualcommon law rules that apply indetermining the employer-employeerelationship, as applied for purposes ofsection 3121(d)(2) of the InternalRevenue Code of 1986.

Comment: Two commentersrecommended an expansion of theproposed definition of ‘‘employee’’ toinclude ‘‘leased employees’’ to betterreflect the realities of the market place.The current definition, which referencesincome tax law, limits an employee toan individual who meets the definitionof a ‘‘common law’’ employee. But thedefinition of a common law employeedoes not include leased employees, whoare defined by State law and have aquasi-common law status.

Response: We do not believe we havethe authority to expand the definition ofemployee that appears in the law. It isour understanding that leasedemployees are essentially regarded bythe courts, the IRS, and Federallegislators as ‘‘contingent employees.’’Contingent workers are generallydescribed as workers who are not partof the employer’s regular work force, butare hired to meet certain needs. Theseworkers are technically employed by anentity other than the one for whom theservices are performed. Other types ofcontingent workers includeindependent contractors andconsultants.

A leased employee is defined insection 414(n) of the Internal RevenueService Code as an individual whoperforms services under an agreementbetween the service recipient and aleasing/staffing organization; performsservices under the primary direction orcontrol of the service recipient; andperforms services for the servicerecipient on a substantially full-timebasis for a 12-month period. Thelabeling of a worker as a leasedemployee under a leasing/staffingarrangement does not mean that theworker will be defined as a ‘‘leasedemployee’’ under section 414(n) of theInternal Revenue Code for employeebenefit plan purposes. The IRSdetermines the common lawemployment relationship between aworker and an organization byanalyzing the facts and circumstances ofeach particular situation. The IRS usesguidelines, in the form of a list of

factors, for classifying workers as eitheremployees or independent contractors,in order to determine whether there isactually an employer/employeerelationship. We would regard anyleased employee that qualifies as an‘‘employee’’ under the IRS test as anemployee for purposes of section 1877of the Act.

7. Immediate Family MembersThe referral prohibition in section

1877(a) of the Act states that if aphysician, or immediate family member,has a financial relationship with anentity, the physician cannot refer aMedicare patient to that entity for thefurnishing of DHS, unless an exceptionapplies. In the August 1995 final rule,we listed in § 411.351 the individualswho qualify as a physician’s‘‘immediate’’ family members. Theseindividuals include a husband or wife;natural or adoptive parent, child, orsibling; stepparent, stepchild,stepbrother, or stepsister; father-in-law,mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law;grandparent or grandchild; and spouseof a grandparent or grandchild. Weadopted this definition without anychanges in the January 1998 proposedrule.

We did not receive any comments onthis definition. We did receivecomments that relate to whetherphysicians should be precluded fromreferring to people who qualify asmembers of their immediate family. Wehave addressed these comments insection VI.B of this preamble. Toconform to common usage, we haveamended the definition to substitute theterm ‘‘birth’’ for ‘‘natural’’ parent.

8. ReferralThe definition of ‘‘referral’’ is

addressed in this preamble in section IIIand in § 411.351 of the regulations.

9. Remuneration and the Exceptions inSection 1877(h)(1)(C) of the Act

The definition of ‘‘remuneration’’ insection 1877(h)(1)(B) of the Act isdrafted broadly to include ‘‘anyremuneration, directly or indirectly, incash or in kind.’’ However, a‘‘compensation arrangement’’ is definedin paragraph (h)(1)(A) of section 1877 ofthe Act to specifically exclude variouskinds of remuneration that are listed inparagraph (h)(1)(C) of section 1877 ofthe Act. These are arrangementsinvolving only the followingremuneration:

(i) the forgiveness of amounts owed forinaccurate tests or procedures, mistakenlyperformed tests or procedures, or thecorrection of minor billing errors;

(ii) the provision of items, devices, orsupplies that are used solely to—

(I) collect, transport, process, or storespecimens for the entity furnishing the item,device, or supply, or

(II) to order or communicate the results oftests or procedures for such entity.

(iii) a payment made by an insurer or aself-insured plan to a physician to satisfy aclaim, submitted on a fee for service basis, forthe furnishing of health services by thatphysician to an individual who is covered bya 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 acontract or other arrangement between theinsurer or the plan and the physician,

(II) the payment is made to the physicianon behalf of the covered individual andwould otherwise be made directly to theindividual,

(III) the amount of the payment is set inadvance, does not exceed fair market value,and is not determined in a manner that takesinto account directly or indirectly the volumeor value of any referrals, and

(IV) the payment meets such otherrequirements as the Secretary may impose byregulation as needed to protect againstprogram or patient abuse.

We incorporated these exclusionsfrom the definition of ‘‘remuneration’’into the August 1995 final rule and intothe January 1998 proposed rule in§ 411.351. We interpreted the exclusionsin the January 1998 proposed rule at 63FR 1693 through 1694 to mean that theportion of any business arrangementthat consists of the remuneration listedin paragraph (h)(1)(C) of section 1877 ofthe Act alone does not constitute acompensation arrangement. The finalregulation adopts our proposedregulations text and incorporatesexpressly the interpretation applicableto arrangements that include portions ofremuneration that meet the exclusionsin section 1877 (h)(1)(C) of the Act.

a. Minor Billing Errors.Comment: One commenter, in

referring to the exclusion fromremuneration of forgiveness for amountsdue to corrections of minor billingerrors, stated that even a ‘‘minor’’ billingerror might have large dollarconsequences, particularly if the sameminor mistake were repeated onnumerous bills. This could easilyhappen because virtually all bills arenow computer-generated. Thecommenter stated that the term ‘‘minor’’should refer to the type of error, ratherthan the sum of money that may beinvolved.

Response: We agree with thecommenter’s suggestion that a ‘‘minor’’billing error could have large dollarconsequences, particularly in situationsin which bills are computer generated.We also agree that the term ‘‘minor’’



should refer to the kind of billing errorrather than the sum of money involved.Therefore, we are interpreting ‘‘minorbilling errors’’ to cover isolated orinfrequent instances in which anadministrative error, such as atypographic, keying, or othertranscribing error, results in an incorrectcharge or bill. On the other hand, apattern of similar or consistent billingerror ‘‘corrections’’ may suggestimproper remuneration and subject thebusiness arrangement to scrutiny.

b. Medicare as an Insurer.Section 1877(h)(1)(C)(iii) of the Act

‘‘excepts’’ from the definition of acompensation arrangement situationsinvolving payments made by an insureror self-insured plan to a physician. Thepayments must satisfy a physician’s fee-for-service claim for furnishing healthservices to an individual who is coveredby a policy with the insurer or the self-insured plan.

Comment: One commenter askedwhether the term ‘‘insurer’’ includes theMedicare program. The commenterbelieves that Medicare is includedwithin the meaning of the term‘‘insurer,’’ and cited for supportreferences in the preamble, as well asthe designation of Medicare in the Actas ‘‘Health Insurance for the Aged andDisabled.’’

Response: In the preamble to theJanuary 1998 proposed rule at 63 FR1694, we pointed out that we believedthis provision was designed forsituations in which an insurer is alsoinvolved in the delivery of health careservices. If the insurer owns a healthcare facility, a physician mightotherwise be precluded from referring tothat facility just because the physicianreceives compensation from the insurerin the form of payments that satisfy thephysician’s claims.

The Medicare program is not directlyinvolved in the delivery of services, butis simply a payer of services; that is,Medicare never actually furnishesservices to program patients but pays forclaims from providers and suppliers ormakes payments to managed careorganizations. The physician self-referral law is only implicated if aphysician refers a patient to an entity forDHS and the physician has anownership or investment interest in theentity or receives direct or indirectremuneration from the entity. Since aphysician would never refer a patient tothe Medicare program to receive adesignated health service, thesepayments from Medicare to a physicianare totally irrelevant under this law.

c. Items, Devices, or Supplies UsedSolely To Collect Specimens.

Comment: One commenter thoughtthere was a possible inconsistency inthe preamble to the January 1998proposed rule in the section discussingwhether biopsy needles are excludedfrom the definition of remunerationunder section 1877(h)(1)(C)(ii) of theAct. Section 1877(h)(1)(C)(ii) of the Actcovers items, devices, or supplies thatare used solely to collect, transport,process, or store specimens for theentity providing the items, devices, orsupplies. First, the commenter notedour conclusion at 63 FR 1693 through1694 that biopsy needles do notfunction solely as specimen collectiondevices and therefore are categoricallyexcluded from ‘‘items, devices, orsupplies that are used solely’’ forspecimen collection purposes. In otherwords, biopsy needles may constituteremuneration under section 1877 of theAct. This discussion is followed in thepreamble by a statement that any items,supplies, or devices provided to aphysician must be used solely inconnection with specimens sent by thephysician to the entity that supplied theitems, devices, or supplies. Accordingly,the preamble indicates that the numberof items, supplies, or devices furnishedshould not exceed the number ofspecimens sent to the laboratory forprocessing. The commenter suggestedthat the proximity and sequence of thesediscussions in the preamble has causedconfusion in the industry; some haveconcluded that, regardless of the firstdiscussion and conclusion, biopsyneedles might not constituteremuneration if the number of biopsyneedles provided by a laboratory wereto correlate to the number of biopsyspecimens sent to the laboratory.

The commenter urged us to adopt theview that biopsy needles are surgical ormedical devices, rather than items,devices, or supplies solely used forspecimen collection purposes in allcases. The commenter noted that thisinterpretation would be consistent withstatements made by the OIG that the freeprovision of biopsy needles from alaboratory to a physician would besuspect under the anti-kickback statutebecause the needles have independentvalue to the physician as a surgicaldevice used in surgical procedures. (Seethe letter dated August 4, 1997,available on the OIG website at http://www.dhhs.oig/gov.) A secondcommenter concurred with thisconclusion, and suggested that the sameanalysis should apply to other surgicalor medical devices that may be usedduring a procedure to collect specimens,but have independent value to

physicians, such as snares and reusableaspiration and injection needles.

Response: We agree with the firstcommenter that the proximity andsequence of our discussion of this topicin the preamble might have beenconfusing. We wish to clarify our viewson the ‘‘items, devices, and supplies’’provision here. First, in enacting section1877(h)(1)(C)(ii) of the Act, we believethat the Congress did not intend toallow laboratories to supply physicianswith surgical instruments for free orbelow fair market value prices. Rather,we believe the Congress intended toinclude in this section items, supplies,and devices of low value, such as singleuse needles, vials, and specimen cups,that are primarily provided bylaboratories to physicians to ensureproper collection of specimens forprocessing at the laboratory and thathave little, if any, independenteconomic value to the physicians whoreceive them. In many cases, the cost ofthese items may already be included inthe practice expense portion of theMedicare payment made to thephysician. In addition, to the extent theitems are reusable, they may have valueunrelated to the collection of specimensfor processing by the laboratoryproviding the items. The provision ofsuch items for free or below fair marketvalue poses a risk that the items mayconstitute compensation from thelaboratories for the physician’s referralsand increase the risk of overutilization.Accordingly, biopsy needles and likedevices, such as snares and reusableaspiration and injection needles, arecategorically excluded from the items,devices, and supplies covered bysection 1877(h)(1)(C)(ii) of the Act,although arrangements for providingsuch items may be structured to fit intothe exception for payments by aphysician for items and services to anentity if the items or services arefurnished at a price that is consistentwith fair market value. (See section1877(e)(7) of the Act and § 411.357(i).)This view is consistent with theguidance published by the OIG noted inthe preceding comment.

The discussion of the correlation ofthe number of supplies to the number ofspecimens sent to the laboratory has noapplication to biopsy needles and otherdevices that fall outside section1877(h)(1)(C)(ii) of the Act. As to thosesingle use, low value items, devices, andsupplies that come within the scope ofsection 1877(h)(1)(C)(ii) of the Act, thefact that the number of suppliesprovided to a physician approximatesthe number of specimens sent by thephysician to the laboratory providing



the supplies is merely one indicator thatthe supplies have been provided inconnection with specimen collection forthe entity providing the supplies. Thenumerical correlation is not a statutoryor regulatory requirement. However, theprovision of an excessive number ofsupplies creates an inference that thesupplies are not provided solely tocollect, transport, process, or storespecimens for the entity providingthem.

Comment: A commenter noted thatcertain supplies that are used inconnection with the collection ofspecimens, such as gloves, can also beused by a physician for other purposes.Since the laboratory cannot guaranteethat the gloves it supplies are used bythe physician only for collectingspecimens, the commenterrecommended that the laboratorymonitor the volume of the itemssupplied. The commenter asserted thatif the number of gloves supplied equals,or is close to, the number needed for thecollection of specimens by thisphysician, we should consider theconditions in the exception in section1877(h)(1)(C)(ii) of the Act to have beenmet.

Response: While we recognize thatsterile gloves are essential to the propercollection of specimens, we believe theyare not items, devices, or supplies usedsolely to collect, transport, process, orstore specimens. To be sure, sterilegloves are essential to the specimencollection process, but their mainfunction is to prevent infection orcontamination. Also, sterile gloves arefungible, general purpose suppliestypically found in a physician’s officeand used for a wide range ofexaminations and procedures. Webelieve it would be impractical forphysicians’ offices to monitor andregulate the use of gloves so as to limittheir use to the collection of specimensfor the laboratory that provided them.Accordingly, we believe the provision offree gloves is remuneration subject tothe general prohibition of section 1877of the Act, in the absence of anapplicable exception.

Comment: A commenter questionedhow a laboratory should measure thevolume of specimen collection suppliesit provides to a new physician or groupclient with whom it has no experience.In such a situation, the commenterbelieves the laboratory should beallowed to rely on the anticipatedvolume of services, until an actualpattern of referral can be established, tomeet the requirement that itemsfurnished by the laboratory beconsistent with the number of testsreferred to the laboratory.

Response: As noted above, there is noexplicit requirement in the statute thatthe volume of supplies provided by alaboratory correlate with the volume ofspecimens sent to the laboratory forprocessing. Rather, a correlation is oneindicator that the provision of thesupplies meets the requirement thatthey be used to collect, transport,process, or store specimens for thelaboratory that provided them and thatthe supplies are not for the physician’sgeneral office use. We understand thata laboratory may not have a pattern ofreferrals on which to base the provisionof items, devices, and supplies to a newphysician or group practice client. Inthese instances, the laboratory may electto provide supplies based on thenumber of tests typically ordered byphysicians or group practices of liketype and size in that community untilthe physician or group practiceestablishes a pattern of referrals with thelaboratory sufficient to determine theappropriate number of supplies. Thelaboratory or physician should beprepared to demonstrate that the items,devices, or supplies were furnishedbased on a community standard and todescribe the standard.

Comment: One commenter asked thatwe clarify how section 1877 of the Actapplies to a clinical laboratory’sprovision of a phlebotomist to aphysician, group practice, or ESRDfacility without charge to the physician,group, or ESRD facility.

Response: Under section 1877(h)(1)(B)of the Act, remuneration includes ‘‘anyremuneration, directly or indirectly,overtly or covertly, in cash or in kind,’’with the exception of certain items ofpotential value listed in section1877(h)(1)(C) of the Act. The provisionof personnel, such as a phlebotomist,does not fit in any category listed insection 1877(h)(1)(C). Thus, theprovision of a phlebotomist, asdescribed by the commenter, mayconstitute remuneration, and thereforecreate a compensation arrangement, forpurposes of section 1877 of the Act.Whether a particular phlebotomistarrangement confers a benefit on aphysician or group practice depends onthe specific facts and circumstances.(The provision of a phlebotomist to anESRD facility would not implicatesection 1877 of the Act, unless thearrangement conferred a direct orindirect benefit on a physician orphysician group; such laboratory-ESRDfacility arrangements may implicate theanti-kickback statute.)

The OIG has issued a special fraudalert addressing the provision of freegoods and services to physicians underthe anti-kickback statute, 59 FR 242

(December 9, 1994). We believe thefraud alert is instructive here.Discussing the issue of laboratoryphlebotomists placed in physicians’offices, it observes:

When permitted by State law, a laboratorymay make available to a physician’s office aphlebotomist who collects specimens frompatients for testing by the outside laboratory.While the mere placement of a laboratoryemployee in the physician’s office would notnecessarily serve as an inducementprohibited by the anti-kickback statute, thestatute is implicated when the phlebotomistperforms additional tasks that are normallythe responsibility of the physician’s officestaff. These tasks can include taking vitalsigns or other nursing functions, testing forthe physician’s office laboratory, orperforming clerical services. Where thephlebotomist performs clerical or medicalfunctions not directly related to thecollection or processing of laboratoryspecimens, a strong inference arises that heor she is providing a benefit in return for thephysician’s referrals to the laboratory. Insuch a case, the physician, the phlebotomist,and the laboratory may have exposure underthe anti-kickback statute. This analysisapplies equally to the placement ofphlebotomists in other health care settings,including nursing homes, clinics andhospitals. Furthermore, the mere existence ofa contract between the laboratory and thehealth care provider that prohibits thephlebotomist from performing servicesunrelated to specimen collection does noteliminate the OIG’s concern, where thephlebotomist is not closely monitored by his[or her] employer or where the contractualprohibition is not rigorously enforced.

Like the OIG, we believe that if thephlebotomist is purely performinglaboratory functions for the laboratorythat places the phlebotomist, then therewould be no remuneration to thephysician or group practice (that is, nocompensation arrangement). Put anotherway, there would be no services to thephysician or group for which theyshould pay. However, if thephlebotomist performs services that arenot directly related to the collection orprocessing of laboratory specimens forthe laboratory that has provided thephlebotomist, he or she may beproviding a benefit to the physician orgroup practice, thus creating acompensation arrangement between thephysician and the clinical laboratorythat furnished the phlebotomist. Sucharrangements may be structured to fit inan exception to section 1877 of the Act,such as the personal servicearrangements exception, the fair marketvalue exception, or the exception forpayments by physicians for items orservices.

Comment: Another commenter askedthat we establish a clear standardgoverning the use by ESRD facilities of



personnel from a clinical laboratory.The commenter recommended thatemployees of clinical laboratories onlybe allowed to perform duties directlyassociated with collecting and preparingspecimens, and making test resultsavailable to the ESRD facility. Activitiesinvolved in ESRD facilityadministration, patient care, or handlingof specimens or data from otherlaboratories would not be allowed.

Response: As noted above, theprovision of a phlebotomist to an ESRDfacility would not implicate section1877 of the Act unless the arrangementbenefits a physician or physician group.

Comment: One commenter inquiredwhether a laboratory may providemedical waste disposal supplies andservices to physicians free of charge.The commenter asserted that theservices would be provided only formedical waste generated in connectionwith the collection, transportation,processing, or storage of specimens.

Response: Section 1877(h)(1)(C)(ii) ofthe Act excludes from the definition ofa compensation arrangementremuneration that consists of ‘‘theprovision of items, devices, or suppliesthat are used solely to—(I) collect,transport, process, or store specimensfor the entity providing the item, device,or supply * * *. ’’ The provision doesnot specifically allow laboratories tofurnish physicians and group practiceswith medical waste disposal suppliesand services at no charge. However, webelieve that supplies and the disposal ofitems used solely in connection with thecollection of specimens for this clinicallaboratory are part of the process thelaboratory engages in when it collects,transports, and processes specimens. Ifa laboratory can provide a needle forcollection and it can take away thespecimen, we believe that the laboratorycan also take away the needle and otheritems that are used in the process.However, we do not believe thisexception covers the disposal of needlesor other waste items that have been usedby the physician practice for otherpurposes.

IX. Collection of InformationRequirements

Under the Paperwork Reduction Actof 1995 (PRA), agencies are required toprovide a 30-day notice in the FederalRegister and solicit public commentwhen a collection of informationrequirement is submitted to the Office ofManagement and Budget (OMB) forreview and approval. To fairly evaluatewhether an information collectionshould be approved by OMB, section3506(c)(2)(A) of the PRA requires that

we solicit comments on the followingissues:

• Whether the information collectionis necessary and useful to carry out theproper functions of the agency;

• The accuracy of the agency’sestimate of the information collectionburden;

• The quality, utility, and clarity ofthe information to be collected; and

• Recommendations to minimize theinformation collection burden on theaffected public, including automatedcollection techniques.Therefore, we are soliciting publiccomment on each of these issues for theinformation collection requirementsdiscussed below.

Section 411.352 Group Practice

Paragraph (d) requires that, except asprovided in paragraphs (d)(2) and (d)(3)of this section, substantially all of thepatient care services of the physicianswho are members of the group (that is,at least 75 percent of the total patientcare services of the group practicemembers) must be furnished throughthe group and billed under a billingnumber assigned to the group; theamounts received must be treated asreceipts of the group; and ‘‘patient careservices’’ must be measured anddocumented by any reasonable means(including, but not limited to, timecards, appointment schedules, orpersonal diaries) or any alternativemeasure that is reasonable, fixed inadvance of the performance of theservices being measured, uniformlyapplied over time, verifiable, anddocumented.

While this requirement is subject tothe PRA, the burden associated with itis exempt from the PRA because itmeets the requirements set forth in 5CFR 1320.3(b)(2) and/or (b)(3) and 5CFR 1320.4(a).

Paragraph (i) requires that supportingdocumentation verifying the methodused to calculate the profit shares orproductivity bonus under paragraphs(i)(2) and (i)(3) of this section, and theresulting amount of compensation, mustbe made available to the Secretary uponrequest.


Section 411.354 FinancialRelationship, Compensation, andOwnership or Investment Interest

Paragraph (d) requires that, whenspecial rules are applied tocompensation under section 1877 of the

Act and under these regulations insubpart J of this part, the compensationwill be considered ‘‘set in advance’’ ifthe aggregate compensation or a time-based or per unit of service-based(whether per-use or per-service) amountis set in advance in the initialagreement, in writing, between theparties in sufficient detail so that it canbe objectively verified, and meets theterms and conditions of this section.


Section 411.355 General Exceptions tothe Referral Prohibition Related to BothOwnership/Investment andCompensation

Paragraph (e) requires that therelationship of the components of theacademic medical center must be setforth in a written agreement that hasbeen adopted by the governing body ofeach component.


Section 411.357 Exceptions to theReferral Prohibition Related toCompensation Arrangements

Paragraph (l) requires thatcompensation resulting from anarrangement between an entity and aphysician (or an immediate familymember) or any group of physicians(regardless of whether the group meetsthe definition of a group practice setforth in § 411.351) for the provision ofitems or services by the physician (or animmediate family member) or grouppractice to the entity, must be set forthin an agreement, be in writing, and meetthe conditions of the section.


Paragraph (p) requires that, forindirect compensation arrangements, asdefined in § 411.354(c)(2), thecompensation described in§ 411.354(c)(2)(ii) is part of anarrangement that is set out in writingand meets all of the conditions andrequirements set forth in this section.

While this requirement is subject tothe PRA, the burden associated with itis exempt from the PRA because itmeets the requirements set forth in 5



CFR 1320.3(b)(2) and/or (b)(3) and 5CFR 1320.4(a).

We have submitted a copy of this finalrule to OMB for its review of theinformation collection requirements in§§ 411.352, 411.354, 411.355, and411.357. These requirements are noteffective until they have been approvedby OMB.

If you have any comments on any ofthese information collection and recordkeeping requirements, please mail theoriginal and 3 copies within 30 days ofthis publication date directly to thefollowing:Office of Information and Regulatory

Affairs, Office of Management andBudget, Room 10235, New ExecutiveOffice Building, Washington, DC20503, Attn: Allison Heron Eydt,HCFA Desk Officer; and

Health Care Financing Administration,Office of Information Services,Information Technology InvestmentManagement Group, Division ofHCFA Enterprise Standards, RoomN2–14–26, 7500 Security Boulevard,Baltimore, MD 21244–1850, Attn:John Burke HCFA–1809.

X. Regulatory Impact Statement

A. Overall Impact

We have examined the impacts ofPhase I of this rulemaking as requiredby Executive Order 12866 (September1993, Regulatory Planning and Review)and the Regulatory Flexibility Act (RFA)(Pub. L. 96–354, enacted September 19,1980). Executive Order 12866 directsagencies to assess all costs and benefitsof available regulatory alternatives and,if regulation is necessary, to selectregulatory approaches that maximizenet benefits (including potentialeconomic, environmental, public healthand safety effects, distributive impacts,and equity). A regulatory impactanalysis (RIA) must be prepared formajor rules with economicallysignificant effects ($100 million or moreannually). We do not believe that PhaseI of this rulemaking is a major rule thatwill have an economically significanteffect. We have no way of determiningwith any certainty the aggregate amountof savings or costs Phase I of thisrulemaking will impose, but do notbelieve it will approach $100 million ormore annually.

The RFA requires agencies to analyzeoptions for regulatory relief of smallbusinesses. For purposes of the RFA,small entities include small businesses,nonprofit organizations and governmentagencies. Most hospitals and most otherproviders and suppliers are smallentities, either by nonprofit status or byhaving revenues of $5 million or less

annually. For purposes of the RFA, mostphysician practices are considered to besmall entities. Individuals and States arenot included in the definition of a smallentity.

In addition, section 1102(b) of the Actrequires us to prepare an RIA if a rulemay have a significant impact on theoperations of a substantial number ofsmall rural hospitals. This analysis mustconform to the provisions of section 604of the RFA. For purposes of section1102(b) of the Act, we define a smallrural hospital as a hospital that islocated outside of a MetropolitanStatistical Area and has fewer than 50beds. We do not believe Phase I of thisrulemaking will have a significantimpact on the operations of a substantialnumber of small rural hospitals.

Section 202 of the UnfundedMandates Reform Act of 1995 alsorequires that agencies assess anticipatedcosts and benefits before issuing anyrule that may result in an expenditurein any 1 year by State, local, or tribalgovernments, in the aggregate, or by theprivate sector, of $100 million. Phase Iof this rulemaking will not have such aneffect on the governments mentioned,and we do not believe the private sectorcosts will meet the $100 millionthreshold.

Executive Order 13132 establishescertain requirements that an agencymust meet when it promulgates aproposed rule (and subsequent finalrule) that imposes substantial directrequirement costs on State and localgovernments, preempts State law, orotherwise has Federalism implications.We do not anticipate that Phase I of thisrulemaking will have a substantial effecton State or local governments.

B. Anticipated EffectsWe stated in the impact analysis in

the January 1998 proposed rule that anyestimate of the individual or aggregateeconomic impact of the provisions ofthe final rule would be purelyspeculative. We explained that we couldnot gauge with any certainty the numberof physicians and entities that would beaffected, or the extent of any changesthey would have to make to complywith the rule. As we noted in theJanuary 1998 proposed rule at 63 FR1716, various studies have indicatedthat the degree of conflict of interestpresented by a physician’s investmentin entities to which he or she referspatients is unknown. We pointed outthat ownership information orinformation on the compensationarrangements between physicians andall of their immediate family membersand the entities that furnish any of 11DHS constitutes an enormous amount of

data that is continually subject tochange. We also expected that theAmerican Medical Association’sdeclaration that self-referrals areunethical outside of a physician’spractice, in conjunction with State lawsrestricting or qualifying self-referralsand the referral prohibition undersection 1877 of the Act itself, havealready led to a decline in self-referralactivity and financial relationshipsbetween physicians and entities.However, we lack the data necessary toeither confirm or refute thissupposition. We also lack data thatwould tell us how many of the financialrelationships that physicians have witha furnishing entity would already beexempted under the statute.

We stated that, although theprovisions in the rule do not lendthemselves to a quantitative impactestimate, we did not anticipate that theywould have a significant economicimpact on a substantial number of smallentities. We based this assessment onthe many exceptions in the rule(including a broad exception forownership in rural entities), as well asthe actions parties can take to revisetheir business arrangements to avoid thereferral prohibition. We still believe thisto be the case. In fact, we expect thatPhase I of this rulemaking will have amuch smaller impact than theprovisions that we proposed. However,because Phase I of this rulemaking mayhave significant effects on some healthcare practitioners, or be viewed ascontroversial, we wish to inform thepublic of what we regard as the possiblemajor effects of Phase I of thisrulemaking.

We stated in the January 1998proposed rule that we expected thatphysicians who refer Medicare patientsfor DHS and entities that furnish DHS,including hospitals, would be theparties that are primarily affected bythis rule. In response to comments onthe January 1998 proposed rule, wehave liberalized a wide variety of theprovisions that could affect theseparties. We have tried to create a moremanageable regulation that includes‘‘bright line’’ rules to help the healthcare community determine more easilywhen a physician’s referrals are incompliance with the law. We have madenumerous changes to the rule to try tomold it around existing businesspractices, and have attempted toreinterpret the law so that it has a morepractical and realistic effect onphysicians and the entities that provideDHS. The result, we believe, is anoverall approach that should have farless impact on the businessrelationships of individuals and entities



than the provisions of the January 1998proposed rule. We discuss below someof the major issues affecting physiciansand furnishing entities. We also brieflydiscuss the effects of the rule onMedicare beneficiaries.

1. Effects on PhysiciansA physician can be financially related

to an entity either through an ownershipor investment interest in the entity, orthrough a compensation arrangementwith the entity. A physician who has (orwhose immediate family member has) afinancial relationship with an entity thatdoes not qualify for an exception isprohibited from referring Medicarepatients to that entity for the provisionof DHS. Also, when a physician withsuch a relationship makes a prohibitedreferral, there is a risk that the entitywill receive no Medicare payment forthose DHS. These provisions can have asignificant effect on the businessarrangements in which a physician willparticipate and the manner in which thephysician will structure his or herpractice.

The potential impact of the regulationon physicians and other individualparties was revealed to us by thevoluminous comments from the publicand health care community we receivedin response to the January 1998proposed rule. In addition to specificcomplaints and objections, thecommenters expressed a number ofgeneral concerns, including that theproposed regulation inappropriatelyintruded into the organization anddelivery of medical care withinphysicians’ offices; that the regulationin many respects was counter to ourother longstanding policies on coverageand similar issues; that the rule wasunclear in many areas and that in lightof the severe penalty (that is, paymentdenial), ‘‘bright line’’ rules wereessential; and that some aspects of theproposed rule, such as its treatment ofindirect financial relationships, wereadministratively impractical or wouldhave been prohibitively costly in termsof monitoring compliance.

We believe Phase I of this rulemakingsubstantially addresses the concernsraised by the commenters and yet isconsistent with the statute. Phase I ofthis rulemaking clarifies the definitionsof DHS; substantially broadens the in-office ancillary services exception(which allows physicians to refer withintheir own practices) by easing thecriteria for qualifying as a group practiceand conforming the supervisionrequirements to our coverage and otherpayment policies; permits sharedfacilities in the same building wherephysicians routinely provide services

that are neither Federal nor private payDHS; excludes from the definition of‘‘referral’’ services personally performedby the referring physician; expands thein-office ancillary services exception tocover certain DME provided to patientsin physicians’ offices; creates a newexception for compensation of faculty inacademic medical centers; and clarifieswhen a managed care organization(MCO) is an entity furnishing DHS. Allof these issues are described in greaterdetail elsewhere in the preamble, alongwith a number of lesser issues thatcould affect physicians.

2. Effects on Other ProvidersAs we stated above, Phase I of this

rulemaking affects entities that furnishDHS by preventing them from receivingpayment for services that they furnish asthe result of a physician’s prohibitedreferral. Entities can also be subject tovarious other sanctions, including finesand exclusion from Federal health careprograms if they knowingly submit aclaim in violation of the prohibition. Welack the data to determine the numberof entities that could be affected byPhase I of this rulemaking. However, webelieve they will be fewer in numberthan we had anticipated in the January1998 proposed rule because, as wedescribed above, physicians will havefar more leeway to refer.

3. Effects on the Medicare and MedicaidPrograms

Section 1877 of the Act was enactedprimarily to address overutilization ofhealth care services covered byMedicare. We have tried to focus PhaseI of this rulemaking on financialrelationships that may result inoverutilization. We expect that Phase Iof this rulemaking will result in savingsto the program by providing physiciansand entities with ‘‘bright line’’ rules onhow to avoid the prohibited referralsthat can result in overutilization ofcovered services. We cannot gauge withany certainty the extent of these savingsto the program at this time. (We willdiscuss the effects on the Medicaidprogram in Phase II of this rulemaking.)

4. Effects on BeneficiariesSome commenters thought the

January 1998 proposed regulationsexceeded our statutory authority andimposed unnecessary and costlyburdens on physicians that would harmpatient access to health care facilitiesand services. In Phase I of thisrulemaking, we have tried to ensure thatthe rule will not adversely impact themedical care of Federal health carebeneficiaries or other patients. Wherewe have determined that Phase I of this

rulemaking may impact currentarrangements under which patients arereceiving medical care, we haveattempted to verify that there are otherways available to structure thearrangement, so that patients couldcontinue to receive the care in the samelocation. In almost all cases, we believePhase I of this rulemaking should notrequire substantial changes in deliveryarrangements, although it may affect thereferring physician’s or group practice’sability to bill for the care.

In addition, we have significantlyexpanded the scope of servicespotentially included in the in-officeancillary services exception and thusreadily available to a referringphysician’s patients by: (1) Making clearthat outpatient prescription drugs maybe ‘‘furnished’’ in the office, even if theyare used by the patient at home; (2)explicitly permitting externalambulatory infusion pumps that areDME to be provided under the in-officeancillary services exception; (3) makingclear that chemotherapy infusion drugsmay be provided under the in-officeancillary services exception through theadministration or dispensing of thedrugs to patients in the physician’soffice; and (4) creating a new exceptionfor certain items of DME furnished in aphysician’s office for the convenience ofthe physician’s patients.

C. Alternatives ConsideredIn drafting the January 1998 proposed

rule covering a physician’s referrals forDHS, we attempted to interpret thestatute strictly and literally. Afterreviewing the voluminous number ofcomments we received, we haveconsidered many alternative ways tointerpret the statute to accommodate thepractical problems that commentersraised, while still fulfilling the intent ofthe law. For example, we revised the‘‘same building’’ requirements in the in-office ancillary services exception toaddress commenters’ concerns. Undersection 1877(b)(2)(A)(ii)(I) of the Act,services qualify for the in-officeancillary services exception if they arefurnished ‘‘in a building in which thereferring physician (or anotherphysician who is a member of the samegroup practice) furnishes physicianservices unrelated to the furnishing ofdesignated health services.’’ In theJanuary 1998 proposed rule, we made itclear that we regarded the buildingrequirement of the in-office ancillaryservices exception, in combination withthe supervision and billingrequirements, as the Congress’s attemptto circumscribe the exception so that itapplies only to services provided withinthe referring physician’s actual sphere



of practice. Without these requirements,physicians could refer to, and profitfrom, almost any entity, with the claimthat somehow the referred services are‘‘in-office’’ services that are beingsupervised from some remote place.

Notwithstanding, we now realize thatour proposed definition of a ‘‘building’’that attempted to define a building inarchitectural terms could cause practicalproblems for some physicians and thata clearer, ‘‘bright line’’ rule would bepreferable. Accordingly, havingconsidered the various alternativessuggested by the commenters, weconcluded that for purposes of Phase Iof this rulemaking, we would define a‘‘building’’ as a structure with, orcombination of structures that share, asingle street address as assigned by theU.S. Postal Service. A building wouldbe considered as one building for allsuites or room numbers located insidethat are required by the U.S. PostalService to use the same street address,regardless of the suite number. UnderPhase I of this rulemaking, suites usedby the same group practice or solophysician in buildings with separatestreet addresses will be treated asseparate buildings for the purposes ofthe in-office ancillary servicesexception. While we recognize that thismailing address rule may result in anoccasional anomaly, we are persuadedthat it creates a ‘‘bright line’’ rule thatwill be easy to apply and will producefair results in the vast majority of cases.

We have also responded to thecommenters’ numerous concerns thatthe space in the building in which theDHS are provided must be adjacent tothe space in which services that are notDHS are provided. We have revised theregulation so that an adjacent space isno longer necessary (subject to thedictates of any Medicare or Medicaidpayment or coverage supervision rules).Shared facilities in the same buildingare now permitted to the extent theycomply with the supervision, location,and billing requirements of the in-officeancillary services exception. However,because of the increased risk of abuse inthis expansion, we felt that we couldnot protect DHS provided by mobilevans or other mobile facilities under thein-office ancillary services exception,except in very limited circumstances.

As these examples demonstrate, ourapproach in Phase I of this rulemakingwas to address as many of the industry’sconcerns as possible. We considered avariety of suggestions and alternatives,selecting only those that were consistentwith the statute’s goals and directives,and that would protect Federal healthcare program beneficiaries’ access toservices.

D. ConclusionFor the reasons stated above, we are

not preparing analyses for either theRFA or section 1102(b) of the Actbecause we have determined, and wecertify, that Phase I of this rulemakingwill not have a significant economicimpact on a substantial number of smallentities or a significant impact on theoperations of a substantial number ofsmall rural hospitals.

In accordance with the provisions ofExecutive Order 12866, Phase I of thisrulemaking was reviewed by the Officeof Management and Budget.

List of Subjects

42 CFR Part 411Kidney diseases, Medicare, Physician

referral, Reporting and recordkeepingrequirements.

42 CFR Part 424Emergency medical services, Health

facilities, Health professions, Medicare.For the reasons set forth in the

preamble, HCFA amends 42 CFRchapter IV as set forth below:

PART 411—EXCLUSIONS FROMMEDICARE AND LIMITATIONS ONMEDICARE 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 and1395hh).

Subpart A—General Exclusions andExclusions of Particular Services

2. In § 411.1, paragraph (a) is revisedto read as follows:

§ 411.1 Basis and scope.(a) Statutory basis. Sections 1814(a)

and 1835(a) of the Act require that aphysician certify or recertify a patient’sneed for home health services but, ingeneral, prohibit a physician fromcertifying or recertifying the need forservices if the services will be furnishedby an HHA in which the physician hasa significant ownership interest, or withwhich the physician has a significantfinancial or contractual relationship.Sections 1814(c), 1835(d), and 1862 ofthe Act exclude from Medicare paymentcertain specified services. The Actprovides special rules for payment ofservices furnished by the following:Federal providers or agencies (sections1814(c) and 1835(d)); hospitals andphysicians outside of the U.S. (sections1814(f) and 1862(a)(4)); and hospitalsand SNFs of the Indian Health Service(section 1880 of the Act). Section 1877

of the Act sets forth limitations onreferrals and payment for designatedhealth services furnished by entitieswith which the referring physician (oran immediate family member of thereferring physician) has a financialrelationship.* * * * *

Subpart J—Physician Ownership of,and Referral of Patients or LaboratorySpecimens to, Entities FurnishingClinical Laboratory or Other HealthServices

3. Section 411.350 is revised to readas follows:

§ 411.350 Scope of subpart.(a) This subpart implements section

1877 of the Act, which generallyprohibits a physician from making areferral under Medicare for designatedhealth services to an entity with whichthe physician or a member of thephysician’s immediate family has afinancial relationship.

(b) This subpart does not provide forexceptions or immunity from civil orcriminal prosecution or other sanctionsapplicable under any State laws orunder Federal law other than section1877 of the Act. For example, althougha particular arrangement involving aphysician’s financial relationship withan entity may not prohibit the physicianfrom making referrals to the entityunder this subpart, the arrangement maynevertheless violate another provisionof the Act or other laws administered byHHS, the Federal Trade Commission,the Securities and ExchangeCommission, the Internal RevenueService, or any other Federal or Stateagency.

(c) This subpart requires, with someexceptions, that certain entitiesfurnishing covered services underMedicare Part A or Part B reportinformation concerning theirownership, investment, orcompensation arrangements in the form,manner, and at the times specified byHCFA.


§ 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 ofthis definition only, a mobile vehicle,van, or trailer that is owned or leased ona full-time basis (that is, 24 hours perday, 7 days per week, for a term of notless than 6 months) by a group practiceand that is used exclusively by thegroup practice. Space in a building or a



mobile vehicle, van, or trailer that isshared by more than one group practice,by a group practice and one or moresolo practitioners, or by a group practiceand another provider (for example, adiagnostic imaging facility) is not acentralized building for purposes of thisrule. This provision does not precludea group practice from providing servicesto other providers (for example,purchased diagnostic tests) in the grouppractice’s centralized building. A grouppractice may have more than onecentralized building.

Clinical laboratory services means thebiological, microbiological, serological,chemical, immunohematological,hematological, biophysical, cytological,pathological, or other examination ofmaterials derived from the human bodyfor the purpose of providing informationfor the diagnosis, prevention, ortreatment of any disease or impairmentof, or the assessment of the health of,human beings, including procedures todetermine, measure, or otherwisedescribe the presence or absence ofvarious substances or organisms in thebody, as specifically identified by theCPT and HCPCS codes posted on theHCFA web site, http://www.hcfa.gov,(and in annual updates published in theFederal Register and posted on theHCFA web site), except as specificallyexcluded on the HCFA web site and inannual updates. All services identifiedon the HCFA web site and in annualupdates are clinical laboratory servicesfor purposes of these regulations. Anyservice not specifically identified on theHCFA web site, as amended from timeto time and published in the FederalRegister, is not a clinical laboratoryservice for purposes of theseregulations.

Consultation means a professionalservice furnished to a patient by aphysician if the following conditions aresatisfied:

(1) The physician’s opinion or adviceregarding evaluation and/ormanagement of a specific medicalproblem is requested by anotherphysician.

(2) The request and need for theconsultation are documented in thepatient’s medical record.

(3) After the consultation is provided,the physician prepares a written reportof his or her findings, which is providedto the physician who requested theconsultation.

(4) With respect to radiation therapyservices provided by a radiationoncologist, a course of radiationtreatments over a period of time will beconsidered to be pursuant to aconsultation, provided the radiationoncologist communicates with the

referring physician on a regular basisabout the patient’s course of treatmentand progress.

Designated health services (DHS)means any of the following services(other than those provided as emergencyphysician services furnished outside ofthe U.S.), as they are defined in thissection:

(1) Clinical laboratory services.(2) Physical therapy, occupational

therapy, and speech-language pathologyservices.

(3) Radiology and certain otherimaging services.

(4) Radiation therapy services andsupplies.

(5) Durable medical equipment andsupplies.

(6) Parenteral and enteral nutrients,equipment, and supplies.

(7) Prosthetics, orthotics, andprosthetic 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 healthservices (DHS)’’ means only DHSpayable, in whole or in part, byMedicare. DHS do not include servicesthat are reimbursed by Medicare as partof a composite rate (for example,ambulatory surgical center services orSNF Part A payments), except to theextent the services listed in paragraphs(1) through (10) of this definition arethemselves payable through a compositerate (that is, all services provided ashome health services or inpatient andoutpatient hospital services are DHS).

Durable medical equipment (DME)and supplies has the meaning given insection 1861(n) of the Act and § 414.202of this chapter.

Employee means any individual who,under the common law rules that applyin determining the employer-employeerelationship (as applied for purposes ofsection 3121(d)(2) of the InternalRevenue Code of 1986), is considered tobe employed by, or an employee of, anentity. (Application of these commonlaw rules is discussed in 20 CFR404.1007 and 26 CFR 31.3121(d)–1(c).)

Entity means a physician’s solepractice or a practice of multiplephysicians or any other person, soleproprietorship, public or private agencyor trust, corporation, partnership,limited liability company, foundation,not-for-profit corporation, orunincorporated association thatfurnishes DHS. For purposes of thisdefinition, an entity does not includethe referring physician himself orherself, but does include his or hermedical practice. A person or entity is

considered to be furnishing DHS if it isthe person or entity to which HCFAmakes payment for the DHS, directly orupon assignment on the patient’s behalf,except that if the person or entity hasreassigned its right to payment to anemployer pursuant to § 424.80(b)(1) ofthis chapter; a facility pursuant to§ 424.80(b)(2) of this chapter; or a healthcare delivery system, including clinics,pursuant to § 424.80(b)(3) of this chapter(other than a health care delivery systemthat is a health plan (as defined in§ 1000.952(l) of this title), and otherthan any managed care organization(MCO), provider-sponsored organization(PSO), or independent practiceassociation (IPA) with which a healthplan contracts for services provided toplan enrollees), the person or entityfurnishing DHS is the person or entityto which payment has been reassigned.Provided further, that a health plan,MCO, PSO, or IPA that employs asupplier or operates a facility that couldaccept reassignment from a supplierpursuant to §§ 424.80(b)(1) and (b)(2) ofthis chapter is the entity furnishing DHSfor any services provided by suchsupplier.

Fair market value means the value inarm’s-length transactions, consistentwith the general market value. ‘‘Generalmarket value’’ means the price that anasset would bring, as the result of bonafide bargaining between well-informedbuyers and sellers who are nototherwise in a position to generatebusiness for the other party; or thecompensation that would be included ina service agreement, as the result ofbona fide bargaining between well-informed parties to the agreement whoare not otherwise in a position togenerate business for the other party, onthe date of acquisition of the asset or atthe time of the service agreement.Usually, the fair market price is theprice at which bona fide sales have beenconsummated for assets of like type,quality, and quantity in a particularmarket at the time of acquisition, or thecompensation that has been included inbona fide service agreements withcomparable terms at the time of theagreement. With respect to the rentalsand leases described in § 411.357(a) and(b), ‘‘fair market value’’ means the valueof rental property for generalcommercial purposes (not taking intoaccount its intended use). In the case ofa lease of space, this value may not beadjusted to reflect the additional valuethe prospective lessee or lessor wouldattribute to the proximity orconvenience to the lessor when thelessor is a potential source of patientreferrals to the lessee. For purposes of



this section, a rental payment does nottake into account intended use if it takesinto account costs incurred by the lessorin developing or upgrading the propertyor maintaining the property or itsimprovements.

Home health services means theservices described in section 1861(m) ofthe Act and part 409, subpart E of thischapter.

Hospital means any entity thatqualifies as a ‘‘hospital’’ under section1861(e) of the Act, as a ‘‘psychiatrichospital’’ under section 1861(f) of theAct, or as a ‘‘rural primary carehospital’’ under section 1861(mm)(1) ofthe Act, and refers to any separatelegally organized operating entity plusany subsidiary, related entity, or otherentities that perform services for thehospital’s patients and for which thehospital bills. However, a ‘‘hospital’’does not include entities that performservices for hospital patients ‘‘underarrangements’’ with the hospital.

HPSA means, for purposes of thissubpart, an area designated as a healthprofessional shortage area under section332(a)(1)(A) of the Public Health ServiceAct for primary medical careprofessionals (in accordance with thecriteria specified in part 5 of this title).

Immediate family member or memberof a physician’s immediate familymeans husband or wife; birth oradoptive parent, child, or sibling;stepparent, stepchild, stepbrother, orstepsister; father-in-law, mother-in-law,son-in-law, daughter-in-law, brother-in-law, or sister-in-law; grandparent orgrandchild; and spouse of a grandparentor grandchild.

‘‘Incident to’’ services means thoseservices that meet the requirements ofsection 1861(s)(2)(A) of the Act andsection 2050 of the Medicare CarriersManual (HCFA Pub. 14–3), Part 3—Claims Process. (Those wishing tosubscribe to program manuals shouldcontact either the Government PrintingOffice (GPO) or the National TechnicalInformation Service (NTIS) at thefollowing addresses: Superintendent ofDocuments, Government PrintingOffice, ATTN: New Orders, P.O. Box371954, Pittsburgh, PA 15250–7954,Telephone (202) 512–1800, Fax number(202) 512–2250 (for credit card orders);or National Technical InformationService, Department of Commerce, 5825Port Royal Road, Springfield, VA 22161,Telephone (703) 487–4630. In addition,individual manual transmittals andProgram Memoranda can be purchasedfrom NTIS. Interested parties shouldidentify the transmittal(s) they want.GPO or NTIS can give complete detailson how to obtain the publications theysell. Additionally, all manuals are

available at the following Internetaddress: http://www.hcfa.gov/pubforms/progman.htm.)

Inpatient hospital services meansthose services as defined in section1861(b) of the Act and § 409.10(a) and(b) of this chapter and includesinpatient psychiatric hospital serviceslisted in section 1861(c) of the Act andinpatient rural primary care hospitalservices, as defined in section1861(mm)(2) of the Act. ‘‘Inpatienthospital services’’ do not includeemergency inpatient services providedby a hospital located outside of the U.S.and covered under the authority insection 1814(f)(2) of the Act and part424, subpart H of this chapter, oremergency inpatient services providedby a nonparticipating hospital withinthe U.S., as authorized by section1814(d) of the Act and described in part424, subpart G of this chapter. Theseservices also do not include dialysisfurnished by a hospital that is notcertified to provide end-stage renaldialysis (ESRD) services under subpartU of part 405 of this chapter. Inpatienthospital services include services that ahospital provides for its patients that arefurnished either by the hospital or byothers under arrangements with thehospital. ‘‘Inpatient hospital services’’do not include professional servicesperformed by physicians, physicianassistants, nurse practitioners, clinicalnurse specialists, certified nursemidwives, and certified registered nurseanesthetists and qualified psychologistsif Medicare reimburses the servicesindependently and not as part of theinpatient hospital service (even if theyare billed by a hospital under anassignment or reassignment).

Laboratory means an entity furnishingbiological, microbiological, serological,chemical, immunohematological,hematological, biophysical, cytological,pathological, or other examination ofmaterials derived from the human bodyfor the purpose of providing informationfor the diagnosis, prevention, ortreatment of any disease or impairmentof, or the assessment of the health of,human beings. These examinations alsoinclude procedures to determine,measure, or otherwise describe thepresence or absence of varioussubstances or organisms in the body.Entities only collecting or preparingspecimens (or both) or only serving asa mailing service and not performingtesting are not considered laboratories.

List of CPT/HCPCS Codes Used toDescribe Certain Designated HealthServices Under the Physician ReferralProvisions (Section 1877 of the SocialSecurity Act) means the list of certaindesignated health services under section

1877 of the Act initially posted on theHCFA web site and updated annuallythereafter in an addendum to thephysician fee schedule final rule and onthe HCFA web site.

Member of the group means, forpurposes of this rule, a direct or indirectphysician owner of a group practice(including a physician whose interest isheld by his or her individualprofessional corporation or by anotherentity), a physician employee of thegroup practice (including a physicianemployed by his or her individualprofessional corporation that has anequity interest in the group practice), alocum tenens physician (as defined inthis section), or an on-call physicianwhile the physician is providing on-callservices for members of the grouppractice. A physician is a member of thegroup during the time he or shefurnishes ‘‘patient care services’’ to thegroup as defined in this section. Anindependent contractor or a leasedemployee is not a member of the group.‘‘Locum tenens physician’’ means aphysician who substitutes (that is,‘‘stands in the shoes’’) in exigentcircumstances for a regular physicianwho is a member of the group, inaccordance with applicablereassignment rules and regulations,including section 3060.7 of theMedicare Carriers Manual (HCFA Pub.14–3), Part 3—Claims Process.

Outpatient hospital services meansthe therapeutic, diagnostic, and partialhospitalization services listed undersections 1861(s)(2)(B) and (C) of the Act;outpatient services furnished by apsychiatric hospital, as defined insection 1861(f) of the Act; andoutpatient rural primary care hospitalservices, as defined in section1861(mm)(3) of the Act. Emergencyservices covered in nonparticipatinghospitals are excluded under theconditions described in section 1835(b)of the Act and subpart G of part 424 ofthis chapter. ‘‘Outpatient hospitalservices’’ includes services that ahospital provides for its patients that arefurnished either by the hospital or byothers under arrangements with thehospital. ‘‘Outpatient hospital services’’do not include professional servicesperformed by physicians, physicianassistants, nurse practitioners, clinicalnurse specialists, certified nursemidwives, certified registered nurseanesthetists, and qualified psychologistsif Medicare reimburses the servicesindependently and not as part of theoutpatient hospital service (even if theyare billed by a hospital under anassignment or reassignment).



Outpatient prescription drugs meansall prescription drugs covered byMedicare Part B.

Parenteral and enteral nutrients,equipment, and supplies means thefollowing services (including all HCPCSlevel 2 codes for these services):

(1) Parenteral nutrients, equipment,and supplies, meaning those items andsupplies needed to provide nutriment toa patient with permanent, severepathology of the alimentary tract thatdoes not allow absorption of sufficientnutrients to maintain strengthcommensurate with the patient’s generalcondition, as described in section 65–10of the Medicare Coverage Issues Manual(HCFA Pub. 6); and

(2) Enteral nutrients, equipment, andsupplies, meaning items and suppliesneeded to provide enteral nutrition to apatient with a functioninggastrointestinal tract who, due topathology to or nonfunction of thestructures that normally permit food toreach the digestive tract, cannotmaintain weight and strengthcommensurate with his or her generalcondition, as described in section 65–10of the Medicare Coverage Issues Manual(HCFA Pub. 6).

Patient care services means any tasksperformed by a physician in the grouppractice that address the medical needsof specific patients or patients ingeneral, regardless of whether theyinvolve direct patient encounters; orgenerally benefit a particular practice.Patient care services can include, forexample, the services of physicians whodo not directly treat patients, such astime spent by a physician consultingwith other physicians or reviewinglaboratory tests, or time spent trainingstaff members, arranging for equipment,or performing administrative ormanagement tasks.

Physical therapy, occupationaltherapy, and speech-language pathologyservices means those particular servicesidentified by the CPT and HCPCS codeson the HCFA web site (and in annualupdates published in the FederalRegister). All services identified on theHCFA web site and in annual updatesare physical therapy, occupationaltherapy, and speech-language pathologyservices for purposes of theseregulations. Any service not specificallyidentified on the HCFA web site, asamended from time to time andpublished in the Federal Register, is nota physical therapy, occupationaltherapy, or speech-language pathologyservice for purposes of theseregulations. The list of codes identifyingphysical therapy, occupational therapy,and speech-language pathology services

for purposes of these regulationsincludes the following:

(1) Physical therapy services, meaningthose outpatient physical therapyservices (including speech-languagepathology services) described at section1861(p) of the Act that are coveredunder Medicare Part A or Part B,regardless of who provides them, if theservices include—

(i) Assessments, function tests andmeasurements of strength, balance,endurance, range of motion, andactivities of daily living;

(ii) Therapeutic exercises, massage,and use of physical medicinemodalities, assistive devices, andadaptive equipment;

(iii) Establishment of a maintenancetherapy program for an individualwhose restoration potential has beenreached; however, maintenance therapyitself is not covered as part of theseservices; or

(iv) Speech-language pathologyservices that are for the diagnosis andtreatment of speech, language, andcognitive disorders that includeswallowing and other oral-motordysfunctions.

(2) Occupational therapy services,meaning those services described atsection 1861(g) of the Act that arecovered under Medicare Part A or PartB, regardless of who provides them, ifthe services include—

(i) Teaching of compensatorytechniques to permit an individual witha physical or cognitive impairment orlimitation to engage in daily activities;

(ii) Evaluation of an individual’s levelof independent functioning;

(iii) Selection and teaching of task-oriented therapeutic activities to restoresensory-integrative function; or

(iv) Assessment of an individual’svocational potential, except when theassessment is related solely tovocational rehabilitation.

Physician means a doctor of medicineor osteopathy, a doctor of dental surgeryor dental medicine, a doctor of podiatricmedicine, a doctor of optometry, or achiropractor, as defined in section1861(r) of the Act.

Physician in the group practice meansa member of the group practice, as wellas an independent contractor physician,during the time the independentcontractor is furnishing patient careservices (as defined in this section) tothe group practice under a contractualarrangement with the group practice toprovide services to the group practice’spatients in the group practice’sfacilities. The contract must contain thesame restrictions on compensation thatapply to members of the group practiceunder § 411.352(g) (or the contract fits

in the personal services exception in§ 411.357(d)), and the independentcontractor’s arrangement with the grouppractice must comply with thereassignment rules at § 424.80(b)(3) ofthis chapter (see also section 3060.3 ofthe Medicare Carriers Manual (HCFAPub. 14–3), Part 3—Claims Process).Referrals from an independentcontractor who is a physician in thegroup are subject to the prohibition onreferrals in § 411.353(a), and the grouppractice is subject to the limitation onbilling for those referrals in § 411.353(b).

Physician incentive plan means anycompensation arrangement between anentity and a physician or physiciangroup that may directly or indirectlyhave the effect of reducing or limitingservices furnished with respect toindividuals enrolled with the entity.

Plan of care means the establishmentby a physician of a course of diagnosisor treatment (or both) for a particularpatient, including the ordering ofservices.

Prosthetics, Orthotics, and ProstheticDevices and Supplies means thefollowing services (including all HCPCSlevel 2 codes for these services that arecovered by Medicare):

(1) Orthotics, meaning leg, arm, back,and neck braces, as listed in section1861(s)(9) of the Act.

(2) Prosthetics, meaning artificial legs,arms, and eyes, as described in section1861(s)(9) of the Act.

(3) Prosthetic devices, meaningdevices (other than a dental device)listed in section 1861(s)(8) of the Actthat replace all or part of an internalbody organ, including colostomy bags,and one pair of conventional eyeglassesor contact lenses furnished subsequentto each cataract surgery with insertionof an intraocular lens.

(4) Prosthetic supplies, meaningsupplies that are necessary for theeffective use of a prosthetic device(including supplies directly related tocolostomy care).

Radiation therapy services andsupplies means those particular servicesand supplies identified by the CPT andHCPCS codes on the HCFA web site andin annual updates published in theFederal Register. All services identifiedon the HCFA web site and in annualupdates are radiation therapy servicesand supplies for purposes of theseregulations. Any service not specificallyidentified on the HCFA web site, asamended from time to time andpublished in the Federal Register, is nota radiation therapy service or supply forpurposes of these regulations. The list ofcodes for radiation therapy services andsupplies identified on the HCFA website and in annual updates is based on



section 1861(s)(4) of the Act and§ 410.35 of this chapter but does notinclude nuclear medicine procedures.

Radiology and certain other imagingservices means those particular servicesidentified by the CPT and HCPCS codeson the HCFA web site and in annualupdates published in the FederalRegister (except as otherwisespecifically excluded on the HCFA website and in annual updates). All servicesidentified on the HCFA web site and inannual updates are radiology andcertain other imaging services forpurposes of these regulations. Anyservice not specifically identified on theHCFA web site, as amended from timeto time and published in the FederalRegister, is not a radiology or certainother imaging service for purposes ofthese regulations. The list of radiologyand certain other imaging services setforth on the HCFA web site and inannual updates includes theprofessional and technical componentsof any diagnostic test or procedure usingx-rays, ultrasound, or other imagingservices, computerized axialtomography, or magnetic resonanceimaging, as covered under section1861(s)(3) of the Act and §§ 410.32 and410.34 of this chapter but does notinclude—

(1) X-ray, fluoroscopy, or ultrasonicprocedures that require the insertion ofa needle, catheter, tube, or probethrough the skin or into a body orifice;

(2) Radiology procedures that areintegral to the performance of, andperformed during, nonradiologicalmedical 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 aphysician for, or ordering of, or thecertifying or recertifying of the need for,any designated health service for whichpayment may be made under MedicarePart B, including a request for aconsultation with another physician andany test or procedure ordered by or tobe performed by (or under thesupervision of) that other physician, butnot including any designated healthservice personally performed orprovided by the referring physician. Adesignated health service is notpersonally performed or provided by thereferring physician if it is performed orprovided by any other person,including, but not limited to, thereferring physician’s employees,independent contractors, or grouppractice members.

(ii) Except as provided in paragraph(2) of this definition, a request by aphysician that includes the provision of

any designated health service for whichpayment may be made under Medicare,the establishment of a plan of care by aphysician that includes the provision ofsuch a designated health service, or thecertifying or recertifying of the need forsuch a designated health service, but notincluding any designated health servicepersonally performed or provided by thereferring physician. A designated healthservice is not personally performed orprovided by the referring physician if itis performed or provided by any otherperson including, but not limited to, thereferring physician’s employees,independent contractors, or grouppractice members.

(2) Does not include a request by apathologist for clinical diagnosticlaboratory tests and pathologicalexamination services, by a radiologistfor diagnostic radiology services, and bya radiation oncologist for radiationtherapy, if—

(i) The request results from aconsultation initiated by anotherphysician (whether the request for aconsultation was made to a particularphysician or to an entity with which thephysician is affiliated); and

(ii) The tests or services are furnishedby or under the supervision of thepathologist, radiologist, or radiationoncologist.

(3) Can be in any form, including, butnot limited to, written, oral, orelectronic.

Referring physician means aphysician who makes a referral asdefined in this section or who directsanother person or entity to make areferral or who controls referrals madeby another person or entity.

Remuneration means any payment orother benefit made directly orindirectly, overtly or covertly, in cash orin kind, except that the following arenot considered remuneration forpurposes of this section:

(1) The forgiveness of amounts owedfor inaccurate tests or procedures,mistakenly performed tests orprocedures, or the correction of minorbilling errors.

(2) The furnishing of items, devices,or supplies (not including surgicalitems, devices, or supplies) that are usedsolely to collect, transport, process, orstore specimens for the entity furnishingthe items, devices, or supplies or areused solely to order or communicate theresults of tests or procedures for theentity.

(3) A payment made by an insurer ora self-insured plan to a physician tosatisfy a claim, submitted on a fee-for-service basis, for the furnishing ofhealth services by that physician to anindividual who is covered by a policy

with the insurer or by the self-insuredplan, if—

(i) The health services are notfurnished, and the payment is not made,under a contract or other arrangementbetween the insurer or the plan and thephysician;

(ii) The payment is made to thephysician on behalf of the coveredindividual and would otherwise bemade directly to the individual; and

(iii) The amount of the payment is setin advance, does not exceed fair marketvalue, and is not determined in amanner that takes into account directlyor indirectly the volume or value of anyreferrals.

Same building means a structurewith, or combination of structures thatshare, a single street address as assignedby the U.S. Postal Service, excluding allexterior spaces (for example, lawns,courtyards, driveways, parking lots) andinterior parking garages. For purposes ofthis rule, the ‘‘same building’’ does notinclude a mobile vehicle, van, or trailer.

5. Section 411.352 is added to read asfollows:

§ 411.352 Group practice.

For purposes of this subpart, a grouppractice is a physician practice thatmeets the following conditions:

(a) Single legal entity. The grouppractice must consist of a single legalentity formed primarily for the purposeof being a physician group practice inany organizational form recognized bythe State in which the group practiceachieves its legal status, including, butnot limited to, a partnership,professional corporation, limitedliability company, foundation, not-for-profit corporation, faculty practice plan,or similar association. The single legalentity may be organized by any party orparties, including, but not limited to,physicians, health care facilities, orother persons or entities (including, butnot limited to, physicians individuallyincorporated as professionalcorporations). The single legal entitymay not be organized or owned (inwhole or in part) by another medicalpractice that is an operating physicianpractice (regardless of whether themedical practice meets the conditionsfor a group practice under this section).For purposes of this rule, a single legalentity does not include informalaffiliations of physicians formedsubstantially to share profits fromreferrals, or separate group practicesunder common ownership or controlthrough a physician practicemanagement company, hospital, healthsystem, or other entity or organization.A group practice that is otherwise a



single legal entity may itself ownsubsidiary entities.

(b) Physicians. The group practicemust have at least two physicians whoare members of the group (whetheremployees or direct or indirect owners),as defined in this section.

(c) Range of care. Each physician whois a member of the group, as defined in§ 411.351, must furnish substantially thefull range of patient care services thatthe physician routinely furnishes,including medical care, consultation,diagnosis, and treatment, through thejoint use of shared office space,facilities, equipment, and personnel.

(d) Services furnished by grouppractice members. (1) Except asprovided in paragraphs (d)(2) and (d)(3)of this section, substantially all of thepatient care services of the physicianswho are members of the group (that is,at least 75 percent of the total patientcare services of the group practicemembers) must be furnished throughthe group and billed under a billingnumber assigned to the group, and theamounts received must be treated asreceipts of the group. ‘‘Patient careservices’’ must be measured by one ofthe following:

(i) The total time each member spendson patient care services documented byany reasonable means (including, butnot limited to, time cards, appointmentschedules, or personal diaries). (Forexample, if a physician practices 40hours a week and spends 30 hours onpatient care services for a grouppractice, the physician has spent 75percent of his or her time providingpatient care services for the group.)

(ii) Any alternative measure that isreasonable, fixed in advance of theperformance of the services beingmeasured, uniformly applied over time,verifiable, and documented.

(2) The data used to calculatecompliance with this ‘‘substantially alltest’’ and related supportivedocumentation must be made availableto the Secretary upon request.

(3) The ‘‘substantially all test’’ doesnot apply to any group practice that islocated solely in an HPSA, as defined in§ 411.351.

(4) For a group practice locatedoutside of an HPSA (as defined in§ 411.351), any time spent by a grouppractice member providing services inan HPSA should not be used tocalculate whether the group practice hasmet the ‘‘substantially all test,’’regardless of whether the member’s timein the HPSA is spent in a grouppractice, clinic, or office setting.

(5) During the ‘‘start up’’ period (notto exceed 12 months) that begins on thedate of the initial formation of a new

group practice, a group practice mustmake a reasonable, good faith effort toensure that the group practice complieswith the requirement set forth inparagraph (d)(1) of this section as soonas practicable, but no later than 12months from the date of the initialformation of the group practice. Thisparagraph (d)(5) does not apply when anexisting group practice admits a newmember or when an existing grouppractice reorganizes.

(e) Distribution of expenses andincome. The overhead expenses of, andincome from, the practice must bedistributed according to methods thatare determined before the receipt ofpayment for the services giving rise tothe overhead expense or producing theincome. Nothing in this rule prevents agroup practice from adjusting itscompensation methodologyprospectively, subject to restrictions onthe distribution of revenue from DHSunder paragraph (i) of this section.

(f) Unified business. (1) The grouppractice must be a unified businesshaving at least the following features:

(i) Centralized decision-making by abody representative of the grouppractice that maintains effective controlover 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 permittedwith respect to revenues derived fromservices that are not DHS and may bepermitted with respect to revenuesderived from DHS under paragraph (i) ofthis section.

(g) Volume or value of referrals. Nophysician who is a member of the grouppractice directly or indirectly receivescompensation based on the volume orvalue of referrals by the physician,except as provided in paragraph (i) ofthis section.

(h) Physician-patient encounters.Members of the group must personallyconduct no less than 75 percent of thephysician-patient encounters of thegroup practice.

(i) Special rule for productivitybonuses and profit shares. (1) Aphysician in a group practice may bepaid a share of overall profits of thegroup, or a productivity bonus based onservices that he or she has personallyperformed (including services ‘‘incidentto’’ those personally performed servicesas defined in § 411.351), provided thatthe share or bonus is not determined inany manner that is directly related tothe volume or value of referrals of DHSby the physician.

(2) ‘‘Overall profits’’ means thegroup’s entire profits derived from DHSpayable by Medicare or Medicaid or theprofits derived from DHS payable byMedicare or Medicaid of any componentof the group practice that consists of atleast five physicians. The share ofoverall profits will be deemed not torelate directly to the volume or value ofreferrals if one of the followingconditions is met:

(i) The group’s profits are divided percapita (for example, per member of thegroup or per physician in the group).

(ii) Revenues derived from DHS aredistributed based on the distribution ofthe group practice’s revenues attributedto services that are not DHS payable byany Federal health care program orprivate payer.

(iii) Revenues derived from DHSconstitute less than 5 percent of thegroup practice’s total revenues, and theallocated portion of those revenues toeach physician in the group practiceconstitutes 5 percent or less of his or hertotal compensation from the group.

(iv) Overall profits are divided in areasonable and verifiable manner that isnot directly related to the volume orvalue of the physician’s referrals ofDHS.

(3) A productivity bonus forpersonally performed services(including services ‘‘incident to’’ thosepersonally performed services asdefined in § 411.351) will be deemednot to relate directly to the volume orvalue of referrals of DHS if one of thefollowing conditions is met:

(i) The bonus is based on thephysician’s total patient encounters orrelative value units (RVUs). Themethodology for establishing RVUs isset forth in § 414.22 of this chapter.

(ii) The bonus is based on theallocation of the physician’scompensation attributable to servicesthat are not DHS payable by any Federalhealth care program or private payer.

(iii) Revenues derived from DHS areless than 5 percent of the grouppractice’s total revenues, and theallocated portion of those revenues toeach physician in the group practiceconstitutes 5 percent or less of his or hertotal compensation from the grouppractice.

(iv) The bonus is calculated in areasonable and verifiable manner that isnot directly related to the volume orvalue of the physician’s referrals ofDHS.

(4) Supporting documentationverifying the method used to calculatethe profit shares or productivity bonusunder paragraphs (i)(2) and (i)(3) of thissection, and the resulting amount of



compensation, must be made availableto the Secretary upon request.


§ 411.353 Prohibition on certain referralsby physicians and limitations on billing.

(a) Prohibition on referrals. Except asprovided in this subpart, a physicianwho has a direct or indirect financialrelationship with an entity, or who hasan immediate family member who hasa direct or indirect financialrelationship with the entity, may notmake a referral to that entity for thefurnishing of DHS for which paymentotherwise may be made under Medicare.A physician’s prohibited financialrelationship with an entity thatfurnishes DHS is not imputed to his orher group practice or its members or itsstaff; however, a referral made by aphysician’s group practice, its members,or its staff may be imputed to thephysician, if the physician directs thegroup practice, its members, or its staffto make the referral or if the physiciancontrols referrals made by his or hergroup practice, its members, or its staff.

(b) Limitations on billing. An entitythat furnishes DHS pursuant to a referralthat is prohibited by paragraph (a) ofthis section may not present or cause tobe presented a claim or bill to theMedicare program or to any individual,third party payer, or other entity for theDHS performed pursuant to theprohibited referral.

(c) Denial of payment. Except asprovided in paragraph (e) of thissection, no Medicare payment may bemade for a designated health servicethat is furnished pursuant to aprohibited referral.

(d) Refunds. An entity that collectspayment for a designated health servicethat was performed under a prohibitedreferral must refund all collectedamounts on a timely basis, as defined in§ 1003.101 of this title.

(e) Exception for certain entities.Payment may be made to an entity thatsubmits a claim for a designated healthservice if—

(1) The entity did not have actualknowledge of, and did not act inreckless disregard or deliberateignorance of, the identity of thephysician who made the referral of thedesignated health service to the entity;and

(2) The claim otherwise complieswith all applicable Federal laws, rules,and regulations.

7. Section 411.354 is added to read asfollows:

§ 411.354 Financial relationship,compensation, and ownership orinvestment interest.

(a) Financial relationships. (1)Financial relationship means—

(i) A direct or indirect ownership orinvestment interest (as defined inparagraph (b) of this section) in anyentity that furnishes DHS; or

(ii) A direct or indirect compensationarrangement (as defined in paragraph (c)of this section) with an entity thatfurnishes DHS.

(2) A direct financial relationshipexists if remuneration passes betweenthe referring physician (or a member ofhis or her immediate family) and theentity furnishing DHS without anyintervening persons or entities (notincluding an agent of the physician, theimmediate family member, or the entityfurnishing DHS).

(3) An indirect financial relationshipexists under the conditions described inparagraphs (b)(5) and (c)(2) of thissection.

(b) Ownership or investment interest.An ownership or investment interestmay be through equity, debt, or othermeans, and includes an interest in anentity that holds an ownership orinvestment interest in any entity thatfurnishes DHS.

(1) An ownership or investmentinterest includes, but is not limited to,stock, partnership shares, limitedliability company memberships, as wellas loans, bonds, or other financialinstruments that are secured with anentity’s property or revenue or a portionof that property or revenue.

(2) An ownership or investmentinterest in a subsidiary company isneither an ownership or investmentinterest in the parent company, nor inany other subsidiary of the parent,unless the subsidiary company itself hasan ownership or investment interest inthe parent or such other subsidiaries. Itmay, however, be part of an indirectfinancial relationship.

(3) Ownership and investmentinterests do not include, among otherthings—

(i) An interest in a retirement plan;(ii) Stock options and convertible

securities until the stock options areexercised or the convertible securitiesare converted to equity (before this timethey are compensation arrangements asdefined in paragraph (c) of this section);

(iii) An unsecured loan subordinatedto a credit facility (which is acompensation arrangement as defined inparagraph (c) of this section); or

(iv) An ‘‘under arrangements’’contract between a hospital and anentity owned by one or more physicians(or a group of physicians) providing

DHS ‘‘under arrangements’’ to thehospital.

(4) An ownership or investmentinterest that meets an exception set forthin §§ 411.355 or 411.356 need not alsomeet an exception for compensationarrangements set forth in § 411.357 withrespect to profit distributions,dividends, interest payments on securedobligations, or the like.

(5) Indirect ownership or investmentinterest. (i) An indirect ownership orinvestment interest exists if—

(A) Between the referring physician(or immediate family member) and theentity furnishing DHS there exists anunbroken chain of any number (but nofewer than one) of persons or entitieshaving ownership or investmentinterests between them; and

(B) The entity furnishing DHS hasactual knowledge of, or acts in recklessdisregard or deliberate ignorance of, thefact that the referring physician (orimmediate family member) has someownership or investment interest(through any number of intermediaryownership or investment interests) inthe entity furnishing the DHS.

(ii) The entity furnishing DHS neednot know, or act in reckless disregard ordeliberate ignorance of, the precisecomposition of the unbroken chain orthe specific terms of the ownership orinvestment interests that form the linksin the chain.

(c) Compensation arrangement. Acompensation arrangement can be anyarrangement involving remuneration,direct or indirect, between a physician(or a member of a physician’s immediatefamily) and an entity. An ‘‘underarrangements’’ contract between ahospital and an entity providing DHS‘‘under arrangements’’ to the hospitalcreates a compensation arrangement forpurposes of these regulations.

(1) A compensation arrangement doesnot include any of the following:

(i) The portion of any businessarrangement that consists solely of theremuneration described in section1877(h)(1)(C) of the Act and inparagraphs (1) through (3) of thedefinition of the term ‘‘remuneration’’ in§ 411.351. (However, any other portionof the arrangement may still constitutea compensation arrangement.)

(ii) Payments made by a consultant toa referring physician under § 414.65(e)of this chapter.

(2) Indirect compensationarrangement. An indirect compensationarrangement exists if—

(i) Between the referring physician (ora member of his or her immediatefamily) and the entity furnishing DHSthere exists an unbroken chain of anynumber (but not fewer than one) of



persons or entities that have financialrelationships (as defined in paragraph(a) of this section) between them (that is,each link in the chain has either anownership or investment interest or acompensation arrangement with thepreceding link);

(ii) The referring physician (orimmediate family member) receivesaggregate compensation from the personor entity in the chain with which thephysician (or immediate familymember) has a direct financialrelationship that varies with, orotherwise reflects, the volume or valueof referrals or other business generatedby the referring physician for the entityfurnishing the DHS. If the financialrelationship between the physician (orimmediate family member) and theperson or entity in the chain with whichthe referring physician (or immediatefamily member) has a direct financialrelationship is an ownership orinvestment interest, the determinationwhether the aggregate compensationvaries with, or otherwise reflects, thevolume or value of referrals or otherbusiness generated by the referringphysician for the entity furnishing theDHS will be measured by thenonownership or noninvestmentinterest closest to the referringphysician (or immediate familymember). (For example, if a referringphysician has an ownership interest incompany A, which owns company B,which has a compensation arrangementwith company C, which has acompensation arrangement with entityD that furnishes DHS, we would look tothe aggregate compensation betweencompany B and company C for purposesof this paragraph (c)(2)(ii)); and

(iii) The entity furnishing DHS hasactual knowledge of, or acts in recklessdisregard or deliberate ignorance of, thefact that the referring physician (orimmediate family member) receivesaggregate compensation that varies with,or otherwise reflects, the value orvolume of referrals or other businessgenerated by the referring physician forthe entity furnishing the DHS.

(d) Special rules on compensation.The following special rules apply onlyto compensation under section 1877 ofthe Act and these regulations in subpartJ of this part.

(1) Compensation will be considered‘‘set in advance’’ if the aggregatecompensation or a time-based or perunit of service-based (whether per-useor per-service) amount is set in advancein the initial agreement between theparties in sufficient detail so that it canbe objectively verified. The paymentamount must be fair market valuecompensation for services or items

actually provided, not taking intoaccount the volume or value of referralsor other business generated by thereferring physician at the time of theinitial agreement or during the term ofthe agreement. Percentage compensationarrangements do not constitutecompensation that is ‘‘set in advance’’in which the percentage compensationis based on fluctuating or indeterminatemeasures or in which the arrangementresults in the seller receiving differentpayment amounts for the same servicefrom the same purchaser.

(2) Compensation (including time-based or per unit of service-basedcompensation) will be deemed not totake into account ‘‘the volume or valueof referrals’’ if the compensation is fairmarket value for services or itemsactually provided and does not varyduring the course of the compensationagreement in any manner that takes intoaccount referrals of DHS.

(3) Compensation (including time-based or per unit of service-basedcompensation) will be deemed to nottake into account ‘‘other businessgenerated between the parties’’ so longas the compensation is fair market valueand does not vary during the term of theagreement in any manner that takes intoaccount referrals or other businessgenerated by the referring physician,including private pay health carebusiness.

(4) A physician’s compensation maybe conditioned on the physician’sreferrals to a particular provider,practitioner, or supplier, so long as thecompensation arrangement—

(i) Is fixed in advance for the term ofthe agreement;

(ii) Is consistent with fair marketvalue for services performed (that is, thepayment does not take into account thevolume or value of anticipated orrequired referrals);

(iii) Complies with an applicableexception under §§ 411.355 or 411.357;and

(iv) Complies with the followingconditions:

(A) The requirement to make referralsto a particular provider, practitioner, orsupplier is set forth in a writtenagreement signed by the parties.

(B) The requirement to make referralsto a particular provider, practitioner, orsupplier does not apply if the patientexpresses a preference for a differentprovider, practitioner, or supplier; thepatient’s insurer determines theprovider, practitioner, or supplier; orthe referral is not in the patient’s bestmedical interests in the physician’sjudgement.


§ 411.355 General exceptions to thereferral prohibition related to bothownership/investment and compensation.

The prohibition on referrals set forthin § 411.353 does not apply to thefollowing types of services:

(a) Physician services. (1) Physicianservices as defined in § 410.20(a) of thischapter that are furnished—

(i) Personally by another physicianwho is a member of the referringphysician’s group practice or is aphysician in the same group practice (asdefined in § 411.351) as the referringphysician; or

(ii) Under the supervision of anotherphysician who is a member of thereferring physician’s group practice or isa physician in the same group practice(as defined at § 411.351) as the referringphysician, provided that the supervisioncomplies with all other applicableMedicare payment and coverage rulesfor the physician services.

(2) For purposes of paragraph (a) ofthis section, ‘‘physician services’’includes only those ‘‘incident to’’services (as defined in § 411.351) thatare physician services under § 410.20(a)of this chapter.

(3) All other ‘‘incident to’’ services(for example, diagnostic tests, physicaltherapy) are outside the scope ofparagraph (a) of this section.

(b) In-office ancillary services.Services (including certain items ofdurable medical equipment (DME), asdefined in paragraph (b)(4) of thissection, and infusion pumps that areDME (including external ambulatoryinfusion pumps), but excluding all otherDME and parenteral and enteralnutrients, equipment, and supplies(such as infusion pumps used for PEN),that meet the following conditions:

(1) They are furnished personally byone of the following individuals:

(i) The referring physician.(ii) A physician who is a member of

the same group practice as the referringphysician.

(iii) An individual who is supervisedby the referring physician or by anotherphysician in the group practice,provided the supervision complies withall other applicable Medicare paymentand coverage rules for the services.

(2) They are furnished in one of thefollowing locations:

(i) The same building (as defined in§ 411.351), but not necessarily in thesame space or part of the building, inwhich—

(A) The referring physician (oranother physician who is a member ofthe same group practice) furnishessubstantial physician services that areunrelated to the furnishing of DHSpayable by Medicare, any other Federal



health care payer, or a private payer,even though the unrelated services maylead to the ordering of DHS;

(B) The physician services that areunrelated to the furnishing of DHS inparagraph (b)(2)(i)(A) of this sectionmust represent substantially the fullrange of physician services unrelated tothe furnishing of DHS that the referringphysician routinely provides (or, in thecase of a referring physician who is amember of a group practice, the fullrange of physician services that thephysician routinely provides for thegroup practice); and

(C) The receipt of DHS (whetherpayable by a Federal health careprogram or a private payer) is not theprimary reason the patient comes incontact with the referring physician orhis or her group practice.

(ii) A centralized building (as definedin § 411.351) that is used by the grouppractice for the provision of some or allof the group practice’s clinicallaboratory services.

(iii) A centralized building (as definedin § 411.351) that is used by the grouppractice for the provision of some or allof the group practice’s DHS (other thanclinical laboratory services).

(3) They must be billed by one of thefollowing:

(i) The physician performing orsupervising the service.

(ii) The group practice of which theperforming or supervising physician is amember under a billing numberassigned to the group practice.

(iii) The group practice if thesupervising physician is a ‘‘physician inthe group’’ (as defined at § 411.351)under a billing number assigned to thegroup practice.

(iv) An entity that is wholly owned bythe performing or supervising physicianor by that physician’s group practiceunder the entity’s own billing numberor under a billing number assigned tothe physician or group practice.

(v) An independent third party billingcompany acting as an agent of thephysician, group practice, or entityspecified in paragraphs (b)(3)(i) through(b)(3)(iv) of this section under a billingnumber assigned to the physician, grouppractice, or entity, provided the billingarrangement meets the requirements of§ 424.80(b)(6) of this chapter. Forpurposes of this paragraph (b)(3), agroup practice may have, and bill under,more than one Medicare billing number,subject to any applicable Medicareprogram restrictions.

(4) For purposes of paragraph (b) ofthis section, DME covered by the in-office ancillary services exceptionmeans canes, crutches, walkers andfolding manual wheelchairs, and blood

glucose monitors, that meet thefollowing conditions:

(i) The item is one that a patientrequires for the purposes of ambulating,uses in order to depart from thephysician’s office, or is a blood glucosemonitor (including one starter set of teststrips and lancets, consisting of no morethan 100 of each). A blood glucosemonitor may be furnished only by aphysician or employee of a physician orgroup practice that also furnishesoutpatient diabetes self-managementtraining to the patient.

(ii) The item is furnished in a buildingthat meets the ‘‘same building’’requirements in the in-office ancillaryservices exception as part of thetreatment for the specific condition forwhich the patient-physician encounteroccurred.

(iii) The item is furnished personallyby the physician who ordered the DME,by another physician in the grouppractice, or by an employee of thephysician or the group practice.

(iv) A physician or group practice thatfurnishes the DME meets all DMEsupplier standards located in § 424.57(c)of this chapter.

(v) The arrangement does not violatethe anti-kickback statute, section1128B(b) of the Act, or any law orregulation governing billing or claimssubmission.

(vi) All other requirements of the in-office ancillary services exception inparagraph (b) of this section are met.

(5) A designated health service is‘‘furnished’’ for purposes of paragraph(b) of this section in the location wherethe service is actually performed upona patient or where an item is dispensedto a patient in a manner that is sufficientto meet the applicable Medicarepayment and coverage rules.

(6) Special rule for home carephysicians. In the case of a referringphysician whose principal medicalpractice consists of treating patients intheir private homes, the ‘‘samebuilding’’ requirements of paragraph(b)(2)(i) of this section are met if thereferring physician (or a qualifiedperson accompanying the physician,such as a nurse or technician) providesthe DHS contemporaneously with aphysician service that is not adesignated health service provided bythe referring physician to the patient inthe patient’s private home. For purposesof paragraph (b)(5) of this section, aprivate home does not include anursing, long-term care, or other facilityor institution.

(c) Services furnished by anorganization (or its contractors orsubcontractors) to enrollees. Servicesfurnished by an organization (or its

contractors or subcontractors) toenrollees of one of the following prepaidhealth plans (not including servicesprovided to enrollees in any other planor line of business offered oradministered by the same organization):

(1) An HMO or a CMP in accordancewith a contract with HCFA undersection 1876 of the Act and part 417,subparts J through M of this chapter,which set forth qualifying conditions forMedicare contracts; enrollment,entitlement, and disenrollment underMedicare contracts; Medicare contractrequirements; and change of ownershipand leasing of facilities: effect onMedicare contracts.

(2) A health care prepayment plan inaccordance with an agreement withHCFA under section 1833(a)(1)(A) of theAct and part 417, subpart U of thischapter.

(3) An organization that is receivingpayments on a prepaid basis forMedicare enrollees through ademonstration project under section402(a) of the Social SecurityAmendments of 1967 (42 U.S.C. 1395b–1) or under section 222(a) of the SocialSecurity Amendments of 1972 (42U.S.C. 1395b—1 note).

(4) A qualified HMO (within themeaning of section 1310(d) of the PublicHealth Service Act).

(5) A coordinated care plan (withinthe meaning of section 1851(a)(2)(A) ofthe Act) offered by an organization inaccordance with a contract with HCFAunder section 1857 of the Act and part422 of this chapter.

(d) Clinical laboratory servicesfurnished in an ambulatory surgicalcenter (ASC) or end-stage renal disease(ESRD) facility, or by a hospice ifpayment for those services is includedin the ASC rate, the ESRD compositerate, or as part of the per diem hospicecharge, respectively.

(e) Academic medical centers. (1)Services provided by an academicmedical center if all of the followingconditions are met:

(i) The referring physician—(A) Is a bona fide employee of a

component of the academic medicalcenter on a full-time or substantial part-time basis. (‘‘Components’’ of anacademic medical center means anaffiliated medical school, facultypractice plan, hospital, teaching facility,institution of higher education, ordepartmental professional corporation.);

(B) Is licensed to practice medicine inthe State;

(C) Has a bona fide facultyappointment at the affiliated medicalschool; and

(D) Provides either substantialacademic or substantial clinical



teaching services for which the facultymember receives compensation as partof his or her employment relationshipwith the academic medical center.

(ii) The total compensation paid forthe previous 12-month period (or fiscalyear or calendar year) from all academicmedical center components to thereferring physician is set in advanceand, in the aggregate, does not exceedfair market value for the servicesprovided, and is not determined in amanner that takes into account thevolume or value of any referrals or otherbusiness generated by the referringphysician within the academic medicalcenter.

(iii) The academic medical centermust meet all of the followingconditions:

(A) All transfers of money betweencomponents of the academic medicalcenter must directly or indirectlysupport the missions of teaching,indigent care, research, or communityservice.

(B) The relationship of thecomponents of the academic medicalcenter must be set forth in a writtenagreement that has been adopted by thegoverning body of each component.

(C) All money paid to a referringphysician for research must be usedsolely to support bona fide research.

(iv) The referring physician’scompensation arrangement does notviolate the anti-kickback statute, section1128B(b) of the Act.

(2) The ‘‘academic medical center’’ forpurposes of this section consists of—

(i) An accredited medical school(including a university, whenappropriate);

(ii) An affiliated faculty practice planthat is a 501(c)(3) or (c)(4) of the InternalRevenue Code nonprofit, tax-exemptorganization under IRS regulations (or isa part of such an organization under anumbrella designation); and

(iii) One or more affiliated hospital(s)in which a majority of the hospitalmedical staff consists of physicians whoare faculty members and a majority ofall hospital admissions are made byphysicians who are faculty members.

(f) Implants in an ASC. Implants,including, but not limited to, cochlearimplants, intraocular lenses, and otherimplanted prosthetics, implantedprosthetic devices and implanted DMEthat meet the following conditions:

(1) The implant is furnished by thereferring physician or a member of thereferring physician’s group practice in aMedicare-certified ASC (under part 416of this chapter) with which the referringphysician has a financial relationship.

(2) The implant is implanted in thepatient during a surgical procedure

performed in the same ASC where theimplant is furnished.

(3) The arrangement for the furnishingof the implant does not violate theFederal anti-kickback statute, section1128B(b) of the Act.

(4) Billing and claims submission forthe implants complies with all Federaland State laws and regulations.

(5) The exception set forth in thisparagraph (f) does not apply to anyfinancial relationships between thereferring physician and any entity otherthan the ASC in which the implant isfurnished to and implanted in thepatient.

(g) EPO and other dialysis-relatedoutpatient prescription drugs furnishedin or by an ESRD facility. EPO and otherdialysis-related outpatient prescriptiondrugs that are identified by the CPT andHCPCS codes on the HCFA web site,http://www.hcfa.gov, and in annualupdates published in the FederalRegister and that meet the followingconditions:

(1) The EPO and other dialysis-relateddrugs are furnished in or by an ESRDfacility. For purposes of this paragraph,‘‘furnished’’ means that the EPO ordrugs are either administered ordispensed to a patient in or by the ESRDfacility, even if the EPO or drugs arefurnished to the patient at home.‘‘Dialysis-related drugs’’ means certaindrugs required for the efficacy ofdialysis, as identified on the HCFA website and in annual updates.

(2) The arrangement for the furnishingof the EPO and other dialysis-relateddrugs does not violate the Federal anti-kickback statute, section 1128B(b) of theAct.

(3) Billing and claims submission forthe EPO and other dialysis related drugscomplies with all Federal and State lawsand regulations.

(4) The exception set forth in thisparagraph (g) does not apply to anyfinancial relationships between thereferring physician and any entity otherthan the ESRD facility that furnishes theEPO and other dialysis-related drugs tothe patient.

(h) Preventive screening tests,immunizations, and vaccines.Preventive screening tests,immunizations, and vaccines that arecovered by Medicare and identified bythe CPT and HCPCS codes included onthe HCFA web site and in annualupdates published in the FederalRegister and that meet the followingconditions:

(1) The preventive screening tests,immunizations, and vaccines are subjectto HCFA-mandated frequency limits.

(2) The preventive screening tests,immunizations, and vaccines are

reimbursed by Medicare based on a feeschedule.

(3) The arrangement for the provisionof the preventive screening tests,immunizations, and vaccines does notviolate the Federal anti-kickback statute,section 1128B(b) of the Act.

(4) Billing and claims submission forthe preventive screening tests,immunizations, and vaccines complieswith all Federal and State laws andregulations.

(5) To qualify under this exception,the preventive screening tests,immunizations, and vaccines must becovered by Medicare and must be listedon the HCFA web site and in annualupdates.

(i) Eyeglasses and contact lensesfollowing cataract surgery. Eyeglassesand contact lenses that are covered byMedicare when furnished to patientsfollowing cataract surgery that meet thefollowing conditions:

(1) The eyeglasses or contact lensesare provided in accordance with thecoverage and payment provisions setforth in § 410.36(a)(2)(ii) and § 414.228of this chapter, respectively.

(2) The arrangement for the furnishingof the eyeglasses or contact lenses doesnot violate the Federal anti-kickbackstatute, section 1128B(b) of the Act.

(3) Billing and claims submission forthe eyeglasses or contact lensescomplies with all Federal and State lawsand regulations.

9. In § 411.357, paragraph (j) is addedand reserved, and paragraphs (k), (l),(m), (n), (o), and (p) are added to readas follows:

§ 411.357 Exceptions to the referralprohibition related to compensationarrangements.

* * * * *(j) [Reserved](k) Non-monetary compensation up to

$300. Compensation from an entity inthe form of items or services (notincluding cash or cash equivalents) thatdoes not exceed an aggregate of $300 peryear, if all of the following conditionsare satisfied:

(1) The compensation is notdetermined in any manner that takesinto account the volume or value ofreferrals or other business generated bythe referring physician.

(2) The compensation may not besolicited by the physician or thephysician’s practice (includingemployees and staff members).

(3) The compensation arrangementdoes not violate the Federal anti-kickback statute, section 1128B(b) of theAct.

(l) Fair market value compensation.Compensation resulting from an



arrangement between an entity and aphysician (or an immediate familymember) or any group of physicians(regardless of whether the group meetsthe definition of a group practice setforth in § 411.351) for the provision ofitems or services by the physician (or animmediate family member) or grouppractice to the entity, if the arrangementis set forth in an agreement that meetsthe following conditions:

(1) It is in writing, signed by theparties, and covers only identifiableitems or services, all of which arespecified in the agreement.

(2) It specifies the timeframe for thearrangement, which can be for anyperiod of time and contain a terminationclause, provided the parties enter intoonly one arrangement for the same itemsor services during the course of a year.An arrangement made for less than 1year may be renewed any number oftimes if the terms of the arrangementand the compensation for the sameitems or services do not change.

(3) It specifies the compensation thatwill be provided under the arrangement.The compensation must be set inadvance, be consistent with fair marketvalue, and not be determined in amanner that takes into account thevolume or value of any referrals or anyother business generated by the referringphysician.

(4) It involves a transaction that iscommercially reasonable (taking intoaccount the nature and scope of thetransaction) and furthers the legitimatebusiness purposes of the parties.

(5) It meets a safe harbor under theanti-kickback statute in § 1001.952 ofthis title, has been approved by the OIGunder a favorable advisory opinionissued in accordance with part 1008 ofthis title, or does not violate the anti-kickback provisions in section 1128B(b)of the Act.

(6) The services to be performedunder the arrangement do not involvethe counseling or promotion of abusiness arrangement or other activitythat violates a State or Federal law.

(m) Medical staff incidental benefits.Compensation in the form of items orservices (not including cash or cashequivalents) from a hospital to amember of its medical staff when theitem or service is used on the hospital’scampus, if all of the followingconditions are met:

(1) The compensation is offered to allmembers of the medical staff withoutregard to the volume or value ofreferrals or other business generatedbetween the parties.

(2) The compensation is offered onlyduring periods when the medical staffmembers are making rounds or

performing other duties that benefit thehospital or its patients.

(3) The compensation is provided bythe hospital and used by the medicalstaff members only on the hospital’scampus.

(4) The compensation is reasonablyrelated to the provision of, or designedto facilitate directly or indirectly thedelivery of, medical services at thehospital.

(5) The compensation is consistentwith the types of benefits offered tomedical staff members—

(i) By other hospitals within the samelocal region; or

(ii) If no such hospitals exist withinthe same local region, by comparablehospitals in comparable regions.

(6) The compensation is of low value(that is, less than $25) with respect toeach occurrence of the benefit (forexample, each meal given to a physicianwhile he or she is serving patients whoare hospitalized must be of low value).

(7) The compensation is notdetermined in any manner that takesinto account the volume or value ofreferrals or other business generatedbetween the parties.

(8) The compensation arrangementdoes not violate the Federal anti-kickback provisions in section 1128B(b)of the Act.

(n) Risk sharing arrangements.Compensation pursuant to a risk-sharingarrangement (including, but not limitedto, withholds, bonuses, and risk pools)between a managed care organization oran independent physicians associationand a physician (either directly orindirectly through a subcontractor) forservices provided to enrollees of ahealth plan, provided that thearrangement does not violate theFederal anti-kickback statute, section1128B(b) of the Act, or any law orregulation governing billing or claimssubmission. For purposes of thisparagraph (n), ‘‘health plan’’ and‘‘enrollees’’ have the meanings ascribedto those terms in § 1001.952(l) of thistitle.

(o) Compliance training. Compliancetraining provided by a hospital to aphysician (or the physician’s immediatefamily member) who practices in thehospital’s local community or servicearea, provided the training is held in thelocal community or service area. Forpurposes of this paragraph (o),‘‘compliance training’’ means trainingregarding the basic elements of acompliance program (for example,establishing policies and procedures,training of staff, internal monitoring,reporting) or specific training regardingthe requirements of Federal health careprograms (for example, billing, coding,

reasonable and necessary services,documentation, unlawful referralarrangements).

(p) Indirect compensationarrangements. Indirect compensationarrangements, as defined in§ 411.354(c)(2), if all of the followingconditions are satisfied:

(1) The compensation received by thereferring physician (or immediate familymember) described in § 411.354(c)(2)(ii)is fair market value for services anditems actually provided not taking intoaccount the value or volume of referralsor other business generated by thereferring physician for the entityfurnishing DHS.

(2) The compensation arrangementdescribed in § 411.354(c)(2)(ii) is set outin writing, signed by the parties, andspecifies the services covered by thearrangement, except in the case of abona fide employment relationshipbetween an employer and an employee,in which case the arrangement need notbe set out in a written contract, but mustbe for identifiable services and becommercially reasonable even if noreferrals are made to the employer.

(3) The compensation arrangementdoes not violate the anti-kickbackstatute or any laws or regulationsgoverning billing or claims submission.

PART 424—CONDITIONS FORMEDICARE 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 and1395hh).

Subpart B—Certification and Plan ofTreatment Requirements

2. In § 424.22, paragraph (d) is revisedto read as set forth below, andparagraphs (e), (f), and (g) are removed.

§ 424.22 Requirements for home healthservices.

* * * * *(d) Limitation on the performance of

certification and plan of treatmentfunctions. The need for home healthservices to be provided by an HHA maynot be certified or recertified, and a planof treatment may not be established andreviewed, by any physician who has afinancial relationship, as defined in§ 411.351 of this chapter, with thatHHA, unless the physician’srelationship meets one of the exceptionsin section 1877 of the Act, which setsforth general exceptions to the referralprohibition related to both ownership/investment and compensation;exceptions to the referral prohibition



1 CPT codes, descriptions and other data only arecopyright 2000 American Medical Association. AllRights Reserved. Applicable FARS/DFARS ClausesApply.

related to ownership or investmentinterests; and exceptions to the referralprohibition related to compensationarrangements.(Catalog of Federal Domestic AssistanceProgram No. 93.773, Medicare-HospitalInsurance; Program No. 93.774, Medicare-Supplementary Medical Insurance Program;and Program No. 93.778, Medical AssistanceProgram)

Dated: October 6, 2000.Michael M. Hash,Acting Administrator, Health Care FinancingAdministration.

Dated: October 16, 2000.Donna E. Shalala,Secretary.

Note: The following attachment will notappear in the Code of Federal Regulations.

Attachment

List of CPT 1/HCPCS Codes Used ToDescribe Certain Designated HealthServices Under the Physician ReferralProvisions (Section 1877 of the SocialSecurity Act)

Clinical Laboratory Services

Include CPT codes for all clinicallaboratory services in the 80000 series,except Exclude CPT codes for thefollowing blood component collectionservices:86890 Autologous blood process86891 Autologous blood, op salvage86915 Bone marrow/stem cell prep86927 Plasma, fresh frozen86930 Frozen blood prep86931 Frozen blood thaw86932 Frozen blood freeze/thaw86945 Blood product/irradiation86950 Leukacyte transfusion86965 Pooling blood platelets86985 Split blood or products

Include HCPCS level 2 codes for otherclinical laboratory services:G0001 Drawing blood for specimenG0026 Fecal leukocyte examinationG0027 Semen analysisG0103 Psa, total screeningG0107 CA screen; fecal blood testG0123 Screen cerv/vag thin layerG0124 Screen c/v thin layer by MDG0141 Scr c/v cyto,autosys and mdG0143–G0145 Scr c/v cyto, thinlayer,

rescrG0147 Scr c/v cyto, automated sysG0148 Scr c/v cyto, autosys, rescrP2028 Cephalin floculation testP2029 Congo red blood testP2031 Hair analysisP2033 Blood thymol turbidityP2038 Blood mucoprotein

P3000 Screen pap by tech w md supvP3001 Screening pap smear by physP7001 Culture bacterial urineP9612 Catheterize for urine specP9615 Urine specimen collect multQ0111 Wet mounts/w preparationsQ0112 Potassium hydroxide prepsQ0113 Pinworm examinationsQ0114 Fern testQ0115 Post-coital mucous exam

Physical Therapy/OccupationalTherapy/Speech-Language Pathology

Include the following CPT codes forthe physical therapy/occupationaltherapy/speech-language pathologyservices in the 97000 series:97001 Pt evaluation97002 Pt re-evaluation97003 Ot evaluation97004 Ot re-evaluation97010 Hot or cold packs therapy97012 Mechanical traction therapy97014 Electric stimulation therapy97016 Vasopneumatic device therapy97018 Paraffin bath therapy97020 Microwave therapy97022 Whirlpool therapy97024 Diathermy treatment97026 Infrared therapy97028 Ultraviolet therapy97032 Electrical stimulation97033 Electric current therapy97034 Contrast bath therapy97035 Ultrasound therapy97036 Hydrotherapy97039 Physical therapy treatment97110 Therapeutic exercises97112 Neuromuscular reeducation97113 Aquatic therapy/exercises97116 Gait training therapy97124 Massage therapy97139 Physical medicine procedure97140 Manual therapy97150 Group therapeutic procedures97504 Orthotic training97520 Prosthetic training97530 Therapeutic activities97532 Cognitive skills development97533 Sensory integration97535 Self care mngment training97537 Community/work reintegration97542 Wheelchair mngment training97545 Work hardening97546 Work hardening add-on97703 Prosthetic checkout97750 Physical performance test97799 Physical medicine procedure

Include CPT codes for physicaltherapy/occupational therapy/speech-language pathology services not in the97000 series:64550 Apply neurostimulator90901 Biofeedback train, any meth90911 Biofeedback peri/uro/rectal92506 Speech/hearing evaluation92507–92508 Speech/hearing therapy92510 Rehab for ear implant

92526 Oral function therapy93797 Cardiac rehab93798 Cardiac rehab/monitor94667–94668 Chest wall manipulation94762 Measure blood oxygen level95831 Limb muscle testing, manual95832 Hand muscle testing, manual95833–95834 Body muscle testing,

manual95851–95852 Range of motion

measurements96105 Assessment of aphasia96110 Developmental test, lim96111 Developmental test, extend96115 Neurobehavior status exam

Include HCPCS level 2 codes for thefollowing physical therapy/occupationaltherapy/speech-language pathologyservices:G0193 Endoscopic study swallow

functnG0194 Sensory testing endoscopic

studG0195 Clinical eval swallowing functG0196 Eval of swallowing with

radioopaG0197 Eval of pt for prescip speech

deviG0198 Patient adapation & train for

speG0199 Reevaluation of patient use

specG0200 Eval of patient prescip of voice

pG0201 Modi for training in use voice

proQ0086 Physical therapy evaluation/

Radiology

Include the following radiology andcertain other imaging services in theCPT 70000 series:70100–70110 X-ray exam of jaw70120–70130 X-ray exam of mastoids70134 X-ray exam of middle ear70140–70150 X-ray exam of facial

bones70160 X-ray exam of nasal bones70190–70200 X-ray exam of eye

sockets70210–70220 X-ray exam of sinuses70240 X-ray exam, pituitary saddle70250–70260 X-ray exam of skull70300–70310 X-ray exam of teeth70320 Full mouth x-ray of teeth70328 X-ray exam of jaw joint70330 X-ray exam of jaw joints70336 Magnetic image, jaw joint70350 X-ray head for orthodontia70355 Panoramic x-ray of jaws70360 X-ray exam of neck70370 Throat x-ray & fluoroscopy70371 Speech evaluation, complex70380 X-ray exam of salivary gland70450 CT head/brain w/o dye70460 CT head/brain w/dye70470 CT head/brain w/o&w dye70480 CT orbit/ear/fossa w/o dye70481 CT orbit/ear/fossa w/dye70482 CT orbit/ear/fossa w/o&w dye



70486 CT maxillofacial w/o dye70487 CT maxillofacial w/dye70488 CT maxillofacial w/o&w dye70490 CT soft tissue neck w/o dye70491 CT soft tissue neck w/dye70492 CT sft tsue nck w/o & w/dye70496 CT angiography, head70498 CT angiography, neck70540 MRI orbit/face/neck w/o dye70542 MRI orbit/face/neck w/dye70543 MRI orbt/fac/nck w/o&w dye70544 MR angiography head w/o dye70545 MR angiography head w/dye70546 MR angiograph head w/o&w

dye70547 MR angiography neck w/o dye70548 MR angiography neck w/dye70549 MR angiograph neck w/o&w

dye70551 MRI brain w/o dye70552 MRI brain w/dye70553 MRI brain w/o&w dye71010–71022 Chest x-ray71023 Chest x-ray and fluoroscopy71030 Chest x-ray71034 Chest x-ray and fluoroscopy71035 Chest x-ray71100 X-ray exam of ribs71101 X-ray exam of ribs/chest71110 X-ray exam of ribs71111 X-ray exam of ribs/chest71120–71130 X-ray exam of

breastbone71250 CT thorax w/o dye71260 CT thorax w/dye71270 CT thorax w/o&w dye71275 CT angiography, chest71550 MRI chest w/o dye71551 MRI chest w/dye71552 MRI chest w/o&w dye71555 MRI angio chest w or w/o dye72010–72020 X-ray exam of spine72040–72052 X-ray exam of neck

spine72069 X-ray exam of trunk spine72070–72074 X-ray exam of thoracic

spine72080–72090 X-ray exam of trunk

spine72100–72120 X-ray exam of lower

spine72125 CT neck spine w/o dye72126 CT neck spine w/dye72127 CT neck spine w/o&w dye72128 CT chest spine w/o dye72129 CT chest spine w/dye72130 CT chest spine w/o&w dye72131 CT lumbar spine w/o dye72132 CT lumbar spine w/dye72133 CT lumbar spine w/o&w dye72141 MRI neck spine w/o dye72142 MRI neck spine w/dye72146 MRI chest spine w/o dye72147 MRI chest spine w/dye72148 MRI lumbar spine w/o dye72149 MRI lumbar spine w/dye72156 MRI neck spine w/o&w dye72157 MRI chest spine w/o&w dye72158 MRI lumbar spine w/o&w dye

72170–72190 X-ray exam of pelvis72191 CT angiograph pelv w/o&w dye72192 CT pelvis w/o dye72193 CT pelvis w/dye72194 CT pelvis w/o&w dye72195 MRI pelvis w/o dye72196 MRI pelvis w/dye72197 MRI pelvis w/o&w dye72200–72202 X-ray exam sacroiliac

joints72220 X-ray exam of tailbone73000 X-ray exam of collar bone73010 X-ray exam of shoulder blade73020–73030 X-ray exam of shoulder73050 X-ray exam of shoulders73060 X-ray exam of humerus73070–73080 X-ray exam of elbow73090 X-ray exam of forearm73092 X-ray exam of arm, infant73100–73110 X-ray exam of wrist73120–73130 X-ray exam of hand73140 X-ray exam of finger(s)73200 CT upper extremity w/o dye73201 CT upper extremity w/dye73202 CT uppr extremity w/o&w dye73206 CT angio upr extrm w/o&w dye73218 MRI upper extremity w/o dye73219 MRI upper extremity w/dye73220 MRI uppr extremity w/o&w dye73221 MRI joint upr extrem w/o dye73222 MRI joint upr extrem w/ dye73223 MRI joint upr extr w/o&w dye73500–73510 X-ray exam of hip73520 X-ray exam of hips73540 X-ray exam of pelvis & hips73550 X-ray exam of thigh73560 X-ray exam of knee, 1 or 273562 X-ray exam of knee, 373564 X-ray exam, knee, 4 or more73565 X-ray exam of knees73590 X-ray exam of lower leg73592 X-ray exam of leg, infant73600–73610 X-ray exam of ankle73620–73630 X-ray exam of foot73650 X-ray exam of heel73660 X-ray exam of toe(s)73700 CT lower extremity w/o dye73701 CT lower extremity w/dye73702 CT lwr extremity w/o&w dye73706 CT angio lwr extr w/o&w dye73718 MRI lower extremity w/o dye73719 MRI lower extremity w/dye73720 MRI lwr extremity w/o&w dye73721 MRI joint of lwr extre w/o d73722 MRI joint of lwr extr w/dye73723 MRI joint lwr extr w/o&w dye73725 MR ang lwr ext w or w/o dye74000–74020 X-ray exam of abdomen74022 X-ray exam series, abdomen74150 CT abdomen w/o dye74160 CT abdomen w/dye74170 CT abdomen w/o&w dye74175 CT angio abdom w/o&w dye74181 MRI abdomen w/o dye74182 MRI abdomen w/dye74183 MRI abdomen w/o&w dye74185 MRI angio, abdom w or w/o dy74210 Contrst x-ray exam of throat74220 Contrast x-ray, esophagus

74230 Cinema x-ray, throat/esoph74240–74245 X-ray exam, upper gi

tract74246–74249 Contrst x-ray uppr gi

tract74250 X-ray exam of small bowel74290 Contrast x-ray, gallbladder74291 Contrast x-rays, gallbladder74710 X-ray measurement of pelvis75552 Heart MRI for morph w/o dye75553 Heart MRI for morph w/dye75554 Cardiac MRI/function75555 Cardiac MRI/limited study75635 CT angio abdominal arteries76000 Fluoroscope examination76006 X-ray stress view76010 X-ray, nose to rectum76020 X-rays for bone age76040 X-rays, bone evaluation76061–76062 X-rays, bone survey76065 X-rays, bone evaluation76066 Joint(s) survey, single film76090 Mammogram, one breast76091 Mammogram, both breasts76092 Mammogram, screening76093 Magnetic image, breast76094 Magnetic image, both breasts76100 X-ray exam of body section76101 Complex body section x-ray76102 Complex body section x-rays76120 Cinematic x-rays76125 Cinematic x-rays add-on76150 X-ray exam, dry process76370 CAT scan for therapy guide76375 3d/holograph reconstr add-on76380 CAT scan follow-up study76390 Mr spectroscopy76400 Magnetic image, bone marrow76499 Radiographic procedure76506 Echo exam of head76511–76512 Echo exam of eye76513 Echo exam of eye, water bath76516–76519 Echo exam of eye76536 Echo exam of head and neck76604 Echo exam of chest76645 Echo exam of breast(s)76700–76705 Echo exam of abdomen76770–76775 Echo exam abdomen

back wall76778 Echo exam kidney transplant76800 Echo exam spinal canal76805–76815 Echo exam of pregnant

uterus76816 Echo exam follow-up/repeat76818 Fetl biophys profil w/stress76819 Fetl biophys profil w/o strs76825–76828 Echo exam of fetal heart76830 Echo exam, transvaginal76831 Echo exam, uterus76856–76857 Echo exam of pelvis76870 Echo exam of scrotum76872 Echo exam, transrectal76873 Echograp trans r, pros study76880 Echo exam of extremity76885–76886 Echo exam, infant hips76970 Ultrasound exam follow-up76977 Us bone density measure76999 Echo examination procedure

Include the following CPT codes forechocardiography and vascularultrasound:



93303–93304 Echo transthoracic93307–93308 Echo exam of heart93320–93321 Doppler echo exam,

heart, if used in conjunction with93303–93308

93325 Doppler color flow add-on, ifused in conjunction with 93303–93308

93875–93882 Extracranial study93886–93888 Intracranial study93922–93924 Extremity study93925–93926 Lower extremity study93930–93931 Upper extremity study93965–93971 Extremity study93975–93979 Vascular study93980–93981 Penile vascular study93990 Doppler flow testing

Include miscellaneous other HCPCSlevel 2 codes for radiology and certainother imaging services:G0050 Residual urine by ultrasoundG0131–132 CT scan, bone density

studyG0188 Xray lwr extrmty-full lngthR0070 Transport portable x-rayR0075 Transport port x-ray multipl

Radiation Therapy Services andSupplies

Include CPT codes for all radiationtherapy services and supplies in theCPT 70000 series:77261–77263 Radiation therapy

planning77280–77295 Set radiation therapy

field77299 Radiation therapy planning77300–77315 Radiation therapy dose

plan77321 Radiation therapy port plan77326–77328 Radiation therapy dose

plan77331 Special radiation dosimetry77332–77334 Radiation treatment

aid(s)77336–77370 Radiation physics

consult77399 External radiation dosimetry77401–77416 Radiation treatment

delivery

77417 Radiology port film(s)77427 Radiation tx management, x577431 Radiation therapy management77432 Stereotactic radiation trmt77470 Special radiation treatment77499 Radiation therapy management77520 Proton trmt, simple w/o comp77522 Proton trmt, simple w/comp77523 Proton trmt, intermediate77525 Proton treatment, complex77600–77620 Hyperthermia treatment77750 Infuse radioactive materials77761 Apply intrcav radiat simple77762 Apply intrcav radiat interm77763 Apply intrcav radiat compl77776 Apply interstit radiat simpl77777 Apply interstit radiat inter77778 Apply iterstit radiat compl77781–77784 High intensity

brachytherapy77789 Apply surface radiation77790 Radiation handling77799 Radium/radioisotope therapy

Include CPT codes for radiationtherapy classified elsewhere:31643 Diag bronchoscope/catheter50559 Renal endoscopy/radiotracer55859 Percut/needle insert, pros61770 Incise skull for treatment61793 Focus radiation beam

Preventive Screening Tests,Immunizations and Vaccines

The following CPT and HCPCS codesare excluded under § 411.355(h) asscreening tests:76092 Mammogram, screening76977 Us bone density measureG0103 Psa, total screeningG0107 CA screen; fecal blood testG0123 Screen cerv/vag thin layerG0124 Screen c/v thin layer by MDG0141 Scr c/v cyto,autosys and mdG0143–G0145 Scr c/v cyto, thin layer,

rescrG0147 Scr c/v cyto, automated sysG0148 Scr c/v cyto, autosys, rescrP3000 Screen pap by tech w md supvP3001 Screening pap smear by phys

The following CPT codes areexcluded under § 411.355(h) asvaccines:90657 Flu vaccine, 6–35 mo, im90658 Flu vaccine, 3 yrs, im90659 Flu vacine, whole, im90732 Pneumococcal vacc, adult/ill90744 Hepb vacc ped/adol 3 dose im90746 Hep b vaccine, adult, im90747 Hepb vacc, ill pat 4 dose im90748 Hep b/hib vaccine, im

Drugs Used by Patients UndergoingDialysis

The following HCPCS codes areexcluded under § 411.355(g) as EPO andother dialysis related outpatientprescription drugs furnished in or by anESRD facility:J0635 Calcitriol injectionJ0895 Deferoxamine meslyate injJ1750 Iron dextranJ2915 NA Ferric Gluconate ComplexJ2997 Alteplase recombinantQ9920 Epoetin with hct <=20Q9921 Epoetin with hct = 21Q9922 Epoetin with hct = 22Q9923 Epoetin with hct = 23Q9924 Epoetin with hct = 24Q9925 Epoetin with hct = 25Q9926 Epoetin with hct = 26Q9927 Epoetin with hct = 27Q9928 Epoetin with hct = 28Q9929 Epoetin with hct = 29Q9930 Epoetin with hct = 30Q9931 Epoetin with hct = 31Q9932 Epoetin with hct = 32Q9933 Epoetin with hct = 33Q9934 Epoetin with hct = 34Q9935 Epoetin with hct = 35Q9936 Epoetin with hct = 36Q9937 Epoetin with hct = 37Q9938 Epoetin with hct = 38Q9939 Epoetin with hct = 39Q9940 Epoetin with hct >= 40

[FR Doc. 01–4 Filed 1–3–01; 8:45 am]BILLING CODE 4120–03–P
