 |
Published
Nov. 19 in the Federal Register
Final
rule on ambulance restocking kickback controversy
[Federal Register: November 19, 1999 (Volume 64, Number 223)]
[Rules and Regulations]
[Page 63517-63557]
Part V
Department of Health and Human Services
Office of Inspector General
42 CFR Part 1001
Medicare and State Health Care Programs: Fraud and Abuse; Clarification
of the Initial OIG Safe Harbor Provisions and Establishment of
Additional Safe Harbor Provisions Under the Anti-Kickback Statute;
Final Rule
ACTION: Final rule.
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SUMMARY: This final rule serves both to add new safe harbor provisions
under the Federal and State health care programs' anti-kickback
statute, as authorized under section 14 of Public Law 100-93, the
Medicare and Medicaid Patient and Program Protection Act of 1987, and
to clarify various aspects of the original safe harbor provisions now
codified in 42 CFR part 1001 (originally proposed in RIN 0991-AA74).
Specifically, this final rule modifies the original set of final safe
harbor provisions codified in 42 CFR 1001.952 to give greater clarity
to that rulemaking's original intent. In addition, this final rule sets
forth an expanded set of safe harbor provisions designed to protect
additional payment and business practices from criminal prosecution or
civil sanctions under the anti-kickback provisions of the statute.
EFFECTIVE DATE: This rulemaking is effective November 19, 1999.
FOR FURTHER INFORMATION CONTACT:
Vicki L. Robinson, Office of Counsel to the Inspector General (202)
619-0335
Joel Schaer, Office of Counsel to the Inspector General (202) 619-1306
SUPPLEMENTARY INFORMATION:
I. Background
Section 1128B(b) of the Social Security Act (the ``Act'') (42
U.S.C. 1320a-7b(b)) provides criminal penalties for individuals or
entities that knowingly and willfully offer, pay, solicit or receive
remuneration in order to induce business reimbursable under the Federal
or State health care programs. The offense is classified as a felony
and is punishable by fines of up to $25,000 and imprisonment for up to
5 years. Violations of the anti-kickback statute may also result in the
imposition of a civil money penalty (CMP) under section 1128A(a)(7) of
the Act (42 U.S.C. 1320a-7a(a)(7)) or program exclusion under section
1128 of the Act (42 U.S.C. 1320a-7).
The types of remuneration covered specifically include kickbacks,
bribes, and rebates, whether made directly or indirectly, overtly or
covertly, in cash or in kind. In addition, prohibited conduct includes
not only remuneration intended to induce referrals of patients, but
remuneration intended to induce the purchasing, leasing or ordering, or
arranging of any good, facility, service, or item paid for by Federal
or State health care programs.
Establishing the Original Safe Harbors
Since the statute on its face is so broad, concern had been
expressed that some relatively innocuous commercial arrangements were
technically covered by the statute and therefore were subject to
criminal prosecution. As a response to the above concern, the Medicare
and Medicaid Patient and Program Protection Act (MMPPPA) of 1987,
section 14 of Public Law 100-93, specifically required the development
and promulgation of regulations, the so-called ``safe harbor''
provisions, designed to specify various payment and business practices
which, although potentially capable of inducing referrals of business
under the Federal and State health care programs, would not be treated
as criminal offenses under the anti-kickback statute. The OIG safe
harbor provisions have been developed ``to limit the reach of the
statute somewhat by permitting certain non-abusive arrangements, while
encouraging beneficial and innocuous arrangements.'' \1\ Health care
providers and others may voluntarily seek to comply with these
provisions so that they have the assurance that their business
practices are not subject to any enforcement action under the anti-
kickback statute, the CMP provision for anti-kickback violations, or
the program exclusion authority related to kickbacks.
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\1\ 56 FR 35952; July 21, 1991.
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On July 29, 1991, we published in the Federal Register the 1991
final rule (56 FR 35952) setting forth various safe harbor provisions
to the Medicare and Medicaid anti-kickback statute. The rulemaking was
authorized under section 14 of Public Law 100-93, MMPPPA of 1987, and
specified certain payment practices that will not be subject to
criminal prosecution under section 1128B(b) of the Social Security Act
(42 U.S.C. 1320a-7b(b)), and that will not provide a basis for
exclusion from Medicare or the State health care programs under section
1128(b)(7) of the Act (42 U.S.C. 1320a-7(b)(7)). The initial final
rulemaking established ``safe harbors'' in ten broad areas: investment
interests, space rental, equipment rental, personal services and
management contracts, sales of practices, referral services,
warranties, discounts, employees, and group purchasing organizations.
However, in giving the Department the authority to protect certain
arrangements and payment practices under the anti-kickback statute,
Congress intended the regulations to be evolving rules that would be
updated periodically to reflect changing business practices and
technologies in the health care industry.
Establishing Additional Safe Harbors
The public comments in response to the original proposed rule
establishing the safe harbor provisions contained suggestions for the
consideration and adoption of additional safe harbor provisions under
42 CFR 1001.952. As a result of those comments, on September 21, 1993,
the OIG published a proposed rule (58 FR 49008) (the ``1993 proposed
rule'') formally requesting public comments on seven new areas of safe
harbor protection under the anti-kickback statute, as well as proposed
modifications to the existing safe harbor for sales of practices. The
proposals for new safe harbors addressed investment interests in rural
areas; ambulatory surgical centers; group practices; practitioner
recruitment; obstetrical malpractice insurance subsidies; referral
agreements for specialty services; and cooperative hospital service
organizations described in section 501(e) of the Internal Revenue Code.
Clarifying the Original Safe Harbor Provisions
After publication of the 1991 final rule, the OIG became aware of a
limited number of issues that had created uncertainties for health care
providers trying to comply with the original safe harbor provisions,
and of certain instances where our intent, either to protect or
preclude protection for particular business arrangements, was not fully
reflected in the text of the regulation, even though it was reflected
in the preamble. As a result, the OIG developed and published a new
notice of proposed rulemaking on July 21, 1994 (59 FR 37202) (the
``1994 proposed clarifications'') intended to modify the text of 1991
final rule to conform to the rulemaking's original intent. The
clarifications contained in the proposed rule did not represent an
attempt to reevaluate the basic judgments that led to the original safe
harbors, but rather were designed to protect business practices
originally intended to be
[[Page 63519]]
protected by making the regulatory language more precise.
Annual Solicitations for Suggestions for Modified and New Safe Harbors
In accordance with section 205 of the Health Insurance Portability
and Accountability Act (HIPAA) of 1996 (Pub. L. 104-191), the
Department is now required to develop and publish an annual notice in
the Federal Register formally soliciting proposals for modifying
existing safe harbors and promulgating new safe harbors and OIG special
fraud alerts. The Department will review the proposals and, in
consultation with the Department of Justice (DoJ), consider issuing new
or modified safe harbor regulations, where appropriate. On December 31,
1996, we published the first of these notices in the Federal Register
(61 FR 69060), soliciting public comment regarding ``the development of
proposed or modified safe harbor regulations,'' including the pending
proposals for new and modified safe harbors (61 FR 69062). We published
additional annual notices on December 10, 1997 (62 FR 65050) and
December 10, 1998 (63 FR 68223). (These notices are referred to in this
preamble collectively as the ``annual solicitations.'') Respondents to
the annual solicitations suggested a number of areas for new or
modified safe harbor protection; additionally, a number of respondents
commented on the 1993 proposed rule and the 1994 proposed
clarifications. This rulemaking is based on the comments received in
response to the 1993 proposed rule, the 1994 proposed clarifications,
and the annual solicitations insofar as the latter addressed the new
and modified safe harbor proposals contained in the 1993 proposed rule
and the 1994 proposed clarifications. Other suggestions for new and
modified safe harbors are under review and will be the subject of
annual reports to Congress made as part of the Inspector General's
year-end semiannual report, as required by HIPAA.
Shared-Risk Exception
Section 216 of HIPAA created an exception to the anti-kickback
statute for certain risk-sharing arrangements and directed the
Department to use a negotiated rulemaking process to establish
companion regulations. Specifically, section 216 of HIPAA created an
exception for certain managed care arrangements, involving remuneration
(i) between eligible organizations under section 1876 of the Social
Security Act (certain health maintenance organizations and competitive
medical plans) and individuals or entities providing items or services
and (ii) between any organization and an individual or entity that has
a risk-sharing arrangement, if a written agreement places the
individual or entity at ``substantial financial risk'' for the cost or
utilization of the items or services provided.
On January 22, 1998, the negotiated rulemaking committee comprised
of 21 industry representatives, a representative from the DoJ, and an
OIG representative representing the Department, reached consensus on a
final proposal for two new safe harbors.\2\ Issues raised in comments
to the 1993 proposed rule and the 1994 proposed clarifications that
pertain to matters covered by the two shared-risk exception safe
harbors are not considered in this final rulemaking.
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\2\ The OIG's interim final rule addressing the safe harbors for
shared-risk arrangements is published in today's edition of the
Federal Register.
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II. Summary of Proposed Rules, Response to Public Comments and
Summary of Revisions
In response to the 1993 proposed rule and the 1994 proposed
clarifications, we received a total of 313 timely-filed public comments
on the additional safe harbors proposed rule and 28 timely-filed public
comments on the safe harbor clarifications proposed rule from various
provider groups, medical facilities, professional and business
organizations and associations, medical societies, State and local
government entities, private practitioners, and concerned citizens. We
received 32 comments in response to the annual solicitations that were
relevant to the issues addressed in this rulemaking. A summary of the
comments and our responses to those comments follow.
A. General Comments
1. Conformity With Stark Law
Comment: Several commenters urged the OIG to conform existing and
proposed safe harbors to the statutory exceptions to section 1877 of
the Act, otherwise known as the ``Stark Law.'' These commenters believe
that payment arrangements permitted under the Stark Law should be
protected under the anti-kickback statute. They argue that it is
confusing for the industry to be subject to two separate bodies of
fraud and abuse law applicable to arrangements involving physician
self-referrals. At minimum, these commenters urge that the safe harbors
be made consistent with the Stark exceptions with respect to physician
compliance with the anti-kickback statute.
Response: The Stark Law is a civil statute that generally (i)
prohibits physicians from making referrals for clinical laboratory or
other designated health services to entities in which the physicians
have ownership or other financial interests and (ii) prohibits entities
from presenting or causing to be presented claims or bills to any
individual, third party payor, or other entity for designated health
services furnished pursuant to a prohibited referral. (42 U.S.C.
1395nn(a)(1)). The anti-kickback statute, on the other hand, is a
criminal statute that prohibits the knowing and willful offer, payment,
solicitation, or receipt of remuneration to induce Federal health care
program business. Both laws are directed at the problem of
inappropriate financial incentives influencing medical decision-making.
This similarity notwithstanding, the statutes are different in scope
and structural approach. Under the Stark Law, physicians may not refer
patients for certain designated health services to entities from which
the physicians receive financial benefits, except as allowed in
enumerated exceptions. A transaction must fall entirely within an
exception to be lawful under the Stark Law. The anti-kickback statute,
on the other hand, establishes an intent-based criminal prohibition
with optional statutory and regulatory ``safe harbors'' that do not
purport to define the full range of lawful activity. Rather, safe
harbors provide a means of assuring that payment practices are not
illegal. Payment practices that do not fully comply with a safe harbor
may still be lawful if no purpose of the payment practice is to induce
referrals of Federal health care program business. Because the two
statutory schemes are fundamentally different, the conference report
for the Stark Law included language clarifying that ``any prohibition,
exemption, or exception authorized under this provision in no way
alters (or reflects on) the scope and application of the anti-kickback
provisions in section 1128B of the Social Security Act'' (H.R. Conf.
Rep. 239, 101st Cong., 1st sess. 856 (1989)).
We are mindful that it may sometimes be burdensome for parties to
review their arrangements under two separate statutory schemes.
However, it would be inappropriate to adjust our safe harbor provisions
in a manner that would prejudice enforcement of the anti-kickback
statute merely to conform the safe harbors to an exception or
prohibition under section 1877 of the Act. This is particularly the
case in view of the clear legislative intent to keep
[[Page 63520]]
enforcement under the anti-kickback statute separate from enforcement
under section 1877 of the Act. Moreover, variation between the Stark
Law exceptions and anti-kickback safe harbors is reasonable in light of
the schematic differences between the two statutes. To the extent the
anti-kickback statute and the Stark Law address the same conduct, the
Stark Law acts as a structural bar to arrangements that contain a per
se conflict of interest. However, even if an arrangement passes muster
under the Stark Law, it may still constitute a violation of the anti-
kickback statute, if the requisite intent to induce referrals is
present.
2. Integrated Delivery Systems and Managed Care
Comment: Several commenters urged the OIG to modify existing safe
harbors and develop new safe harbors to protect and encourage the
development of integrated health care delivery systems and managed care
arrangements. For example, several commenters urged the OIG to provide
specific safe harbor protection for payments between wholly-owned
entities, including parent entities and their wholly-owned
subsidiaries. Some commenters questioned whether the anti-kickback
statute is an appropriate method of regulating business arrangements in
the health care industry, particularly in the context of managed care.
Response: The anti-kickback statute is very broad and potentially
covers many managed care arrangements that are common in the
marketplace today. However, we have recognized that many of these
arrangements do not create the potential for fraud or abuse under the
anti-kickback statute and have created safe harbors aimed at those
managed care arrangements. Currently, for example, a safe harbor
protects certain price reductions offered to health plans
(Sec. 1001.952(m)). In addition, Congress enacted in HIPAA a statutory
shared-risk exception for certain managed care plans and arrangements
that put individuals or entities at substantial financial risk.\3\
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\3\ See footnote 2.
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With respect to integrated delivery systems and payments between
wholly-owned entities, we have stated previously that the anti-kickback
statute is not implicated when payments are transferred within a single
corporate entity, for example, from one division to another, and
therefore no explicit safe harbor is needed for such payments (56 FR
35983). We recognize that there are many lawful integrated delivery
system arrangements and arrangements between wholly-owned entities in
the marketplace today and that many of these arrangements may be
beneficial to the Federal health care programs and their beneficiaries.
We are concerned, however, that integrated delivery systems, including
arrangements involving wholly-owned subsidiaries, may present
opportunities for the payment of improper financial incentives that
result in overutilization of services and increased program costs and
that may adversely affect quality of care and patient freedom of choice
among providers. This is primarily of concern where payment by the
Federal health care programs is on a fee-for-service basis, as may
occur, for example, with a hospital's referrals to a wholly-owned home
health care agency (see, for example, Medicare Hospital Discharge
Planning, OEI-02-94-00320 (December 1997)). Accordingly, we do not
anticipate providing safe harbor protection for integrated delivery
systems and arrangements between wholly-owned entities at this time.
The advisory opinion process (42 CFR part 1008) is available for
parties wishing to obtain OIG review of their particular integrated
delivery or wholly-owned arrangements.
3. Additional Safe Harbors
Comment: Several commenters urged the OIG to demonstrate renewed
commitment to issuing clarifying interpretations of the anti-kickback
statute in a regular and timely manner.
Response: The OIG recognizes the need to work closely with the
industry to combat fraud and abuse in the Federal health care programs
through meaningful industry guidance consistent with our law
enforcement obligations. As part of HIPAA, the OIG received substantial
additional funding for its fraud-fighting efforts. A portion of that
funding has been used for a number of industry guidance purposes,
including the creation of an Industry Guidance Branch in the Office of
Counsel to the Inspector General, which is tasked with issuing advisory
opinions and promulgating safe harbor regulations and special fraud
alerts. As part of our mandate under HIPAA, we have canvassed the
industry through annual notices in the Federal Register soliciting
public suggestions for new and modified safe harbors and special fraud
alerts. The suggestions received in response to those notices, as well
as other suggestions received from the industry or generated
internally, are under review, and we anticipate further rulemaking
periodically in connection with some of these safe harbor suggestions.
We have reported to Congress on the status of the suggestions in the
OIG semiannual report to be issued shortly. In addition, the ongoing
issuance of advisory opinions, model compliance guidance, special fraud
alerts and special advisory bulletins is providing the industry with
meaningful guidance on the scope and application of the anti-kickback
statute in a regular and timely manner.
4. Transition Period
Comment: Several commenters urged the OIG to afford providers who
entered into arrangements with a good faith belief that the
arrangements did not violate the anti-kickback statute a reasonable
grace period to restructure existing arrangements to conform to the
final safe harbors contained in these regulations. In particular,
several commenters expressed concern that the 1994 clarifications would
be interpreted to be retroactive to the date of the original safe
harbors, with no provision for ``grandfathering'' arrangements that
providers believed in good faith complied with the safe harbors as set
forth in the 1991 final rule. For example, these commenters note that
it was not clear that only ``health care'' assets could be counted for
purposes of qualifying for the large entity investment safe harbor
(Sec. 1001.952(a)(i)). Specifically, one commenter proposed
implementation of a one year grace period.
Response: We recognize that many providers have in good faith
attempted to structure lawful arrangements under the anti-kickback
statute that may not fit squarely within these final safe harbor rules.
In this regard, we repeat our response to similar comments in our
preamble to the 1991 final rule. There we stated:
The failure of a particular business arrangement to comply with
these provisions does not determine whether or not the arrangement
violates the statute because * * * this regulation does not make
conduct illegal. Any conduct that could be construed to be illegal
after the promulgation of this rule would have been illegal at any
time since the current law was enacted in 1977. Thus illegal
arrangements entered into in the past were undertaken with a risk of
prosecution. This regulation is intended to provide a formula for
avoiding risk in the future.
We also recognize, however, that many health care providers have
structured their business arrangements based on the advice of an
attorney and in good-faith belief that the arrangement was legal. In
the event that they now find that the arrangement does not comply
fully with a particular safe harbor provision and are working with
diligence and good faith to restructure it so that it does comply,
we will use our discretion to be fair
[[Page 63521]]
to the parties to such arrangements. (56 FR 35955).
These same principles apply with respect to arrangements structured
in good faith in accordance with the 1991 final rule. Thus, to the
extent that parties reasonably believed that they complied with a safe
harbor based on the 1991 final rule and work with diligence and good
faith to restructure their arrangements so that they comply with the
safe harbor as clarified in this final rule, we will exercise our
discretion to be fair to the parties. We are not setting a specific
``grace period,'' as we believe that the reasonable time period for
restructuring an arrangement will vary depending on the type and
complexity of the arrangement.
5. Meaning of Safe Harbors
Comment: Several commenters asked the OIG to clarify that the
failure to meet the conditions of a safe harbor does not mean that an
arrangement is suspect under the anti-kickback statute. One commenter
expressed concern that members of the public view arrangements that do
not comply with a safe harbor as suspect arrangements.
Response: The issue of the scope and effect of the safe harbors is
important and often misunderstood. We addressed this issue in our
preamble to the 1991 final rule:
This (safe harbor) regulation does not expand the scope of
activities that the statute prohibits. The statute itself describes
the scope of illegal activities. The legality of a particular
business arrangement must be determined by comparing the particular
facts to the proscriptions of the statute.
The failure to comply with a safe harbor can mean one of three
things. First * * * it may mean that the arrangement does not fall
within the ambit of the statute. In other words, the arrangement is
not intended to induce the referral of business reimbursable under
(a Federal health care program); so there is no reason to comply
with the safe harbor standards, and no risk of prosecution.
Second, at the other end of the spectrum, the arrangement could
be a clear statutory violation and also not qualify for safe harbor
protection. In that case, assuming the arrangement is obviously
abusive, prosecution would be very likely.
Third, the arrangement may violate the statute in a less serious
manner, although not be in compliance with a safe harbor provision.
Here there is no way to predict the degree of risk. Rather, the
degree of risk depends on an evaluation of the many factors which
are part of the decision-making process regarding case selection for
investigation and prosecution. Certainly, in many (but not
necessarily all) instances, prosecutorial discretion would be
exercised not to pursue cases where the participants appear to have
acted in a genuine good-faith attempt to comply with the terms of a
safe harbor, but for reasons beyond their control are not in
compliance with the terms of the safe harbor. In other instances,
there may not even be an applicable safe harbor, but the arrangement
may appear innocuous. But in other instances, we will want to take
appropriate action. (56 FR 35954)
Thus, it is not true that every arrangement that does not comply
with a safe harbor is suspect under the anti-kickback statute, though
such arrangements may be suspect in particular circumstances. Parties
seeking guidance about their specific arrangements may request an OIG
advisory opinion in accordance with the regulations set forth at 42 CFR
part 1008.
B. 1994 Clarifications to Existing Safe Harbors
In general, the 1994 proposed clarifications were designed to
clarify various aspects of the original safe harbor provisions. Set
forth below are a summary of the proposed clarifications for each safe
harbor provision, a summary of the final clarifications adopted in this
rulemaking, summaries of the public comments received, and our
responses to those comments.
1. Investment Interests
Summary of Proposed Clarifications: We proposed five clarifications
to the investment interests safe harbor, as follows
<bullet> First, we proposed that only assets or revenues related to
the furnishing of health care items or services will be counted for
purposes of qualifying for either the $50,000,000 asset threshold for
``large entities'' (Sec. 1001.952(a)(1)) or the 60-40 gross revenue
test for ``small entities'' (Sec. 1001.952(a)(2)(vi)). The purpose of
this modification is to make clear our original intent that only assets
and revenues derived from health care lines of business will be
considered for purposes of qualifying for safe harbor protection.
<bullet> Second, we proposed revising the standards that prohibit
an entity from loaning funds to an investor to be used to purchase the
investor's investment interest in the entity. (Secs. 1001.952(a)(1)(iv)
and 952(a)(2)(vii)). The revised standard would make clear that the
prohibition also includes any such loan from another investor or a
person acting on behalf of the entity or any investor.
<bullet> Third, we proposed modifying the first investment interest
standard to the small entity investment safe harbor (the 60-40 investor
test) to allow an alternative to the existing requirement of class-by-
class analysis. Under the current rule, ``each class of investments''
must meet the 60-40 investor test. Upon review, we found this class-by-
class analysis unnecessarily restrictive. Accordingly, the proposed
alternative would allow equivalent classes of equity investment
interests to be combined together or equivalent classes of debt
investment interests to be combined together (separate from the equity
investments) in order to apportion investors into ``untainted'' and
``tainted'' pools for purposes of meeting the 60-40 investor test.
<bullet> Fourth, we proposed striking the language ``items or
services furnished'' from the 60-40 revenue rule
(Sec. 1001.952(a)(2)(vi)) in the small entity investment safe harbor to
make clear that we did not intend for revenues that the joint venture
derives from items or services furnished by an investor to the joint
venture (such as management services) to be considered tainted for
purposes of satisfying the 60-40 revenue test.
<bullet> Fifth, we proposed a clarification in the preamble to the
1994 proposed clarification to the effect that an interested investor
must obtain his or her investment interest in the same way as members
of the public (i.e., directly off a registered national securities
exchange through a broker) and the investment interest must be the same
type of investment interest that is available to the public. In this
regard, we stated that there cannot be any side agreements that require
stock to be purchased or that restrict in any manner an investor's
ability to dispose of the stock. We proposed no change in the language
of the existing safe harbor, which states that the investment interest
of an interested investor ``must be obtained on terms equally available
to the public thorough trading on a registered national securities
exchange * * * or on the National Association of Securities Dealers
Automated Quotation Service'' (Sec. 1001.952(a)(1)(ii)).
Summary of the Final Rule: We are adopting the clarifications to
the large and small entity investment safe harbors as proposed in the
1994 proposed clarifications and described above, with the following
modifications in response to comments received (unless otherwise
noted):
<bullet> We have added language to Sec. 1001.952(a)(2)(vii)
clarifying that, for purposes of the small entity investment safe
harbor, loans to an investor may not be made by individuals or entities
acting on behalf of the investment entity or any of its investors. This
language is the same as language proposed to be added to
Sec. 1001.952(a)(1)(iv) in the large entity investment safe harbor in
the 1994 proposed clarifications and was
[[Page 63522]]
described as applying to the small entity investment safe harbor in the
preamble to the 1994 proposed clarifications. It was inadvertently
omitted from the regulatory language published in the notice of
proposed rulemaking.
<bullet> We have revisited the meaning of ``on terms equally
available'' in the second standard of the large entity investment safe
harbor and have concluded that an investment interest is obtained on
equally available terms if it is obtained at the same price as is
available to the general public trading on a registered securities
exchange through a broker and is not subject to restrictions on
transferability.
Comments and Responses
a. Large Entity Investments
Comment: In response to our clarification that only assets or
revenues ``related to the furnishing of health care items or services''
will be counted for purposes of qualifying for either the $50,000,000
asset threshold for ``large entities'' or the 60-40 gross revenue test
for ``small entities,'' several commenters sought guidance regarding
what constitutes ``health care items or services.'' For example, some
commenters wondered whether a managed care organization would be
considered a health care business if it does not furnish health care
services. Some commenters objected to the proposal, arguing that
requiring items and services to be health care related would actually
increase the incentives for improper referrals. They reason, for
example, that a large entity entirely composed of health-care related
businesses would be more susceptible to the lure of paying kickbacks
for referrals than a diversified entity less dependent on health care
derived profits.
Response: By using the term ``health care items or services,'' we
mean (i) health care items, devices, supplies, and services and (ii)
items or services reasonably related to the furnishing of health care
items, devices, supplies, or services, including, but not limited to,
non-emergency transportation, patient education, attendant services,
social services (e.g., case management), utilization review, quality
assurance, and practice management services. Marketing services are not
included. In this context, we believe that a managed care company would
count as a health care related asset for purposes of the large entity
investment threshold test and that revenue derived from a managed care
company would count as ``tainted'' revenue for purposes of the 60-40
revenue test in the small entity investment safe harbor.
While we agree that diversified assets may, in some circumstances,
indirectly minimize financial incentives for referrals from investor
referral sources, we continue to believe that arrangements involving
ventures between health care businesses and non-health care business
pose an increased risk of program abuse. As we stated in the preamble
to the 1994 clarifications, ``[i]t would be an obvious sham,
inconsistent with our original intent, if a joint venture could merge
with a non-health care business and have those non-health care assets,
and the revenues derived from that non-health care line of business
counted for the purposes of qualifying for safe harbor protection'' (59
FR 37203-37204).
Comment: Several commenters expressed concern about our
clarification of the phrase ``on terms equally available to the
public'' in the safe harbor condition that describes how interested
investors must obtain their investment interests in order to receive
safe harbor protection (Sec. 1001.952(a)(1)(ii)). We indicated that the
phrase should be interpreted to mean that the interested investor must
obtain his or her investment interest in the same way as investors from
the general public. Several commenters urged that this interpretation
was too narrow and imposed unwarranted limitations on investment in
large entities. These commenters argued, for example, that a large
entity should be permitted to purchase a physician's practice using
stock in addition to cash, provided that the value of the stock plus
all other consideration paid to the physician equals the fair market
value for the practice. For example, one commenter asked why it would
be acceptable for an entity to purchase a practice for $1 million in
cash (assuming fair market value to be $1 million), but not to do so
for $500,000 in cash and $500,000 worth of stock. These commenters
suggest that the phrase ``on terms equally available'' should mean that
the stock is not lettered, restricted, subject to side agreements, or
otherwise subject to limited transferability. One commenter proposed an
alternative safe harbor condition that would deny safe harbor
protection to an interested investor's holding of publicly-traded stock
that is subject to transfer restrictions that are not applicable to the
stock when held by members of the public.
Response: We have two significant concerns regarding interested
investors' investments in large entities that are in health care
related businesses. First, we are concerned that limited
transferability or other restrictions on the sale or disposition of
stock may serve to ``lock'' interested investors into specific
investments, thereby increasing the incentives for those investors to
refer Federal health care program business to the investment entity.
Second, we are concerned that interested investors who are potential
referral sources for the investment entity not be permitted to obtain
their investment interests at insider prices or at prices more
favorable than those available to the general public when purchasing
stock from a registered national securities exchange through a broker.
Such favorable treatment could potentially be disguised remuneration
for referrals. For example, we are aware of certain public offerings of
health care companies that involve simultaneous acquisitions of
physician practices in exchange for stock in the newly-public company,
with the stock valued in a manner that results in the selling physician
obtaining the stock at a lower price or on more advantageous terms than
offered to the public. The economic benefit conferred on the physician
in such an arrangement potentially violates the anti-kickback statute
if one purpose of the benefit is to reward or induce referrals. The
investment would not fall within the large entity investment safe
harbor.
Notwithstanding, upon further consideration of this issue, we are
persuaded that requiring stock acquired by interested investors to be
obtained in the same way as the same stock acquired by members of the
public imposes an unduly restrictive interpretation on the existing
safe harbor language. Accordingly, we are adding language to make clear
that an investment interest will not qualify for safe harbor protection
as ``obtained on terms equally available to the public'' if (i) the
investment interest is subject to restrictions or limited
transferability (including side agreements) not applicable to the same
investment interest when held by members of the public and/or (ii) the
investment interest is not obtained for the same price that is
available to the general public when trading on a registered national
securities exchange through a broker. Thus, in the example cited by the
commenter above, the investment interest would be protected if $1
million is the fair market value for the physician practice (not taking
into account the value of any referrals) and the stock obtained by the
physician is valued at $500,000 based on the price per share then
available to the general public trading on a registered national
[[Page 63523]]
securities exchange through a broker. However, the public stock
offering described in the preceding paragraph would not be protected.
b. Small Entity Investments
Comment: Some commenters asked that we clarify which investors
constitute referral sources for purposes of the small entity safe
harbor. One commenter recommended that we amend the small entity safe
harbor to make clear that only physicians (using the Medicare program
definition of that term) are capable of making referrals or influencing
the flow of business. In this commenter's view, the current OIG
position that referral source investors may include hospitals and other
entities means that safe harbor protection is unavailable for various
integrated delivery system models that involve joint ownership and
investment. Another commenter requested that we clarify that
manufacturers that invest in health care entities and sell products to
those entities are rarely in a position to refer patients, and thus
should not fall within the pool of ``tainted'' investors for purposes
of the investment interests safe harbors.
Response: We continue to believe that the appropriate focus under
this safe harbor is the status of the investors and the ability of the
investors to make or influence the investment entity's referral stream
or level of business activity. Investors that furnish items or services
to the entity, as well as investors that refer patients or otherwise
generate business for the entity, are ``tainted'' investors doing
business with the entity for purposes of the 60-40 investor test. Thus,
to iterate the example provided in the preamble to the 1991 final rule,
if a durable medical equipment (DME) supplier and hospital enter into a
joint venture to furnish DME to patients when they leave the hospital,
both the DME supplier and the hospital fit within the category of
investors doing business with the entity (56 FR 35968).
We are not persuaded that hospitals, nursing homes, skilled nursing
facilities, or other institutions are incapable of influencing
referrals of Federal health care program business. To the contrary, we
are aware of instances of referrals that are in fact controlled by
these institutions' employees or agents. (See, e.g., Medicare Hospital
Discharge Planning, OEI-02-94-00320 (December 1997); Special Fraud
Alert: Fraud and Abuse in Nursing Home Arrangements with Hospices, 63
FR 20415 (April 24, 1998)). Similarly, we believe that managed care
companies and physician practice plans may control referrals in certain
circumstances. We agree, however, that in many circumstances
manufacturers that invest in health care entities and sell products to
those entities may not be in a position to refer patients to, or
generate business for, those entities for purposes of the 60-40 revenue
test (Sec. 1001.952(a)(2)(vi)). However, in other circumstances,
investor manufacturers may fall within the pool of ``tainted''
investors, and thus each arrangement must be evaluated on a case-by-
case basis. In short, manufacturers may be ``tainted'' investors for
purposes of the 60-40 investor test (Sec. 1001.952(a)(2)(i)), where
they are in a position to furnish items or services to the investment
entity or to influence the flow of referrals to the entity.
Comment: One commenter who supported our proposal to aggregate
similar classes of investment interests sought clarification of the
proposed condition that classes of investment interests be ``similar in
all material respects'' for purposes of the 60-40 investor test,
particularly as the condition applies to debt investment interests. For
example, the commenter noted that the OIG is willing to treat general
partners' and limited partners' interests as sufficiently similar for
safe harbor purposes (56 FR 37204), even though general partner and
limited partner interests are not similar in a number of arguably
material respects, such as fiduciary obligations and assumption of
liability. With respect to debt interests, the commenter questioned
whether differing redemption rights would result in otherwise similar
classes of debt being deemed too dissimilar to aggregate. Similarly,
the commenter questioned whether debt instruments with different
interest rates could be aggregated (especially if the different
interest rates accurately reflect market rates at the time the
instruments issued) and whether secured debt instruments could be
aggregated with unsecured debt instruments.
Response: Our use of the phrase ``similar in all material
respects'' was not intended to suggest that for purposes of
aggregation, classes of investment interests must be similar in all
respects that might be material to a partner or to a lender or a
borrower, but only that classes of investment interests must be similar
in all respects material to the purposes of the safe harbor. The focus
is on the potential for remuneration to investors who are existing or
potential referral sources; material investment terms are those terms
that create, or relate to the creation of, potential value for
investors. For example, classes of investment interests may be
aggregated where the classes have similar rights with respect to the
entity's income and assets, where investors receive equivalent returns
in proportion to amounts invested, and, most importantly, where there
is no preferential treatment of referral source investors, including,
but not limited to, preferences that take effect in the event of a
disposition of entity assets.
Comment: One commenter expressed concern about our treatment of
general partners for purposes of the 60-40 investor rule. We have
previously stated that general partners--who have fiduciary obligations
to manage a partnership so as to make a profit and who are liable for
losses incurred due to gross mismanagement--provide services to a
partnership and are, therefore, ``tainted'' or ``interested'' investors
for purposes of the 60-40 investor rule. The commenter observed that
this interpretation serves to disqualify many partnerships from safe
harbor protection and that our proposal to permit classes of investment
interests to be aggregated for purposes of determining compliance with
the 60-40 investor rule does not adequately address this issue.
According to the commenter, even under our proposed aggregation test,
safe harbor protection is only available if general partners hold a
minority interest in the partnership, even if the partnership has no
potential referral source investors. Thus, for example, a hospital
owned entirely by a partnership composed of non-referral source
investors would not qualify for safe harbor protection if the general
partners owned more than 40 percent of any class of investment
interest.
Response: As we explained in our preamble to the 1991 final rule,
it would be inappropriate to grant safe harbor protection, for example,
to a joint venture composed of a DME supplier and physicians, because
all of the owners would be doing business with the joint venture by
either furnishing items or services or making referrals (56 FR 35968).
We recognize that there may be circumstances, such as those posited by
the commenter, where the fact that an investor is furnishing items or
services to the investment entity may not pose an increased risk of
improper referrals comparable to the risk posed in our DME/physician
joint venture example. However, we find that it is not feasible to
craft a rule that would clearly distinguish among types of investors
furnishing items or services, while excluding potentially abusive
arrangements from safe harbor protection.
[[Page 63524]]
Distributions to investors in partnerships that have no existing or
potential referral source investors may not implicate the anti-kickback
statute at all, since the crux of the statute is a prohibition on
remuneration to induce or reward referrals of Federal health care
program business. To the extent the statute is implicated, partnerships
that do not comply fully with all safe harbor conditions will have to
be evaluated on a case-by-case basis. Our advisory opinion process is
also available to parties contemplating such partnerships (42 CFR part
1008).
Comment: Several commenters supported our proposal to change the
60-40 revenue test by striking ``items or services furnished''
(Sec. 1001.952(a)(2)(vi)). However, these commenters asked for
clarification of the term ``business otherwise generated'' as used in
the safe harbor standard. We have previously explained that revenue is
``generated'' if it is ``induced to come to the joint venture for items
or services by an investor'' (56 FR 37205) (emphasis in original).
These commenters requested that we clarify that ``by an investor''
means by an investor who is a licensed professional with legal
authority to order items and services, for instance, an investor with
legal authority to refer or induce a person to obtain care from a
participating provider.
Response: We disagree that the definition of an investor for these
purposes should be as narrow as the commenters suggest. Certain
investors that are arguably not ``licensed professionals,'' such as
hospitals, long-term care facilities, home health agencies, managed
care companies, and physician practice management companies, may be in
a position to generate business for an entity in which they have an
investment interest and to receive distributions that may be
remuneration for that business. We recognize that there may be
occasional instances where business is generated by investors who would
not ordinarily be considered as potential referral sources. This might
occur, for example, if an investor is not in a health care related line
of business, but happens to refer friends or relatives to a joint
venture entity in which he or she has invested. However, we think that
these situations are likely to be infrequent and, in most
circumstances, are not likely to generate appreciable revenue.
Comment: As described above, several commenters questioned our
clarification that the term ``revenue'' for purposes of the 60-40
revenue test means revenue related to the furnishing of health care
items or services. In addition, two commenters expressed concern about
an example involving radiologists that we used to illustrate our
discussion of the revenue rule in the preamble to the 1994 proposed
clarifications. Specifically, the example stated that:
If a radiologist holds an investment interest in an imaging
center and reads all the films at the center, his or her reading of
the film does not taint all the revenues from the referrals by non-
investors. However, we have received a few questions from people who
read the 60-40 revenue rule as making such referrals tainted because
the investor furnished services at the joint venture.
We emphasize that if a radiologist-investor is reading the film
and making referrals or otherwise generating business, then the
revenues the joint venture derives from that activity would become
tainted. For example, revenues would be tainted when a radiologist-
investor takes part in a consultation with a non-investor internist,
and during that consultation the radiologist recommends a procedure
which is performed at the joint venture. (59 FR 37205).
Commenters complained that in light of this example, a radiologist-
investor seeking safe harbor protection would essentially be prohibited
from practicing medicine, because he or she would be precluded from
recommending follow-up procedures. Moreover, the commenters argued that
compliance with the example would not be feasible because of the record
keeping and administrative burden associated with tracking all
recommendations to determine if recommended follow-up studies were
later performed at the radiologist-investor's facility. These
commenters asked that we clarify our position regarding radiologist-
investors.
Response: We continue to be persuaded that it is appropriate and
consistent with our original intent that only health care related
revenues be counted for purposes of the 60-40 revenue test. The purpose
of the test is to limit the number of investor referrals to a safe
harbor protected joint venture, thereby minimizing the risk that profit
distributions might be disguised payments for investor referrals.
Our use of the example in the preamble to the 1994 proposed
clarifications was merely intended to illustrate the difference between
providing items and services to an entity (which does not result in
``tainted'' revenue) and generating business for the entity (which does
result in ``tainted'' revenue). In retrospect, our focus on
radiologists in the example may have led to some confusion about the
anti-kickback implications specifically for radiologists' practice of
medicine. In the unique circumstances of radiologists, we wish to
clarify that the occasional recommendation of additional testing by a
radiologist to an attending physician with whom the radiologist has no
financial arrangements and pursuant to a bona fide medical consultation
is not prohibited under the anti-kickback statute. Accordingly, for
purposes of the 60-40 revenue test, such consultative recommendations
would not ``taint'' revenue derived from tests performed at the joint
venture entity as a result of a subsequent referral of the patient by
his or her attending physician for the recommended tests.
Comment: One commenter supported our proposed clarification
regarding the prohibition on loans from entities or their investors
that are used by investors to purchase their investment interests
(Sec. 1001.952(a)(2)(vii)). Another commenter requested that we make
clear that we do not intend to prohibit loans from banks or other
unrelated parties.
Response: The seventh investment interest standard addressing loans
is not intended to apply to loans from banks or other unrelated third
parties that are not equity investors in the entity seeking safe harbor
protection and that are not acting on behalf of the entity or any of
its investors, even if the loan is used in whole or in part by a
prospective investor to purchase an investment interest. On the other
hand, the safe harbor condition is intended to preclude from protection
loan guarantees, collateral assignments or other arrangements made by
an investment entity or any of its investors, or by individuals or
entities acting on their behalf, to secure a loan from a bank or other
unrelated third party, if the loan is used in whole or in part by an
investor to obtain an investment interest in the entity.
Comment: The remaining comments to the existing investment interest
safe harbors addressed various aspects of the safe harbors not
specifically covered by the proposed clarifications. Two commenters
argued that the safe harbor's two 60-40 tests unnecessarily limit
potential investors for, and referral sources to, legitimate, cost-
effective, high-quality health care ventures. In one commenter's view,
the 60-40 tests prevent potential joint ventures from attracting
necessary capital and cause investors to refrain from using the
venture's services, even when the venture offers higher quality, lower
prices, or better patient convenience than competing providers. This
commenter noted that the two 60-40 tests are particularly problematic
in rural and underserved areas, where alternative sources of capital
and
[[Page 63525]]
alternative providers are often in short supply.
Response: Except as otherwise noted above, we are adopting the
proposed clarifications to the investment interests safe harbor as set
forth in our 1994 proposed clarifications. Aside from clarifying that
``revenue'' refers to health care related revenue and deleting the
phrase ``items or services furnished'' in Sec. 1001.952(a)(2)(vi), we
are not persuaded at this time that there is a need to revisit the two
60-40 tests for small entity investments. Elsewhere in this rulemaking,
we address a new safe harbor for investments in rural and urban
undeserved areas (Sec. 1001.952(a)(3)) that eliminates the 60-40
revenue test and incorporates a modified 60-40 investor test.
2. Space and Equipment Rental and Personal Services and Management
Contracts Summary of Proposed Clarifications
We proposed 2 clarifications to the space and equipment rental and
personal services and management contracts safe harbors
(Secs. 1001.952(b), (c), and (d)). First, we proposed revising these
safe harbors expressly to preclude schemes involving the use of
multiple overlapping contracts to circumvent the safe harbor
requirement that space and equipment rental and personal services and
management contracts be for terms of at least 1 year. This requirement
was intended to prevent regular renegotiation of contracts based on the
volume of referrals or business generated between the parties. Second,
we proposed revising these safe harbors to preclude safe harbor
protection for health care providers that rent more space or equipment
or purchase more services than they actually need as a means of paying
for referrals.
Summary of Final Rule: We are adopting the clarifications to the
space and equipment rental and personal services and management
contracts safe harbors as proposed in the 1994 proposed clarifications
and described above, with the following modifications in response to
comments received:
<bullet> We are substituting the word ``term'' for the word
``period'' in the second condition of each safe harbor to be more
consistent with customary business terminology;
<bullet> We are replacing the phrase ``legitimate business
purpose'' with the phrase ``commercially reasonable business purpose''
in each safe harbor to make clear that the test is not whether a
business arrangement is lawful, but whether it serves a commercially
reasonable business purpose, that is, whether the space and equipment
leased or services purchased have intrinsic commercial value to the
lessee or purchaser.
Comments and Responses
Comment: A commenter expressed concern that the safe harbor
condition that a lease cover all equipment leased between parties and
specify the equipment leased would jeopardize many common commercial
equipment leasing transactions. This commenter asserted that
manufacturers and lessors typically lease capital equipment to health
care providers at different times, but under leases that cover the same
time period, in whole or in part. The commenter opined that other safe
harbor conditions, including those prescribing aggregate compensation,
fair market value, and arms-length negotiations, are sufficient
safeguards against abuse.
Response: We recognize that some lawful equipment contracts will
not qualify for safe harbor protection and will need to be analyzed on
a case-by-case basis. The existence of a safe harbor for a particular
set of business arrangements does not jeopardize other types of
arrangements under the anti-kickback statute. Many multiple contract
arrangements are legitimate business arrangements that do not violate
the statute; however, some multiple contract arrangements are
essentially shams that operate to reward and encourage referrals. We
are unable to provide safe harbor protection for such arrangements, in
view of the potential abuse of multiple overlapping contracts described
above. The advisory opinion process (42 CFR part 1008) is available to
parties seeking individualized legal opinions regarding the legality of
their leasing arrangements under the anti-kickback statute.
Comment: One commenter suggested that for purposes of clarity and
consistency with customary business terminology we substitute the word
``term'' for the word ``period'' as used in Secs. 1001.952(b)(2),
(c)(2), and (d)(2).
Response: We agree that substituting the word ``term'' for
``period'' in Secs. 1001.952(b)(2), (c)(2), and (d)(2) would provide
clarity and consistency in the context of leases and service contracts.
Comment: One commenter approved of our proposal that the aggregate
space, equipment, or services contracted for not exceed ``that which is
reasonably necessary to accomplish the legitimate business purpose'' of
the party renting the space or equipment or purchasing the services.
This commenter believed that the clarification would inhibit lessors
with greater bargaining power from coercing lessees into contracting
for more space than needed to conduct business. However, several
commenters suggested that the language of our proposed clarification is
ambiguous, duplicative, and confusing, and, in the words of one
commenter, would open a ``Pandora's Box of potentially conflicting
interpretations.'' For example, one commenter observed that many
arrangements in today's health care arena, such as cost-sharing or
risk-sharing arrangements, joint research initiatives, and data
collection arrangements, may not reflect ``traditional'' business
purposes, but are legitimate and reasonable in responding to insurers'
growing demands for cost-effectiveness. One commenter recommended
replacing the word ``legitimate'' with the word ``reasonable.''
Response: We believe the proposed clarification further ensures
that protected leases and personal services contracts will provide for
fair market value compensation. However, we agree that the term
``legitimate'' may be misconstrued. Thus, in the final rule we are
substituting the phrase ``commercially reasonable business purpose''
for ``legitimate business purpose'' to make clear that the test is not
merely whether a business purpose is legal or illegal. The
``commercially reasonable business purpose'' test is intended to
preclude safe harbor protection for health care providers that
surreptitiously pay for referrals--whether because of coercion or by
their own initiative--by renting more space or equipment or purchasing
more services than they actually need from referral sources. By
``commercially reasonable business purpose,'' we mean that the purpose
must be reasonably calculated to further the business of the lessee or
purchaser. In other words, the rental or the purchase must be of space,
equipment, or services that the lessee or purchaser needs, intends to
utilize, and does utilize in furtherance of its commercially reasonable
business objectives. Thus, for example, a space rental contract between
a physician and a DME supplier for space in the physician's office that
includes extra office space that the DME supplier neither occupies nor
uses for its DME business would not be protected by this safe harbor.
Nor would the safe harbor protect the lease of more space than would
reasonably be rented by a similarly-situated DME supplier negotiating
in an arms-length transaction with a non-referral source lessor. Cost-
sharing or risk-sharing arrangements, joint research initiatives,
[[Page 63526]]
and data collection arrangements may qualify as commercially reasonable
business purposes in many circumstances. However, we are aware of
abusive arrangements involving contracts with referral sources for data
collection services or research projects where the data to be collected
or research to be performed have no value to the entity paying for them
and are merely pretexts for payments for referrals. Such arrangements
do not comply with the safe harbor and are highly suspect under the
anti-kickback statute.
Comment: The remaining comments we received regarding clarification
of this safe harbor addressed matters not covered by the proposed
clarifications. Several commenters described difficulties in meeting
the safe harbor for part-time arrangements--including time-share office
leases, per use equipment leases, and personal services contracts with
hourly compensation --caused by the requirement that the ``aggregate''
contract price be set in advance (Secs. 1001.952(b)(5), (c)(5), and
(d)(5)). One commenter noted that these types of arrangements typically
contain compensation methods that are set in advance and that can be
made consistent with fair market value and unrelated to the volume or
value of referrals. Along these lines, one commenter suggested that the
OIG permit ``aggregate'' payments that are not set in advance, if they
are calculated in accordance with specific and predetermined formulas
set forth in the written agreement. Similarly, several commenters
expressed concern about the impracticality of the requirement that
protected contracts specify the exact schedule of intervals for the use
of space or equipment or the rendering of services for many part-time
or as-needed arrangements.
Response: We continue to believe that both the ``aggregate'' and
the ``specific schedule of intervals'' requirements are necessary to
ensure that safe harbor protection is not afforded to arrangements that
include payments that are adjusted periodically on the basis of the
volume or value of referrals or business otherwise generated from a
referral source. We recognize that these requirements may raise
practical problems for certain providers seeking safe harbor protection
for part-time or as-needed arrangements. Nevertheless, we are aware of
many instances of abuse in these types of arrangements; therefore, for
purposes of granting protection from prosecution, we believe it is
appropriate to protect only those arrangements that can meet the safe
harbor's strict standards. However, as we have stated numerous times,
safe harbors do not define the scope of legal activities under the
anti-kickback statute. Part-time, as-needed, and other similar
arrangements that cannot fit within the safe harbor may be lawful, if
no payments are made, directly or indirectly, to induce referrals of
Federal health care program business.
Comment: One commenter sought clarification regarding the effect of
a termination provision in a lease or contract in light of the safe
harbor requirement that leases or contracts be for at least a 1-year
term. This commenter specifically asked whether the 1-year term
requirement is satisfied (i) if the lease or contract allows for ``for
cause'' termination by either party, or (ii) if the lease or contract
permits termination by either party with or without cause upon advance
written notice, provided there is a concurrent contractual provision
that restricts parties that terminate without cause from entering into
any further relationships for the balance of the required 1-year
period.
Response: The 1-year term requirement ensures that protected leases
or contracts cannot be readjusted frequently based on the number of
referrals between the parties. Although not specifically stated in the
safe harbor regulation, a ``for cause'' termination clause that (i)
specifies the conditions under which the contract may be terminated
``for cause,'' and (ii) operates in conjunction with an absolute
prohibition on any renegotiation of the lease or contract or further
financial arrangements between the parties for the duration of the
original 1-year term would satisfy the 1-year term requirement. We
remain concerned, however, that ``without cause'' termination
provisions could be used by unscrupulous parties to create sham leases
and contracts. This could occur, for example, where the parties enter
into an agreement to pay a sum of money upfront for services to be
performed over a period of time. Parties could disguise payments for
referrals by terminating the agreement without cause after payment, but
before performance of any services. A 1-year prohibition on
renegotiation or further financial arrangements would be meaningless in
such circumstances.
3. Referral Services
Summary of Proposed Clarifications: The referral services safe
harbor requires that any fee a referral service charges a participant
be ``based on the cost of operating the referral service, and not on
the volume or value of any referrals to or business otherwise generated
by the participants for the referral service * * *''
(Sec. 1001.952(f)(2)) (emphasis added). This language created an
unintended ambiguity when a referral service tries to adjust its fee
based on the volume of referrals it makes to the participants. We
proposed clarifying that the safe harbor precludes protection for
payments from participants to referral services that are based on the
volume or value of referrals to, or business otherwise generated by,
either party for the other party.
Summary of Final Rule: We received one comment in favor of our
proposed clarification to the referral services safe harbor and none
opposed. We are adopting the proposed clarification as set forth in the
1994 proposed clarifications.
4. Discounts
Summary of Proposed Clarifications: As a general rule, discounts
for health care items and services are encouraged under the Federal
health care programs so long as the Federal health care programs share
in the discount where appropriate, and as appropriate, to the
reimbursement methodology. Arrangements in accordance with which
Federal programs get less than their proportional share of cost-savings
on items or services payable by the programs are seriously abusive.
Such arrangements result in the programs being overcharged and are not
protected by either the statutory exception or regulatory safe harbor
for discounts.
Because of expressed industry uncertainty over what obligations
individuals or entities have to meet in order to receive protection
under this safe harbor, we proposed clarifying the discount safe harbor
by dividing the parties to a discount arrangement into three groups--
buyers, sellers, and offerors of discounts--with descriptions of each
party's obligations in separate paragraphs. In addition, we proposed
clarifying the definition of ``rebate'' for purposes of this safe
harbor. A rebate under our proposal would be defined as any discount
not given at the time of sale. Consequently, a rebate transaction would
not be covered by the safe harbor if it involves a buyer under
Sec. 1001.952(h)(1)(iii) that is neither a cost-reporter nor a HMO or
CMP, because for such buyers, all discounts must be given at the time
of sale.
We also proposed clarifying the scope of safe harbor protection for
sellers in situations where buyers have not fully complied with their
obligations under the safe harbor provisions. If a seller has done
everything that it reasonably could under the circumstances to ensure
that the buyer understands its obligation to
[[Page 63527]]
report the discount accurately, the seller is protected irrespective of
the buyer's omissions. To receive such protection, however, the seller
must report the discount to the buyer and inform the buyer of its
obligation to report the discount. To emphasize that the seller's
obligations require more than perfunctory compliance with the safe
harbor, we proposed adding that the seller must inform the buyer ``in
an effective manner.'' We also proposed adding a requirement that the
seller ``refrain from doing anything that would impede the buyer from
meeting its obligations under this paragraph.'' Thus, if the seller, in
good faith, meets its obligations under the safe harbor and the buyer
does not meet its obligations due to no fault of the seller, the seller
would receive safe harbor protection. However, when a seller submits a
claim or request for payment on behalf of the buyer, the seller must
fully and accurately report the discount to the appropriate Federal or
State health care program. An offeror of a discount would similarly
receive safe harbor protection if it meets all of its safe harbor
obligations, but its buyer or seller does not meet its obligations due
to no fault of the offeror.
We further proposed clarifying whether any reduction in price
offered to a beneficiary could be safe harbored under this regulation.
To the extent that a discount is offered to a beneficiary and all other
applicable standards in the safe harbor are met, such a discount would
receive safe harbor protection. However, discounts to beneficiaries in
the form of routine reductions or waivers of any coinsurance or
deductible amount owned by the beneficiaries do not meet the safe
harbor conditions and are not protected.
The preamble to the 1991 final rule stated that when reporting a
discount, one only need report the actual purchase price and note that
it is ``net discount.'' However, for purposes of submitting a claim or
request for payment, we proposed clarifying that what is necessary is
that the value of the discount be accurately reflected in the actual
purchase price. It is not necessary to distinguish whether this price
is the result of a discount or to state ``net discount.'' Consequently,
parties who were uncertain about how or where to report on a particular
form the fact that the price was due to a discount need not be
concerned with reporting that fact, as long as the actual purchase
price accurately reflects the discount.
Finally, we proposed some minor editorial changes that do not
affect the substance of the provision, but hopefully make it easier to
understand.
Summary of Final Rule: We are adopting the clarifications to the
discount safe harbor as proposed in the 1994 proposed clarifications
and described above, with the following modifications in response to
comments received (unless otherwise noted):
<bullet> In paragraphs (h)(2) and (h)(5)(ii), we are changing the
words ``furnishes'' to ``supplies'' and ``furnishing'' to
``supplying,'' respectively, to clarify the role of sellers under the
discount safe harbor and to avoid confusion with other regulatory uses
of the word ``furnishes.''
<bullet> We are modifying our proposal that sellers and offerors
give buyers ``effective notice'' of their obligations to report
discounts by requiring instead that sellers and offerors provide buyers
with notice in a manner that is reasonably calculated to give the
buyers notice of their reporting obligations, including their
obligation to provide information to the Secretary upon request under
Sec. 1001.952(h)(1). The intent of this modification is to make clear
that safe harbor protection for sellers and offerors who fully comply
with the safe harbor conditions is conditioned on the actions of the
sellers and offerors, and not on the buyers' compliance.
<bullet> We are modifying our proposed definition of a ``rebate''
to include any discount the terms of which are fixed at the time of the
sale of the good or service and disclosed to the buyer, but which is
not received at the time of the sale of the good or service. This
modification will enable us to extend safe harbor protection to certain
charge-based buyers and buyers reimbursed on the basis of fee schedules
who obtain rebates. We are eliminating the requirement that charge-
based buyers report discounts on claims submitted to the Federal
programs; however, we are retaining the requirement that such buyers
provide documentation of discounts to the Secretary upon request.
<bullet> We are clarifying that credits and coupons may qualify for
safe harbor protection if they meet all of the safe harbor criteria;
however, credits or coupons that are, in essence, cash equivalents are
not discounts for safe harbor purposes.
<bullet> We are clarifying that, in certain circumstances described
in more detail below, discounts on multiple items may qualify as a
``discount'' for safe harbor purposes where the reimbursement
methodology for all discounted items or services is the same and where
the discount can be fully disclosed to the Federal health care programs
and accurately reflected where appropriate, and as appropriate, to the
reimbursement methodology.
<bullet> We are correcting a technical error in the proposed
clarifications by changing the word ``include'' in
Sec. 1001.952(h)(5)(ii) to ``induce.''
Comment and Response
Comment: Many commenters questioned the relationship between the
regulatory safe harbor for discounts and the statutory exception for
discounts, which provides for protection for ``a discount or other
reduction in price obtained by a provider of services or other entity
under a Federal health care program, if the reduction in price is
properly disclosed and appropriately reflected in the costs claimed or
charges made by the provider or entity under a Federal health care
program'' (42 U.S.C. 1320a-7b(b)(3)(A)). In the preamble to the 1991
final rule, we stated that the regulatory safe harbor includes all
discounts Congress intended to protect under the statutory exception
(56 FR 37206). Commenters expressed concern that this statement means
that failure to qualify under the discount safe harbor is a statutory
violation if items or services payable by a Federal health care program
are involved, since intent to induce business is always present in a
discount arrangement. Under this interpretation, according to
commenters, numerous forms of discount pricing, such as pricing one
product dependent on the price of another, discount package pricing,
and certain capitation arrangements, would be prohibited without the
case-by-case analysis generally afforded other types of arrangements
that do not fit squarely within a safe harbor. These commenters also
urge that limiting permissible discounts to those that comply with the
safe harbor ``freezes'' the health care industry into a particular way
of doing business, thereby chilling innovations in discount pricing
that could result in reductions in health care costs, especially as the
market moves from fee-for-service arrangements to managed care. These
commenters argue that Congress did not give the OIG authority to
constrict the reach of the statutory exception. One commenter observed
that Congress unequivocally stated that practices protected under the
safe harbors were to be in addition to existing statutory protections
(Pub. L. 100-93, section 14(a)), and therefore the regulatory discount
safe harbor should create a class of protected practices in addition to
practices protected under the statutory exception.
Response: As stated in the preamble to the 1994 proposed
clarifications, it continues to be our position that the
[[Page 63528]]
regulatory safe harbor protects all discounts or reductions in price
protected by Congress in the statutory exception (see 59 FR 37206). The
Secretary is vested with the authority to make and publish rules, not
inconsistent with the Social Security Act, necessary to the efficient
administration of her functions under the Social Security Act (42
U.S.C. 1302). The anti-kickback statute, including all exceptions
thereto, are codified as part of the Social Security Act. Moreover, the
regulatory safe harbor expands upon the statutory safe harbor by
defining additional discounting practices not included in the statutory
exception that are not abusive, such as certain discounts to
beneficiaries (other than routine waivers of cost-sharing amounts) that
meet all applicable safe harbor standards. In sum, the regulatory safe
harbor both incorporates and enlarges upon the statutory exception.
Comment: One commenter questioned the safe harbor exclusion of
reductions in price that are available to one payer but not to Medicare
or Medicaid (Sec. 1001.952(h)(3)(iii)), noting that it is unclear how
failure to provide a discount to Medicare or Medicaid gives rise to a
question under the anti-kickback statute, which prohibits remuneration
to induce referrals of items or services payable by a Federal health
care program. The commenter further argued that there is no basis in
the statutory discount safe harbor for a requirement that Medicare and
Medicaid patients receive the same prices as other patients.
Response: The safe harbor excludes from the definition of a
protected ``discount'' price reductions that apply to one payer but not
to the Federal health care programs. This exclusion is necessary to
protect against abusive arrangements in which remuneration in the form
of discounts on items or services for private pay patients is offered
to a provider to induce referrals of Federal health care program
patients. For example, as noted in the preamble to the 1991 final rule,
we are aware of clinical laboratories that offer price reductions to
physicians for laboratory work for private pay patients on the
condition that the physicians refer all of their Medicare and Medicaid
business to the laboratory. Such ``swapping'' arrangements, which
essentially shift costs to the Federal health care programs, continue
to be of concern to this office. We do not believe that Congress
intended to except such schemes from the anti-kickback statute. Nor do
we believe that Congress intended for the Federal health care programs
to pay premium prices and thus serve as de facto subsidy programs for
other reimbursement systems.
Comment: Several commenters generally supported the clarification
of the discount safe harbor to recognize 3 groups: Buyers, sellers and
offerors. However, a number of commenters requested further
clarification regarding the meaning of ``offeror'' and how an
``offeror'' differs from a ``seller''. Specifically, commenters asked
about the application of the ``offeror'' category to wholesalers and
other brokers, as well as to managed care plans, group purchasing
organizations and preferred provider organizations.
Response: An ``offeror'' may be any individual or entity that
provides a discount on an item or service to a buyer, but that is not
the seller of the item or service. For example, many pharmaceutical
manufacturers sell some or all of their products through wholesalers,
which, in turn, sell the products to hospitals, retail pharmacies,
HMOs, and other providers. A manufacturer may offer a discount in the
form of a rebate to the ultimate purchaser that is in addition to any
discount from the wholesaler to the retailer. For purposes of this
regulation, the manufacturer would be the ``offeror,'' the wholesaler
the ``seller,'' and the retailer the ``buyer.'' While we believe that
typically the wholesaler would be the ``seller'' and its retail
customer the ``buyer,'' if a wholesaler offers a discount to a retail
purchaser that has purchased the discounted product from another party,
the wholesaler could qualify as an ``offeror.''
Nothing in these regulations precludes a managed care organization,
including a preferred provider organization, from being eligible as an
``offeror'' in accordance with the safe harbor. However, in many
situations, discounts offered by managed care organizations will not
fit within the scope of the discount safe harbor, because the buyers
who obtain the discounts will not be providers of services that claim
payment for costs or charges associated with the discounted items or
services under a Federal health care program. For example, the
recipient of a preferred provider organization discount is typically an
employer or other payer or patient. However, some discount arrangements
offered by a managed care organization may be eligible for safe harbor
protection under the discount safe harbor, provided all conditions of
the safe harbor are satisfied. In addition, managed care ``discounts''
are potentially protected by the shared-risk exception (42 U.S.C.
1320a-7b(b)(3)(F)), and the existing safe harbors for managed care
arrangements (Secs. 1001.952(l) and (m)).
Comment: One commenter objected to the safe harbor's portrayal of
the role of ``sellers.'' This commenter maintained that sellers do not
generally ``furnish'' items or services, nor do they ``permit'' buyers
to take discounts off the purchase price. Rather, sellers sell, lease,
transfer, or otherwise arrange for the use of products, in some cases
involving discounts or reductions in price. This commenter noted that
other OIG regulations define ``furnish'' as referring to items and
services provided directly by or under the direct supervision of, or
ordered by, a practitioner or other individual, or ordered or
prescribed by a physician (either as an employee or in his or her own
capacity), a provider, or other supplier of services (see Sec. 000.10).
In addition, the preamble to the OIG final rule addressing amendments
to the OIG's exclusion and CMP authorities resulting from Public Law
100-93 states that manufacturers who do not receive payment directly or
indirectly from Medicare or Medicaid do not ``furnish'' items in the
context of that definition (57 FR 3298 and 3300). For consistency and
to avoid confusion, the commenter suggests that the term ``furnished''
should be replaced by the term ``supplies.''
Response: To avoid confusion with other regulatory definitions, we
agree that the term ``supplies'' should be substituted for
``furnishes'' in Secs. 1001.952(h)(2) and (h)(5)(ii).
Comment: Several commenters commented that the proposed language
clarifying the seller's obligation to disclose the discount properly to
the buyer is beyond the scope of the statutory exception and confuses
rather than clarifies the seller's obligations. A number of commenters
suggested that the requirement that sellers provide effective notice
would lead to mistrust between buyers and sellers and disputes about
whether ``effective notice'' was provided. One commenter suggested that
the requirement inappropriately saddles a seller with the
responsibility of being the buyer's ``brother's keeper.'' Some
commenters requested clarification of what qualifies as ``notice.''
Others questioned the intention of the added language requiring sellers
to ``refrain from impeding'' the buyer's performance of its
obligations. One commenter objected that this requirement imposed an
undue burden on sellers, because sellers would have to know all of an
individual buyer's specific billing activities and possible obligations
in order to be in a position to refrain from doing anything
[[Page 63529]]
that could impede the buyer in meeting its obligations.
Response: As we stated in the preamble to the 1991 final rule (56
FR 35958), we believe the statute permits us to interpret statutory
terms used in the statutory exceptions, including the phrase
``appropriately reflect'' in the discount exception (also see 42 U.S.C.
1302). We note that the statutory exception does not protect any seller
if the purchaser has not appropriately reflected the discount. Thus,
the objection based on the statute is misplaced.
With respect to the substance of the comments, the proposed
clarification would require that the seller inform the buyer ``in an
effective manner'' of the buyer's obligation to report the discount and
refrain from doing anything to impede the buyer from fulfilling its
obligations. We agree that the phrase ``in an effective manner''
perhaps unintentionally focuses on the buyer's conduct and might
inappropriately be interpreted to mean that a seller is only protected
when the buyer, in fact, fulfills its obligation to report the
discount. This was not our intention. Accordingly, we have decided to
modify the language to require the seller to inform the buyer of its
obligations ``in a manner that is reasonably calculated to give notice
to the buyer.'' We believe this language provides the seller with an
objective standard by which to measure the sufficiency of its notice.
We are further clarifying that for safe harbor purposes one of the
buyer's obligations is to provide information about discounts to the
Secretary upon request in accordance with Sec. 1001.952(h)(1).
We are not prescribing a specific form of notice. The form of
notice appropriate in particular situations may vary. Our intention in
adding the ``refrain from impeding'' standard is to make clear that a
seller will only be protected by the safe harbor if it is not complicit
in a buyer's noncompliance with its obligations to report discounts
accurately to the Federal health care programs. We are not making any
change to the requirement that the seller not impede the buyer's
compliance because we believe the language is clear. The same standard
applies to offerors; they will not be protected by the safe harbor if
they are complicit in either buyer or seller noncompliance.
Comment: A number of commenters objected to our bar on safe harbor
protection for rebates offered to charge-based providers. Our proposed
definition of ``rebate'' defined a rebate as a discount not given at
the time of sale. Under our proposed clarification, safe harbor
protection would only be extended to charge-based providers for
discounts made at the time of sale of a good or service. The commenters
point out, for example, that the regulation precludes retail pharmacies
and outpatient clinics from being eligible for price reductions on the
same basis as hospitals (cost reporters) and other large purchasers
(e.g., HMOs). Moreover, the commenters note that there may be
situations in which adjustments to previous billings or other errors
could result in a rebate. The commenters also maintain that where
payment is based on the lesser of actual charges or a fee schedule
amount, fee schedules could be adjusted to reflect the availability of
volume discounting. The commenters argue that excluding rebates for
charge-based providers lacks a statutory basis, since the statutory
exception refers to a ``reduction in price obtained by a provider,''
without any reference to when the reduction must be obtained. The
commenters further argue that there is no sound basis for not
protecting delayed discounts to physicians, since we are not requiring
physicians to reduce their charges for the amount of a discount, even
where there is a separately claimed item. Thus, the commenters urge
that rebates be covered so long as the amount is fully disclosed to the
Federal health care programs and the other safe harbor conditions are
satisfied.
Response: The most important aspect of the discount safe harbor is
that the Federal health care programs share in the discount in
proportion to the percentage the programs pay of the total cost.
Congress intended only to protect discounts that could fairly benefit
the Federal health care programs. It is our intention in these
regulations to ensure that the only discounts protected are those where
the Federal programs receive such benefit.
Having considered the comments received about rebates, we have
concluded that excluding safe harbor protection for all rebates to
charge-based buyers or buyers that are reimbursed based on Federal
program fee schedules is unnecessarily restrictive and may prevent the
Federal health care programs from realizing indirect benefits that may
accrue from rebates to charge-based providers.
Accordingly, we are defining a ``rebate'' for purposes of the safe
harbor as a discount, the terms of which are fixed at the time of the
sale and disclosed to the buyer at the time of sale, but which is not
given at the time of sale. ``Terms'' refers to the methodology that
will be used to calculate the rebate (e.g., a percentage of sales or a
fixed amount per item purchased during a given period of time). The
terms of the rebate must be set at the time of the sale and disclosed
to the buyer, even though the exact dollar amount of the rebate may not
be known until the rebate is paid. In some circumstances, a rebate may
be paid only after some number of successive purchases of particular
goods or services; in such circumstances, the terms of the rebate must
be fixed and disclosed to the buyer at the time of the first sale of a
good or service to which the rebate applies. We are eliminating the
safe harbor requirement that charge-based buyers (and sellers if
submitting claims on behalf of charge-based buyers) disclose the amount
of discounts on claims submitted to the Federal programs. We are
retaining the existing requirement that buyers (and sellers submitting
claims on their behalf) must provide information documenting the
discount upon request of the Secretary.
Comment: The proposed clarifications eliminated a reference to
credits and coupons in the definition of a ``discount''
(Sec. 1001.952(h)(3)). Two commenters expressed concern that this
deletion indicated an intent to prohibit safe harbor protection for
credits and coupons.
Response: To the contrary, our revised definition of ``discount''
applies to any reduction in the price a buyer who buys directly or
through a wholesaler or group purchasing organization is charged for an
item or service based on an arms-length transaction, except for certain
forms of price reduction expressly not included in the definition
(e.g., no cash or cash equivalents, no routine waivers of copayments).
If a coupon or credit fits within the definition of a discount, it is
included within the safe harbor (assuming all safe harbor conditions
are satisfied). However, we did not intend to protect credits or
coupons that are merely surrogate cash payments, such as credits or
coupons that can be used like cash to purchase unspecified goods or
services from the seller or offeror. Thus, a coupon good for a reduced
price on a designated item could be included in the definition, so long
as it meets all of the other requirements of the regulation; however, a
coupon good for a certain dollar amount off any goods sold by the
seller is not included in the definition. We are, therefore, adding
clarifying language to the definition of ``discount'' to make clear
that cash equivalents are not discounts for purposes of the safe
harbor.
Comment: One commenter objected to a ``discount'' for purposes of
the safe harbor being limited to discounts offered to buyers who buy
directly or
[[Page 63530]]
through wholesalers or group purchasing organizations. This commenter
urged that this limitation fails to accommodate new distribution
arrangements, many of which contribute to purchasing economies. For
example, hospitals, physicians or ambulatory surgical centers may buy
items and services through HMOs or other brokering-type suppliers.
Response: In general, if a discount is negotiated with a bona fide
seller of the item or service, including an entity that aggregates
provider demand to obtain access to volume discounts, in accordance
with an arms-length transaction, and if the discount otherwise meets
all safe harbor requirements, we believe that the discount would come
within the safe harbor definition of discount. However, there may be
arrangements that do not fit the definition where access to a seller's
favorable discount rates is itself an inducement or reward for
referrals, e.g., providing certain physician practices access to a
hospital's employee health benefits plan in order to reduce the
physician's employee insurance costs.
Comment: Several commenters expressed concern about the exclusion
from the definition of ``discount'' of price reductions furnished on
one good or service without or at a reduced charge to induce the
purchase of a different good or service. These commenters assert that
this restriction was intended to preclude furnishing a good at a
reduced price in exchange for any agreement to buy a good which was
reimbursed under a different reimbursement methodology, in such a way
that discounts would not be passed along to the Medicare program. For
example, the safe harbor was not intended to protect a discount on
hospital supplies covered by a Diagnostic Related Group (DRG) payment
in exchange for the purchase at the full price of capital equipment
separately reimbursed by Medicare on a reasonable cost basis in
accordance with a hospital's cost report. Nor was it intended to
protect a discount earned on products reimbursed by Medicare but
applied to products reimbursed by non-Medicare payers. However, these
commenters argue that the safe harbor should not exclude discounts on
multiple products when the net value of the discounts could be properly
reported to, and benefit, the Medicare program. For example, commenters
believe that safe harbor protection should be available for a discount
to a hospital for sterile gauze pads in exchange for the purchase of
surgical tape, both of which are included in the hospital's DRG payment
and recorded on the hospital's cost report as routine costs not
separately reimbursable. These commenters expressed concern that the
discount safe harbor's limitation on discounts for bundled or multiple
items or services fails to recognize the diversity of cost controls
inherent in such reimbursement methodologies as DRGs; physician payment
under the RBRVS system; national limitation amounts for clinical
laboratory tests; fee schedules for DME, prosthetics, orthotics, and
other supplies; and fixed rates for ASCs. Finally, commenters noted
that by restricting discounts on multiple items, the safe harbors may
prevent the Federal health care programs from benefitting from
purchasing economies that result from volume purchasing and group
discounts.
Response: We agree that one purpose of the limitation on discounts
for bundled items or services is to preclude protection for discounts
that do not benefit the Federal health care programs, but which are
used to induce purchases of other products for which the Federal health
care programs pay the full price. These discounts are problematic,
because they shift costs among reimbursement systems or distort the
true costs of all items. As a result, it may be difficult for the
Federal health care programs to determine proper reimbursement levels.
(See 56 FR 35987, for example, citing the example of the development of
accurate pricing data for intraocular lenses.)
However, we are persuaded that in certain circumstances, discounts
offered on one good or service to induce the purchase of a different
good or service where the net value can be properly reported do not
pose a risk of program abuse and may benefit the programs through lower
costs or charges achieved through volume purchasing and other economies
of scale. Such circumstances exist where the goods and services are
reimbursed by the same Federal health care program in the same manner,
such as under a DRG payment.
Comment: Several commenters questioned our intent in changing
certain language in the definition of discount from ``in exchange for
any agreement to buy a different good or service'' to ``to include
(induce) the purchase of a different good or service.'' (See
Sec. 1001.952(h)(5)(ii)).
Response: We changed this language to be consistent with the anti-
kickback statute, which prohibits inducements to refer Federal health
care program business, even if there is no actual referral made or
agreement to refer. We are correcting an editorial error in the
proposed rule, which incorrectly used the word ``include'' instead of
``induce'' in Sec. 1001.952(h)(5)(ii).
5. Sham Transactions or Devices
Summary: We proposed a new provision to clarify that any
arrangement entered into or employed for the purpose of appearing to
fit within a safe harbor when the substance of the arrangement is not
accurately reflected by its form will be disregarded, and the substance
of the arrangement will determine whether safe harbor protection is
warranted.
Comment: Although one commenter supported the proposed sham
transactions rule, many commenters objected to it. These commenters
argued that the proposed sham transactions rule was vague, lacked clear
objective criteria, and did not provide any examples of sham
transactions.
Response: Upon further consideration, we have decided to withdraw
this proposal. We emphasize, however, that for purposes of determining
compliance with the safe harbors, we will evaluate both the form and
substance of arrangements. To be protected, the form must accurately
reflect the substance. As we have explained in the context of space and
equipment rentals:
If a sham contract is entered into, which on paper looks like it
complies with these provisions, but where there is no intent to have
the space or equipment used or the services provided, then clearly
we will look behind the contract and find that in reality payments
are based on referrals. Thus, these contracts would not be protected
under these provisions. (56 FR 35972)
This same general principle would apply in determining compliance with
other safe harbors.
C. 1993 Proposed Safe Harbors
The 1993 proposed rule set forth new safe harbor regulations in the
subject areas described below. Each description includes a summary of
the proposed rule; a summary of the final rule, including a summary of
significant changes between the proposed and final rules; and a summary
of comments received and our responses.
1. Investment Interests in Underserved Areas
Summary of Proposed Rule: It had come to our attention that it is
difficult for entities located in many rural areas to comply with the
two 60-40 tests set forth in the ``small entity'' investment interest
safe harbor. The first 60-40 rule (Sec. 1001.952(a)(2)(i)) requires
that no more than 40 percent of the investment interests of the entity
be held by
[[Page 63531]]
investors who are in a position to make or influence referrals to,
furnish items or services to, or otherwise generate business for the
entity (the ``60-40 investor rule''). The second 60-40 rule
(Sec. 1001.952(a)(2)(vi)) requires that no more than 40 percent of the
gross revenue of the entity may come from referrals or business
otherwise generated from investors (the ``60-40 revenue rule'').
Entities located in rural areas may have an especially difficult time
complying with these two standards, because in many cases physicians
may be the primary sources of capital in the area, and those physicians
may have no alternative facility to which they can refer.
Consequently, we proposed an additional safe harbor for investments
in entities located in rural areas that would have eliminated the two
60-40 rules. We proposed defining the rural areas included in the safe
harbor in accordance with the standards set by the Office of Management
and Budget (OMB) and used by the Bureau of the Census. We solicited
comments on the appropriateness of this definition of rural area. We
stressed that the method for designating rural areas must ensure that
this safe harbor only protects entities that truly serve a rural
population. We suggested that one alternative would be to adopt the
definition of ``rural'' found at 42 CFR 412.62(f)(1)(ii), which is the
definition used by HCFA in its DRG reimbursement rules. We proposed
leaving in place the remaining six standards for small entity
investments for purposes of the new safe harbor. These six standards
provide substantial assurances against abuse, and we had not been
apprised of any particular difficulty that rural entities were
experiencing with these standards.
In place of the 60-40 tests, we proposed a more flexible standard
that would still assure that referring sources, physicians in
particular, were not inappropriately selected as investors. First, we
proposed requiring the entity to make a bona fide offer of the
investment interest to any individual or entity irrespective of whether
such prospective investor is in a position to make or influence
referrals to, furnish items or services to, or otherwise generate
business for the entity. Thus, we proposed requiring that opportunities
for investment be offered in a good faith, non-discriminatory manner to
any individuals or entities that are potential sources of capital.
Second, to exclude the possibility of sham business structures not
intended to serve the rural areas in which they are located, we
proposed incorporating a standard that would require that at least 85
percent of the dollar volume of the entity's business in the previous
fiscal year or twelve month period be derived from items and services
provided to persons residing in the rural area. For entities that have
not been in business for 12 months, compliance with this standard would
be determined by examining the composition of the entity's business
over the entire period of its existence.
Methods of Classifying Geographic Areas: Depending on its purpose,
the Government uses several methodologies to define whether certain
geographic areas are ``urban'' or ``rural'' and whether certain
geographic areas or populations have inadequate access to health care
services. Among them, the following are relevant to this preamble
discussion:
<bullet> OMB Methodology: The OMB defines a Metropolitan
Statistical Area (MSA) as a group of counties (or, in New England, a
group of townships) surrounding and related to an urban core area
containing a large population nucleus. The core of an MSA is a city
with a population of at least 50,000 people and/or an urbanized area
with a total population of at least 100,000 (75,000 in New England).
The OMB defines a county as part of the MSA if it contains the core
city or contains part of a continuous urbanized area around the core
city, even if outlying areas of the county are rural in character.
Using this methodology, an area may be considered ``rural'' if it is
not metropolitan, e.g., not part of an OMB-defined MSA (see 44 U.S.C.
3504).
<bullet> HCFA DRG Definition: For purposes of establishing DRG
payments, HCFA defines ``rural'' areas as all areas outside the
metropolitan areas (MSAs) defined by OMB (Sec. 412.62(f)(1)(ii)).
<bullet> Medically Underserved Areas/Populations (MUA/MUPs): The
MUA/MUP system was developed in the 1970s in accordance with section
330(b)(3) of the Public Health Service (PHS) Act to identify areas and
populations eligible to participate in the Community Health Center
Program. MUAs and MUPs are designated by the Health Resources and
Services Administration (HRSA). An MUA is either a rural or urban area
designated by the Secretary as having a shortage of health care
services; an MUP is a population group designated as having such a
shortage, such as certain migrant farmworkers or homeless populations.
Factors HRSA considers as part of the existing MUA/MUP designation
process include population-to-primary care physician ratios, infant
mortality rates, poverty rates, and the percentage of the population
aged 65 or over. The regulations governing MUA/MUPs are currently set
forth at 42 CFR part 51c.
<bullet> Health Professional Shortage Areas (HPSAs): HRSA developed
HPSAs to meet the statutory requirement in section 332 of the PHS Act
to designate areas, population groups and facilities with a shortage of
health professionals eligible for placement of National Health Services
Corps personnel. HPSA designations are currently based primarily on
measurements of area population-to-provider ratios for specific
geographic service areas (or population groups within those areas),
together with indicators that provider resources in adjoining areas are
overutilized, excessively distant (e.g., more than 30 minutes travel
time away for primary care) or otherwise inaccessible (42 CFR part 5).
A HPSA can be designated based on shortages of (1) providers in a
geographic area; (2) providers willing to treat a specific population
within a defined area; or (3) providers for a public or nonprofit
facility serving a designated area or population group (which could
include a hospital). HPSAs are identified for three types of provider
shortages: primary care, dental care and mental health care. The
current primary care HPSA criteria define a ``primary care physician''
as a physician in one of the following specialties: general practice,
family practice, pediatrics, general internal medicine or obstetrics/
gynecology. Mental health providers covered by mental health HPSA
designations include psychiatrists, clinical psychologists, psychiatric
nurses, psychiatric social workers and marriage counselors.
<bullet> Notice of Proposed Rulemaking on MUA/MUPs and HPSAs. HRSA
has proposed revising the MUA/MUP and HPSA regulations to improve the
current designation process by combining the two designation processes;
automating the scoring process and simplifying it by maximizing the use
of national data; expanding States' roles in identification of rational
service areas for designation; and incorporating better measures or
correlates of health status and lack of access, including measures of
minorities and isolated rural areas (63 FR 46538). In response to
public comments, HRSA has announced its intention to issue a second
notice of proposed rulemaking following a period of evaluation of
comments received, analysis of alternative approaches and impact
testing (64 FR 28831). Following an additional public comment period,
new regulations governing MUA/MUPs and
[[Page 63532]]
HPSAs are expected to be codified at 42 CFR part 5.
Summary of Final Rule: Paramount among OIG's concerns is that
beneficiaries have adequate access to quality health care. We are aware
that certain communities experience shortages of health care services
that affect Federal program beneficiaries and others. This rule for
investments in underserved areas is designed to balance the interests
of those communities in facilitating the development of health care
services with the anti-fraud interests that are the basis of the anti-
kickback statute.
Health care joint ventures in underserved areas raise the same
basic anti-kickback concerns as other joint ventures: First, is the
joint venture a bona fide business enterprise? Second, are
distributions from the joint venture really payments for referrals to
the joint venture from investors? Third, are the distributions really
payments for referrals from one investor to another? For this reason,
it is important that any safe harbor contain adequate safeguards and
conditions against fraud and abuse.
This new safe harbor for investments in joint ventures in
underserved areas is designed to provide additional flexibility for
investments in underserved areas that may experience a shortage of
available capital from non-referral source investors. The safe harbor
includes specific criteria that substantially reduce the risk of
inappropriate payments for referrals and exclude from protection
entities that do not serve the health care needs of people living in
the underserved areas in which the entities are located. Because the
safe harbor affords protection for a broader range of investments in
joint ventures in underserved areas, we hope it will promote the
development of needed health care ventures.
Based on our review of the comments received from, and concerns
expressed by, various commenters, we have made several significant
changes to the proposed safe harbor, all of which are described in more
detail in the responses to comments section below.
<bullet> First, we have expanded safe harbor protection to include
urban, as well as rural, underserved areas. We are persuaded that joint
ventures in urban underserved areas often experience the same
difficulties in qualifying for safe harbor protection as their rural
counterparts. We are defining an underserved area as any defined
geographic area that is designated as a MUA in accordance with the
regulations at 42 CFR part 51c (or, if and when applicable, 42 CFR part
5).
<bullet> Second, we have reduced from 85 percent to 75 percent the
volume of the investment entity's business that must be derived from
residents of underserved areas.
<bullet> Third, we have provided a ``grace'' period for investment
entities that qualify for safe harbor protection at the time of the
initial investment, but subsequently find themselves located in areas
that have ceased to meet the safe harbor definition of an underserved
area.
<bullet> Fourth, we have incorporated a modified investor rule that
requires that at least half of the investment interests in the entity
be held by non-referral source investors. Here, we were in part
persuaded by comments from health care entities that are currently
located in underserved areas and that have no or few referral source
investors. These entities expressed concern about unfair competition
from new entities entirely composed of referral source investors
(primarily physicians) in markets with few referral sources. We were
also concerned about limiting inappropriate financial incentives.
Comments and Responses
Comment: We solicited comments regarding the appropriateness of our
proposal to define ``rural'' with reference to the OMB standards for
MSAs. In response, several commenters urged us to adopt our alternative
proposal to use the rural definition employed by HCFA for purposes of
reimbursing hospitals located in rural areas under DRG payment rates
(42 CFR 412.62(f)(1)(iii)). A number of commenters urged us to extend
the investment interest safe harbor for rural entities to equally
qualified underserved urban areas.
Response: One of the important issues in designing this safe harbor
is how to define geographically the scope of investments to which it
applies. After consideration and examination of various approaches to
defining ``rural'' for purposes of this safe harbor, we have decided to
limit this safe harbor to investment interests in entities located in
areas defined by HRSA as MUAs (that otherwise meet all safe harbor
eligibility standards). This decision responds to requests for safe
harbor protection to facilitate investment in areas demonstrably
experiencing difficulty in attracting needed health care services.
Unlike OMB's MSAs, which merely measure geographic distributions of
population, MUAs identify areas experiencing health care shortages by
accounting for such factors as poverty levels, infant mortality, and
population age. Thus, we are amending the rule to substitute MUAs for
the existing definition of ``rural'' to more closely tailor the safe
harbor to protect investment interests in entities located in
underserved areas.
In addition to more accurately targeting rural areas with shortages
of health care services, protecting investments in MUAs offers a means
of expanding safe harbor protection to urban underserved areas. We are
persuaded that many urban underserved areas experience difficulties in
attracting investments in health care services that are comparable to
those experienced in rural areas. Because one of our objectives in
creating this safe harbor is to foster the development of needed health
care services, we believe it makes sense to protect qualified
investments in defined shortage areas without regard to density of
population.
At the time of publication of this rulemaking, HRSA's final
regulations on the new process for designating MUAs are still pending.
Although we anticipate that those regulations will be finalized, we are
persuaded that, even in the absence of that rule, and notwithstanding
certain concerns we have regarding the administration of the current
program, our selection of MUAs as a basis for this safe harbor is sound
and more consistent with the stated purpose of the safe harbor than
either of our original proposals for identifying the covered areas.
We anticipate that, if finally promulgated, HRSA's new rule for
evaluating and designating MUAs may result in some areas presently
classified as MUAs losing their classifications. Moreover, HRSA has
indicated its intent to review MUA classifications regularly, resulting
in the possibility that some areas could periodically lose their
classifications. Given this potential, it is incumbent on us to address
the effect of the loss of a MUA designation on an entity protected by
the safe harbor for investments in underserved areas. If an entity that
meets all of the safe harbor standards were located in an area that
loses its designation as a MUA after the entity has initially qualified
for the safe harbor, the entity would technically no longer fit
squarely within the safe harbor and would lose its protection. However,
we are mindful of the need investors have for reasonable certainty in
their arrangements and the significant effect a sudden loss of safe
harbor protection resulting from circumstances outside their direct
control may have on investors. Accordingly, we are including in this
safe harbor a 3-year grace period during which such entities will be
protected, provided they continue to meet all of the other safe harbor
[[Page 63533]]
conditions. This grace period will afford entities that wish to
maintain safe harbor protection an opportunity to restructure so as to
qualify for the small entity investment interest safe harbor at
Sec. 1001.952(a)(2). We wish to iterate that loss of safe harbor
protection does not mean that a joint venture arrangement becomes
unlawful.
Comment: Several commenters expressed concern about our proposal to
eliminate the 60-40 tests of the small entity investment safe harbor
for purposes of this safe harbor. One commenter advocated that the 60-
40 rules should continue to apply to facilities located in rural areas
to prevent a proliferation of unnecessary facilities, especially
laboratories, that are dependent on referrals from investor-physicians.
Another commenter supported restricting the safe harbor only to rural
areas where alternative sources of a particular service are not
otherwise available. These commenters argued that a proliferation of
protected entities with large numbers of referral source investors
could adversely affect existing entities in rural communities. One
commenter suggested that we use a ``demonstrated community need''
standard instead of limiting safe harbor protection to defined
geographic areas. This commenter further recommended that entities that
meet such a ``demonstrated community need'' test be required to
disclose to patients a referring physician's ownership interest and to
conduct utilization review of an entity's services.
Response: Having considered these comments, we are persuaded that
eliminating both 60-40 rules, and in particular the 60-40 investor
rule, may lead to inappropriate financial incentives and unfair
competition in some areas by allowing referral source investors,
primarily physicians, to ``lock up'' the market for particular services
in those areas. Ensuring fair competition in the health care
marketplace is one of the goals of the anti-kickback statute. We are
also concerned that an excessive proliferation of particular services
in rural or urban underserved areas could lead to overutilization by
entities competing for scarce revenue and could prompt protected
entities to develop revenue streams from patients not residing in
underserved areas, in contravention of the intent and spirit of the
safe harbor.
MUA designations are not made on a service-specific basis; thus, an
area may qualify as a MUA based on an overall shortage of health care
services even if it has a sufficient supply of a particular heath care
service. As we stated in the preamble to the 1993 proposed rule, one of
the purposes of this safe harbor is to ensure adequate access to
medical care for patients in underserved areas. Our intent was to
design a safe harbor that would accomplish this purpose, while
excluding ventures that do not serve the underserved areas in which
they are located. We remain persuaded that there are many rural and
urban underserved areas with legitimate shortages of health care
services and limited sources of potential investors. However, while we
believe that market competition should minimize the number of
duplicative ventures in a particular underserved area, we are persuaded
that safe harbor protection should be limited, to the extent
practicable, to ventures that fill a genuine health care need of area
residents.
In light of our intention to minimize safe harbor protection for
redundant health care services owned by referral source investors in
otherwise underserved areas, reduce inappropriate financial incentives,
and maintain fair competition for providers that are not owned by
referral source investors, we have revisited our original proposal to
eliminate both of the 60-40 tests of the small entity investment safe
harbor for purposes of this safe harbor. In this final rule, we are
adopting our original proposal to eliminate the 60-40 revenue rule, but
we are retaining a modified limitation on the number of interested
investors. Specifically, we are requiring, as a condition for
protection, that investors who make referrals or who are in a position
to make referrals or furnish items or services to the entity not own
more than 50 percent of the value of investment interests within each
class of investments in the entity. As with the 60-40 investor rule in
the small entity investment safe harbor, we are permitting equivalent
classes of stock to be aggregated for purposes of determining safe
harbor compliance.
We believe that eliminating the 60-40 revenue rule, thereby
permitting entities to draw 100 percent of their revenue from referrals
by investor-owners, should make investment in such entities
sufficiently attractive to non-referral source investors so as to
permit the entities to meet the new 50-50 investor test. We recognize
that this safe harbor may not fully answer all of the concerns raised
by the commenters and that there may be particular circumstances in
which ventures with parties to existing health care entities can not
qualify for safe harbor protection. Some of these ventures may be
appropriate for protection through an advisory opinion (42 CFR part
1008). In addition, joint ventures in underserved areas may still
qualify for protection under the small entity investment interest safe
harbor at Sec. 1001.951(a)(2).
We are not adopting the suggestion that we promulgate a
``demonstrated community need'' standard for this safe harbor. Such a
standard would not create a sufficiently clear rule and would be
unenforceable in practice. Moreover, the additional two standards
suggested by one commenter--public disclosure of ownership interests
and utilization review--while good practices, are not, in our
experience, effective deterrents to fraud and abuse.
Comment: One commenter urged us to allow compliance with the rural
investment safe harbor if an entity certified its inability to comply
with the 60-40 rules in the small entity safe harbor despite its best
efforts.
Response: A mere ``best efforts'' exception to the small entity
investment interests safe harbor based on a certification from the
investment entity would be insufficient to protect against abusive
arrangements and would be impractical in application. Like all parties
that cannot comply with a safe harbor, parties that are unable to
comply with the 50-50 investor rule have recourse to the advisory
opinion process for guidance about their specific arrangements.
Comment: One commenter requested that the OIG incorporate a ``fair
market value'' principle more explicitly into the proposed rural
investment safe harbor.
Response: The principle of ``fair market value'' is included in
this investment safe harbor at Sec. 1001.952(a)(3)(viii).
Comment: One commenter expressed concern that a rural referral
center (RRC) that had been reclassified as located in an urban area by
the Medicare Geographic Classification Review Board for purposes of
Medicare payment (42 CFR 412.230) would not be eligible to receive
protection under the rural investment interest safe harbor. RRCs are
Medicare participating acute care hospitals that are located in rural
areas and that qualify under HCFA rules as referral centers (see 42 CFR
412.96). Under certain circumstances, an individual hospital, including
a referral center, may be redesignated from a rural area to an urban
area for purposes of using the urban area's standardized amount for
inpatient operating costs, wage index value, or both. (42 CFR 413.230).
Response: A RRC located in a MUA would be eligible for protection
under the rural investment interest safe harbor, provided it meets all
of the conditions of the safe harbor. Reclassification as
[[Page 63534]]
``urban'' for Medicare payment purposes would not bar safe harbor
protection.
Comment: Several commenters asked us to further explain how
facilities can comply with the requirement that an entity must offer
equal and bona fide opportunities t |
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