Medicare and State Health Care Programs: Fraud and Abuse; Clarification of the Initial OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti- Kickback Statute

SUMMARY: This final rule serves both to add new safe harbor provisions

under the Federal and State health care programs' anti-kickback

statute, as authorized under section 14 of Public Law 100-93, the

Medicare and Medicaid Patient and Program Protection Act of 1987, and

to clarify various aspects of the original safe harbor provisions now

codified in 42 CFR part 1001 (originally proposed in RIN 0991-AA74).

Specifically, this final rule modifies the original set of final safe

harbor provisions codified in 42 CFR 1001.952 to give greater clarity

to that rulemaking's original intent. In addition, this final rule sets

forth an expanded set of safe harbor provisions designed to protect

additional payment and business practices from criminal prosecution or

civil sanctions under the anti-kickback provisions of the statute.

EFFECTIVE DATE: This rulemaking is effective November 19, 1999.

FOR FURTHER INFORMATION CONTACT:

Vicki L. Robinson, Office of Counsel to the Inspector General (202)

619-0335

Joel Schaer, Office of Counsel to the Inspector General (202) 619-1306

SUPPLEMENTARY INFORMATION:

I. Background

Section 1128B(b) of the Social Security Act (the ``Act'') (42

U.S.C. 1320a-7b(b)) provides criminal penalties for individuals or

entities that knowingly and willfully offer, pay, solicit or receive

remuneration in order to induce business reimbursable under the Federal

or State health care programs. The offense is classified as a felony

and is punishable by fines of up to $25,000 and imprisonment for up to

5 years. Violations of the anti-kickback statute may also result in the

imposition of a civil money penalty (CMP) under section 1128A(a)(7) of

the Act (42 U.S.C. 1320a-7a(a)(7)) or program exclusion under section

1128 of the Act (42 U.S.C. 1320a-7).

The types of remuneration covered specifically include kickbacks,

bribes, and rebates, whether made directly or indirectly, overtly or

covertly, in cash or in kind. In addition, prohibited conduct includes

not only remuneration intended to induce referrals of patients, but

remuneration intended to induce the purchasing, leasing or ordering, or

arranging of any good, facility, service, or item paid for by Federal

or State health care programs.

Establishing the Original Safe Harbors

Since the statute on its face is so broad, concern had been

expressed that some relatively innocuous commercial arrangements were

technically covered by the statute and therefore were subject to

criminal prosecution. As a response to the above concern, the Medicare

and Medicaid Patient and Program Protection Act (MMPPPA) of 1987,

section 14 of Public Law 100-93, specifically required the development

and promulgation of regulations, the so-called ``safe harbor''

provisions, designed to specify various payment and business practices

which, although potentially capable of inducing referrals of business

under the Federal and State health care programs, would not be treated

as criminal offenses under the anti-kickback statute. The OIG safe

harbor provisions have been developed ``to limit the reach of the

statute somewhat by permitting certain non-abusive arrangements, while

encouraging beneficial and innocuous arrangements.'' \1\ Health care

providers and others may voluntarily seek to comply with these

provisions so that they have the assurance that their business

practices are not subject to any enforcement action under the anti-

kickback statute, the CMP provision for anti-kickback violations, or

the program exclusion authority related to kickbacks.

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\1\ 56 FR 35952; July 21, 1991.

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On July 29, 1991, we published in the Federal Register the 1991

final rule (56 FR 35952) setting forth various safe harbor provisions

to the Medicare and Medicaid anti-kickback statute. The rulemaking was

authorized under section 14 of Public Law 100-93, MMPPPA of 1987, and

specified certain payment practices that will not be subject to

criminal prosecution under section 1128B(b) of the Social Security Act

(42 U.S.C. 1320a-7b(b)), and that will not provide a basis for

exclusion from Medicare or the State health care programs under section

1128(b)(7) of the Act (42 U.S.C. 1320a-7(b)(7)). The initial final

rulemaking established ``safe harbors'' in ten broad areas: investment

interests, space rental, equipment rental, personal services and

management contracts, sales of practices, referral services,

warranties, discounts, employees, and group purchasing organizations.

However, in giving the Department the authority to protect certain

arrangements and payment practices under the anti-kickback statute,

Congress intended the regulations to be evolving rules that would be

updated periodically to reflect changing business practices and

technologies in the health care industry.

Establishing Additional Safe Harbors

The public comments in response to the original proposed rule

establishing the safe harbor provisions contained suggestions for the

consideration and adoption of additional safe harbor provisions under

42 CFR 1001.952. As a result of those comments, on September 21, 1993,

the OIG published a proposed rule (58 FR 49008) (the ``1993 proposed

rule'') formally requesting public comments on seven new areas of safe

harbor protection under the anti-kickback statute, as well as proposed

modifications to the existing safe harbor for sales of practices. The

proposals for new safe harbors addressed investment interests in rural

areas; ambulatory surgical centers; group practices; practitioner

recruitment; obstetrical malpractice insurance subsidies; referral

agreements for specialty services; and cooperative hospital service

organizations described in section 501(e) of the Internal Revenue Code.

Clarifying the Original Safe Harbor Provisions

After publication of the 1991 final rule, the OIG became aware of a

limited number of issues that had created uncertainties for health care

providers trying to comply with the original safe harbor provisions,

and of certain instances where our intent, either to protect or

preclude protection for particular business arrangements, was not fully

reflected in the text of the regulation, even though it was reflected

in the preamble. As a result, the OIG developed and published a new

notice of proposed rulemaking on July 21, 1994 (59 FR 37202) (the

``1994 proposed clarifications'') intended to modify the text of 1991

final rule to conform to the rulemaking's original intent. The

clarifications contained in the proposed rule did not represent an

attempt to reevaluate the basic judgments that led to the original safe

harbors, but rather were designed to protect business practices

originally intended to be

[[Page 63519]]

protected by making the regulatory language more precise.

Annual Solicitations for Suggestions for Modified and New Safe Harbors

In accordance with section 205 of the Health Insurance Portability

and Accountability Act (HIPAA) of 1996 (Pub. L. 104-191), the

Department is now required to develop and publish an annual notice in

the Federal Register formally soliciting proposals for modifying

existing safe harbors and promulgating new safe harbors and OIG special

fraud alerts. The Department will review the proposals and, in

consultation with the Department of Justice (DoJ), consider issuing new

or modified safe harbor regulations, where appropriate. On December 31,

1996, we published the first of these notices in the Federal Register

(61 FR 69060), soliciting public comment regarding ``the development of

proposed or modified safe harbor regulations,'' including the pending

proposals for new and modified safe harbors (61 FR 69062). We published

additional annual notices on December 10, 1997 (62 FR 65050) and

December 10, 1998 (63 FR 68223). (These notices are referred to in this

preamble collectively as the ``annual solicitations.'') Respondents to

the annual solicitations suggested a number of areas for new or

modified safe harbor protection; additionally, a number of respondents

commented on the 1993 proposed rule and the 1994 proposed

clarifications. This rulemaking is based on the comments received in

response to the 1993 proposed rule, the 1994 proposed clarifications,

and the annual solicitations insofar as the latter addressed the new

and modified safe harbor proposals contained in the 1993 proposed rule

and the 1994 proposed clarifications. Other suggestions for new and

modified safe harbors are under review and will be the subject of

annual reports to Congress made as part of the Inspector General's

year-end semiannual report, as required by HIPAA.

Shared-Risk Exception

Section 216 of HIPAA created an exception to the anti-kickback

statute for certain risk-sharing arrangements and directed the

Department to use a negotiated rulemaking process to establish

companion regulations. Specifically, section 216 of HIPAA created an

exception for certain managed care arrangements, involving remuneration

(i) between eligible organizations under section 1876 of the Social

Security Act (certain health maintenance organizations and competitive

medical plans) and individuals or entities providing items or services

and (ii) between any organization and an individual or entity that has

a risk-sharing arrangement, if a written agreement places the

individual or entity at ``substantial financial risk'' for the cost or

utilization of the items or services provided.

On January 22, 1998, the negotiated rulemaking committee comprised

of 21 industry representatives, a representative from the DoJ, and an

OIG representative representing the Department, reached consensus on a

final proposal for two new safe harbors.\2\ Issues raised in comments

to the 1993 proposed rule and the 1994 proposed clarifications that

pertain to matters covered by the two shared-risk exception safe

harbors are not considered in this final rulemaking.

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\2\ The OIG's interim final rule addressing the safe harbors for

shared-risk arrangements is published in today's edition of the

Federal Register.

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II. Summary of Proposed Rules, Response to Public Comments and

Summary of Revisions

In response to the 1993 proposed rule and the 1994 proposed

clarifications, we received a total of 313 timely-filed public comments

on the additional safe harbors proposed rule and 28 timely-filed public

comments on the safe harbor clarifications proposed rule from various

provider groups, medical facilities, professional and business

organizations and associations, medical societies, State and local

government entities, private practitioners, and concerned citizens. We

received 32 comments in response to the annual solicitations that were

relevant to the issues addressed in this rulemaking. A summary of the

comments and our responses to those comments follow.

A. General Comments

1. Conformity With Stark Law

Comment: Several commenters urged the OIG to conform existing and

proposed safe harbors to the statutory exceptions to section 1877 of

the Act, otherwise known as the ``Stark Law.'' These commenters believe

that payment arrangements permitted under the Stark Law should be

protected under the anti-kickback statute. They argue that it is

confusing for the industry to be subject to two separate bodies of

fraud and abuse law applicable to arrangements involving physician

self-referrals. At minimum, these commenters urge that the safe harbors

be made consistent with the Stark exceptions with respect to physician

compliance with the anti-kickback statute.

Response: The Stark Law is a civil statute that generally (i)

prohibits physicians from making referrals for clinical laboratory or

other designated health services to entities in which the physicians

have ownership or other financial interests and (ii) prohibits entities

from presenting or causing to be presented claims or bills to any

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

services furnished pursuant to a prohibited referral. (42 U.S.C.

1395nn(a)(1)). The anti-kickback statute, on the other hand, is a

criminal statute that prohibits the knowing and willful offer, payment,

solicitation, or receipt of remuneration to induce Federal health care

program business. Both laws are directed at the problem of

inappropriate financial incentives influencing medical decision-making.

This similarity notwithstanding, the statutes are different in scope

and structural approach. Under the Stark Law, physicians may not refer

patients for certain designated health services to entities from which

the physicians receive financial benefits, except as allowed in

enumerated exceptions. A transaction must fall entirely within an

exception to be lawful under the Stark Law. The anti-kickback statute,

on the other hand, establishes an intent-based criminal prohibition

with optional statutory and regulatory ``safe harbors'' that do not

purport to define the full range of lawful activity. Rather, safe

harbors provide a means of assuring that payment practices are not

illegal. Payment practices that do not fully comply with a safe harbor

may still be lawful if no purpose of the payment practice is to induce

referrals of Federal health care program business. Because the two

statutory schemes are fundamentally different, the conference report

for the Stark Law included language clarifying that ``any prohibition,

exemption, or exception authorized under this provision in no way

alters (or reflects on) the scope and application of the anti-kickback

provisions in section 1128B of the Social Security Act'' (H.R. Conf.

Rep. 239, 101st Cong., 1st sess. 856 (1989)).

We are mindful that it may sometimes be burdensome for parties to

review their arrangements under two separate statutory schemes.

However, it would be inappropriate to adjust our safe harbor provisions

in a manner that would prejudice enforcement of the anti-kickback

statute merely to conform the safe harbors to an exception or

prohibition under section 1877 of the Act. This is particularly the

case in view of the clear legislative intent to keep

[[Page 63520]]

enforcement under the anti-kickback statute separate from enforcement

under section 1877 of the Act. Moreover, variation between the Stark

Law exceptions and anti-kickback safe harbors is reasonable in light of

the schematic differences between the two statutes. To the extent the

anti-kickback statute and the Stark Law address the same conduct, the

Stark Law acts as a structural bar to arrangements that contain a per

se conflict of interest. However, even if an arrangement passes muster

under the Stark Law, it may still constitute a violation of the anti-

kickback statute, if the requisite intent to induce referrals is

present.

2. Integrated Delivery Systems and Managed Care

Comment: Several commenters urged the OIG to modify existing safe

harbors and develop new safe harbors to protect and encourage the

development of integrated health care delivery systems and managed care

arrangements. For example, several commenters urged the OIG to provide

specific safe harbor protection for payments between wholly-owned

entities, including parent entities and their wholly-owned

subsidiaries. Some commenters questioned whether the anti-kickback

statute is an appropriate method of regulating business arrangements in

the health care industry, particularly in the context of managed care.

Response: The anti-kickback statute is very broad and potentially

covers many managed care arrangements that are common in the

marketplace today. However, we have recognized that many of these

arrangements do not create the potential for fraud or abuse under the

anti-kickback statute and have created safe harbors aimed at those

managed care arrangements. Currently, for example, a safe harbor

protects certain price reductions offered to health plans

(Sec. 1001.952(m)). In addition, Congress enacted in HIPAA a statutory

shared-risk exception for certain managed care plans and arrangements

that put individuals or entities at substantial financial risk.\3\

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\3\ See footnote 2.

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With respect to integrated delivery systems and payments between

wholly-owned entities, we have stated previously that the anti-kickback

statute is not implicated when payments are transferred within a single

corporate entity, for example, from one division to another, and

therefore no explicit safe harbor is needed for such payments (56 FR

35983). We recognize that there are many lawful integrated delivery

system arrangements and arrangements between wholly-owned entities in

the marketplace today and that many of these arrangements may be

beneficial to the Federal health care programs and their beneficiaries.

We are concerned, however, that integrated delivery systems, including

arrangements involving wholly-owned subsidiaries, may present

opportunities for the payment of improper financial incentives that

result in overutilization of services and increased program costs and

that may adversely affect quality of care and patient freedom of choice

among providers. This is primarily of concern where payment by the

Federal health care programs is on a fee-for-service basis, as may

occur, for example, with a hospital's referrals to a wholly-owned home

health care agency (see, for example, Medicare Hospital Discharge

Planning, OEI-02-94-00320 (December 1997)). Accordingly, we do not

anticipate providing safe harbor protection for integrated delivery

systems and arrangements between wholly-owned entities at this time.

The advisory opinion process (42 CFR part 1008) is available for

parties wishing to obtain OIG review of their particular integrated

delivery or wholly-owned arrangements.

3. Additional Safe Harbors

Comment: Several commenters urged the OIG to demonstrate renewed

commitment to issuing clarifying interpretations of the anti-kickback

statute in a regular and timely manner.

Response: The OIG recognizes the need to work closely with the

industry to combat fraud and abuse in the Federal health care programs

through meaningful industry guidance consistent with our law

enforcement obligations. As part of HIPAA, the OIG received substantial

additional funding for its fraud-fighting efforts. A portion of that

funding has been used for a number of industry guidance purposes,

including the creation of an Industry Guidance Branch in the Office of

Counsel to the Inspector General, which is tasked with issuing advisory

opinions and promulgating safe harbor regulations and special fraud

alerts. As part of our mandate under HIPAA, we have canvassed the

industry through annual notices in the Federal Register soliciting

public suggestions for new and modified safe harbors and special fraud

alerts. The suggestions received in response to those notices, as well

as other suggestions received from the industry or generated

internally, are under review, and we anticipate further rulemaking

periodically in connection with some of these safe harbor suggestions.

We have reported to Congress on the status of the suggestions in the

OIG semiannual report to be issued shortly. In addition, the ongoing

issuance of advisory opinions, model compliance guidance, special fraud

alerts and special advisory bulletins is providing the industry with

meaningful guidance on the scope and application of the anti-kickback

statute in a regular and timely manner.

4. Transition Period

Comment: Several commenters urged the OIG to afford providers who

entered into arrangements with a good faith belief that the

arrangements did not violate the anti-kickback statute a reasonable

grace period to restructure existing arrangements to conform to the

final safe harbors contained in these regulations. In particular,

several commenters expressed concern that the 1994 clarifications would

be interpreted to be retroactive to the date of the original safe

harbors, with no provision for ``grandfathering'' arrangements that

providers believed in good faith complied with the safe harbors as set

forth in the 1991 final rule. For example, these commenters note that

it was not clear that only ``health care'' assets could be counted for

purposes of qualifying for the large entity investment safe harbor

(Sec. 1001.952(a)(i)). Specifically, one commenter proposed

implementation of a one year grace period.

Response: We recognize that many providers have in good faith

attempted to structure lawful arrangements under the anti-kickback

statute that may not fit squarely within these final safe harbor rules.

In this regard, we repeat our response to similar comments in our

preamble to the 1991 final rule. There we stated:

The failure of a particular business arrangement to comply with

these provisions does not determine whether or not the arrangement

violates the statute because * * * this regulation does not make

conduct illegal. Any conduct that could be construed to be illegal

after the promulgation of this rule would have been illegal at any

time since the current law was enacted in 1977. Thus illegal

arrangements entered into in the past were undertaken with a risk of

prosecution. This regulation is intended to provide a formula for

avoiding risk in the future.

We also recognize, however, that many health care providers have

structured their business arrangements based on the advice of an

attorney and in good-faith belief that the arrangement was legal. In

the event that they now find that the arrangement does not comply

fully with a particular safe harbor provision and are working with

diligence and good faith to restructure it so that it does comply,

we will use our discretion to be fair

[[Page 63521]]

to the parties to such arrangements. (56 FR 35955).

These same principles apply with respect to arrangements structured

in good faith in accordance with the 1991 final rule. Thus, to the

extent that parties reasonably believed that they complied with a safe

harbor based on the 1991 final rule and work with diligence and good

faith to restructure their arrangements so that they comply with the

safe harbor as clarified in this final rule, we will exercise our

discretion to be fair to the parties. We are not setting a specific

``grace period,'' as we believe that the reasonable time period for

restructuring an arrangement will vary depending on the type and

complexity of the arrangement.

5. Meaning of Safe Harbors

Comment: Several commenters asked the OIG to clarify that the

failure to meet the conditions of a safe harbor does not mean that an

arrangement is suspect under the anti-kickback statute. One commenter

expressed concern that members of the public view arrangements that do

not comply with a safe harbor as suspect arrangements.

Response: The issue of the scope and effect of the safe harbors is

important and often misunderstood. We addressed this issue in our

preamble to the 1991 final rule:

This (safe harbor) regulation does not expand the scope of

activities that the statute prohibits. The statute itself describes

the scope of illegal activities. The legality of a particular

business arrangement must be determined by comparing the particular

facts to the proscriptions of the statute.

The failure to comply with a safe harbor can mean one of three

things. First * * * it may mean that the arrangement does not fall

within the ambit of the statute. In other words, the arrangement is

not intended to induce the referral of business reimbursable under

(a Federal health care program); so there is no reason to comply

with the safe harbor standards, and no risk of prosecution.

Second, at the other end of the spectrum, the arrangement could

be a clear statutory violation and also not qualify for safe harbor

protection. In that case, assuming the arrangement is obviously

abusive, prosecution would be very likely.

Third, the arrangement may violate the statute in a less serious

manner, although not be in compliance with a safe harbor provision.

Here there is no way to predict the degree of risk. Rather, the

degree of risk depends on an evaluation of the many factors which

are part of the decision-making process regarding case selection for

investigation and prosecution. Certainly, in many (but not

necessarily all) instances, prosecutorial discretion would be

exercised not to pursue cases where the participants appear to have

acted in a genuine good-faith attempt to comply with the terms of a

safe harbor, but for reasons beyond their control are not in

compliance with the terms of the safe harbor. In other instances,

there may not even be an applicable safe harbor, but the arrangement

may appear innocuous. But in other instances, we will want to take

appropriate action. (56 FR 35954)

Thus, it is not true that every arrangement that does not comply

with a safe harbor is suspect under the anti-kickback statute, though

such arrangements may be suspect in particular circumstances. Parties

seeking guidance about their specific arrangements may request an OIG

advisory opinion in accordance with the regulations set forth at 42 CFR

part 1008.

B. 1994 Clarifications to Existing Safe Harbors

In general, the 1994 proposed clarifications were designed to

clarify various aspects of the original safe harbor provisions. Set

forth below are a summary of the proposed clarifications for each safe

harbor provision, a summary of the final clarifications adopted in this

rulemaking, summaries of the public comments received, and our

responses to those comments.

1. Investment Interests

Summary of Proposed Clarifications: We proposed five clarifications

to the investment interests safe harbor, as follows

First, we proposed that only assets or revenues related to

the furnishing of health care items or services will be counted for

purposes of qualifying for either the $50,000,000 asset threshold for

``large entities'' (Sec. 1001.952(a)(1)) or the 60-40 gross revenue

test for ``small entities'' (Sec. 1001.952(a)(2)(vi)). The purpose of

this modification is to make clear our original intent that only assets

and revenues derived from health care lines of business will be

considered for purposes of qualifying for safe harbor protection.

Second, we proposed revising the standards that prohibit

an entity from loaning funds to an investor to be used to purchase the

investor's investment interest in the entity. (Secs. 1001.952(a)(1)(iv)

and 952(a)(2)(vii)). The revised standard would make clear that the

prohibition also includes any such loan from another investor or a

person acting on behalf of the entity or any investor.

Third, we proposed modifying the first investment interest

standard to the small entity investment safe harbor (the 60-40 investor

test) to allow an alternative to the existing requirement of class-by-

class analysis. Under the current rule, ``each class of investments''

must meet the 60-40 investor test. Upon review, we found this class-by-

class analysis unnecessarily restrictive. Accordingly, the proposed

alternative would allow equivalent classes of equity investment

interests to be combined together or equivalent classes of debt

investment interests to be combined together (separate from the equity

investments) in order to apportion investors into ``untainted'' and

``tainted'' pools for purposes of meeting the 60-40 investor test.

Fourth, we proposed striking the language ``items or

services furnished'' from the 60-40 revenue rule

(Sec. 1001.952(a)(2)(vi)) in the small entity investment safe harbor to

make clear that we did not intend for revenues that the joint venture

derives from items or services furnished by an investor to the joint

venture (such as management services) to be considered tainted for

purposes of satisfying the 60-40 revenue test.

Fifth, we proposed a clarification in the preamble to the

1994 proposed clarification to the effect that an interested investor

must obtain his or her investment interest in the same way as members

of the public (i.e., directly off a registered national securities

exchange through a broker) and the investment interest must be the same

type of investment interest that is available to the public. In this

regard, we stated that there cannot be any side agreements that require

stock to be purchased or that restrict in any manner an investor's

ability to dispose of the stock. We proposed no change in the language

of the existing safe harbor, which states that the investment interest

of an interested investor ``must be obtained on terms equally available

to the public thorough trading on a registered national securities

exchange * * * or on the National Association of Securities Dealers

Automated Quotation Service'' (Sec. 1001.952(a)(1)(ii)).

Summary of the Final Rule: We are adopting the clarifications to

the large and small entity investment safe harbors as proposed in the

1994 proposed clarifications and described above, with the following

modifications in response to comments received (unless otherwise

noted):

We have added language to Sec. 1001.952(a)(2)(vii)

clarifying that, for purposes of the small entity investment safe

harbor, loans to an investor may not be made by individuals or entities

acting on behalf of the investment entity or any of its investors. This

language is the same as language proposed to be added to

Sec. 1001.952(a)(1)(iv) in the large entity investment safe harbor in

the 1994 proposed clarifications and was

[[Page 63522]]

described as applying to the small entity investment safe harbor in the

preamble to the 1994 proposed clarifications. It was inadvertently

omitted from the regulatory language published in the notice of

proposed rulemaking.

We have revisited the meaning of ``on terms equally

available'' in the second standard of the large entity investment safe

harbor and have concluded that an investment interest is obtained on

equally available terms if it is obtained at the same price as is

available to the general public trading on a registered securities

exchange through a broker and is not subject to restrictions on

transferability.

Comments and Responses

a. Large Entity Investments

Comment: In response to our clarification that only assets or

revenues ``related to the furnishing of health care items or services''

will be counted for purposes of qualifying for either the $50,000,000

asset threshold for ``large entities'' or the 60-40 gross revenue test

for ``small entities,'' several commenters sought guidance regarding

what constitutes ``health care items or services.'' For example, some

commenters wondered whether a managed care organization would be

considered a health care business if it does not furnish health care

services. Some commenters objected to the proposal, arguing that

requiring items and services to be health care related would actually

increase the incentives for improper referrals. They reason, for

example, that a large entity entirely composed of health-care related

businesses would be more susceptible to the lure of paying kickbacks

for referrals than a diversified entity less dependent on health care

derived profits.

Response: By using the term ``health care items or services,'' we

mean (i) health care items, devices, supplies, and services and (ii)

items or services reasonably related to the furnishing of health care

items, devices, supplies, or services, including, but not limited to,

non-emergency transportation, patient education, attendant services,

social services (e.g., case management), utilization review, quality

assurance, and practice management services. Marketing services are not

included. In this context, we believe that a managed care company would

count as a health care related asset for purposes of the large entity

investment threshold test and that revenue derived from a managed care

company would count as ``tainted'' revenue for purposes of the 60-40

revenue test in the small entity investment safe harbor.

While we agree that diversified assets may, in some circumstances,

indirectly minimize financial incentives for referrals from investor

referral sources, we continue to believe that arrangements involving

ventures between health care businesses and non-health care business

pose an increased risk of program abuse. As we stated in the preamble

to the 1994 clarifications, ``[i]t would be an obvious sham,

inconsistent with our original intent, if a joint venture could merge

with a non-health care business and have those non-health care assets,

and the revenues derived from that non-health care line of business

counted for the purposes of qualifying for safe harbor protection'' (59

FR 37203-37204).

Comment: Several commenters expressed concern about our

clarification of the phrase ``on terms equally available to the

public'' in the safe harbor condition that describes how interested

investors must obtain their investment interests in order to receive

safe harbor protection (Sec. 1001.952(a)(1)(ii)). We indicated that the

phrase should be interpreted to mean that the interested investor must

obtain his or her investment interest in the same way as investors from

the general public. Several commenters urged that this interpretation

was too narrow and imposed unwarranted limitations on investment in

large entities. These commenters argued, for example, that a large

entity should be permitted to purchase a physician's practice using

stock in addition to cash, provided that the value of the stock plus

all other consideration paid to the physician equals the fair market

value for the practice. For example, one commenter asked why it would

be acceptable for an entity to purchase a practice for $1 million in

cash (assuming fair market value to be $1 million), but not to do so

for $500,000 in cash and $500,000 worth of stock. These commenters

suggest that the phrase ``on terms equally available'' should mean that

the stock is not lettered, restricted, subject to side agreements, or

otherwise subject to limited transferability. One commenter proposed an

alternative safe harbor condition that would deny safe harbor

protection to an interested investor's holding of publicly-traded stock

that is subject to transfer restrictions that are not applicable to the

stock when held by members of the public.

Response: We have two significant concerns regarding interested

investors' investments in large entities that are in health care

related businesses. First, we are concerned that limited

transferability or other restrictions on the sale or disposition of

stock may serve to ``lock'' interested investors into specific

investments, thereby increasing the incentives for those investors to

refer Federal health care program business to the investment entity.

Second, we are concerned that interested investors who are potential

referral sources for the investment entity not be permitted to obtain

their investment interests at insider prices or at prices more

favorable than those available to the general public when purchasing

stock from a registered national securities exchange through a broker.

Such favorable treatment could potentially be disguised remuneration

for referrals. For example, we are aware of certain public offerings of

health care companies that involve simultaneous acquisitions of

physician practices in exchange for stock in the newly-public company,

with the stock valued in a manner that results in the selling physician

obtaining the stock at a lower price or on more advantageous terms than

offered to the public. The economic benefit conferred on the physician

in such an arrangement potentially violates the anti-kickback statute

if one purpose of the benefit is to reward or induce referrals. The

investment would not fall within the large entity investment safe

harbor.

Notwithstanding, upon further consideration of this issue, we are

persuaded that requiring stock acquired by interested investors to be

obtained in the same way as the same stock acquired by members of the

public imposes an unduly restrictive interpretation on the existing

safe harbor language. Accordingly, we are adding language to make clear

that an investment interest will not qualify for safe harbor protection

as ``obtained on terms equally available to the public'' if (i) the

investment interest is subject to restrictions or limited

transferability (including side agreements) not applicable to the same

investment interest when held by members of the public and/or (ii) the

investment interest is not obtained for the same price that is

available to the general public when trading on a registered national

securities exchange through a broker. Thus, in the example cited by the

commenter above, the investment interest would be protected if $1

million is the fair market value for the physician practice (not taking

into account the value of any referrals) and the stock obtained by the

physician is valued at $500,000 based on the price per share then

available to the general public trading on a registered national

[[Page 63523]]

securities exchange through a broker. However, the public stock

offering described in the preceding paragraph would not be protected.

b. Small Entity Investments

Comment: Some commenters asked that we clarify which investors

constitute referral sources for purposes of the small entity safe

harbor. One commenter recommended that we amend the small entity safe

harbor to make clear that only physicians (using the Medicare program

definition of that term) are capable of making referrals or influencing

the flow of business. In this commenter's view, the current OIG

position that referral source investors may include hospitals and other

entities means that safe harbor protection is unavailable for various

integrated delivery system models that involve joint ownership and

investment. Another commenter requested that we clarify that

manufacturers that invest in health care entities and sell products to

those entities are rarely in a position to refer patients, and thus

should not fall within the pool of ``tainted'' investors for purposes

of the investment interests safe harbors.

Response: We continue to believe that the appropriate focus under

this safe harbor is the status of the investors and the ability of the

investors to make or influence the investment entity's referral stream

or level of business activity. Investors that furnish items or services

to the entity, as well as investors that refer patients or otherwise

generate business for the entity, are ``tainted'' investors doing

business with the entity for purposes of the 60-40 investor test. Thus,

to iterate the example provided in the preamble to the 1991 final rule,

if a durable medical equipment (DME) supplier and hospital enter into a

joint venture to furnish DME to patients when they leave the hospital,

both the DME supplier and the hospital fit within the category of

investors doing business with the entity (56 FR 35968).

We are not persuaded that hospitals, nursing homes, skilled nursing

facilities, or other institutions are incapable of influencing

referrals of Federal health care program business. To the contrary, we

are aware of instances of referrals that are in fact controlled by

these institutions' employees or agents. (See, e.g., Medicare Hospital

Discharge Planning, OEI-02-94-00320 (December 1997); Special Fraud

Alert: Fraud and Abuse in Nursing Home Arrangements with Hospices, 63

FR 20415 (April 24, 1998)). Similarly, we believe that managed care

companies and physician practice plans may control referrals in certain

circumstances. We agree, however, that in many circumstances

manufacturers that invest in health care entities and sell products to

those entities may not be in a position to refer patients to, or

generate business for, those entities for purposes of the 60-40 revenue

test (Sec. 1001.952(a)(2)(vi)). However, in other circumstances,

investor manufacturers may fall within the pool of ``tainted''

investors, and thus each arrangement must be evaluated on a case-by-

case basis. In short, manufacturers may be ``tainted'' investors for

purposes of the 60-40 investor test (Sec. 1001.952(a)(2)(i)), where

they are in a position to furnish items or services to the investment

entity or to influence the flow of referrals to the entity.

Comment: One commenter who supported our proposal to aggregate

similar classes of investment interests sought clarification of the

proposed condition that classes of investment interests be ``similar in

all material respects'' for purposes of the 60-40 investor test,

particularly as the condition applies to debt investment interests. For

example, the commenter noted that the OIG is willing to treat general

partners' and limited partners' interests as sufficiently similar for

safe harbor purposes (56 FR 37204), even though general partner and

limited partner interests are not similar in a number of arguably

material respects, such as fiduciary obligations and assumption of

liability. With respect to debt interests, the commenter questioned

whether differing redemption rights would result in otherwise similar

classes of debt being deemed too dissimilar to aggregate. Similarly,

the commenter questioned whether debt instruments with different

interest rates could be aggregated (especially if the different

interest rates accurately reflect market rates at the time the

instruments issued) and whether secured debt instruments could be

aggregated with unsecured debt instruments.

Response: Our use of the phrase ``similar in all material

respects'' was not intended to suggest that for purposes of

aggregation, classes of investment interests must be similar in all

respects that might be material to a partner or to a lender or a

borrower, but only that classes of investment interests must be similar

in all respects material to the purposes of the safe harbor. The focus

is on the potential for remuneration to investors who are existing or

potential referral sources; material investment terms are those terms

that create, or relate to the creation of, potential value for

investors. For example, classes of investment interests may be

aggregated where the classes have similar rights with respect to the

entity's income and assets, where investors receive equivalent returns

in proportion to amounts invested, and, most importantly, where there

is no preferential treatment of referral source investors, including,

but not limited to, preferences that take effect in the event of a

disposition of entity assets.

Comment: One commenter expressed concern about our treatment of

general partners for purposes of the 60-40 investor rule. We have

previously stated that general partners--who have fiduciary obligations

to manage a partnership so as to make a profit and who are liable for

losses incurred due to gross mismanagement--provide services to a

partnership and are, therefore, ``tainted'' or ``interested'' investors

for purposes of the 60-40 investor rule. The commenter observed that

this interpretation serves to disqualify many partnerships from safe

harbor protection and that our proposal to permit classes of investment

interests to be aggregated for purposes of determining compliance with

the 60-40 investor rule does not adequately address this issue.

According to the commenter, even under our proposed aggregation test,

safe harbor protection is only available if general partners hold a

minority interest in the partnership, even if the partnership has no

potential referral source investors. Thus, for example, a hospital

owned entirely by a partnership composed of non-referral source

investors would not qualify for safe harbor protection if the general

partners owned more than 40 percent of any class of investment

interest.

Response: As we explained in our preamble to the 1991 final rule,

it would be inappropriate to grant safe harbor protection, for example,

to a joint venture composed of a DME supplier and physicians, because

all of the owners would be doing business with the joint venture by

either furnishing items or services or making referrals (56 FR 35968).

We recognize that there may be circumstances, such as those posited by

the commenter, where the fact that an investor is furnishing items or

services to the investment entity may not pose an increased risk of

improper referrals comparable to the risk posed in our DME/physician

joint venture example. However, we find that it is not feasible to

craft a rule that would clearly distinguish among types of investors

furnishing items or services, while excluding potentially abusive

arrangements from safe harbor protection.

[[Page 63524]]

Distributions to investors in partnerships that have no existing or

potential referral source investors may not implicate the anti-kickback

statute at all, since the crux of the statute is a prohibition on

remuneration to induce or reward referrals of Federal health care

program business. To the extent the statute is implicated, partnerships

that do not comply fully with all safe harbor conditions will have to

be evaluated on a case-by-case basis. Our advisory opinion process is

also available to parties contemplating such partnerships (42 CFR part

1008).

Comment: Several commenters supported our proposal to change the

60-40 revenue test by striking ``items or services furnished''

(Sec. 1001.952(a)(2)(vi)). However, these commenters asked for

clarification of the term ``business otherwise generated'' as used in

the safe harbor standard. We have previously explained that revenue is

``generated'' if it is ``induced to come to the joint venture for items

or services by an investor'' (56 FR 37205) (emphasis in original).

These commenters requested that we clarify that ``by an investor''

means by an investor who is a licensed professional with legal

authority to order items and services, for instance, an investor with

legal authority to refer or induce a person to obtain care from a

participating provider.

Response: We disagree that the definition of an investor for these

purposes should be as narrow as the commenters suggest. Certain

investors that are arguably not ``licensed professionals,'' such as

hospitals, long-term care facilities, home health agencies, managed

care companies, and physician practice management companies, may be in

a position to generate business for an entity in which they have an

investment interest and to receive distributions that may be

remuneration for that business. We recognize that there may be

occasional instances where business is generated by investors who would

not ordinarily be considered as potential referral sources. This might

occur, for example, if an investor is not in a health care related line

of business, but happens to refer friends or relatives to a joint

venture entity in which he or she has invested. However, we think that

these situations are likely to be infrequent and, in most

circumstances, are not likely to generate appreciable revenue.

Comment: As described above, several commenters questioned our

clarification that the term ``revenue'' for purposes of the 60-40

revenue test means revenue related to the furnishing of health care

items or services. In addition, two commenters expressed concern about

an example involving radiologists that we used to illustrate our

discussion of the revenue rule in the preamble to the 1994 proposed

clarifications. Specifically, the example stated that:

If a radiologist holds an investment interest in an imaging

center and reads all the films at the center, his or her reading of

the film does not taint all the revenues from the referrals by non-

investors. However, we have received a few questions from people who

read the 60-40 revenue rule as making such referrals tainted because

the investor furnished services at the joint venture.

We emphasize that if a radiologist-investor is reading the film

and making referrals or otherwise generating business, then the

revenues the joint venture derives from that activity would become

tainted. For example, revenues would be tainted when a radiologist-

investor takes part in a consultation with a non-investor internist,

and during that consultation the radiologist recommends a procedure

which is performed at the joint venture. (59 FR 37205).

Commenters complained that in light of this example, a radiologist-

investor seeking safe harbor protection would essentially be prohibited

from practicing medicine, because he or she would be precluded from

recommending follow-up procedures. Moreover, the commenters argued that

compliance with the example would not be feasible because of the record

keeping and administrative burden associated with tracking all

recommendations to determine if recommended follow-up studies were

later performed at the radiologist-investor's facility. These

commenters asked that we clarify our position regarding radiologist-

investors.

Response: We continue to be persuaded that it is appropriate and

consistent with our original intent that only health care related

revenues be counted for purposes of the 60-40 revenue test. The purpose

of the test is to limit the number of investor referrals to a safe

harbor protected joint venture, thereby minimizing the risk that profit

distributions might be disguised payments for investor referrals.

Our use of the example in the preamble to the 1994 proposed

clarifications was merely intended to illustrate the difference between

providing items and services to an entity (which does not result in

``tainted'' revenue) and generating business for the entity (which does

result in ``tainted'' revenue). In retrospect, our focus on

radiologists in the example may have led to some confusion about the

anti-kickback implications specifically for radiologists' practice of

medicine. In the unique circumstances of radiologists, we wish to

clarify that the occasional recommendation of additional testing by a

radiologist to an attending physician with whom the radiologist has no

financial arrangements and pursuant to a bona fide medical consultation

is not prohibited under the anti-kickback statute. Accordingly, for

purposes of the 60-40 revenue test, such consultative recommendations

would not ``taint'' revenue derived from tests performed at the joint

venture entity as a result of a subsequent referral of the patient by

his or her attending physician for the recommended tests.

Comment: One commenter supported our proposed clarification

regarding the prohibition on loans from entities or their investors

that are used by investors to purchase their investment interests

(Sec. 1001.952(a)(2)(vii)). Another commenter requested that we make

clear that we do not intend to prohibit loans from banks or other

unrelated parties.

Response: The seventh investment interest standard addressing loans

is not intended to apply to loans from banks or other unrelated third

parties that are not equity investors in the entity seeking safe harbor

protection and that are not acting on behalf of the entity or any of

its investors, even if the loan is used in whole or in part by a

prospective investor to purchase an investment interest. On the other

hand, the safe harbor condition is intended to preclude from protection

loan guarantees, collateral assignments or other arrangements made by

an investment entity or any of its investors, or by individuals or

entities acting on their behalf, to secure a loan from a bank or other

unrelated third party, if the loan is used in whole or in part by an

investor to obtain an investment interest in the entity.

Comment: The remaining comments to the existing investment interest

safe harbors addressed various aspects of the safe harbors not

specifically covered by the proposed clarifications. Two commenters

argued that the safe harbor's two 60-40 tests unnecessarily limit

potential investors for, and referral sources to, legitimate, cost-

effective, high-quality health care ventures. In one commenter's view,

the 60-40 tests prevent potential joint ventures from attracting

necessary capital and cause investors to refrain from using the

venture's services, even when the venture offers higher quality, lower

prices, or better patient convenience than competing providers. This

commenter noted that the two 60-40 tests are particularly problematic

in rural and underserved areas, where alternative sources of capital

and

[[Page 63525]]

alternative providers are often in short supply.

Response: Except as otherwise noted above, we are adopting the

proposed clarifications to the investment interests safe harbor as set

forth in our 1994 proposed clarifications. Aside from clarifying that

``revenue'' refers to health care related revenue and deleting the

phrase ``items or services furnished'' in Sec. 1001.952(a)(2)(vi), we

are not persuaded at this time that there is a need to revisit the two

60-40 tests for small entity investments. Elsewhere in this rulemaking,

we address a new safe harbor for investments in rural and urban

undeserved areas (Sec. 1001.952(a)(3)) that eliminates the 60-40

revenue test and incorporates a modified 60-40 investor test.

2. Space and Equipment Rental and Personal Services and Management

Contracts Summary of Proposed Clarifications

We proposed 2 clarifications to the space and equipment rental and

personal services and management contracts safe harbors

(Secs. 1001.952(b), (c), and (d)). First, we proposed revising these

safe harbors expressly to preclude schemes involving the use of

multiple overlapping contracts to circumvent the safe harbor

requirement that space and equipment rental and personal services and

management contracts be for terms of at least 1 year. This requirement

was intended to prevent regular renegotiation of contracts based on the

volume of referrals or business generated between the parties. Second,

we proposed revising these safe harbors to preclude safe harbor

protection for health care providers that rent more space or equipment

or purchase more services than they actually need as a means of paying

for referrals.

Summary of Final Rule: We are adopting the clarifications to the

space and equipment rental and personal services and management

contracts safe harbors as proposed in the 1994 proposed clarifications

and described above, with the following modifications in response to

comments received:

We are substituting the word ``term'' for the word

``period'' in the second condition of each safe harbor to be more

consistent with customary business terminology;

We are replacing the phrase ``legitimate business

purpose'' with the phrase ``commercially reasonable business purpose''

in each safe harbor to make clear that the test is not whether a

business arrangement is lawful, but whether it serves a commercially

reasonable business purpose, that is, whether the space and equipment

leased or services purchased have intrinsic commercial value to the

lessee or purchaser.

Comments and Responses

Comment: A commenter expressed concern that the safe harbor

condition that a lease cover all equipment leased between parties and

specify the equipment leased would jeopardize many common commercial

equipment leasing transactions. This commenter asserted that

manufacturers and lessors typically lease capital equipment to health

care providers at different times, but under leases that cover the same

time period, in whole or in part. The commenter opined that other safe

harbor conditions, including those prescribing aggregate compensation,

fair market value, and arms-length negotiations, are sufficient

safeguards against abuse.

Response: We recognize that some lawful equipment contracts will

not qualify for safe harbor protection and will need to be analyzed on

a case-by-case basis. The existence of a safe harbor for a particular

set of business arrangements does not jeopardize other types of

arrangements under the anti-kickback statute. Many multiple contract

arrangements are legitimate business arrangements that do not violate

the statute; however, some multiple contract arrangements are

essentially shams that operate to reward and encourage referrals. We

are unable to provide safe harbor protection for such arrangements, in

view of the potential abuse of multiple overlapping contracts described

above. The advisory opinion process (42 CFR part 1008) is available to

parties seeking individualized legal opinions regarding the legality of

their leasing arrangements under the anti-kickback statute.

Comment: One commenter suggested that for purposes of clarity and

consistency with customary business terminology we substitute the word

``term'' for the word ``period'' as used in Secs. 1001.952(b)(2),

(c)(2), and (d)(2).

Response: We agree that substituting the word ``term'' for

``period'' in Secs. 1001.952(b)(2), (c)(2), and (d)(2) would provide

clarity and consistency in the context of leases and service contracts.

Comment: One commenter approved of our proposal that the aggregate

space, equipment, or services contracted for not exceed ``that which is

reasonably necessary to accomplish the legitimate business purpose'' of

the party renting the space or equipment or purchasing the services.

This commenter believed that the clarification would inhibit lessors

with greater bargaining power from coercing lessees into contracting

for more space than needed to conduct business. However, several

commenters suggested that the language of our proposed clarification is

ambiguous, duplicative, and confusing, and, in the words of one

commenter, would open a ``Pandora's Box of potentially conflicting

interpretations.'' For example, one commenter observed that many

arrangements in today's health care arena, such as cost-sharing or

risk-sharing arrangements, joint research initiatives, and data

collection arrangements, may not reflect ``traditional'' business

purposes, but are legitimate and reasonable in responding to insurers'

growing demands for cost-effectiveness. One commenter recommended

replacing the word ``legitimate'' with the word ``reasonable.''

Response: We believe the proposed clarification further ensures

that protected leases and personal services contracts will provide for

fair market value compensation. However, we agree that the term

``legitimate'' may be misconstrued. Thus, in the final rule we are

substituting the phrase ``commercially reasonable business purpose''

for ``legitimate business purpose'' to make clear that the test is not

merely whether a business purpose is legal or illegal. The

``commercially reasonable business purpose'' test is intended to

preclude safe harbor protection for health care providers that

surreptitiously pay for referrals--whether because of coercion or by

their own initiative--by renting more space or equipment or purchasing

more services than they actually need from referral sources. By

``commercially reasonable business purpose,'' we mean that the purpose

must be reasonably calculated to further the business of the lessee or

purchaser. In other words, the rental or the purchase must be of space,

equipment, or services that the lessee or purchaser needs, intends to

utilize, and does utilize in furtherance of its commercially reasonable

business objectives. Thus, for example, a space rental contract between

a physician and a DME supplier for space in the physician's office that

includes extra office space that the DME supplier neither occupies nor

uses for its DME business would not be protected by this safe harbor.

Nor would the safe harbor protect the lease of more space than would

reasonably be rented by a similarly-situated DME supplier negotiating

in an arms-length transaction with a non-referral source lessor. Cost-

sharing or risk-sharing arrangements, joint research initiatives,

[[Page 63526]]

and data collection arrangements may qualify as commercially reasonable

business purposes in many circumstances. However, we are aware of

abusive arrangements involving contracts with referral sources for data

collection services or research projects where the data to be collected

or research to be performed have no value to the entity paying for them

and are merely pretexts for payments for referrals. Such arrangements

do not comply with the safe harbor and are highly suspect under the

anti-kickback statute.

Comment: The remaining comments we received regarding clarification

of this safe harbor addressed matters not covered by the proposed

clarifications. Several commenters described difficulties in meeting

the safe harbor for part-time arrangements--including time-share office

leases, per use equipment leases, and personal services contracts with

hourly compensation --caused by the requirement that the ``aggregate''

contract price be set in advance (Secs. 1001.952(b)(5), (c)(5), and

(d)(5)). One commenter noted that these types of arrangements typically

contain compensation methods that are set in advance and that can be

made consistent with fair market value and unrelated to the volume or

value of referrals. Along these lines, one commenter suggested that the

OIG permit ``aggregate'' payments that are not set in advance, if they

are calculated in accordance with specific and predetermined formulas

set forth in the written agreement. Similarly, several commenters

expressed concern about the impracticality of the requirement that

protected contracts specify the exact schedule of intervals for the use

of space or equipment or the rendering of services for many part-time

or as-needed arrangements.

Response: We continue to believe that both the ``aggregate'' and

the ``specific schedule of intervals'' requirements are necessary to

ensure that safe harbor protection is not afforded to arrangements that

include payments that are adjusted periodically on the basis of the

volume or value of referrals or business otherwise generated from a

referral source. We recognize that these requirements may raise

practical problems for certain providers seeking safe harbor protection

for part-time or as-needed arrangements. Nevertheless, we are aware of

many instances of abuse in these types of arrangements; therefore, for

purposes of granting protection from prosecution, we believe it is

appropriate to protect only those arrangements that can meet the safe

harbor's strict standards. However, as we have stated numerous times,

safe harbors do not define the scope of legal activities under the

anti-kickback statute. Part-time, as-needed, and other similar

arrangements that cannot fit within the safe harbor may be lawful, if

no payments are made, directly or indirectly, to induce referrals of

Federal health care program business.

Comment: One commenter sought clarification regarding the effect of

a termination provision in a lease or contract in light of the safe

harbor requirement that leases or contracts be for at least a 1-year

term. This commenter specifically asked whether the 1-year term

requirement is satisfied (i) if the lease or contract allows for ``for

cause'' termination by either party, or (ii) if the lease or contract

permits termination by either party with or without cause upon advance

written notice, provided there is a concurrent contractual provision

that restricts parties that terminate without cause from entering into

any further relationships for the balance of the required 1-year

period.

Response: The 1-year term requirement ensures that protected leases

or contracts cannot be readjusted frequently based on the number of

referrals between the parties. Although not specifically stated in the

safe harbor regulation, a ``for cause'' termination clause that (i)

specifies the conditions under which the contract may be terminated

``for cause,'' and (ii) operates in conjunction with an absolute

prohibition on any renegotiation of the lease or contract or further

financial arrangements between the parties for the duration of the

original 1-year term would satisfy the 1-year term requirement. We

remain concerned, however, that ``without cause'' termination

provisions could be used by unscrupulous parties to create sham leases

and contracts. This could occur, for example, where the parties enter

into an agreement to pay a sum of money upfront for services to be

performed over a period of time. Parties could disguise payments for

referrals by terminating the agreement without cause after payment, but

before performance of any services. A 1-year prohibition on

renegotiation or further financial arrangements would be meaningless in

such circumstances.

3. Referral Services

Summary of Proposed Clarifications: The referral services safe

harbor requires that any fee a referral service charges a participant

be ``based on the cost of operating the referral service, and not on

the volume or value of any referrals to or business otherwise generated

by the participants for the referral service * * *''

(Sec. 1001.952(f)(2)) (emphasis added). This language created an

unintended ambiguity when a referral service tries to adjust its fee

based on the volume of referrals it makes to the participants. We

proposed clarifying that the safe harbor precludes protection for

payments from participants to referral services that are based on the

volume or value of referrals to, or business otherwise generated by,

either party for the other party.

Summary of Final Rule: We received one comment in favor of our

proposed clarification to the referral services safe harbor and none

opposed. We are adopting the proposed clarification as set forth in the

1994 proposed clarifications.

4. Discounts

Summary of Proposed Clarifications: As a general rule, discounts

for health care items and services are encouraged under the Federal

health care programs so long as the Federal health care programs share

in the discount where appropriate, and as appropriate, to the

reimbursement methodology. Arrangements in accordance with which

Federal programs get less than their proportional share of cost-savings

on items or services payable by the programs are seriously abusive.

Such arrangements result in the programs being overcharged and are not

protected by either the statutory exception or regulatory safe harbor

for discounts.

Because of expressed industry uncertainty over what obligations

individuals or entities have to meet in order to receive protection

under this safe harbor, we proposed clarifying the discount safe harbor

by dividing the parties to a discount arrangement into three groups--

buyers, sellers, and offerors of discounts--with descriptions of each

party's obligations in separate paragraphs. In addition, we proposed

clarifying the definition of ``rebate'' for purposes of this safe

harbor. A rebate under our proposal would be defined as any discount

not given at the time of sale. Consequently, a rebate transaction would

not be covered by the safe harbor if it involves a buyer under

Sec. 1001.952(h)(1)(iii) that is neither a cost-reporter nor a HMO or

CMP, because for such buyers, all discounts must be given at the time

of sale.

We also proposed clarifying the scope of safe harbor protection for

sellers in situations where buyers have not fully complied with their

obligations under the safe harbor provisions. If a seller has done

everything that it reasonably could under the circumstances to ensure

that the buyer understands its obligation to

[[Page 63527]]

report the discount accurately, the seller is protected irrespective of

the buyer's omissions. To receive such protection, however, the seller

must report the discount to the buyer and inform the buyer of its

obligation to report the discount. To emphasize that the seller's

obligations require more than perfunctory compliance with the safe

harbor, we proposed adding that the seller must inform the buyer ``in

an effective manner.'' We also proposed adding a requirement that the

seller ``refrain from doing anything that would impede the buyer from

meeting its obligations under this paragraph.'' Thus, if the seller, in

good faith, meets its obligations under the safe harbor and the buyer

does not meet its obligations due to no fault of the seller, the seller

would receive safe harbor protection. However, when a seller submits a

claim or request for payment on behalf of the buyer, the seller must

fully and accurately report the discount to the appropriate Federal or

State health care program. An offeror of a discount would similarly

receive safe harbor protection if it meets all of its safe harbor

obligations, but its buyer or seller does not meet its obligations due

to no fault of the offeror.

We further proposed clarifying whether any reduction in price

offered to a beneficiary could be safe harbored under this regulation.

To the extent that a discount is offered to a beneficiary and all other

applicable standards in the safe harbor are met, such a discount would

receive safe harbor protection. However, discounts to beneficiaries in

the form of routine reductions or waivers of any coinsurance or

deductible amount owned by the beneficiaries do not meet the safe

harbor conditions and are not protected.

The preamble to the 1991 final rule stated that when reporting a

discount, one only need report the actual purchase price and note that

it is ``net discount.'' However, for purposes of submitting a claim or

request for payment, we proposed clarifying that what is necessary is

that the value of the discount be accurately reflected in the actual

purchase price. It is not necessary to distinguish whether this price

is the result of a discount or to state ``net discount.'' Consequently,

parties who were uncertain about how or where to report on a particular

form the fact that the price was due to a discount need not be

concerned with reporting that fact, as long as the actual purchase

price accurately reflects the discount.

Finally, we proposed some minor editorial changes that do not

affect the substance of the provision, but hopefully make it easier to

understand.

Summary of Final Rule: We are adopting the clarifications to the

discount safe harbor as proposed in the 1994 proposed clarifications

and described above, with the following modifications in response to

comments received (unless otherwise noted):

In paragraphs (h)(2) and (h)(5)(ii), we are changing the

words ``furnishes'' to ``supplies'' and ``furnishing'' to

``supplying,'' respectively, to clarify the role of sellers under the

discount safe harbor and to avoid confusion with other regulatory uses

of the word ``furnishes.''

We are modifying our proposal that sellers and offerors

give buyers ``effective notice'' of their obligations to report

discounts by requiring instead that sellers and offerors provide buyers

with notice in a manner that is reasonably calculated to give the

buyers notice of their reporting obligations, including their

obligation to provide information to the Secretary upon request under

Sec. 1001.952(h)(1). The intent of this modification is to make clear

that safe harbor protection for sellers and offerors who fully comply

with the safe harbor conditions is conditioned on the actions of the

sellers and offerors, and not on the buyers' compliance.

We are modifying our proposed definition of a ``rebate''

to include any discount the terms of which are fixed at the time of the

sale of the good or service and disclosed to the buyer, but which is

not received at the time of the sale of the good or service. This

modification will enable us to extend safe harbor protection to certain

charge-based buyers and buyers reimbursed on the basis of fee schedules

who obtain rebates. We are eliminating the requirement that charge-

based buyers report discounts on claims submitted to the Federal

programs; however, we are retaining the requirement that such buyers

provide documentation of discounts to the Secretary upon request.

We are clarifying that credits and coupons may qualify for

safe harbor protection if they meet all of the safe harbor criteria;

however, credits or coupons that are, in essence, cash equivalents are

not discounts for safe harbor purposes.

We are clarifying that, in certain circumstances described

in more detail below, discounts on multiple items may qualify as a

``discount'' for safe harbor purposes where the reimbursement

methodology for all discounted items or services is the same and where

the discount can be fully disclosed to the Federal health care programs

and accurately reflected where appropriate, and as appropriate, to the

reimbursement methodology.

We are correcting a technical error in the proposed

clarifications by changing the word ``include'' in

Sec. 1001.952(h)(5)(ii) to ``induce.''

Comment and Response

Comment: Many commenters questioned the relationship between the

regulatory safe harbor for discounts and the statutory exception for

discounts, which provides for protection for ``a discount or other

reduction in price obtained by a provider of services or other entity

under a Federal health care program, if the reduction in price is

properly disclosed and appropriately reflected in the costs claimed or

charges made by the provider or entity under a Federal health care

program'' (42 U.S.C. 1320a-7b(b)(3)(A)). In the preamble to the 1991

final rule, we stated that the regulatory safe harbor includes all

discounts Congress intended to protect under the statutory exception

(56 FR 37206). Commenters expressed concern that this statement means

that failure to qualify under the discount safe harbor is a statutory

violation if items or services payable by a Federal health care program

are involved, since intent to induce business is always present in a

discount arrangement. Under this interpretation, according to

commenters, numerous forms of discount pricing, such as pricing one

product dependent on the price of another, discount package pricing,

and certain capitation arrangements, would be prohibited without the

case-by-case analysis generally afforded other types of arrangements

that do not fit squarely within a safe harbor. These commenters also

urge that limiting permissible discounts to those that comply with the

safe harbor ``freezes'' the health care industry into a particular way

of doing business, thereby chilling innovations in discount pricing

that could result in reductions in health care costs, especially as the

market moves from fee-for-service arrangements to managed care. These

commenters argue that Congress did not give the OIG authority to

constrict the reach of the statutory exception. One commenter observed

that Congress unequivocally stated that practices protected under the

safe harbors were to be in addition to existing statutory protections

(Pub. L. 100-93, section 14(a)), and therefore the regulatory discount

safe harbor should create a class of protected practices in addition to

practices protected under the statutory exception.

Response: As stated in the preamble to the 1994 proposed

clarifications, it continues to be our position that the

[[Page 63528]]

regulatory safe harbor protects all discounts or reductions in price

protected by Congress in the statutory exception (see 59 FR 37206). The

Secretary is vested with the authority to make and publish rules, not

inconsistent with the Social Security Act, necessary to the efficient

administration of her functions under the Social Security Act (42

U.S.C. 1302). The anti-kickback statute, including all exceptions

thereto, are codified as part of the Social Security Act. Moreover, the

regulatory safe harbor expands upon the statutory safe harbor by

defining additional discounting practices not included in the statutory

exception that are not abusive, such as certain discounts to

beneficiaries (other than routine waivers of cost-sharing amounts) that

meet all applicable safe harbor standards. In sum, the regulatory safe

harbor both incorporates and enlarges upon the statutory exception.

Comment: One commenter questioned the safe harbor exclusion of

reductions in price that are available to one payer but not to Medicare

or Medicaid (Sec. 1001.952(h)(3)(iii)), noting that it is unclear how

failure to provide a discount to Medicare or Medicaid gives rise to a

question under the anti-kickback statute, which prohibits remuneration

to induce referrals of items or services payable by a Federal health

care program. The commenter further argued that there is no basis in

the statutory discount safe harbor for a requirement that Medicare and

Medicaid patients receive the same prices as other patients.

Response: The safe harbor excludes from the definition of a

protected ``discount'' price reductions that apply to one payer but not

to the Federal health care programs. This exclusion is necessary to

protect against abusive arrangements in which remuneration in the form

of discounts on items or services for private pay patients is offered

to a provider to induce referrals of Federal health care program

patients. For example, as noted in the preamble to the 1991 final rule,

we are aware of clinical laboratories that offer price reductions to

physicians for laboratory work for private pay patients on the

condition that the physicians refer all of their Medicare and Medicaid

business to the laboratory. Such ``swapping'' arrangements, which

essentially shift costs to the Federal health care programs, continue

to be of concern to this office. We do not believe that Congress

intended to except such schemes from the anti-kickback statute. Nor do

we believe that Congress intended for the Federal health care programs

to pay premium prices and thus serve as de facto subsidy programs for

other reimbursement systems.

Comment: Several commenters generally supported the clarification

of the discount safe harbor to recognize 3 groups: Buyers, sellers and

offerors. However, a number of commenters requested further

clarification regarding the meaning of ``offeror'' and how an

``offeror'' differs from a ``seller''. Specifically, commenters asked

about the application of the ``offeror'' category to wholesalers and

other brokers, as well as to managed care plans, group purchasing

organizations and preferred provider organizations.

Response: An ``offeror'' may be any individual or entity that

provides a discount on an item or service to a buyer, but that is not

the seller of the item or service. For example, many pharmaceutical

manufacturers sell some or all of their products through wholesalers,

which, in turn, sell the products to hospitals, retail pharmacies,

HMOs, and other providers. A manufacturer may offer a discount in the

form of a rebate to the ultimate purchaser that is in addition to any

discount from the wholesaler to the retailer. For purposes of this

regulation, the manufacturer would be the ``offeror,'' the wholesaler

the ``seller,'' and the retailer the ``buyer.'' While we believe that

typically the wholesaler would be the ``seller'' and its retail

customer the ``buyer,'' if a wholesaler offers a discount to a retail

purchaser that has purchased the discounted product from another party,

the wholesaler could qualify as an ``offeror.''

Nothing in these regulations precludes a managed care organization,

including a preferred provider organization, from being eligible as an

``offeror'' in accordance with the safe harbor. However, in many

situations, discounts offered by managed care organizations will not

fit within the scope of the discount safe harbor, because the buyers

who obtain the discounts will not be providers of services that claim

payment for costs or charges associated with the discounted items or

services under a Federal health care program. For example, the

recipient of a preferred provider organization discount is typically an

employer or other payer or patient. However, some discount arrangements

offered by a managed care organization may be eligible for safe harbor

protection under the discount safe harbor, provided all conditions of

the safe harbor are satisfied. In addition, managed care ``discounts''

are potentially protected by the shared-risk exception (42 U.S.C.

1320a-7b(b)(3)(F)), and the existing safe harbors for managed care

arrangements (Secs. 1001.952(l) and (m)).

Comment: One commenter objected to the safe harbor's portrayal of

the role of ``sellers.'' This commenter maintained that sellers do not

generally ``furnish'' items or services, nor do they ``permit'' buyers

to take discounts off the purchase price. Rather, sellers sell, lease,

transfer, or otherwise arrange for the use of products, in some cases

involving discounts or reductions in price. This commenter noted that

other OIG regulations define ``furnish'' as referring to items and

services provided directly by or under the direct supervision of, or

ordered by, a practitioner or other individual, or ordered or

prescribed by a physician (either as an employee or in his or her own

capacity), a provider, or other supplier of services (see Sec. 000.10).

In addition, the preamble to the OIG final rule addressing amendments

to the OIG's exclusion and CMP authorities resulting from Public Law

100-93 states that manufacturers who do not receive payment directly or

indirectly from Medicare or Medicaid do not ``furnish'' items in the

context of that definition (57 FR 3298 and 3300). For consistency and

to avoid confusion, the commenter suggests that the term ``furnished''

should be replaced by the term ``supplies.''

Response: To avoid confusion with other regulatory definitions, we

agree that the term ``supplies'' should be substituted for

``furnishes'' in Secs. 1001.952(h)(2) and (h)(5)(ii).

Comment: Several commenters commented that the proposed language

clarifying the seller's obligation to disclose the discount properly to

the buyer is beyond the scope of the statutory exception and confuses

rather than clarifies the seller's obligations. A number of commenters

suggested that the requirement that sellers provide effective notice

would lead to mistrust between buyers and sellers and disputes about

whether ``effective notice'' was provided. One commenter suggested that

the requirement inappropriately saddles a seller with the

responsibility of being the buyer's ``brother's keeper.'' Some

commenters requested clarification of what qualifies as ``notice.''

Others questioned the intention of the added language requiring sellers

to ``refrain from impeding'' the buyer's performance of its

obligations. One commenter objected that this requirement imposed an

undue burden on sellers, because sellers would have to know all of an

individual buyer's specific billing activities and possible obligations

in order to be in a position to refrain from doing anything

[[Page 63529]]

that could impede the buyer in meeting its obligations.

Response: As we stated in the preamble to the 1991 final rule (56

FR 35958), we believe the statute permits us to interpret statutory

terms used in the statutory exceptions, including the phrase

``appropriately reflect'' in the discount exception (also see 42 U.S.C.

1302). We note that the statutory exception does not protect any seller

if the purchaser has not appropriately reflected the discount. Thus,

the objection based on the statute is misplaced.

With respect to the substance of the comments, the proposed

clarification would require that the seller inform the buyer ``in an

effective manner'' of the buyer's obligation to report the discount and

refrain from doing anything to impede the buyer from fulfilling its

obligations. We agree that the phrase ``in an effective manner''

perhaps unintentionally focuses on the buyer's conduct and might

inappropriately be interpreted to mean that a seller is only protected

when the buyer, in fact, fulfills its obligation to report the

discount. This was not our intention. Accordingly, we have decided to

modify the language to require the seller to inform the buyer of its

obligations ``in a manner that is reasonably calculated to give notice

to the buyer.'' We believe this language provides the seller with an

objective standard by which to measure the sufficiency of its notice.

We are further clarifying that for safe harbor purposes one of the

buyer's obligations is to provide information about discounts to the

Secretary upon request in accordance with Sec. 1001.952(h)(1).

We are not prescribing a specific form of notice. The form of

notice appropriate in particular situations may vary. Our intention in

adding the ``refrain from impeding'' standard is to make clear that a

seller will only be protected by the safe harbor if it is not complicit

in a buyer's noncompliance with its obligations to report discounts

accurately to the Federal health care programs. We are not making any

change to the requirement that the seller not impede the buyer's

compliance because we believe the language is clear. The same standard

applies to offerors; they will not be protected by the safe harbor if

they are complicit in either buyer or seller noncompliance.

Comment: A number of commenters objected to our bar on safe harbor

protection for rebates offered to charge-based providers. Our proposed

definition of ``rebate'' defined a rebate as a discount not given at

the time of sale. Under our proposed clarification, safe harbor

protection would only be extended to charge-based providers for

discounts made at the time of sale of a good or service. The commenters

point out, for example, that the regulation precludes retail pharmacies

and outpatient clinics from being eligible for price reductions on the

same basis as hospitals (cost reporters) and other large purchasers

(e.g., HMOs). Moreover, the commenters note that there may be

situations in which adjustments to previous billings or other errors

could result in a rebate. The commenters also maintain that where

payment is based on the lesser of actual charges or a fee schedule

amount, fee schedules could be adjusted to reflect the availability of

volume discounting. The commenters argue that excluding rebates for

charge-based providers lacks a statutory basis, since the statutory

exception refers to a ``reduction in price obtained by a provider,''

without any reference to when the reduction must be obtained. The

commenters further argue that there is no sound basis for not

protecting delayed discounts to physicians, since we are not requiring

physicians to reduce their charges for the amount of a discount, even

where there is a separately claimed item. Thus, the commenters urge

that rebates be covered so long as the amount is fully disclosed to the

Federal health care programs and the other safe harbor conditions are

satisfied.

Response: The most important aspect of the discount safe harbor is

that the Federal health care programs share in the discount in

proportion to the percentage the programs pay of the total cost.

Congress intended only to protect discounts that could fairly benefit

the Federal health care programs. It is our intention in these

regulations to ensure that the only discounts protected are those where

the Federal programs receive such benefit.

Having considered the comments received about rebates, we have

concluded that excluding safe harbor protection for all rebates to

charge-based buyers or buyers that are reimbursed based on Federal

program fee schedules is unnecessarily restrictive and may prevent the

Federal health care programs from realizing indirect benefits that may

accrue from rebates to charge-based providers.

Accordingly, we are defining a ``rebate'' for purposes of the safe

harbor as a discount, the terms of which are fixed at the time of the

sale and disclosed to the buyer at the time of sale, but which is not

given at the time of sale. ``Terms'' refers to the methodology that

will be used to calculate the rebate (e.g., a percentage of sales or a

fixed amount per item purchased during a given period of time). The

terms of the rebate must be set at the time of the sale and disclosed

to the buyer, even though the exact dollar amount of the rebate may not

be known until the rebate is paid. In some circumstances, a rebate may

be paid only after some number of successive purchases of particular

goods or services; in such circumstances, the terms of the rebate must

be fixed and disclosed to the buyer at the time of the first sale of a

good or service to which the rebate applies. We are eliminating the

safe harbor requirement that charge-based buyers (and sellers if

submitting claims on behalf of charge-based buyers) disclose the amount

of discounts on claims submitted to the Federal programs. We are

retaining the existing requirement that buyers (and sellers submitting

claims on their behalf) must provide information documenting the

discount upon request of the Secretary.

Comment: The proposed clarifications eliminated a reference to

credits and coupons in the definition of a ``discount''

(Sec. 1001.952(h)(3)). Two commenters expressed concern that this

deletion indicated an intent to prohibit safe harbor protection for

credits and coupons.

Response: To the contrary, our revised definition of ``discount''

applies to any reduction in the price a buyer who buys directly or

through a wholesaler or group purchasing organization is charged for an

item or service based on an arms-length transaction, except for certain

forms of price reduction expressly not included in the definition

(e.g., no cash or cash equivalents, no routine waivers of copayments).

If a coupon or credit fits within the definition of a discount, it is

included within the safe harbor (assuming all safe harbor conditions

are satisfied). However, we did not intend to protect credits or

coupons that are merely surrogate cash payments, such as credits or

coupons that can be used like cash to purchase unspecified goods or

services from the seller or offeror. Thus, a coupon good for a reduced

price on a designated item could be included in the definition, so long

as it meets all of the other requirements of the regulation; however, a

coupon good for a certain dollar amount off any goods sold by the

seller is not included in the definition. We are, therefore, adding

clarifying language to the definition of ``discount'' to make clear

that cash equivalents are not discounts for purposes of the safe

harbor.

Comment: One commenter objected to a ``discount'' for purposes of

the safe harbor being limited to discounts offered to buyers who buy

directly or

[[Page 63530]]

through wholesalers or group purchasing organizations. This commenter

urged that this limitation fails to accommodate new distribution

arrangements, many of which contribute to purchasing economies. For

example, hospitals, physicians or ambulatory surgical centers may buy

items and services through HMOs or other brokering-type suppliers.

Response: In general, if a discount is negotiated with a bona fide

seller of the item or service, including an entity that aggregates

provider demand to obtain access to volume discounts, in accordance

with an arms-length transaction, and if the discount otherwise meets

all safe harbor requirements, we believe that the discount would come

within the safe harbor definition of discount. However, there may be

arrangements that do not fit the definition where access to a seller's

favorable discount rates is itself an inducement or reward for

referrals, e.g., providing certain physician practices access to a

hospital's employee health benefits plan in order to reduce the

physician's employee insurance costs.

Comment: Several commenters expressed concern about the exclusion

from the definition of ``discount'' of price reductions furnished on

one good or service without or at a reduced charge to induce the

purchase of a different good or service. These commenters assert that

this restriction was intended to preclude furnishing a good at a

reduced price in exchange for any agreement to buy a good which was

reimbursed under a different reimbursement methodology, in such a way

that discounts would not be passed along to the Medicare program. For

example, the safe harbor was not intended to protect a discount on

hospital supplies covered by a Diagnostic Related Group (DRG) payment

in exchange for the purchase at the full price of capital equipment

separately reimbursed by Medicare on a reasonable cost basis in

accordance with a hospital's cost report. Nor was it intended to

protect a discount earned on products reimbursed by Medicare but

applied to products reimbursed by non-Medicare payers. However, these

commenters argue that the safe harbor should not exclude discounts on

multiple products when the net value of the discounts could be properly

reported to, and benefit, the Medicare program. For example, commenters

believe that safe harbor protection should be available for a discount

to a hospital for sterile gauze pads in exchange for the purchase of

surgical tape, both of which are included in the hospital's DRG payment

and recorded on the hospital's cost report as routine costs not

separately reimbursable. These commenters expressed concern that the

discount safe harbor's limitation on discounts for bundled or multiple

items or services fails to recognize the diversity of cost controls

inherent in such reimbursement methodologies as DRGs; physician payment

under the RBRVS system; national limitation amounts for clinical

laboratory tests; fee schedules for DME, prosthetics, orthotics, and

other supplies; and fixed rates for ASCs. Finally, commenters noted

that by restricting discounts on multiple items, the safe harbors may

prevent the Federal health care programs from benefitting from

purchasing economies that result from volume purchasing and group

discounts.

Response: We agree that one purpose of the limitation on discounts

for bundled items or services is to preclude protection for discounts

that do not benefit the Federal health care programs, but which are

used to induce purchases of other products for which the Federal health

care programs pay the full price. These discounts are problematic,

because they shift costs among reimbursement systems or distort the

true costs of all items. As a result, it may be difficult for the

Federal health care programs to determine proper reimbursement levels.

(See 56 FR 35987, for example, citing the example of the development of

accurate pricing data for intraocular lenses.)

However, we are persuaded that in certain circumstances, discounts

offered on one good or service to induce the purchase of a different

good or service where the net value can be properly reported do not

pose a risk of program abuse and may benefit the programs through lower

costs or charges achieved through volume purchasing and other economies

of scale. Such circumstances exist where the goods and services are

reimbursed by the same Federal health care program in the same manner,

such as under a DRG payment.

Comment: Several commenters questioned our intent in changing

certain language in the definition of discount from ``in exchange for

any agreement to buy a different good or service'' to ``to include

(induce) the purchase of a different good or service.'' (See

Sec. 1001.952(h)(5)(ii)).

Response: We changed this language to be consistent with the anti-

kickback statute, which prohibits inducements to refer Federal health

care program business, even if there is no actual referral made or

agreement to refer. We are correcting an editorial error in the

proposed rule, which incorrectly used the word ``include'' instead of

``induce'' in Sec. 1001.952(h)(5)(ii).

5. Sham Transactions or Devices

Summary: We proposed a new provision to clarify that any

arrangement entered into or employed for the purpose of appearing to

fit within a safe harbor when the substance of the arrangement is not

accurately reflected by its form will be disregarded, and the substance

of the arrangement will determine whether safe harbor protection is

warranted.

Comment: Although one commenter supported the proposed sham

transactions rule, many commenters objected to it. These commenters

argued that the proposed sham transactions rule was vague, lacked clear

objective criteria, and did not provide any examples of sham

transactions.

Response: Upon further consideration, we have decided to withdraw

this proposal. We emphasize, however, that for purposes of determining

compliance with the safe harbors, we will evaluate both the form and

substance of arrangements. To be protected, the form must accurately

reflect the substance. As we have explained in the context of space and

equipment rentals:

If a sham contract is entered into, which on paper looks like it

complies with these provisions, but where there is no intent to have

the space or equipment used or the services provided, then clearly

we will look behind the contract and find that in reality payments

are based on referrals. Thus, these contracts would not be protected

under these provisions. (56 FR 35972)

This same general principle would apply in determining compliance with

other safe harbors.

C. 1993 Proposed Safe Harbors

The 1993 proposed rule set forth new safe harbor regulations in the

subject areas described below. Each description includes a summary of

the proposed rule; a summary of the final rule, including a summary of

significant changes between the proposed and final rules; and a summary

of comments received and our responses.

1. Investment Interests in Underserved Areas

Summary of Proposed Rule: It had come to our attention that it is

difficult for entities located in many rural areas to comply with the

two 60-40 tests set forth in the ``small entity'' investment interest

safe harbor. The first 60-40 rule (Sec. 1001.952(a)(2)(i)) requires

that no more than 40 percent of the investment interests of the entity

be held by

[[Page 63531]]

investors who are in a position to make or influence referrals to,

furnish items or services to, or otherwise generate business for the

entity (the ``60-40 investor rule''). The second 60-40 rule

(Sec. 1001.952(a)(2)(vi)) requires that no more than 40 percent of the

gross revenue of the entity may come from referrals or business

otherwise generated from investors (the ``60-40 revenue rule'').

Entities located in rural areas may have an especially difficult time

complying with these two standards, because in many cases physicians

may be the primary sources of capital in the area, and those physicians

may have no alternative facility to which they can refer.

Consequently, we proposed an additional safe harbor for investments

in entities located in rural areas that would have eliminated the two

60-40 rules. We proposed defining the rural areas included in the safe

harbor in accordance with the standards set by the Office of Management

and Budget (OMB) and used by the Bureau of the Census. We solicited

comments on the appropriateness of this definition of rural area. We

stressed that the method for designating rural areas must ensure that

this safe harbor only protects entities that truly serve a rural

population. We suggested that one alternative would be to adopt the

definition of ``rural'' found at 42 CFR 412.62(f)(1)(ii), which is the

definition used by HCFA in its DRG reimbursement rules. We proposed

leaving in place the remaining six standards for small entity

investments for purposes of the new safe harbor. These six standards

provide substantial assurances against abuse, and we had not been

apprised of any particular difficulty that rural entities were

experiencing with these standards.

In place of the 60-40 tests, we proposed a more flexible standard

that would still assure that referring sources, physicians in

particular, were not inappropriately selected as investors. First, we

proposed requiring the entity to make a bona fide offer of the

investment interest to any individual or entity irrespective of whether

such prospective investor is in a position to make or influence

referrals to, furnish items or services to, or otherwise generate

business for the entity. Thus, we proposed requiring that opportunities

for investment be offered in a good faith, non-discriminatory manner to

any individuals or entities that are potential sources of capital.

Second, to exclude the possibility of sham business structures not

intended to serve the rural areas in which they are located, we

proposed incorporating a standard that would require that at least 85

percent of the dollar volume of the entity's business in the previous

fiscal year or twelve month period be derived from items and services

provided to persons residing in the rural area. For entities that have

not been in business for 12 months, compliance with this standard would

be determined by examining the composition of the entity's business

over the entire period of its existence.

Methods of Classifying Geographic Areas: Depending on its purpose,

the Government uses several methodologies to define whether certain

geographic areas are ``urban'' or ``rural'' and whether certain

geographic areas or populations have inadequate access to health care

services. Among them, the following are relevant to this preamble

discussion:

OMB Methodology: The OMB defines a Metropolitan

Statistical Area (MSA) as a group of counties (or, in New England, a

group of townships) surrounding and related to an urban core area

containing a large population nucleus. The core of an MSA is a city

with a population of at least 50,000 people and/or an urbanized area

with a total population of at least 100,000 (75,000 in New England).

The OMB defines a county as part of the MSA if it contains the core

city or contains part of a continuous urbanized area around the core

city, even if outlying areas of the county are rural in character.

Using this methodology, an area may be considered ``rural'' if it is

not metropolitan, e.g., not part of an OMB-defined MSA (see 44 U.S.C.

3504).

HCFA DRG Definition: For purposes of establishing DRG

payments, HCFA defines ``rural'' areas as all areas outside the

metropolitan areas (MSAs) defined by OMB (Sec. 412.62(f)(1)(ii)).

Medically Underserved Areas/Populations (MUA/MUPs): The

MUA/MUP system was developed in the 1970s in accordance with section

330(b)(3) of the Public Health Service (PHS) Act to identify areas and

populations eligible to participate in the Community Health Center

Program. MUAs and MUPs are designated by the Health Resources and

Services Administration (HRSA). An MUA is either a rural or urban area

designated by the Secretary as having a shortage of health care

services; an MUP is a population group designated as having such a

shortage, such as certain migrant farmworkers or homeless populations.

Factors HRSA considers as part of the existing MUA/MUP designation

process include population-to-primary care physician ratios, infant

mortality rates, poverty rates, and the percentage of the population

aged 65 or over. The regulations governing MUA/MUPs are currently set

forth at 42 CFR part 51c.

Health Professional Shortage Areas (HPSAs): HRSA developed

HPSAs to meet the statutory requirement in section 332 of the PHS Act

to designate areas, population groups and facilities with a shortage of

health professionals eligible for placement of National Health Services

Corps personnel. HPSA designations are currently based primarily on

measurements of area population-to-provider ratios for specific

geographic service areas (or population groups within those areas),

together with indicators that provider resources in adjoining areas are

overutilized, excessively distant (e.g., more than 30 minutes travel

time away for primary care) or otherwise inaccessible (42 CFR part 5).

A HPSA can be designated based on shortages of (1) providers in a

geographic area; (2) providers willing to treat a specific population

within a defined area; or (3) providers for a public or nonprofit

facility serving a designated area or population group (which could

include a hospital). HPSAs are identified for three types of provider

shortages: primary care, dental care and mental health care. The

current primary care HPSA criteria define a ``primary care physician''

as a physician in one of the following specialties: general practice,

family practice, pediatrics, general internal medicine or obstetrics/

gynecology. Mental health providers covered by mental health HPSA

designations include psychiatrists, clinical psychologists, psychiatric

nurses, psychiatric social workers and marriage counselors.

Notice of Proposed Rulemaking on MUA/MUPs and HPSAs. HRSA

has proposed revising the MUA/MUP and HPSA regulations to improve the

current designation process by combining the two designation processes;

automating the scoring process and simplifying it by maximizing the use

of national data; expanding States' roles in identification of rational

service areas for designation; and incorporating better measures or

correlates of health status and lack of access, including measures of

minorities and isolated rural areas (63 FR 46538). In response to

public comments, HRSA has announced its intention to issue a second

notice of proposed rulemaking following a period of evaluation of

comments received, analysis of alternative approaches and impact

testing (64 FR 28831). Following an additional public comment period,

new regulations governing MUA/MUPs and

[[Page 63532]]

HPSAs are expected to be codified at 42 CFR part 5.

Summary of Final Rule: Paramount among OIG's concerns is that

beneficiaries have adequate access to quality health care. We are aware

that certain communities experience shortages of health care services

that affect Federal program beneficiaries and others. This rule for

investments in underserved areas is designed to balance the interests

of those communities in facilitating the development of health care

services with the anti-fraud interests that are the basis of the anti-

kickback statute.

Health care joint ventures in underserved areas raise the same

basic anti-kickback concerns as other joint ventures: First, is the

joint venture a bona fide business enterprise? Second, are

distributions from the joint venture really payments for referrals to

the joint venture from investors? Third, are the distributions really

payments for referrals from one investor to another? For this reason,

it is important that any safe harbor contain adequate safeguards and

conditions against fraud and abuse.

This new safe harbor for investments in joint ventures in

underserved areas is designed to provide additional flexibility for

investments in underserved areas that may experience a shortage of

available capital from non-referral source investors. The safe harbor

includes specific criteria that substantially reduce the risk of

inappropriate payments for referrals and exclude from protection

entities that do not serve the health care needs of people living in

the underserved areas in which the entities are located. Because the

safe harbor affords protection for a broader range of investments in

joint ventures in underserved areas, we hope it will promote the

development of needed health care ventures.

Based on our review of the comments received from, and concerns

expressed by, various commenters, we have made several significant

changes to the proposed safe harbor, all of which are described in more

detail in the responses to comments section below.

First, we have expanded safe harbor protection to include

urban, as well as rural, underserved areas. We are persuaded that joint

ventures in urban underserved areas often experience the same

difficulties in qualifying for safe harbor protection as their rural

counterparts. We are defining an underserved area as any defined

geographic area that is designated as a MUA in accordance with the

regulations at 42 CFR part 51c (or, if and when applicable, 42 CFR part

5).

Second, we have reduced from 85 percent to 75 percent the

volume of the investment entity's business that must be derived from

residents of underserved areas.

Third, we have provided a ``grace'' period for investment

entities that qualify for safe harbor protection at the time of the

initial investment, but subsequently find themselves located in areas

that have ceased to meet the safe harbor definition of an underserved

area.

Fourth, we have incorporated a modified investor rule that

requires that at least half of the investment interests in the entity

be held by non-referral source investors. Here, we were in part

persuaded by comments from health care entities that are currently

located in underserved areas and that have no or few referral source

investors. These entities expressed concern about unfair competition

from new entities entirely composed of referral source investors

(primarily physicians) in markets with few referral sources. We were

also concerned about limiting inappropriate financial incentives.

Comments and Responses

Comment: We solicited comments regarding the appropriateness of our

proposal to define ``rural'' with reference to the OMB standards for

MSAs. In response, several commenters urged us to adopt our alternative

proposal to use the rural definition employed by HCFA for purposes of

reimbursing hospitals located in rural areas under DRG payment rates

(42 CFR 412.62(f)(1)(iii)). A number of commenters urged us to extend

the investment interest safe harbor for rural entities to equally

qualified underserved urban areas.

Response: One of the important issues in designing this safe harbor

is how to define geographically the scope of investments to which it

applies. After consideration and examination of various approaches to

defining ``rural'' for purposes of this safe harbor, we have decided to

limit this safe harbor to investment interests in entities located in

areas defined by HRSA as MUAs (that otherwise meet all safe harbor

eligibility standards). This decision responds to requests for safe

harbor protection to facilitate investment in areas demonstrably

experiencing difficulty in attracting needed health care services.

Unlike OMB's MSAs, which merely measure geographic distributions of

population, MUAs identify areas experiencing health care shortages by

accounting for such factors as poverty levels, infant mortality, and

population age. Thus, we are amending the rule to substitute MUAs for

the existing definition of ``rural'' to more closely tailor the safe

harbor to protect investment interests in entities located in

underserved areas.

In addition to more accurately targeting rural areas with shortages

of health care services, protecting investments in MUAs offers a means

of expanding safe harbor protection to urban underserved areas. We are

persuaded that many urban underserved areas experience difficulties in

attracting investments in health care services that are comparable to

those experienced in rural areas. Because one of our objectives in

creating this safe harbor is to foster the development of needed health

care services, we believe it makes sense to protect qualified

investments in defined shortage areas without regard to density of

population.

At the time of publication of this rulemaking, HRSA's final

regulations on the new process for designating MUAs are still pending.

Although we anticipate that those regulations will be finalized, we are

persuaded that, even in the absence of that rule, and notwithstanding

certain concerns we have regarding the administration of the current

program, our selection of MUAs as a basis for this safe harbor is sound

and more consistent with the stated purpose of the safe harbor than

either of our original proposals for identifying the covered areas.

We anticipate that, if finally promulgated, HRSA's new rule for

evaluating and designating MUAs may result in some areas presently

classified as MUAs losing their classifications. Moreover, HRSA has

indicated its intent to review MUA classifications regularly, resulting

in the possibility that some areas could periodically lose their

classifications. Given this potential, it is incumbent on us to address

the effect of the loss of a MUA designation on an entity protected by

the safe harbor for investments in underserved areas. If an entity that

meets all of the safe harbor standards were located in an area that

loses its designation as a MUA after the entity has initially qualified

for the safe harbor, the entity would technically no longer fit

squarely within the safe harbor and would lose its protection. However,

we are mindful of the need investors have for reasonable certainty in

their arrangements and the significant effect a sudden loss of safe

harbor protection resulting from circumstances outside their direct

control may have on investors. Accordingly, we are including in this

safe harbor a 3-year grace period during which such entities will be

protected, provided they continue to meet all of the other safe harbor

[[Page 63533]]

conditions. This grace period will afford entities that wish to

maintain safe harbor protection an opportunity to restructure so as to

qualify for the small entity investment interest safe harbor at

Sec. 1001.952(a)(2). We wish to iterate that loss of safe harbor

protection does not mean that a joint venture arrangement becomes

unlawful.

Comment: Several commenters expressed concern about our proposal to

eliminate the 60-40 tests of the small entity investment safe harbor

for purposes of this safe harbor. One commenter advocated that the 60-

40 rules should continue to apply to facilities located in rural areas

to prevent a proliferation of unnecessary facilities, especially

laboratories, that are dependent on referrals from investor-physicians.

Another commenter supported restricting the safe harbor only to rural

areas where alternative sources of a particular service are not

otherwise available. These commenters argued that a proliferation of

protected entities with large numbers of referral source investors

could adversely affect existing entities in rural communities. One

commenter suggested that we use a ``demonstrated community need''

standard instead of limiting safe harbor protection to defined

geographic areas. This commenter further recommended that entities that

meet such a ``demonstrated community need'' test be required to

disclose to patients a referring physician's ownership interest and to

conduct utilization review of an entity's services.

Response: Having considered these comments, we are persuaded that

eliminating both 60-40 rules, and in particular the 60-40 investor

rule, may lead to inappropriate financial incentives and unfair

competition in some areas by allowing referral source investors,

primarily physicians, to ``lock up'' the market for particular services

in those areas. Ensuring fair competition in the health care

marketplace is one of the goals of the anti-kickback statute. We are

also concerned that an excessive proliferation of particular services

in rural or urban underserved areas could lead to overutilization by

entities competing for scarce revenue and could prompt protected

entities to develop revenue streams from patients not residing in

underserved areas, in contravention of the intent and spirit of the

safe harbor.

MUA designations are not made on a service-specific basis; thus, an

area may qualify as a MUA based on an overall shortage of health care

services even if it has a sufficient supply of a particular heath care

service. As we stated in the preamble to the 1993 proposed rule, one of

the purposes of this safe harbor is to ensure adequate access to

medical care for patients in underserved areas. Our intent was to

design a safe harbor that would accomplish this purpose, while

excluding ventures that do not serve the underserved areas in which

they are located. We remain persuaded that there are many rural and

urban underserved areas with legitimate shortages of health care

services and limited sources of potential investors. However, while we

believe that market competition should minimize the number of

duplicative ventures in a particular underserved area, we are persuaded

that safe harbor protection should be limited, to the extent

practicable, to ventures that fill a genuine health care need of area

residents.

In light of our intention to minimize safe harbor protection for

redundant health care services owned by referral source investors in

otherwise underserved areas, reduce inappropriate financial incentives,

and maintain fair competition for providers that are not owned by

referral source investors, we have revisited our original proposal to

eliminate both of the 60-40 tests of the small entity investment safe

harbor for purposes of this safe harbor. In this final rule, we are

adopting our original proposal to eliminate the 60-40 revenue rule, but

we are retaining a modified limitation on the number of interested

investors. Specifically, we are requiring, as a condition for

protection, that investors who make referrals or who are in a position

to make referrals or furnish items or services to the entity not own

more than 50 percent of the value of investment interests within each

class of investments in the entity. As with the 60-40 investor rule in

the small entity investment safe harbor, we are permitting equivalent

classes of stock to be aggregated for purposes of determining safe

harbor compliance.

We believe that eliminating the 60-40 revenue rule, thereby

permitting entities to draw 100 percent of their revenue from referrals

by investor-owners, should make investment in such entities

sufficiently attractive to non-referral source investors so as to

permit the entities to meet the new 50-50 investor test. We recognize

that this safe harbor may not fully answer all of the concerns raised

by the commenters and that there may be particular circumstances in

which ventures with parties to existing health care entities can not

qualify for safe harbor protection. Some of these ventures may be

appropriate for protection through an advisory opinion (42 CFR part

1008). In addition, joint ventures in underserved areas may still

qualify for protection under the small entity investment interest safe

harbor at Sec. 1001.951(a)(2).

We are not adopting the suggestion that we promulgate a

``demonstrated community need'' standard for this safe harbor. Such a

standard would not create a sufficiently clear rule and would be

unenforceable in practice. Moreover, the additional two standards

suggested by one commenter--public disclosure of ownership interests

and utilization review--while good practices, are not, in our

experience, effective deterrents to fraud and abuse.

Comment: One commenter urged us to allow compliance with the rural

investment safe harbor if an entity certified its inability to comply

with the 60-40 rules in the small entity safe harbor despite its best

efforts.

Response: A mere ``best efforts'' exception to the small entity

investment interests safe harbor based on a certification from the

investment entity would be insufficient to protect against abusive

arrangements and would be impractical in application. Like all parties

that cannot comply with a safe harbor, parties that are unable to

comply with the 50-50 investor rule have recourse to the advisory

opinion process for guidance about their specific arrangements.

Comment: One commenter requested that the OIG incorporate a ``fair

market value'' principle more explicitly into the proposed rural

investment safe harbor.

Response: The principle of ``fair market value'' is included in

this investment safe harbor at Sec. 1001.952(a)(3)(viii).

Comment: One commenter expressed concern that a rural referral

center (RRC) that had been reclassified as located in an urban area by

the Medicare Geographic Classification Review Board for purposes of

Medicare payment (42 CFR 412.230) would not be eligible to receive

protection under the rural investment interest safe harbor. RRCs are

Medicare participating acute care hospitals that are located in rural

areas and that qualify under HCFA rules as referral centers (see 42 CFR

412.96). Under certain circumstances, an individual hospital, including

a referral center, may be redesignated from a rural area to an urban

area for purposes of using the urban area's standardized amount for

inpatient operating costs, wage index value, or both. (42 CFR 413.230).

Response: A RRC located in a MUA would be eligible for protection

under the rural investment interest safe harbor, provided it meets all

of the conditions of the safe harbor. Reclassification as

[[Page 63534]]

``urban'' for Medicare payment purposes would not bar safe harbor

protection.

Comment: Several commenters asked us to further explain how

facilities can comply with the requirement that an entity must offer

equal and bona fide opportunities to acquire investment interests to

individuals or entities irrespective of whether such prospective

investors are in a position to make or influence referrals to, furnish

item or services to, or otherwise generate business for the entity

(Sec. 1001.952(a)(3)(i)). In the alternative, a commenter requested

that this provision be deleted. One commenter expressed concern that

the ``broad'' terms of the proposed safe harbor would make it difficult

for parties to identify ``potential sources of capital'' and inquired

whether satisfying the safe harbor required investment opportunities to

be registered under Federal and State securities laws as public

offerings. Another commenter expressed concern about publicizing

investment opportunities in rural areas where investors often do not

wish to be publicly identified.

Response: Our intent in proposing the ``equal and bona fide

opportunities'' standard was to ensure that investment opportunities

are offered in a good faith, nondiscriminatory manner to any

individuals or entities that are potential sources of capital, so that

referral source investors are not inappropriately selected as

investors. In light of our decision to require that at least 50 percent

of the investment interests be held by non-referral source investors,

we have concluded that this standard is not necessary. Accordingly, we

are not adopting it in the final rule.

Comment: The sixth standard of the proposed safe harbor required

that at least 85 percent of the dollar volume of the entity's business

in the previous fiscal year or previous 12-month period be derived from

services provided to persons residing in the underserved area. One

commenter asked us to lower the 85 percent dollar volume requirement to

40 percent in order to make the threshold more attainable and allow

more investment interests to qualify for protection.

Response: As we explained in the preamble to the 1993 proposed

rule, although we proposed eliminating the 60-40 revenue rule for

investments for purposes of the proposed safe harbor, we remained

concerned that a sham joint venture structure could be established that

does not intend to serve the underserved area in which it is located.

This safe harbor responds to requests for assistance in facilitating

investment in underserved areas. It is not unreasonable to offer this

safe harbor protection only to investments in entities that will

primarily serve underserved populations by providing services needed in

their communities. We are persuaded, however, that lowering the

required percentage to 75 percent would adequately protect against

abuses and further the purpose of this safe harbor. Accordingly, we are

requiring that at least 75 percent of the dollar volume of the entity's

business in the previous fiscal year or previous 12-month period be

derived from services provided to persons residing in an underserved

area or persons who are members of a MUP (as defined by HRSA).

2. Ambulatory Surgical Centers

Summary of Proposed Rule: We proposed a fourth investment interest

safe harbor to protect payments to investors in ambulatory surgical

centers (ASCs) who are surgeons who refer patients directly to the ASC

and perform surgery themselves on these referred patients. What we

intended to protect is often understood conceptually as an extension of

the physician's office space. We further explained that a safe harbor

for investment interests in ASCs was warranted because the professional

fee generated by a referral from a physician-investor to the ASC is

substantially greater than the facility fee generated by the referral,

and therefore profit distributions to physician-investors, which are

derived from the facility fee, do not constitute a significant improper

inducement to make referrals. The rationale underlying the proposed

safe harbor would not extend to investment interests held by physicians

who are not in a position to refer patients directly to the ASC and

perform surgery. We explained that the concern with investments by such

physicians is the potential for indirect kickbacks, because they might

receive a return, through the ASC's profit distribution, for referrals

of patients to other investors who perform surgical procedures at the

ASC. We solicited comments on whether the rationale underlying this

safe harbor is applicable to entities other than ASCs. We also

specifically solicited comments on what degree of disparity should

exist between the professional fee and the facility fee generated by

referrals to a type of entity for that type of entity to receive safe

harbor protection.

The proposed safe harbor applied only to ASCs certified under 42

CFR part 416. We did not propose protecting ASCs located on the

premises of a hospital that share operating or recovery room space with

the hospital for treatment of the hospital's inpatients or outpatients.

The proposed safe harbor contained the following 5 standards:

The terms on which an investment interest is offered to an

investor must not be related to the previous or expected volume of

referrals, services furnished or the amount of business otherwise

generated from that investor to the entity.

There is no requirement that a passive investor, if any,

make referrals to the entity as a condition for remaining an investor.

Neither the entity nor any investor may loan funds to, or

guarantee a loan for, an investor if the investor uses any part of such

loan to obtain the investment interest.

The amount of payment to an investor in return for the

investment interest must be directly proportional to the amount of the

capital investment (including the fair market value of any pre-

operational services rendered) of that investor.

Each investor must agree to treat patients receiving

Medicare or Medicaid benefits.

In contrast to the other investment interest safe harbors that

limit investment by individuals in a position to refer, the proposed

ASC safe harbor would have only protected entities whose investment

interests were held entirely by such individuals. With that distinction

in mind, four of the five standards were adapted from the standards in

the small entity safe harbor (Sec. 1001.952(a)(2)). We solicited

comments on the extent to which other standards were appropriate to

safeguard against potential abuse.

Summary of Final Rule: The OIG received nearly two hundred comments

relating to the proposed safe harbor for investment interests in ASCs.

As a result of these comments, we have significantly reworked this safe

harbor to provide, in general, expanded safe harbor protection for

investments in ASCs.

As an initial matter, our proposed placement of the ASC safe harbor

with the investment interests safe harbor appears to have caused

confusion as to the safe harbor's purpose and scope. Our proposed ASC

safe harbor contemplated a joint venture composed entirely of referral

source investors. Placing these regulations alongside the large entity

safe harbor, which limits safe harbor protection to investments that

are so small as to be, at most, tangentially related to referrals, and

the small entity investment safe harbor, which limits safe harbor

protection to ventures composed of no more than 40 percent referral

source investors, led

[[Page 63535]]

some commenters to question why an ASC with 100 percent referral source

investors would pose less risk of fraud and abuse than another type of

investment entity with a smaller percentage of referral source

investors. The answer is that ASC investments do not necessarily pose

less risk. Rather, as described in more detail below, investments in

ASCs raise concerns that are different from those addressed by the

small entity investment safe harbor; therefore, investments in ASCs

warrant different safe harbor criteria, including different safeguards,

limitations and controls.

The new ASC safe harbor has four categories: Surgeon-Owned ASCs,

Single-Specialty ASCs, Multi-Specialty ASCs, and Hospital/Physician

ASCs. Safe harbor protection requires full compliance with all of the

standards of any one category. All four categories have the following

requirements in common: (i) The ASC must be certified under 42 CFR part

416; (ii) loans from the entity or other investors for the purpose of

investing are prohibited; (iii) investment interests must be offered on

terms not related to the volume or value of referrals; (iv) all

ancillary services must be directly and integrally related to primary

procedures performed at the ASC and none may be separately billed to

Medicare or other Federal health care programs; and (v) neither the ASC

nor physicians practicing at the ASC can discriminate against Federal

health care program beneficiaries. Additional specific standards apply

to particular categories. Moreover, in the interest of ensuring patient

freedom of choice and promoting informed decision-making by patients,

we have included a requirement in each category that patients referred

to the ASC by an investor be fully informed of the investor's

investment interest.

The four categories are summarized here and described in greater

detail in the responses to comments below:

Surgeon-Owned ASCs. The first category is designed to

protect ASC investments where all of the physician investors are either

general surgeons or surgeons engaged in the same surgical specialty.

Specifically, category one protects certain investments in entities

where all of the investors are either (i) general surgeons or surgeons

engaged in the same surgical specialty, all of whom are in a position

to refer patients directly to the ASC and perform procedures on such

referred patients; (ii) group practices that are composed of such

surgeons and that meet all of the requirements of the group practice

safe harbor (Sec. 1001.952(p)); or (iii) investors who (a) do not

provide items or services to the ASC or its investors, (b) are not

employed by the ASC or any investor, and (c) are not in a position to

refer patients directly or indirectly to, or generate business for, the

ASC or any of its investors. A surgeon is considered to be in a

position to refer patients directly and perform procedures if he or she

derives at least one-third of his or her medical practice income from

all sources for the previous fiscal year or previous 12-month period

from his or her own performance of procedures that require an ASC or

hospital surgical setting in accordance with Medicare reimbursement

rules (the ``one-third practice income'' test).

Single-Specialty ASCs. The second category is similar to

the first category, except that it is designed to protect ASC

investments where all of the physician investors are engaged in the

same medical practice specialty (e.g., gastroenterologists), provided

that they perform ASC procedures as a significant part of their medical

practices. The physicians that qualify under this category need not be

traditional surgeons. Specifically, category two protects certain

investments in entities where all of the investors are either (i)

physicians engaged in the same medical practice specialty who are in a

position to refer patients directly to the ASC and perform procedures

on such referred patients; (ii) group practices that are composed of

such physicians and that meet all of the requirements of the group

practice safe harbor (Sec. 1001.952(p)); or (iii) investors who (a) do

not provide items or services to the ASC or its investors, (b) are not

employed by the ASC or any investor, and (c) are not in a position to

refer patients directly or indirectly to, or generate business for, the

ASC or any of its investors. As with category one (Surgeon-Owned ASCs),

physician investors must meet the ``one-third practice income'' test.

Multi-Specialty ASCs. The third category is similar to the

first two categories, but it allows a mix of the types of physicians

addressed in those categories. Thus, the third category protects

certain investments in entities where all of the investors are either

(i) physicians (surgeons or non-surgeons) who are in a position to

refer patients directly to the ASC and perform procedures on such

referred patients; (ii) group practices that are composed of such

physicians and that meet all of the requirements of the group practice

safe harbor (Sec. 1001.952(p)); or (iii) investors who (a) do not

provide items or services to the ASC or its investors, (b) are not

employed by the ASC or any investor, and (c) are not in a position to

refer patients directly or indirectly to, or generate business for, the

ASC or any of its investors. The physicians must meet the ``one-third

practice income'' test described in the preceding paragraphs. In

addition, physicians in this category must meet a second standard

related to practice income because of the increased risk of

remuneration for referrals among physicians with different specialties.

Specifically, the rule requires that at least one-third of the

physician's procedures that require an ASC or hospital surgical setting

(in accordance with Medicare reimbursement rules) be performed at the

ASC in which he or she is investing. We believe that for physicians who

meet the ``one-third/one-third'' test, an investment in an ASC truly

qualifies as an extension of the physician's office. We believe such

physician investors are unlikely to have significant incentives to

generate referrals for other investors because of the minimal

additional return on investment derived from such referrals.

Hospital/Physician ASCs. The fourth category protects

certain investments by hospitals in ASCs. To qualify for the safe

harbor, at least one investor must be a hospital and the other

investors must be (i) physicians or group practices that otherwise

qualify under the safe harbor or (ii) non-referral source investors.

The hospital must not be in a position to refer patients directly or

indirectly to the ASC or any physician investor. The ASC space must be

dedicated exclusively to the ASC and not used by the hospital for the

treatment of the hospital's inpatients or outpatients. The ASC may

lease space that is located in or owned by a hospital investor, if the

space lease qualifies for protection under the space rental safe

harbor. Equipment and personal services provided by the hospital must

similarly meet safe harbor requirements.

In this final rule, we are expressly departing from the underlying

rationale for our original safe harbor proposal, which was the

professional fee/facility fee differential. The existence of a

significant disparity between the facility fee and the professional

fee, such that the facility fee is significantly smaller than the

professional fee, minimizes the risk of improper incentives for

referrals; however, we are aware that professional and facility fees

have changed and may continue to change over time and that the ratio

between them will not always, by itself, provide a clear basis for safe

harbor protection. So although the fee differential was meaningful at

the time, we will in the future look more broadly for indicia that an

ASC investment represents the extension of a physician's

[[Page 63536]]

office space and not a means to profit from referrals.

The gravamen of an anti-kickback offense is payment of remuneration

to induce the referral of Federal health care program business. In the

context of an ASC, our chief concern is that a return on an investment

in an ASC might be a disguised payment for referrals. Two examples

illustrate the potential problem. First, primary care physicians could

be offered an investment interest in an ASC for a nominal capital

contribution as an incentive to refer patients to surgeon owners of the

ASC. The primary care physicians would not perform any services at the

ASC, but would profit from any referrals they make. Second, physicians

in specialties that typically refer to one another could jointly invest

in an ASC so that they are positioned to earn a profit from such

referrals or so that one physician specialty provides the ASC services

and the other provides the referrals. In such cases, medical decision-

making may be corrupted by financial incentives offered to potential

referral sources who stand to profit from services provided by another

physician.

With the above concern in mind, we are still able to provide safe

harbor protection for certain non-surgeon physicians, group practices

and hospitals that meet certain requirements set forth in the safe

harbor. These requirements are designed to preclude protection for

investors who might have incentives to generate returns on their

investments through referrals to other investors or to other physicians

who perform procedures at the ASC. The safe harbor will also protect

some investment interests held by persons who are not in a position to

make or influence referrals either directly or indirectly to the ASC or

to any of its investors.

However, except as otherwise described in the regulations, we are

not protecting investment interests held by any party that provides

items or services to, is in a position to influence the flow of

referrals directly or indirectly to, or generates business for, the

entity or any investor. Notwithstanding, investments by these parties

are not necessarily unlawful, provided that payments made in return for

the investment are not for the purpose of inducing or rewarding

referrals.

Indeed, we recognize that some legitimate ASC arrangements may not

fit precisely in the final ASC safe harbor. Those that do not fit may

be eligible for safe harbor protection under the small entity

investments safe harbor (Sec. 1001.952(a)(2)) or the new safe harbor

for investments in underserved areas (Sec. 1001.952(a)(3)).

Alternatively, current or potential investors may request an OIG

advisory opinion in accordance with section 1128D(b) of the Act and the

regulations at 42 CFR part 1008.

Our responses to public comments are summarized below.

Comments and Responses

Comment: Many commenters commended the OIG for proposing a safe

harbor to shield ASCs from prosecution under the anti-kickback statute.

Many commenters noted that ASCs have saved Medicare hundreds of

millions of dollars, forcing hospitals to become more competitive,

because ASC payment rates are typically lower than hospital payment

rates for the same procedures. Several commenters stated that ASCs

foster patient access to care, particularly in medically underserved

regions. Moreover, many commenters observed that patients generally

prefer outpatient surgical care at an ASC to hospital care.

Response: We agree that ASCs can significantly reduce costs for

Federal health care programs, while simultaneously benefitting

patients. The HCFA has promoted the use of ASCs as cost-effective

alternatives to higher cost settings, such as hospital inpatient

surgery. Where the ASC is functionally an extension of a physician's

office, so that the physician personally performs services at the ASC

on his or her own patients as a substantial part of his or her medical

practice, we believe that the ASC serves a bona fide business purpose

and that the risk of improper payments for referrals is relatively low.

Where the criteria set forth in the safe harbor are satisfied, we do

not consider investments in ASCs to be a likely source of

overutilization of services payable by the Federal health care programs

or increased program costs. We are concerned, however, that patient

freedom of choice be protected and informed decision-making promoted in

situations where a physician is required to refer to an entity that he

or she owns in order to qualify for safe harbor protection.

Accordingly, we are adding a requirement that the existence of the

ownership interest be disclosed to patients. We note that such

disclosure in and of itself does not provide sufficient assurance

against fraud and abuse of the Federal health care programs. This

conclusion derives from our observation that a disclosure of financial

interest is often part of a testimonial, i.e., a reason why the patient

should patronize that facility. Thus, often patients are not put on

guard against the potential conflict of interest, i.e., the possible

effect of financial considerations on the physician's medical judgment.

Comment: Many commenters questioned our proposal to limit safe

harbor protection to physicians who are ``surgeons'', given that many

procedures or services performed in ASCs are performed by physicians

not commonly called surgeons (i.e., cardiologists, gastroenterologists,

radiologists or pathologists). Many commenters argued that the

``extension of practice?'' rationale would apply to surgeons and such

other physicians alike.

A number of commenters proposed that we adopt a definition of

``surgeon'' that would include any physician who performs procedures

classified as surgical by HCFA regulations. For example, many kinds of

endoscopy are classified as surgical procedures in accordance with 42

CFR 416.65 and various updates to the list of HCFA-approved ASC

surgical procedures published in the Federal Register (see 42 CFR

416.65(c); 63 FR 32290 (1998) (to be codified at 42 CFR parts 416 and

488)). One commenter suggested that physicians who refer to an ASC, but

do not perform services at the ASC, should be permitted in the safe

harbor as long as they meet the safe harbor's five enumerated

requirements.

Response: As discussed above, we agree that limiting the safe

harbor to investors who are physicians traditionally termed

``surgeons'' is unnecessarily restrictive, especially in light of

advancing technology and the scope of HCFA's approved list of ASC

procedures. In light of the many comments received on this topic, we

have revised the safe harbor to protect investments in ASCs certified

under 42 CFR part 416 by non-surgeon physicians, group practices,

hospitals and non-referral source investors that meet certain

conditions. Investments by group practices and hospitals are discussed

in responses to separate comments below.

With respect to physicians, we are promulgating three categories of

safe harbor criteria, each designed to protect different types of

physician investment. All of the categories protect combinations of

qualifying physicians, which generally are those physicians who perform

a substantial number of procedures listed on the HCFA ASC surgical

procedures list as part of their medical practices. Specifically, at

least one-third of each physician investor's medical practice income

from all sources for the previous fiscal year or previous 12-month

period must be derived from the physician's performance of procedures

that require an ASC or hospital surgical setting. In

[[Page 63537]]

addition, where there is a risk of referrals among physicians or

surgeons in different specialties, we are requiring that each perform

at least one third of his or her procedures that require an ASC or

hospital surgical setting at the investment ASC. We believe these

standards ensure that a physicians investment in an ASC will truly

represent an extension of his or her office. Where physicians own an

ASC in which they will personally perform a significant number of

procedures, obvious and legitimate business and professional reasons

exist for the ownership, including convenience, professional autonomy,

accountability and quality control. Moreover, any risk of

overutilization or unnecessary surgery is already present by reason of

the opportunity for a surgeon to generate his professional fee; the

additional financial return from the ASC is not likely to increase the

risk of overutilization of procedures significantly. We believe that

the ``one-third/one-third'' standards in the safe harbor ensure that

physician investors will have no significant incentive beyond receipt

of their professional fees to refer to the entity or any of its

investors, because any return on investment will be attributable

primarily to legitimate business and only tangentially to possible

referrals of ASC business.

Because of the risk of remuneration for referrals, investments by

other physicians, such as anesthesiologists, radiologists and

pathologists, or by non-physician providers, such as certified

registered nurse anesthetists, are not protected by the safe harbor if

the physician or provider is in a position to provide items or services

to, refer patients directly or indirectly to, or generate business for,

the ASC or any of its investors. The determination whether an investor

should be classified as a potential referral source is a factual

question. As is the case for investments in small entities (56 FR

35964), we will accept a written stipulation that for the life of the

investment the investor will not make referrals to, furnish items or

services to, or otherwise generate business for, the entity or any of

its investors, provided that, in fact, the investor's actions comport

with the written stipulation. We wish to make clear that investments by

these physicians and other providers do not necessarily implicate the

anti-kickback statute. Finally, we note that we do not consider an

investment by a physician's own wholly-owned professional corporation

to be an excluded non-physician investment.

Comment: Many commenters also objected to our proposal to protect

only ASCs owned entirely by surgeons who practice there. These

commenters asserted that non-surgeons, and more specifically non-

physicians, should be allowed safe harbor protection for investments in

ASCs. Many commenters advocated a rule that would allow surgeon

investors to transfer ownership to family members and other non-

surgeons upon retirement or death without jeopardizing the ASC's safe

harbor protection. Commenters also expressed concern that the safe

harbor did not protect investments held by administrative staff at the

ASC. Many commenters asserted that co-ownership with administrative

staff would enable these individuals to make long-term commitments to

providing better services in a cost-effective manner. Many commenters

further expressed the view that anyone who is not in a position to

refer patients to the ASC, including corporate entities such as for-

profit management companies, should be eligible to invest in the ASC.

Some commenters urged that investments held by a physician's retirement

plan be protected.

Response: We are extending safe harbor protection to investors who

are not in a position to provide items or services to the ASC or any of

its investors and who are not in a position directly or indirectly to

generate referrals for the entity or any of its investors. There is

minimal risk that a payment made to such a non-referral source investor

would implicate the anti-kickback statute, and accordingly investments

by such investors do not taint the ASC investment. However, we believe

that hospitals, skilled nursing facilities, home health agencies,

managed care companies, physician practice management companies, and

similar entities may be referral sources in some circumstances. By way

of example only, a hospital may be in a position to influence referrals

when it employs physicians who make referrals, when it owns surgical

practices, or when it is affiliated with a ``friendly'' or ``captive''

professional corporation owned or controlled by its employees. We

further believe that some employees, such as certain marketing and

administrative staff, may be referral sources.

Comment: Many commenters argued that the scope of the safe harbor

should be expanded to include facilities that are not traditionally

considered ``surgical'' centers, such as lithotripsy facilities, end-

stage renal disease (ESRD) facilities, comprehensive outpatient

rehabilitation facilities (CORFs), radiation oncology facilities,

cardiac catheterization centers and optical dispensing facilities. Many

commenters argued that such facilities, like ASCs, are part of the

physician's practice and are not simply vehicles for passive investment

and self-referral. A number of commenters stated that such facilities

would not encourage overutilization, would increase access to care,

would reduce costs, and would maintain or improve quality of care.

Several commenters averred that investments in such facilities offer

little inducement because each investor makes very little profit from

investments in such facilities, in part because in some facilities,

each physician's investment is a small percentage of the whole. Other

commenters stated that the cost of operating these facilities is so

high that each investor's net revenues from the facility investment is

marginal. Many commenters argued that existing regulation by Federal

and State agencies and by physician associations creates sufficient

checks on fraud and abuse.

Response: Our regulatory treatment of ASCs recognizes the

Department's historical policy of promoting greater utilization of ASCs

because of the substantial cost savings to Federal health care programs

when procedures are performed in ASCs rather than in more costly

hospital inpatient or outpatient facilities. Physician investment in

ASCs was an important corollary to the Department's efforts to promote

ASCs because physicians were natural sources of capital, since many

hospitals were reluctant to open or invest in ASCs that competed with

their own outpatient and inpatient surgery departments. Accordingly,

many of the early ASCs were financed and owned by surgeons and other

physicians who worked in them. Currently, HCFA's goal is to set payment

rates that are consistent across different sites of service.\4\

However, currently surgeries in ASCs generally continue to be

reimbursed at lower rates.

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\4\ See e.g., Update of Ratesetting Methodology, Payment Rates,

Payment Policies, and the List of Covered Surgical Procedures for

Ambulatory Surgical Centers Effective October 1, 1998, 63 FR 32290,

32307 (to be codified at 42 CFR parts 416 and 488) (proposed June

12, 1998).

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Safe harbor protection for ASCs derives in large measure from this

longstanding policy encouraging freestanding ASCs as a less costly

alternative to hospitals for appropriate surgeries. In addition,

Medicare's uniform, prospectively-established ASC payment methodology

and the safe harbor's restriction on billing Medicare separately for

ancillary services provide further assurance against abuse.

[[Page 63538]]

Investments by referring physicians or combinations of referring

physicians and hospitals in non-ASC clinical joint ventures, including,

but not limited to, cardiac catheterization laboratories, radiation

oncology centers or ESRD facilities, do not share the same policy

background and are not subject to the same reimbursement structure as

investments by physicians in ASCs. Such clinical joint ventures may

raise concerns not present with ASCs. In short, to qualify under this

safe harbor, a facility must be a certified ASC under 42 CFR part 416.

The existing small entity investment safe harbor (Sec. 1001.952(a)(2))

may be applicable for other joint ventures (assuming all safe harbor

conditions are satisfied). In addition, we are not prepared at this

time to extend safe harbor protection to non-HCFA-certified ASCs.

Industry-promulgated standards, while welcome and often helpful in

combating fraud and abuse, may not be sufficient to safeguard the

Federal health care programs.

Comment: Several commenters asserted that hospitals with investment

interests in ASCs should also be protected under the proposed ASC safe

harbor. One commenter expressed the view that hospitals have no

financial incentive to refer outpatient surgeries to ASCs because ASC

net collections would be significantly lower than hospital net

collections for the same procedures. By contrast, several other

commenters suggested that hospitals would refer outpatient procedures

to ASCs to enable the hospitals to focus resources on inpatient

operations and treatments and the development of integrated delivery

systems. Several commenters asserted that a hospital referral of a

patient to an ASC would be an extension of the hospital's practice

analogous to a surgeon's referral of a patient to an ASC. A number of

commenters asserted that patients would benefit from using an ASC in

close proximity to a hospital, and that creating an ASC would make

efficient use of surplus hospital space.

Response: After reviewing the comments, we are persuaded that safe

harbor protection should be extended to ASCs jointly owned by hospitals

and physicians who qualify under the terms of this safe harbor.

Although joint ventures between hospitals and physicians are often

susceptible to fraud and abuse, precluding all safe harbor protection

for hospital investors in ASCs may unnecessarily place hospitals at a

competitive disadvantage if they are forced to compete with ASCs owned

by physicians, who principally control referrals.

To be protected by the safe harbor, a hospital investment must meet

all of the conditions set forth in the safe harbor. The hospital must

not be in a position to make or influence referrals directly or

indirectly to the ASC or to any of its physician investors. Whether

this condition is met will depend on the facts and circumstances of

particular arrangements. Any space used by the ASC that is located in,

or owned by, the hospital must be leased in accordance with a lease

arrangement that satisfies all of the criteria of the space rental safe

harbor (Sec. 1001.952(b)). Similarly, any hospital equipment used by

the ASC must be leased under an arrangement that satisfies the

equipment rental safe harbor (Sec. 1001.952(c)), and any personal

services provided by the hospital must be provided in accordance with a

contract that complies with the personal services and management

contracts safe harbor (Sec. 1001.952(d)). To further mitigate the risk

of improper cost-shifting, in no event may operating or recovery room

space be shared with the hospital for the treatment of the hospital's

inpatients or outpatients, nor may the hospital reflect or include any

costs associated with developing or operating the ASC on any Federal

health care program claim or cost report (except such non-reimbursable

costs as may be required by the programs).

Comment: Many commenters expressed the view that a safe harbor that

protects an investment where 100 percent of the investors are

physicians would be inconsistent with the 60-40 investor rule in the

existing investment interest in small entities safe harbor. Several

commenters argued that imposing a new 100 percent rule would be

burdensome on those investors who diligently tried to comply with the

40 percent rule.

Response: We are not changing the rules for those ASCs that meet

the criteria for the ``small entity'' safe harbor. However, many

existing ASCs that are owned entirely or predominantly by the

physicians who practice there cannot fit within the ``small entity''

safe harbor and thus are not currently afforded safe harbor protection.

Depending on the circumstances, either this new safe harbor, the

``small entity'' safe harbor (Sec. 1001.952(a)(2)), or the new

``underserved areas'' safe harbor (Sec. 1001.952(a)(3)) may offer

protection to investors in an ASC.

Comment: Several commenters requested clarification of the

requirement that a participating practitioner ``must agree to treat''

Medicare and Medicaid patients. Some commenters noted that it was

unclear what level of participation in these Federal health care

programs would satisfy the requirement. One commenter questioned

whether the safe harbor would require treating Medicare and Medicaid

patients to the exclusion of other patients if capacity were limited.

Two commenters questioned whether it was sufficient to ``agree to

treat'' instead of actually treating Medicare and Medicaid patients.

Another commenter wondered whether all investors in the facility must

treat Medicare and Medicaid patients. One commenter suggested that the

requirement be deleted from the safe harbor. Another suggested that

each ASC maintain records, on an annual basis, to show that it actually

provided services to Medicare and Medicaid patients in proportion to

those patients in the community. Several commenters noted that the

requirement to treat Medicare and Medicaid patients is unnecessary

because the anti-kickback statute is implicated only when Federal

health care program reimbursement is requested.

Response: The requirement that all protected investors agree to

treat Medicare and Medicaid patients is intended to ensure Medicare and

Medicaid patients access to care at ASCs on a non-discriminatory basis.

Thus, decisions whether to accept and treat Federal health care program

beneficiaries must be made on a nondiscriminatory basis. This

requirement is further intended to promote cost savings for the

programs by encouraging investors to provide services for Federal

program beneficiaries in ASCs rather than hospitals in medically

appropriate circumstances. We do not intend to exclude from protection

physicians who are not accepting any new patients. We are not adopting

the suggestion that ASCs demonstrate that they provide services to

Medicare and Medicaid patients in proportion to the numbers of those

patients in the community. We find that requirement to be too limiting.

We are clarifying the language of the safe harbor to make clear its

anti-discrimination purpose, and we are expanding it to require non-

discriminatory treatment of all Federal health care program

beneficiaries.

The commenter is correct that the anti-kickback statute would not

be implicated, and no safe harbor protection required, if the investor

physicians were not in a position to make referrals of or otherwise

generate business payable in whole or in part under a Federal health

care program. However, given the number of Federal health care

programs, which include

[[Page 63539]]

Medicare, Medicaid, TRICARE, Veterans' Administration, Public Health

Service, Indian Health Service, and children's health insurance under

Title XXI of the Act, we think it likely that most investor physicians

will potentially be in a position to refer Federal program busi

This text is long and has been trimmed here. Open the source document for the complete record.