Medicare and Medicaid Programs; Physicians' Referrals to Health Care Entities With Which They Have Financial Relationships

SUMMARY: This proposed rule would incorporate into regulations the

provisions of sections 1877 and 1903(s) of the Social Security Act.

Under section 1877, if a physician or a member of a physician's

immediate family has a financial relationship with a health care

entity, the physician may not make referrals to that entity for the

furnishing of designated health services under the Medicare program,

unless certain exceptions apply. The following services are designated

health services:

Clinical laboratory services.

Physical therapy services.

Occupational therapy services.

Radiology services, including magnetic resonance imaging,

computerized axial tomography scans, and ultrasound services.

Radiation therapy services and supplies.

Durable medical equipment and supplies.

Parenteral and enteral nutrients, equipment, and supplies.

Prosthetics, orthotics, and prosthetic devices and

supplies.

Home health services.

Outpatient prescription drugs.

Inpatient and outpatient hospital services.

In addition, section 1877 provides that an entity may not present

or cause to be presented a Medicare claim or bill to any individual,

third party payer, or other entity for designated health services

furnished under a prohibited referral, nor may the Secretary make

payment for a designated health service furnished under a prohibited

referral.

Section 1903(s) of the Social Security Act extended aspects of the

referral prohibition to the Medicaid program. It denies payment under

the Medicaid program to a State for certain expenditures for designated

health services. Payment would be denied if the services are furnished

to an individual on the basis of a physician referral that would result

in the denial of payment for the services under Medicare if Medicare

covered the services to the same extent and under the same terms and

conditions as under the State plan.

This proposed rule incorporates these statutory provisions into the

Medicare and Medicaid regulations and interprets certain aspects of the

law. The proposed rule is based on the provisions of section 1903(s)

and section 1877 of the Social Security Act, as amended by section

13562 of the Omnibus Budget Reconciliation Act of 1993, and by section

152 of the Social Security Act Amendments of 1994.

DATES: Comments will be considered if we receive them at the

appropriate address, as provided below, no later than 5 p.m. on March

10, 1998. We will also consider comments that we received in response

to the final rule with comment period, ``Physician Financial

Relationships With, and Referrals to, Health Care Entities That Furnish

Clinical Laboratory Services and Financial Relationship Reporting

Requirements,'' which we published in the Federal Register on August

14, 1995 (60 FR 41914).

ADDRESSES: Mail written comments (1 original and 3 copies) to the

following address: Health Care Financing Administration, Department of

Health and Human Services, Attention: HCFA-1809-P, P.O. Box 26688,

Baltimore, MD 21207.

If you prefer, you may deliver your written comments (1 original

and 3 copies) to one of the following addresses:

Room 309-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW.,

Washington, DC 20201, or

Room C5-09-26, 7500 Security Boulevard, Baltimore, MD 21244-1850.

Comments may also be submitted electronically to the following e-

mail address: hcfa1809p.hcfa.gov. E-mail comments must include the full

name and address of the sender and must be submitted to the referenced

address in order to be considered. All comments must be incorporated in

the e-mail message because we may not be able to access attachments.

Because of staffing and resource limitations, we cannot accept comments

by facsimile (FAX) transmission. In commenting, please refer to file

code HCFA-1809-P. Comments received timely will be available for public

inspection as they are received, generally beginning approximately 3

weeks after publication of a document, in Room 309-G of the

Department's offices at 200 Independence Avenue, SW., Washington, DC,

on Monday through Friday of each week from 8:30 a.m. to 5 p.m. (phone:

(202) 690-7890).

Copies: To order copies of the Federal Register containing this

document, send your request to: New Orders, Superintendent of

Documents, P.O. Box 371954, Pittsburgh, PA 15250-7954. Specify the date

of the issue requested and enclose a check or money order payable to

the Superintendent of Documents, or enclose your Visa or Master Card

number and expiration date. Credit card orders can also be placed by

calling the order desk at (202) 783-3238 or by faxing to (202) 275-

6802. The cost for each copy is $8. As an alternative, you can view and

photocopy the Federal Register document at most libraries designated as

Federal Depository Libraries and at many other public and academic

libraries throughout the country that receive the Federal Register.

This Federal Register document is also available from the Federal

Register online database through GPO Access, a service of the U.S.

Government Printing Office. Free public access is available on a Wide

Area Information Server (WAIS) through the Internet and via

asynchronous dial-in. Internet users can access the database by using

the World Wide Web; the Superintendent of Documents home page address

is http://www.access.gpo.gov/su_docs/, by using local WAIS client

software, or by telnet to swais.access.gpo.gov, then log in as guest

(no password required). Dial-in users should use communications

software and modem to call (202) 512-1661; type swais, then log in as

guest (no password required).

FOR FURTHER INFORMATION CONTACT: Joanne Sinsheimer (410) 786-4620.

SUPPLEMENTARY INFORMATION: To assist readers in referencing sections

contained in this proposed rule, we are providing the following table

of contents:

Table of Contents

I. Background

A. Problems Associated with Physician Self-referrals

B. Legislation Designed to Address Self-referrals and Similar

Practices

1. Legislative history of section 1877

2. Recent provisions and how they relate to each other

C. HCFA and OIG Regulations Relating to Section 1877

II. Sections 1877 and 1903(s) of the Act and the Provisions of This

Proposed Rule

A. Reflecting the Statutory Changes in Section 1877

1. General prohibition

2. Definitions

a. Referral, referring physician

[[Page 1660]]

b. Designated health services

c. Financial relationship

d. Compensation arrangement, remuneration

3. General Exceptions to the Prohibition on Physician Referrals

a. Exception--physician services

b. Exception--in-office ancillary services

c. Exception--certain prepaid health plans

d. Other exceptions

4. Exceptions That Apply Only to Certain Ownership or Investment

Interests

a. Exception--certain investment securities and shares

b. Exception--ownership or investment interest in certain health

care facilities

5. Exceptions That Apply Only to Certain Compensation

Arrangements

a. Exception--rental of office space

b. Exception--rental of equipment

c. Exception--bona fide employment relationship

d. Exception--personal service arrangements

e. Exception--remuneration unrelated to the provision of

designated health services

f. Exception--physician recruitment

g. Exception--isolated transaction

h. Exception--certain group practice arrangements with a

hospital

i. Exception--payments by a physician for items and services

6. Requirements Related to the ``Substantially All'' Test

7. Reporting Requirements

8. Sanctions

9. Additional Definitions

a. ``Clinical laboratory services''

b. ``Entity''

c. ``Hospital''

d. ``HPSA''

e. ``Immediate family member'' or ``member of a physician's

immediate family''

f. ``Laboratory''

g. ``Plan of care''

10. Conforming Changes

11. Editorial Changes

B. Applying The Referral Prohibition to the Medicaid Program:

Section 1903(s) of the Act and the Provisions of this Proposed Rule

III. Interpretations of Sections 1877 and 1903(s) of the Act

A. Definitions

1. Designated health services

a. Clinical laboratory services

b. Physical therapy services (including speech-language

pathology services)

c. Occupational therapy services

d. Radiology services, including magnetic resonance imaging,

computerized axial tomography scans, ultrasound services, and

radiation therapy services and supplies

e. Durable medical equipment and supplies

f. Parenteral and enteral nutrients, equipment, and supplies

g. Prosthetics, orthotics, and prosthetic devices

h. Home health services

i. Outpatient prescription drugs

j. Inpatient hospital services

k. Outpatient hospital services

2. Direct supervision

3. Entity

4. Fair market value

5. Financial relationship

6. Group practice

7. Referral

8. Remuneration

B. General Prohibition on Referrals

C. General Exceptions That Apply to Ownership or Investment

Interests and to Compensation Arrangements

1. Exception for physician services

2. Exception for in-office ancillary services

a. The site requirement

b. The billing requirement

c. Designated health services that do not trigger the in-office

exception

3. Exception for services provided under prepaid health plans

a. Physicians, suppliers, and providers that contract with

prepaid organizations

b. Managed care organizations under the Medicaid program

c. Evolving structures of integrated delivery and other health

care delivery systems

d. Designated health services furnished under a demonstration

project or waiver

D. Exceptions That Apply Only to Ownership or Investment

Interests

1. Exception for ownership in publicly traded securities

2. Exception for hospital ownership

E. Exceptions That Apply Only to Compensation Arrangements

1. A new exception for all compensation arrangements that meet

certain standards

2. A new exception for certain forms of ``de minimis''

compensation

3. The ``volume or value of referrals'' standard

4. The commercial reasonableness standard

5. The Secretary's authority to create additional requirements

6. Exception for bona fide employment relationships

7. Exception for personal services arrangements

8. Exception for remuneration unrelated to the provision of

designated health services

9. Exception for a hospital's payments for physician recruitment

10. Exception for certain group practice arrangements with a

hospital

11. Exception for payments by a physician for items and services

F. The Reporting Requirements

1. Which financial relationships must be reported

2. What entities outside the United States must report

G. How the Referral Prohibition Applies to the Medicaid Program

1. Who qualifies as a ``physician'' for purposes of section

1903(s)

2. How the referral prohibition and sanctions affect Medicaid

providers

3. How the referral rules apply when Medicaid-covered designated

health services differ from the services covered under Medicare

4. How the reporting requirements apply under the Medicaid

program

IV. Our Responses to Questions About the Law

A. Definitions

1. Compensation arrangement

What is an ``indirect'' compensation arrangement?

Which exceptions apply in indirect situations?

2. Entity

What are the characteristics of an ``entity'' that provides for

the furnishing of designated health services?

When is an entity furnishing, or providing for the furnishing

of, designated health services?

3. Financial relationship

How do equity and debt qualify as ownership?

Is membership in a nonprofit corporation an ownership or

investment interest?

Do stock options and nonvested interests constitute ownership?

4. Group practice

What is the ``full range of services'' test?

5. Immediate family member or member of a physician's immediate

family

How does the prohibition affect a physician's referrals to

immediate family members?

If one member of a group practice cannot make a referral to an

entity, are all other group practice physicians also precluded?

6. Remuneration

Do payments qualify as remuneration only if they result in a net

benefit?

B. General prohibition--What constitutes a prohibited referral

Does the prohibition apply only if a physician refers directly

to a particular related entity?

When is the owner of a designated health services provider

considered as equivalent to that provider?

Has a physician made a referral to a particular entity if

another individual directs the patient there?

How will HCFA interpret situations in which it is not clear

whether a physician has referred to a particular entity?

C. General Exceptions That Apply to Ownership or Investment

Interests and to Compensation Arrangements

1. The in-office ancillary exception

Can a physician supply crutches as in-office ancillary services?

2. Exception for services furnished by organizations operating

under prepaid plans.

Can a physician refer non-enrollees to a related prepaid

organization or to its physicians and providers?

3. Other permissible exceptions for financial relationships that

do not pose a risk of program or patient abuse.

Should situations that meet a safe harbor under the anti-

kickback statute be automatically excepted?

D. Exceptions That Apply Only to Ownership or Investment

Interests

1. Exception for ownership in publicly traded securities or

mutual funds

Does the exception for publicly traded securities apply to stock

options?

2. Exception for services provided by a hospital in which a

physician or family member has an interest

Can a physician or family member own an interest in a chain of

hospitals?

[[Page 1661]]

E. Exceptions That Apply Only to Compensation Arrangements

1. Compensation arrangements in general

Can a lease or arrangement for items or services have a

termination clause?

Will a physician's referrals be prohibited if an entity pays for

certain incidental benefits?

2. Exception for agreements involving the rental of office space

or equipment

Can a lessee sublet office space or equipment?

Does the lease exception apply to any kind of lease covering

space or equipment?

Can a lease provide for payment based on how often the equipment

is used?

3. Exception for personal services arrangements

How does the physician incentive plan exception apply when an

enrolling entity contracts with a group practice?

V. Regulatory Impact Statement

A. Background

B. Anticipated Effects and Alternatives Considered

1. Physicians

2. Entities, including hospitals

C. Conclusion

VI. Collection of Information Requirements

VII. Response to Comments

I. Background

A. Problems Associated With Physician Self-referrals

When a patient seeks medical care, his or her physician has a major

role in determining the kind and amount of health care services the

patient will receive. Having a financial interest in an entity that

furnishes these services can affect a physician's decision about what

medical care to furnish a patient and who should furnish the care. In

fact, numerous studies have raised serious concerns about the referral

patterns of physicians who make self-referrals (referrals to entities

with which they or their family members have financial relationships).

In June 1988, Congress mandated that the Office of Inspector

General (OIG) of the Department of Health and Human Services conduct a

study on physician ownership of and compensation from health care

entities to which the physicians make referrals. The OIG reported that

patients of referring physicians who owned or invested in independent

clinical laboratories received 45 percent more laboratory services than

all Medicare patients in general. The OIG found similar effects on

utilization associated with the existence of compensation arrangements

between laboratories and physicians. Patients of these physicians used

32 percent more laboratory services than all Medicare patients in

general. (``Financial Arrangements Between Physicians and Health Care

Businesses: Report to Congress,'' Office of Inspector General, DHHS,

pages 18 and 21 (May 1989)). Based in part on the results of this

study, Congress enacted, in November of 1989, section 1877 of the

Social Security Act (the Act). (Unless otherwise indicated, references

to sections of the law below are to sections of the Act.) We discuss

section 1877 in detail below.

Subsequent studies have supported the OIG findings on self-

referrals. The studies indicate that other types of services are also

associated with higher utilization and increased costs. For example, in

1991 the Florida Cost Containment Board (the Board) analyzed the effect

of joint venture arrangements on the following aspects of health care:

access, costs, charges, utilization, and quality. A joint venture was

defined as any ownership or investment interest or compensation

arrangement involving physicians (or any health care professionals who

make referrals) and an entity providing health care goods or services.

The Board found that doctor-owned clinical laboratories, diagnostic

imaging centers, and physical therapy and rehabilitation centers

performed more procedures on a per-patient basis and charged higher

prices than nondoctor-affiliated facilities. The Board concluded that

there might be referral problems or the results did not allow clear

conclusions for ambulatory surgical centers, durable medical equipment

suppliers, home health agencies, and radiation therapy centers. The

study revealed that little or no impact existed for acute care

hospitals and nursing homes. (``Joint Ventures Among Health Care

Providers in Florida,'' State of Florida Health Care Cost Containment

Board (Sept. 1991)).

Additionally, in 1994, the General Accounting Office (GAO) released

an analysis of 2.4 million diagnostic imaging services ordered by

17,900 physicians in the State of Florida. The GAO found that Florida

physicians with a financial interest in joint venture imaging centers

had higher referral rates for almost all types of imaging services than

other Florida physicians. The differences in the referral rates were

greatest for costly high-technology imaging services. For example,

owners of joint ventures ordered 54 percent more magnetic resonance

imaging scans for patients than did non-owners.

The GAO study also found that Florida physicians, group practices,

or other practice affiliations with imaging facilities in their own

offices ordered imaging tests more frequently than physicians who

referred their patients to imaging facilities outside their practices.

The in-practice imaging rates were about 3 times higher for magnetic

resonance imaging scans; about 2 times higher for computed tomograph

scans; 4.5 to 5.1 times higher for ultrasound, echocardiography, and

diagnostic nuclear medicine imaging; and about 2 times higher for

complex and simple X-rays. (GAO Report, ``Medicare: Referrals to

Physician-owned Imaging Facilities Warrant HCFA's Scrutiny,'' No. B-

253835; pages 2, 3, and 10, October 1994.)

Several other studies, appearing in the New England Journal of

Medicine and the Journal of the American Medical Association, have

found increased utilization for a variety of services when the

physicians have a financial relationship with the entity to which they

refer their patients. (See, for example, Bruce J. Hillman, M.D., and

others, ``Physicians' Utilization and Charges for Outpatient Diagnostic

Imaging in a Medicare Population,'' Journal of the American Medical

Association, Vol. 268, No. 15 (Oct. 21, 1992), pp. 2050-2054; Hemenway

D., Killen A., and others, ``Physicians' Responses to Financial

Incentives--Evidence From a For-profit Ambulatory Care Center,'' New

England Journal of Medicine, Vol. 322, No. 15 (April 12, 1990), pp.

1059-1063; Alex Swedlow and others, ``Increased Costs and Rates of Use

in the California Workers' Compensation System as a Result of Self

Referral by Physicians,'' New England Journal of Medicine, Vol. 327,

No. 21 (Nov. 19, 1992), pp. 1502-1506.)

B. Legislation Designed to Address Self-referrals and Similar Practices

1. Legislative History of Section 1877

Section 6204 of the Omnibus Budget Reconciliation Act of 1989 (OBRA

'89), Public Law 101-239, enacted on December 19, 1989, added section

1877 to the Social Security Act. In general, section 1877 as it read

under OBRA '89 provided that, if a physician (or an immediate family

member of a physician) had a financial relationship with a clinical

laboratory, that physician could not make a referral to the laboratory

entity for the furnishing of clinical laboratory services for which

Medicare might otherwise pay. (For the sake of brevity, whenever we

refer to ``immediate family member'' or ``family member,'' this means

``a member of the physician's immediate family.'') It also provided

that the laboratory could not present or cause to be presented a

Medicare claim or bill to any individual, third party payer, or other

entity for clinical laboratory services furnished under the prohibited

referral. Additionally, it required a refund of any

[[Page 1662]]

amount collected from an individual as a result of a billing for an

item or service furnished under a prohibited referral.

The statute defined ``financial relationship'' as an ownership or

investment interest in the entity or a compensation arrangement between

the physician (or immediate family member) and the entity. The statute

provided a number of exceptions to the prohibition. Some of these

exceptions applied to both ownership/investment interests and

compensation arrangements, while other exceptions applied to only one

or the other of these. Additionally, the statute imposed reporting

requirements and provided for sanctions.

Section 4207(e) of the Omnibus Budget Reconciliation Act of 1990

(OBRA '90), Public Law 101-508, enacted on November 5, 1990, amended

certain provisions of section 1877 to clarify definitions and reporting

requirements relating to physician ownership and referral and to

provide an additional exception to the prohibition.

Section 13562 of the Omnibus Budget Reconciliation Act of 1993

(OBRA '93), Public Law 103-66, enacted on August 10, 1993, extensively

revised section 1877. It modified the prior law to apply to referrals

for ten ``designated health services'' in addition to clinical

laboratory services, modified some exceptions, and added new ones.

Section 152 of the Social Security Act Amendments of 1994 (SSA '94),

Public Law 103-432, enacted on October 31, 1994, amended the list of

designated services, effective January 1, 1995. (Section II of this

preamble contains a listing of the designated health services.) It also

changed the reporting requirements in section 1877(f) and amended some

of the effective dates of the OBRA '93 provisions.

Section 13624 of OBRA '93 extended aspects of the referral

prohibition to the Medicaid program. It amended section 1903 of the Act

by adding a new paragraph (s). This provision denies Federal financial

participation (FFP) payment under the Medicaid program to a State for

certain expenditures for designated health services. A State cannot

receive FFP for designated health services furnished to an individual

on the basis of a physician referral that would result in a denial of

payment under the Medicare program if Medicare covered the services to

the same extent and under the same terms and conditions as under the

State Medicaid plan. Section 13624 also specified that the reporting

requirements of section 1877(f) and the civil money penalty provision

of section 1877(g)(5) (which relates to reporting) apply to a provider

of a designated health service for which payment may be made under

Medicaid in the same manner as they apply to a provider of a designated

health service for which payment may be made under Medicare.

We describe the provisions of section 1877, as amended, in detail

in part A of section II of this preamble. We discuss section 1903(s) in

part B of section II.

2. Recent Provisions and How They Relate to Each Other

Congress has enacted into law several provisions governing

financial relationships between entities furnishing health care

services and those health care professionals who refer patients to

them. For example, the ``anti-kickback statute'' provides criminal

penalties for individuals or entities that knowingly and willfully

offer, pay, solicit, or receive remuneration to induce the furnishing

of items or services covered by Medicare or State health care programs

(including Medicaid, and any State program receiving funds under titles

V or XX of the Act). (This provision was originally enacted in 1972 as

part of the Social Security Amendments of 1972, Public Law 92-603. It

was revised in 1977 (in Public Law 95-142) to read as it does today. It

was subsequently recodified by the Medicare and Medicaid Program

Patient Protection Act of 1987 (Public Law 100-93). It currently

appears at 42 U.S.C. 1320a-7b(b)(2) and section 1128B(b) of the Social

Security Act.)

Both the anti-kickback statute and section 1877 address Congress'

concern that health care decisionmaking can be unduly influenced by a

profit motive. When physicians have a financial incentive to refer,

this incentive can affect utilization, patient choice, and competition.

Physicians can overutilize by ordering items and services for patients

that, absent a profit motive, they would not have ordered. A patient's

choice can be affected when physicians steer patients to less

convenient, lower quality, or more expensive providers of health care,

just because the physicians are sharing profits with, or receiving

remuneration from, the providers. And lastly, where referrals are

controlled by those sharing profits or receiving remuneration, the

medical marketplace suffers since new competitors can no longer win

business with superior quality, service, or price. Although the

purposes behind the anti-kickback statute and section 1877 are similar,

it is important to analyze them separately. In other words, to operate

lawfully under Medicare and Medicaid, one must comply with both

statutes.

Anti-kickback statute: The anti-kickback statute is a criminal

statute that applies to those who knowingly and willfully offer, pay,

solicit, or receive remuneration to induce the furnishing of items or

services under Medicare or State health care programs (including

Medicaid). The offense is classified as a felony and is punishable by

fines of up to $25,000 and imprisonment for up to 5 years. Violation of

the statute is also a basis for exclusion from Medicare and Medicaid.

Since the statute on its face is very broad, a number of health

care entities expressed concern after its enactment that many

relatively innocuous, or even beneficial, commercial arrangements are

technically covered by the statute and can therefore lead to criminal

prosecution. Congress addressed this fact by enacting section 14 of the

Medicare and Medicaid Patient and Program Protection Act of 1987. This

provision requires the Department of Health and Human Services to issue

``safe harbors,'' specifying those payment practices that will not be

subject to criminal prosecution under the anti-kickback statute and

will not provide a basis for an exclusion. The safe harbors are not

mandatory in the sense that one is required to fit into a safe harbor.

The safe harbors exist to provide absolute immunity to those

arrangements.

Section 1877: Section 1877 prohibits physicians from referring

Medicare patients to certain entities for designated health services if

the physician (or an immediate family member) has a financial

relationship with the entity, unless the relationship fits into an

exception. Certain aspects of section 1877 also affect Medicaid

referrals. While there are other remedies, section 1877 is primarily a

payment ban that is effective regardless of intent. Many of the

exceptions in section 1877 are similar to the safe harbors under the

anti-kickback statute, such as exceptions for certain employees,

personal service arrangements, and space and equipment rentals. The

exceptions are different in the sense that, under section 1877, a

physician is required to meet an exception if the physician wants to

make an otherwise prohibited referral, while under the anti-kickback

statute, a health care provider is not required to meet a safe harbor.

That is, if a provider meets a safe harbor, it is automatically

protected from prosecution. If a provider does not meet a safe harbor,

it may still be in compliance with the anti-kickback statute and

therefore be safe from prosecution, but that

[[Page 1663]]

determination would be based on a case-by-case assessment of the facts.

C. HCFA and OIG Regulations Relating to Section 1877

On December 3, 1991, we issued an interim final rule with comment

period (56 FR 61374) setting forth the reporting requirements under

section 1877(f). On March 11, 1992, we published a proposed rule (57 FR

8588) setting forth the self-referral prohibition and exceptions to the

prohibition in section 1877, as these provisions were amended by OBRA

'90, and as they relate to referrals for clinical laboratory services.

On October 20, 1993, the OIG published a proposed rule (58 FR

54096) that would set forth in regulations the penalty provisions

specified in sections 1877(g)(3) and (g)(4). The final rule with

comment period implementing the civil money penalty provisions was

published on March 31, 1995 (60 FR 16580).

On August 14, 1995, we published a final rule with comment period

in the Federal Register (60 FR 41914) that incorporated into

regulations the provisions of section 1877 that relate to the

prohibition on physician referrals for clinical laboratory services.

The August 1995 final rule contains revisions to the March 11, 1992

proposal based on comments submitted by the public. Further, it

incorporates the amendments and exceptions created by OBRA '93 and the

amendments in SSA '94 that relate to referrals for clinical laboratory

services.

The final rule addresses only those changes that had a retroactive

effective date of January 1, 1992; it does not incorporate those

modifications made to section 1877 that became effective for referrals

made after December 31, 1994. (Even though the August 1995 final rule

incorporates OBRA '93 and SSA '94 provisions, it generally only

reiterates them without interpreting them. We interpreted the new

provisions only in a few instances in which it was necessary to do so

in order to implement the statute at all.) The final rule also responds

to comments received on the December 1991 interim final rule covering

the reporting requirements. In addition, it revises the regulations

established by that rule to incorporate the amendments to section

1877(f) made by SSA '94, to apply to any future reporting that we

require.

II. Sections 1877 and 1903(s) of the Act and the Provisions of This

Proposed Rule

Many of the provisions covered below are discussed in detail in the

preamble of either the March 1992 proposed rule or the August 1995

final rule in the context of referrals for clinical laboratory

services. We are proposing, as discussed below, to leave a number of

these provisions unchanged except to apply them to the additional

designated health services. Readers who desire more background

information on these provisions are referred to the earlier documents.

We are also proposing to amend the provisions of the August 1995

final regulation to reflect other changes in section 1877 that were

enacted in OBRA '93 or in SSA '94 and became effective on January 1,

1995. In part A of this section, we discuss how we have altered the

final regulation to apply it to the additional designated health

services, and to reflect the statutory changes in section 1877 that

took effect on January 1, 1995. Part B of this section covers the

changes made by section 13624 of OBRA '93 to the Medicaid program in

section 1903(s) of the Act. Section 13624 applies aspects of the

referral prohibition to the Medicaid program for referrals made on or

after December 31, 1994. We discuss in part B how we propose to amend

the Medicaid regulations to reflect the statutory changes.

In section III of this preamble we discuss in detail how we propose

to interpret any provisions in sections 1877 and 1903(s) that we

believe are ambiguous, incomplete, or that provide the Secretary with

discretion. We also discuss policy changes or clarifications we propose

to make to the August 1995 rule. In section IV, we present some of the

most common questions concerning physician referrals that we received

from the health care community. We include in section IV our

interpretations of how the law applies in the situations described to

us.

A. Reflecting the Statutory Changes in Section 1877

1. General Prohibition

With certain exceptions, section 1877(a)(1)(A) prohibits a

physician from making a referral to an entity for the furnishing of

designated health services, for which Medicare may otherwise pay, if

the physician (or an immediate family member) has a financial

relationship with that entity. This provision as it related to clinical

laboratory services was incorporated into our regulations at

Sec. 411.353(a) by the August 1995 final rule. We would revise

Sec. 411.353(a) to apply the prohibition to referrals for designated

health services.

Section 1877(a)(1)(B) prohibits an entity from presenting, or

causing to be presented, either a Medicare claim or a bill to any

individual, third party payor, or other entity for designated health

services furnished under a prohibited referral. This provision, with

regard to clinical laboratory services, was incorporated into our

regulations at Sec. 411.353(b) by the August 1995 final rule. We would

revise Sec. 411.353(b) to apply it to claims or bills for any of the

designated health services.

2. Definitions

For purposes of section 1877, the statute provides definitions of a

number of terms. Because they are important to understanding the

general prohibition set forth above, we discuss certain of these

definitions immediately below. The statutory definitions of other terms

are presented elsewhere in this preamble when relevant.

a. Referral, referring physician

As defined by section 1877(h)(5), a ``referral'' means the

following:

The request by a physician for an item or service for

which payment may be made under Medicare Part B, including the request

by a physician for a consultation with another physician (and any test

or procedure ordered by, or to be performed by (or under the

supervision of) that other physician).

The request or establishment of a plan of care by a

physician that includes the furnishing of designated health services.

Section 1877(h)(5)(C), however, provides an exception to this

definition in the case of a request by a pathologist for clinical

diagnostic laboratory tests and pathological examination services, (and

as added by OBRA '93) a request by a radiologist for diagnostic

radiology services, and a request by a radiation oncologist for

radiation therapy if the services are furnished by (or under the

supervision of) the pathologist, radiologist, or radiation oncologist,

respectively, as a result of a consultation requested by another

physician.

The August 1995 final rule incorporated section 1877(h)(5), with

regard to clinical laboratory services, into our regulations by

defining ``referral'' at Sec. 411.351. We interpreted a referral as the

request by a physician for, or the ordering of, any item or service

covered under Medicare Part B. We interpreted the referral for other

items or services as a request by a physician that includes the

provision of laboratory services or the establishment of a plan of care

by a physician that includes the provision of laboratory services. We

also included the statutory exception for certain clinical diagnostic

laboratory tests and pathological examination services requested by a

pathologist.

[[Page 1664]]

This proposed rule would revise the definition of ``referral'' to

apply it to referrals for designated health services. In accordance

with section 1877(h)(5)(C), we would also add the exception to the

definition described above relating to a request by a radiologist for

diagnostic radiology services and a request by a radiation oncologist

for radiation therapy. In addition, we would make a technical change in

this section. We would remove the phrase ``any item or service'' and

replace it with the phrase ``any service.'' Because the term

``services'' is defined in our regulations (at Sec. 400.202) to include

``items,'' the phrase ``any item or service'' contains a redundancy.

Hereinafter, unless we specifically state otherwise, we use the term

``service(s)'' as including ``item(s).'' We have also made several

other changes to the definition that are discussed in section III of

this preamble.

Also, in accordance with section 1877(h)(5), the August 1995 final

rule at Sec. 411.351 defined ``referring physician'' as a physician (or

group practice) who makes a referral as defined in Sec. 411.351. This

proposed rule would retain this definition, but with one amendment that

is described in section IV.A.5 of this preamble.

b. Designated health services

Section 1877(h)(6) defines ``designated health services'' as any of

the following services:

Clinical laboratory services.

Physical therapy services.

Occupational therapy services.

Radiology services, including magnetic resonance imaging,

computerized axial tomography scans, and ultrasound services.

Radiation therapy services and supplies.

Durable medical equipment and supplies.

Parenteral and enteral nutrients, equipment, and supplies.

Prosthetics, orthotics, and prosthetic devices and

supplies.

Home health services.

Outpatient prescription drugs.

Inpatient and outpatient hospital services.

This proposed rule would incorporate this definition of

``designated health services'' into our regulations at Sec. 411.351,

except that, for purposes of definition, we would combine radiology

services and radiation therapy services and supplies. Also, we propose

to define each of these designated health services in Sec. 411.351. We

explain our definitions and interpretations in section III of this

preamble.

c. Financial relationship

Section 1877(a)(2) describes a financial relationship between a

physician (or an immediate family member) and an entity as being an

ownership or investment interest in the entity or a compensation

arrangement between a physician (or immediate family member) and the

entity. (We discuss compensation arrangements in the next section). The

statute provides that an ownership or investment interest may be

established through equity, debt, or other means. The statute further

specifies that an ownership or investment interest includes an interest

in an entity that holds an ownership or investment interest in any

entity furnishing designated health services.

The August 1995 final rule incorporated this definition into our

regulations, with regard to clinical laboratory services, at

Sec. 411.351. That section specifies that a financial relationship

includes an interest in an entity that holds an ownership or investment

interest in any entity providing laboratory services. This proposed

rule would revise the definition to specify that a financial

relationship includes an interest in an entity that holds an ownership

or investment interest in any entity providing designated health

services. We have also made certain other changes described in section

III of this preamble.

d. Compensation arrangement, remuneration

Section 1877(h)(1)(A) defines a ``compensation arrangement'' as any

arrangement involving any remuneration between a physician (or

immediate family member) and an entity, other than an arrangement

involving only remuneration described in section 1877(h)(1)(C). Section

1877(h)(1)(B) defines ``remuneration'' to include ``any remuneration,

directly or indirectly, overtly or covertly, in cash or in kind.''

Section 1877(h)(1)(C) provides that a compensation arrangement does not

include the following types of remuneration:

The forgiveness of amounts owed for inaccurate tests or

procedures, mistakenly performed tests or procedures, or the correction

of minor billing errors.

The provision of items, devices, or supplies that are used

solely to--

+ Collect, transport, process, or store specimens for the entity

providing the item, device, or supply; or

+ Order or communicate the results of tests or procedures for the

entity.

A payment made by an insurer or a self-insured plan to a

physician to satisfy a claim, submitted on a fee-for-service basis, for

the furnishing of health services by that physician to an individual

who is covered by a policy with the insurer or by the self-insured

plan, if--

+ The health services are not furnished, and the payment is not

made, under a contract or other arrangement between the insurer or the

plan and the physician;

+ The payment is made to the physician on behalf of the covered

individual and would otherwise be made directly to the individual;

+ The amount of the payment is set in advance, does not exceed fair

market value, and is not determined in a manner that takes into account

directly or indirectly the volume or value of any referrals; and

+ The payment meets any other requirements the Secretary may impose

by regulation as needed to protect against Medicare program or patient

abuse.

The above definitions of a ``compensation arrangement'' and

``remuneration'' were incorporated into our regulations at Sec. 411.351

by the August 1995 final rule. In the definition of ``compensation

arrangement,'' we clarified that such an arrangement could be either

direct or indirect. This proposed rule would retain that definition.

Also, because the statute defines ``remuneration'' only by referring to

how the remuneration might be made (for example, in cash or in kind),

we interpreted remuneration to mean any payment, discount, forgiveness

of debt, or other benefit. This proposed rule would retain the

definition of ``remuneration,'' with one change. We will consider that

payments made by an insurer to a physician are not ``remuneration'' if

they meet the requirements in the statute, and if the amount of the

payment does not take into account directly or indirectly other

business generated between the parties. We explain this change in

section III.E.3 of this preamble.

3. General Exceptions to the Prohibition on Physician Referrals

Section 1877(b) provides for general exceptions to the prohibition

on referrals. (General exceptions are exceptions that apply to both

ownership/investment interests and compensation arrangements.)

Because the first two of these exceptions apply to a ``group

practice,'' we begin with a discussion of ``group practice'' as defined

in section 1877. A ``group practice,'' as defined in section

1877(h)(4), is a group of two or more physicians legally organized as a

[[Page 1665]]

partnership, professional corporation, foundation, not-for-profit

corporation, faculty practice plan, or similar association, that meets

the following conditions:

Each physician member of the group furnishes substantially

the full range of services that the physician routinely furnishes,

including medical care, consultation, diagnosis, or treatment, through

the joint use of shared office space, facilities, equipment, and

personnel.

Substantially all of the services of the physician members

of the group are furnished through the group, are billed under a

billing number assigned to the group, and amounts so received are

treated as receipts of the group (the ``substantially all'' test, which

we discuss below). (The predecessor provision, that is, the provision

as it read before January 1, 1995, required that the services be billed

in the name of the group (not that they be billed under a billing

number assigned to the group).)

The overhead expenses of and the income from the practice

are distributed in accordance with methods previously determined.

Except for profits and productivity bonuses that meet the

conditions described below, no physician member of the group directly

or indirectly receives compensation based on the volume or value of

referrals by the physician. (Added by OBRA '93 to be effective January

1, 1995.)

Members of the group personally conduct at least 75

percent of the physician-patient encounters of the group practice.

(Added by OBRA '93 to be effective January 1, 1995.)

The group practice complies with all other standards

established by the Secretary in regulations.

With regard to the above definition, section 1877(h)(4)(B)

establishes the following ``Special Rules'':

A physician in a group practice may be paid a share of the

overall profits of the group, or a productivity bonus based on services

personally performed or services incident to the personally performed

services, so long as the share or bonus is not determined in any manner

that is directly related to the volume or value of referrals by the

physician. (Added by OBRA '93 to be effective for referrals made on or

after January 1, 1995.)

In the case of a faculty practice plan associated with a

hospital, institution of higher education, or medical school with an

approved medical residency training program in which physician members

may furnish a variety of different specialty services and furnish

professional services both within and outside the group, as well as

perform other tasks such as research, the conditions contained in the

definition of ``group practice'' apply only with respect to the

services furnished within the faculty practice plan.

Our August 1995 final rule established a definition of ``group

practice'' at Sec. 411.351 based on the statute as it read effective

January 1, 1992. In implementing the statute, we interpreted the

provision requiring that ``substantially all'' of the services of the

physician members be furnished through the group as meaning 75 percent

of the patient care services of the group practice. (We discuss

additional requirements and definitions related to the ``substantially

all'' test in section II.A.6. of this preamble.) As stated above, OBRA

'93 made certain revisions to the definition of a group practice,

effective January 1, 1995. This proposed rule would revise the

definition of ``group practice'' at Sec. 411.351 to conform with the

changes made by OBRA '93. Therefore we would do the following:

Remove the requirement that substantially all of the

services must be billed in the name of the group. We would specify,

instead, that substantially all of the services must be billed under a

billing number assigned to the group.

Add the above provisions restricting payments made to

physicians based on volume or value of referrals, with the exception

for profits and productivity bonuses.

Add that members of the group must personally conduct at

least 75 percent of the physician-patient encounters of the group

practice.

In addition, for reasons explained in the August 1995 final rule,

the definition would continue to provide that the ``substantially all''

test does not apply to any group practice that is located solely in a

health professional shortage area (HPSA). Also, for group practices

located outside of a HPSA, any time spent by group practice members

providing services in a HPSA should not be used to calculate whether

the group practice located outside the HPSA has met the ``substantially

all'' test. We have also made several other changes to the definition

of a group practice, which are discussed later in this preamble.

a. Exception--physician services

Section 1877(b)(1) specifies that the prohibition does not apply to

services furnished on a referral basis if the services are physician

services, as defined in section 1861(q), furnished personally by (or

under the personal supervision of) another physician in the same group

practice as the referring physician. Our August 1995 final rule

incorporated this provision at Sec. 411.355(a), covering physician

services as we have defined them at Sec. 410.20(a). This proposed rule

retains Sec. 411.355(a).

b. Exception--in-office ancillary services

Section 1877(b)(2) specifies that the prohibition does not apply to

referrals for certain in-office ancillary services. We consider in-

office ancillary services to be all designated health services that can

be provided in an in-office setting, except durable medical equipment

(excluding infusion pumps) and parenteral and enteral nutrients,

equipment, and supplies. (In other words, referrals for infusion pumps

can qualify for the exception. However, the exception does not apply to

referrals for the in-office provision of other durable medical

equipment and parenteral and enteral nutrients, equipment, and

supplies.) To qualify for the exception, an ownership or investment

interest in the services must meet any requirements the Secretary sets

forth in regulations to protect against Medicare program or patient

abuse. Additionally, the ancillary services must meet the following

requirements:

The services must be furnished personally by the referring

physician, a physician who is a member of the same group practice as

the referring physician, or an individual who is directly supervised by

the physician or by another physician in the group practice. Also, the

services must be furnished in either of the following:

+ A building in which the referring physician (or another physician

who is a member of the same group practice) furnishes physician

services unrelated to the furnishing of designated health services.

(The predecessor provision read ``* * * unrelated to the furnishing of

clinical laboratory services.'')

+ In the case of a referring physician who is a member of a group

practice, in another building that is used by the group practice for

either of the following:

++ Furnishing some or all of the group's clinical laboratory

services.

++ The centralized provision of the group's designated health

services (other than clinical laboratory services). (This provision,

which was added by OBRA '93, became effective January 1, 1995.) Note

that OBRA '93 also contains an undesignated paragraph following this

provision that reads as follows: ``unless the Secretary determines

other terms and conditions under which the

[[Page 1666]]

provision of such services does not present a risk of program or

patient abuse, * * *.'' As discussed in the August 1995 final rule, it

is our interpretation that this paragraph is intended to provide for

the possibility of our liberalizing the conditions described in section

1877(b)(2)(A)(ii)(II); that is, the conditions concerning the provision

of services in ``another building'' that is used by a group practice.

The ancillary services must be billed by one of the

following:

+ The physician performing or supervising the services.

+ A group practice of which the physician is a member under a

billing number assigned to the group practice. (Prior to January 1,

1995, this provision did not require that the services be billed under

a group practice's billing number.)

+ An entity that is wholly owned by the physician or group

practice.

The August 1995 final rule incorporated into our regulations an in-

office ancillary services exception that was based on the statutory

provision, as it was in effect on January 1, 1992, at Sec. 411.355(b).

This proposed rule would revise Sec. 411.355(b) to conform it to the

current statutory provision. That is, it would--

Specify that the exception does not apply to durable

medical equipment (other than infusion pumps) or to parenteral and

enteral nutrients, equipment, and supplies; and

Revise paragraph (b)(2) of Sec. 411.355 to require that

the services be furnished in one of the following locations:

+ A building in which the referring physician (or another physician

who is a member of the same group practice) furnishes physician

services unrelated to the furnishing of designated health services.

+ A building that is used by the group practice for the provision

of some or all of the group's clinical laboratory services.

+ A building that is used by the group practice for the centralized

provision of the group's designated health services (other than

clinical laboratory services).

Indicate that when a group practice bills for ancillary

services, the services must be billed under a billing number assigned

to the group practice.

We have also made several other changes to the in-office ancillary

services exception that we discuss in section III of this preamble.

For purposes of the in-office ancillary services exception, the

August 1995 final rule also defined ``direct supervision'' at

Sec. 411.351. The rule defines this term as supervision by a physician

who is present in the office suite and immediately available to provide

assistance and direction throughout the time services are being

performed. This proposed rule would retain that definition, with

several changes that are meant to clarify the meaning of the term

``present in the office suite.'' We discuss these changes in section

III of this preamble.

c. Exception--certain prepaid health plans

Section 1877(b)(3) specifies that the prohibition on referrals does

not apply to services furnished by certain prepaid health plans. To

qualify for the exception, the services must be furnished by a

Federally-qualified health maintenance organization (within the meaning

of section 1310(d) of the Public Health Services Act) to its enrollees

or by a prepaid health care organization to its enrollees under a

contract or agreement with Medicare under one of the following

statutory authorities:

Section 1876, which authorizes us to enter into contracts

with health maintenance organizations and competitive medical plans to

furnish covered items and services on a risk-sharing or reasonable cost

basis.

Section 1833(a)(1)(A), which authorizes payment for

Medicare Part B services to prepaid health plans on a reasonable cost

basis.

Section 402(a) of the Social Security Amendments of 1967

or section 222(a) of the Social Security Amendments of 1972, both of

which authorize us to conduct demonstration projects involving payments

on a prepaid basis.

The August 1995 final rule incorporated section 1877(b)(3) into our

regulations at Sec. 411.355(c). We are proposing to set forth at

Sec. 435.1012(b) an exception for services provided by organizations

analogous to those cited above to enrollees under the Medicaid program.

We discuss this proposal in section III of this preamble.

d. Other exceptions

Effective January 1, 1995, section 1877(b)(4) authorizes the

Secretary to provide in regulations for additional exceptions for

financial relationships, beyond those specified in the statute, if she

determines that they do not pose a risk of Medicare program or patient

abuse. The Secretary determined, based on the rationale explained in

the August 1995 final rule, that referrals for certain clinical

laboratory services furnished in an ambulatory surgical center or end

stage renal disease facility, or by a hospice do not pose a risk of

Medicare program or patient abuse. The Secretary found no risk of abuse

when payments for these services are included in the ambulatory

surgical center payment rate, the end stage renal disease composite

payment rate, or as part of the hospice payment rate, respectively.

Therefore, the August 1995 final rule incorporated an exception for

those services into our regulations at Sec. 411.355(d). This proposed

rule would retain that provision, with a change discussed below.

Because this proposed rule covers 10 additional designated health

services, this exception would now apply to any of the designated

health services provided in the same manner.

As we noted in the August 1995 final rule, we excepted the listed

services because they are furnished as part of a composite rate that

cannot vary in response to utilization. We are amending Sec. 411.355(d)

to allow the Secretary to except services furnished under other payment

rates that the Secretary determines provide no financial incentive for

either underutilization or overutilization, or any other risk of

program or patient abuse. We are specifically soliciting comments on

whether there are analogous composite rates under the Medicaid program

that are similarly guaranteed not to result in program or patient

abuse. Commenters who are interested in this issue should demonstrate

why they believe a particular kind of service should qualify for the

exception.

4. Exceptions That Apply Only to Certain Ownership or Investment

Interests

The statute also provides that certain ownership or investment

interests do not constitute a ``financial relationship'' for purposes

of the section 1877 prohibition on referrals.

a. Exception--certain investment securities and shares

Under section 1877(c), the prohibition on referrals does not apply

in the case of ownership by a physician (or immediate family member) of

the following:

Investment securities (including shares or bonds,

debentures, notes, or other debt instruments) that may be purchased on

terms generally available to the public and that are--

Securities listed on the New York Stock Exchange, the

American Stock Exchange, or any regional exchange in which quotations

are published on a daily basis, or foreign securities listed on a

recognized foreign, national, or regional exchange in which quotations

are published on a daily basis, or

[[Page 1667]]

Securities traded under an automated interdealer quotation

system operated by the National Association of Securities Dealers, and

In a corporation that had, at the end of the corporation's

most recent fiscal year or on average during the previous 3 fiscal

years, stockholder equity exceeding $75 million. (OBRA '93 also

included, until January 1, 1995, securities in a corporation that, at

the end of the corporation's most recent fiscal year, had total assets

exceeding $100 million.)

Ownership of shares in a regulated investment company as

defined in section 851(a) of the Internal Revenue Code of 1986 if the

company had, at the end of the company's most recent fiscal year or on

average during the previous 3 fiscal years, total assets exceeding $75

million.

The August 1995 final rule incorporated the above provision into

our regulations at Secs. 411.356 (a) and (b). This proposed rule would

remove from Sec. 411.356(a) that portion of the provision that expired

on January 1, 1995, and would make certain other changes described in

section III of this preamble.

b. Exception--ownership or investment interest in certain health care

facilities

Section 1877(d) provides additional exceptions to the prohibition

on physician referrals for certain designated health services furnished

by three types of facilities if the physician (or immediate family

member) has an ownership or investment interest in the facilities:

Designated health services furnished by a hospital located

in Puerto Rico.

Designated health services furnished in a rural area by an

entity if substantially all of the designated health services furnished

by the entity are furnished to individuals residing in a rural area. A

``rural area'' is defined in section 1886(d)(2)(D) as meaning an area

outside of a Metropolitan Statistical Area. (Until January 1, 1995,

this provision read as follows: ``In the case of clinical laboratory

services if the laboratory furnishing the services is in a rural area

(as defined in section 1886(d)(2)(D)).'')

Designated health services furnished by a hospital outside

of Puerto Rico if the referring physician is authorized to perform

services at the hospital and the ownership or investment interest is in

the hospital itself (and not merely in a subdivision of the hospital).

The August 1995 final rule incorporated section 1877(d), as it

related to clinical laboratory services, into our regulations at

Sec. 411.356(c). In establishing the rural provider exception in the

regulations, we required that referred laboratory testing be performed

on the premises of the rural laboratory (if not performed on the

premises, the laboratory performing the testing was required to bill

the Medicare program directly). As described in the preamble to the

proposed rule covering referrals for clinical laboratory services (57

FR 8598 (March 11, 1992)), we believe that Congress included this

exception in order to benefit Medicare beneficiaries who live in rural

areas where laboratories may not be available without the financial

support of local physicians. We included the additional requirement to

prevent situations in which physicians who own an urban laboratory set

up a storefront or ``shell'' laboratory with a rural address in order

to use the rural exception. In this scenario, the urban owner could

make referrals to the rural laboratory, which would in turn refer the

tests to the physician's urban laboratory. Alternatively, urban

laboratories with physician owners could set up rural laboratories for

the purpose of performing tests referred by the physician owners for

their urban patients.

Because section 1877(d)(2) has been amended to apply only to

designated health services that are actually furnished in a rural area

(they cannot be transferred to an urban provider), and only by

providers that provide designated health services to a predominantly

rural population, we no longer believe that the extra requirement is

necessary. We are therefore proposing to remove it from

Sec. 410.356(c).

The August 1995 final regulation adopted the OBRA '93 standard that

substantially all of the designated health services furnished by the

rural entity are furnished to individuals residing in a rural area. We

interpreted ``substantially all'' as meaning at least 75 percent of the

services. In addition, Sec. 411.356(c) provided an exception, until

January 1, 1995, for an ownership or investment interest in a hospital

if the physician's ownership or investment interest does not relate

(directly or indirectly) to the furnishing of clinical laboratory

services. This exception was based on section 1877(b)(4) as it read

under OBRA '90. OBRA '93, as amended by SSA '94, retained this

provision only until January 1, 1995.

This proposed rule would revise Sec. 411.356(c) to reflect the

statutory provision as it became effective on January 1, 1995 and to

apply Sec. 411.356(c) to entities providing any of the designated

health services. We would change the requirement that a rural entity be

located in a rural area to instead except referrals for designated

health services furnished in a rural area by an entity that furnishes

substantially all of its designated health services to individuals

residing in a rural area. We would continue to interpret

``substantially all'' as being at least 75 percent of the services

furnished by the entity. In addition, this proposed rule would remove

the exception that expired on January 1, 1995.

5. Exceptions That Apply Only to Certain Compensation Arrangements

Section 1877(e) provides that certain compensation arrangements are

not considered a ``financial relationship'' for purposes of the

prohibition on physician referrals.

a. Exception--rental of office space

Section 1877(e)(1)(A) provides an exception for payments made by a

lessee to a lessor for the use of premises if the following conditions

are met:

The lease is in writing, signed by the parties, and

specifies the premises covered by the lease.

The space rented or leased does not exceed that which is

reasonable and necessary for the legitimate business purposes of the

rental or lease. Also, the space is used exclusively by the lessee when

being used by the lessee, except that the lessee may make payments for

the use of space consisting of common areas under certain conditions.

That is, acceptable payments for common areas cannot exceed the

lessee's pro rata share of expenses for that space based upon the ratio

of the space used exclusively by the lessee to the total amount of

space (other than common areas) occupied by all persons using the

common areas.

The lease provides for a term of rental or lease of at

least 1 year.

The rental charges over the term of the lease are set in

advance, are consistent with fair market value, and are not determined

in a manner that takes into account the volume or value of any

referrals or other business generated between the parties.

The lease would be commercially reasonable even if no

referrals were made between the parties.

The lease meets any other requirements the Secretary may

impose by regulation, as needed to protest against Medicare program or

patient abuse.

``Fair market value'' is defined by section 1877(h)(3) as the value

in arm's-length transactions, consistent with the general value market,

and, with respect

[[Page 1668]]

to rentals or leases, the value of rental property for general

commercial purposes (not taking into account its intended use) and, in

the case of a lease of space by a lessor that is a potential source of

patient referrals to the lessee, not adjusted to reflect the additional

value the prospective lessee or lessor would attribute to the proximity

or convenience to the lessor. (Meeting the fair market value standard

is a requirement for several of the other compensation-related

exceptions in the statute. We discuss these other exceptions later in

this preamble.)

The August 1995 final rule incorporated the provisions of section

1877(e)(1)(A) into our regulations at Sec. 411.357(a), without imposing

any additional requirements. This proposed rule would retain

Sec. 411.357(a). In addition, the final rule incorporated the

definition of ``fair market value'' in Sec. 411.351. This proposed rule

would retain the definition. Also, since the statute requires that fair

market value be ``consistent with the general market value,'' we have

added to the definition an explanation of ``general market value.''

b. Exception--rental of equipment

Section 1877(e)(1)(B) provides an exception for payments made by a

lessee of equipment to the lessor for the use of the equipment if the

following conditions are met:

The lease is set out in writing, signed by the parties,

and specifies the equipment covered by the lease.

The equipment rented or leased does not exceed that which

is reasonable and necessary for the legitimate business purposes of the

rental or lease and is used exclusively by the lessee when being used

by the lessee.

The lease provides for a term of rental or lease of at

least 1 year.

The rental charges over the term of the lease are set in

advance, are consistent with fair market value, and are not determined

in a manner that takes into account the volume or value of any

referrals or other business generated between the parties.

The lease would be commercially reasonable even if no

referrals were made between the parties.

The lease meets any other requirements the Secretary may

impose by regulation as needed to protect against Medicare program or

patient abuse.

The August 1995 final rule incorporated this provision into our

regulations at Sec. 411.357(b), without imposing any additional

requirements. This proposed rule would retain Sec. 411.357(b), with

minor editorial changes.

c. Exception--bona fide employment relationship

Under section 1877(e)(2), any amount paid by an employer to a

physician (or an immediate family member of the physician) who has a

bona fide employment relationship with the employer for the provision

of services does not constitute a compensation arrangement for purposes

of the prohibition if the following conditions are met:

The employment is for identifiable services.

The amount of the remuneration under the employment is

consistent with the fair market value of the services and (except for

certain productivity bonuses) is not determined in a manner that takes

into account (directly or indirectly) the volume or value of any

referrals by the referring physician.

The remuneration is made in accordance with an agreement

that would be commercially reasonable even if no referrals were made to

the employer.

The employment meets any other requirements the Secretary

may impose by regulation as needed to protect against Medicare program

or patient abuse.

The statute provides that, under this exception, a productivity

bonus that is based on services performed personally by the physician

(or immediate family member) does not violate the ``volume or value of

referrals'' standard.

``Employee'' is defined in section 1877(h)(2) as an individual who

would be considered to be an employee of the entity under the usual

common law rules that apply in determining employer-employee

relationships, as applied for purposes of section 3121(d)(2) of the

Internal Revenue Code of 1986.

The August 1995 final rule incorporated the provisions of section

1877(e)(2) into our regulations at Sec. 411.357(c), without imposing

any additional requirements. This proposed rule would retain

Sec. 411.357(c), but with additional requirements that we describe in

section III. The final rule also incorporated the definition of

``employee'' into our regulations at Sec. 411.351. Again, this proposed

rule would retain that definition.

d. Exception--personal service arrangements

Under section 1877(e)(3)(A), remuneration from an entity under an

arrangement (including remuneration for specific physician services

furnished to a nonprofit blood center) does not constitute a

compensation arrangement for purposes of the prohibition on referrals

if the following conditions are met:

The arrangement is set out in writing, signed by the

parties, and specifies the services covered by the arrangement.

The arrangement covers all of the services to be furnished

by the physician (or immediate family member) to the entity.

The aggregate services contracted for do not exceed those

that are reasonable and necessary for the legitimate business purposes

of the arrangement.

The term of the arrangement is for at least 1 year.

The compensation to be paid over the term of the

arrangement is set in advance, does not exceed fair market value, and,

except in the case of a physician incentive plan (as described below)

is not determined in a manner that takes into account the volume or

value of any referrals or other business generated between the parties.

The services to be performed under the arrangement do not

involve the counseling or promotion of a business arrangement or other

activity that violates State or Federal law.

The arrangement meets any other requirements the Secretary

may impose by regulation as needed to protect against program or

patient abuse.

The August 1995 final rule incorporated section 1877(e)(3)(A) into

our regulations at Sec. 411.357(d)(1), without imposing any additional

requirements. This proposed rule would retain Sec. 411.357(d)(1), with

several changes that we discuss in section III of this preamble.

Section 1877(e)(3)(B)(i) provides that, in the case of a physician

incentive plan between a physician and an entity, the compensation may

be determined in a manner (through a withhold, capitation, bonus, or

otherwise) that takes into account, directly or indirectly, the volume

or value of any referrals or other business generated between the

parties, if the plan meets the following requirements:

No specific payment is made (directly or indirectly) under

the plan to a physician or a physician group as an inducement to reduce

or limit medically necessary services provided with respect to a

specific individual enrolled with the entity.

If the plan places a physician or a physician group at

substantial financial risk as determined by the Secretary under section

1876(i)(8)(A)(ii), the plan

[[Page 1669]]

complies with any requirements the Secretary may impose under that

section.

Upon request by the Secretary, the entity provides the

Secretary with access to descriptive information regarding the plan, in

order to permit the Secretary to determine whether the plan is in

compliance with the requirements listed above.

(Note: Sections 1876(i)(8) and 1903(m)(2)(A) require that physician

incentive plans be regulated. On March 27, 1996, we published, at 61 FR

13430, a final rule with comment period that implemented this

legislation for purposes of both the Medicare and Medicaid programs by

establishing requirements at Sec. 417.479 (for Medicare) and at

Sec. 434.70 (for Medicaid). A final rule amending the final rule with

comment was published on December 31, 1996 at 61 FR 69034.)

The August 1995 final rule incorporated section 1877(e)(3)(B)(i)

into our regulations at Sec. 411.357(d)(2). Because of the

establishment at Sec. 417.479 of requirements concerning incentive

plans, this proposed rule would revise Sec. 411.357(d)(2). It would

replace the reference to requirements established by the Secretary

under section 1876(i)(8)(A)(ii) of the Act with a reference to the

requirements of Sec. 417.479. We would also reverse the order of

paragraphs (ii) and (iii) of Sec. 411.357(d)(2) because we believe this

order reflects a more logical progression. In addition, we would delete

existing Sec. 411.357(d)(3), which contains a time-sensitive provision

related to personal services arrangements that, based on the statute,

is now obsolete.

Section 1877(e)(3)(B)(ii) defines a ``physician incentive plan'' as

any compensation arrangement between an entity and a physician or

physician group that may directly or indirectly have the effect of

reducing or limiting services provided with respect to individuals

enrolled with the entity. The August 1995 final rule incorporated this

definition into our regulations at Sec. 411.351. This proposed rule

would retain that definition.

e. Exception--remuneration unrelated to the provision of designated

health services

Prior to OBRA '93, section 1877(b)(4) provided an exception for any

financial relationship with a hospital if the financial relationship

does not relate to the provision of clinical laboratory services. OBRA

'93 eliminated this provision, but SSA '94 reinstated it until January

1, 1995. OBRA '93 also added paragraph (e)(4) to section 1877,

retroactive to January 1, 1992. Under section 1877(e)(4), remuneration

provided by a hospital to a physician that does not relate to the

furnishing of designated health services does not constitute a

compensation arrangement for purposes of the prohibition on referrals.

Section 1877(e)(4) differs from the predecessor provision at section

1877(b)(4) in that it retains only the compensation aspect of the

exception. In addition, it applies only to remuneration from a hospital

to a physician (that is, it does not include remuneration from a

physician to a hospital) if the remuneration does not relate to the

furnishing of designated health services. Also, the exception does not

apply to remuneration from a hospital to a member of a physician's

immediate family.

The August 1995 final rule incorporated the provisions of sections

1877(b)(4) and (e)(4) as they were effective on January 1, 1992, and as

they relate to compensation, into our regulations at Sec. 411.357(g).

This proposed rule would revise Sec. 411.357(g) by removing that

portion that was based on the predecessor provision of section

1877(b)(4), since that provision has expired. We would also revise that

portion of Sec. 411.357(g) that was based on section 1877(e)(4) by

changing the reference to remuneration not related to the furnishing of

clinical laboratory services to remuneration not related to the

furnishing of designated health services. We have also made several

other changes described in section III of this preamble.

f. Exception--physician recruitment

Section 1877(e)(5) provides that remuneration provided by a

hospital to a physician to induce the physician to relocate to the area

serviced by the hospital in order to be a member of the hospital's

medical staff does not constitute a compensation arrangement for

purposes of the prohibition on referrals if the following conditions

are met:

The physician is not required to refer patients to the

hospital.

The amount of remuneration under the arrangement is not

determined in a manner that takes into account (directly or indirectly)

the volume or value of any referrals by the referring physician.

The arrangement meets any other requirements the Secretary

may impose by regulation as needed to protect against program or

patient abuse.

The August 1995 final rule incorporated the provisions of section

1877(e)(5) into our regulations at Sec. 411.357(e), with additional

requirements. Under our authority to impose additional requirements, we

specified that the arrangement and its terms must be in writing and

signed by both parties. We also specified that the physician must not

be precluded from establishing staff privileges at another hospital or

referring business to another entity. This proposed rule would retain

Sec. 411.357(e), with a minor editorial change.

g. Exception--isolated transaction

Section 1877(e)(6) provides that an isolated transaction, such as a

one-time sale of property or a practice, is not considered to be a

compensation arrangement for purposes of the prohibition on referrals

if the following conditions are met:

The amount of remuneration for the transaction is

consistent with fair market value and is not determined, directly or

indirectly, in a manner that takes into account the volume or value of

referrals by the physician.

The remuneration is provided under an agreement that would

be commercially reasonable even if no referrals were made to the

entity.

The arrangement meets any other requirements the Secretary

may impose by regulation as needed to protect against Medicare program

or patient abuse.

The August 1995 final rule incorporated the provisions of section

1877(e)(6) into our regulations at Sec. 411.357(f), with additional

requirements. Under our authority to impose additional requirements, we

specified that there can be no additional transactions between the

parties for 6 months after the isolated transaction, except for

transactions that are specifically excepted under one of the other

exceptions provided in the regulations. This proposed rule would retain

Sec. 411.357(f), with a minor editorial change. In addition, we

established definitions of ``transaction'' and ``isolated transaction''

at Sec. 411.351. We defined a ``transaction'' as an instance or process

of two or more persons doing business. We defined an ``isolated

transaction'' as one involving a single payment between two or more

persons. We specified that a transaction that involves long-term or

installment payments is not considered an isolated transaction. This

proposed rule would retain those definitions, with the clarification

that ``transactions'' can involve persons or entities.

h. Exception--certain group practice arrangements with a hospital

Section 1877(e)(7) provides that an arrangement between a hospital

and group under which designated health services are furnished by the

group but

[[Page 1670]]

are billed by the hospital does not constitute a compensation

arrangement for purposes of the prohibition on referrals if the

following conditions are met:

With respect to the services furnished to a hospital

inpatient, the arrangement is for the provision of inpatient hospital

services under section 1861(b)(3).

The arrangement began before December 19, 1989, and has

continued in effect without interruption since that date.

With respect to the designated health services covered by

the arrangement, substantially all of those services furnished to

patients of the hospital are furnished by the group under the

arrangement.

The arrangement is set out in a written agreement that

specifies the services to be furnished by the parties and the amount of

compensation.

The compensation paid over the term of the agreement is

consistent with fair market value, and the compensation per unit of

services is fixed in advance and is not determined in a manner that

takes into account the volume or value of any referrals or other

business generated between the parties.

The compensation is provided under an agreement that would

be commercially reasonable even if no referrals were made to the

entity.

The arrangement between the parties meets any other

requirements the Secretary may impose by regulation as needed to

protect against Medicare program or patient abuse.

The August 1995 final rule incorporated the provisions of section

1877(e)(7), as they relate to clinical laboratory services, into our

regulations at Sec. 411.357(h), without imposing any additional

requirements. This proposed rule would revise Sec. 411.357(h) to apply

the provisions to the designated health services, and would make

certain minor changes described in section III.

i. Exception--payments by a physician for items and services

Section 1877(e)(8) provides that the following do not constitute

compensation arrangements for purposes of the prohibition on referrals:

Payments made by a physician to a laboratory in exchange

for the provision of clinical laboratory services.

Payments made by a physician to an entity as compensation

for items or services other than clinical laboratory services if the

items or services are furnished at fair market value.

The August 1995 final rule incorporated the provisions of section

1877(e)(8) into our regulations at Sec. 411.357(i). This proposed rule

would retain Sec. 411.357(i), but clarify that ``services'' as used in

the provision means services of any kind (not just those defined as

``services'' for purposes of the Medicare program in Sec. 400.202).

6. Requirements Related to the ``Substantially All'' Test

As mentioned earlier, the definition of ``group practice'' in

section 1877(h)(4) contains a requirement that substantially all of the

services of the physicians who are members of the group be furnished

through the group. In the August 1995 final rule, we interpreted

``substantially all'' to mean at least 75 percent of the total patient

care services of the group practice members. Further, we defined

``members of the group,'' at Sec. 411.351, as physician partners and

full-time and part-time physician contractors and employees during the

time they furnish services to patients of the group practice that are

furnished through the group and are billed in the name of the group.

This proposed rule would revise the definition of ``members of the

group'' to exclude independent contractors, to count physician owners

other than partners, and to count physicians as members during the time

they furnish ``patient care services'' to the group. We discuss these

changes in section III of this preamble.

The August 1995 final rule defined ``patient care services,'' at

Sec. 411.351, as any tasks performed by a group practice member that

address the medical needs of specific patients, regardless of whether

they involve direct patient encounters. We included, as examples, the

services of physicians who do not directly treat patients, time spent

by a physician consulting with other physicians, and time spent

reviewing laboratory tests. Under Sec. 411.351, ``patient care

services'' are measured by the total patient care time each member

spends on these services.

This proposed rule would retain the definition of patient care

services, but would broaden the definition to include tasks that

benefit patients in general or the group practice. We are also

proposing minor changes that we believe are necessary to clarify what

tasks qualify under the definition. We describe these changes in

section III of this preamble.

The August 1995 final rule also required, at Sec. 411.360, that a

group practice submit a written statement to its carrier annually to

attest that, during the most recent 12-month period (calendar year,

fiscal year, or immediately preceding 12-month period) 75 percent of

the total patient care services of group practice members was furnished

through the group, was billed under a billing number assigned to the

group, and the amounts so received were treated as receipts of the

group.

Section 411.360 also provides that a newly-formed group practice

(one in which physicians have recently begun to practice together) or

any group practice that has been unable in the past to meet the

definition of a group practice as set forth at section 1877(h)(4)

must--

Submit a written statement to attest that, during the next

12-month period (calendar year, fiscal year, or next 12 months), it

expects to meet the 75 percent standard and will take measures to

ensure the standard is met; and

At the end of the 12-month period, submit a written

statement to attest that it met the 75 percent standard during that

period, billed for those services under a billing number assigned to

the group, and treated amounts received for those services as receipts

of the group. If the group did not meet the standard, any Medicare

payments made to the group during the 12-month period that were

conditioned on the group meeting the standard are overpayments.

In addition, Sec. 411.360 specifies that--

Once any group has chosen to use its fiscal year, the

calendar year, or some other 12-month period, the group practice must

adhere to this choice.

The attestation must contain a statement that the

information furnished in the attestation is true and accurate and must

be signed by a group representative.

Any group that intends to meet the definition of a group

practice in order to qualify for one of the exceptions provided in the

regulations must submit the required attestation to its carrier by

December 12, 1995.

The August 1995 final rule contains a discussion of the rationale

for the above provisions. On December 11, 1995, we published in the

Federal Register, at 60 FR 63438, a final rule that delays the date by

which a group of physicians must file an attestation statement. The

December final rule amended Sec. 411.360 to require that a group that

intends to meet the definition of a group practice must submit an

attestation statement to its carrier no later than 60 days after the

group receives attestation instructions from its carrier. The preamble

to the December rule points out that a group can regard itself as a

group practice in the interim period before it receives attestation

instructions, provided the group believes that it meets the

[[Page 1671]]

definition of a group practice under Sec. 411.351.

This proposed rule would retain Sec. 411.360, as amended by the

December 1995 final rule. We propose to make several minor changes to

clarify that a group is only required to complete an attestation if it

wishes to qualify as a group practice for purposes of meeting an

exception that requires group status. We are also changing the

provision to require that the attestation be signed by an authorized

representative of the group practice who is knowledgeable about the

group, and to contain a statement that the information furnished in the

attestation is true and accurate to the best of the representative's

knowledge and belief. The proposed provision also states that any

person filing a false statement will be subject to applicable criminal

and civil penalties.

7. Reporting Requirements

Prior to SSA '94, section 1877(f) included the requirement that

each entity furnishing Medicare covered items or services must provide

us with certain information concerning its ownership or investment

arrangements. In our December 3, 1991 interim final rule with comment

period, published in the Federal Register at 56 FR 61374, we extended

the rule to include certain information concerning an entity's

compensation arrangements for the reasons discussed in the preamble of

that rule.

Section 1877(f) also gave the Secretary the option of waiving the

reporting requirements, for certain entities that do not furnish

clinical laboratory services, in all but 10 States. The interim final

rule discussed our decision to waive the reporting requirements for all

entities (other than those providing clinical laboratory services) in

States other than the minimum 10 States specified in the statute. In

the 10 States, we were required to obtain data from at least six

specific types of entities. We gathered data from these providers in

the fall of 1991.

Section 152 of SSA '94 amended section 1877(f) extensively. It

extended the reporting requirements to specifically cover information

not only about an entity's ownership or investment interests, but about

compensation arrangements as well. SSA '94 also eliminated the

Secretary's authority to waive the reporting requirements for certain

States or services, although the Secretary continues to have the right

to determine that an entity is not subject to the reporting

requirements because it provides services covered under Medicare very

infrequently. In addition, the requirements continue to not apply to

designated health services furnished outside of the United States.

Section 1877(f) allows the Secretary to gather the information in such

form, manner, and at such times as she specifies.

We discussed the provisions of section 1877(f), as they relate to

clinical laboratories and as they read under OBRA '90, in detail in the

December 1991 interim final rule. The August 1995 final rule adopted

the provisions of the interim final rule with revisions that reflect

the changes made by SSA '94. While the August 1995 final rule reflects

the amendments made to section 1877(f), it did not interpret these

amendments. This proposed rule retains the reporting requirements as

they appear in the August 1995 final rule, subject to certain

interpretations we have added in section III of this preamble. These

requirements are set forth at existing Sec. 411.361, and we would apply

them to any future reporting we may require.

8. Sanctions

Prior to OBRA '93, section 1877(g)(1) required a denial of payment

for a clinical laboratory service that was provided in violation of the

referral prohibition. Paragraph (g)(2) of section 1877 required the

timely refund of amounts collected in violation of the prohibition.

OBRA '93 extended these provisions to apply to all of the designated

health services, effective January 1, 1995. The August 1995 final rule

incorporated these provisions as they relate to clinical laboratory

services into our regulations at Secs. 411.353(c) and (d),

respectively. This proposed rule would revise Secs. 411.353(c) and (d)

to extend their application to the other designated health services.

Paragraph (g)(3) of section 1877 provides for the imposition of a

civil money penalty of $15,000 per service and exclusion from Medicare

and any State health care program, including Medicaid, for any person

who presents or causes to be presented a bill or claim the person knows

or should know is for a service for which payment may not be made under

Sec. 1877(a). The same penalty applies for a service for which a person

has not made a refund as described in paragraph (g)(2).

Paragraph (g)(4) provides for a $100,000 civil money penalty and

the same exclusion penalty for any physician or other entity that

enters into a circumvention scheme that the physician or entity knows

or should know has a principal purpose of assuring referrals by the

physician to a particular entity which, if the physician made the

referrals directly, would be in violation of section 1877. A proposed

rule published by the Office of Inspector General on October 20, 1993

(58 FR 54096) addresses sections 1877(g)(3) and (g)(4). That rule

became final on March 31, 1995 (60 FR 16580).

Paragraph (g)(5) of section 1877 provides for possible exclusion

and a civil money penalty of not more than $10,000 per day for each day

in which a person has failed to meet a reporting requirement in section

1877(f). The December 1991 interim final rule covering the reporting

requirements incorporated this provision into our regulations at

Sec. 411.361(g), and the August 1995 final rule redesignated

Sec. 411.361(g) as Sec. 411.361(f). This proposed rule would retain

Sec. 411.361(f).

9. Additional Definitions

In implementing provisions of section 1877 as they were effective

on January 1, 1992, the August 1995 final rule established definitions

of the following terms (which were not discussed above) at

Sec. 411.351:

a. Clinical laboratory services means the biological,

microbiological, serological, chemical, immunohematological,

biophysical, cytological, pathological, or other examination of

materials derived from the human body for the purpose of providing

information for the diagnosis, prevention, or treatment of any disease

or impairment of, or the assessment of the health of, human beings.

These examinations also include procedures to determine, measure, or

otherwise describe the presence or absence of various substances or

organisms in the body.

b. Entity means a sole proprietorship, trust, corporation,

partnership, foundation, not-for-profit corporation, or unincorporated

association. For reasons discussed in section III of this preamble,

this proposed rule would revise the definition of ``entity'' to include

a physician's sole proprietorship and any practice of multiple

physicians that provides for the furnishing of a designated health

service.

c. Hospital means any separate legally-organized operating entity

plus any subsidiary, related, or other entities that perform services

for the hospital's patients and for which the hospital bills. However,

we have excluded from this definition entities that perform services

for hospital patients ``under arrangements'' with the hospital. We

propose to amend this definition to make it clear that ``hospitals''

include regular hospitals, psychiatric hospitals, and rural primary

care hospitals.

[[Page 1672]]

d. HPSA means, for purposes of the August 1995 final rule, an area

designated as a health professional shortage area under section

332(a)(1)(A) of the Public Health Service Act for primary medical care

professionals (in accordance with the criteria specified in 42 CFR part

5, Appendix A, Part I--Geographic Areas). In addition, with respect to

dental, mental health, vision care, podiatric, and pharmacy services,

an HPSA means an area designated as a health professional shortage area

under section 332(a)(1)(A) of the Public Health Service Act for dental

professionals, mental health professionals, vision care professionals,

podiatric professionals, and pharmacy professionals, respectively.

e. Immediate family member or ``member of a physician's immediate

family'' means husband or wife; natural or adoptive parent, child, or

sibling; stepparent, stepchild, stepbrother, or stepsister; father-in-

law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or

sister-in-law; grandparent or grandchild; and spouse of a grandparent

or grandchild.

f. Laboratory means an entity furnishing biological,

microbiological, serological, chemical, immunohematological,

hematological, biophysical, cytological, pathological, or other

examination of materials derived from the human body for the purpose of

providing information for the diagnosis, prevention, or treatment of

any disease or impairment of, or the assessment of the health of, human

beings. These examinations also include procedures to determine,

measure, or otherwise describe the presence or absence of various

substances or organisms in the body. Entities only collecting or

preparing specimens (or both) or only serving as a mailing service and

not performing testing are not considered laboratories.

g. The August 1995 final rule defined a ``plan of care'' as the

establishment by a physician of a course of diagnosis or treatment (or

both) for a particular patient, including the ordering of items or

services. For reasons discussed earlier, this proposed rule would

remove the words ``items or'' from this definition.

(We explain our rationale for some of these definitions in the

March 1992 proposed rule, and we explain the remainder in the August

1995 final rule.) We would extend these definitions to apply to

referrals involving any of the designated health services.

We have made some changes to the definitions in addition to those

noted above. Any changes in definitions that we have included in this

proposed rule do not result from changes in the legislation, but

reflect our most recent interpretations of the statute. In section III

of this preamble, we discuss in detail how we propose to interpret

provisions in section 1877 and in section 1903(s) that we have either

not interpreted in the August 1995 final rule or that we believe we

must reconsider in the context of the designated health services. In

section III, we also define or interpret terms that are present in the

statute (such as each of the designated health services) as well as

include new definitions that we propose to add to the rule to enable us

to implement other parts of the statute.

10. Conforming Changes

We propose to revise existing Secs. 411.1(a) and 411.350(a), which

set forth the statutory basis for the provisions in part 411, subpart

A, and part 411, subpart J, respectively, by changing the reference to

``clinical laboratory services'' to ``designated health services.''

11. Editorial Changes

In addition to the proposed changes discussed above, we would also

make a number of editorial changes to subpart J of part 411. These

changes would not affect the substance of the provisions. As an example

of the type of change we would make, in Sec. 411.355(a), we would add

the words ``of this chapter'' after the reference to Sec. 410.20(a).

B. Applying The Referral Prohibition to the Medicaid Program: Section

1903(s) of the Act and the Provisions of This Proposed Rule

Title XIX of the Act authorizes Federal grants to States to

establish Medicaid programs to provide medical assistance to needy

individuals. Medicaid programs are administered by the States in

accordance with Federal laws and regulations. State Medicaid agencies

operate their programs in accordance with a Medicaid State plan that is

approved by us.

While Medicaid programs are administered by the States, they are

jointly financed by the Federal and State governments. The Federal

government pays its share of medical assistance expenditures to the

State on a quarterly basis according to a formula described in sections

1903 and 1905(b). The amount of the Federal share for medical

assistance is called Federal financial participation (FFP). Before the

enactment of OBRA '93, there were no statutory or regulatory

requirements concerning the availability of FFP for Medicaid services

resulting from physician referrals.

Section 13624 of OBRA '93, entitled ``Application of Medicare Rules

Limiting Certain Physician Referrals,'' added a new paragraph (s) to

section 1903 of the Act. This new provision extends aspects of the

Medicare prohibition on physician referrals to Medicaid. Specifically,

this provision restricts FFP for expenditures for medical assistance

under the State plan consisting of designated health services, as

defined under section 1877(h)(6), that are furnished to an individual

on the basis of a physician referral that would result in the denial of

payment under the Medicare program if Medicare covered the services to

the same extent and under the same terms and conditions as under a

State's Medicaid plan.

This proposed rule would revise Sec. 435.1002, ``FFP for

services,'' to reflect section 1903(s). We would specify in

Sec. 435.1002(a) that the availability of FFP for expenditures for

Medicaid services is subject to the limitations set forth in new

Sec. 435.1012. We would entitle Sec. 435.1012 as ``Limitation on FFP

Related to Prohibited Referrals.'' The proposed new provision states

that we will deny FFP for designated health services (as defined in

Sec. 431.351) furnished under the State plan to an individual on the

basis of a physician referral that would result in the denial of

payment under the Medicare program if Medicare covered the services to

the same extent and under the same terms and conditions as under the

State plan. We believe that certain aspects of section 1903(s) require

our interpretation, and we discuss these aspects in section III of this

preamble.

Section 4314 of the Balanced Budget Act of 1997 established section

1877(g)(6) of the Act. It requires that the Secretary issue written

advisory opinions to outside parties concerning whether the referral of

a Medicare patient by a physician for designated health services (other

than clinical laboratory services) is prohibited under the physician

referral provisions in section 1877. Because the Medicare rules can

affect whether a State will receive FFP for certain services, States,

as well as individuals and entities that provide services under the

Medicaid program, may be interested in the advisory opinion process. As

a result, we have included in Sec. 435.1012(c) a cross reference to the

Medicare regulations that set forth the specific procedures we will use

in issuing advisory opinions.

Section 1903(s) also specifies that the reporting requirements of

section

[[Page 1673]]

1877(f) and the penalties for failing to report in section 1877(g)(5)

apply to a provider of a designated health service for which payment

may be made under Medicaid in the same manner as they apply to a

provider that furnishes a designated health service for which payment

may be made under Medicare.

This proposed rule would incorporate the provisions of sections

1877(f) and (g)(5) into our Medicaid regulations by adding new

Secs. 455.108 and 455.109 to part 455 (``Program Integrity:

Medicaid''). These two provisions would appear under a new subpart C

entitled ``Disclosure of Information by Providers for Purposes of the

Prohibition on Certain Physician Referrals.'' Section 455.108,

``Purpose,'' would specify that subpart C implements section 1903(s) of

the Act. Section 455.109, ``Disclosure of ownership, investment, and

compensation arrangements,'' would list the specific disclosure

requirements, and the sanctions for failing to comply. We interpret

these disclosure requirements, as we believe they apply to Medicaid

providers, in section III of this preamble.

III. Interpretations of Sections 1877 and 1903(s) of the Act

In this section of the preamble, we discuss in detail how we

propose to interpret provisions in section 1877 and in section 1903(s)

that we either did not interpret in the August 1995 final rule or that

we interpreted in the context of referrals for clinical laboratory

services, but must reconsider in the context of the additional

designated health services. We propose to define or interpret terms

that are present in the statute (such as each of the designated health

services) or to reinterpret or clarify certain statutory terms that we

interpreted in the past. We also propose to add certain new terms and

definitions to the rule that we believe are necessary for us to

implement parts of the statute. This section is structured in the order

we used to present the statutory provisions and our interpretations in

the August 1995 final rule. We would like to point out that, in these

proposed regulations, we intend to interpret only the provisions of

section 1877 of the Act, and not the provisions of any other State or

Federal laws, such as the antitrust laws, the anti-kickback statute, or

the Internal Revenue Code.

A. Definitions

1. Designated Health Services

As we noted above, OBRA '93 expanded the physician referral

prohibition to apply to ten designated health services in addition to

clinical laboratory services. Section 1877(h)(6) lists these services,

but does not define them. Because the designated health services are

not defined in section 1877, we would define them in Sec. 411.351.

Designated health services as components of other services. We

believe that a designated health service remains one, even if it is

billed as something else or is subsumed within another service category

by being bundled with other services for billing purposes. For example,

most services provided by a skilled nursing facility (SNF) are

considered SNF services, which are not themselves designated health

services. Nonetheless, SNF services can encompass a variety of

designated health services, such as physical therapy services or

laboratory services.

Similarly under Medicaid, services provided by a clinic are

considered ``clinic services'' under section 1905(a)(9) of the Act, but

could encompass a variety of designated health services, such as

occupational therapy, physical therapy, or radiology services.

We base our interpretation on the fact that Congress compiled its

list of designated health services based on abuses or potential abuses

it perceived in regard to a variety of specific kinds of services. The

list in section 1877(h)(6), in fact, does not exactly track the service

categories as they are defined under either Medicare or Medicaid. In

short, we regard the services designated in section 1877 as subject to

the requirements of that section regardless of the setting in which

they are provided or the payment category under which they are billed.

On the other hand, we are also aware that designated health

services are sometimes provided as merely peripheral parts of some

other major service that a physician has prescribed. For example,

physicians often employ echocardiography (to obtain ultrasound signals

from the heart) as a mechanism to intraoperatively view the results of

bypass surgery. We do not believe that a physician using

echocardiography this way has made a specific referral for a designated

health service; instead, we regard the physician as prescribing a

physician service that happens to incidentally include

echocardiography. In other words, it is our view that a physician is

unlikely to over-prescribe bypass surgery in order to enhance his or

her investment in an echocardiography machine. Because we believe that

Congress meant to include under designated health services specific

services that are or could be subject to abuse, we are proposing to

define those services accordingly. Thus, we propose to deviate from

standard Medicare or Medicaid definitions of certain services in order

to meet the intent of the statute.

How we define designated health services. We have chosen, in

general, to base the definitions for the designated health services on

existing definitions in the Medicare program. Except for inpatient

hospital services and home health services, our definitions are based

on how Medicare covers a service under Part B. As noted above, we have

chosen to deviate from these definitions when we believe it is

appropriate to fulfill the purpose of the statute.

These definitions would apply for purposes of physician referrals

that are made for services covered under Medicare and for analogous

services covered under the Medicaid program. However, section 1903(s)

precludes FFP for medical assistance under a State plan consisting of a

designated health service furnished to an individual on the basis of a

referral that would result in a denial of payment under Medicare if

Medicare provided for coverage of the service to the same extent and

under the same terms and conditions as under the State plan. We believe

that in enacting section 1903(s), Congress was clearly concerned that

financial relationships of the kind that would prohibit a referral for

services under Medicare may also lead to improper utilization of

Medicaid services. However, because Medicaid has its own unique set of

coverage requirements, a State can cover and reimburse designated

health services very differently from the way these services are

covered and reimbursed under the Medicare program. We believe that

Congress was aware of these program differences and specifically meant

to provide us with some flexibility in applying the Medicare physician

referral rules in the Medicaid context. Therefore, we intend to apply

this flexibility in the following manner, which we believe will further

the goals of the statute:

When the definition of a designated health service is the same

under both programs, we intend to use the same definition, as described

in this preamble, for both programs. However, when the definition of a

designated health service differs under a State's plan from the

definition under Medicare, we will assume that the services under the

State's plan take precedence, even if the definition will encompass

services that are not covered by Medicare. However, we propose not to

include Medicaid services as designated health services in situations

[[Page 1674]]

in which including those services appears to run counter to the

underlying purpose of the legislation. Because Medicaid is administered

by the States, we do not believe that we are in the best position to

determine when including particular services will have this effect. As

a result, we are specifically soliciting comments on how to implement

our policy in a manner that will achieve the goals of the statute.

We have received a number of inquiries from individuals who were

confused about whether a particular service falls under one of the

designated service categories listed in section 1877(h)(6). In order to

remedy this problem, we have included below general explanations of

each of the designated health services, including explanations of how

we interpret similar or parallel services under Medicare. In the text

of the proposed regulation, however, we have defined designated health

services whenever we could by simply cross-referencing existing

definitions in the Medicare statute, regulations, or manuals or by

including specific language whenever we believe the definitions should

deviate from standard Medicare definitions.

a. Clinical laboratory services

We would retain the definition that was incorporated into our

regulations at Sec. 411.351 by the August 1995 rule.

b. Physical therapy services (including speech-language pathology

services)

Physical therapy services. Sections 1861(s)(2)(D) and 1832 provide

for coverage of outpatient physical therapy services under Part B,

which are defined in section 1861(p). Under section 1861(p), outpatient

physical therapy services may be furnished by a provider of services, a

clinic, rehabilitation agency, or public health agency, or by others

under arrangements with and under the supervision of one of these

entities. The services must be furnished to an outpatient who is under

the care of a doctor of medicine or osteopathy, or a doctor of

podiatric medicine, under a plan of care established by one of these

physicians or by a qualified physical therapist. The plan must be

periodically reviewed by the physician and must include the type,

amount, and duration of physical therapy services to be furnished. No

service is included as outpatient physical therapy if it would not be

included as an inpatient hospital service if furnished to an inpatient

of a hospital. Outpatient physical therapy may be furnished by a

provider to an individual as an inpatient of a hospital or extended

care facility if the individual has exhausted or is otherwise

ineligible for benefit days under Medicare Part A.

Outpatient physical therapy services may be furnished by an

independent physical therapist in his or her office or in an

individual's home. The physical therapist must meet any standards

created by the Secretary in regulations, including health and safety

standards. Special provisions concerning services furnished by a

physical therapist in independent practice are set forth at

Sec. 410.60(c).

Under section 1861(p), the term ``outpatient physical therapy

services'' also includes speech-language pathology services. Medicare

covers speech-language pathology services if furnished to an outpatient

by a provider of services, a clinic, rehabilitation agency, or public

health agency, or by others under arrangements with and under the

supervision of one of these entities. However, the statute does not

provide for coverage of services furnished by speech-language

pathologists in independent practice.

Plan of treatment requirements for outpatient physical therapy and

speech-language pathology services are set forth in Sec. 410.61.

Conditions for outpatient physical therapy services are set forth in

Sec. 410.60(a) and (b), and conditions and exclusions for outpatient

speech-language pathology services are set forth in Sec. 410.62.

Basically, covered outpatient physical therapy services include

three types of services, which are best described in Sec. 410.100(b)

(which specifically concerns services provided by a comprehensive

outpatient rehabilitation facility). Section 410.100(b) provides that

the following are physical therapy services:

Testing and measurement of the function or dysfunction of

the neuromuscular, musculoskeletal, cardiovascular, and respiratory

systems.

Assessment and treatment related to dysfunction caused by

illness or injury and aimed at preventing or reducing disability or

pain and restoring lost function.

The establishment of a maintenance therapy program for an

individual whose restoration has been reached. (However, maintenance

therapy itself is not covered as part of these services. Sections

3101.8 of the Medicare Intermediary Manual (HCFA Pub. 13, Part 3) and

2210 of the Medicare Carriers Manual provide guidelines for coverage of

restorative therapy and maintenance programs.)

Speech-language pathology services. These services are defined in

section 1861(ll)(1) as such speech, language, and related function

assessment and rehabilitation services furnished by a qualified speech-

language pathologist as this pathologist is legally authorized to

perform under State law (or the State regulatory mechanism) as would

otherwise be covered if furnished by a physician. Section 1877(ll)(3)

defines a ``qualified speech-language pathologist.''

Speech-language pathology services are briefly described in

Sec. 410.100(d) as those necessary for the diagnosis and treatment of

speech and language disorders that create difficulties in

communication. Section 2216 of the Medicare Carriers Manual provides

that speech-language pathology services are also services necessary for

the diagnosis and treatment of swallowing disorders (dysphagia),

regardless of the presence of a communication disability. This section

of the manual also discusses restorative therapy and maintenance

programs and group speech pathology services under the two main

categories of diagnostic or evaluation services and therapeutic

services.

Services that are essentially the same as ``outpatient physical

therapy services'' and ``outpatient speech pathology services'' are

also covered by Medicare in other contexts and in different settings,

and may be billed under different categories. For example, section

1861(b)(3) lists as ``inpatient hospital services'' other diagnostic or

therapeutic items or services furnished by a hospital or by others

under arrangements with the hospital, as are ordinarily furnished to

inpatients. We have a longstanding policy of covering physical therapy

and occupational therapy as diagnostic or therapeutic ``inpatient

hospital services.'' The Medicare regulations in Sec. 482.56, in fact,

include conditions of participation for hospitals that provide physical

therapy, occupational therapy, or speech pathology services.

Similarly, these services can also be covered as SNF services.

Section 1861(h)(3) includes as ``extended care services'' physical or

occupational therapy or speech-language pathology services furnished by

the SNF (or by others under arrangements made by the facility), to an

inpatient of the facility. These services can also be furnished as

``incident to'' a physician's services under section 1861(b)(2)(A).

This provision covers services and supplies furnished as an incident to

a physician's professional service, of kinds that are commonly

furnished in physicians' offices and are commonly either furnished

without charge or included in the physicians' bills. Physical and

occupational therapy can qualify as

[[Page 1675]]

``incident to'' services, as reflected in section 2050.2 of the

Carriers Manual, if the physician directly supervises auxiliary

personnel who furnish these services and if these personnel are

employed by the physician.

Section 1877(h)(6)(B) lists as a designated health service

``physical therapy services,'' rather than the more limited category of

``outpatient physical therapy services.'' Therefore, we believe that we

can include within our definition of these services any physical

therapy or speech-language pathology services that are covered under

Medicare, regardless of where they are furnished and by whom, or how

they are billed.

For purposes of section 1877, we would define ``physical therapy

services'' as those outpatient physical therapy services (including

speech-language pathology services) described at section 1861(p) of the

Act and at Sec. 410.100(b) and (d). Physical therapy services also

include any other services with the characteristics described in

Sec. 410.100(b) and (d) that are covered under Medicare Part A or B,

regardless of who provides them, the location in which they are

provided, or how they are billed.

c. Occupational therapy services

Sections 1861(s)(2)(D) and 1832 of the Act provide for coverage of

outpatient occupational therapy services under Part B. Section 1861(g)

defines ``outpatient occupational therapy services'' by substituting

the word ``occupational'' for the word ``physical'' each place that it

appears in the definition of outpatient physical therapy services in

section 1861(p).

Under section 1861(g), outpatient occupational therapy services may

be furnished by a provider of services, a clinic, rehabilitation

agency, or public health agency, or by others under arrangements with

and under the supervision of one of these entities. The services must

be furnished to an outpatient who is under the care of a doctor of

medicine or osteopathy, or a doctor of podiatric medicine, under a plan

of care established by one of these physicians or by a qualified

occupational therapist. The plan must be periodically reviewed by the

physician and must include the type, amount, and duration of

occupational therapy services to be furnished. No service is included

as outpatient occupational therapy if it would not be included as an

inpatient hospital service if furnished to an inpatient of a hospital.

Outpatient occupational therapy may be furnished by a provider to an

individual as an inpatient of a hospital or extended care facility if

the individual has exhausted or is otherwise ineligible for benefit

days under Medicare Part A.

Outpatient occupational therapy services may be furnished by an

independent occupational therapist in his or her office or in an

individual's home. The occupational therapist must meet any standards

created by the Secretary in regulations, including health and safety

standards.

Coverage guidelines for occupational therapy services are set forth

in sections 3101.9 of the Medicare Intermediary Manual (HCFA Pub. 13,

Part 3) and 2217 of the Medicare Carriers Manual. The purpose of

occupational therapy services is described generally in section 3101.9

of the Intermediary Manual as follows: ``Occupational therapy is a

medically prescribed treatment concerned with improving or restoring

functions which have been impaired by illness or injury or, where

function has been permanently lost or reduced by illness or injury, to

improve the individual's ability to perform those tasks required for

independent functioning.''

Basically, covered outpatient occupational therapy services include

the following types of services, which are best described in section

410.100(c), a section that specifically concerns services provided by a

comprehensive outpatient rehabilitation facility. For purposes of

section 1877, we would use the same services that are described in

section 410.100(c). In Sec. 411.351, occupational therapy services

would include the following:

Teaching of compensatory techniques to permit an

individual with a physical impairment or limitation to engage in daily

activities.

Evaluation of an individual's level of independent

functioning.

Selection and teaching of task-oriented therapeutic

activities to restore sensory-integrative function.

Assessment of an individual's vocational potential, except

when the assessment is related solely to vocational rehabilitation.

As we pointed out in the section covering physical therapy

services, services that are essentially the same as ``outpatient

occupational therapy services'' are also covered by Medicare in other

contexts and in different settings, and may be billed under different

categories. For example, they might be covered as ``inpatient hospital

services'' under section 1861(b)(3) as ``other diagnostic or

therapeutic items or services'' furnished by a hospital or by others

under arrangements with the hospital; they might be covered as SNF

services under section 1861(h)(3) as part of a patient's ``extended

care services''; or they might be furnished in a physician's office as

services ``incident to'' the physician's services under section

1861(b)(2)(A).

Section 1877(h)(6)(C) lists as a designated health service

``occupational therapy services,'' rather than the more limited

category of ``outpatient occupational therapy services.'' Therefore, we

believe that we can include within our definition of these services any

occupational therapy services which are covered under Medicare,

regardless of where they are furnished and by whom, or how they are

billed.

For purposes of section 1877, we would define ``occupational

therapy services'' as those outpatient occupational therapy services

described at section 1861(g) of the Act and at 42 CFR 410.100(c).

Occupational therapy services also include any other services with the

characteristics described in Sec. 410.100(c) that are covered under

Medicare Part A or B, regardless of who furnishes them, the location in

which they are furnished, or how they are billed.

d. Radiology services, including magnetic resonance imaging,

computerized axial tomography scans, ultrasound services, and radiation

therapy services and supplies

Section 1877(h)(6)(D) identifies ``radiology services, including

magnetic resonance imaging, computerized axial tomography scans, and

ultrasound'' as a designated health service. Section 1877(h)(6)(E)

identifies ``radiation therapy services and supplies'' as a designated

health service.

Sections 1861(s)(3) and 1832 establish that ``diagnostic X-ray

tests,'' including diagnostic mammography services under certain

conditions, are considered medical or other health services under Part

B. Similarly, section 1861(s)(4) establishes that ``X-ray, radium, and

radioactive isotope therapy, including materials and services of

technicians'' are considered medical or other health services under

Part B. Even though the statute does not define these terms, the

payment provisions in section 1833(a)(2)(E) prescribe rules for paying

for outpatient hospital radiology services. These include diagnostic

and therapeutic radiology, nuclear medicine, computer assisted

tomography (CAT scan) procedures, magnetic resonance imaging, and

ultrasound and other imaging services (but excluding screening

mammography). We cover these services under the conditions described in

Secs. 410.32(a) and 410.35 of the regulations and in the Coverage

[[Page 1676]]

Issues Manual (HCFA Pub. 6) and in other manuals.

Section 1861(s)(13) includes as medical or other health services

screening mammography services, which are defined in section 1861(jj)

as a ``radiologic procedure'' provided to a woman for the purpose of

early detection of breast cancer. We believe that screening mammography

could qualify as one of the ``radiology services'' listed in section

1877(h)(6)(D) as a designated health service. However, as we have

stated elsewhere, we believe that Congress enacted the physician

referral prohibition to limit the tendency for referring physicians to

overutilize services because they have a financial incentive to do so.

It is our view that screening mammography services cannot be subject to

overutilization. We base this conclusion on the fact that the statute

specifically limits the frequency with which the Medicare program will

cover these services. That is, section 1834(c)(2) specifically

prescribes how frequently the screenings will be covered for different

age groups. In addition, we never consider the covered level of

screenings to be unnecessary services--we believe that all women should

receive the screenings that are covered for them under the statute. (We

cover these screening services under the conditions described in

Sec. 410.34 and in the Coverage Issues Manual.)

We wish to make it clear that the only type of mammography that we

would exclude from the definition of ``radiology services'' listed

under section 1877(h)(6)(D) would be screening mammography as covered

under section 1861(s)(13) and as defined in section 1861(jj). It is our

view that ``radiology services'' does include diagnostic mammography,

which is not subject to the same limits. (Diagnostic mammography

services are defined in Sec. 410.34(a) as mammography furnished to a

symptomatic patient for the purpose of detecting breast disease, while

screening mammography is furnished to asymptomatic patients.)

Although Congress did not set up section 1877(h)(6)(D) and (E) in a

manner that parallels section 1861(s)(3) and (4), we believe that

paragraphs (D) and (E) of section 1877(h)(6), taken together, cover the

same services that are covered as Part B services under section

1861(s)(3) and (4). Therefore, throughout this document the terms

``radiology'' and ``imaging'' mean any diagnostic test or therapeutic

procedure using X-rays, ultrasound and other imaging services, CT

scans, MRIs, radiation, or nuclear medicine, including diagnostic

mammography services, except for the distinctions that follow.

The physician's professional component--Medicare has traditionally

considered a physician's professional services related to radiology to

in general be covered as physician services under section 1861(s)(1)

rather than as radiology services under either paragraph (3) or (4) of

section 1861(s). However, we believe that it is appropriate for

purposes of section 1877 to consider radiology services as including

these physician services. We are proposing to include the professional

component because radiology always consists of a technical service

combined with a physician's professional service. Whenever a technical

radiological service is overutilized, it follows that a physician's

radiological service will also be overutilized.

Several studies have found that nonradiologists with imaging

facilities in their own offices order imaging tests far more frequently

than physicians who refer their patients to imaging facilities outside

their practices. We mentioned several of these studies in section I.A

of this preamble in the general discussion concerning studies that have

raised serious concerns about physicians who make self-referrals. For

example, one GAO study found that Florida nonradiologists who were sole

practitioners or in group practices or other practice affiliations with

imaging facilities in their own offices, when compared to physicians

who referred outside their practices, had imaging rates about 3 times

higher for MRIs; about 2 times higher for CT scans; 4.5 to 5.1 times

higher for ultrasound, echocardiography, and diagnostic nuclear

medicine imaging; and about 2 times higher for complex and simple X-

rays. (GAO Report, ``Medicare: Referrals to Physician-owned Imaging

Facilities Warrant HCFA's Scrutiny,'' No. B-253835, pages 2, 3, and 10

(October 1994).)

Similarly, a study appearing in the New England Journal of Medicine

compared the frequency and costs of diagnostic imaging furnished by

self-referring physicians to the frequency and costs of these same

services when physicians refer patients to an unrelated radiologist.

The study covered referrals for four medical conditions. The study

determined that the self-referring physicians obtained imaging

examinations 4.0 to 4.5 times more often than the physicians who

referred to unrelated radiologists. In addition, with respect to three

of the four medical conditions, the self-referring physicians charged

significantly more than the radiologists for imaging examinations of

similar complexity. The combination of more frequent imaging and higher

charges resulted in mean imaging charges per episode of care that were

4.4 to 7.5 times higher for the self-referring physicians. (Bruce J.

Hillman, M.D., and others, ``Frequency and Costs of Diagnostic Imaging

In Office Practice--A Comparison of Self-Referring and Radiologist-

Referring Physicians,'' The New England Journal of Medicine, Vol. 323,

No. 23 (Dec. 6, 1990), pp. 1604-1608)

Exclusion for Invasive or Interventional Radiology

We would exclude from the meaning of radiology, for the purposes of

section 1877, any ``invasive'' radiology (also commonly referred to as

interventional radiology). Invasive radiology is any procedure in which

the imaging modality is used to guide a needle, probe, or a catheter

accurately. Examples include percutaneous transluminal angioplasty

(PTA); the placement of catheters for therapeutic embolization of

tumors, arteriovenous malformations, or bleeding sites; the placement

of drainage catheters; removal of stones; balloon dilation of

strictures; biopsies; arthrograms; and myelograms.

We are basing this exclusion on the theory that the radiology

services in these procedures are merely incidental or secondary to

another procedure that the physician has ordered. As we have stated

earlier, we believe that Congress meant for the categories listed in

the statute as designated health services to encompass services that

tend to be subject to abuse. It is our view that physicians do not

routinely refer patients for the main procedures listed in the last

paragraph, such as angioplasty, in order to profit from unnecessary

radiology services. As a result, we are proposing not to include these

``secondary'' radiology procedures as designated health services. We

are also specifically soliciting comments on any other types of

services that would qualify as designated health services, but which

may actually be incidental to other procedures.

We would include the following definition at Sec. 411.351:

Radiology services and radiation therapy and supplies means any

diagnostic test or therapeutic procedure using X-rays, ultrasound or

other imaging services, computerized axial tomography, magnetic

resonance imaging, radiation, or nuclear medicine, and diagnostic

mammography services, as covered under section 1861(s)(3) and (4) of

the Act and Secs. 410.32(a), 410.34, and 410.35, including the

professional

[[Page 1677]]

component of these services, but excluding any invasive radiology

procedure in which the imaging modality is used to guide a needle,

probe, or a catheter accurately.

e. Durable medical equipment and supplies

Sections 1861(s)(6) and 1832 establish DME as one of the

``medical or other health services'' covered under Medicare Part B.

Section 1861(n) defines DME as including iron lungs, oxygen tents,

hospital beds, and wheelchairs (under certain conditions), used in a

patient's home (including certain institutions that can qualify as

the patient's home), whether furnished on a rental basis or

purchased. The definition of DME is explained further in the

Medicare regulations. Section 414.202 defines DME as equipment

furnished by a supplier or a home health agency that meets the

following conditions:

Can withstand repeated use.

Is primarily and customarily used to serve a medical

purpose.

Generally is not useful to an individual in the absence

of an illness or injury.

Is appropriate for use in the home.

Durable medical equipment includes equipment such as

wheelchairs, hospital beds, nebulizers, and walkers. We also regard

DME that is furnished to a patient under a home health plan under

section 1861(m)(5) as DME for purposes of section 1877. The

conditions under which we cover DME are described in Sec. 410.38.

For the purposes of this proposed rule, we would use the definition

of DME set forth in section 1861(n) and in Sec. 414.202.

We have received a number of inquiries concerning Medicare

claims processed by the four Durable Medical Equipment Regional

Carriers (DMERCs). Many people erroneously believe that all devices,

items, or supplies processed by the DMERCs are items of DME. This is

not so, because the DMERCs are also responsible for paying claims

for other items, such as immunosuppressive drugs, orthotics,

prosthetics, and prosthetic devices and related supplies.

We have received requests that we clearly identify in this

regulation which items are considered DME and which are not. Because

the number of items considered to be DME is so extensive, we cannot

in this proposed rule identify each of them. However, in response to

these requests, we have provided below the general categories of

DME.

We have also listed below the types of supplies used with the

DME. We are listing the supplies because when identifying DME as a

designated health service, Congress also included the supplies

necessary for the effective use of the DME as part of the designated

health service. For example, supplies used with DME could include

such items as test strips and lancets used with blood glucose

monitoring equipment or drugs used with a nebulizer. In general,

supplies are items that cannot be reused. We would also like to

point out that, effective December 1, 1996, in order for drugs used

in conjunction with DME to be covered by Medicare, the entity

dispensing the drug must have a Medicare supplier number, must be

licensed to dispense the drug in the State in which it will be

dispensed, and must bill and receive payment in its own name.

An infusion pump may be covered as DME, in which case the

supplies necessary for its effective use are covered as designated

health services; these supplies include the drugs and biologicals

that must be put directly into the infusion pump.

External infusion pumps--External infusion pumps may be covered

as DME under Medicare if certain coverage requirements are met,

including use in the home. The Medicare Coverage Issues Manual

provides for the coverage of infusion pumps for certain indications

and under certain circumstances, as described in sections 60-9 and

60-14. Other uses of external infusion pumps are covered if the

DMERC's medical staff verifies the appropriateness of the therapy

and of the prescribed pump for the individual patient. Payment may

also be made for the drugs necessary for the effective use of an

infusion pump as long as they are reasonable and necessary for the

patient's treatment.

Section 1877(b)(2) provides an exception for in-office ancillary

services ``other than durable medical equipment (excluding infusion

pumps) and parenteral and enteral nutrients, equipment, and

supplies.'' Section 1877(b)(2) has the effect of specifically

excepting infusion pumps from the prohibition on a physician

referring durable medical equipment furnished in the physician's own

office. External infusion pumps may be used in a physician's office

to administer drug therapy, including chemotherapy. However,

external infusion pumps (or other drug delivery systems used in the

physician's office (and not in the patient's home) are covered by

Medicare under section 1861(s)(2)(A) as a service incident to the

physician's service and not as DME. In addition, we do not believe

that the in-office ancillary exception applies to external infusion

pumps used outside a physician's office. That is, we do not believe

that Congress intended for the in-office exception to apply to

infusion pumps that are only picked up at a physician's office to be

used in the home, or that are delivered to the home.

Implantable infusion pumps--Implantable infusion pumps may also

be covered as DME in accordance with the policy described in the

Medicare Coverage Issues Manual when they are used for certain

indications. Coverage for other uses of implantable infusion pumps

is allowed if the carrier's medical staff verifies that the drug and

the infusion pump are reasonable and necessary. (Implantable devices

are not billed to the DMERC carriers; rather, they are billed to the

local carrier.)

If an implantable infusion pump is implanted in the physician's

office, but will be used at home and elsewhere, we believe that it

qualifies as DME that has been furnished in the physician's office.

Hence, the in-office ancillary services exception could apply, since

section 1877(b)(2) specifically includes infusion pumps, but not

other DME.

End-Stage Renal Disease equipment and supplies--Section

1861(s)(2)(F) includes as covered medical and other health services

home dialysis supplies, equipment, and self-care home dialysis

support services, as well as institutional dialysis services and

supplies provided to individuals with end-stage renal disease

(ESRD). This ESRD benefit is separate from the DME benefit under

section 1861(s)(6). Therefore, the equipment, services, and supplies

covered under this section of the statute are not covered as DME

under Medicare. Examples of home dialysis equipment and supplies

include needles and syringes, blood pressure cuffs, dialysate

solution, and intermittent peritoneal dialyzers.

Other items of equipment furnished in a physician's office--As

mentioned above, Medicare does not cover equipment used in a

physician's office as DME but may pay for the equipment under other

provisions in the statute. For example, section 1861(s)(2)(A) covers

services and supplies furnished incident to a physician's services,

and can include the use of any equipment that is needed in order for

a physician to provide a covered service.

In addition, we may cover diagnostic testing under the

diagnostic services benefit under section 1861(s)(3), which would

include equipment used in diagnostic testing irrespective of where

the equipment is used. For example, dynamic electrocardiography

(EKG), commonly known as Holter monitoring, is a diagnostic

procedure that provides a continuous record of the

electrocardiographic activity of a patient's heart while he or she

is engaged in daily activities. Diagnostic services under section

1861(s)(3) are not themselves included as a designated health

service and thus are not specifically covered by this rule.

General Categories of DME--Under certain circumstances (which

include use in the patient's home), the following items may be

covered as DME. (Readers should refer to section 60-9 of the

Medicare Coverage Issues Manual for additional information.)

Alternating pressure pads and mattresses and miscellaneous support

surfaces

Bed pans

Blood glucose monitors

Canes/crutches and walkers

Commodes

Continuous positive airway pressure

Cushion lift, power seat

Decubitus care equipment

Gel flotation pads and mattresses

Heating pads

Heat lamps

Hospital beds and accessories

Intermittent positive pressure breathing equipment

Infusion pumps, supplies and drugs

Lymphedema pumps

Manual wheelchair base

Motorized wheelchair/power wheel chair base

Nebulizers

Wheel chair options/accessories

Oxygen and related respiratory equipment

Pacemaker monitor

Patient lifts

Pneumatic compressor and appliances

Power operated vehicles

Restraints

Roll about chairs

Safety equipment

Support surfaces

[[Page 1678]]

Suction pumps

Traction equipment

Transcutaneous electric nerve simulators and supplies

Trapeze equipment, fracture frame, and other orthopaedic devices

Ultraviolet cabinets

We would include the following definition at Sec. 411.351:

Durable medical equipment has the meaning given in section

1861(n) of the Act and Sec. 414.202.

f. Parenteral and enteral nutrients, equipment, and supplies

Coverage of enteral and parenteral therapy as a Medicare Part B

benefit is provided under the prosthetic device benefit provision in

section 1861(s)(8). The regulations cover prosthetic devices in

Sec. 410.36(a)(2). Details for enteral and parenteral therapy are

set forth in the Medicare Coverage Issues Manual at section 65-10.

When the coverage requirements for enteral or parenteral nutritional

therapy are met, Medicare also covers related supplies, equipment

and nutrients.

Enteral nutrients, equipment, and supplies--Enteral nutrition

therapy provides nutrients to an individual with a functioning

gastrointestinal tract who, due to pathology to or nonfunction of

the structures that normally permit food to reach the digestive

tract, cannot maintain weight and strength commensurate with his or

her general condition. Enteral nutritional therapy may be

administered by nasogastric, jejunostomy, or gastrostomy tubes. This

benefit also includes supplies appropriate for the method of

administration.

Therefore, at Sec. 411.351, we would define ``enteral nutrients,

equipment, and supplies'' as ``items and supplies needed to provide

enteral nutrition to a patient with a functioning gastrointestinal

tract who, due to pathology to or nonfunction of the structures that

normally permit food to reach the digestive tract, cannot maintain

weight and strength commensurate with his or her general condition,

as described in section 65-10 of the Medicare Coverage Issues Manual

(HCFA Pub. 6).''

Parenteral nutrients, equipment, and supplies--Parenteral

nutrition therapy provides nutrients to an individual with severe

pathology of the alimentary tract that does not allow adequate

absorption of sufficient nutrients to maintain weight and strength

commensurate with the patient's general condition. Since the

alimentary tract of such a patient does not function adequately,

parenteral nutrition may be provided through an indwelling catheter

placed percutaneously in the subclavian vein and then advanced into

the superior vena cava. An example of a condition that may typically

qualify for coverage is a massive small bowel resection resulting in

a severe inability to absorb nutrition in spite of oral intake.

Parenteral nutritional therapy would include the equipment and

supplies necessary to furnish the parenteral nutrition therapy.

(Parenteral nutrients are commonly considered as prescription drugs.

Effective December 1, 1996, any entity dispensing drugs that are

used in conjunction with a prosthetic device, including parenteral

equipment, must meet certain conditions in order for the drugs to be

covered under Medicare. These conditions are described in the

section covering DME and the supplies used in conjunction with DME.)

At Sec. 411.351, we would define ``parenteral nutrients,

equipment, and supplies'' as ``items and supplies needed to provide

nutriment to a patient with permanent, severe pathology of the

alimentary tract that does not allow absorption of sufficient

nutrients to maintain strength commensurate with the patient's

general condition, as described in section 65-10 of the Medicare

Coverage Issues Manual (HCFA Pub. 6).''

We wish to point out that section 1877(b)(2) specifically

excludes parenteral and enteral nutrients, equipment, and supplies

as a service that can qualify for the in-office ancillary services

exception.

g. Prosthetics, orthotics, and prosthetic devices

Prosthetics--Section 1861(s)(9) provides for inclusion as

medical and other health services artificial legs, arms, and eyes,

including replacements if required because of a change in a

patient's physical condition. Prosthetics are covered in the

regulations in Secs. 410.36(a)(3) and 414.202. As described in

section 2133 of the Medicare Carriers Manual, these appliances are

covered when furnished under a physician's order. We also cover

adjustments to artificial limbs or other appliances required by wear

or by a change in the patient's condition when ordered by a

physician.

We would define ``prosthetics,'' at Sec. 411.351, as artificial

legs, arms, and eyes, as described in section 1861(s)(9) of the Act.

Orthotics--Orthotics are included as a medical service under

section 1861(s)(9) as leg, arm, back, and neck braces. The

regulations at Sec. 410.36(a)(3) allow payment for these services to

include replacements if required because of a change in the

individual's condition. We have interpreted the statute in section

2133 of the Medicare Carriers Manual to cover these items when used

for the purpose of supporting a weak or deformed body member or

restricting or eliminating motion in a diseased or injured part of

the body. In the Carriers Manual, orthotics are covered only when

furnished under a physician's order.

Under section 2133D of the Medicare Carriers Manual, orthopedic

footwear is covered under the orthotic benefit if the footwear is an

integral part of a leg brace. Diabetic shoes are covered under

section 1861(s)(12) of the Act in a separate benefit category.

Splints, casts, and other devices used for the reduction of

fractures and dislocations are covered under section 1861(s)(5). We

do not consider diabetic shoes, casts, splints, or these other

devices to be included under orthotics, prosthetics, or prosthetic

devices.

At Sec. 411.351, we would define ``orthotics'' as ``leg, arm,

back, and neck braces, as listed in section 1861(s)(9) of the Act.''

Prosthetic devices--Section 1861(s)(8) provides for inclusion as

medical and other health services ``prosthetic devices (other than

dental) which replace all or part of an internal body organ

(including colostomy bags and supplies directly related to colostomy

care), including replacement of such devices, and including one pair

of conventional eyeglasses or contact lenses furnished subsequent to

each cataract surgery with insertion of an intraocular lens.'' This

definition is reflected in the regulations at Secs. 410.36(a)(2) and

414.202. The statute specifically excludes dental devices from

Medicare coverage as prosthetic devices. (In addition, renal

dialysis machines are covered under the end stage renal disease

benefit and are discussed elsewhere in this section.)

Under the prosthetic device benefit, Medicare also includes

supplies that are necessary for the effective use of a prosthetic

device, for example, tape to secure an indwelling catheter. Section

1877(h)(6)(H) includes prosthetic devices as a designated health

service and also specifically includes the supplies associated with

these devices. (Effective December 1, 1996, any entity dispensing

drugs that are used in conjunction with a prosthetic device must

meet certain conditions in order for the drugs to be covered under

Medicare. These conditions are described in the section covering DME

and drugs used in conjunction with DME.) Section 410.100(f)(2)

provides that services necessary to design the device, select

materials and components, measure, fit, and align the device, and

instructions to the patient are also included in this benefit.

Examples of prosthetic devices include cochlear implants, cardiac

pacemakers, and incontinence control appliances.

We have received many questions concerning whether Medicare

considers an intraocular lens to be a prosthetic device. The answer

is yes. We have also been asked, for purposes of the designated

health services listed in section 1877(h)(6), to define a prosthetic

device to exclude any device that is implanted by a physician as

part of a surgical procedure. The theory behind this exclusion is

that such devices are only a small component of a central procedure,

which is the surgery needed to implant them. Physicians would not

unnecessarily subject patients to a surgical procedure just to boost

profits on intraocular lenses or other implantable devices, and are

thus not the kind of services Congress meant to cover. In addition,

some physicians believe that it is critical in many cases that they

have the freedom to prescribe their own choice of an implantable

device because they have particularized the design or find the

device better to work with than others.

On the other hand, we have also been advised that only a very

small percentage of surgeons ``customize'' prosthetic devices by

developing their own, or by modifying existing devices. In addition,

it is not uncommon for physicians to receive compensation from

companies that manufacture or supply these devices, sometimes in the

form of ``consulting fees,'' perhaps in exchange for the physician's

agreement to use that company's device exclusively. Physicians might

also have an ownership interest in a supplier or manufacturer, thus

realizing a profit every time the device is used.

[[Page 1679]]

It has also come to our attention that physicians who have some

relationship with a manufacturer or supplier are in a position to

manipulate a hospital's or an ASC's choice of a prosthetic device in

exchange for the physicians' referrals. Although these practices

might not lead to the overutilization of services, we believe that

they can drive up the cost of certain services that are not subject

to a fee schedule, which we would regard as a form of potential

program abuse. Such an arrangement might also result in patient

abuse, since a physician may choose a prosthetic device based on

financial incentives rather than on the best interest of the

patient. Because of the controversy surrounding surgically implanted

devices, we have not excluded them from the definition of

``prosthetic devices,'' but specifically solicit comments on this

issue.

We would also like to point out that intraocular lenses that are

implanted in an ambulatory surgical center (ASC) would be covered

under the ASC payment rate. We have excluded any services covered

under the ASC rate from the referral prohibition under an exception

we created in Sec. 411.355(d).

We have also been asked whether, if an ophthalmologist has an

optical shop as part of his or her office, he or she can refer

Medicare patients to the optical shop for eyeglasses. Medicare

coverage of eyeglasses and contact lenses is very limited, covering

only those that qualify as ``prosthetic devices'' used after

intraocular lenses are implanted during cataract surgery. Thus, a

physician would not be prohibited from referring a Medicare patient

to the optical shop for any conventional eyewear that is not covered

under the Medicare program. For eyeglasses that are covered by

Medicare, the physician could prescribe and fill the eyeglass

prescription if an exception applies. For example, the services

might meet the in-office ancillary services exception if the optical

shop is located in the physician's office suite. Alternatively, the

optical shop might qualify as a rural provider so that the exception

for rural ownership in section 1877(d)(2) of the Act could apply.

At Sec. 411.351, we would define a ``prosthetic device'' as a

device (other than a dental device) listed in section 1861(s)(8)

that replaces all or part of an internal body organ, including

colostomy bags and including one pair of conventional eyeglasses or

contact lenses furnished subsequent to each cataract surgery with

insertion of an intraocular lens. We would define ``prosthetic

supplies'' as ``supplies that are necessary for the effective use of

a prosthetic device (including supplies directly related to

colostomy care).''

h. Home health services

How we will define home health services. Medicare-covered home

health services are defined in section 1861(m), and requirements for

payment for home health services furnished to eligible beneficiaries

are set forth in part 409, subpart E (``Home Health Services Under

Hospital Insurance'') of our regulations. For purposes of the

physician referral prohibition, ``home health services'' would have

the same meaning as the appropriate provisions described in part

409, subpart E. A brief explanation of the home health benefit

follows:

Home health services are items and services furnished to an

individual who is confined to the home, under the care of a

physician, and in need of at least one of the following skilled

services: intermittent skilled nursing services, physical therapy

services, speech-language pathology services, or continuing

occupational therapy services.

To receive covered home health services, a beneficiary must be

under a plan of care established and periodically reviewed by a

physician. Home health services are furnished by, or under

arrangements made by, a participating home health agency. Home

health services are furnished on a visiting basis in a place of

residence used as an individual's home. (A patient may not receive

home health services in a physician's office.) An individual's home

is wherever the individual makes his or her home. This may be his or

her own dwelling, an apartment, a relative's home, a home for the

aged, or some other type of institution. However, an institution is

not considered a patient's home if the institution meets the basic

requirements in the definition of a hospital (as defined in section

1861(e)(1)), an SNF (as defined in section 1819(a)(1)), or a nursing

facility (as defined in section 1919(a)(1)).

The following services may be furnished under the home

health services benefit if appropriate requirements are met:

Part-time or intermittent nursing care furnished by or

under the supervision of a registered professional nurse.

Physical therapy, occupational therapy, and speech-

language pathology services.

Medical social services furnished under the direction

of a physician.

Part-time or intermittent services of a home health

aide.

Medical supplies (including catheters, catheter

supplies, ostomy bags, and supplies related to ostomy care, and a

covered osteoporosis drug, but excluding biologicals and other

drugs), the use of durable medical equipment, and appliances

suitable for home use.

The medical services of an intern or resident in

training under an approved hospital teaching program if a home

health agency is affiliated with or under the common control of the

hospital furnishing the medical services.

A beneficiary may also receive home health services on an

outpatient basis at a hospital, SNF, or a rehabilitation center

under arrangements made by the home health agency if equipment is

required that cannot be made available at the beneficiary's home or

the services are furnished while the beneficiary is at the facility

to receive services requiring equipment that cannot be made

available at the beneficiary's home. Home health services do not

include transportation of the beneficiary to the facility for these

home health services.

Existing Sec. 409.49 identifies services that are excluded from

payment under the Medicare home health benefit. Note that included

among those services is any service that would not be covered as

inpatient hospital services.

Also note that under the Medicare statute, home health services

can be provided only by an HHA. That is, under section 1814(a),

payments for services furnished to an individual may be made only to

providers of services that are eligible for that payment. To be

eligible, an HHA must, among other things, have in effect its own

provider agreement with Medicare, as described in section 1866, and

meet the specific conditions of participation for HHAs, as described

in section 1891. As a result, we regard home health services as

services ``provided by an HHA'' and not as services provided by any

other entity, even if the HHA is owned by the other entity or is

otherwise financially related to it. (We regard hospital services

the same way; that is, they can be provided only by an entity that

meets the requirements for participation as a hospital.) Therefore,

even if a hospital owns an HHA, the exception for hospital ownership

in section 1877(d)(3), which applies to designated health services

``provided by a hospital,'' would not apply to home health services

provided by a hospital-based HHA.

At Sec. 411.351, we would include the following definition:

``Home health services'' means the services described in section

1861(m) of the Act and part 409, subpart E of this chapter.''

How We Propose to Reconcile Section 1877 and the Physician

Certification Requirements for Home Health Services Under 42 CFR

424.22(d)

Section 903 of the Omnibus Reconciliation Act of 1980 amended

sections 1814(a) and 1835(a) of the Act to prohibit the certification

of need for home health services, and the establishment and review of a

home health plan of care for those services, by a physician who has a

significant ownership interest in, or a significant contractual or

financial relationship with, the home health agency that provides those

services. These amendments were incorporated into the regulations at 42

CFR 405.1633(d) (which was redesignated as section 424.22(d)), by an

interim final rule with comment period that we published in the Federal

Register on October 26, 1982, at 42 FR 47388, and that became effective

on November 26, 1982.

On June 30, 1986, we published a final rule in the Federal

Register at 51 FR 23541 that confirmed the provisions of the October

26, 1982 rule and clarified that under the term, ``significant

ownership interest in or a significant financial or contractual

relationship with'' the home health agency, we intended to include

salaried employment. This clarification was made effective on August

29, 1986.

The only exceptions to the home health regulations were

uncompensated officers or directors of an HHA, HHAs operated by

Federal, State, or local governmental authority, and sole community

HHAs. The home health certification restrictions of sections 1814(a)

and 1835(a) and Sec. 424.22(d) have not been significantly updated

since 1986.

[[Page 1680]]

On November 5, 1997, we published a notice with comment period

in the Federal Register (62 FR 59818) that announced our intention

to reconcile the statutory prohibitions in sections 1814(a) and

1835(a) concerning physician certification for home health services

with the related section 1877 prohibition. In that notice we stated

that we had decided to reexamine appropriate provisions of section

1877 and the home health regulations as they pertain to indirect

compensation arrangements involving physicians who are compensated

by e

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