federal register - Office of Inspector General, U.S ...Federal Register/Vol. 64, No. 223/Friday, November 19, 1999/Rules and Regulations63519 2 The OIG’s interim final rule addressing

fede

ral r

egiste

r

63517

FridayNovember 19, 1999

Part V

Department ofHealth and HumanServicesOffice of Inspector General

42 CFR Part 1001Medicare and State Health CarePrograms: Fraud and Abuse; Clarificationof the Initial OIG Safe Harbor Provisionsand Establishment of Additional SafeHarbor Provisions Under the Anti-Kickback Statute; Final Rule

VerDate 29-OCT-99 14:35 Nov 18, 1999 Jkt 190000 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\19NOR3.XXX pfrm04 PsN: 19NOR3

63518 Federal Register / Vol. 64, No. 223 / Friday, November 19, 1999 / Rules and Regulations

1 56 FR 35952; July 21, 1991.

DEPARTMENT OF HEALTH ANDHUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0991–AA66 (Also incorporating RIN0991–AA74)

Medicare and State Health CarePrograms: Fraud and Abuse;Clarification of the Initial OIG SafeHarbor Provisions and Establishmentof Additional Safe Harbor ProvisionsUnder the Anti-Kickback Statute

AGENCY: Office of Inspector General(OIG), HHS.ACTION: Final rule.

SUMMARY: This final rule serves both toadd new safe harbor provisions underthe Federal and State health careprograms’ anti-kickback statute, asauthorized under section 14 of PublicLaw 100–93, the Medicare andMedicaid Patient and ProgramProtection Act of 1987, and to clarifyvarious aspects of the original safeharbor provisions now codified in 42CFR part 1001 (originally proposed inRIN 0991–AA74). Specifically, this finalrule modifies the original set of finalsafe harbor provisions codified in 42CFR 1001.952 to give greater clarity tothat rulemaking’s original intent. Inaddition, this final rule sets forth anexpanded set of safe harbor provisionsdesigned to protect additional paymentand business practices from criminalprosecution or civil sanctions under theanti-kickback provisions of the statute.EFFECTIVE DATE: This rulemaking iseffective November 19, 1999.

FOR FURTHER INFORMATION CONTACT:Vicki L. Robinson, Office of Counsel to

the Inspector General (202) 619–0335Joel Schaer, Office of Counsel to the

Inspector General (202) 619–1306SUPPLEMENTARY INFORMATION:

I. Background

Section 1128B(b) of the SocialSecurity Act (the ‘‘Act’’) (42 U.S.C.1320a–7b(b)) provides criminalpenalties for individuals or entities thatknowingly and willfully offer, pay,solicit or receive remuneration in orderto induce business reimbursable underthe Federal or State health careprograms. The offense is classified as afelony and is punishable by fines of upto $25,000 and imprisonment for up to5 years. Violations of the anti-kickbackstatute may also result in the impositionof a civil money penalty (CMP) undersection 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 coveredspecifically include kickbacks, bribes,and rebates, whether made directly orindirectly, overtly or covertly, in cash orin kind. In addition, prohibited conductincludes not only remunerationintended to induce referrals of patients,but remuneration intended to inducethe purchasing, leasing or ordering, orarranging of any good, facility, service,or item paid for by Federal or Statehealth care programs.

Establishing the Original Safe HarborsSince the statute on its face is so

broad, concern had been expressed thatsome relatively innocuous commercialarrangements were technically coveredby the statute and therefore were subjectto criminal prosecution. As a responseto the above concern, the Medicare andMedicaid Patient and ProgramProtection Act (MMPPPA) of 1987,section 14 of Public Law 100–93,specifically required the developmentand promulgation of regulations, the so-called ‘‘safe harbor’’ provisions,designed to specify various paymentand business practices which, althoughpotentially capable of inducing referralsof business under the Federal and Statehealth care programs, would not betreated as criminal offenses under theanti-kickback statute. The OIG safeharbor provisions have been developed‘‘to limit the reach of the statutesomewhat by permitting certain non-abusive arrangements, whileencouraging beneficial and innocuousarrangements.’’ 1 Health care providersand others may voluntarily seek tocomply with these provisions so thatthey have the assurance that theirbusiness practices are not subject to anyenforcement action under the anti-kickback statute, the CMP provision foranti-kickback violations, or the programexclusion authority related to kickbacks.

On July 29, 1991, we published in theFederal Register the 1991 final rule (56FR 35952) setting forth various safeharbor provisions to the Medicare andMedicaid anti-kickback statute. Therulemaking was authorized undersection 14 of Public Law 100–93,MMPPPA of 1987, and specified certainpayment practices that will not besubject to criminal prosecution undersection 1128B(b) of the Social SecurityAct (42 U.S.C. 1320a–7b(b)), and thatwill not provide a basis for exclusionfrom Medicare or the State health careprograms under section 1128(b)(7) of theAct (42 U.S.C. 1320a–7(b)(7)). Theinitial final rulemaking established

‘‘safe harbors’’ in ten broad areas:investment interests, space rental,equipment rental, personal services andmanagement contracts, sales ofpractices, referral services, warranties,discounts, employees, and grouppurchasing organizations. However, ingiving the Department the authority toprotect certain arrangements andpayment practices under the anti-kickback statute, Congress intended theregulations to be evolving rules thatwould be updated periodically to reflectchanging business practices andtechnologies in the health care industry.

Establishing Additional Safe HarborsThe public comments in response to

the original proposed rule establishingthe safe harbor provisions containedsuggestions for the consideration andadoption of additional safe harborprovisions under 42 CFR 1001.952. Asa result of those comments, onSeptember 21, 1993, the OIG publisheda proposed rule (58 FR 49008) (the‘‘1993 proposed rule’’) formallyrequesting public comments on sevennew areas of safe harbor protectionunder the anti-kickback statute, as wellas proposed modifications to theexisting safe harbor for sales ofpractices. The proposals for new safeharbors addressed investment interestsin rural areas; ambulatory surgicalcenters; group practices; practitionerrecruitment; obstetrical malpracticeinsurance subsidies; referral agreementsfor specialty services; and cooperativehospital service organizations describedin section 501(e) of the Internal RevenueCode.

Clarifying the Original Safe HarborProvisions

After publication of the 1991 finalrule, the OIG became aware of a limitednumber of issues that had createduncertainties for health care providerstrying to comply with the original safeharbor provisions, and of certaininstances where our intent, either toprotect or preclude protection forparticular business arrangements, wasnot fully reflected in the text of theregulation, even though it was reflectedin the preamble. As a result, the OIGdeveloped and published a new noticeof proposed rulemaking on July 21, 1994(59 FR 37202) (the ‘‘1994 proposedclarifications’’) intended to modify thetext of 1991 final rule to conform to therulemaking’s original intent. Theclarifications contained in the proposedrule did not represent an attempt toreevaluate the basic judgments that ledto the original safe harbors, but ratherwere designed to protect businesspractices originally intended to be


63519Federal Register / Vol. 64, No. 223 / Friday, November 19, 1999 / Rules and Regulations

2 The OIG’s interim final rule addressing the safeharbors for shared-risk arrangements is published intoday’s edition of the Federal Register.

protected by making the regulatorylanguage more precise.

Annual Solicitations for Suggestions forModified and New Safe Harbors

In accordance with section 205 of theHealth Insurance Portability andAccountability Act (HIPAA) of 1996(Pub. L. 104–191), the Department isnow required to develop and publish anannual notice in the Federal Registerformally soliciting proposals formodifying existing safe harbors andpromulgating new safe harbors and OIGspecial fraud alerts. The Departmentwill review the proposals and, inconsultation with the Department ofJustice (DoJ), consider issuing new ormodified safe harbor regulations, whereappropriate. On December 31, 1996, wepublished the first of these notices inthe Federal Register (61 FR 69060),soliciting public comment regarding‘‘the development of proposed ormodified safe harbor regulations,’’including the pending proposals fornew and modified safe harbors (61 FR69062). We published additional annualnotices on December 10, 1997 (62 FR65050) and December 10, 1998 (63 FR68223). (These notices are referred to inthis preamble collectively as the‘‘annual solicitations.’’) Respondents tothe annual solicitations suggested anumber of areas for new or modifiedsafe harbor protection; additionally, anumber of respondents commented onthe 1993 proposed rule and the 1994proposed clarifications. This rulemakingis based on the comments received inresponse to the 1993 proposed rule, the1994 proposed clarifications, and theannual solicitations insofar as the latteraddressed the new and modified safeharbor proposals contained in the 1993proposed rule and the 1994 proposedclarifications. Other suggestions for newand modified safe harbors are underreview and will be the subject of annualreports to Congress made as part of theInspector General’s year-endsemiannual report, as required byHIPAA.

Shared-Risk ExceptionSection 216 of HIPAA created an

exception to the anti-kickback statutefor certain risk-sharing arrangementsand directed the Department to use anegotiated rulemaking process toestablish companion regulations.Specifically, section 216 of HIPAAcreated an exception for certainmanaged care arrangements, involvingremuneration (i) between eligibleorganizations under section 1876 of theSocial Security Act (certain healthmaintenance organizations andcompetitive medical plans) and

individuals or entities providing itemsor services and (ii) between anyorganization and an individual or entitythat has a risk-sharing arrangement, if awritten agreement places the individualor entity at ‘‘substantial financial risk’’for the cost or utilization of the items orservices provided.

On January 22, 1998, the negotiatedrulemaking committee comprised of 21industry representatives, arepresentative from the DoJ, and an OIGrepresentative representing theDepartment, reached consensus on afinal proposal for two new safe harbors.2Issues raised in comments to the 1993proposed rule and the 1994 proposedclarifications that pertain to matterscovered by the two shared-riskexception safe harbors are notconsidered in this final rulemaking.

II. Summary of Proposed Rules,Response to Public Comments andSummary of Revisions

In response to the 1993 proposed ruleand the 1994 proposed clarifications, wereceived a total of 313 timely-filedpublic comments on the additional safeharbors proposed rule and 28 timely-filed public comments on the safeharbor clarifications proposed rule fromvarious provider groups, medicalfacilities, professional and businessorganizations and associations, medicalsocieties, State and local governmententities, private practitioners, andconcerned citizens. We received 32comments in response to the annualsolicitations that were relevant to theissues addressed in this rulemaking. Asummary of the comments and ourresponses to those comments follow.

A. General Comments

1. Conformity With Stark Law

Comment: Several commenters urgedthe OIG to conform existing andproposed safe harbors to the statutoryexceptions to section 1877 of the Act,otherwise known as the ‘‘Stark Law.’’These commenters believe that paymentarrangements permitted under the StarkLaw should be protected under the anti-kickback statute. They argue that it isconfusing for the industry to be subjectto two separate bodies of fraud andabuse law applicable to arrangementsinvolving physician self-referrals. Atminimum, these commenters urge thatthe safe harbors be made consistent withthe Stark exceptions with respect tophysician compliance with the anti-kickback statute.

Response: The Stark Law is a civilstatute that generally (i) prohibitsphysicians from making referrals forclinical laboratory or other designatedhealth services to entities in which thephysicians have ownership or otherfinancial interests and (ii) prohibitsentities from presenting or causing to bepresented claims or bills to anyindividual, third party payor, or otherentity for designated health servicesfurnished pursuant to a prohibitedreferral. (42 U.S.C. 1395nn(a)(1)). Theanti-kickback statute, on the other hand,is a criminal statute that prohibits theknowing and willful offer, payment,solicitation, or receipt of remunerationto induce Federal health care programbusiness. Both laws are directed at theproblem of inappropriate financialincentives influencing medicaldecision-making. This similaritynotwithstanding, the statutes aredifferent in scope and structuralapproach. Under the Stark Law,physicians may not refer patients forcertain designated health services toentities from which the physiciansreceive financial benefits, except asallowed in enumerated exceptions. Atransaction must fall entirely within anexception to be lawful under the StarkLaw. The anti-kickback statute, on theother hand, establishes an intent-basedcriminal prohibition with optionalstatutory and regulatory ‘‘safe harbors’’that do not purport to define the fullrange of lawful activity. Rather, safeharbors provide a means of assuring thatpayment practices are not illegal.Payment practices that do not fullycomply with a safe harbor may still belawful if no purpose of the paymentpractice is to induce referrals of Federalhealth care program business. Becausethe two statutory schemes arefundamentally different, the conferencereport for the Stark Law includedlanguage clarifying that ‘‘anyprohibition, exemption, or exceptionauthorized under this provision in noway alters (or reflects on) the scope andapplication of the anti-kickbackprovisions in section 1128B of theSocial Security Act’’ (H.R. Conf. Rep.239, 101st Cong., 1st sess. 856 (1989)).

We are mindful that it may sometimesbe burdensome for parties to reviewtheir arrangements under two separatestatutory schemes. However, it would beinappropriate to adjust our safe harborprovisions in a manner that wouldprejudice enforcement of the anti-kickback statute merely to conform thesafe harbors to an exception orprohibition under section 1877 of theAct. This is particularly the case in viewof the clear legislative intent to keep



3 See footnote 2.

enforcement under the anti-kickbackstatute separate from enforcement undersection 1877 of the Act. Moreover,variation between the Stark Lawexceptions and anti-kickback safeharbors is reasonable in light of theschematic differences between the twostatutes. To the extent the anti-kickbackstatute and the Stark Law address thesame conduct, the Stark Law acts as astructural bar to arrangements thatcontain a per se conflict of interest.However, even if an arrangement passesmuster under the Stark Law, it may stillconstitute a violation of the anti-kickback statute, if the requisite intentto induce referrals is present.

2. Integrated Delivery Systems andManaged Care

Comment: Several commenters urgedthe OIG to modify existing safe harborsand develop new safe harbors to protectand encourage the development ofintegrated health care delivery systemsand managed care arrangements. Forexample, several commenters urged theOIG to provide specific safe harborprotection for payments betweenwholly-owned entities, including parententities and their wholly-ownedsubsidiaries. Some commentersquestioned whether the anti-kickbackstatute is an appropriate method ofregulating business arrangements in thehealth care industry, particularly in thecontext of managed care.

Response: The anti-kickback statute isvery broad and potentially covers manymanaged care arrangements that arecommon in the marketplace today.However, we have recognized that manyof these arrangements do not create thepotential for fraud or abuse under theanti-kickback statute and have createdsafe harbors aimed at those managedcare arrangements. Currently, forexample, a safe harbor protects certainprice reductions offered to health plans(§ 1001.952(m)). In addition, Congressenacted in HIPAA a statutory shared-risk exception for certain managed careplans and arrangements that putindividuals or entities at substantialfinancial risk.3

With respect to integrated deliverysystems and payments between wholly-owned entities, we have statedpreviously that the anti-kickback statuteis not implicated when payments aretransferred within a single corporateentity, for example, from one division toanother, and therefore no explicit safeharbor is needed for such payments (56FR 35983). We recognize that there aremany lawful integrated delivery systemarrangements and arrangements

between wholly-owned entities in themarketplace today and that many ofthese arrangements may be beneficial tothe Federal health care programs andtheir beneficiaries. We are concerned,however, that integrated deliverysystems, including arrangementsinvolving wholly-owned subsidiaries,may present opportunities for thepayment of improper financialincentives that result in overutilizationof services and increased program costsand that may adversely affect quality ofcare and patient freedom of choiceamong providers. This is primarily ofconcern where payment by the Federalhealth 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, forexample, Medicare Hospital DischargePlanning, OEI–02–94–00320 (December1997)). Accordingly, we do notanticipate providing safe harborprotection for integrated deliverysystems and arrangements betweenwholly-owned entities at this time. Theadvisory opinion process (42 CFR part1008) is available for parties wishing toobtain OIG review of their particularintegrated delivery or wholly-ownedarrangements.

3. Additional Safe HarborsComment: Several commenters urged

the OIG to demonstrate renewedcommitment to issuing clarifyinginterpretations of the anti-kickbackstatute in a regular and timely manner.

Response: The OIG recognizes theneed to work closely with the industryto combat fraud and abuse in theFederal health care programs throughmeaningful industry guidanceconsistent with our law enforcementobligations. As part of HIPAA, the OIGreceived substantial additional fundingfor its fraud-fighting efforts. A portion ofthat funding has been used for a numberof industry guidance purposes,including the creation of an IndustryGuidance Branch in the Office ofCounsel to the Inspector General, whichis tasked with issuing advisory opinionsand promulgating safe harborregulations and special fraud alerts. Aspart of our mandate under HIPAA, wehave canvassed the industry throughannual notices in the Federal Registersoliciting public suggestions for newand modified safe harbors and specialfraud alerts. The suggestions received inresponse to those notices, as well asother suggestions received from theindustry or generated internally, areunder review, and we anticipate furtherrulemaking periodically in connectionwith some of these safe harborsuggestions. We have reported to

Congress on the status of the suggestionsin the OIG semiannual report to beissued shortly. In addition, the ongoingissuance of advisory opinions, modelcompliance guidance, special fraudalerts and special advisory bulletins isproviding the industry with meaningfulguidance on the scope and applicationof the anti-kickback statute in a regularand timely manner.

4. Transition Period

Comment: Several commenters urgedthe OIG to afford providers who enteredinto arrangements with a good faithbelief that the arrangements did notviolate the anti-kickback statute areasonable grace period to restructureexisting arrangements to conform to thefinal safe harbors contained in theseregulations. In particular, severalcommenters expressed concern that the1994 clarifications would be interpretedto be retroactive to the date of theoriginal safe harbors, with no provisionfor ‘‘grandfathering’’ arrangements thatproviders believed in good faithcomplied with the safe harbors as setforth in the 1991 final rule. Forexample, these commenters note that itwas not clear that only ‘‘health care’’assets could be counted for purposes ofqualifying for the large entityinvestment safe harbor(§ 1001.952(a)(i)). Specifically, onecommenter proposed implementation ofa one year grace period.

Response: We recognize that manyproviders have in good faith attemptedto structure lawful arrangements underthe anti-kickback statute that may not fitsquarely within these final safe harborrules. In this regard, we repeat ourresponse to similar comments in ourpreamble to the 1991 final rule. Therewe stated:

The failure of a particular businessarrangement to comply with these provisionsdoes not determine whether or not thearrangement violates the statute because* * * this regulation does not make conductillegal. Any conduct that could be construedto be illegal after the promulgation of thisrule would have been illegal at any timesince the current law was enacted in 1977.Thus illegal arrangements entered into in thepast were undertaken with a risk ofprosecution. This regulation is intended toprovide a formula for avoiding risk in thefuture.

We also recognize, however, that manyhealth care providers have structured theirbusiness arrangements based on the advice ofan attorney and in good-faith belief that thearrangement was legal. In the event that theynow find that the arrangement does notcomply fully with a particular safe harborprovision and are working with diligence andgood faith to restructure it so that it doescomply, we will use our discretion to be fair



to the parties to such arrangements. (56 FR35955).

These same principles apply withrespect to arrangements structured ingood faith in accordance with the 1991final rule. Thus, to the extent thatparties reasonably believed that theycomplied with a safe harbor based onthe 1991 final rule and work withdiligence and good faith to restructuretheir arrangements so that they complywith the safe harbor as clarified in thisfinal rule, we will exercise ourdiscretion to be fair to the parties. Weare not setting a specific ‘‘grace period,’’as we believe that the reasonable timeperiod for restructuring an arrangementwill vary depending on the type andcomplexity of the arrangement.

5. Meaning of Safe HarborsComment: Several commenters asked

the OIG to clarify that the failure to meetthe conditions of a safe harbor does notmean that an arrangement is suspectunder the anti-kickback statute. Onecommenter expressed concern thatmembers of the public viewarrangements that do not comply with asafe harbor as suspect arrangements.

Response: The issue of the scope andeffect of the safe harbors is importantand often misunderstood. We addressedthis issue in our preamble to the 1991final rule:

This (safe harbor) regulation does notexpand the scope of activities that the statuteprohibits. The statute itself describes thescope of illegal activities. The legality of aparticular business arrangement must bedetermined by comparing the particular factsto the proscriptions of the statute.

The failure to comply with a safe harborcan mean one of three things. First * * * itmay mean that the arrangement does not fallwithin the ambit of the statute. In otherwords, the arrangement is not intended toinduce the referral of business reimbursableunder (a Federal health care program); sothere is no reason to comply with the safeharbor standards, and no risk of prosecution.

Second, at the other end of the spectrum,the arrangement could be a clear statutoryviolation and also not qualify for safe harborprotection. In that case, assuming thearrangement is obviously abusive,prosecution would be very likely.

Third, the arrangement may violate thestatute in a less serious manner, although notbe in compliance with a safe harborprovision. Here there is no way to predict thedegree of risk. Rather, the degree of riskdepends on an evaluation of the many factorswhich are part of the decision-makingprocess regarding case selection forinvestigation and prosecution. Certainly, inmany (but not necessarily all) instances,prosecutorial discretion would be exercisednot to pursue cases where the participantsappear to have acted in a genuine good-faithattempt to comply with the terms of a safeharbor, but for reasons beyond their control

are not in compliance with the terms of thesafe harbor. In other instances, there may noteven be an applicable safe harbor, but thearrangement may appear innocuous. But inother instances, we will want to takeappropriate action. (56 FR 35954)

Thus, it is not true that everyarrangement that does not comply witha safe harbor is suspect under the anti-kickback statute, though sucharrangements may be suspect inparticular circumstances. Partiesseeking guidance about their specificarrangements may request an OIGadvisory opinion in accordance with theregulations set forth at 42 CFR part1008.

B. 1994 Clarifications to Existing SafeHarbors

In general, the 1994 proposedclarifications were designed to clarifyvarious aspects of the original safeharbor provisions. Set forth below are asummary of the proposed clarificationsfor each safe harbor provision, asummary of the final clarificationsadopted in this rulemaking, summariesof the public comments received, andour responses to those comments.

1. Investment Interests

Summary of Proposed Clarifications:We proposed five clarifications to theinvestment interests safe harbor, asfollows

• First, we proposed that only assetsor revenues related to the furnishing ofhealth care items or services will becounted for purposes of qualifying foreither the $50,000,000 asset thresholdfor ‘‘large entities’’ (§ 1001.952(a)(1)) orthe 60–40 gross revenue test for ‘‘smallentities’’ (§ 1001.952(a)(2)(vi)). Thepurpose of this modification is to makeclear our original intent that only assetsand revenues derived from health carelines of business will be considered forpurposes of qualifying for safe harborprotection.

• Second, we proposed revising thestandards that prohibit an entity fromloaning funds to an investor to be usedto purchase the investor’s investmentinterest in the entity.(§§ 1001.952(a)(1)(iv) and 952(a)(2)(vii)).The revised standard would make clearthat the prohibition also includes anysuch loan from another investor or aperson acting on behalf of the entity orany investor.

• Third, we proposed modifying thefirst investment interest standard to thesmall entity investment safe harbor (the60–40 investor test) to allow analternative to the existing requirementof class-by-class analysis. Under thecurrent rule, ‘‘each class ofinvestments’’ must meet the 60–40

investor test. Upon review, we foundthis class-by-class analysisunnecessarily restrictive. Accordingly,the proposed alternative would allowequivalent classes of equity investmentinterests to be combined together orequivalent classes of debt investmentinterests to be combined together(separate from the equity investments)in order to apportion investors into‘‘untainted’’ and ‘‘tainted’’ pools forpurposes of meeting the 60–40 investortest.

• Fourth, we proposed striking thelanguage ‘‘items or services furnished’’from the 60–40 revenue rule(§ 1001.952(a)(2)(vi)) in the small entityinvestment safe harbor to make clearthat we did not intend for revenues thatthe joint venture derives from items orservices furnished by an investor to thejoint venture (such as managementservices) to be considered tainted forpurposes of satisfying the 60–40revenue test.

• Fifth, we proposed a clarification inthe preamble to the 1994 proposedclarification to the effect that aninterested investor must obtain his orher investment interest in the same wayas members of the public (i.e., directlyoff a registered national securitiesexchange through a broker) and theinvestment interest must be the sametype of investment interest that isavailable to the public. In this regard,we stated that there cannot be any sideagreements that require stock to bepurchased or that restrict in any manneran investor’s ability to dispose of thestock. We proposed no change in thelanguage of the existing safe harbor,which states that the investment interestof an interested investor ‘‘must beobtained on terms equally available tothe public thorough trading on aregistered national securities exchange* * * or on the National Association ofSecurities Dealers Automated QuotationService’’ (§ 1001.952(a)(1)(ii)).

Summary of the Final Rule: We areadopting the clarifications to the largeand small entity investment safe harborsas proposed in the 1994 proposedclarifications and described above, withthe following modifications in responseto comments received (unless otherwisenoted):

• We have added language to§ 1001.952(a)(2)(vii) clarifying that, forpurposes of the small entity investmentsafe harbor, loans to an investor may notbe made by individuals or entitiesacting on behalf of the investment entityor any of its investors. This language isthe same as language proposed to beadded to § 1001.952(a)(1)(iv) in the largeentity investment safe harbor in the1994 proposed clarifications and was



described as applying to the small entityinvestment safe harbor in the preambleto the 1994 proposed clarifications. Itwas inadvertently omitted from theregulatory language published in thenotice of proposed rulemaking.

• We have revisited the meaning of‘‘on terms equally available’’ in thesecond standard of the large entityinvestment safe harbor and haveconcluded that an investment interest isobtained on equally available terms if itis obtained at the same price as isavailable to the general public tradingon a registered securities exchangethrough a broker and is not subject torestrictions on transferability.

Comments and Responses

a. Large Entity Investments

Comment: In response to ourclarification that only assets or revenues‘‘related to the furnishing of health careitems or services’’ will be counted forpurposes of qualifying for either the$50,000,000 asset threshold for ‘‘largeentities’’ or the 60–40 gross revenue testfor ‘‘small entities,’’ several commenterssought guidance regarding whatconstitutes ‘‘health care items orservices.’’ For example, somecommenters wondered whether amanaged care organization would beconsidered a health care business if itdoes not furnish health care services.Some commenters objected to theproposal, arguing that requiring itemsand services to be health care relatedwould actually increase the incentivesfor improper referrals. They reason, forexample, that a large entity entirelycomposed of health-care relatedbusinesses would be more susceptible tothe lure of paying kickbacks for referralsthan a diversified entity less dependenton health care derived profits.

Response: By using the term ‘‘healthcare items or services,’’ we mean (i)health care items, devices, supplies, andservices and (ii) items or servicesreasonably related to the furnishing ofhealth care items, devices, supplies, orservices, including, but not limited to,non-emergency transportation, patienteducation, attendant services, socialservices (e.g., case management),utilization review, quality assurance,and practice management services.Marketing services are not included. Inthis context, we believe that a managedcare company would count as a healthcare related asset for purposes of thelarge entity investment threshold testand that revenue derived from amanaged care company would count as‘‘tainted’’ revenue for purposes of the60–40 revenue test in the small entityinvestment safe harbor.

While we agree that diversified assetsmay, in some circumstances, indirectlyminimize financial incentives forreferrals from investor referral sources,we continue to believe thatarrangements involving venturesbetween health care businesses andnon-health care business pose anincreased risk of program abuse. As westated in the preamble to the 1994clarifications, ‘‘[i]t would be an obvioussham, inconsistent with our originalintent, if a joint venture could mergewith a non-health care business andhave those non-health care assets, andthe revenues derived from that non-health care line of business counted forthe purposes of qualifying for safeharbor protection’’ (59 FR 37203–37204).

Comment: Several commentersexpressed concern about ourclarification of the phrase ‘‘on termsequally available to the public’’ in thesafe harbor condition that describes howinterested investors must obtain theirinvestment interests in order to receivesafe harbor protection(§ 1001.952(a)(1)(ii)). We indicated thatthe phrase should be interpreted tomean that the interested investor mustobtain his or her investment interest inthe same way as investors from thegeneral public. Several commentersurged that this interpretation was toonarrow and imposed unwarrantedlimitations on investment in largeentities. These commenters argued, forexample, that a large entity should bepermitted to purchase a physician’spractice using stock in addition to cash,provided that the value of the stock plusall other consideration paid to thephysician equals the fair market valuefor the practice. For example, onecommenter asked why it would beacceptable for an entity to purchase apractice for $1 million in cash(assuming fair market value to be $1million), but not to do so for $500,000in cash and $500,000 worth of stock.These commenters suggest that thephrase ‘‘on terms equally available’’should mean that the stock is notlettered, restricted, subject to sideagreements, or otherwise subject tolimited transferability. One commenterproposed an alternative safe harborcondition that would deny safe harborprotection to an interested investor’sholding of publicly-traded stock that issubject to transfer restrictions that arenot applicable to the stock when held bymembers of the public.

Response: We have two significantconcerns regarding interested investors’investments in large entities that are inhealth care related businesses. First, weare concerned that limited

transferability or other restrictions onthe sale or disposition of stock mayserve to ‘‘lock’’ interested investors intospecific investments, thereby increasingthe incentives for those investors torefer Federal health care programbusiness to the investment entity.Second, we are concerned thatinterested investors who are potentialreferral sources for the investment entitynot be permitted to obtain theirinvestment interests at insider prices orat prices more favorable than thoseavailable to the general public whenpurchasing stock from a registerednational securities exchange through abroker. Such favorable treatment couldpotentially be disguised remunerationfor referrals. For example, we are awareof certain public offerings of health carecompanies that involve simultaneousacquisitions of physician practices inexchange for stock in the newly-publiccompany, with the stock valued in amanner that results in the sellingphysician obtaining the stock at a lowerprice or on more advantageous termsthan offered to the public. Theeconomic benefit conferred on thephysician in such an arrangementpotentially violates the anti-kickbackstatute if one purpose of the benefit isto reward or induce referrals. Theinvestment would not fall within thelarge entity investment safe harbor.

Notwithstanding, upon furtherconsideration of this issue, we arepersuaded that requiring stock acquiredby interested investors to be obtained inthe same way as the same stockacquired by members of the publicimposes an unduly restrictiveinterpretation on the existing safeharbor language. Accordingly, we areadding language to make clear that aninvestment interest will not qualify forsafe harbor protection as ‘‘obtained onterms equally available to the public’’ if(i) the investment interest is subject torestrictions or limited transferability(including side agreements) notapplicable to the same investmentinterest when held by members of thepublic and/or (ii) the investmentinterest is not obtained for the sameprice that is available to the generalpublic when trading on a registerednational securities exchange through abroker. Thus, in the example cited bythe commenter above, the investmentinterest would be protected if $1 millionis the fair market value for the physicianpractice (not taking into account thevalue of any referrals) and the stockobtained by the physician is valued at$500,000 based on the price per sharethen available to the general publictrading on a registered national



securities exchange through a broker.However, the public stock offeringdescribed in the preceding paragraphwould not be protected.

b. Small Entity InvestmentsComment: Some commenters asked

that we clarify which investorsconstitute referral sources for purposesof the small entity safe harbor. Onecommenter recommended that weamend the small entity safe harbor tomake clear that only physicians (usingthe Medicare program definition of thatterm) are capable of making referrals orinfluencing the flow of business. In thiscommenter’s view, the current OIGposition that referral source investorsmay include hospitals and other entitiesmeans that safe harbor protection isunavailable for various integrateddelivery system models that involvejoint ownership and investment.Another commenter requested that weclarify that manufacturers that invest inhealth care entities and sell products tothose entities are rarely in a position torefer patients, and thus should not fallwithin the pool of ‘‘tainted’’ investorsfor purposes of the investment interestssafe harbors.

Response: We continue to believe thatthe appropriate focus under this safeharbor is the status of the investors andthe ability of the investors to make orinfluence the investment entity’sreferral stream or level of businessactivity. Investors that furnish items orservices to the entity, as well asinvestors that refer patients or otherwisegenerate business for the entity, are‘‘tainted’’ investors doing business withthe entity for purposes of the 60–40investor test. Thus, to iterate theexample provided in the preamble tothe 1991 final rule, if a durable medicalequipment (DME) supplier and hospitalenter into a joint venture to furnishDME to patients when they leave thehospital, both the DME supplier and thehospital fit within the category ofinvestors doing business with the entity(56 FR 35968).

We are not persuaded that hospitals,nursing homes, skilled nursingfacilities, or other institutions areincapable of influencing referrals ofFederal health care program business.To the contrary, we are aware ofinstances of referrals that are in factcontrolled by these institutions’employees or agents. (See, e.g.,Medicare Hospital Discharge Planning,OEI–02–94–00320 (December 1997);Special Fraud Alert: Fraud and Abusein Nursing Home Arrangements withHospices, 63 FR 20415 (April 24, 1998)).Similarly, we believe that managed carecompanies and physician practice plans

may control referrals in certaincircumstances. We agree, however, thatin many circumstances manufacturersthat invest in health care entities andsell products to those entities may notbe in a position to refer patients to, orgenerate business for, those entities forpurposes of the 60–40 revenue test(§ 1001.952(a)(2)(vi)). However, in othercircumstances, investor manufacturersmay fall within the pool of ‘‘tainted’’investors, and thus each arrangementmust be evaluated on a case-by-casebasis. In short, manufacturers may be‘‘tainted’’ investors for purposes of the60–40 investor test (§ 1001.952(a)(2)(i)),where they are in a position to furnishitems or services to the investmententity or to influence the flow ofreferrals to the entity.

Comment: One commenter whosupported our proposal to aggregatesimilar classes of investment interestssought clarification of the proposedcondition that classes of investmentinterests be ‘‘similar in all materialrespects’’ for purposes of the 60–40investor test, particularly as thecondition applies to debt investmentinterests. For example, the commenternoted that the OIG is willing to treatgeneral partners’ and limited partners’interests as sufficiently similar for safeharbor purposes (56 FR 37204), eventhough general partner and limitedpartner interests are not similar in anumber of arguably material respects,such as fiduciary obligations andassumption of liability. With respect todebt interests, the commenterquestioned whether differingredemption rights would result inotherwise similar classes of debt beingdeemed too dissimilar to aggregate.Similarly, the commenter questionedwhether debt instruments with differentinterest rates could be aggregated(especially if the different interest ratesaccurately reflect market rates at thetime the instruments issued) andwhether secured debt instruments couldbe aggregated with unsecured debtinstruments.

Response: Our use of the phrase‘‘similar in all material respects’’ wasnot intended to suggest that forpurposes of aggregation, classes ofinvestment interests must be similar inall respects that might be material to apartner or to a lender or a borrower, butonly that classes of investment interestsmust be similar in all respects materialto the purposes of the safe harbor. Thefocus is on the potential forremuneration to investors who areexisting or potential referral sources;material investment terms are thoseterms that create, or relate to thecreation of, potential value for investors.

For example, classes of investmentinterests may be aggregated where theclasses have similar rights with respectto the entity’s income and assets, whereinvestors receive equivalent returns inproportion to amounts invested, and,most importantly, where there is nopreferential treatment of referral sourceinvestors, including, but not limited to,preferences that take effect in the eventof a disposition of entity assets.

Comment: One commenter expressedconcern about our treatment of generalpartners for purposes of the 60–40investor rule. We have previously statedthat general partners—who havefiduciary obligations to manage apartnership so as to make a profit andwho are liable for losses incurred due togross mismanagement—provide servicesto a partnership and are, therefore,‘‘tainted’’ or ‘‘interested’’ investors forpurposes of the 60–40 investor rule. Thecommenter observed that thisinterpretation serves to disqualify manypartnerships from safe harbor protectionand that our proposal to permit classesof investment interests to be aggregatedfor purposes of determining compliancewith the 60–40 investor rule does notadequately address this issue.According to the commenter, evenunder our proposed aggregation test,safe harbor protection is only availableif general partners hold a minorityinterest in the partnership, even if thepartnership has no potential referralsource investors. Thus, for example, ahospital owned entirely by apartnership composed of non-referralsource investors would not qualify forsafe harbor protection if the generalpartners owned more than 40 percent ofany class of investment interest.

Response: As we explained in ourpreamble to the 1991 final rule, it wouldbe inappropriate to grant safe harborprotection, for example, to a jointventure composed of a DME supplierand physicians, because all of theowners would be doing business withthe joint venture by either furnishingitems or services or making referrals (56FR 35968). We recognize that there maybe circumstances, such as those positedby the commenter, where the fact thatan investor is furnishing items orservices to the investment entity maynot pose an increased risk of improperreferrals comparable to the risk posed inour DME/physician joint ventureexample. However, we find that it is notfeasible to craft a rule that would clearlydistinguish among types of investorsfurnishing items or services, whileexcluding potentially abusivearrangements from safe harborprotection.



Distributions to investors inpartnerships that have no existing orpotential referral source investors maynot implicate the anti-kickback statuteat all, since the crux of the statute is aprohibition on remuneration to induceor reward referrals of Federal healthcare program business. To the extent thestatute is implicated, partnerships thatdo not comply fully with all safe harborconditions will have to be evaluated ona case-by-case basis. Our advisoryopinion process is also available toparties contemplating such partnerships(42 CFR part 1008).

Comment: Several commenterssupported our proposal to change the60–40 revenue test by striking ‘‘items orservices furnished’’(§ 1001.952(a)(2)(vi)). However, thesecommenters asked for clarification ofthe term ‘‘business otherwise generated’’as used in the safe harbor standard. Wehave previously explained that revenueis ‘‘generated’’ if it is ‘‘induced to cometo the joint venture for items or servicesby an investor’’ (56 FR 37205) (emphasisin original). These commentersrequested that we clarify that ‘‘by aninvestor’’ means by an investor who isa licensed professional with legalauthority to order items and services, forinstance, an investor with legalauthority to refer or induce a person toobtain care from a participatingprovider.

Response: We disagree that thedefinition of an investor for thesepurposes should be as narrow as thecommenters suggest. Certain investorsthat are arguably not ‘‘licensedprofessionals,’’ such as hospitals, long-term care facilities, home healthagencies, managed care companies, andphysician practice managementcompanies, may be in a position togenerate business for an entity in whichthey have an investment interest and toreceive distributions that may beremuneration for that business. Werecognize that there may be occasionalinstances where business is generatedby investors who would not ordinarilybe considered as potential referralsources. This might occur, for example,if an investor is not in a health carerelated line of business, but happens torefer friends or relatives to a jointventure entity in which he or she hasinvested. However, we think that thesesituations are likely to be infrequentand, in most circumstances, are notlikely to generate appreciable revenue.

Comment: As described above, severalcommenters questioned our clarificationthat the term ‘‘revenue’’ for purposes ofthe 60–40 revenue test means revenuerelated to the furnishing of health careitems or services. In addition, two

commenters expressed concern about anexample involving radiologists that weused to illustrate our discussion of therevenue rule in the preamble to the 1994proposed clarifications. Specifically, theexample stated that:

If a radiologist holds an investment interestin an imaging center and reads all the filmsat the center, his or her reading of the filmdoes not taint all the revenues from thereferrals by non-investors. However, we havereceived a few questions from people whoread the 60–40 revenue rule as making suchreferrals tainted because the investorfurnished services at the joint venture.

We emphasize that if a radiologist-investoris reading the film and making referrals orotherwise generating business, then therevenues the joint venture derives from thatactivity would become tainted. For example,revenues would be tainted when aradiologist-investor takes part in aconsultation with a non-investor internist,and during that consultation the radiologistrecommends a procedure which is performedat the joint venture. (59 FR 37205).

Commenters complained that in lightof this example, a radiologist-investorseeking safe harbor protection wouldessentially be prohibited from practicingmedicine, because he or she would beprecluded from recommending follow-up procedures. Moreover, thecommenters argued that compliancewith the example would not be feasiblebecause of the record keeping andadministrative burden associated withtracking all recommendations todetermine if recommended follow-upstudies were later performed at theradiologist-investor’s facility. Thesecommenters asked that we clarify ourposition regarding radiologist-investors.

Response: We continue to bepersuaded that it is appropriate andconsistent with our original intent thatonly health care related revenues becounted for purposes of the 60–40revenue test. The purpose of the test isto limit the number of investor referralsto a safe harbor protected joint venture,thereby minimizing the risk that profitdistributions might be disguisedpayments for investor referrals.

Our use of the example in thepreamble to the 1994 proposedclarifications was merely intended toillustrate the difference betweenproviding items and services to anentity (which does not result in‘‘tainted’’ revenue) and generatingbusiness for the entity (which doesresult in ‘‘tainted’’ revenue). Inretrospect, our focus on radiologists inthe example may have led to someconfusion about the anti-kickbackimplications specifically forradiologists’ practice of medicine. In theunique circumstances of radiologists,we wish to clarify that the occasional

recommendation of additional testing bya radiologist to an attending physicianwith whom the radiologist has nofinancial arrangements and pursuant toa bona fide medical consultation is notprohibited under the anti-kickbackstatute. Accordingly, for purposes of the60–40 revenue test, such consultativerecommendations would not ‘‘taint’’revenue derived from tests performed atthe joint venture entity as a result of asubsequent referral of the patient by hisor her attending physician for therecommended tests.

Comment: One commenter supportedour proposed clarification regarding theprohibition on loans from entities ortheir investors that are used by investorsto purchase their investment interests(§ 1001.952(a)(2)(vii)). Anothercommenter requested that we makeclear that we do not intend to prohibitloans from banks or other unrelatedparties.

Response: The seventh investmentinterest standard addressing loans is notintended to apply to loans from banksor other unrelated third parties that arenot equity investors in the entityseeking safe harbor protection and thatare not acting on behalf of the entity orany of its investors, even if the loan isused in whole or in part by aprospective investor to purchase aninvestment interest. On the other hand,the safe harbor condition is intended topreclude from protection loanguarantees, collateral assignments orother arrangements made by aninvestment entity or any of its investors,or by individuals or entities acting ontheir behalf, to secure a loan from abank or other unrelated third party, ifthe loan is used in whole or in part byan investor to obtain an investmentinterest in the entity.

Comment: The remaining commentsto the existing investment interest safeharbors addressed various aspects of thesafe harbors not specifically covered bythe proposed clarifications. Twocommenters argued that the safeharbor’s two 60–40 tests unnecessarilylimit potential investors for, and referralsources to, legitimate, cost-effective,high-quality health care ventures. In onecommenter’s view, the 60–40 testsprevent potential joint ventures fromattracting necessary capital and causeinvestors to refrain from using theventure’s services, even when theventure offers higher quality, lowerprices, or better patient conveniencethan competing providers. Thiscommenter noted that the two 60–40tests are particularly problematic inrural and underserved areas, wherealternative sources of capital and



alternative providers are often in shortsupply.

Response: Except as otherwise notedabove, we are adopting the proposedclarifications to the investment interestssafe harbor as set forth in our 1994proposed clarifications. Aside fromclarifying that ‘‘revenue’’ refers to healthcare related revenue and deleting thephrase ‘‘items or services furnished’’ in§ 1001.952(a)(2)(vi), we are notpersuaded at this time that there is aneed to revisit the two 60–40 tests forsmall entity investments. Elsewhere inthis rulemaking, we address a new safeharbor for investments in rural andurban undeserved areas(§ 1001.952(a)(3)) that eliminates the60–40 revenue test and incorporates amodified 60–40 investor test.

2. Space and Equipment Rental andPersonal Services and ManagementContracts Summary of ProposedClarifications

We proposed 2 clarifications to thespace and equipment rental andpersonal services and managementcontracts safe harbors (§§ 1001.952(b),(c), and (d)). First, we proposed revisingthese safe harbors expressly to precludeschemes involving the use of multipleoverlapping contracts to circumvent thesafe harbor requirement that space andequipment rental and personal servicesand management contracts be for termsof at least 1 year. This requirement wasintended to prevent regularrenegotiation of contracts based on thevolume of referrals or businessgenerated between the parties. Second,we proposed revising these safe harborsto preclude safe harbor protection forhealth care providers that rent morespace or equipment or purchase moreservices than they actually need as ameans of paying for referrals.

Summary of Final Rule: We areadopting the clarifications to the spaceand equipment rental and personalservices and management contracts safeharbors as proposed in the 1994proposed clarifications and describedabove, with the following modificationsin response to comments received:

• We are substituting the word‘‘term’’ for the word ‘‘period’’ in thesecond condition of each safe harbor tobe more consistent with customarybusiness terminology;

• We are replacing the phrase‘‘legitimate business purpose’’ with thephrase ‘‘commercially reasonablebusiness purpose’’ in each safe harbor tomake clear that the test is not whethera business arrangement is lawful, butwhether it serves a commerciallyreasonable business purpose, that is,whether the space and equipment

leased or services purchased haveintrinsic commercial value to the lesseeor purchaser.

Comments and ResponsesComment: A commenter expressed

concern that the safe harbor conditionthat a lease cover all equipment leasedbetween parties and specify theequipment leased would jeopardizemany common commercial equipmentleasing transactions. This commenterasserted that manufacturers and lessorstypically lease capital equipment tohealth care providers at different times,but under leases that cover the sametime period, in whole or in part. Thecommenter opined that other safeharbor conditions, including thoseprescribing aggregate compensation, fairmarket value, and arms-lengthnegotiations, are sufficient safeguardsagainst abuse.

Response: We recognize that somelawful equipment contracts will notqualify for safe harbor protection andwill need to be analyzed on a case-by-case basis. The existence of a safe harborfor a particular set of businessarrangements does not jeopardize othertypes of arrangements under the anti-kickback statute. Many multiplecontract arrangements are legitimatebusiness arrangements that do notviolate the statute; however, somemultiple contract arrangements areessentially shams that operate to rewardand encourage referrals. We are unableto provide safe harbor protection forsuch arrangements, in view of thepotential abuse of multiple overlappingcontracts described above. The advisoryopinion process (42 CFR part 1008) isavailable to parties seekingindividualized legal opinions regardingthe legality of their leasing arrangementsunder the anti-kickback statute.

Comment: One commenter suggestedthat for purposes of clarity andconsistency with customary businessterminology we substitute the word‘‘term’’ for the word ‘‘period’’ as used in§§ 1001.952(b)(2), (c)(2), and (d)(2).

Response: We agree that substitutingthe word ‘‘term’’ for ‘‘period’’ in§§ 1001.952(b)(2), (c)(2), and (d)(2)would provide clarity and consistencyin the context of leases and servicecontracts.

Comment: One commenter approvedof our proposal that the aggregate space,equipment, or services contracted fornot exceed ‘‘that which is reasonablynecessary to accomplish the legitimatebusiness purpose’’ of the party rentingthe space or equipment or purchasingthe services. This commenter believedthat the clarification would inhibitlessors with greater bargaining power

from coercing lessees into contractingfor more space than needed to conductbusiness. However, several commenterssuggested that the language of ourproposed clarification is ambiguous,duplicative, and confusing, and, in thewords of one commenter, would open a‘‘Pandora’s Box of potentiallyconflicting interpretations.’’ Forexample, one commenter observed thatmany arrangements in today’s healthcare arena, such as cost-sharing or risk-sharing arrangements, joint researchinitiatives, and data collectionarrangements, may not reflect‘‘traditional’’ business purposes, but arelegitimate and reasonable in respondingto insurers’ growing demands for cost-effectiveness. One commenterrecommended replacing the word‘‘legitimate’’ with the word‘‘reasonable.’’

Response: We believe the proposedclarification further ensures thatprotected leases and personal servicescontracts will provide for fair marketvalue compensation. However, we agreethat the term ‘‘legitimate’’ may bemisconstrued. Thus, in the final rule weare substituting the phrase‘‘commercially reasonable businesspurpose’’ for ‘‘legitimate businesspurpose’’ to make clear that the test isnot merely whether a business purposeis legal or illegal. The ‘‘commerciallyreasonable business purpose’’ test isintended to preclude safe harborprotection for health care providers thatsurreptitiously pay for referrals—whether because of coercion or by theirown initiative—by renting more spaceor equipment or purchasing moreservices than they actually need fromreferral sources. By ‘‘commerciallyreasonable business purpose,’’ we meanthat the purpose must be reasonablycalculated to further the business of thelessee or purchaser. In other words, therental or the purchase must be of space,equipment, or services that the lessee orpurchaser needs, intends to utilize, anddoes utilize in furtherance of itscommercially reasonable businessobjectives. Thus, for example, a spacerental contract between a physician anda DME supplier for space in thephysician’s office that includes extraoffice space that the DME supplierneither occupies nor uses for its DMEbusiness would not be protected by thissafe harbor. Nor would the safe harborprotect the lease of more space thanwould reasonably be rented by asimilarly-situated DME suppliernegotiating in an arms-lengthtransaction with a non-referral sourcelessor. Cost-sharing or risk-sharingarrangements, joint research initiatives,



and data collection arrangements mayqualify as commercially reasonablebusiness purposes in manycircumstances. However, we are awareof abusive arrangements involvingcontracts with referral sources for datacollection services or research projectswhere the data to be collected orresearch to be performed have no valueto the entity paying for them and aremerely pretexts for payments forreferrals. Such arrangements do notcomply with the safe harbor and arehighly suspect under the anti-kickbackstatute.

Comment: The remaining commentswe received regarding clarification ofthis safe harbor addressed matters notcovered by the proposed clarifications.Several commenters describeddifficulties in meeting the safe harborfor part-time arrangements—includingtime-share office leases, per useequipment leases, and personal servicescontracts with hourly compensation—caused by the requirement that the‘‘aggregate’’ contract price be set inadvance (§§ 1001.952(b)(5), (c)(5), and(d)(5)). One commenter noted that thesetypes of arrangements typically containcompensation methods that are set inadvance and that can be madeconsistent with fair market value andunrelated to the volume or value ofreferrals. Along these lines, onecommenter suggested that the OIGpermit ‘‘aggregate’’ payments that arenot set in advance, if they are calculatedin accordance with specific andpredetermined formulas set forth in thewritten agreement. Similarly, severalcommenters expressed concern aboutthe impracticality of the requirementthat protected contracts specify theexact schedule of intervals for the use ofspace or equipment or the rendering ofservices for many part-time or as-neededarrangements.

Response: We continue to believe thatboth the ‘‘aggregate’’ and the ‘‘specificschedule of intervals’’ requirements arenecessary to ensure that safe harborprotection is not afforded toarrangements that include paymentsthat are adjusted periodically on thebasis of the volume or value of referralsor business otherwise generated from areferral source. We recognize that theserequirements may raise practicalproblems for certain providers seekingsafe harbor protection for part-time oras-needed arrangements. Nevertheless,we are aware of many instances of abusein these types of arrangements;therefore, for purposes of grantingprotection from prosecution, we believeit is appropriate to protect only thosearrangements that can meet the safeharbor’s strict standards. However, as

we have stated numerous times, safeharbors do not define the scope of legalactivities under the anti-kickbackstatute. Part-time, as-needed, and othersimilar arrangements that cannot fitwithin the safe harbor may be lawful, ifno payments are made, directly orindirectly, to induce referrals of Federalhealth care program business.

Comment: One commenter soughtclarification regarding the effect of atermination provision in a lease orcontract in light of the safe harborrequirement that leases or contracts befor at least a 1-year term. Thiscommenter specifically asked whetherthe 1-year term requirement is satisfied(i) if the lease or contract allows for ‘‘forcause’’ termination by either party, or(ii) if the lease or contract permitstermination by either party with orwithout cause upon advance writtennotice, provided there is a concurrentcontractual provision that restrictsparties that terminate without causefrom entering into any furtherrelationships for the balance of therequired 1-year period.

Response: The 1-year termrequirement ensures that protectedleases or contracts cannot be readjustedfrequently based on the number ofreferrals between the parties. Althoughnot specifically stated in the safe harborregulation, a ‘‘for cause’’ terminationclause that (i) specifies the conditionsunder which the contract may beterminated ‘‘for cause,’’ and (ii) operatesin conjunction with an absoluteprohibition on any renegotiation of thelease or contract or further financialarrangements between the parties for theduration of the original 1-year termwould satisfy the 1-year termrequirement. We remain concerned,however, that ‘‘without cause’’termination provisions could be used byunscrupulous parties to create shamleases and contracts. This could occur,for example, where the parties enter intoan agreement to pay a sum of moneyupfront for services to be performedover a period of time. Parties coulddisguise payments for referrals byterminating the agreement withoutcause after payment, but beforeperformance of any services. A 1-yearprohibition on renegotiation or furtherfinancial arrangements would bemeaningless in such circumstances.

3. Referral ServicesSummary of Proposed Clarifications:

The referral services safe harbor requiresthat any fee a referral service charges aparticipant be ‘‘based on the cost ofoperating the referral service, and not onthe volume or value of any referrals toor business otherwise generated by the

participants for the referral service* * *’’ (§ 1001.952(f)(2)) (emphasisadded). This language created anunintended ambiguity when a referralservice tries to adjust its fee based onthe volume of referrals it makes to theparticipants. We proposed clarifyingthat the safe harbor precludes protectionfor payments from participants toreferral services that are based on thevolume or value of referrals to, orbusiness otherwise generated by, eitherparty for the other party.

Summary of Final Rule: We receivedone comment in favor of our proposedclarification to the referral services safeharbor and none opposed. We areadopting the proposed clarification asset forth in the 1994 proposedclarifications.

4. DiscountsSummary of Proposed Clarifications:

As a general rule, discounts for healthcare items and services are encouragedunder the Federal health care programsso long as the Federal health careprograms share in the discount whereappropriate, and as appropriate, to thereimbursement methodology.Arrangements in accordance with whichFederal programs get less than theirproportional share of cost-savings onitems or services payable by theprograms are seriously abusive. Sucharrangements result in the programsbeing overcharged and are not protectedby either the statutory exception orregulatory safe harbor for discounts.

Because of expressed industryuncertainty over what obligationsindividuals or entities have to meet inorder to receive protection under thissafe harbor, we proposed clarifying thediscount safe harbor by dividing theparties to a discount arrangement intothree groups—buyers, sellers, andofferors of discounts—with descriptionsof each party’s obligations in separateparagraphs. In addition, we proposedclarifying the definition of ‘‘rebate’’ forpurposes of this safe harbor. A rebateunder our proposal would be defined asany discount not given at the time ofsale. Consequently, a rebate transactionwould not be covered by the safe harborif it involves a buyer under§ 1001.952(h)(1)(iii) that is neither acost-reporter nor a HMO or CMP,because for such buyers, all discountsmust be given at the time of sale.

We also proposed clarifying the scopeof safe harbor protection for sellers insituations where buyers have not fullycomplied with their obligations underthe safe harbor provisions. If a seller hasdone everything that it reasonably couldunder the circumstances to ensure thatthe buyer understands its obligation to



report the discount accurately, the selleris protected irrespective of the buyer’somissions. To receive such protection,however, the seller must report thediscount to the buyer and inform thebuyer of its obligation to report thediscount. To emphasize that the seller’sobligations require more thanperfunctory compliance with the safeharbor, we proposed adding that theseller must inform the buyer ‘‘in aneffective manner.’’ We also proposedadding a requirement that the seller‘‘refrain from doing anything that wouldimpede the buyer from meeting itsobligations under this paragraph.’’ Thus,if the seller, in good faith, meets itsobligations under the safe harbor andthe buyer does not meet its obligationsdue to no fault of the seller, the sellerwould receive safe harbor protection.However, when a seller submits a claimor request for payment on behalf of thebuyer, the seller must fully andaccurately report the discount to theappropriate Federal or State health careprogram. An offeror of a discount wouldsimilarly receive safe harbor protectionif it meets all of its safe harborobligations, but its buyer or seller doesnot meet its obligations due to no faultof the offeror.

We further proposed clarifyingwhether any reduction in price offeredto a beneficiary could be safe harboredunder this regulation. To the extent thata discount is offered to a beneficiary andall other applicable standards in the safeharbor are met, such a discount wouldreceive safe harbor protection. However,discounts to beneficiaries in the form ofroutine reductions or waivers of anycoinsurance or deductible amountowned by the beneficiaries do not meetthe safe harbor conditions and are notprotected.

The preamble to the 1991 final rulestated that when reporting a discount,one only need report the actualpurchase price and note that it is ‘‘netdiscount.’’ However, for purposes ofsubmitting a claim or request forpayment, we proposed clarifying thatwhat is necessary is that the value of thediscount be accurately reflected in theactual purchase price. It is not necessaryto distinguish whether this price is theresult of a discount or to state ‘‘netdiscount.’’ Consequently, parties whowere uncertain about how or where toreport on a particular form the fact thatthe price was due to a discount need notbe concerned with reporting that fact, aslong as the actual purchase priceaccurately reflects the discount.

Finally, we proposed some minoreditorial changes that do not affect thesubstance of the provision, buthopefully make it easier to understand.

Summary of Final Rule: We areadopting the clarifications to thediscount safe harbor as proposed in the1994 proposed clarifications anddescribed above, with the followingmodifications in response to commentsreceived (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 therole of sellers under the discount safeharbor and to avoid confusion withother regulatory uses of the word‘‘furnishes.’’

• We are modifying our proposal thatsellers and offerors give buyers‘‘effective notice’’ of their obligations toreport discounts by requiring insteadthat sellers and offerors provide buyerswith notice in a manner that isreasonably calculated to give the buyersnotice of their reporting obligations,including their obligation to provideinformation to the Secretary uponrequest under § 1001.952(h)(1). Theintent of this modification is to makeclear that safe harbor protection forsellers and offerors who fully complywith the safe harbor conditions isconditioned on the actions of the sellersand offerors, and not on the buyers’compliance.

• We are modifying our proposeddefinition of a ‘‘rebate’’ to include anydiscount the terms of which are fixed atthe time of the sale of the good orservice and disclosed to the buyer, butwhich is not received at the time of thesale of the good or service. Thismodification will enable us to extendsafe harbor protection to certain charge-based buyers and buyers reimbursed onthe basis of fee schedules who obtainrebates. We are eliminating therequirement that charge-based buyersreport discounts on claims submitted tothe Federal programs; however, we areretaining the requirement that suchbuyers provide documentation ofdiscounts to the Secretary upon request.

• We are clarifying that credits andcoupons may qualify for safe harborprotection if they meet all of the safeharbor criteria; however, credits orcoupons that are, in essence, cashequivalents are not discounts for safeharbor purposes.

• We are clarifying that, in certaincircumstances described in more detailbelow, discounts on multiple items mayqualify as a ‘‘discount’’ for safe harborpurposes where the reimbursementmethodology for all discounted items orservices is the same and where thediscount can be fully disclosed to theFederal health care programs andaccurately reflected where appropriate,

and as appropriate, to thereimbursement methodology.

• We are correcting a technical errorin the proposed clarifications bychanging the word ‘‘include’’ in§ 1001.952(h)(5)(ii) to ‘‘induce.’’

Comment and ResponseComment: Many commenters

questioned the relationship between theregulatory safe harbor for discounts andthe statutory exception for discounts,which provides for protection for ‘‘adiscount or other reduction in priceobtained by a provider of services orother entity under a Federal health careprogram, if the reduction in price isproperly disclosed and appropriatelyreflected in the costs claimed or chargesmade by the provider or entity under aFederal health care program’’ (42 U.S.C.1320a–7b(b)(3)(A)). In the preamble tothe 1991 final rule, we stated that theregulatory safe harbor includes alldiscounts Congress intended to protectunder the statutory exception (56 FR37206). Commenters expressed concernthat this statement means that failure toqualify under the discount safe harbor isa statutory violation if items or servicespayable by a Federal health careprogram are involved, since intent toinduce business is always present in adiscount arrangement. Under thisinterpretation, according tocommenters, numerous forms ofdiscount pricing, such as pricing oneproduct dependent on the price ofanother, discount package pricing, andcertain capitation arrangements, wouldbe prohibited without the case-by-caseanalysis generally afforded other typesof arrangements that do not fit squarelywithin a safe harbor. These commentersalso urge that limiting permissiblediscounts to those that comply with thesafe harbor ‘‘freezes’’ the health careindustry into a particular way of doingbusiness, thereby chilling innovationsin discount pricing that could result inreductions in health care costs,especially as the market moves from fee-for-service arrangements to managedcare. These commenters argue thatCongress did not give the OIG authorityto constrict the reach of the statutoryexception. One commenter observedthat Congress unequivocally stated thatpractices protected under the safeharbors were to be in addition toexisting statutory protections (Pub. L.100–93, section 14(a)), and therefore theregulatory discount safe harbor shouldcreate a class of protected practices inaddition to practices protected underthe statutory exception.

Response: As stated in the preambleto the 1994 proposed clarifications, itcontinues to be our position that the



regulatory safe harbor protects alldiscounts or reductions in priceprotected by Congress in the statutoryexception (see 59 FR 37206). TheSecretary is vested with the authority tomake and publish rules, notinconsistent with the Social SecurityAct, necessary to the efficientadministration of her functions underthe Social Security Act (42 U.S.C. 1302).The anti-kickback statute, including allexceptions thereto, are codified as partof the Social Security Act. Moreover, theregulatory safe harbor expands upon thestatutory safe harbor by definingadditional discounting practices notincluded in the statutory exception thatare not abusive, such as certaindiscounts to beneficiaries (other thanroutine waivers of cost-sharingamounts) that meet all applicable safeharbor standards. In sum, the regulatorysafe harbor both incorporates andenlarges upon the statutory exception.

Comment: One commenter questionedthe safe harbor exclusion of reductionsin price that are available to one payerbut not to Medicare or Medicaid(§ 1001.952(h)(3)(iii)), noting that it isunclear how failure to provide adiscount to Medicare or Medicaid givesrise to a question under the anti-kickback statute, which prohibitsremuneration to induce referrals ofitems or services payable by a Federalhealth care program. The commenterfurther argued that there is no basis inthe statutory discount safe harbor for arequirement that Medicare andMedicaid patients receive the sameprices as other patients.

Response: The safe harbor excludesfrom the definition of a protected‘‘discount’’ price reductions that applyto one payer but not to the Federalhealth care programs. This exclusion isnecessary to protect against abusivearrangements in which remuneration inthe form of discounts on items orservices for private pay patients isoffered to a provider to induce referralsof Federal health care program patients.For example, as noted in the preambleto the 1991 final rule, we are aware ofclinical laboratories that offer pricereductions to physicians for laboratorywork for private pay patients on thecondition that the physicians refer all oftheir Medicare and Medicaid businessto the laboratory. Such ‘‘swapping’’arrangements, which essentially shiftcosts to the Federal health careprograms, continue to be of concern tothis office. We do not believe thatCongress intended to except suchschemes from the anti-kickback statute.Nor do we believe that Congressintended for the Federal health careprograms to pay premium prices and

thus serve as de facto subsidy programsfor other reimbursement systems.

Comment: Several commentersgenerally supported the clarification ofthe discount safe harbor to recognize 3groups: Buyers, sellers and offerors.However, a number of commentersrequested further clarification regardingthe meaning of ‘‘offeror’’ and how an‘‘offeror’’ differs from a ‘‘seller’’.Specifically, commenters asked aboutthe application of the ‘‘offeror’’ categoryto wholesalers and other brokers, aswell as to managed care plans, grouppurchasing organizations and preferredprovider organizations.

Response: An ‘‘offeror’’ may be anyindividual or entity that provides adiscount on an item or service to abuyer, but that is not the seller of theitem or service. For example, manypharmaceutical manufacturers sell someor all of their products throughwholesalers, which, in turn, sell theproducts to hospitals, retail pharmacies,HMOs, and other providers. Amanufacturer may offer a discount inthe form of a rebate to the ultimatepurchaser that is in addition to anydiscount from the wholesaler to theretailer. For purposes of this regulation,the manufacturer would be the‘‘offeror,’’ the wholesaler the ‘‘seller,’’and the retailer the ‘‘buyer.’’ While webelieve that typically the wholesalerwould be the ‘‘seller’’ and its retailcustomer the ‘‘buyer,’’ if a wholesaleroffers a discount to a retail purchaserthat has purchased the discountedproduct from another party, thewholesaler could qualify as an‘‘offeror.’’

Nothing in these regulationsprecludes a managed care organization,including a preferred providerorganization, from being eligible as an‘‘offeror’’ in accordance with the safeharbor. However, in many situations,discounts offered by managed careorganizations will not fit within thescope of the discount safe harbor,because the buyers who obtain thediscounts will not be providers ofservices that claim payment for costs orcharges associated with the discounteditems or services under a Federal healthcare program. For example, the recipientof a preferred provider organizationdiscount is typically an employer orother payer or patient. However, somediscount arrangements offered by amanaged care organization may beeligible for safe harbor protection underthe discount safe harbor, provided allconditions of the safe harbor aresatisfied. In addition, managed care‘‘discounts’’ are potentially protected bythe shared-risk exception (42 U.S.C.1320a–7b(b)(3)(F)), and the existing safe

harbors for managed care arrangements(§§ 1001.952(l) and (m)).

Comment: One commenter objected tothe safe harbor’s portrayal of the role of‘‘sellers.’’ This commenter maintainedthat sellers do not generally ‘‘furnish’’items or services, nor do they ‘‘permit’’buyers to take discounts off thepurchase price. Rather, sellers sell,lease, transfer, or otherwise arrange forthe use of products, in some casesinvolving discounts or reductions inprice. This commenter noted that otherOIG regulations define ‘‘furnish’’ asreferring to items and services provideddirectly by or under the directsupervision of, or ordered by, apractitioner or other individual, orordered or prescribed by a physician(either as an employee or in his or herown capacity), a provider, or othersupplier of services (see § 000.10). Inaddition, the preamble to the OIG finalrule addressing amendments to theOIG’s exclusion and CMP authoritiesresulting from Public Law 100–93 statesthat manufacturers who do not receivepayment directly or indirectly fromMedicare or Medicaid do not ‘‘furnish’’items in the context of that definition(57 FR 3298 and 3300). For consistencyand to avoid confusion, the commentersuggests that the term ‘‘furnished’’should be replaced by the term‘‘supplies.’’

Response: To avoid confusion withother regulatory definitions, we agreethat the term ‘‘supplies’’ should besubstituted for ‘‘furnishes’’ in§§ 1001.952(h)(2) and (h)(5)(ii).

Comment: Several commenterscommented that the proposed languageclarifying the seller’s obligation todisclose the discount properly to thebuyer is beyond the scope of thestatutory exception and confuses ratherthan clarifies the seller’s obligations. Anumber of commenters suggested thatthe requirement that sellers provideeffective notice would lead to mistrustbetween buyers and sellers and disputesabout whether ‘‘effective notice’’ wasprovided. One commenter suggestedthat the requirement inappropriatelysaddles a seller with the responsibilityof being the buyer’s ‘‘brother’s keeper.’’Some commenters requestedclarification of what qualifies as‘‘notice.’’ Others questioned theintention of the added languagerequiring sellers to ‘‘refrain fromimpeding’’ the buyer’s performance ofits obligations. One commenter objectedthat this requirement imposed an undueburden on sellers, because sellers wouldhave to know all of an individualbuyer’s specific billing activities andpossible obligations in order to be in aposition to refrain from doing anything



that could impede the buyer in meetingits obligations.

Response: As we stated in thepreamble to the 1991 final rule (56 FR35958), we believe the statute permitsus to interpret statutory terms used inthe statutory exceptions, including thephrase ‘‘appropriately reflect’’ in thediscount exception (also see 42 U.S.C.1302). We note that the statutoryexception does not protect any seller ifthe purchaser has not appropriatelyreflected the discount. Thus, theobjection based on the statute ismisplaced.

With respect to the substance of thecomments, the proposed clarificationwould require that the seller inform thebuyer ‘‘in an effective manner’’ of thebuyer’s obligation to report the discountand refrain from doing anything toimpede the buyer from fulfilling itsobligations. We agree that the phrase ‘‘inan effective manner’’ perhapsunintentionally focuses on the buyer’sconduct and might inappropriately beinterpreted to mean that a seller is onlyprotected when the buyer, in fact,fulfills its obligation to report thediscount. This was not our intention.Accordingly, we have decided to modifythe language to require the seller toinform the buyer of its obligations ‘‘ina manner that is reasonably calculatedto give notice to the buyer.’’ We believethis language provides the seller with anobjective standard by which to measurethe sufficiency of its notice. We arefurther clarifying that for safe harborpurposes one of the buyer’s obligationsis to provide information aboutdiscounts to the Secretary upon requestin accordance with § 1001.952(h)(1).

We are not prescribing a specific formof notice. The form of notice appropriatein particular situations may vary. Ourintention in adding the ‘‘refrain fromimpeding’’ standard is to make clearthat a seller will only be protected bythe safe harbor if it is not complicit ina buyer’s noncompliance with itsobligations to report discountsaccurately to the Federal health careprograms. We are not making anychange to the requirement that the sellernot impede the buyer’s compliancebecause we believe the language is clear.The same standard applies to offerors;they will not be protected by the safeharbor if they are complicit in eitherbuyer or seller noncompliance.

Comment: A number of commentersobjected to our bar on safe harborprotection for rebates offered to charge-based providers. Our proposeddefinition of ‘‘rebate’’ defined a rebateas a discount not given at the time ofsale. Under our proposed clarification,safe harbor protection would only be

extended to charge-based providers fordiscounts made at the time of sale of agood or service. The commenters pointout, for example, that the regulationprecludes retail pharmacies andoutpatient clinics from being eligible forprice reductions on the same basis ashospitals (cost reporters) and other largepurchasers (e.g., HMOs). Moreover, thecommenters note that there may besituations in which adjustments toprevious billings or other errors couldresult in a rebate. The commenters alsomaintain that where payment is basedon the lesser of actual charges or a feeschedule amount, fee schedules couldbe adjusted to reflect the availability ofvolume discounting. The commentersargue that excluding rebates for charge-based providers lacks a statutory basis,since the statutory exception refers to a‘‘reduction in price obtained by aprovider,’’ without any reference towhen the reduction must be obtained.The commenters further argue that thereis no sound basis for not protectingdelayed discounts to physicians, sincewe are not requiring physicians toreduce their charges for the amount ofa discount, even where there is aseparately claimed item. Thus, thecommenters urge that rebates be coveredso long as the amount is fully disclosedto the Federal health care programs andthe other safe harbor conditions aresatisfied.

Response: The most important aspectof the discount safe harbor is that theFederal health care programs share inthe discount in proportion to thepercentage the programs pay of the totalcost. Congress intended only to protectdiscounts that could fairly benefit theFederal health care programs. It is ourintention in these regulations to ensurethat the only discounts protected arethose where the Federal programsreceive such benefit.

Having considered the commentsreceived about rebates, we haveconcluded that excluding safe harborprotection for all rebates to charge-basedbuyers or buyers that are reimbursedbased on Federal program fee schedulesis unnecessarily restrictive and mayprevent the Federal health careprograms from realizing indirectbenefits that may accrue from rebates tocharge-based providers.

Accordingly, we are defining a‘‘rebate’’ for purposes of the safe harboras a discount, the terms of which arefixed at the time of the sale anddisclosed to the buyer at the time ofsale, but which is not given at the timeof sale. ‘‘Terms’’ refers to themethodology that will be used tocalculate the rebate (e.g., a percentage ofsales or a fixed amount per item

purchased during a given period oftime). The terms of the rebate must beset at the time of the sale and disclosedto the buyer, even though the exactdollar amount of the rebate may not beknown until the rebate is paid. In somecircumstances, a rebate may be paidonly after some number of successivepurchases of particular goods orservices; in such circumstances, theterms of the rebate must be fixed anddisclosed to the buyer at the time of thefirst sale of a good or service to whichthe rebate applies. We are eliminatingthe safe harbor requirement that charge-based buyers (and sellers if submittingclaims on behalf of charge-based buyers)disclose the amount of discounts onclaims submitted to the Federalprograms. We are retaining the existingrequirement that buyers (and sellerssubmitting claims on their behalf) mustprovide information documenting thediscount upon request of the Secretary.

Comment: The proposed clarificationseliminated a reference to credits andcoupons in the definition of a‘‘discount’’ (§ 1001.952(h)(3)). Twocommenters expressed concern that thisdeletion indicated an intent to prohibitsafe harbor protection for credits andcoupons.

Response: To the contrary, our reviseddefinition of ‘‘discount’’ applies to anyreduction in the price a buyer who buysdirectly or through a wholesaler orgroup purchasing organization ischarged for an item or service based onan arms-length transaction, except forcertain forms of price reductionexpressly not included in the definition(e.g., no cash or cash equivalents, noroutine waivers of copayments). If acoupon or credit fits within thedefinition of a discount, it is includedwithin the safe harbor (assuming all safeharbor conditions are satisfied).However, we did not intend to protectcredits or coupons that are merelysurrogate cash payments, such as creditsor coupons that can be used like cash topurchase unspecified goods or servicesfrom the seller or offeror. Thus, acoupon good for a reduced price on adesignated item could be included inthe definition, so long as it meets all ofthe other requirements of the regulation;however, a coupon good for a certaindollar amount off any goods sold by theseller is not included in the definition.We are, therefore, adding clarifyinglanguage to the definition of ‘‘discount’’to make clear that cash equivalents arenot discounts for purposes of the safeharbor.

Comment: One commenter objected toa ‘‘discount’’ for purposes of the safeharbor being limited to discountsoffered to buyers who buy directly or



through wholesalers or grouppurchasing organizations. Thiscommenter urged that this limitationfails to accommodate new distributionarrangements, many of which contributeto purchasing economies. For example,hospitals, physicians or ambulatorysurgical centers may buy items andservices through HMOs or otherbrokering-type suppliers.

Response: In general, if a discount isnegotiated with a bona fide seller of theitem or service, including an entity thataggregates provider demand to obtainaccess to volume discounts, inaccordance with an arms-lengthtransaction, and if the discountotherwise meets all safe harborrequirements, we believe that thediscount would come within the safeharbor definition of discount. However,there may be arrangements that do notfit the definition where access to aseller’s favorable discount rates is itselfan inducement or reward for referrals,e.g., providing certain physicianpractices access to a hospital’s employeehealth benefits plan in order to reducethe physician’s employee insurancecosts.

Comment: Several commentersexpressed concern about the exclusionfrom the definition of ‘‘discount’’ ofprice reductions furnished on one goodor service without or at a reducedcharge to induce the purchase of adifferent good or service. Thesecommenters assert that this restrictionwas intended to preclude furnishing agood at a reduced price in exchange forany agreement to buy a good which wasreimbursed under a differentreimbursement methodology, in such away that discounts would not be passedalong to the Medicare program. Forexample, the safe harbor was notintended to protect a discount onhospital supplies covered by aDiagnostic Related Group (DRG)payment in exchange for the purchase atthe full price of capital equipmentseparately reimbursed by Medicare on areasonable cost basis in accordance witha hospital’s cost report. Nor was itintended to protect a discount earned onproducts reimbursed by Medicare butapplied to products reimbursed by non-Medicare payers. However, thesecommenters argue that the safe harborshould not exclude discounts onmultiple products when the net value ofthe discounts could be properlyreported to, and benefit, the Medicareprogram. For example, commentersbelieve that safe harbor protectionshould be available for a discount to ahospital for sterile gauze pads inexchange for the purchase of surgicaltape, both of which are included in the

hospital’s DRG payment and recordedon the hospital’s cost report as routinecosts not separately reimbursable. Thesecommenters expressed concern that thediscount safe harbor’s limitation ondiscounts for bundled or multiple itemsor services fails to recognize thediversity of cost controls inherent insuch reimbursement methodologies asDRGs; physician payment under theRBRVS system; national limitationamounts for clinical laboratory tests; feeschedules for DME, prosthetics,orthotics, and other supplies; and fixedrates for ASCs. Finally, commentersnoted that by restricting discounts onmultiple items, the safe harbors mayprevent the Federal health careprograms from benefitting frompurchasing economies that result fromvolume purchasing and groupdiscounts.

Response: We agree that one purposeof the limitation on discounts forbundled items or services is to precludeprotection for discounts that do notbenefit the Federal health careprograms, but which are used to inducepurchases of other products for whichthe Federal health care programs paythe full price. These discounts areproblematic, because they shift costsamong reimbursement systems or distortthe true costs of all items. As a result,it may be difficult for the Federal healthcare programs to determine properreimbursement levels. (See 56 FR 35987,for example, citing the example of thedevelopment of accurate pricing data forintraocular lenses.)

However, we are persuaded that incertain circumstances, discounts offeredon one good or service to induce thepurchase of a different good or servicewhere the net value can be properlyreported do not pose a risk of programabuse and may benefit the programsthrough lower costs or charges achievedthrough volume purchasing and othereconomies of scale. Such circumstancesexist where the goods and services arereimbursed by the same Federal healthcare program in the same manner, suchas under a DRG payment.

Comment: Several commentersquestioned our intent in changingcertain language in the definition ofdiscount from ‘‘in exchange for anyagreement to buy a different good orservice’’ to ‘‘to include (induce) thepurchase of a different good or service.’’(See § 1001.952(h)(5)(ii)).

Response: We changed this languageto be consistent with the anti-kickbackstatute, which prohibits inducements torefer Federal health care programbusiness, even if there is no actualreferral made or agreement to refer. Weare correcting an editorial error in the

proposed rule, which incorrectly usedthe word ‘‘include’’ instead of ‘‘induce’’in § 1001.952(h)(5)(ii).

5. Sham Transactions or Devices

Summary: We proposed a newprovision to clarify that anyarrangement entered into or employedfor the purpose of appearing to fitwithin a safe harbor when the substanceof the arrangement is not accuratelyreflected by its form will be disregarded,and the substance of the arrangementwill determine whether safe harborprotection is warranted.

Comment: Although one commentersupported the proposed shamtransactions rule, many commentersobjected to it. These commenters arguedthat the proposed sham transactionsrule was vague, lacked clear objectivecriteria, and did not provide anyexamples of sham transactions.

Response: Upon furtherconsideration, we have decided towithdraw this proposal. We emphasize,however, that for purposes ofdetermining compliance with the safeharbors, we will evaluate both the formand substance of arrangements. To beprotected, the form must accuratelyreflect the substance. As we haveexplained in the context of space andequipment rentals:

If a sham contract is entered into, whichon paper looks like it complies with theseprovisions, but where there is no intent tohave the space or equipment used or theservices provided, then clearly we will lookbehind the contract and find that in realitypayments are based on referrals. Thus, thesecontracts would not be protected under theseprovisions. (56 FR 35972)

This same general principle wouldapply in determining compliance withother safe harbors.

C. 1993 Proposed Safe Harbors

The 1993 proposed rule set forth newsafe harbor regulations in the subjectareas described below. Each descriptionincludes a summary of the proposedrule; a summary of the final rule,including a summary of significantchanges between the proposed and finalrules; and a summary of commentsreceived and our responses.

1. Investment Interests in UnderservedAreas

Summary of Proposed Rule: It hadcome to our attention that it is difficultfor entities located in many rural areasto comply with the two 60–40 tests setforth in the ‘‘small entity’’ investmentinterest safe harbor. The first 60–40 rule(§ 1001.952(a)(2)(i)) requires that nomore than 40 percent of the investmentinterests of the entity be held by



investors who are in a position to makeor influence referrals to, furnish items orservices to, or otherwise generatebusiness for the entity (the ‘‘60–40investor rule’’). The second 60–40 rule(§ 1001.952(a)(2)(vi)) requires that nomore than 40 percent of the grossrevenue of the entity may come fromreferrals or business otherwisegenerated from investors (the ‘‘60–40revenue rule’’). Entities located in ruralareas may have an especially difficulttime complying with these twostandards, because in many casesphysicians may be the primary sourcesof capital in the area, and thosephysicians may have no alternativefacility to which they can refer.

Consequently, we proposed anadditional safe harbor for investments inentities located in rural areas that wouldhave eliminated the two 60–40 rules.We proposed defining the rural areasincluded in the safe harbor inaccordance with the standards set by theOffice of Management and Budget(OMB) and used by the Bureau of theCensus. We solicited comments on theappropriateness of this definition ofrural area. We stressed that the methodfor designating rural areas must ensurethat this safe harbor only protectsentities that truly serve a ruralpopulation. We suggested that onealternative would be to adopt thedefinition of ‘‘rural’’ found at 42 CFR412.62(f)(1)(ii), which is the definitionused by HCFA in its DRGreimbursement rules. We proposedleaving in place the remaining sixstandards for small entity investmentsfor purposes of the new safe harbor.These six standards provide substantialassurances against abuse, and we hadnot been apprised of any particulardifficulty that rural entities wereexperiencing with these standards.

In place of the 60–40 tests, weproposed a more flexible standard thatwould still assure that referring sources,physicians in particular, were notinappropriately selected as investors.First, we proposed requiring the entityto make a bona fide offer of theinvestment interest to any individual orentity irrespective of whether suchprospective investor is in a position tomake or influence referrals to, furnishitems or services to, or otherwisegenerate business for the entity. Thus,we proposed requiring thatopportunities for investment be offeredin a good faith, non-discriminatorymanner to any individuals or entitiesthat are potential sources of capital.Second, to exclude the possibility ofsham business structures not intendedto serve the rural areas in which theyare located, we proposed incorporating

a standard that would require that atleast 85 percent of the dollar volume ofthe entity’s business in the previousfiscal year or twelve month period bederived from items and servicesprovided to persons residing in the ruralarea. For entities that have not been inbusiness for 12 months, compliancewith this standard would be determinedby examining the composition of theentity’s business over the entire periodof its existence.

Methods of Classifying GeographicAreas: Depending on its purpose, theGovernment uses several methodologiesto define whether certain geographicareas are ‘‘urban’’ or ‘‘rural’’ andwhether certain geographic areas orpopulations have inadequate access tohealth care services. Among them, thefollowing are relevant to this preamblediscussion:

• OMB Methodology: The OMBdefines a Metropolitan Statistical Area(MSA) as a group of counties (or, inNew England, a group of townships)surrounding and related to an urbancore area containing a large populationnucleus. The core of an MSA is a citywith a population of at least 50,000people and/or an urbanized area with atotal population of at least 100,000(75,000 in New England). The OMBdefines a county as part of the MSA ifit contains the core city or contains partof a continuous urbanized area aroundthe core city, even if outlying areas ofthe county are rural in character. Usingthis methodology, an area may beconsidered ‘‘rural’’ if it is notmetropolitan, e.g., not part of an OMB-defined MSA (see 44 U.S.C. 3504).

• HCFA DRG Definition: For purposesof establishing DRG payments, HCFAdefines ‘‘rural’’ areas as all areas outsidethe metropolitan areas (MSAs) definedby OMB (§ 412.62(f)(1)(ii)).

• Medically Underserved Areas/Populations (MUA/MUPs): The MUA/MUP system was developed in the1970s in accordance with section330(b)(3) of the Public Health Service(PHS) Act to identify areas andpopulations eligible to participate in theCommunity Health Center Program.MUAs and MUPs are designated by theHealth Resources and ServicesAdministration (HRSA). An MUA iseither a rural or urban area designatedby the Secretary as having a shortage ofhealth care services; an MUP is apopulation group designated as havingsuch a shortage, such as certain migrantfarmworkers or homeless populations.Factors HRSA considers as part of theexisting MUA/MUP designation processinclude population-to-primary carephysician ratios, infant mortality rates,poverty rates, and the percentage of the

population aged 65 or over. Theregulations governing MUA/MUPs arecurrently set forth at 42 CFR part 51c.

• Health Professional Shortage Areas(HPSAs): HRSA developed HPSAs tomeet the statutory requirement insection 332 of the PHS Act to designateareas, population groups and facilitieswith a shortage of health professionalseligible for placement of NationalHealth Services Corps personnel. HPSAdesignations are currently basedprimarily on measurements of areapopulation-to-provider ratios forspecific geographic service areas (orpopulation groups within those areas),together with indicators that providerresources in adjoining areas areoverutilized, excessively distant (e.g.,more than 30 minutes travel time awayfor primary care) or otherwiseinaccessible (42 CFR part 5). A HPSAcan be designated based on shortages of(1) providers in a geographic area; (2)providers willing to treat a specificpopulation within a defined area; or (3)providers for a public or nonprofitfacility serving a designated area orpopulation group (which could includea hospital). HPSAs are identified forthree types of provider shortages:primary care, dental care and mentalhealth care. The current primary careHPSA criteria define a ‘‘primary carephysician’’ as a physician in one of thefollowing specialties: general practice,family practice, pediatrics, generalinternal medicine or obstetrics/gynecology. Mental health providerscovered by mental health HPSAdesignations include psychiatrists,clinical psychologists, psychiatricnurses, psychiatric social workers andmarriage counselors.

• Notice of Proposed Rulemaking onMUA/MUPs and HPSAs. HRSA hasproposed revising the MUA/MUP andHPSA regulations to improve thecurrent designation process bycombining the two designationprocesses; automating the scoringprocess and simplifying it bymaximizing the use of national data;expanding States’ roles in identificationof rational service areas for designation;and incorporating better measures orcorrelates of health status and lack ofaccess, including measures of minoritiesand isolated rural areas (63 FR 46538).In response to public comments, HRSAhas announced its intention to issue asecond notice of proposed rulemakingfollowing a period of evaluation ofcomments received, analysis ofalternative approaches and impacttesting (64 FR 28831). Following anadditional public comment period, newregulations governing MUA/MUPs and



HPSAs are expected to be codified at 42CFR part 5.

Summary of Final Rule: Paramountamong OIG’s concerns is thatbeneficiaries have adequate access toquality health care. We are aware thatcertain communities experienceshortages of health care services thataffect Federal program beneficiaries andothers. This rule for investments inunderserved areas is designed tobalance the interests of thosecommunities in facilitating thedevelopment of health care serviceswith the anti-fraud interests that are thebasis of the anti-kickback statute.

Health care joint ventures inunderserved areas raise the same basicanti-kickback concerns as other jointventures: First, is the joint venture abona fide business enterprise? Second,are distributions from the joint venturereally payments for referrals to the jointventure from investors? Third, are thedistributions really payments forreferrals from one investor to another?For this reason, it is important that anysafe harbor contain adequate safeguardsand conditions against fraud and abuse.

This new safe harbor for investmentsin joint ventures in underserved areas isdesigned to provide additionalflexibility for investments inunderserved areas that may experiencea shortage of available capital from non-referral source investors. The safeharbor includes specific criteria thatsubstantially reduce the risk ofinappropriate payments for referrals andexclude from protection entities that donot serve the health care needs ofpeople living in the underserved areasin which the entities are located.Because the safe harbor affordsprotection for a broader range ofinvestments in joint ventures inunderserved areas, we hope it willpromote the development of neededhealth care ventures.

Based on our review of the commentsreceived from, and concerns expressedby, various commenters, we have madeseveral significant changes to theproposed safe harbor, all of which aredescribed in more detail in theresponses to comments section below.

• First, we have expanded safe harborprotection to include urban, as well asrural, underserved areas. We arepersuaded that joint ventures in urbanunderserved areas often experience thesame difficulties in qualifying for safeharbor protection as their ruralcounterparts. We are defining anunderserved area as any definedgeographic area that is designated as aMUA in accordance with the regulationsat 42 CFR part 51c (or, if and whenapplicable, 42 CFR part 5).

• Second, we have reduced from 85percent to 75 percent the volume of theinvestment entity’s business that mustbe derived from residents ofunderserved areas.

• Third, we have provided a ‘‘grace’’period for investment entities thatqualify for safe harbor protection at thetime of the initial investment, butsubsequently find themselves located inareas that have ceased to meet the safeharbor definition of an underservedarea.

• Fourth, we have incorporated amodified investor rule that requires thatat least half of the investment interestsin the entity be held by non-referralsource investors. Here, we were in partpersuaded by comments from healthcare entities that are currently located inunderserved areas and that have no orfew referral source investors. Theseentities expressed concern about unfaircompetition from new entities entirelycomposed of referral source investors(primarily physicians) in markets withfew referral sources. We were alsoconcerned about limiting inappropriatefinancial incentives.

Comments and ResponsesComment: We solicited comments

regarding the appropriateness of ourproposal to define ‘‘rural’’ withreference to the OMB standards forMSAs. In response, several commentersurged us to adopt our alternativeproposal to use the rural definitionemployed by HCFA for purposes ofreimbursing hospitals located in ruralareas under DRG payment rates (42 CFR412.62(f)(1)(iii)). A number ofcommenters urged us to extend theinvestment interest safe harbor for ruralentities to equally qualified underservedurban areas.

Response: One of the important issuesin designing this safe harbor is how todefine geographically the scope ofinvestments to which it applies. Afterconsideration and examination ofvarious approaches to defining ‘‘rural’’for purposes of this safe harbor, we havedecided to limit this safe harbor toinvestment interests in entities locatedin areas defined by HRSA as MUAs (thatotherwise meet all safe harbor eligibilitystandards). This decision responds torequests for safe harbor protection tofacilitate investment in areasdemonstrably experiencing difficulty inattracting needed health care services.Unlike OMB’s MSAs, which merelymeasure geographic distributions ofpopulation, MUAs identify areasexperiencing health care shortages byaccounting for such factors as povertylevels, infant mortality, and populationage. Thus, we are amending the rule to

substitute MUAs for the existingdefinition of ‘‘rural’’ to more closelytailor the safe harbor to protectinvestment interests in entities locatedin underserved areas.

In addition to more accuratelytargeting rural areas with shortages ofhealth care services, protectinginvestments in MUAs offers a means ofexpanding safe harbor protection tourban underserved areas. We arepersuaded that many urban underservedareas experience difficulties inattracting investments in health careservices that are comparable to thoseexperienced in rural areas. Because oneof our objectives in creating this safeharbor is to foster the development ofneeded health care services, we believeit makes sense to protect qualifiedinvestments in defined shortage areaswithout regard to density of population.

At the time of publication of thisrulemaking, HRSA’s final regulations onthe new process for designating MUAsare still pending. Although weanticipate that those regulations will befinalized, we are persuaded that, even inthe absence of that rule, andnotwithstanding certain concerns wehave regarding the administration of thecurrent program, our selection of MUAsas a basis for this safe harbor is soundand more consistent with the statedpurpose of the safe harbor than either ofour original proposals for identifyingthe covered areas.

We anticipate that, if finallypromulgated, HRSA’s new rule forevaluating and designating MUAs mayresult in some areas presently classifiedas MUAs losing their classifications.Moreover, HRSA has indicated its intentto review MUA classifications regularly,resulting in the possibility that someareas could periodically lose theirclassifications. Given this potential, it isincumbent on us to address the effect ofthe loss of a MUA designation on anentity protected by the safe harbor forinvestments in underserved areas. If anentity that meets all of the safe harborstandards were located in an area thatloses its designation as a MUA after theentity has initially qualified for the safeharbor, the entity would technically nolonger fit squarely within the safeharbor and would lose its protection.However, we are mindful of the needinvestors have for reasonable certaintyin their arrangements and the significanteffect a sudden loss of safe harborprotection resulting from circumstancesoutside their direct control may have oninvestors. Accordingly, we are includingin this safe harbor a 3-year grace periodduring which such entities will beprotected, provided they continue tomeet all of the other safe harbor



conditions. This grace period will affordentities that wish to maintain safeharbor protection an opportunity torestructure so as to qualify for the smallentity investment interest safe harbor at§ 1001.952(a)(2). We wish to iterate thatloss of safe harbor protection does notmean that a joint venture arrangementbecomes unlawful.

Comment: Several commentersexpressed concern about our proposal toeliminate the 60–40 tests of the smallentity investment safe harbor forpurposes of this safe harbor. Onecommenter advocated that the 60–40rules should continue to apply tofacilities located in rural areas toprevent a proliferation of unnecessaryfacilities, especially laboratories, thatare dependent on referrals frominvestor-physicians. Anothercommenter supported restricting thesafe harbor only to rural areas wherealternative sources of a particularservice are not otherwise available.These commenters argued that aproliferation of protected entities withlarge numbers of referral sourceinvestors could adversely affect existingentities in rural communities. Onecommenter suggested that we use a‘‘demonstrated community need’’standard instead of limiting safe harborprotection to defined geographic areas.This commenter further recommendedthat entities that meet such a‘‘demonstrated community need’’ test berequired to disclose to patients areferring physician’s ownership interestand to conduct utilization review of anentity’s services.

Response: Having considered thesecomments, we are persuaded thateliminating both 60–40 rules, and inparticular the 60–40 investor rule, maylead to inappropriate financialincentives and unfair competition insome areas by allowing referral sourceinvestors, primarily physicians, to ‘‘lockup’’ the market for particular services inthose areas. Ensuring fair competition inthe health care marketplace is one of thegoals of the anti-kickback statute. Weare also concerned that an excessiveproliferation of particular services inrural or urban underserved areas couldlead to overutilization by entitiescompeting for scarce revenue and couldprompt protected entities to developrevenue streams from patients notresiding in underserved areas, incontravention of the intent and spirit ofthe safe harbor.

MUA designations are not made on aservice-specific basis; thus, an area mayqualify as a MUA based on an overallshortage of health care services even ifit has a sufficient supply of a particularheath care service. As we stated in the

preamble to the 1993 proposed rule, oneof the purposes of this safe harbor is toensure adequate access to medical carefor patients in underserved areas. Ourintent was to design a safe harbor thatwould accomplish this purpose, whileexcluding ventures that do not serve theunderserved areas in which they arelocated. We remain persuaded that thereare many rural and urban underservedareas with legitimate shortages of healthcare services and limited sources ofpotential investors. However, while webelieve that market competition shouldminimize the number of duplicativeventures in a particular underservedarea, we are persuaded that safe harborprotection should be limited, to theextent practicable, to ventures that fill agenuine health care need of arearesidents.

In light of our intention to minimizesafe harbor protection for redundanthealth care services owned by referralsource investors in otherwiseunderserved areas, reduce inappropriatefinancial incentives, and maintain faircompetition for providers that are notowned by referral source investors, wehave revisited our original proposal toeliminate both of the 60–40 tests of thesmall entity investment safe harbor forpurposes of this safe harbor. In this finalrule, we are adopting our originalproposal to eliminate the 60–40 revenuerule, but we are retaining a modifiedlimitation on the number of interestedinvestors. Specifically, we are requiring,as a condition for protection, thatinvestors who make referrals or who arein a position to make referrals or furnishitems or services to the entity not ownmore than 50 percent of the value ofinvestment interests within each class ofinvestments in the entity. As with the60–40 investor rule in the small entityinvestment safe harbor, we arepermitting equivalent classes of stock tobe aggregated for purposes ofdetermining safe harbor compliance.

We believe that eliminating the 60–40revenue rule, thereby permitting entitiesto draw 100 percent of their revenuefrom referrals by investor-owners,should make investment in such entitiessufficiently attractive to non-referralsource investors so as to permit theentities to meet the new 50–50 investortest. We recognize that this safe harbormay not fully answer all of the concernsraised by the commenters and that theremay be particular circumstances inwhich ventures with parties to existinghealth care entities can not qualify forsafe harbor protection. Some of theseventures may be appropriate forprotection through an advisory opinion(42 CFR part 1008). In addition, jointventures in underserved areas may still

qualify for protection under the smallentity investment interest safe harbor at§ 1001.951(a)(2).

We are not adopting the suggestionthat we promulgate a ‘‘demonstratedcommunity need’’ standard for this safeharbor. Such a standard would notcreate a sufficiently clear rule andwould be unenforceable in practice.Moreover, the additional two standardssuggested by one commenter—publicdisclosure of ownership interests andutilization review—while goodpractices, are not, in our experience,effective deterrents to fraud and abuse.

Comment: One commenter urged usto allow compliance with the ruralinvestment safe harbor if an entitycertified its inability to comply with the60–40 rules in the small entity safeharbor despite its best efforts.

Response: A mere ‘‘best efforts’’exception to the small entity investmentinterests safe harbor based on acertification from the investment entitywould be insufficient to protect againstabusive arrangements and would beimpractical in application. Like allparties that cannot comply with a safeharbor, parties that are unable to complywith the 50–50 investor rule haverecourse to the advisory opinion processfor guidance about their specificarrangements.

Comment: One commenter requestedthat the OIG incorporate a ‘‘fair marketvalue’’ principle more explicitly into theproposed rural investment safe harbor.

Response: The principle of ‘‘fairmarket value’’ is included in thisinvestment safe harbor at§ 1001.952(a)(3)(viii).

Comment: One commenter expressedconcern that a rural referral center (RRC)that had been reclassified as located inan urban area by the MedicareGeographic Classification Review Boardfor purposes of Medicare payment (42CFR 412.230) would not be eligible toreceive protection under the ruralinvestment interest safe harbor. RRCsare Medicare participating acute carehospitals that are located in rural areasand that qualify under HCFA rules asreferral centers (see 42 CFR 412.96).Under certain circumstances, anindividual hospital, including a referralcenter, may be redesignated from a ruralarea to an urban area for purposes ofusing the urban area’s standardizedamount for inpatient operating costs,wage index value, or both. (42 CFR413.230).

Response: A RRC located in a MUAwould be eligible for protection underthe rural investment interest safe harbor,provided it meets all of the conditionsof the safe harbor. Reclassification as



‘‘urban’’ for Medicare payment purposeswould not bar safe harbor protection.

Comment: Several commenters askedus to further explain how facilities cancomply with the requirement that anentity must offer equal and bona fideopportunities to acquire investmentinterests to individuals or entitiesirrespective of whether such prospectiveinvestors are in a position to make orinfluence referrals to, furnish item orservices to, or otherwise generatebusiness for the entity(§ 1001.952(a)(3)(i)). In the alternative, acommenter requested that this provisionbe deleted. One commenter expressedconcern that the ‘‘broad’’ terms of theproposed safe harbor would make itdifficult for parties to identify ‘‘potentialsources of capital’’ and inquiredwhether satisfying the safe harborrequired investment opportunities to beregistered under Federal and Statesecurities laws as public offerings.Another commenter expressed concernabout publicizing investmentopportunities in rural areas whereinvestors often do not wish to bepublicly identified.

Response: Our intent in proposing the‘‘equal and bona fide opportunities’’standard was to ensure that investmentopportunities are offered in a good faith,nondiscriminatory manner to anyindividuals or entities that are potentialsources of capital, so that referral sourceinvestors are not inappropriatelyselected as investors. In light of ourdecision to require that at least 50percent of the investment interests beheld by non-referral source investors,we have concluded that this standard isnot necessary. Accordingly, we are notadopting it in the final rule.

Comment: The sixth standard of theproposed safe harbor required that atleast 85 percent of the dollar volume ofthe entity’s business in the previousfiscal year or previous 12-month periodbe derived from services provided topersons residing in the underservedarea. One commenter asked us to lowerthe 85 percent dollar volumerequirement to 40 percent in order tomake the threshold more attainable andallow more investment interests toqualify for protection.

Response: As we explained in thepreamble to the 1993 proposed rule,although we proposed eliminating the60–40 revenue rule for investments forpurposes of the proposed safe harbor,we remained concerned that a shamjoint venture structure could beestablished that does not intend to servethe underserved area in which it islocated. This safe harbor responds torequests for assistance in facilitatinginvestment in underserved areas. It is

not unreasonable to offer this safeharbor protection only to investments inentities that will primarily serveunderserved populations by providingservices needed in their communities.We are persuaded, however, thatlowering the required percentage to 75percent would adequately protectagainst abuses and further the purposeof this safe harbor. Accordingly, we arerequiring that at least 75 percent of thedollar volume of the entity’s business inthe previous fiscal year or previous 12-month period be derived from servicesprovided to persons residing in anunderserved area or persons who aremembers of a MUP (as defined byHRSA).

2. Ambulatory Surgical CentersSummary of Proposed Rule: We

proposed a fourth investment interestsafe harbor to protect payments toinvestors in ambulatory surgical centers(ASCs) who are surgeons who referpatients directly to the ASC and performsurgery themselves on these referredpatients. What we intended to protect isoften understood conceptually as anextension of the physician’s officespace. We further explained that a safeharbor for investment interests in ASCswas warranted because the professionalfee generated by a referral from aphysician-investor to the ASC issubstantially greater than the facility feegenerated by the referral, and thereforeprofit distributions to physician-investors, which are derived from thefacility fee, do not constitute asignificant improper inducement tomake referrals. The rationale underlyingthe proposed safe harbor would notextend to investment interests held byphysicians who are not in a position torefer patients directly to the ASC andperform surgery. We explained that theconcern with investments by suchphysicians is the potential for indirectkickbacks, because they might receive areturn, through the ASC’s profitdistribution, for referrals of patients toother investors who perform surgicalprocedures at the ASC. We solicitedcomments on whether the rationaleunderlying this safe harbor is applicableto entities other than ASCs. We alsospecifically solicited comments on whatdegree of disparity should exist betweenthe professional fee and the facility feegenerated by referrals to a type of entityfor that type of entity to receive safeharbor protection.

The proposed safe harbor appliedonly to ASCs certified under 42 CFRpart 416. We did not propose protectingASCs located on the premises of ahospital that share operating or recoveryroom space with the hospital for

treatment of the hospital’s inpatients oroutpatients. The proposed safe harborcontained the following 5 standards:

• The terms on which an investmentinterest is offered to an investor mustnot be related to the previous orexpected volume of referrals, servicesfurnished or the amount of businessotherwise generated from that investorto the entity.

• There is no requirement that apassive investor, if any, make referralsto the entity as a condition forremaining an investor.

• Neither the entity nor any investormay loan funds to, or guarantee a loanfor, an investor if the investor uses anypart of such loan to obtain theinvestment interest.

• The amount of payment to aninvestor in return for the investmentinterest must be directly proportional tothe amount of the capital investment(including the fair market value of anypre-operational services rendered) ofthat investor.

• Each investor must agree to treatpatients receiving Medicare or Medicaidbenefits.

In contrast to the other investmentinterest safe harbors that limitinvestment by individuals in a positionto refer, the proposed ASC safe harborwould have only protected entitieswhose investment interests were heldentirely by such individuals. With thatdistinction in mind, four of the fivestandards were adapted from thestandards in the small entity safe harbor(§ 1001.952(a)(2)). We solicitedcomments on the extent to which otherstandards were appropriate to safeguardagainst potential abuse.

Summary of Final Rule: The OIGreceived nearly two hundred commentsrelating to the proposed safe harbor forinvestment interests in ASCs. As aresult of these comments, we havesignificantly reworked this safe harborto provide, in general, expanded safeharbor protection for investments inASCs.

As an initial matter, our proposedplacement of the ASC safe harbor withthe investment interests safe harborappears to have caused confusion as tothe safe harbor’s purpose and scope.Our proposed ASC safe harborcontemplated a joint venture composedentirely of referral source investors.Placing these regulations alongside thelarge entity safe harbor, which limitssafe harbor protection to investmentsthat are so small as to be, at most,tangentially related to referrals, and thesmall entity investment safe harbor,which limits safe harbor protection toventures composed of no more than 40percent referral source investors, led



some commenters to question why anASC with 100 percent referral sourceinvestors would pose less risk of fraudand abuse than another type ofinvestment entity with a smallerpercentage of referral source investors.The answer is that ASC investments donot necessarily pose less risk. Rather, asdescribed in more detail below,investments in ASCs raise concerns thatare different from those addressed bythe small entity investment safe harbor;therefore, investments in ASCs warrantdifferent safe harbor criteria, includingdifferent safeguards, limitations andcontrols.

The new ASC safe harbor has fourcategories: Surgeon-Owned ASCs,Single-Specialty ASCs, Multi-SpecialtyASCs, and Hospital/Physician ASCs.Safe harbor protection requires fullcompliance with all of the standards ofany one category. All four categorieshave the following requirements incommon: (i) The ASC must be certifiedunder 42 CFR part 416; (ii) loans fromthe entity or other investors for thepurpose of investing are prohibited; (iii)investment interests must be offered onterms not related to the volume or valueof referrals; (iv) all ancillary servicesmust be directly and integrally relatedto primary procedures performed at theASC and none may be separately billedto Medicare or other Federal health careprograms; and (v) neither the ASC norphysicians practicing at the ASC candiscriminate against Federal health careprogram beneficiaries. Additionalspecific standards apply to particularcategories. Moreover, in the interest ofensuring patient freedom of choice andpromoting informed decision-making bypatients, we have included arequirement in each category thatpatients referred to the ASC by aninvestor be fully informed of theinvestor’s investment interest.

The four categories are summarizedhere and described in greater detail inthe responses to comments below:

• Surgeon-Owned ASCs. The firstcategory is designed to protect ASCinvestments where all of the physicianinvestors are either general surgeons orsurgeons engaged in the same surgicalspecialty. Specifically, category oneprotects certain investments in entitieswhere all of the investors are either (i)general surgeons or surgeons engaged inthe same surgical specialty, all of whomare in a position to refer patientsdirectly to the ASC and performprocedures on such referred patients;(ii) group practices that are composed ofsuch surgeons and that meet all of therequirements of the group practice safeharbor (§ 1001.952(p)); or (iii) investorswho (a) do not provide items or services

to the ASC or its investors, (b) are notemployed by the ASC or any investor,and (c) are not in a position to referpatients directly or indirectly to, orgenerate business for, the ASC or any ofits investors. A surgeon is considered tobe in a position to refer patients directlyand perform procedures if he or shederives at least one-third of his or hermedical practice income from allsources for the previous fiscal year orprevious 12-month period from his orher own performance of procedures thatrequire an ASC or hospital surgicalsetting in accordance with Medicarereimbursement rules (the ‘‘one-thirdpractice income’’ test).

• Single-Specialty ASCs. The secondcategory is similar to the first category,except that it is designed to protect ASCinvestments where all of the physicianinvestors are engaged in the samemedical practice specialty (e.g.,gastroenterologists), provided that theyperform ASC procedures as a significantpart of their medical practices. Thephysicians that qualify under thiscategory need not be traditionalsurgeons. Specifically, category twoprotects certain investments in entitieswhere all of the investors are either (i)physicians engaged in the same medicalpractice specialty who are in a positionto refer patients directly to the ASC andperform procedures on such referredpatients; (ii) group practices that arecomposed of such physicians and thatmeet all of the requirements of thegroup practice safe harbor(§ 1001.952(p)); or (iii) investors who (a)do not provide items or services to theASC or its investors, (b) are notemployed by the ASC or any investor,and (c) are not in a position to referpatients directly or indirectly to, orgenerate business for, the ASC or any ofits investors. As with category one(Surgeon-Owned ASCs), physicianinvestors must meet the ‘‘one-thirdpractice income’’ test.

• Multi-Specialty ASCs. The thirdcategory is similar to the first twocategories, but it allows a mix of thetypes of physicians addressed in thosecategories. Thus, the third categoryprotects certain investments in entitieswhere all of the investors are either (i)physicians (surgeons or non-surgeons)who are in a position to refer patientsdirectly to the ASC and performprocedures on such referred patients;(ii) group practices that are composed ofsuch physicians and that meet all of therequirements of the group practice safeharbor (§ 1001.952(p)); or (iii) investorswho (a) do not provide items or servicesto the ASC or its investors, (b) are notemployed by the ASC or any investor,and (c) are not in a position to refer

patients directly or indirectly to, orgenerate business for, the ASC or any ofits investors. The physicians must meetthe ‘‘one-third practice income’’ testdescribed in the preceding paragraphs.In addition, physicians in this categorymust meet a second standard related topractice income because of theincreased risk of remuneration forreferrals among physicians withdifferent specialties. Specifically, therule requires that at least one-third ofthe physician’s procedures that requirean ASC or hospital surgical setting (inaccordance with Medicarereimbursement rules) be performed atthe ASC in which he or she is investing.We believe that for physicians who meetthe ‘‘one-third/one-third’’ test, aninvestment in an ASC truly qualifies asan extension of the physician’s office.We believe such physician investors areunlikely to have significant incentivesto generate referrals for other investorsbecause of the minimal additionalreturn on investment derived from suchreferrals.

• Hospital/Physician ASCs. Thefourth category protects certaininvestments by hospitals in ASCs. Toqualify for the safe harbor, at least oneinvestor must be a hospital and theother investors must be (i) physicians orgroup practices that otherwise qualifyunder the safe harbor or (ii) non-referralsource investors. The hospital must notbe in a position to refer patients directlyor indirectly to the ASC or anyphysician investor. The ASC space mustbe dedicated exclusively to the ASC andnot used by the hospital for thetreatment of the hospital’s inpatients oroutpatients. The ASC may lease spacethat is located in or owned by a hospitalinvestor, if the space lease qualifies forprotection under the space rental safeharbor. Equipment and personalservices provided by the hospital mustsimilarly meet safe harbor requirements.

In this final rule, we are expresslydeparting from the underlying rationalefor our original safe harbor proposal,which was the professional fee/facilityfee differential. The existence of asignificant disparity between the facilityfee and the professional fee, such thatthe facility fee is significantly smallerthan the professional fee, minimizes therisk of improper incentives for referrals;however, we are aware that professionaland facility fees have changed and maycontinue to change over time and thatthe ratio between them will not always,by itself, provide a clear basis for safeharbor protection. So although the feedifferential was meaningful at the time,we will in the future look more broadlyfor indicia that an ASC investmentrepresents the extension of a physician’s



office space and not a means to profitfrom referrals.

The gravamen of an anti-kickbackoffense is payment of remuneration toinduce the referral of Federal healthcare program business. In the context ofan ASC, our chief concern is that areturn on an investment in an ASCmight be a disguised payment forreferrals. Two examples illustrate thepotential problem. First, primary carephysicians could be offered aninvestment interest in an ASC for anominal capital contribution as anincentive to refer patients to surgeonowners of the ASC. The primary carephysicians would not perform anyservices at the ASC, but would profitfrom any referrals they make. Second,physicians in specialties that typicallyrefer to one another could jointly investin an ASC so that they are positioned toearn a profit from such referrals or sothat one physician specialty providesthe ASC services and the other providesthe referrals. In such cases, medicaldecision-making may be corrupted byfinancial incentives offered to potentialreferral sources who stand to profit fromservices provided by another physician.

With the above concern in mind, weare still able to provide safe harborprotection for certain non-surgeonphysicians, group practices andhospitals that meet certain requirementsset forth in the safe harbor. Theserequirements are designed to precludeprotection for investors who might haveincentives to generate returns on theirinvestments through referrals to otherinvestors or to other physicians whoperform procedures at the ASC. The safeharbor will also protect someinvestment interests held by personswho are not in a position to make orinfluence referrals either directly orindirectly to the ASC or to any of itsinvestors.

However, except as otherwisedescribed in the regulations, we are notprotecting investment interests held byany party that provides items or servicesto, is in a position to influence the flowof referrals directly or indirectly to, orgenerates business for, the entity or anyinvestor. Notwithstanding, investmentsby these parties are not necessarilyunlawful, provided that payments madein return for the investment are not forthe purpose of inducing or rewardingreferrals.

Indeed, we recognize that somelegitimate ASC arrangements may not fitprecisely in the final ASC safe harbor.Those that do not fit may be eligible forsafe harbor protection under the smallentity investments safe harbor(§ 1001.952(a)(2)) or the new safe harborfor investments in underserved areas

(§ 1001.952(a)(3)). Alternatively, currentor potential investors may request anOIG advisory opinion in accordancewith section 1128D(b) of the Act and theregulations at 42 CFR part 1008.

Our responses to public comments aresummarized below.

Comments and ResponsesComment: Many commenters

commended the OIG for proposing asafe harbor to shield ASCs fromprosecution under the anti-kickbackstatute. Many commenters noted thatASCs have saved Medicare hundreds ofmillions of dollars, forcing hospitals tobecome more competitive, because ASCpayment rates are typically lower thanhospital payment rates for the sameprocedures. Several commenters statedthat ASCs foster patient access to care,particularly in medically underservedregions. Moreover, many commentersobserved that patients generally preferoutpatient surgical care at an ASC tohospital care.

Response: We agree that ASCs cansignificantly reduce costs for Federalhealth care programs, whilesimultaneously benefitting patients. TheHCFA has promoted the use of ASCs ascost-effective alternatives to higher costsettings, such as hospital inpatientsurgery. Where the ASC is functionallyan extension of a physician’s office, sothat the physician personally performsservices at the ASC on his or her ownpatients as a substantial part of his orher medical practice, we believe that theASC serves a bona fide businesspurpose and that the risk of improperpayments for referrals is relatively low.Where the criteria set forth in the safeharbor are satisfied, we do not considerinvestments in ASCs to be a likelysource of overutilization of servicespayable by the Federal health careprograms or increased program costs.We are concerned, however, that patientfreedom of choice be protected andinformed decision-making promoted insituations where a physician is requiredto refer to an entity that he or she ownsin order to qualify for safe harborprotection. Accordingly, we are addinga requirement that the existence of theownership interest be disclosed topatients. We note that such disclosurein and of itself does not providesufficient assurance against fraud andabuse of the Federal health careprograms. This conclusion derives fromour observation that a disclosure offinancial interest is often part of atestimonial, i.e., a reason why thepatient should patronize that facility.Thus, often patients are not put onguard against the potential conflict ofinterest, i.e., the possible effect of

financial considerations on thephysician’s medical judgment.

Comment: Many commentersquestioned our proposal to limit safeharbor protection to physicians who are‘‘surgeons’’, given that many proceduresor services performed in ASCs areperformed by physicians not commonlycalled surgeons (i.e., cardiologists,gastroenterologists, radiologists orpathologists). Many commenters arguedthat the ‘‘extension of practice?’’rationale would apply to surgeons andsuch other physicians alike.

A number of commenters proposedthat we adopt a definition of ‘‘surgeon’’that would include any physician whoperforms procedures classified assurgical by HCFA regulations. Forexample, many kinds of endoscopy areclassified as surgical procedures inaccordance with 42 CFR 416.65 andvarious updates to the list of HCFA-approved ASC surgical procedurespublished in the Federal Register (see42 CFR 416.65(c); 63 FR 32290 (1998)(to be codified at 42 CFR parts 416 and488)). One commenter suggested thatphysicians who refer to an ASC, but donot perform services at the ASC, shouldbe permitted in the safe harbor as longas they meet the safe harbor’s fiveenumerated requirements.

Response: As discussed above, weagree that limiting the safe harbor toinvestors who are physicianstraditionally termed ‘‘surgeons’’ isunnecessarily restrictive, especially inlight of advancing technology and thescope of HCFA’s approved list of ASCprocedures. In light of the manycomments received on this topic, wehave revised the safe harbor to protectinvestments in ASCs certified under 42CFR part 416 by non-surgeonphysicians, group practices, hospitalsand non-referral source investors thatmeet certain conditions. Investments bygroup practices and hospitals arediscussed in responses to separatecomments below.

With respect to physicians, we arepromulgating three categories of safeharbor criteria, each designed to protectdifferent types of physician investment.All of the categories protectcombinations of qualifying physicians,which generally are those physicianswho perform a substantial number ofprocedures listed on the HCFA ASCsurgical procedures list as part of theirmedical practices. Specifically, at leastone-third of each physician investor’smedical practice income from allsources for the previous fiscal year orprevious 12-month period must bederived from the physician’sperformance of procedures that requirean ASC or hospital surgical setting. In



4 See e.g., Update of Ratesetting Methodology,Payment Rates, Payment Policies, and the List ofCovered Surgical Procedures for AmbulatorySurgical Centers Effective October 1, 1998, 63 FR32290, 32307 (to be codified at 42 CFR parts 416and 488) (proposed June 12, 1998).

addition, where there is a risk ofreferrals among physicians or surgeonsin different specialties, we are requiringthat each perform at least one third ofhis or her procedures that require anASC or hospital surgical setting at theinvestment ASC. We believe thesestandards ensure that a physiciansinvestment in an ASC will trulyrepresent an extension of his or heroffice. Where physicians own an ASC inwhich they will personally perform asignificant number of procedures,obvious and legitimate business andprofessional reasons exist for theownership, including convenience,professional autonomy, accountabilityand quality control. Moreover, any riskof overutilization or unnecessarysurgery is already present by reason ofthe opportunity for a surgeon togenerate his professional fee; theadditional financial return from the ASCis not likely to increase the risk ofoverutilization of proceduressignificantly. We believe that the ‘‘one-third/one-third’’ standards in the safeharbor ensure that physician investorswill have no significant incentivebeyond receipt of their professional feesto refer to the entity or any of itsinvestors, because any return oninvestment will be attributableprimarily to legitimate business andonly tangentially to possible referrals ofASC business.

Because of the risk of remunerationfor referrals, investments by otherphysicians, such as anesthesiologists,radiologists and pathologists, or by non-physician providers, such as certifiedregistered nurse anesthetists, are notprotected by the safe harbor if thephysician or provider is in a position toprovide items or services to, referpatients directly or indirectly to, orgenerate business for, the ASC or any ofits investors. The determinationwhether an investor should be classifiedas a potential referral source is a factualquestion. As is the case for investmentsin small entities (56 FR 35964), we willaccept a written stipulation that for thelife of the investment the investor willnot make referrals to, furnish items orservices to, or otherwise generatebusiness for, the entity or any of itsinvestors, provided that, in fact, theinvestor’s actions comport with thewritten stipulation. We wish to makeclear that investments by thesephysicians and other providers do notnecessarily implicate the anti-kickbackstatute. Finally, we note that we do notconsider an investment by a physician’sown wholly-owned professionalcorporation to be an excluded non-physician investment.

Comment: Many commenters alsoobjected to our proposal to protect onlyASCs owned entirely by surgeons whopractice there. These commentersasserted that non-surgeons, and morespecifically non-physicians, should beallowed safe harbor protection forinvestments in ASCs. Many commentersadvocated a rule that would allowsurgeon investors to transfer ownershipto family members and other non-surgeons upon retirement or deathwithout jeopardizing the ASC’s safeharbor protection. Commenters alsoexpressed concern that the safe harbordid not protect investments held byadministrative staff at the ASC. Manycommenters asserted that co-ownershipwith administrative staff would enablethese individuals to make long-termcommitments to providing betterservices in a cost-effective manner.Many commenters further expressed theview that anyone who is not in aposition to refer patients to the ASC,including corporate entities such as for-profit management companies, shouldbe eligible to invest in the ASC. Somecommenters urged that investmentsheld by a physician’s retirement plan beprotected.

Response: We are extending safeharbor protection to investors who arenot in a position to provide items orservices to the ASC or any of itsinvestors and who are not in a positiondirectly or indirectly to generatereferrals for the entity or any of itsinvestors. There is minimal risk that apayment made to such a non-referralsource investor would implicate theanti-kickback statute, and accordinglyinvestments by such investors do nottaint the ASC investment. However, webelieve that hospitals, skilled nursingfacilities, home health agencies,managed care companies, physicianpractice management companies, andsimilar entities may be referral sourcesin some circumstances. By way ofexample only, a hospital may be in aposition to influence referrals when itemploys physicians who make referrals,when it owns surgical practices, orwhen it is affiliated with a ‘‘friendly’’ or‘‘captive’’ professional corporationowned or controlled by its employees.We further believe that some employees,such as certain marketing andadministrative staff, may be referralsources.

Comment: Many commenters arguedthat the scope of the safe harbor shouldbe expanded to include facilities thatare not traditionally considered‘‘surgical’’ centers, such as lithotripsyfacilities, end-stage renal disease (ESRD)facilities, comprehensive outpatientrehabilitation facilities (CORFs),

radiation oncology facilities, cardiaccatheterization centers and opticaldispensing facilities. Many commentersargued that such facilities, like ASCs,are part of the physician’s practice andare not simply vehicles for passiveinvestment and self-referral. A numberof commenters stated that such facilitieswould not encourage overutilization,would increase access to care, wouldreduce costs, and would maintain orimprove quality of care. Severalcommenters averred that investments insuch facilities offer little inducementbecause each investor makes very littleprofit from investments in suchfacilities, in part because in somefacilities, each physician’s investment isa small percentage of the whole. Othercommenters stated that the cost ofoperating these facilities is so high thateach investor’s net revenues from thefacility investment is marginal. Manycommenters argued that existingregulation by Federal and State agenciesand by physician associations createssufficient checks on fraud and abuse.

Response: Our regulatory treatment ofASCs recognizes the Department’shistorical policy of promoting greaterutilization of ASCs because of thesubstantial cost savings to Federalhealth care programs when proceduresare performed in ASCs rather than inmore costly hospital inpatient oroutpatient facilities. Physicianinvestment in ASCs was an importantcorollary to the Department’s efforts topromote ASCs because physicians werenatural sources of capital, since manyhospitals were reluctant to open orinvest in ASCs that competed with theirown outpatient and inpatient surgerydepartments. Accordingly, many of theearly ASCs were financed and owned bysurgeons and other physicians whoworked in them. Currently, HCFA’s goalis to set payment rates that areconsistent across different sites ofservice.4 However, currently surgeriesin ASCs generally continue to bereimbursed at lower rates.

Safe harbor protection for ASCsderives in large measure from thislongstanding policy encouragingfreestanding ASCs as a less costlyalternative to hospitals for appropriatesurgeries. In addition, Medicare’suniform, prospectively-established ASCpayment methodology and the safeharbor’s restriction on billing Medicareseparately for ancillary services providefurther assurance against abuse.



Investments by referring physicians orcombinations of referring physiciansand hospitals in non-ASC clinical jointventures, including, but not limited to,cardiac catheterization laboratories,radiation oncology centers or ESRDfacilities, do not share the same policybackground and are not subject to thesame reimbursement structure asinvestments by physicians in ASCs.Such clinical joint ventures may raiseconcerns not present with ASCs. Inshort, to qualify under this safe harbor,a facility must be a certified ASC under42 CFR part 416. The existing smallentity investment safe harbor(§ 1001.952(a)(2)) may be applicable forother joint ventures (assuming all safeharbor conditions are satisfied). Inaddition, we are not prepared at thistime to extend safe harbor protection tonon-HCFA-certified ASCs. Industry-promulgated standards, while welcomeand often helpful in combating fraudand abuse, may not be sufficient tosafeguard the Federal health careprograms.

Comment: Several commentersasserted that hospitals with investmentinterests in ASCs should also beprotected under the proposed ASC safeharbor. One commenter expressed theview that hospitals have no financialincentive to refer outpatient surgeries toASCs because ASC net collectionswould be significantly lower thanhospital net collections for the sameprocedures. By contrast, several othercommenters suggested that hospitalswould refer outpatient procedures toASCs to enable the hospitals to focusresources on inpatient operations andtreatments and the development ofintegrated delivery systems. Severalcommenters asserted that a hospitalreferral of a patient to an ASC would bean extension of the hospital’s practiceanalogous to a surgeon’s referral of apatient to an ASC. A number ofcommenters asserted that patientswould benefit from using an ASC inclose proximity to a hospital, and thatcreating an ASC would make efficientuse of surplus hospital space.

Response: After reviewing thecomments, we are persuaded that safeharbor protection should be extended toASCs jointly owned by hospitals andphysicians who qualify under the termsof this safe harbor. Although jointventures between hospitals andphysicians are often susceptible to fraudand abuse, precluding all safe harborprotection for hospital investors inASCs may unnecessarily place hospitalsat a competitive disadvantage if they areforced to compete with ASCs owned byphysicians, who principally controlreferrals.

To be protected by the safe harbor, ahospital investment must meet all of theconditions set forth in the safe harbor.The hospital must not be in a positionto make or influence referrals directly orindirectly to the ASC or to any of itsphysician investors. Whether thiscondition is met will depend on thefacts and circumstances of particulararrangements. Any space used by theASC that is located in, or owned by, thehospital must be leased in accordancewith a lease arrangement that satisfiesall of the criteria of the space rental safeharbor (§ 1001.952(b)). Similarly, anyhospital equipment used by the ASCmust be leased under an arrangementthat satisfies the equipment rental safeharbor (§ 1001.952(c)), and any personalservices provided by the hospital mustbe provided in accordance with acontract that complies with the personalservices and management contracts safeharbor (§ 1001.952(d)). To furthermitigate the risk of improper cost-shifting, in no event may operating orrecovery room space be shared with thehospital for the treatment of thehospital’s inpatients or outpatients, normay the hospital reflect or include anycosts associated with developing oroperating the ASC on any Federal healthcare program claim or cost report(except such non-reimbursable costs asmay be required by the programs).

Comment: Many commentersexpressed the view that a safe harborthat protects an investment where 100percent of the investors are physicianswould be inconsistent with the 60–40investor rule in the existing investmentinterest in small entities safe harbor.Several commenters argued thatimposing a new 100 percent rule wouldbe burdensome on those investors whodiligently tried to comply with the 40percent rule.

Response: We are not changing therules for those ASCs that meet thecriteria for the ‘‘small entity’’ safeharbor. However, many existing ASCsthat are owned entirely orpredominantly by the physicians whopractice there cannot fit within the‘‘small entity’’ safe harbor and thus arenot currently afforded safe harborprotection. Depending on thecircumstances, either this new safeharbor, the ‘‘small entity’’ safe harbor(§ 1001.952(a)(2)), or the new‘‘underserved areas’’ safe harbor(§ 1001.952(a)(3)) may offer protectionto investors in an ASC.

Comment: Several commentersrequested clarification of therequirement that a participatingpractitioner ‘‘must agree to treat’’Medicare and Medicaid patients. Somecommenters noted that it was unclear

what level of participation in theseFederal health care programs wouldsatisfy the requirement. One commenterquestioned whether the safe harborwould require treating Medicare andMedicaid patients to the exclusion ofother patients if capacity were limited.Two commenters questioned whether itwas sufficient to ‘‘agree to treat’’ insteadof actually treating Medicare andMedicaid patients. Another commenterwondered whether all investors in thefacility must treat Medicare andMedicaid patients. One commentersuggested that the requirement bedeleted from the safe harbor. Anothersuggested that each ASC maintainrecords, on an annual basis, to showthat it actually provided services toMedicare and Medicaid patients inproportion to those patients in thecommunity. Several commenters notedthat the requirement to treat Medicareand Medicaid patients is unnecessarybecause the anti-kickback statute isimplicated only when Federal healthcare program reimbursement isrequested.

Response: The requirement that allprotected investors agree to treatMedicare and Medicaid patients isintended to ensure Medicare andMedicaid patients access to care at ASCson a non-discriminatory basis. Thus,decisions whether to accept and treatFederal health care programbeneficiaries must be made on anondiscriminatory basis. Thisrequirement is further intended topromote cost savings for the programsby encouraging investors to provideservices for Federal programbeneficiaries in ASCs rather thanhospitals in medically appropriatecircumstances. We do not intend toexclude from protection physicians whoare not accepting any new patients. Weare not adopting the suggestion thatASCs demonstrate that they provideservices to Medicare and Medicaidpatients in proportion to the numbers ofthose patients in the community. Wefind that requirement to be too limiting.We are clarifying the language of thesafe harbor to make clear its anti-discrimination purpose, and we areexpanding it to require non-discriminatory treatment of all Federalhealth care program beneficiaries.

The commenter is correct that theanti-kickback statute would not beimplicated, and no safe harborprotection required, if the investorphysicians were not in a position tomake referrals of or otherwise generatebusiness payable in whole or in partunder a Federal health care program.However, given the number of Federalhealth care programs, which include



Medicare, Medicaid, TRICARE,Veterans’ Administration, Public HealthService, Indian Health Service, andchildren’s health insurance under TitleXXI of the Act, we think it likely thatmost investor physicians willpotentially be in a position to referFederal program business.

Comment: One commenter wasconcerned that States might interpretState self-referral prohibitions as alsoprohibiting surgeons in ASCs fromreferring patients to the ASC for relatedlaboratory, radiology and other ancillaryservices, and asked that we clarify that,under this safe harbor, such ‘‘self-referrals’’ would be permissible.

Response: We are not in a position tocomment on State self-referralprohibitions. The ASC safe harbor is notintended to protect payments derivedfrom ancillary services performed at orby the ASC, unless such services aredirectly and integrally related to theprimary procedure performed at theASC. Thus, for example, payments inconnection with invasive radiology (aprocedure in which an imagingmodality is used to guide a needle,probe, or catheter accurately) would beprotected, while payments fordiagnostic or therapeutic radiologywould not be protected. To clarify thesafe harbor on this point, we have addeda requirement that all ancillary servicesfor Federal health care programbeneficiaries performed at or by the ASCbe directly and integrally related toprimary procedures performed at theASC and that no ancillary services beseparately billed to the programs.Simply stated, because of the risk ofoverutilization of ancillary services, thissafe harbor does not protect ancillaryservices joint ventures married to ASCs.Payments to providers of ancillaryservices may be protected under theemployee compensation or personalservices contract safe harbors, if thearrangements meet all applicablecriteria.

Comment: A number of commentersexpressed the opinion that integratedmultispecialty or single-specialty grouppractices, as well as HMOs, should beable to develop ASCs as part of thepractice network or HMO. With respectto HMO ownership and operation ofASCs, one commenter requested that thesafe harbor permit such ownership evenif physicians own the HMO and wouldbe referral sources for the ASC.

Response: We have revised the safeharbor to protect explicitly grouppractice investments in qualifyingASCs. To be protected, a group practiceinvestor must meet the requirements forthe group practices safe harbor at§ 1001.952(p) and be composed entirely

of physicians who meet all of thecriteria for protection as individualinvestors under the ASC safe harbor.Nothing in these regulations is intendedto preclude the development of ASCs byHMOs, provided such arrangements donot include impermissible payments ofremuneration to induce or rewardreferrals of Federal program business.These rules merely describe a certainsubset of lawful practices that aredeemed protected from prosecutionunder the anti-kickback statute.

Comment: At least one commentersuggested that the safe harbor beexpanded for ASCs in rural areas, sothat any individual or entity who isfinancially able to invest may do so, onthe ground that there is a great need forASCs and limited ability to capitalizethem in rural areas.

Response: We believe that theprovisions of this safe harbor willpermit most investors who are in aposition to capitalize ASCs in ruralareas to do so. No special exception isnecessary. Investors in an ASC locatedin a rural area may qualify for safeharbor protection under the investmentinterests in ASCs safe harbor, theinvestment interests in small entitiessafe harbor, or the new investmentinterests in underserved areas safeharbor. Investors in ASCs need onlysatisfy one safe harbor to qualify returnson their investments for protection fromprosecution under the anti-kickbackstatute.

3. Investment Interests In GroupPractices

Summary of Proposed Rule: Weproposed a new safe harbor to protectpayments to investors in entitiescomposed only of active investors in agroup practice. This safe harbor wouldhave protected the investment interestsof members of group practices that metcertain prerequisites and standards. Weproposed adopting the definition ofgroup practice contained in the StarkLaw at section 1877(h)(4) of the Act.The Stark Law prohibits Medicarepayment where physicians makereferrals for designated health servicesto entities in which they have anownership interest or with which theyhave a compensation arrangement,unless that interest or arrangementmeets the strict terms of a statutoryexception. In the proposed safe harbor,we intended principally to protectinvestors who are individuals whoqualify as ‘‘physicians’’ under the StarkLaw definition; however, our definitionof group practice permitted a physicianto invest as a professional corporation,if the corporation were exclusivelyowned by the physician. The proposed

safe harbor was intended to protect anypayment that is a return on aninvestment interest (such as a dividendor interest income) made to a physicianmember of a group practice who is an‘‘active investor’’ in the investmententity, as long as all of the standards inthe safe harbor were satisfied. Forexample, the safe harbor would haveprotected any payments resulting fromthe ownership of an interest in thegroup practice itself. It also could havebeen read—although it was notintended—to protect dividends from aninvestment in an MRI facility to whichthe physician-investors referredpatients, if the investment met the termsof the safe harbor. The proposed safeharbor was not intended to protect otherpayments made by group practices, suchas salary payments to employees of agroup practice or payments toindependent contractors.

We solicited comments on theappropriateness of our definition ofgroup practice. We further solicitedcomments on the appropriateness ofincorporating standards from the secondinvestment interest safe harbor(§ 1001.952(a)(2)), including theprohibition on preferential terms of aninvestment interest being offered tocertain physicians based on expectedreferrals; the prohibition on loans orloan guarantees from the entity oranother investor used to obtain theinvestment interest; and therequirement that the amount of thereturn on an investor’s investment mustbe directly proportional to the capitalinvested. In particular, we solicitedinformation regarding the types ofcompensation arrangements that existwithin group practices and the extent towhich such compensation arrangementscreate inappropriate incentives thatmight distort the professional judgementof the members of the group. Lastly, wesolicited comments on how we mightexpand the proposed safe harbor toother types of joint ventures composedexclusively of active investors.

We received over a dozen commentson this proposal. While somecommenters supported the safe harborand some opposed it, most questionedthe need for the safe harbor andindicated that it would cause confusionamong existing group practices.Moreover, it became apparent fromreviewing the comments that theintended scope of the safe harbor wasnot clear. Some commenters understoodthe safe harbor to protect investments ingroup practices; others believed itprotected investments by group practicemembers in other entities. A fewcommenters believed it covered bothtypes of investments.



Summary of Final Rule: Because ofthe evident confusion caused by theproposed safe harbor, and for reasonsmore fully explained below, we havedecided not to promulgate the safeharbor in the form it was originallyproposed. Instead, we are adopting asimpler, although perhaps narrower,safe harbor that protects returns oninvestments in the group practice itself(i.e., not in separately owned health careservices), if the group practice meets theStark Law definition of a group practice(section 1877(h)(4) of the Act) and if thegroup practice investors are all licensedprofessionals who practice in the group.The safe harbor also protectsinvestments in solo practices where thepractice is conducted through the solopractitioner’s professional corporationor other separate legal entity. The anti-kickback statute is not otherwiseimplicated for investments by solopractitioners in their practices. The safeharbor protects returns derived from in-office ancillary services that qualify forthe exception for ‘‘in-office ancillaryservices’’ under the Stark Law (section1877(b)(2) of the Act). This safe harbordoes not protect investments madejointly by group members in separateentities. The general parameters of thisnew safe harbor were suggested incomments submitted by a group practicetrade association as a less complicatedalternative to our proposed safe harborlanguage.

Specifically, the new safe harborimposes four criteria. First, the equityinterests in the practice or group mustbe held by licensed professionals whopractice in the practice or group. Theequity interests may be held by anindividual professional corporation ifthe corporation is exclusively owned bya single individual. Second, the equityinterests must be in the practice orgroup itself, and not some subdivisionof the practice or group. Third, thepractice (unless a solo practice) mustmeet the definition of ‘‘group practice’’in section 1877(h)(4) of the Act andimplementing regulations. Fourth, profitdistributions derived from in-officeancillary services are only protected ifthe services meet the definition of ‘‘in-office ancillary services’’ in section1877(b)(2) of the Act and implementingregulations. We believe these conditionswill offer reasonably broad safe harborcoverage for integrated medicalpractices, while at the same timeminimizing financial incentives thatcould lead to inappropriate utilizationand increased program costs.

Conceptually, this new safe harbor isconsistent with the accommodation forreferrals between group practicemembers contained in the safe harbor

for specialty referral arrangements(§ 1001.952(s)). In our preamble to the1993 proposed rule, we explained thatrevenues shared between members of agroup practice as a result of a referralfrom one member of the group toanother are an inherent part ofbelonging to a group practice. This safeharbor protects such payments,provided all safe harbor conditions aresatisfied.

We want to emphasize our view thatunder section 1877(h)(4) of the Act, agroup practice must consist of one legalentity and must be a unified businesswith centralized decision-making,pooling of expenses and revenues, anda distribution system that is not basedon satellite offices operating as if theywere separate enterprises or profitcenters. This safe harbor is not intendedto protect group practices that are notlegally organized, but instead only holdthemselves out as groups. Nor is thissafe harbor intended to protect multiplegroups of physicians that remain inmany ways separate, but join togetherfor selective purposes, such as takingadvantage of the exceptions in section1877 of the Act that apply to grouppractices. For purposes of theseregulations, a group practice may be onelegal entity if it is composed of ownerswho are individual professionalcorporations or is owned by physicianswho are individually incorporated.

Comments and ResponsesComment: One commenter supported

a safe harbor based on the definition of‘‘group practice’’ contained in section1877(h)(4) of the Act, but objected to theapplication of any other standards orconditions. This commenter argued thata bona fide group practice can beequated, for fraud and abuse purposes,with sole-practitioner medical practicesin that any remuneration shared orexchanged among the members of thegroup and any investment made jointlyby the group in an entity to which themembers of the group practice maymake referrals and which can beconsidered as ‘‘extension’’ of the grouppractice should be regarded as a self-referral. On the other hand, somecommenters expressed concernregarding the anti-competitive effects ofprotecting group practice investments inancillary services and the attendantincreased risk of abusive practices,including overutilization. Commenterssuggested that the safe harbor include arequirement for public notice of grouppractice investment in ancillary servicesentities and notices to patientsidentifying alternative service providers.

Response: We agree that, generallyspeaking, safe harbor protection is

warranted for remuneration shared orexchanged among the members of agroup practice that meets the definitionof a group practice under the Stark Law(section 1877(h)(4) of the Act). However,we are persuaded that investments bygroup practice members in entities thatprovide ancillary services may haveanti-competitive effects and may resultin abusive arrangements and incentivesto overutilize those ancillary services.Accordingly, we do not believe that safeharbor protection is warranted for grouppractice investments in ancillaryservices at this time. Of course,investments in ancillary services may becovered by the small entity investmentsafe harbor. This new safe harbor forinvestments in group practices protectsremuneration derived from in-officeancillary services, as defined in section1877(b)(2) of the Act and implementingregulations.

Comment: Some commentersquestioned the need to protectphysicians’ investments in their owngroup practice, and suggested that theanti-kickback statute is not implicatedby a physician’s ownership of his or herown professional practice.

Response: The plain language of theanti-kickback statute is sufficientlybroad so as potentially to includepayments from a group practice to aninvestor in the practice, even if theinvestor is a physician member of thegroup practice. However, ourpromulgation of this safe harbor is notan indication that we view investmentsin group practices as suspect per seunder the anti-kickback statute.Similarly, we do not view investmentsin solo practices as suspect per se.

Comment: Some commenters urgedthat the proposed safe harbor wouldhave excluded from protection mostexisting group practices. First, theproposed safe harbor required allinvestment interests in the group to beheld by physicians. ‘‘Investmentinterests’’ was broadly defined toinclude bonds, notes and other debtinstruments. Thus, if a group practiceborrowed from a bank or other entity,the bank or other entity would have hadan investment interest that precludedsafe harbor protection. Second, theproposed safe harbor required allinvestors to be ‘‘active investors.’’ Onecommenter noted that in most groups,the responsibility for the day-to-daymanagement of the entity is given to onephysician or to a practice manageroperating under the supervision of amanaging physician. This commenterstated that it is not possible or desirablefor every physician partner to beresponsible for the day-to-day operationof the practice. Another commenter



observed that many group practices arecorporations in which the members areshareholders and thus not ‘‘activeinvestors’’ in the corporation.

Response: We agree that inclusion ofdebt interests and the requirement thatall investors be ‘‘active investors’’ asdefined in our investment interests safeharbor unnecessarily limited theproposed group practice safe harbor.The new safe harbor, which appliesonly to investors who practice in agroup practice that meets the grouppractice definition in the Stark Law,looks only to equity interests owned byphysicians for purposes of measuringsafe harbor compliance. Moreover, thenew safe harbor does not require allgroup members be ‘‘active investors’’ asdefined in the small entity investmentinterests safe harbor. Thus, the fact thatall group members do not participate inthe day-to-day management of the grouppractice will not disqualify a grouppractice from safe harbor protection.

Comment: One commenter expressedconcern about the proposed restrictionon investment terms being related to theprevious or expected volume ofreferrals, noting that many physicianswho previously practiced in solo orsmall groups have joined grouppractices or merged into large groupsprecisely because of the professionalrelationships between and among thephysicians involved.

Response: We agree that a restrictionon the terms of an investment interestbeing related to previous or expectedvolume of referrals is not necessary inthe context of investments in grouppractices that meet the definition of agroup practice under the Stark Law. Ourrevised safe harbor language does notcontain such a requirement. However,the return on the investment interestmust comply with the Stark Law, whichlimits compensation to physicianinvestors that is based on the volume orvalue of referrals by the physician(section 1877(h)(4)(A)(iv) of the Act andimplementing regulations).

Comment: One commenter expressedconcern about the prohibition on grouppractices making loans to, orguaranteeing loans for, investors, if theloans are used to acquire an interest inthe group. This commenter believed thatthis provision could create a problemfor physicians who are given theopportunity to buy into an existingpractice over time, if a deferred capitalcontribution were viewed as a loan.

Response: Our new safe harbor doesnot contain a prohibition on loans fromgroup practices or group practicemembers used to acquire interests in thegroup practice.

Comment: One commenter suggestedthat the safe harbor should be expandedby adding protection for in-officeancillary services (such as a laboratory)shared by physicians who are not partof the same group practice, where thephysicians sharing the in-officelaboratory bill independently of oneanother and do not benefit from thevolume or value of referrals made bytheir partners. According to thecommenter, these arrangements arecommon, practical, and cost-effective.

Response: We agree that thesearrangements are often practical andcost-effective for physicians. However,as indicated above, we are not preparedto provide safe harbor protection forinvestments in separately-ownedancillary services at this time, whetherthe ownership is by group practicemembers or others. We remainconcerned that investments in ancillaryservices may create incentives foroverutilization and lead to increasedprogram costs. This is not to say that allsuch arrangements are unlawful underthe anti-kickback statute. However, wedo not believe that it would be possibleto craft a sufficiently circumscribed safeharbor that would protect legitimateinvestments, while at the same timeexcluding from protection shaminvestments that are in reality vehiclesfor the payment of kickbacks.

Comment: One commenterrecommended that the safe harbor applyto all practitioners within the reach ofthe anti-kickback statute, includingnurse practitioners, certified nurse-midwives, clinical nurse specialists andcertified registered nurseanesthesiologists.

Response: For now, we are limitingthe safe harbor to group practices asdefined in the Stark Law. The Stark Lawdefinition of group practices appliesonly to physicians. We may consider anexpansion to non-physicianpractitioners in future rulemaking.

4. Practitioner Recruitment

Summary of Proposed Rule: Weproposed a safe harbor for certainpayments or benefits offered by ruralhospitals and entities in their efforts torecruit physicians and otherpractitioners. It had come to ourattention that some hospitals located inrural areas encounter difficulties inattracting physicians to theircommunities. Our proposed safe harborwas designed to address this problemwithout protecting recruitmentarrangements intended to channelFederal health care programbeneficiaries to recruiting hospitals andentities.

We proposed limiting the practitionerrecruitment safe harbor to entitieslocated in rural areas as defined in ourproposed safe harbor for investments inrural areas. However, we solicitedcomments on alternative geographiccriteria. One alternative we suggestedwas limiting safe harbor protection torecruitment of practitioners located inareas that are health professionalshortage areas (HPSAs) for thepractitioner’s specialty category.

To ensure that we did not protectarrangements designed to channelFederal program business to recruitinghospitals or entities, we proposedprotecting recruitment of 2 types ofpractitioners: (1) Practitioners relocatingat least 100 miles to a new geographicarea and starting a new practice, and (2)new practitioners starting practices orspecialties after completing aninternship or residency program. Weproposed seven standards that wouldhave to be met to qualify for safe harborprotection. We also solicited commentsabout protecting payments designed toretain physicians already practicing inan area that has been designated as aHPSA for the physician’s specialtycategory.

Summary of Final Rule: The intent ofthe practitioner recruitment safe harboris to promote beneficiary access toquality health care by permittingcommunities that have difficultyattracting needed medical professionalsto offer inducements to thoseprofessionals without running afoul ofthe anti-kickback statute. This safeharbor is intended to apply only to areaswith a demonstrated need forpractitioners and only to practitionerswho actually serve the residents of suchareas. We are adopting the proposedsafe harbor with the followingmodifications:

• We are expanding the safe harbor tocover practitioner recruitment in urban,as well as rural, underserved areas.Specifically, the safe harbor applies torecruitment activities where therecruited practitioner’s primary place ofpractice will be located in a HPSA forthe practitioner’s specialty area inaccordance with 42 CFR part 5.

• We have eliminated the ‘‘100 mile’’rule.

• We have reduced the required newpatient revenues from 85 percent to 75percent.

• At least 75 percent of the revenuesof the new practice must be generatedfrom patients residing in a HPSA or aMUA or who are members of a MUP (asdefined by HRSA).

• The benefits may be provided for aterm of up to 3 years, provided there isa written agreement, and the benefits do



not directly or indirectly benefit otherreferral sources. If the HPSA ceases tobe a HPSA during the term of thewritten agreement, the recruitmentarrangement will not lose its safe harborprotection.

• The recruited practitioner mustagree to treat Federal health careprogram patients in a non-discriminatory manner.

• We are not requiring the entitydoing the recruiting to be located in theunderserved area.

• We are not requiring newpractitioners to establish staff privilegesat the recruiting entity.

Comments and ResponsesComment: Commenters expressed a

range of views regarding our proposeddefinition of ‘‘rural’’ for purposes of thissafe harbor. Some urged us to adopt thedefinition of rural used by HCFA toreimburse hospitals located in ruralareas under DRG payment rates (42 CFR412.62(f)(1)(iii)). Others urged that anentity be protected under the safe harborif it qualifies as a disproportionate sharehospital (DSH) under Medicare paymentpolicy. Some commenters suggested thatwe use HRSA’s designations of HPSAsas a means of limiting protectionafforded by the safe harbor. Severalcommenters recommended use ofHRSA’s designation of MUAs (42 CFRpart 51c). One commenter suggestedthat we substitute a ‘‘demonstratedcommunity need’’ standard for thegeographic criteria. In addition, manycommenters suggested that we extendthe practitioner recruitment safe harborto underserved urban areas. Severalcommenters proposed that we conformthe safe harbor to the Stark Lawexception for physician recruitment byeliminating geographic criteria.

Response: We are not prepared toexpand this safe harbor by protectingpractitioner recruitment wherever itoccurs. In many areas, hospitals andother recruiting entities can attractsufficient numbers of qualifiedpractitioners. In such areas, we see noneed to protect additional payments orbenefits that may in reality be disguisedbonuses for high referrers. Werecognize, however, that many hospitalsin rural and urban underserved areashave legitimate problems attractingphysicians and other practitioners andmay need to offer additional financialincentives to acquire adequate staff.After carefully reviewing the suggestedoptions, we have concluded that themost sensible approach—one that fairlybalances the need to addresspractitioner shortages with the need toguard against abusive practices—is toextend safe harbor protection to

recruitment payments and benefitsprovided to new and relocatingpractitioners who establish theirprimary place of practice in a HPSA inthe practitioner’s specialty area (seediscussion of HPSAs above). The choiceof HPSAs has the advantage of (i)including urban underserved areas,which we are persuaded oftenexperience comparable difficultiesattracting health care practitioners asrural areas, and (ii) targeting areas thathave demonstrated a shortage ofpractitioners in particular specialties,and, consequently a need for additionalrecruitment.

We are not adopting the definition of‘‘rural’’ used by HCFA for purposes ofreimbursing rural hospitals under DRGpayment rates. As discussed above, thatdefinition is derived from the OMBdefinition of ‘‘rural’’ that is used by theBureau of Census. The OMBmethodology is not as closely tailored tothe purpose of this safe harbor as isHRSA’s HPSA methodology. Moreover,the OMB methodology would notidentify underserved urban areas. Wealso concluded that the use of MUAswould create a broader safe harbor thanis needed to facilitate the type ofpractitioner recruitment we intend toprotect. Unlike HPSAs, which targetpractitioner shortages, MUAs measureshortages of health care servicesgenerally.

Similarly, we are not adopting theproposal to use DSH payments as acriterion for safe harbor protection.Although they are an indicator of thenumber of low-income patients ahospital treats, DSH payments do notnecessarily indicate practitionershortages. A ‘‘demonstrated communityneed’’ standard, while appealing intheory, presents too many difficulties inapplication to produce consistent andpredictable safe harbor protection.

Comment: One commenter asked usto clarify whether the safe harborprotected payments made by recruitingentities that are not located in an ruralarea to practitioners who are practicingin a rural area. This commenterobserved that some hospitals in ‘‘non-rural’’ areas serve patients who live in‘‘rural’’ areas.

Response: The safe harbor providesthat an entity will be protected if thepractitioner’s primary place of practiceis located in a HPSA for thepractitioner’s specialty area. Consistentwith our intent to facilitate recruitmentof health care practitioners to serve theneeds of underserved populations, weare not requiring that the recruitingentity also be located in a HPSA.

Comment: One commenter wonderedwhether a rural referral center (RRC)

that had been reclassified by HCFA asurban for purposes of Medicare paymentwould be eligible for protection underthe practitioner recruitment safe harbor.

Response: A RRC recruiting apractitioner whose primary place ofpractice will be located in a HPSA forthe practitioner’s specialty area wouldbe eligible for protection under the ruralinvestment interest safe harbor providedit met all of the conditions of the safeharbor.

Comment: The proposed safe harborapplies to new and relocatingpractitioners who derive 85 percent oftheir patient revenue from new patientsnot previously seen by the practitionerat his or her former place of practice.One commenter urged that the thresholdbe lowered to 50 percent to expand safeharbor protection. One commenterquestioned the ability to measurecompliance with the 85 percent revenuestandard prospectively. Anothercommenter inquired whether a hospitalwould be required to audit a recruitedphysician’s practice to ensurecompliance with the 85 percent revenuetest. One commenter suggested that the85 percent revenue test be eliminatedfor urban providers.

Response: A dollar volume standardis necessary to ensure that safe harborprotection is granted only to newpractitioners and those genuinelyrelocating and starting new practices.This safe harbor is intended to protectrecruitment activities, not payments toretain physicians in existing practices.The safe harbor does not coverarrangements between hospitals andphysicians that may be, in reality,payments to obtain the referrals ofestablished practitioners. However,upon further consideration, we agreethat the 85 percent standard weproposed is too high. We are, therefore,lowering the required percentage to 75percent, which we believe will besufficient to deter abuses. We recognizethat determining compliance with thesafe harbor may be problematic in somecircumstances, such as during the firstyear of practice. However, we think thatnew and relocating practitioners shouldbe able to achieve a reasonable degreeof certainty that they have compliedwith the regulations. Parties torecruitment arrangements may use anyreasonable method for establishingcompliance, provided they use the sameprinciples consistently over time, so asto avoid manipulating data to obscurenoncompliance.

Comment: Several commenterssuggested that we use a patientpopulation test instead of a revenue testas a basis for ensuring that the practiceis truly new or relocated.



Response: A revenue-based test moreaccurately measures whether servicesare, in fact, being provided to newpatients than does a test based on thenumbers of patients in a practitioner’spractice. We do not intend to protectrelocating practitioners who establishpractices in HPSAs, but who continueprimarily to treat patients from thepractitioner’s former practice.

Comment: The proposed safe harborcontained a requirement that arelocating practitioner’s physicalprimary place of practice be at least 100miles from his or her previous primaryplace of practice. Several commentersurged us to eliminate the 100 mile rulealtogether or reduce the distancerequired. These commenters pointed outthat the 100 mile requirement wouldproduce arbitrary results in somecircumstances and that some rural areaswith practitioner shortages were locatedless than 100 miles from urban areaswith pools of potential practitionersfrom which to recruit. Moreover, the100 mile rule made it more difficult forurban undeserved areas to qualify forsafe harbor protection. One commentersuggested using a travel distance of oneand a half hours as a means of ensuringa majority of the practitioner’s patientswill be new. In the alternative, acommenter suggested making the 100mile rule an alternative test to the 85percent new patient revenue rule.

Response: The 100 mile rule wasintended to ensure that the safe harborprotected recruitment of new orrelocating practitioners only. However,we are persuaded that the proposed 100mile rule would be impractical and leadto arbitrary results in somecircumstances and would unnecessarilylimit the protection afforded by this safeharbor. We also recognize that the 100mile rule would make it difficult forentities in urban underserved areas toenter into recruitment arrangements thatqualify for the safe harbor. Accordingly,we are eliminating the 100 mile rule,thereby enabling some recruitmentarrangements to qualify for the safeharbor even if the practitioner relocateshis or her primary place of practice onlya short distance to a HPSA.

We are concerned, however, about thepossibility of abuse by experiencedpractitioners, particularly in urbansettings, who may ‘‘relocate’’ theiroffices short distances to underservedareas in order to qualify for the safeharbor and therefore receive recruitmentpayments that may, in fact, be rewardsfor referrals. The 75 percent new patientrevenue test does not adequately guardagainst such abuse, because it measureswhether patients are new to the practiceand not whether patients are part of an

underserved population. To ensure thatsafe harbor protection is not availablefor practitioners who relocate but do notserve the populations intended tobenefit from this safe harbor, we areadding a requirement that 75 percent ofthe revenues of the new practice mustbe generated from patients residing in aHPSA or a MUA or who are membersof a MUP. The patients do notnecessarily have to reside in the specificHPSA in which the practitioner’s newpractice is located, but may resideinstead in a nearby MUA or HPSA. Insum, to qualify for the safe harbor, anew or relocating physician mustsubstantially treat patients who are newto the physician’s practice and whoreside in underserved areas, or aremembers of medically-underservedpopulations designated by HRSA.

Comment: A number of commentersdiscussed the third proposed safe harborstandard, which would have imposedcertain time limits on payments andbenefits protected by the safe harbor.One commenter recommendedextending the time limit for protectedrecruitment payments in non-HPSArural areas from 3 years to 5 years.Several commenters urged us to allowprotected recruitment payments forpractitioners in HPSAs for as long as anarea is designated as a HPSA. Somecommenters questioned what wouldhappen if a HPSA designation wasrevoked during the term of therecruitment contact. These commentersrecommended that the contract continueto be protected for its term.

Response: Our original proposed safeharbor contemplated a 3 year limit onbenefits, unless the practitioner waslocated in a HPSA, in which caserecruitment benefits would be protectedfor the entire duration of therelationship between the practitionerand the recruiting entity. Given that wehave limited the scope of this safeharbor to HPSAs, the 3 year limit fornon-HPSA rural areas originallyproposed no longer pertains.

However, our experience over the pastfew years has shown that practitionerrecruitment is an area frequently subjectto abusive practices. The risk ofkickbacks is mitigated when paymentsare made to new or relocatingphysicians who do not have establishedreferrals streams that can be locked upthrough inappropriate incentives andloyalties. Thus, we have concluded thatprotected payments under this safeharbor should not be of unlimitedduration or subject to renegotiation thatmay be based on the volume or value ofreferrals. We believe that 3 years is areasonable time period for recruitmentbenefits. Accordingly, we are amending

the third standard to read as follows:‘‘the benefits are provided by the entityfor a period not to exceed 3 years, andthe terms of the agreement are notrenegotiated during this 3 year period inany substantial aspect.’’ By ‘‘anysubstantial aspect,’’ we mean in anymanner that materially affects thepayments and benefits to be made to therecruited practitioners under the writtenagreement. We have also revised thesafe harbor to make clear that if theHPSA designation is revoked during theterm of the contract, the payments willremain protected for the term of thecontract (which term may not exceed 3years), provided all other safe harborconditions are satisfied.

We understand that limitingrecruitment payments and benefitsraises the question of incentives toretain physicians in HPSAs beyond aninitial 3 year period. Because of theincreased risk of kickbacks, paymentsfor retention purposes require closerscrutiny than initial recruitmentpayments. We solicited commentsregarding development of a physicianretention safe harbor. We receivedseveral comments in support of such asafe harbor. A physician retention safeharbor may be the subject of futurerulemaking.

Comment: Several commenters hadconcerns about the fourth proposedstandard of the physician recruitmentsafe harbor, which would require that‘‘the entity providing the benefitscannot condition the agreement on thepractitioner’s referral of business to theentity.’’ Specifically, one commenterinquired if this meant that the hospitalcould not condition the recruitmentpayments on the practitioner having andmaintaining staff privileges at therecruiting entity.

Response: This requirement is derivedfrom the small entity investmentinterests safe harbor at§ 1001.952(a)(2)(iv) and is intended toensure that the agreement is notconditioned on the referral of businessfrom the practitioner to the entity.Consistent with this provision, hospitalsmay require a practitioner to have andmaintain staff privileges; however, ahospital may not prohibit thepractitioner from obtaining ormaintaining staff privileges at otherfacilities. A hospital may not conditionrecruitment payments on aggregateadmissions by the practitioner, nor mayit require a recruited practitioner toadmit a proportionate share of his or herpatients to the hospital. A hospital mayimpose conditions intended to ensurequality of patient care, such as requiringthat a physician have performed aminimum number of a particular type of



procedure before performing theprocedure at the hospital.

Comment: Some commentersquestioned the need for the requirementthat practitioners agree to treat Medicareand Medicaid patients. One commentersuggested that the regulations require arecruited physician to treat all patientsreferred by the hospital, regardless of apatient’s insurance status or ability topay. A similar comment suggested thatthe regulations for physicianrecruitment require the physician tobecome a participating provider in theMedicare and Medicaid programs.

Response: We have generallyaddressed this issue in our discussionabove. To impose a standard requiringa practitioner to treat all patientsreferred by a hospital would exceed ourregulatory authority. Likewise, we arenot requiring recruited practitioners tobecome participating providers in theMedicare and Medicaid programs.However, if they participate in anyFederal health care program, they musttreat all program beneficiaries in anondiscriminatory manner.

Comment: A number of commentersrequested that we further define theterms ‘‘payment’’ and ‘‘benefit’’ as usedin §§ 1001.952(n)(1), (3), and (6) of theproposed physician recruitment safeharbor. Some commenters soughtguidance regarding which specificpayment practices are protected by thesafe harbor.

Response: We decline to specify inthese regulations any particular set ofpayment practices covered by this safeharbor. Recruitment practicesnecessarily vary depending on specificcircumstances. Accordingly, whetherpayment practices are protected by thissafe harbor must be evaluated on a case-by-case basis. In particular, the amountor value of the benefits provided by theentity may not vary (or be adjusted orrenegotiated) in any manner based onthe volume or value of any expectedreferrals to, or business otherwisegenerated for, the recruiting entity bythe practitioner for which payment maybe made in whole or in part under aFederal health care program.

Comment: A commenter urged thatthe final regulations make clear thatcompliance with the recruitment safeharbor exempts parties from having tocomply with other safe harborregulations, including the personalservices, space and equipment rentaland obstetrical malpractice insurancesafe harbors.

Response: This comment addresses asituation where a recruitment agreementmay involve more than one safe harbor(e.g., the space rental and obstetricalmalpractice safe harbors). If the

recruitment agreement as a whole meetsthe criteria of the recruitment safeharbor, then the agreement as a wholeis exempt from criminal prosecution. If,however, the agreement does not fitwithin the recruitment safe harbor,certain payments made in accordancewith it may still be protected under theother safe harbors, if the otherindividual safe harbor criteria are met.

Comment: Several commentersrequested that we clarify whether thesafe harbor protects joint recruitmentefforts between hospitals and grouppractices or between hospitals andindividual physicians who may employnew physicians in their practices. Alongthese same lines, one commenter askedus to protect the indirect recruitmentactivities of managed care organizations,which frequently conduct physicianrecruitment in conjunction withparticipating hospitals.

Response: We are aware that anincreasing amount of physicianrecruitment is being conducted throughjoint arrangements between hospitalsand group practices or solopractitioners. Typically, thesearrangements involve payments fromhospitals to group practices or solopractitioners to assist the group practiceor solo practitioner in recruiting a newphysician. Managed care organizationsare also involved in joint practitionerrecruitment activities with hospitals andphysician practices. On the one hand,these arrangements can be efficient andcost effective means of recruitingneeded practitioners to an underservedcommunity. Moreover, many newpractitioners prefer joining an existinggroup practice to starting a solo practice.On the other hand, these arrangementscan be used to disguise payments forreferrals from the group practice or solopractice to the hospital.

We are not persuaded that a safeharbor can be crafted that would protectlegitimate joint recruiting arrangementsof the type described above withoutsweeping in sham arrangements that areactually disguised payments forreferrals. However, we want to makeclear that joint recruitmentarrangements are not necessarily illegaland must be evaluated on a case-by-casebasis. Parties seeking further guidanceabout their joint recruitment activitiesmay apply for an advisory opinion.

Comment: One commenter stated thatthe sixth standard of the proposed safeharbor for physician recruitment, whichprohibits benefits that vary based on thevolume or value of expected referrals,would eliminate income guaranteesfrom safe harbor protection, since theamount of the funds advanced againstthe guarantee are generally not

determined until the new physician hascommenced his or her practice and theinitial income from the practice hasbeen determined. According to thecommenter, income guarantees areamong the most common recruitmentincentives.

Response: The anti-kickback statuteprohibits payment of any remunerationto induce referrals for which paymentmay be made in whole or in part by aFederal health care program. To thisend, this safe harbor, like others,prohibits payments that are based on thevolume or value of expected referrals.Recruitment incentives tied to volumeor value of referrals generated are notimmunized by this safe harbor.However, where the maximum amountof the income guarantee and the formulafor determining payment under theguarantee are set in advance and notsubject to renegotiation, the formula isnot tied to volume or value of referrals,and the income guarantee otherwisemeets the safe harbor requirements, thefact that the actual amount that will bepaid to the practitioner under theguarantee is not known in advance willnot disqualify the income guaranteefrom safe harbor protection.

Comment: One commenter requestedclarification as to how the recruitmentsafe harbor would apply to physiciansrecruited to fill medical directorpositions where, in most cases, thephysician is not an employee of thefacility and is not generally perceived asa source of referrals.

Response: In many circumstances,medical directors are potential referralsources and medical director contractsserve as a means to reward referrals.There is no special protection formedical directors under the practitionerrecruitment safe harbor. To beprotected, a recruitment arrangementmust meet all of the standards of thesafe harbor, including the new patientand underserved patient revenue tests(§§ 1001.952(n)(2) and (8)). In thealternative, a contract for medicaldirector services may qualify forprotection under the employeecompensation or personal servicescontract safe harbors (§§ 1001.952(i) and(d)).

Comment: Several commenters urgedus to make the safe harbor consistentwith IRS Revenue Ruling 97–21 onphysician recruitment.

Response: The IRS Revenue Ruling97–21 on physician recruitment by atax-exempt hospital is intended toprovide guidance on recruitmentactivities that are consistent with ahospital’s operations as a tax-exemptentity. The revenue ruling sets forthstandards for determining whether a



tax-exempt hospital’s practitionerrecruitment activities jeopardize its tax-exempt status. Under the revenueruling, a hospital does not jeopardize itstax-exempt status if its recruitmentpayments are reasonably related to itstax-exempt purpose. However, thisstandard is an insufficient safeguardagainst improper payments for referrals.A payment that is reasonably related toa hospital’s tax-exempt purpose, but istied to the volume or value of expectedreferrals, will likely run afoul of theanti-kickback statute and is notappropriate for safe harbor protection.

Comment: One commenter asked usto reaffirm that not all physicianrecruitment activities necessarily violatethe anti-kickback statute, and thatrecruitment programs not meeting thesafe harbor criteria will be analyzed ona case-by-case basis.

Response: The failure of a particulararrangement to comply with the safeharbor does not determine whether ornot the arrangement violates the anti-kickback statute. Neither does suchfailure determine whether anenforcement action is warranted. As ageneral rule, remuneration tophysicians, including recruitment,should be consistent with fair marketvalue for necessary services rendered bythe physician. The practitionerrecruitment safe harbor protects certainpayment practices that may depart fromthis general rule if particular criteriaestablished by the safe harbor are met.Arrangements that do not qualify for thesafe harbor must be evaluated on a case-by-case basis to determine whetherthere has been a violation and whetheran enforcement proceeding iswarranted.

5. Obstetrical Malpractice InsuranceSubsidies

Summary of Proposed Rule: Weproposed a new safe harbor to permit ahospital or other entity to pay all or partof the malpractice insurance premiumsfor practitioners engaging in obstetricalpractice in primary health careprofessional shortage areas. Forpurposes of this safe harbor, weincluded certified nurse midwives asdefined in section 1861(gg) of the Act inthe definition of ‘‘practitioner.’’ Welimited this safe harbor to the provisionof malpractice insurance regulated byState law. We explained that nothing inthe safe harbor would authorizepayment by the Federal health careprograms to hospitals or otherinstitutional providers for costs theymay incur in providing malpracticeinsurance. Any allowable costs for suchinsurance are governed strictly byFederal health care program rules.

We solicited comments on specific,narrowly-drawn circumstances wherethis safe harbor provision could beexpanded to help assure beneficiaryaccess to services that may besignificantly affected by the cost ofmalpractice insurance premiums. Inaddition, we solicited views regardingthe feasibility of expanding this safeharbor to protect malpractice insuranceprograms that are not regulated underState law, but which are operateddirectly by providers.

Summary of Final Rule: This safeharbor is intended to facilitate access toobstetrical services for Federal healthcare program beneficiaries in primarycare health professional shortage areasby protecting from the reach of the anti-kickback statute subsidized malpracticeinsurance for practitioners who areprimarily engaged in obstetricalpractices in those areas. We haveadopted the proposed safe harbor withthe following modifications:

• We are expanding the safe harbor tocover self-funded insurance plans.

• We are reducing from 85 percent to75 percent the proportion of thepractitioner’s obstetrical patients whomust be treated under the subsidizedinsurance coverage.

• We are eliminating the phrase ‘‘bein a position to make or influencereferrals’’ from § 1001.952(o)(3), sincemost, if not all, insurers requirepractitioners to be in a position toperform obstetrical services as acondition of coverage.

• We are requiring that protectedpractitioners be engaged in obstetrics asa routine part of their practices. Fullsubsidies for obstetrical malpracticeinsurance may be paid for full-timeobstetricians or nurse midwives; forpart-time practitioners in obstetrics, thesafe harbor protects only costsattributable to the obstetrical portion oftheir practices.

Comments and ResponsesComment: One commenter

recommended expanding the phrase‘‘practitioners engaging in obstetricalpractice’’ to include explicitly familypractitioners and other physicians whomay deliver babies, in order to makeclear that the safe harbor coversinsurance subsidies for suchindividuals.

Response: We agree that limited safeharbor protection is appropriate forfamily practitioners and otherphysicians and certified nurse midwiveswho deliver babies as a routine part oftheir medical practices. Accordingly, weare amending the proposed regulation toprovide for limited coverage for ‘‘apractitioner who engages in obstetrical

practice as a routine part of his or hermedical practice.’’ For purposes of thissafe harbor, by ‘‘routine’’ we mean thatthe practitioner must providesubstantial and regular obstetricalservices; we do not intend to protectobstetrical insurance subsidies forpractitioners who practice obstetricalmedicine on only an occasional basis.

For practitioners who are not full-timeobstetricians or certified nursemidwives, we will protect payments forobstetrical malpractice insurance only.We will not protect subsidies for othertypes of medical malpractice liabilityinsurance. Thus, for these practitionersthe protected subsidy will be thedifference between the cost ofmalpractice insurance that includesobstetrical coverage and the cost ofmalpractice insurance that does notinclude such coverage. Similarly, thesafe harbor will protect certaininsurance subsidies paid on behalf ofpractitioners engaged in obstetricalpractices part-time in a HPSA and part-time elsewhere. We have in mind, inparticular, urban obstetricians who maypractice several days in an inner-cityclinic (in a HPSA) and several days inareas that are not underserved. For thesepractitioners, the safe harbor protectsinsurance subsidies for obstetricalmalpractice insurance coverage relatedexclusively to services provided in theHPSA. If the practitioner is covered bya single insurance policy or program,the safe harbor covers subsidies for thatportion of the insurance premium thatis reasonably allocable to obstetricalservices provided in a HPSA.

Comment: We solicited comments onspecific, narrowly-drawn circumstanceswhere this safe harbor provision couldbe expanded to help assure beneficiaryaccess to services that may besignificantly affected by the cost ofmalpractice insurance premiums. Inresponse, one commenter recommendedexpanding this safe harbor to includeneuro, cardiovascular and orthopedicsurgeons. Two commentersrecommended enlarging the safe harborto cover malpractice insurance coveragefor pediatricians. A commenter alsorecommended expanding the safeharbor to cover emergency roomcoverage by high risk medicalspecialists in situations where a hospitalis able to certify that a viable panel ofspecialists is only possible if thehospital can provide this benefit. Onehospital association expressed concernthat a safe harbor only for insurancesubsidies for obstetrical practitionersmay create unnecessary concern in theindustry that all other types ofpractitioner malpractice insurancesubsidies may be suspect. The



association recommended greatlyexpanding the proposed safe harbor ordeleting it as written.

Response: This safe harbor isintended to promote access toobstetrical services for Federal healthcare program beneficiaries and others inunderserved areas. Although wesolicited comments on expanding thissafe harbor, we are not persuaded at thistime that there are compelling reasonsto expand it beyond malpracticeinsurance subsidies for practitionersengaging in obstetrical practices. Thissafe harbor does not call into questionthe legality of all other types ofpractitioner malpractice insurancesubsidies. Such subsidies may qualifyfor protection under other safe harbors,such as practitioner recruitment,personal services contracts or employeecompensation (§§ 1001.952(n), (d), and(i)). Moreover, as we have previouslystated, the fact that a payment practicedoes not fall within the ambit of a safeharbor does not necessarily mean thatthe practice violates the anti-kickbackstatute. At the same time, we note thatmalpractice insurance subsidies paid toor on behalf of potential referral sourcesmay be suspect under the anti-kickbackstatute. These arrangements are subjectto a case-by-case evaluation. Theadvisory opinion process is available forparties seeking OIG guidance on theanti-kickback implications of particularinsurance subsidy arrangements (See 42CFR part 1008).

Comment: Several commentersoffered views on the geographic scope ofthe safe harbor. One commenterrecommended that we expand the scopeof the safe harbor to protect subsidies inprimary care HPSAs and in rural areasas defined in 42 CFR 412.62(f)(1)(iii).Another urged application of the safeharbor in urban areas. Somecommenters noted that the HPSAdesignation process is a volatile, on-going process, and that the list ofshortage areas is rarely an accuratereflection of actual need for health careprofessionals at a particular point intime. Moreover, these commentersbelieved that dependence on Federaldesignations fails to recognize the roleof states in identifying and remedyinghealth professional shortage areas. Onecommenter suggested focusing onemergency room admissions ofobstetrics patients who have nodesignated primary care practitionerrather than on HPSA data to measurecommunity need.

One commenter raised the question ofwhat happens when the offer ofsubsidized malpractice insuranceinduces a physician to relocate to aHPSA, but the physician’s relocation

itself serves to remove the community’sHPSA designation. This commenterproposed substituting a ‘‘need’’standard, with the appropriatedocumentation of need for thesubsidized practitioner left up to theentity providing the subsidy. Thiscommenter observed that many currentsafe harbors use the concept of ‘‘fairmarket value’’ without requiring anyparticular fair market value standard tobe met, and the health care communityfor the most part understands thatdocumentation is critical to prove fairmarket value in the event a particulartransaction is later scrutinized.Examples of documentation of ‘‘need’’could include determinations by Statelegislatures, as well as any otherappropriate indications of need for aparticular type of health careprofessional.

Response: As described in greaterdetail above in our responses tocomments on the practitionerrecruitment safe harbor, primary careHPSAs may be located in rural or urbanareas. We are limiting this safe harbor toprimary care HPSAs so as to ensure asmuch as possible that the benefitsprotected by this safe harbor areextended to practitioners in areas wherethere is a well-founded, documentedshortage of obstetrical practitioners. Weare aware that there are and have beenproblems with the HPSA process. Weexpect that the Department’s anticipatedrevision of the process should addressmany of those problems, includingproviding States with greater input indesignating shortage areas. We believethat a general ‘‘need’’ standard could bemanipulated in ways that would permitabusive payments in the guise ofinsurance subsidies. We note thatnothing in this safe harbor preventsprotection of malpractice insurancesubsidies for practitioners engaged inpractice outside primary care HPSAs aspart of an arms-length, fair market valuecompensation package that meets therequirements of the personal servicessafe harbor or the employeecompensation exception to the anti-kickback statute (§§ 1001.952(d) and (c);42 U.S.C. 1320a–7b(b)(3)(B)).

Comment: One commenter questionedthe feasibility of the requirement that 85percent of the practitioner’s obstetricalpatients treated under the insurancecoverage must come from certaindefined underserved populations,noting that compliance with thestandard can only be determined afterthe payment of the insurance premiumsubsidy. The commenter observed thatobtaining liability coverage necessarilyprecedes treatment of any patientsunder that coverage. Documenting

compliance with the standard isparticularly problematic whereinsurance subsidies are used asrecruiting devices for new or relocatingpractitioners who do not haveestablished patient pools that can bemeasured. One commenter suggestedthat this problem could be solved bydeeming the 85 percent test satisfied ifthe practitioner provides a writtenstipulation that the 85 percent test willbe met.

Response: Upon further review, webelieve that an 85 percent test isunnecessarily restrictive. Accordingly,we have amended the safe harbor toprovide that 75 percent of the patientstreated must come from underservedpopulations, that is, they must reside ina HPSA or a MUA or be part of a MUP,all as defined by HRSA and describedabove. Moreover, we agree that underthe test as drafted in the proposed rule,it would not be possible for partiesseeking safe harbor protection todetermine whether a payment for aninsurance subsidy satisfies the safeharbor prior to making the payment.However, we believe that a practitionerstipulation is insufficient by itself toensure that appropriate populations arebenefitting from the increased access toobstetrical care contemplated by thissafe harbor. Accordingly, we haveamended the safe harbor to provide thatfor the initial coverage period, whichwill be limited to one year, thepractitioner must certify that he or shehas a reasonable basis for believing thathe or she will meet the 75 percent testfor the duration of the coverage period.Thereafter, for payments of insurancepremiums to be protected, the 75percent standard must have been metfor the period covered by the precedinginsurance premium payment, whichcoverage period may not exceed oneyear.

Comment: One commenterrecommended eliminating therequirement that the insurance subsidybe paid to the insurance provider, ratherthan the subsidized practitioner.

Response: The requirement that thesubsidy be paid to the insuranceprovider is a reasonable means ofensuring that the payment is used forthe purposes intended by this safeharbor. Permitting a direct cashpayment to the subsidized practitionerincreases the risk that the ‘‘subsidy’’payment may in fact be a disguisedpayment for referrals. We are notpersuaded that payment directly toinsurance providers is impractical orunduly burdensome on subsidizingentities or subsidized practitioners.

Comment: One commenter believedthat the requirement that practitioners



treat Medicaid patients is superfluous,because the anti-kickback statute is onlyimplicated where Medicaid andMedicare referrals are in fact made.Another commenter recommendedamending the requirement to providethat a physician may not discriminateagainst Medicaid patients to the extentthe physician is able to see new patientsin his or her practice. Otherwise, thesafe harbor would preclude protectionfor physicians whose current practicesmay be full.

Response: These issues are addressedabove with respect to the safe harborregarding physician recruitment.

Comment: A commenter observed thatsome professional liability underwriters,especially in states with harsh liabilityclimates, do not have the surplusesrequired to provide coverage beyondcertain minimum limits, and suggestedthat the safe harbor should protecthospital underwriting of all physicianliability above certain limits in order toprotect physicians against large awardsagainst them. The commenter suggestedlimits of $100,000 to $300,000.

Response: This proposal, whichessentially would cover the entire rangeof practitioner services, does not meetour requirements for proposals ofspecific, narrowly-drawn circumstanceswhere the safe harbor could beexpanded to help assure beneficiaryaccess to services significantly affectedby the cost of malpractice insurancepremiums.

Comment: Several commenterssuggested the safe harbor be extended toprotect payment of premiums orestablishment of reserves in self-fundedprograms underwritten and operated byhospitals and other providers, includingrisk-retention groups. Thesecommenters point out that manyhospitals and other entities elect self-insurance programs for physicians onthe medical staff, instead of purchasingcommercial insurance fromindependent third parties. Thecommenters noted that self-insuranceprograms, including risk-retentiongroups, were established in response tothe unavailability or unaffordability ofmalpractice insurance for certain areasor specialities. Commenters believedthat these programs keep health carecosts to a more reasonable level andought to be encouraged and protected.They argued that the benefit to thephysician is the same whetherinsurance is provided through a self-funded program or commercial thirdparty insurance, and thus hospitals orother health care providers with self-funded programs should not bedeprived of protection. Self-insuredhospitals are not in a position to make

payments to another entity that providesinsurance. To assure that only bona fideprograms are shielded, one commenterrecommended that only programs thathave been certified by a qualifiedactuary as adequate relative to the riskassumed should be afforded safe harborprotection. Finally, several commenterssuggested expanding the safe harbor toinclude offshore insurance products.

Response: We solicited commentsregarding the feasibility of expandingthe safe harbor to protect subsidies forinsurance under programs operateddirectly by providers. As indicated inthe preamble to the 1993 proposed rule,our concern was that the subsidizedinsurance policies be bona fide toensure that this safe harbor is not usedas a mechanism to disguise improperinducements to practitioners. Therequirement that the insurance be bonafide also protects practitioners andpatients. We agree that from thepractitioner’s perspective, the benefitderived from an insurance subsidy isthe same whether the insurance isprovided by commercial third partyinsurance or a self-funded program.Accordingly, we have amended the safeharbor to extend protection to bona fideself-funded obstetrical malpracticeinsurance programs, including risk-retention groups that qualify under theLiability Risk Retention Act, 15 U.S.C.3901, and to bona fide offshoreinsurance products. Although we arenot defining the full scope of bona fideinsurance products, we believe thatcertification by a qualified actuary thatthe program is adequate relative to therisk insured would be an indicator of abona fide insurance program.

Comment: One commenter suggestedthat the prohibition on requiring aphysician to ‘‘be in a position to makeor influence referrals’’ limits the abilityof facilities to require that physiciansmaintain medical licenses and be in aposition to practice medicine andrecommended that the prohibition beeliminated.

Response: Nothing in these safeharbor regulations is intended toprevent hospitals and other health carefacilities from requiring that physiciansand other practitioners who performservices at or for such facilities be fullylicensed and able to practice medicine.In particular, we recognize that properlicensure and qualifications to practicemedicine are prerequisites for obtainingmalpractice insurance. We arepersuaded that the language ‘‘be in aposition to make or influence referralsto’’ is unnecessary in the context of asafe harbor for obstetrical malpracticeinsurance subsidies. Therefore, we haveamended the third condition of the safe

harbor to prohibit any requirement thatpractitioners ‘‘make referrals to, orotherwise generate business for, theentity as a condition for receiving thebenefits.’’

Comment: One commenter expressedconcern that the safe harbor does notadequately protect group practices.

Response: A group practice thatprovides obstetrical malpracticeinsurance subsidies may qualify as an‘‘entity’’ for purposes of this safe harbor.Moreover, as indicated above, we haveamended the safe harbor to permitentities to subsidize insurance throughself-funded insurance programs. Thissafe harbor is not intended to protectgroup practices for any paymentpractice that does not satisfy all of thesafe harbor criteria, including therequirements that the subsidizedpractitioner practice in a primary careHPSA and that 75 percent of theobstetrical patients treated reside inunderserved areas.

6. Referral Agreements for SpecialtyServices

Summary of Proposed Rule: Weproposed a new safe harbor for referralagreements for specialty services. Thissafe harbor would protect arrangementsunder which an individual or entityagrees to refer a patient to anotherindividual or entity for specialtyservices in return for an agreement onthe part of the party receiving thereferral to refer the patient back at acertain time or under certaincircumstances. For example, a primarycare physician and a specialist (towhom the primary care physician hasmade a referral) may agree that, whentheir patient reaches a particular stage ofrecovery, the primary care physicianshould resume treatment of the patient.

We proposed three standards thatsuch a referral arrangement would haveto meet to fit within the safe harbor.First, the service for which the initialreferral is made must not be within themedical expertise of the referring partyand must be within the special expertiseof the party receiving the referral.Second, the parties could receive nopayment from each other for the referral.Third, the only exchange of valuepermitted between the parties would bethe monetary remuneration each partywould receive directly from third-partypayers or the patient as compensationfor professional services furnished byeach party to the patient.

We proposed an accommodation inthis safe harbor for members of the samegroup practice who refer to one another.Where the referring and receivingphysicians belong to the same grouppractice, revenues are shared among



members of the group practice, and thusit appears that the referring physicianreceives remuneration for the referral.However, such financial benefits are aninherent part of belonging to a grouppractice, and therefore we proposedprotecting such remuneration if thegroup practice met the definition of‘‘group practice’’ in section 1877(h)(4) ofthe Act.

Summary of Final Rule: Because ofthe potential for abuse when thereferring physician and the specialtyphysician receiving the referral split aglobal payment from a Federal healthcare program, we are revising theregulation specifically to excluderemuneration received in suchcircumstances from the safe harbor. Weare also adding a requirement that thecondition for the referral back to theoriginating referral source must beclinically appropriate. We are otherwisepromulgating the safe harbor asproposed.

Comments and ResponsesComment: A number of commenters

generally supported the approach of theproposed safe harbor, stating that itwould adequately protect legitimatereferral arrangements while sufficientlydiscouraging illegitimate ones. Theysuggested that the safe harbor would beuseful because it would assureconvenient access to follow-up care incommunities where there are nospecialists. However, severalcommenters suggested that insulatingreferrals for specialty services from thekickback statute would encouragearrangements that might compromisethe quality of patient care, becausearrangements between the primaryphysician and the referral specialistmight require a patient to be referredback to the primary physician,regardless of whether it would beclinically appropriate. Further, specialtyreferral arrangements could denypatients the right to choose theirproviders.

Response: We share the commenters’concerns that patient referrals be madeonly under clinically appropriatecircumstances. Indeed, clinicalappropriateness should be thetouchstone of all referrals, specialty orotherwise. To emphasize the importanceof clinical appropriateness as aconsideration, we are revising the safeharbor to reflect that the ‘‘mutuallyagreed upon time or circumstance’’ forthe receiving specialist to return thepatient must be clinically appropriate.We are not further defining ‘‘clinicallyappropriate,’’ however, because whethera referral is clinically appropriate willdepend on the particular facts and

circumstances. Depending oncircumstances, an agreement to refer apatient back on a date certain, withoutregard to medical condition, would bequestionable.

We also share the commenters’concerns regarding the preservation ofpatient freedom of choice. Patientfreedom of choice may be compromised,however, if patients are not given accessto needed specialty care. There is alegitimate concern if physicians aredisinclined to refer patients tospecialists because of fear of losingpatients to those specialistspermanently. Thus, for example, thesafe harbor would protect an agreementbetween a general cardiologist and acardiologist with special expertise on aparticular medical condition whereby (i)the general cardiologist would refer apatient to the specialist for treatment ofthe particular medical condition aboutwhich the specialist has expertise, and(ii) the specialist—who also has ageneral cardiology practice—wouldrefer the patient back to the originatingcardiologist upon completion of thespecialty treatment.

We want to make clear that protectionunder this safe harbor is limited toreferral arrangements for patients of thephysician making referrals to thespecialist. The safe harbor does notprotect generalized cross-referralarrangements of the ‘‘you send me yourpatients and I’ll send you mine’’ variety.Rather, the safe harbor protects anagreement to refer patients to aspecialist in return for an agreement orunderstanding that the specialist willrefer those same patients back at theagreed upon time or circumstance (e.g.,completion of the specialist services forwhich the patient was referred). In otherwords, assuming all safe harborconditions are satisfied (and there is nosplit of a global fee, as discussed below),the safe harbor will protect agreementsalong the lines of ‘‘I’ll send you mypatients who need your specialistservices if you agree to send them backto me upon completion of yourservices.’’

On balance, we believe that a safeharbor under the anti-kickback statutefor referrals for specialty services isappropriate and will protect manylegitimate referral arrangements thatbenefit patients, including those livingin remote areas. Where no payment ismade between the referring andreceiving parties (and there is nosplitting of a Federal health careprogram global fee, as discussed below),we believe the specialty referralarrangements protected by the safeharbor pose no more than a minimal

risk of illegal remuneration for referralsin violation of the anti-kickback statute.

Comment: Ophthalmology providerswere especially concerned that theproposed safe harbor may encourage thedevelopment of potentially abusivereferral arrangements with optometrists,who wish to receive the post-operativeportion of the Medicare global fee foreye surgery. The ophthalmologistsallege that many optometrists referpatients to ophthalmologists on thecondition that patients be referred backto the optometrists for post-surgicalcare, often without regard to clinicalappropriateness. Some ophthalmologistsclaimed that optometrists generallycontrol referrals and thereforeophthalmologists, for whom surgicalprocedures are the mainstay of theirpractices, must acquiesce to these returnreferral arrangements in order to getpatients. One commenter described asituation where an optometrist/ophthalmologist network referredpatients for cataract surgery only toophthalmologists who would agree tosplit the global surgical fee by referringthe patient back to the optometrist forpost-operative care. The optometristsreferred their patients to anophthalmologic surgery center 200miles away when there were at least 50available ophthalmologists from 7 to 35miles away. In such circumstances, theophthalmologists do not do any of thefollow-up care for the patients and thepost-operative portion of the global feeis paid to the optometrists. Thecommenter, an ophthalmologist, hadprovided some of the patients referredby the optometrist network with asecond opinion and found that nonerequired surgery.

Response: The serious issues raisedby the ophthalmologists aboutapparently routine or blanketagreements to split global Medicare feeswith referring optometrists (as well asother information that has come to ourattention from industry and Governmentsources) has caused us to modify thescope of this safe harbor. We haverevised the safe harbor regulation topreclude protection for arrangementsbetween parties that share or split aglobal or bundled payment from aFederal health care program for thereferred patient. Thus, for example, thesafe harbor does not protect referralarrangements where the parties billMedicare using the 54/55 modifiers toindicate an 80 percent-20 percent splitof the surgical fee for cataract surgery.

By limiting the safe harbor, we do notmean to suggest that all specialtyreferral arrangements involving splittingof global fees are illegal under the anti-kickback statute. Whether a particular



5 See footnote 2.

referral arrangement for specialtyservices violates the anti-kickbackstatute depends on a case-by-caseanalysis of all of the facts andcircumstances, including, but notlimited to, whether the specialtyservices are medically necessary,whether the timing of the referrals isclinically appropriate, and whether theservices performed are commensuratewith the portion of the global feereceived.

Comment: One commenter questionedwhether the anti-kickback statuteapplies to specialty referralarrangements where no kickback, rebateor other consideration is made for thereferral.

Response: As the United States Courtof Appeals for the First Circuit hasrecognized, the opportunity to generatea fee may constitute the requisiteremuneration under the statute, even ifno payment or rebate is paid for areferral. For instance, the opportunity tosplit a global surgical fee, as in thehypothetical described in the previouscomment, is an example of acircumstance in which an opportunityto generate a fee is something of valueto a referring party apart from anypayment for the referral. Giving a personan opportunity to earn money may wellbe an inducement to that person tochannel potential Medicare patientstoward a particular recipient. (SeeUnited States v. Bay State Ambulanceand Hospital Rental Service, Inc., 874F.2d 20, 29 (1st Cir. 1989)).

Comment: A managed careorganization trade associationcommented that managed careorganization arrangements often requirethe referral of patients to othercontracting providers as a condition ofthe provider’s compensation and thatthe anti-kickback statute should not beconstrued so broadly as to encompassthese types of managed carearrangements. In addition, a managedcare plan commented that the safeharbor should be expanded to exemptexpressly referrals made within anHMO, or that the OIG should establisha new safe harbor for referrals made byHMO-participating physicians.

Response: The anti-kickback statute isbroad and technically may cover manymanaged care arrangements that arecommon in the marketplace today.However, we have recognized that mostof these arrangements involving HMOsdo not create the potential for fraud orabuse and have created safe harborsaimed at those arrangements. Currently,§ 1001.952(m) protects certain pricereductions offered to health plans. Inaddition, as part of HIPAA, Congressenacted a statutory exception for

managed care arrangements that putindividuals or entities at substantialfinancial risk (42 U.S.C. 1320a–7b(b)(3)(F)).5 These safe harbors offerbroad protection under the anti-kickback statute to HMOs.

Comment: One commenter urged thatwe clarify the safe harbor to make clearthat it covers primary care practitionersin rural areas who do not belong togroup practices.

Response: The safe harbor applies tosolo practitioners, as well as members ofgroup practices. To be protected by thesafe harbor, solo practitioners may notgive anything of value to a specialist inexchange for the referral back of his orher original patient, except for theopportunity to receive compensation forservices directly from third parties orpatients. Members of bona fide grouppractices who refer among themselvesare not similarly restricted; they mayshare revenues from specialty servicesperformed as a result of the intra-groupreferrals.

7. Cooperative Hospital ServiceOrganizations

Summary of Proposed Rule: Weproposed a new safe harbor to protectcooperative hospital serviceorganizations (CHSOs) that qualifyunder section 501(e) of the InternalRevenue Code. These organizations areformed by two or more tax exempthospitals (known as ‘‘patron hospitals’’)to provide specifically enumeratedservices, such as purchasing, billing,and clinical services solely for thebenefit of patron hospitals. Theseentities are required by law to distributeall of their net earnings to patrons onthe basis of services performed (26U.S.C. 501(e)(2)).

The safe harbor would protectpayments from a patron hospital to aCHSO to support the CHSO’soperational costs and those paymentsfrom a CHSO to a patron hospital thatare required by IRS rules. As a conditionof protection, the CHSO must be whollyowned by its patron hospitals, in orderto avoid potentially abusive jointventure arrangements formed under theguise of CHSOs. To the extent a CHSOacts as a group purchasing agent or apatron hospital obtains discounts as aresult of the CHSO’s activities, CHSOsand patron hospitals must comply withthe respective safe harbor provisionsapplicable to group purchasingorganization and discounts(§§ 1001.952(j) and (h)) to be fullyprotected. We solicited commentsregarding the various types of paymentformula (which comply with the IRS

rules) that are used by CHSOs, but didnot receive any comments on this issue.

Summary of Final Rule: We areadopting the rule as proposed, withsome minor technical changes.

Comments and ResponsesComment: We requested comments on

the extent to which we should expandthis provision to protect other similarentities specifically organized underFederal or State laws. Four commentswere submitted suggesting that the safeharbor be expanded to include othertypes of cooperative organizations thatqualify under subchapter T of theInternal Revenue Code (sections 1381 to1388). One commenter also requestedthat the safe harbor be expanded toinclude other types of hospitalcooperative organizations.

Response: We decline to extend safeharbor protection to cooperativeorganizations that do not qualify undersection 501(e). Unlike CHSOscomplying with that section, there arefew limitations applicable tocooperative organizations qualifyingunder subchapter T. There are no limitson the types of services that may beshared, nor are there restrictions on theidentity of shareholders. The conditionsand limitations imposed on tax-exemptentities, including the limits on privateinurement, do not apply to subchapterT organizations. We believe thelimitations imposed under section501(e) are necessary to protect againstpotentially abusive joint ventures orreferral arrangements. Additionally, inview of the small number of commentswe received concerning non-hospitalcooperatives and the fact that wereceived only a single commentrequesting broader hospital coverage,we are not persuaded of the need tobroaden the safe harbor to other types ofhospital or non-hospital cooperatives.Accordingly, we are adopting theproposed safe harbor for CHSOs withoutmodification.

8. Modification of Sale of Practice SafeHarbor

Summary of Proposed Rule: Wesolicited comments on the desirabilityof modifying the existing sale of practicesafe harbor set forth in § 1001.952(e) toaccommodate transactions involving therural hospital purchase of a physicianpractice as part of a practitionerrecruitment program that complies withthe safe harbor we are establishing toprotect practitioner recruitment. Theexisting sale of practice safe harbor didnot protect such purchases. We hadbeen informed that many rural hospitalsbuy and ‘‘hold’’ the practice of a retiringphysician, often using locum tenens



physicians until a new physician can berecruited to replace the retiring one.

Summary of Final Rule: We aremodifying the existing sale of practicesafe harbor to protect payments made toa practitioner by a hospital or otherentity to purchase the practitioner’spractice where the following conditionsare satisfied:

• The sale is completed within 3years.

• After completion of the sale, thepractitioner who is selling his or herpractice will not be in a professionalposition to make referrals to, orotherwise generate business for, thepurchasing entity for which paymentmay be made by a Federal health careprogram.

• The practice being acquired must belocated in a HPSA for the practitioner’sspecialty area.

• Commencing at the time of the sale,the purchasing entity must diligentlyand in good faith engage in recruitmentactivities that (i) may reasonably beexpected to result in the recruitment ofa new practitioner to take over theacquired practice within 1 year ofcompletion of the sale, and (ii) satisfythe conditions of the new practitionerrecruitment safe harbor (§ 1001.952(n)).

Comments and ResponsesComment: Commenters generally

supported our proposed modification tothe sale of practice safe harbor. Somecommenters urged that the safe harborbe extended to sales of practices inurban underserved areas. Onecommenter stated that the problem ofpreserving and maintaining a retiringphysician’s practice until a newphysician can be recruited andestablished exists in both urban andrural HPSAs. Because of thesedifficulties, a hospital may find itself inthe position of ‘‘holding’’ a practice forsome time. One commenter suggestedthat in the case of small, rural hospitalswith tight cash flow, the paymentperiod under the safe harbor should be3 to 5 years, rather than 1 year as setforth in the existing safe harbor.

Several commenters stated that theexisting sale of practice safe harbor istoo narrow. Some commenterssuggested that the safe harbor beexpanded to include entities other thanhospitals, such as hospital systems andother health care organizations. Thesecommenters urged the OIG to modifythe safe harbor to protect, among otherarrangements, sales of practices inaccordance with fair market valuetransactions and sales of practices toentities in connection with the processof creating integrated health caredelivery systems. One commenter urged

the OIG to modify the safe harbor toprovide that reasonable valuation of allassets, tangible and intangible, may beused to determine the market value ofthe practice.

Response: Based on the comments wereceived to our solicitation and afterfurther consideration, we are persuadedthat a need exists to protect certainpractice acquisitions by hospitals andother entities located in rural and urbanunderserved areas that are engaged inpractitioner recruitment programs, andthat these arrangements can beprotected without concurrentlyimmunizing potentially fraudulent orabusive practices. Specifically, we aremodifying the sale of practice safeharbor to protect acquisitions of thepractices of physicians in underservedareas who are retiring or relocating adistance that would preclude them frombeing in a position to make referrals tothe purchasing entity, if the acquisitionsoccur as part of a practitionerrecruitment program that qualifies forprotection under the safe harbor forpractitioner recruitment contained inthese regulations. We are requiring thatthe physician be retired from thepractice of medicine or otherwise nolonger in a position to generate referralsfor the hospital. A purchase of a practicefrom a physician potentially still in aposition to make referrals to thepurchasing entity might result inabusive payments to induce referrals ofbusiness from the physician’s newpractice. Relocation a significantdistance from the practice being sold isan indicator that a physician is nolonger in a position to refer patients. Weagree that a longer payment period isappropriate in the context of this safeharbor; accordingly, we are establishinga 3 year period for completion of thesale from the date of the first agreementpertaining to the sale.

As a result, to be protected, a sale ofpractice by a practitioner must meet allof the following conditions: (1) Theperiod from the date of the firstagreement pertaining to the sale to thecompletion of the sale is not more than3 years; (2) following the sale, thepractitioner may not be in a position tomake or influence referrals to, orotherwise generate business for, thepurchasing entity for which paymentmay be made in whole or in part undera Federal health care program; (3) thepractice being acquired must be locatedin a HPSA for the practitioner’sspecialty area; (4) commencing at thetime of the first agreement pertaining tothe sale, the purchasing entity mustdiligently and in good faith engage incommercially reasonable recruitmentactivities that (i) may reasonably be

expected to result in the recruitment ofa new practitioner to take over theacquired practice within a 1 year period,and (ii) will satisfy the conditions of thepractitioner recruitment safe harbor at§ 1001.952(n).

We are not inclined at this time tomodify the sale of practice safe harborfurther. While we do not intend to standin the way of integrated delivery systemacquisitions of practices, we areconcerned that many such arrangementsmay provide incentives foroverutilization, increased billings to theFederal programs, and inappropriatesteering of patients in circumstanceswhere the Federal health care programspay on a fee-for-service basis. Moreover,we remain of the opinion that paymentsfor ‘‘intangibles’’ can easily be used todisguise payments for referrals ofFederal health care program business,and therefore we are unwilling toprovide safe harbor protection for anyparticular valuation methodology.

III. Regulatory Impact Statement

Executive Order 12866, the UnfundedMandates Reform Act and RegulatoryFlexibility Act

The Office of Management and Budgethas reviewed this final rule inaccordance with the provisions ofExecutive Order 12866 and theRegulatory Flexibility Act (5 U.S.C.601–612), and has determined that itdoes not meet the criteria for aneconomically significant regulatoryaction. Executive Order 12866 directagencies to assess all costs and benefitsof available regulatory alternatives and,when rulemaking is necessary, to selectregulatory approaches that maximizenet benefits (including potentialeconomic, environmental, public health,safety distributive and equity effects).The Unfunded Mandates Reform Act,Public Law 104–4, requires thatagencies prepare an assessment ofanticipated costs and benefits on anyrulemaking that may result in an annualexpenditure by State, local or tribalgovernment, or by the private sector of$100 million or more. In addition, underthe Regulatory Flexibility Act, if a rulehas a significant economic effect on asubstantial number of small businesses,the Secretary must specifically considerthe economic effect of a rule on smallbusiness entities and analyze regulatoryoptions that could lessen the impact ofthe rule.

Executive Order 12866 requires thatall regulations reflect consideration ofalternatives, costs, benefits, incentives,equity and available information.Regulations must meet certainstandards, such as avoiding unnecessary



burden. We believe that this final ruleshould have no significant economicimpact. The safe harbor provisions setforth in this rulemaking are designed topermit individuals and entities to freelyengage in business practices andarrangements that encouragecompetition, innovation and economy.In doing so, these regulations impose norequirements on any party. Health careproviders and others may voluntarilyseek to comply with these provisions sothat they have the assurance that theirbusiness practices are not subject to anyenforcement actions under the anti-kickback statute.

We believe that any aggregateeconomic effect of these safe harborregulations will be minimal and willimpact only those limited few whoengage in prohibited behavior inviolation of the statute. As such, webelieve that the aggregate economicimpact of these regulations is minimaland will have no effect on the economyor on Federal or State expenditures.

Additionally, in accordance with theUnfunded Mandates Reform Act of1995, we have determined that there areno significant costs associated withthese safe harbor guidelines that wouldimpose any mandates on State, local ortribal governments, or the private sectorthat will result in an annual expenditureof $100 million or more, and that a fullanalysis under the Act is not necessary.

Further, in accordance with theRegulatory Flexibility Act (RFA) of1980, and the Small BusinessRegulatory Enforcement Act of 1996,which amended the RFA, we arerequired to determine if this rule willhave a significant economic effect on asubstantial number of small entitiesand, if so, to identify regulatory optionsthat could lessen the impact. Whilesome of these safe harbor provisionsmay have an impact on small entities,we believe that the aggregate economicimpact of this rulemaking should beminimal, since it is the nature of theviolation and not the size of the entitythat will result in a violation of the anti-kickback statute. Since the vast majorityof individuals and entities potentiallyaffected by these regulations do notengage in prohibited arrangements,schemes or practices in violation of thelaw, we have concluded that these finalregulations should not have a significanteconomic impact on a number of smallbusiness entities, and that a regulatoryflexibility analysis is not required forthis rulemaking.

Paperwork Reduction ActAs indicated above, the provisions of

these final regulations are voluntary andimpose no new reporting or

recordkeeping requirements on healthcare providers necessitating clearanceby OMB.

List of Subjects in 42 CFR Part 1001

Administrative practice andprocedure, Fraud, Grant programs—health, Health facilities, Healthprofessions, Maternal and child health,Medicaid, Medicare.

Accordingly, 42 CFR part 1001 isamended as set forth below:

PART 1001—[AMENDED]

1. The authority citation for part 1001continues to read as follows:

Authority: 42 U.S.C. 1302, 1320a–7,1320a–7b, 1395u(j), 1395u(k), 1395y(d),1395y(e), 1395cc(b)(2) (D), (E) and (F), and1395hh; and sec. 2455, Pub.L. 103–355, 108Stat. 3327 (31 U.S.C. 6101 note).

2. Section 1001.952 is amended asfollows:

a. By republishing the introductorytext;

b. Revising paragraph (a),introductory text;

c. Republishing paragraph (a)(1),introductory text;

d. Revising paragraphs (a)(1)(ii) and(iv), (a)(2)(i), (vi) and (vii);

e. Adding a new paragraph (a)(3)f. Redesignating the closing

definitional paragraph in paragraph (a);as paragraph (a)(4) and revising it;

g. Revising paragraph (b), andintroductory text, and paragraph (b)(2)and adding a new paragraph (b)(6);

h. Revising paragraph (c), andintroductory text, and paragraph (c)(2)and adding a new paragraph (c)(6);

i. Revising paragraph (d), introductorytext, and paragraph (d)(2) and adding anew paragraph (d)(7);

j. Revising paragraph (e);k. Republishing paragraph (f),

introductory text, and revisingparagraph (f)(2);

l. Revising paragraph (h); andm. Adding new paragraphs (n)

through (s).The additions and revisions to

§ 1001.952 read as follows:

§ 1001.952 Exceptions.The following payment practices shall

not be treated as a criminal offenseunder section 1128B of the Act andshall not serve as the basis for anexclusion:

(a) Investment interests. As used insection 1128B of the Act,‘‘remuneration’’ does not include anypayment that is a return on aninvestment interest, such as a dividendor interest income, made to an investoras long as all of the applicable standardsare met within one of the followingthree categories of entities:

(1) If, within the previous fiscal yearor previous 12 month period, the entitypossesses more than $50,000,000 inundepreciated net tangible assets (basedon the net acquisition cost of purchasingsuch assets from an unrelated entity)related to the furnishing of health careitems and services, all of the followingfive standards must be met—* * * * *

(ii) The investment interest of aninvestor in a position to make orinfluence referrals to, furnish items orservices to, or otherwise generatebusiness for the entity must be obtainedon terms (including any direct orindirect transferability restrictions) andat a price equally available to the publicwhen trading on a registered securitiesexchange, such as the New York StockExchange or the American StockExchange, or in accordance with theNational Association of SecuritiesDealers Automated Quotation System.* * * * *

(iv) The entity or any investor (orother individual or entity acting onbehalf of the entity or any investor inthe entity) must not loan funds to orguarantee a loan for an investor who isin a position to make or influencereferrals to, furnish items or services to,or otherwise generate business for theentity if the investor uses any part ofsuch loan to obtain the investmentinterest.* * * * *

(2) * * *(i) No more than 40 percent of the

value of the investment interests of eachclass of investment interests may beheld in the previous fiscal year orprevious 12 month period by investorswho are in a position to make orinfluence referrals to, furnish items orservices to, or otherwise generatebusiness for the entity. (For purposes ofparagraph (a)(2)(i) of this section,equivalent classes of equity investmentsmay be combined, and equivalentclasses of debt instruments may becombined.)* * * * *

(vi) No more than 40 percent of theentity’s gross revenue related to thefurnishing of health care items andservices in the previous fiscal year orprevious 12-month period may comefrom referrals or business otherwisegenerated from investors.

(vii) The entity or any investor (orother individual or entity acting onbehalf of the entity or any investor inthe entity) must not loan funds to orguarantee a loan for an investor who isin a position to make or influencereferrals to, furnish items or services to,or otherwise generate business for the



entity if the investor uses any part ofsuch loan to obtain the investmentinterest.* * * * *

(3)(i) If the entity possessesinvestment interests that are held byeither active or passive investors and islocated in an underserved area, all ofthe following eight standards must bemet—

(A) No more than 50 percent of thevalue of the investment interests of eachclass of investments may be held in theprevious fiscal year or previous 12-month period by investors who are in aposition to make or influence referralsto, furnish items or services to, orotherwise generate business for, theentity. (For purposes of paragraph(a)(3)(i)(A) of this section, equivalentclasses of equity investments may becombined, and equivalent classes ofdebt instruments may be combined.)

(B) The terms on which an investmentinterest is offered to a passive investor,if any, who is in a position to make orinfluence referrals to, furnish items orservices to, or otherwise generatebusiness for the entity must be nodifferent from the terms offered to otherpassive investors.

(C) The terms on which an investmentinterest is offered to an investor who isin a position to make or influencereferrals to, furnish items or services to,or otherwise generate business for theentity must not be related to theprevious or expected volume ofreferrals, items or services furnished, orthe amount of business otherwisegenerated from that investor to theentity.

(D) There is no requirement that apassive investor, if any, make referralsto, be in a position to make or influencereferrals to, furnish items or services to,or otherwise generate business for theentity as a condition for remaining as aninvestor.

(E) The entity or any investor mustnot market or furnish the entity’s itemsor services (or those of another entity aspart of a cross-referral agreement) topassive investors differently than tonon-investors.

(F) At least 75 percent of the dollarvolume of the entity’s business in theprevious fiscal year or previous 12-month period must be derived from theservice of persons who reside in anunderserved area or are members ofmedically underserved populations.

(G) The entity or any investor (orother individual or entity acting onbehalf of the entity or any investor inthe entity) must not loan funds to orguarantee a loan for an investor who isin a position to make or influence

referrals to, furnish items or services to,or otherwise generate business for theentity if the investor uses any part ofsuch loan to obtain the investmentinterest.

(H) The amount of payment to aninvestor in return for the investmentinterest must be directly proportional tothe amount of the capital investment(including the fair market value of anypre-operational services rendered) ofthat investor.

(ii) If an entity that otherwise meetsall of the above standards is located inan area that was an underserved area atthe time of the initial investment, butsubsequently ceases to be anunderserved area, the entity will bedeemed to comply with paragraph(a)(3)(i) of this section for a period equalto the lesser of:

(A) The current term of theinvestment remaining after the dateupon which the area ceased to be anunderserved area or

(B) Three years from the date the areaceased to be an underserved area.

(4) For purposes of paragraph (a) ofthis section, the following terms apply.Active investor means an investor eitherwho is responsible for the day-to-daymanagement of the entity and is a bonafide general partner in a partnershipunder the Uniform Partnership Act orwho agrees in writing to undertakeliability for the actions of the entity’sagents acting within the scope of theiragency. Investment interest means asecurity issued by an entity, and mayinclude the following classes ofinvestments: shares in a corporation,interests or units in a partnership orlimited liability company, bonds,debentures, notes, or other debtinstruments. Investor means anindividual or entity either who directlyholds an investment interest in anentity, or who holds such investmentinterest indirectly by, including but notlimited to, such means as having afamily member hold such investmentinterest or holding a legal or beneficialinterest in another entity (such as a trustor holding company) that holds suchinvestment interest. Passive investormeans an investor who is not an activeinvestor, such as a limited partner in apartnership under the UniformPartnership Act, a shareholder in acorporation, or a holder of a debtsecurity. Underserved area means anydefined geographic area that isdesignated as a Medically UnderservedArea (MUA) in accordance withregulations issued by the Department.Medically underserved populationmeans a Medically UnderservedPopulation (MUP) in accordance withregulations issued by the Department.

(b) Space rental. As used in section1128B of the Act, ‘‘remuneration’’ doesnot include any payment made by alessee to a lessor for the use of premises,as long as all of the following sixstandards are met—* * * * *

(2) The lease covers all of thepremises leased between the parties forthe term of the lease and specifies thepremises covered by the lease.* * * * *

(6) The aggregate space rented doesnot exceed that which is reasonablynecessary to accomplish thecommercially reasonable businesspurpose of the rental.* * * * *

(c) Equipment rental. As used insection 1128B of the Act,‘‘remuneration’’ does not include anypayment made by a lessee of equipmentto the lessor of the equipment for theuse of the equipment, as long as all ofthe following six standards are met—* * * * *

(2) The lease covers all of theequipment leased between the partiesfor the term of the lease and specifiesthe equipment covered by the lease.* * * * *

(6) The aggregate equipment rentaldoes not exceed that which isreasonably necessary to accomplish thecommercially reasonable businesspurpose of the rental.* * * * *

(d) Personal services andmanagement contracts. As used insection 1128B of the Act,‘‘remuneration’’ does not include anypayment made by a principal to anagent as compensation for the servicesof the agent, as long as all of thefollowing seven standards are met—* * * * *

(2) The agency agreement covers all ofthe services the agent provides to theprincipal for the term of the agreementand specifies the services to be providedby the agent.* * * * *

(7) The aggregate services contractedfor do not exceed those which arereasonably necessary to accomplish thecommercially reasonable businesspurpose of the services.* * * * *

(e) Sale of practice. (1) As used insection 1128B of the Act,‘‘remuneration’’ does not include anypayment made to a practitioner byanother practitioner where the formerpractitioner is selling his or her practiceto the latter practitioner, as long as bothof the following two standards are met—



(i) The period from the date of thefirst agreement pertaining to the sale tothe completion of the sale is not morethan one year.

(ii) The practitioner who is selling hisor her practice will not be in aprofessional position to make referralsto, or otherwise generate business for,the purchasing practitioner for whichpayment may be made in whole or inpart under Medicare or a State healthcare program after one year from thedate of the first agreement pertaining tothe sale.

(2) As used in section 1128B of theAct, ‘‘remuneration’’ does not includeany payment made to a practitioner bya hospital or other entity where thepractitioner is selling his or her practiceto the hospital or other entity, so longas the following four standards are met:

(i) The period from the date of thefirst agreement pertaining to the sale tothe completion date of the sale is notmore than three years.

(ii) The practitioner who is selling hisor her practice will not be in aprofessional position after completion ofthe sale to make or influence referralsto, or otherwise generate business for,the purchasing hospital or entity forwhich payment may be made in wholeor in part under Medicare or a Statehealth care program.

(iii) The practice being acquired mustbe located in a Health ProfessionalShortage Area (HPSA), as defined inDepartmental regulations, for thepractitioner’s specialty area.

(iv) Commencing at the time of thefirst agreement pertaining to the sale,the purchasing hospital or entity mustdiligently and in good faith engage incommercially reasonable recruitmentactivities that:

(A) May reasonably be expected toresult in the recruitment of a newpractitioner to take over the acquiredpractice within a one year period and

(B) Will satisfy the conditions of thepractitioner recruitment safe harbor inaccordance with paragraph (n) of thissection.

(f) Referral services. As used insection 1128B of the Act,‘‘remuneration’’ does not include anypayment or exchange of anything ofvalue between an individual or entity(‘‘participant’’) and another entityserving as a referral service (‘‘referralservice’’), as long as all of the followingfour standards are met—* * * * *

(2) Any payment the participantmakes to the referral service is assessedequally against and collected equallyfrom all participants, and is only basedon the cost of operating the referral

service, and not on the volume or valueof any referrals to or business otherwisegenerated by either party for the otherparty for which payment may be madein whole or in part under Medicare ora State health care program.* * * * *

(h) Discounts. As used in section1128B of the Act, ‘‘remuneration’’ doesnot include a discount, as defined inparagraph (h)(5) of this section, on anitem or service for which payment maybe made, in whole or in part, underMedicare or a State health care programfor a buyer as long as the buyer complieswith the applicable standards ofparagraph (h)(1) of this section; a selleras long as the seller complies with theapplicable standards of paragraph (h)(2)of this section; and an offeror of adiscount who is not a seller underparagraph (h)(2) of this section so longas such offeror complies with theapplicable standards of paragraph (h)(3)of this section:

(1) With respect to the following threecategories of buyers, the buyer mustcomply with all of the applicablestandards within one of the threefollowing categories—

(i) If the buyer is an entity which isa health maintenance organization(HMO) or a competitive medical plan(CMP) acting in accordance with a riskcontract under section 1876(g) or1903(m) of the Act, or under anotherState health care program, it need notreport the discount except as otherwisemay be required under the risk contract.

(ii) If the buyer is an entity whichreports its costs on a cost reportrequired by the Department or a Statehealth care program, it must complywith all of the following fourstandards—

(A) The discount must be earnedbased on purchases of that same good orservice bought within a single fiscalyear of the buyer;

(B) The buyer must claim the benefitof the discount in the fiscal year inwhich the discount is earned or thefollowing year;

(C) The buyer must fully andaccurately report the discount in theapplicable cost report; and

(D) the buyer must provide, uponrequest by the Secretary or a Stateagency, information provided by theseller as specified in paragraph (h)(2)(ii)of this section, or information providedby the offeror as specified in paragraph(h)(3)(ii) of this section.

(iii) If the buyer is an individual orentity in whose name a claim or requestfor payment is submitted for thediscounted item or service and paymentmay be made, in whole or in part, under

Medicare or a State health care program(not including individuals or entitiesdefined as buyers in paragraph (h)(1)(i)or (h)(1)(ii) of this section), the buyermust comply with both of the followingstandards—

(A) The discount must be made at thetime of the sale of the good or serviceor the terms of the rebate must be fixedand disclosed in writing to the buyer atthe time of the initial sale of the goodor service; and

(B) the buyer (if submitting the claim)must provide, upon request by theSecretary or a State agency, informationprovided by the seller as specified inparagraph (h)(2)(iii)(B) of this section, orinformation provided by the offeror asspecified in paragraph (h)(3)(iii)(A) ofthis section.

(2) The seller is an individual orentity that supplies an item or servicefor which payment may be made, inwhole or in part, under Medicare or aState health care program to the buyerand who permits a discount to be takenoff the buyer’s purchase price. Theseller must comply with all of theapplicable standards within thefollowing three categories—

(i) If the buyer is an entity which isan HMO a CMP acting in accordancewith a risk contract under section1876(g) or 1903(m) of the Act, or underanother State health care program, theseller need not report the discount tothe buyer for purposes of this provision.

(ii) If the buyer is an entity thatreports its costs on a cost reportrequired by the Department or a Stateagency, the seller must comply witheither of the following two standards—

(A) Where a discount is required to bereported to Medicare or a State healthcare program under paragraph (h)(1) ofthis section, the seller must fully andaccurately report such discount on theinvoice, coupon or statement submittedto the buyer; inform the buyer in amanner that is reasonably calculated togive notice to the buyer of its obligationsto report such discount and to provideinformation upon request underparagraph (h)(1) of this section; andrefrain from doing anything that wouldimpede the buyer from meeting itsobligations under this paragraph; or

(B) Where the value of the discount isnot known at the time of sale, the sellermust fully and accurately report theexistence of a discount program on theinvoice, coupon or statement submittedto the buyer; inform the buyer in amanner reasonably calculated to givenotice to the buyer of its obligations toreport such discount and to provideinformation upon request underparagraph (h)(1) of this section; whenthe value of the discount becomes



known, provide the buyer withdocumentation of the calculation of thediscount identifying the specific goodsor services purchased to which thediscount will be applied; and refrainfrom doing anything which wouldimpede the buyer from meeting itsobligations under this paragraph.

(iii) If the buyer is an individual orentity not included in paragraph(h)(2)(i) or (h)(2)(ii) of this section, theseller must comply with either of thefollowing two standards—

(A) Where the seller submits a claimor request for payment on behalf of thebuyer and the item or service isseparately claimed, the seller mustprovide, upon request by the Secretaryor a State agency, information providedby the offeror as specified in paragraph(h)(3)(iii)(A) of this section; or

(B) Where the buyer submits a claim,the seller must fully and accuratelyreport such discount on the invoice,coupon or statement submitted to thebuyer; inform the buyer in a mannerreasonably calculated to give notice tothe buyer of its obligations to reportsuch discount and to provideinformation upon request underparagraph (h)(1) of this section; andrefrain from doing anything that wouldimpede the buyer from meeting itsobligations under this paragraph.

(3) The offeror of a discount is anindividual or entity who is not a sellerunder paragraph (h)(2) of this section,but promotes the purchase of an item orservice by a buyer under paragraph(h)(1) of this section at a reduced pricefor which payment may be made, inwhole or in part, under Medicare or aState health care program. The offerormust comply with all of the applicablestandards within the following threecategories—

(i) If the buyer is an entity which isan HMO or a CMP acting in accordancewith a risk contract under section1876(g) or 1903(m) of the Act, or underanother State health care program, theofferor need not report the discount tothe buyer for purposes of this provision.

(ii) If the buyer is an entity thatreports its costs on a cost reportrequired by the Department or a Stateagency, the offeror must comply withthe following two standards—

(A) The offeror must inform the buyerin a manner reasonably calculated togive notice to the buyer of its obligationsto report such a discount and to provideinformation upon request underparagraph (h)(1) of this section; and

(B) The offeror of the discount mustrefrain from doing anything that wouldimpede the buyer’s ability to meet itsobligations under this paragraph.

(iii) If the buyer is an individual orentity in whose name a request forpayment is submitted for the discounteditem or service and payment may bemade, in whole or in part, underMedicare or a State health care program(not including individuals or entitiesdefined as buyers in paragraph (h)(1)(i)or (h)(1)(ii) of this section), the offerormust comply with the following twostandards—

(A) The offeror must inform theindividual or entity submitting theclaim or request for payment in amanner reasonably calculated to givenotice to the individual or entity of itsobligations to report such a discountand to provide information uponrequest under paragraphs (h)(1) and(h)(2) of this section; and

(B) The offeror of the discount mustrefrain from doing anything that wouldimpede the buyer’s or seller’s ability tomeet its obligations under thisparagraph.

(4) For purposes of this paragraph, arebate is any discount the terms ofwhich are fixed and disclosed in writingto the buyer at the time of the initialpurchase to which the discount applies,but which is not given at the time ofsale.

(5) For purposes of this paragraph, theterm discount means a reduction in theamount a buyer (who buys eitherdirectly or through a wholesaler or agroup purchasing organization) ischarged for an item or service based onan arms-length transaction. The termdiscount does not include—

(i) Cash payment or cash equivalents(except that rebates as defined inparagraph (h)(4) of this section may bein the form of a check);

(ii) Supplying one good or servicewithout charge or at a reduced charge toinduce the purchase of a different goodor service, unless the goods and servicesare reimbursed by the same Federalhealth care program using the samemethodology and the reduced charge isfully disclosed to the Federal healthcare program and accurately reflectedwhere appropriate, and as appropriate,to the reimbursement methodology;

(iii) A reduction in price applicable toone payer but not to Medicare or a Statehealth care program;

(iv) A routine reduction or waiver ofany coinsurance or deductible amountowed by a program beneficiary;

(v) Warranties;(vi) Services provided in accordance

with a personal or management servicescontract; or

(vii) Other remuneration, in cash or inkind, not explicitly described inparagraph (h)(5) of this section.

(n) Practitioner recruitment. As usedin section 1128B of the Act,‘‘remuneration’’ does not include anypayment or exchange of anything ofvalue by an entity in order to induce apractitioner who has been practicingwithin his or her current specialty forless than one year to locate, or to induceany other practitioner to relocate, his orher primary place of practice into aHPSA for his or her specialty area, asdefined in Departmental regulations,that is served by the entity, as long asall of the following nine standards aremet—

(1) The arrangement is set forth in awritten agreement signed by the partiesthat specifies the benefits provided bythe entity, the terms under which thebenefits are to be provided, and theobligations of each party.

(2) If a practitioner is leaving anestablished practice, at least 75 percentof the revenues of the new practice mustbe generated from new patients notpreviously seen by the practitioner athis or her former practice.

(3) The benefits are provided by theentity for a period not in excess of 3years, and the terms of the agreementare not renegotiated during this 3-yearperiod in any substantial aspect;provided, however, that if the HPSA towhich the practitioner was recruitedceases to be a HPSA during the term ofthe written agreement, the paymentsmade under the written agreement willcontinue to satisfy this paragraph for theduration of the written agreement (notto exceed 3 years).

(4) There is no requirement that thepractitioner make referrals to, be in aposition to make or influence referralsto, or otherwise generate business forthe entity as a condition for receivingthe benefits; provided, however, that forpurposes of this paragraph, the entitymay require as a condition for receivingbenefits that the practitioner maintainstaff privileges at the entity.

(5) The practitioner is not restrictedfrom establishing staff privileges at,referring any service to, or otherwisegenerating any business for any otherentity of his or her choosing.

(6) The amount or value of thebenefits provided by the entity may notvary (or be adjusted or renegotiated) inany manner based on the volume orvalue of any expected referrals to orbusiness otherwise generated for theentity by the practitioner for whichpayment may be made in whole or inpart under Medicare or a State healthcare program.

(7) The practitioner agrees to treatpatients receiving medical benefits orassistance under any Federal health care



program in a nondiscriminatorymanner.

(8) At least 75 percent of the revenuesof the new practice must be generatedfrom patients residing in a HPSA or aMedically Underserved Area (MUA) orwho are part of a MedicallyUnderserved Population (MUP), all asdefined in paragraph (a) of this section.

(9) The payment or exchange ofanything of value may not directly orindirectly benefit any person (other thanthe practitioner being recruited) orentity in a position to make or influencereferrals to the entity providing therecruitment payments or benefits ofitems or services payable by a Federalhealth care program.

(o) Obstetrical malpractice insurancesubsidies. As used in section 1128B ofthe Act, ‘‘remuneration’’ does notinclude any payment made by a hospitalor other entity to another entity that isproviding malpractice insurance(including a self-funded entity), wheresuch payment is used to pay for someor all of the costs of malpracticeinsurance premiums for a practitioner(including a certified nurse-midwife asdefined in section 1861(gg) of the Act)who engages in obstetrical practice as aroutine part of his or her medicalpractice in a primary care HPSA, as longas all of the following seven standardsare met—

(1) The payment is made inaccordance with a written agreementbetween the entity paying the premiumsand the practitioner, which sets out thepayments to be made by the entity, andthe terms under which the payments areto be provided.

(2)(i) The practitioner must certifythat for the initial coverage period (notto exceed one year) the practitioner hasa reasonable basis for believing that atleast 75 percent of the practitioner’sobstetrical patients treated under thecoverage of the malpractice insurancewill either—

(A) Reside in a HPSA or MUA, asdefined in paragraph (a) of this section;or

(B) Be part of a MUP, as defined inparagraph (a) of this section.

(ii) Thereafter, for each additionalcoverage period (not to exceed oneyear), at least 75 percent of thepractitioner’s obstetrical patients treatedunder the prior coverage period (not toexceed one year) must have—

(A) Resided in a HPSA or MUA, asdefined in paragraph (a) of this section;or

(B) Been part of a MUP, as defined inparagraph (a) of this section.

(3) There is no requirement that thepractitioner make referrals to, orotherwise generate business for, the

entity as a condition for receiving thebenefits.

(4) The practitioner is not restrictedfrom establishing staff privileges at,referring any service to, or otherwisegenerating any business for any otherentity of his or her choosing.

(5) The amount of payment may notvary based on the volume or value ofany previous or expected referrals to orbusiness otherwise generated for theentity by the practitioner for whichpayment may be made in whole or inpart under Medicare or a State healthcare program.

(6) The practitioner must treatobstetrical patients who receive medicalbenefits or assistance under any Federalhealth care program in anondiscriminatory manner.

(7) The insurance is a bona fidemalpractice insurance policy orprogram, and the premium, if any, iscalculated based on a bona fideassessment of the liability risk coveredunder the insurance. For purposes ofparagraph (o) of this section, costs ofmalpractice insurance premiumsmeans:

(i) For practitioners who engage inobstetrical practice full-time, any costsattributable to malpractice insurance; or

(ii) For practitioners who engage inobstetrical practice on a part-time orsporadic basis, the costs:

(A) Attributable exclusively to theobstetrical portion of the practitioner’smalpractice insurance and

(B) Related exclusively to obstetricalservices provided in a primary careHPSA.

(p) Investments in group practices. Asused in section 1128B of the Act,‘‘remuneration’’ does not include anypayment that is a return on aninvestment interest, such as a dividendor interest income, made to a solo orgroup practitioner investing in his orher own practice or group practice if thefollowing four standards are met—

(1) The equity interests in the practiceor group must be held by licensedhealth care professionals who practicein the practice or group.

(2) The equity interests must be in thepractice or group itself, and not somesubdivision of the practice or group.

(3) In the case of group practices, thepractice must:

(i) Meet the definition of ‘‘grouppractice’’ in section 1877(h)(4) of theSocial Security Act and implementingregulations; and

(ii) Be a unified business withcentralized decision-making, pooling ofexpenses and revenues, and acompensation/profit distribution systemthat is not based on satellite offices

operating substantially as if they wereseparate enterprises or profit centers.

(4) Revenues from ancillary services,if any, must be derived from ‘‘in-officeancillary services’’ that meet thedefinition of such term in section1877(b)(2) of the Act and implementingregulations.

(q) Cooperative hospital serviceorganizations. As used in section 1128Bof the Act, ‘‘remuneration’’ does notinclude any payment made between acooperative hospital serviceorganization (CHSO) and its patron-hospital, both of which are described insection 501(e) of the Internal RevenueCode of 1986 and are tax-exempt undersection 501(c)(3) of the Internal RevenueCode, where the CHSO is wholly ownedby two or more patron-hospitals, as longas the following standards are met—

(1) If the patron-hospital makes apayment to the CHSO, the paymentmust be for the purpose of paying forthe bona fide operating expenses of theCHSO, or

(2) If the CHSO makes a payment tothe patron-hospital, the payment mustbe for the purpose of paying adistribution of net earnings required tobe made under section 501(e)(2) of theInternal Revenue Code of 1986.

(r) Ambulatory surgical centers. Asused in section 1128B of the Act,‘‘remuneration’’ does not include anypayment that is a return on aninvestment interest, such as a dividendor interest income, made to an investor,as long as the investment entity is acertified ambulatory surgical center(ASC) under part 416 of this title, whoseoperating and recovery room space isdedicated exclusively to the ASC,patients referred to the investmententity by an investor are fully informedof the investor’s investment interest,and all of the applicable standards aremet within one of the following fourcategories—

(1) Surgeon-owned ASCs—If all of theinvestors are general surgeons orsurgeons engaged in the same surgicalspecialty, who are in a position to referpatients directly to the entity andperform surgery on such referredpatients; surgical group practices (asdefined in this paragraph) composedexclusively of such surgeons; orinvestors who are not employed by theentity or by any investor, are not in aposition to provide items or services tothe entity or any of its investors, and arenot in a position to make or influencereferrals directly or indirectly to theentity or any of its investors, all of thefollowing six standards must be met—

(i) The terms on which an investmentinterest is offered to an investor mustnot be related to the previous or



expected volume of referrals, servicesfurnished, or the amount of businessotherwise generated from that investorto the entity.

(ii) At least one-third of each surgeoninvestor’s medical practice income fromall sources for the previous fiscal yearor previous 12-month period must bederived from the surgeon’s performanceof procedures (as defined in thisparagraph).

(iii) The entity or any investor (orother individual or entity acting onbehalf of the entity or any investor)must not loan funds to or guarantee aloan for an investor if the investor usesany part of such loan to obtain theinvestment interest.

(iv) The amount of payment to aninvestor in return for the investmentmust be directly proportional to theamount of the capital investment(including the fair market value of anypre-operational services rendered) ofthat investor.

(v) All ancillary services for Federalhealth care program beneficiariesperformed at the entity must be directlyand integrally related to primaryprocedures performed at the entity, andnone may be separately billed toMedicare or other Federal health careprograms.

(vi) The entity and any surgeoninvestors must treat patients receivingmedical benefits or assistance under anyFederal health care program in anondiscriminatory manner.

(2) Single-Specialty ASCs—If all ofthe investors are physicians engaged inthe same medical practice specialty whoare in a position to refer patientsdirectly to the entity and performprocedures on such referred patients;group practices (as defined in thisparagraph) composed exclusively ofsuch physicians; or investors who arenot employed by the entity or by anyinvestor, are not in a position to provideitems or services to the entity or any ofits investors, and are not in a positionto make or influence referrals directly orindirectly to the entity or any of itsinvestors, all of the following sixstandards must be met—

(i) The terms on which an investmentinterest is offered to an investor mustnot be related to the previous orexpected volume of referrals, servicesfurnished, or the amount of businessotherwise generated from that investorto the entity.

(ii) At least one-third of eachphysician investor’s medical practiceincome from all sources for the previousfiscal year or previous 12-month periodmust be derived from the surgeon’sperformance of procedures (as definedin this paragraph).

(iii) The entity or any investor (orother individual or entity acting onbehalf of the entity or any investor)must not loan funds to or guarantee aloan for an investor if the investor usesany part of such loan to obtain theinvestment interest.

(iv) The amount of payment to aninvestor in return for the investmentmust be directly proportional to theamount of the capital investment(including the fair market value of anypre-operational services rendered) ofthat investor.

(v) All ancillary services for Federalhealth care program beneficiariesperformed at the entity must be directlyand integrally related to primaryprocedures performed at the entity, andnone may be separately billed toMedicare or other Federal health careprograms.

(vi) The entity and any physicianinvestors must treat patients receivingmedical benefits or assistance under anyFederal health care program in anondiscriminatory manner.

(3) Multi-Specialty ASCs—If all of theinvestors are physicians who are in aposition to refer patients directly to theentity and perform procedures on suchreferred patients; group practices, asdefined in this paragraph, composedexclusively of such physicians; orinvestors who are not employed by theentity or by any investor, are not in aposition to provide items or services tothe entity or any of its investors, and arenot in a position to make or influencereferrals directly or indirectly to theentity or any of its investors, all of thefollowing seven standards must bemet—


(ii) At least one-third of eachphysician investor’s medical practiceincome from all sources for the previousfiscal year or previous 12-month periodmust be derived from the physician’sperformance of procedures (as definedin this paragraph).

(iii) At least one-third of theprocedures (as defined in thisparagraph) performed by each physicianinvestor for the previous fiscal year orprevious 12-month period must beperformed at the investment entity.

(iv) The entity or any investor (orother individual or entity acting onbehalf of the entity or any investor)must not loan funds to or guarantee aloan for an investor if the investor uses

any part of such loan to obtain theinvestment interest.

(v) The amount of payment to aninvestor in return for the investmentmust be directly proportional to theamount of the capital investment(including the fair market value of anypre-operational services rendered) ofthat investor.

(vi) All ancillary services for Federalhealth care program beneficiariesperformed at the entity must be directlyand integrally related to primaryprocedures performed at the entity, andnone may be separately billed toMedicare or other Federal health careprograms.

(vii) The entity and any physicianinvestors must treat patients receivingmedical benefits or assistance under anyFederal health care program in anondiscriminatory manner.

(4) Hospital/Physician ASCs—If atleast one investor is a hospital, and allof the remaining investors arephysicians who meet the requirementsof paragraphs (r)(1), (r)(2) or (r)(3) of thissection; group practices (as defined inthis paragraph) composed of suchphysicians; surgical group practices (asdefined in this paragraph); or investorswho are not employed by the entity orby any investor, are not in a position toprovide items or services to the entity orany of its investors, and are not in aposition to refer patients directly orindirectly to the entity or any of itsinvestors, all of the following eightstandards must be met—


(ii) The entity or any investor (orother individual or entity acting onbehalf of the entity or any investor)must not loan funds to or guarantee aloan for an investor if the investor usesany part of such loan to obtain theinvestment interest.

(iii) The amount of payment to aninvestor in return for the investmentmust be directly proportional to theamount of the capital investment(including the fair market value of anypre-operational services rendered) ofthat investor.

(iv) The entity and any hospital orphysician investor must treat patientsreceiving medical benefits or assistanceunder any Federal health care programin a nondiscriminatory manner.

(v) The entity may not use space,including, but not limited to, operatingand recovery room space, located in orowned by any hospital investor, unless



such space is leased from the hospitalin accordance with a lease that complieswith all the standards of the space rentalsafe harbor set forth in paragraph (b) ofthis section; nor may it use equipmentowned by or services provided by thehospital unless such equipment isleased in accordance with a lease thatcomplies with the equipment rental safeharbor set forth in paragraph (c) of thissection, and such services are providedin accordance with a contract thatcomplies with the personal services andmanagement contracts safe harbor setforth in paragraph (d) of this section.

(vi) All ancillary services for Federalhealth care program beneficiariesperformed at the entity must be directlyand integrally related to primaryprocedures performed at the entity, andnone may be separately billed toMedicare or other Federal health careprograms.

(vii) The hospital may not include onits cost report or any claim for paymentfrom a Federal health care program anycosts associated with the ASC (unlesssuch costs are required to be includedby a Federal health care program).

(viii) The hospital may not be in aposition to make or influence referralsdirectly or indirectly to any investor orthe entity.

(5) For purposes of paragraph (r) ofthis section, procedures means anyprocedure or procedures on the list ofMedicare-covered procedures forambulatory surgical centers inaccordance with regulations issued bythe Department and group practicemeans a group practice that meets all ofthe standards of paragraph (p) of thissection. Surgical group practice means agroup practice that meets all of thestandards of paragraph (p) of thissection and is composed exclusively ofsurgeons who meet the requirements ofparagraph (r)(1) of this section.

(s) Referral agreements for specialtyservices. As used in section 1128B of theAct, remuneration does not include anyexchange of value among individualsand entities where one party agrees torefer a patient to the other party for theprovision of a specialty service payablein whole or in part under Medicare ora State health care program in return foran agreement on the part of the otherparty to refer that patient back at amutually agreed upon time orcircumstance as long as the followingfour standards are met—

(1) The mutually agreed upon time orcircumstance for referring the patient

back to the originating individual orentity is clinically appropriate.

(2) The service for which the referralis made is not within the medicalexpertise of the referring individual orentity, but is within the specialexpertise of the other party receiving thereferral.

(3) The parties receive no paymentfrom each other for the referral and donot share or split a global fee from anyFederal health care program inconnection with the referred patient.

(4) Unless both parties belong to thesame group practice as defined inparagraph (p) of this section, the onlyexchange of value between the parties isthe remuneration the parties receivedirectly from third-party payors or thepatient compensating the parties for theservices they each have furnished to thepatient.

Dated: February 4, 1999.

June Gibbs Brown,Inspector General.

Approved: June 9, 1999.

Donna E. Shalala,Secretary.[FR Doc. 99–29989 Filed 11–18–99; 8:45 am]BILLING CODE 4150–04–P


Documents

federal register - Office of Inspector General, U.S ...Federal Register/Vol. 64, No. 223/Friday, November 19, 1999/Rules and Regulations63519 2 The OIG’s interim final rule addressing