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77492 Federal Register / Vol. 85, No. 232 / Wednesday, 2, 2020 / Rules and Regulations

DEPARTMENT OF HEALTH AND payable by Medicare to an entity with revisions to the physician self-referral HUMAN SERVICES which he or she (or an immediate family regulations, including: (1) Revisions to member) has a financial relationship, the ‘‘stand in the shoes’’ provisions; (2) Centers for Medicare & Medicaid unless an exception applies; and (2) establishment of provisions regarding Services prohibits the entity from filing claims the period of disallowance and with Medicare (or billing another temporary noncompliance with 42 CFR Part 411 individual, entity, or third party payor) signature requirements; (3) prohibitions [CMS–1720–F] for those referred services. A financial on per unit of service (‘‘per-click’’) and relationship is an ownership or percentage-based compensation RIN 0938–AT64 investment interest in the entity or a formulas for determining the rental compensation arrangement with the charges for office space and equipment Medicare Program; Modernizing and entity. The statute establishes a number lease arrangements; and (4) expansion of Clarifying the Physician Self-Referral of specific exceptions and grants the the definition of ‘‘entity.’’ Regulations Secretary of the Department of Health After passage of the Patient Protection AGENCY: Centers for Medicare & and Human Services (the Secretary) the and Affordable Care Act of 2010 (Pub. Medicaid Services (CMS), HHS. authority to create regulatory exceptions L. 111–148) (Affordable Care Act), we for financial relationships that do not issued final regulations on ACTION: Final rule. pose a risk of program or patient abuse. 29, 2010 in the Calendar Year (CY) 2011 SUMMARY: This final rule addresses any Section 1903(s) of the Act extends Physician Fee Schedule (PFS) final rule undue regulatory impact and burden of aspects of the physician self-referral with comment period that codified a the physician self-referral law. This prohibitions to Medicaid. For additional disclosure requirement established by final rule is being issued in conjunction information about section 1903(s) of the the Affordable Care Act for the in-office with the Centers for Medicare & Act, see 66 FR 857 through 858. ancillary services exception (75 FR Medicaid Services’ (CMS) Patients over This rulemaking follows a history of 73443). We also issued final regulations Paperwork initiative and the rulemakings related to the physician on , 2010 in the CY 2011 Department of Health and Human self-referral law. The following Outpatient Prospective Payment System Services’ (the Department or HHS) discussion provides a chronology of our (OPPS) final rule with comment period Regulatory Sprint to Coordinated Care. more significant and comprehensive (75 FR 71800), on , 2011 in This final rule establishes exceptions to rulemakings; it is not an exhaustive list the CY 2012 OPPS final rule with the physician self-referral law for of all rulemakings related to the comment period (76 FR 74122), and on certain value-based compensation physician self-referral law. After the , 2014 in the CY 2015 arrangements between or among passage of section 1877 of the Act, we OPPS final rule with comment period physicians, providers, and suppliers. It proposed rulemakings in 1992 (related (79 FR 66987) that established or revised certain regulatory provisions also establishes a new exception for only to referrals for clinical laboratory services) (57 FR 8588) (the 1992 concerning physician-owned hospitals certain arrangements under which a proposed rule) and 1998 (addressing to codify and interpret the Affordable physician receives limited remuneration referrals for all designated health Care Act’s revisions to section 1877 of for items or services actually provided services) (63 FR 1659) (the 1998 the Act. On , 2015, in the by the physician; establishes a new proposed rule). We finalized the CY 2016 PFS final rule, we issued exception for donations of cybersecurity proposals from the 1992 proposed rule regulations to reduce burden and technology and related services; and in 1995 (60 FR 41914) (the 1995 final facilitate compliance (80 FR 71300 amends the existing exception for rule), and issued final rules following through 71341). In that rulemaking, we electronic health records (EHR) items the 1998 proposed rule in three stages. established two new exceptions, and services. This final rule also The first final rulemaking (Phase I) was clarified certain provisions of the provides critically necessary guidance published in the Federal Register on physician self-referral regulations, for physicians and health care providers 4, 2001 as a final rule with updated regulations to reflect changes in and suppliers whose financial comment period (66 FR 856). The terminology, and revised definitions relationships are governed by the second final rulemaking (Phase II) was related to physician-owned hospitals. physician self-referral statute and published in the Federal Register on On , 2016, we included in regulations. 26, 2004 as an interim final rule the CY 2017 PFS final rule, at DATES: These regulations are effective with comment period (69 FR 16054). § 411.357(a)(5)(ii)(B), (b)(4)(ii)(B), on , 2021, except for Due to a printing error, a portion of the (l)(3)(ii), and (p)(1)(ii)(B), requirements amendment number 3, which further Phase II preamble was omitted from the identical to regulations that have been amends section 411.352(i), which is , 2004 Federal Register in effect since 1, 2009 that the effective , 2022. publication. That portion of the rental charges for the lease of office FOR FURTHER INFORMATION CONTACT: preamble, which addressed reporting space or equipment are not determined Lisa O. Wilson, (410) 786–8852. requirements and sanctions, was using a formula based on per-unit of Matthew Edgar, (410) 786–0698. published on 6, 2004 (69 FR service rental charges, to the extent that Catherine Martin, (410) 786–8382. 17933). The third final rulemaking such charges reflect services provided to (Phase III) was published in the Federal patients referred by the lessor to the SUPPLEMENTARY INFORMATION: Register on 5, 2007 as a final lessee (81 FR 80533 through 80534). I. Background rule (72 FR 51012). On , 2018, in our most In addition to Phase I, Phase II, and recent substantive update, the CY 2019 A. Statutory and Regulatory History Phase III, we issued final regulations on PFS final rule (83 FR 59715 through Section 1877 of the Social Security 19, 2008 in the Fiscal Year (FY) 59717), we incorporated into our Act (the Act), also known as the 2009 Inpatient Prospective Payment regulations provisions at sections physician self-referral law: (1) Prohibits System final rule with comment period 1877(h)(1)(D) and (E) of the Act that a physician from making referrals for (73 FR 48434) (the FY 2009 IPPS final were added by section 50404 of the certain designated health services rule). That rulemaking made various Bipartisan Budget Act of 2018 (Pub. L.

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115–123). Specifically, we codified in • A patient’s ability to understand As described in this final rule, the regulations our longstanding policy that treatment plans and make empowered physician self-referral statute was the writing requirement in various decisions; enacted to address concerns that arose compensation arrangement exceptions • Providers’ alignment on an end-to- in Medicare’s volume-based in § 411.357 be satisfied by a end treatment approach (that is, reimbursement system where the more collection of documents, including coordination among providers along the designated health services that a contemporaneous documents patient’s full care journey); physician ordered, the more payments evidencing the course of conduct • Incentives for providers to Medicare would make to the entity that between the parties. We also amended coordinate, collaborate, and provide furnished the designated health the special rule for temporary patients with tools to be more involved; services. If the referring physician had noncompliance with signature and an ownership or investment interest in • requirements at § 411.353(g), removing Information-sharing among the entity furnishing the designated the limitation on the use of the rule to providers, facilities, and other health services, he or she could increase once every 3 years with respect to the stakeholders in a manner that facilitates the entity’s revenue by referring patients same physician and making other efficient care while preserving and for more or higher value services, changes to conform the regulatory protecting patient access to data. potentially increasing the profit provision to section 1877(h)(1)(E) of the The Department believes that the distributions tied to the physician’s Act. realization of these goals would ownership interest. Similarly, a meaningfully improve the quality of physician who had a service or other B. Health Care Delivery and Payment care received by all American patients. compensation arrangement with an Reform: Transition to Value-Based Care As part of the Regulatory Sprint, CMS, entity might increase his or her the HHS Office of Inspector General aggregate compensation if he or she 1. The Regulatory Sprint to Coordinated (OIG), and the HHS Office for Civil made referrals that resulted in more Care Rights (OCR) each issued requests for Medicare payments to the entity. The The Department identified the broad information to solicit comments that physician self-referral statute was reach of the physician self-referral law, may help to inform the Department’s enacted to combat the potential that as well as the Federal anti-kickback approach to achieving the goals of the financial self-interest would affect a statute and beneficiary inducements Regulatory Sprint (83 FR 29524, 83 FR physician’s medical decision making civil monetary penalty (CMP) law, 43607, and 83 FR 64302, respectively). and ensure that patients have options sections 1128B(b) and 1128A(a)(5) of the We discuss our request for information for quality care. The law’s prohibitions Act, respectively, as potentially in this section of this final rule. were intended to prevent a patient from being referred for services that are not inhibiting beneficial arrangements that 2. Policy Considerations and Other needed or steered to less convenient, would advance the transition to value- Information Relevant to the lower quality, or more expensive health based care and the coordination of care Development of This Final Rule care providers because the patient’s among providers in both the Federal physician may improve his or her and commercial sectors. Industry a. Medicare Payment Was Volume- financial standing through those stakeholders informed us that, because Based When the Physician Self-Referral Statute Was Enacted referrals. This statutory structure was the consequences of noncompliance designed for and made sense in with the physician self-referral law (and When the physician self-referral Medicare’s then-largely volume-based the anti-kickback statute) are so dire, statute was enacted in 1989, under reimbursement system. providers, suppliers, and physicians traditional fee-for-service (FFS) may be discouraged from entering into Medicare (that is, Parts A and B), the b. The Medicare Shared Savings innovative arrangements that would vast majority of covered services were Program, the Center for Medicare and improve quality outcomes, produce paid based on volume. Although some Medicaid Innovation, and Medicare’s health system efficiencies, and lower services were ‘‘bundled’’ into a single Transition to Value-Based Payment costs (or slow their rate of growth). To payment, such as inpatient hospital Since the enactment of the physician address these concerns, and to help services that were paid on the basis of self-referral statute in 1989, significant accelerate the transformation of the the diagnosis-related group (DRG) that changes in the delivery of health care health care system into one that better corresponded to the patient’s diagnosis services and the payment for such pays for value and promotes care and the services provided (known as the services have occurred, both within the coordination, HHS launched a Hospital Inpatient Prospective Payment Medicare and Medicaid programs and Regulatory Sprint to Coordinated Care System, or IPPS), in general, Medicare for non-Federal payors and patients. For (the Regulatory Sprint), led by the made a payment each time a provider or some time, CMS has engaged in efforts Deputy Secretary of HHS. This supplier furnished a service to a to align payment under the Medicare Regulatory Sprint aims to remove beneficiary. Thus, the more services a program with the quality of the care potential regulatory barriers to care provider or supplier furnished, the more provided to our beneficiaries. Laws such coordination and value-based care Medicare payments it would receive. as the Medicare Prescription Drug, created by four key Federal health care Importantly, these bundled payments Improvement, and Modernization Act of laws and associated regulations: (1) The typically covered services furnished by 2003 (Pub. L. 108–173) (MMA), the physician self-referral law; (2) the anti- a single provider or supplier, directly or Deficit Reduction Act of 2005 (Pub. L. kickback statute; (3) the Health by contract; payments were not bundled 109–171) (DRA), and the Medicare Insurance Portability and across multiple providers, with each Improvements for Patients and Accountability Act of 1996 (Pub. L. billing independently. This volume- Providers Act of 2008 (Pub. L. 110–275) 104–191) (HIPAA); and (4) the rules based reimbursement system continues (MIPPA) guided our early efforts to under 42 CFR part 2 related to opioid to apply under traditional Medicare to move toward health care delivery and and substance use disorder treatment. both services paid under a prospective payment reform. More recently, the Through the Regulatory Sprint, HHS payment system (PPS) and services paid Affordable Care Act required significant aims to encourage and improve— under a retrospective FFS system. changes to the Medicare program’s

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payment systems and provides the and Medicaid programs and the self-referral law, which, in turn, may Secretary with broad authority to test Children’s Health Insurance Program restrict referrals of Medicare patients. innovative payment and service (CHIP) while preserving or enhancing d. Request for Information Regarding the delivery models. the quality of that care. Using its Physician Self-Referral Law (CMS– Section 3022 of the Affordable Care authority in section 1115A of the Act, 1720–NC) Act established the Medicare Shared the Innovation Center has tested Savings Program (Shared Savings numerous health care delivery and The Secretary identified four Program). The Congress created the payment models in which providers, priorities for HHS, the first of which is Shared Savings Program to promote suppliers, and individual practitioners transforming our health care system into accountability for a patient population participate. Most Innovation Center one that pays for value. Dramatically and coordinate items and services under models generally fall into three different from the system that existed Medicare Parts A and B and encourage categories: Accountable care models, when the physician self-referral statute investment in infrastructure and episode-based payment models, and was enacted, a value-driven health care redesigned care processes for high- primary care transformation models. system pays for outcomes rather than quality and efficient service delivery. In The Innovation Center also tests procedures. We believe that a successful essence, the Shared Savings Program initiatives targeted to the Medicaid and value-based system requires integration facilitates coordination among providers CHIP population and to Medicare- and coordination among physicians and to improve the quality of care for Medicaid (dual eligible) enrollees, and other health care providers and Medicare FFS beneficiaries and reduce is focused on other initiatives to suppliers. The Secretary laid out four unnecessary costs. Physicians, accelerate the development and testing areas of emphasis for building a system hospitals, and other eligible providers of new payment and service delivery that delivers value: (1) Maximizing the and suppliers may participate in the models, as well as to speed the adoption promise of health information Shared Savings Program by creating or of best practices.2 technology (IT); (2) improving participating in an accountable care transparency in price and quality; (3) The Congress also granted the pioneering bold new models in organization (ACO) that agrees to be Secretary broad authority to waive held accountable for the quality, cost, Medicare and Medicaid; and (4) provisions of section 1877 of the Act removing government burdens that and experience of care of an assigned and certain other Federal fraud and Medicare FFS beneficiary population. impede care coordination. (See https:// abuse laws when he determines it is www.hhs.gov/about/leadership/ ACOs that successfully meet quality and necessary to implement the Shared savings requirements share a percentage secretary/priorities/index.html#value- Savings Program (see section 1899(f) of based-healthcare.) This final rule of the achieved savings with Medicare. the Act) or test models under the Since enactment, we have issued focuses primarily on the final two areas Innovation Center’s authority (see of emphasis for value-based numerous regulations to implement and section 1115A(d)(1) of the Act).3 update the Shared Savings Program. For transformation—pioneering new models example, in keeping with the Secretary’s c. Commercial Payor and Provider- in Medicare and Medicaid and vision for achieving value-based Driven Activity removing regulatory barriers that transformation by pioneering new impede care coordination. As the Secretary and the payment models, in 2018, we finalized Although payments made directly Administrator of CMS (the changes to the Shared Savings Program from a payor to a physician generally do not implicate the physician self-referral Administrator) have acknowledged, that are intended to put the program on there are burdens associated with the a path toward achieving a more law unless the payor is itself an entity that furnishes designated health physician self-referral regulations that measurable move to value, demonstrate may be inhibiting health care savings to the Medicare program, and services, remuneration between physicians and other health care professionals and organizations, promote a competitive and accountable especially with respect to care marketplace (83 FR 67816). Specifically, providers that provide care to a payor’s enrolled patients (or subscribers) likely coordination. In 2017, through the we finalized a significant redesign of the annual payment rules, CMS requested participation options available under does implicate the physician self- referral law. Commercial payors and comments on improvements that could the Shared Savings Program to be made to the health care delivery encourage ACOs to transition to two- health care providers have implemented and continue to develop numerous system to reduce unnecessary burdens sided risk models (in which they may for clinicians, other providers, and share in savings and are accountable for innovative health care payment and care delivery models that do not include or patients and their families. In response, repaying shared losses), increase savings commenters shared information and mitigate losses for the Medicare specifically relate to CMS. Even though the physicians and health care providers regarding the barriers to participation in Trust Funds, and increase program health care delivery and payment integrity.1 that participate in these initiatives do not necessarily provide designated reform efforts, both public and private, Section 1115A of the Act, as added by as well as the burdens of compliance section 3021 of the Affordable Care Act, health services payable by Medicare as part of the initiatives, financial with the physician self-referral statute established the Center for Medicare and and regulations. As a result of our Medicaid Innovation (the Innovation relationships between them may nonetheless implicate the physician review of these comments, and with a Center) within CMS. The purpose of the goal of reducing regulatory burden and Innovation Center is to test innovative dismantling barriers to value-based care 2 For more information about the Innovation payment and service delivery models to transformation while also protecting the reduce expenditures for the care Center’s innovative health care payment and service delivery models, see https://innovation.cms.gov/. integrity of the Medicare program, on furnished to patients in the Medicare 3 For more information about waivers issued 25, 2018, we published in the using these authorities and guidance documents Federal Register a Request for 1 For more information about the Shared Savings related to specific waivers, see https:// Program, see http://www.cms.gov/Medicare/ www.cms.gov/Medicare/Fraud-and-Abuse/ Information Regarding the Physician Medicare-Fee-for-Service-Payment/ PhysicianSelfReferral/Fraud-and-Abuse- Self-Referral Law (the CMS RFI) seeking sharedsavingsprogram/index.html. Waivers.html. recommendations and input from the

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public on how to address any undue Sprint, and based on our experience in compliance burden on the regulated impact and burden of the physician self- administering the physician self-referral industry. In some cases, our proposals referral statute and regulations (83 FR law, including the CMS Voluntary Self- were different in application or 29524). Referral Disclosure Protocol (SRDP). potentially more restrictive than OIG’s Comments on the CMS RFI fell within The CMS Patients over Paperwork comparable proposals, in recognition of five general themes. First, commenters initiative emphasizes a commitment to the differences in statutory structures, requested new exceptions to the removing regulatory obstacles to authorities, and penalties. In other physician self-referral law to protect a providers spending time with patients. cases, OIG’s proposals were more variety of compensation arrangements Reducing unnecessary burden generally restrictive. In the proposed rule, we between and among parties in CMS- is a shared goal of the Patients over stated that, for some arrangements, it sponsored alternative payment models Paperwork initiative and the Regulatory may be appropriate for the anti-kickback and also those models that are Sprint. The Regulatory Sprint is focused statute, which is an intent-based sponsored by other payors, including specifically on identifying regulatory criminal law, to serve as ‘‘backstop’’ Federal payors. Commenters also requirements or prohibitions that may protection for arrangements that might requested protection for care act as barriers to coordinated care, be protected by an exception to the coordination arrangements, including assessing whether those regulatory strict liability physician self-referral law arrangements where entities and provisions are unnecessary obstacles to (84 FR 55772). physicians share resources to facilitate coordinated care, and issuing guidance C. Application and Scope of the the care of their common patients. or revising regulations to address such Physician Self-Referral Law Generally, commenters recognized the obstacles and, as appropriate, need for appropriate safeguards in encouraging and incentivizing As we emphasized in the proposed exceptions for arrangements among coordinated care. rule, our intent in interpreting and parties that participate in alternative To facilitate the transition of our implementing section 1877 of the Act payment models. Second, commenters health care system to one that is based has always been ‘‘to interpret the requested a new exception to permit on value rather than volume, we [referral and billing] prohibitions entities to donate cybersecurity proposed new exceptions to the narrowly and the exceptions broadly, to technology and services to physicians. physician self-referral law for value- the extent consistent with statutory Third, commenters provided helpful based arrangements, along with language and intent,’’ and we have not feedback on terminology and concepts integrally-related definitions for value- vacillated from this position (84 FR critical to the physician self-referral law, based enterprises, activities, 55771; see also, 66 FR 860). Our 1998 such as commercial reasonableness, fair arrangements, and purposes, the proposed rule was informed by our market value, and compensation that providers and suppliers that participate review of the legislative history of ‘‘takes into account’’ the volume or in a value-based enterprise, and the section 1877 of the Act, consultation value of referrals and is ‘‘set in target patient population for whom the with our law enforcement partners advance.’’ Fourth, some commenters parties’ efforts are undertaken. We also about their experience implementing expressed concerns that new exceptions proposed new and revised policies that and enforcing the Federal fraud and or easing current restrictions could balance program integrity concerns abuse laws, and empirical studies of exacerbate overutilization and other against the burden of the physician self- physicians’ referral patterns and harms. For example, some commenters referral law’s referral and billing practices, which concluded that a indicated that financial gain should prohibitions by: Providing guidance for physician’s financial relationship with never be permitted to influence medical physicians and health care providers an entity can affect a physician’s decision making, and some expressed and suppliers whose financial medical decision making and lead to concern that value-based payment relationships are governed by the overutilization. At the time of our systems drive industry consolidation physician self-referral statute and earliest rulemakings, we did not have as and reduce competition. Finally, a few regulations; reassessing the scope of the much experience in administering the commenters provided feedback on statute’s reach; and establishing new physician self-referral law or working issues that were not specifically exceptions for common nonabusive with our law enforcement partners on discussed in the CMS RFI, such as compensation arrangements between investigations and actions involving requests to eliminate or keep the physicians and the entities to which violations of the physician self-referral statutory restrictions for physician- they refer Medicare beneficiaries for law. Thus, despite our stated intention owned hospitals and requests to designated health services. to interpret the law’s prohibitions eliminate, expand, or limit the scope As part of the Regulatory Sprint and narrowly and the exceptions broadly, and availability of the in-office ancillary also in the , 2019 Federal we proceeded with great caution when services exception. Commenters on the Register, OIG published a proposed rule designing exceptions. CMS RFI provided valuable information under the anti-kickback statute and Over the past decade, we have vastly used to develop the proposals that we CMP law to address concerns regarding expanded our knowledge of the aspects are finalizing in this final rule. provisions in those statutes that may act of financial relationships that result in as barriers to coordinated care (84 FR Medicare program or patient abuse. Our e. Notice of Proposed Rulemaking 55694). Because many of the administration of the SRDP, which has In the October 17, 2019 Federal compensation arrangements between received over 1,200 submissions since Register, we published a proposed rule parties that participate in alternative its inception in 2010, has provided us (84 FR 55766) (the proposed rule) in payment models and other novel insight into thousands of financial which we proposed a comprehensive financial arrangements implicate both relationships—most of which were package of reforms to modernize and the physician self-referral law and the compensation arrangements—that ran clarify the regulations that interpret the anti-kickback statute, we coordinated afoul of the physician self-referral law physician self-referral law. These closely with OIG in developing certain but posed little risk of Medicare proposed policies were developed in provisions of our proposals. Our aim program or patient abuse. We made support of the CMS Patients over was to promote alignment across our revisions to our regulations and shared Paperwork initiative, the Regulatory agencies, where appropriate, to ease the policy clarifications in the CY 2016 and

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2019 PFS rulemakings to address many the physician self-referral law may have with OIG in developing our final issues related to the documentation on parties participating or considering exceptions, definitions, and related requirements in the statutory and participation in integrated care delivery policies. However, for the reasons regulatory exceptions to the physician models, alternative payment models, described in this final rule, the final self-referral law, but had not, until now, and arrangements to incent definitions and exceptions that pertain addressed other requirements in the improvements in outcomes and to the physician self-referral law differ regulatory exceptions that stakeholders reductions in cost, and we share the in some respects from the final identified as adding unnecessary optimism of commenters on the CMS definitions and safe harbors that pertain complexity without increasing RFI and the proposed rule that the to the anti-kickback statute. safeguards for program integrity. As changes to the physician self-referral Compensation arrangements may described in more detail in section II of regulations will allow greater implicate both statutes and, therefore, this final rule, we are eliminating innovation and enable HHS to realize its should be analyzed for compliance with certain requirements in our regulatory goal of transforming the health care each statute. exceptions that may be unnecessary and system into one that pays for value. 2. Definitions and Exceptions revising existing exceptions. We are also The health care landscape when the establishing new exceptions for physician self-referral law was enacted In § 411.357(aa), we are finalizing new nonabusive arrangements for which bears little resemblance to the landscape exceptions to the physician self-referral there is currently no applicable of today. As many commenters on the law for compensation arrangements that exception to the physician self-referral CMS RFI and the proposed rule satisfy specified requirements based on law’s referral and billing prohibitions. highlighted, the physician self-referral the characteristics of the arrangement law was enacted at a time when the and the level of financial risk D. Purpose of the Final Rule goals of the various components of the undertaken by the parties to the This final rule modernizes and health care system were often in arrangement or the value-based clarifies the regulations that interpret conflict, with each component enterprise of which they are the Medicare physician self-referral law. competing for a bigger share of the participants. The exceptions apply Following an extensive review of health care dollar without regard to the regardless of whether the arrangement policies that originated in the context of inefficiencies that resulted for the relates to care furnished to Medicare a health care delivery and payment system as a whole—in other words, a beneficiaries, non-Medicare patients, or system that operates based on the volume-based system. According to a combination of both. Although volume of services, and to support the these commenters, the current physician revisions to the physician self-referral innovation necessary for a health care self-referral regulations—intended to regulations are crucial to facilitating the delivery and payment system that pays combat overutilization in a volume- transition to a value-based health care for value, we are establishing new, based system—are outmoded because, delivery and payment system, nothing permanent exceptions to the physician by their nature, integrated care models in our final policies is intended to self-referral law for value-based protect against overutilization by suggest that many value-based arrangements and definitions for aligning clinical and economic arrangements, such as pay-for- terminology integral to such a system. performance as the benchmarks for performance arrangements or certain This final rule also includes clarifying value. And, in general, the greater the risk-sharing arrangements, do not satisfy provisions and guidance intended to economic risk that providers assume, the requirements of existing exceptions reduce unnecessary regulatory burden the greater the economic disincentive to to the physician self-referral law. on physicians and other health care overutilize services. According to some For purposes of applying the providers and suppliers, while of these commenters, the current exceptions, we are finalizing new reinforcing the physician self-referral prohibitions are even antithetical to the definitions at § 411.351 for the following law’s goal of protecting against program stated goals of policy makers, both in terms: Value-based activity; value-based and patient abuse. Finally, we are the Congress and within HHS, for health arrangement; value-based enterprise; establishing new exceptions for care delivery and payment reform. We value-based purpose; VBE participant; nonabusive arrangements for which agree in concept and, as described and target patient population. The there is currently no applicable below in this section II.A. of this final definitions are essential to the exception to the physician self-referral rule, we are finalizing an interwoven set application of the exceptions, which law’s referral and billing prohibitions. of definitions and exceptions that depart apply only to compensation from the historic exceptions to the arrangements that qualify as value-based II. Provisions of the Final Rule physician self-referral law in order to arrangements. Thus, the exceptions may A. Facilitating the Transition to Value- facilitate the transition to a value-based be accessed only by those parties that Based Care and Fostering Care health care delivery and payment qualify as VBE participants in the same Coordination system. value-based enterprise. The definitions We intend for the policies finalized in and exceptions together create the set of 1. Background this final rule to facilitate an evolving requirements for protection from the Transforming our health care system health care delivery system, and physician self-referral law’s referral and into one that pays for value is one of the endeavored to design policies that will billing prohibitions. Again, where Secretary’s priorities. As we stated in stand the test of time. We believe that possible and feasible, we have aligned the proposed rule, there is broad our final policies achieve the right with OIG’s final policies to ease the consensus throughout the health care balance between ensuring program compliance burden on the regulated industry regarding the urgent need for a integrity, making compliance with the industry. Specifically, with respect to movement away from legacy systems physician self-referral law readily the value-based terminology as defined that pay for care on a FFS basis (84 FR achievable, and providing the flexibility in this final rule, we are aligned with 55772). Identifying and addressing required by participants in value-based the OIG in most respects, and points of regulatory barriers to value-based care health care delivery and payment difference are explained below. transformation is a critical step in this systems. As we did with respect to the To facilitate readers’ review of our movement. We are aware of the effect proposed rule, we coordinated closely final policies, we first discuss the value-

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based definitions we are finalizing in • Target patient population means an Because of this view, we proposed to this final rule. identified patient population selected expressly state in the definition of by a value-based enterprise or its VBE ‘‘value-based activity’’ that the making a. Definitions participants based on legitimate and of a referral is not a value-based activity The final definitions and exceptions verifiable criteria that are set out in in order to make clear that the together create the set of requirements writing in advance of the exceptions would not protect the direct for protection from the physician self- commencement of the value-based payment for referrals. For the reasons referral law’s referral and billing arrangement and further the value-based discussed in response to comments prohibitions. The ‘‘value-based’’ enterprise’s value-based purpose(s). below, we are not finalizing this part of definitions are interconnected and, for We are finalizing the definitions as our proposal. However, as discussed in the best understanding, should be read proposed, with the modifications section II.D.2.c. of this final rule, we are together. In the proposed rule (84 FR described below in this section II.A.2.a. revising the definition of ‘‘referral’’ at 55773), we proposed the following of this final rule. § 411.351 to affirm our policy that, as a terms and definitions for purposes of The activities undertaken by the general matter, referrals are not items or applying the new exceptions at parties to a compensation arrangement services for which a physician may be § 411.357(aa): are key to the arrangement qualifying as compensated under the physician self- • Value-based activity means any of a ‘‘value-based arrangement’’ to which referral law. the following activities, provided that the exceptions at § 411.357(aa) apply. Our final definition of ‘‘value-based the activity is reasonably designed to We refer to these activities as value- activity’’ requires that the activities achieve at least one value-based purpose based activities. In the proposed rule, must be reasonably designed to achieve of the value-based enterprise: (1) The we acknowledged that sometimes value- at least one value-based purpose of the provision of an item or service; (2) the based activities are easily identifiable as value-based enterprise. For example, if taking of an action; or (3) the refraining the provision of items or services to a the value-based purpose of the from taking an action. We also proposed patient and, other times, identifying a enterprise is to coordinate and manage that the making of a referral is not a specific activity responsible for an the care of patients who undergo lower value-based activity. outcome in a value-based health care extremity joint replacement procedures, system can be difficult (84 FR 55773). • Value-based arrangement means an a value-based arrangement might We appreciate that remuneration paid in arrangement for the provision of at least require routine post-discharge meetings furtherance of the objectives of a value- one value-based activity for a target between a hospital and the physician based health care system does not patient population between or among: primarily responsible for the care of the always involve one-to-one payments for (1) The value-based enterprise and one patient following discharge from the items or services provided by a party to or more of its VBE participants; or (2) hospital. The value-based activity—that an arrangement. For example, a shared VBE participants in the same value- is, the physician’s participation in the savings payment distributed by an post-discharge meetings—would be based enterprise. entity to a downstream physician who reasonably designed to achieve the • Value-based enterprise means two joined with other providers and enterprise’s value-based purpose. In or more VBE participants: (1) suppliers to achieve the savings contrast, if the value-based purpose of Collaborating to achieve at least one represents the physician’s agreed upon the enterprise is to reduce the costs to value-based purpose; (2) each of which share of such savings rather than a or growth in expenditures of payors is a party to a value-based arrangement payment for specific items or services while improving or maintaining the with the other or at least one other VBE furnished by the physician to the entity quality of care for the target patient participant in the value-based (or on the entity’s behalf). And, when population, providing patient care enterprise; (3) that have an accountable payments are made to encourage a services (the purported value-based body or person responsible for financial physician to adhere to a redesigned care activity) without monitoring their and operational oversight of the value- protocol, such payments are made, in utilization would not appear to be based enterprise; and (4) that have a part, in consideration of the physician reasonably designed to achieve that governing document that describes the refraining from following or altering his purpose. value-based enterprise and how the VBE or her past patient care practices rather The definition of ‘‘value-based participants intend to achieve its value- than for direct patient care items or arrangement’’ is key to our final policies based purpose(s). services provided by the physician. aimed at facilitating the transition to • Value-based purpose means: (1) Therefore, at final § 411.351, ‘‘value- value-based care and fostering care Coordinating and managing the care of based activity’’ is defined to mean the coordination, as the final exceptions a target patient population; (2) provision of an item or service, the apply only to arrangements that qualify improving the quality of care for a target taking of an action, or the refraining as value-based arrangements. At final patient population; (3) appropriately from taking an action, provided that the § 411.351, ‘‘value-based arrangement’’ is reducing the costs to, or growth in activity is reasonably designed to defined to mean an arrangement for the expenditures of, payors without achieve at least one value-based purpose provision of at least one value-based reducing the quality of care for a target of the value-based enterprise of which activity for a target patient population to patient population; or (4) transitioning the parties to the arrangement are which the only parties are: (1) A value- from health care delivery and payment participants. In the proposed rule, we based enterprise and one or more of its mechanisms based on the volume of stated that the act of referring patients VBE participants; or (2) VBE items and services provided to for designated health services is itself participants in the same value-based mechanisms based on the quality of care not a value-based activity. In addition, enterprise. We have revised the and control of costs of care for a target as a general matter, referrals are not language of our proposed definition by patient population. items or services for which a physician substituting ‘‘to which the only parties • VBE participant means an may be compensated under the are’’ for ‘‘between or among’’ to make individual or entity that engages in at physician self-referral law, and clear that all parties to the value-based least one value-based activity as part of payments for referrals are antithetical to arrangement must be VBE participants a value-based enterprise. the purpose of the statute (84 FR 55773). in the same value-based enterprise. For

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instance, a value-based arrangement previously, are a value-based enterprise based enterprise exists, an arrangement between an imaging center and a and one or more of its VBE participants between the enterprise and a physician physician would not be a value-based or VBE participants in the same value- who is a VBE participant in the value- arrangement if the imaging center is not based enterprise. At final § 411.351, based enterprise may qualify as a part of the same value-based enterprise value-based enterprise is defined to ‘‘value-based arrangement’’ for purposes as the physician. Effectively, the parties mean two or more VBE participants: (1) of the exceptions at § 411.357(aa) if the to a value-based arrangement must Collaborating to achieve at least one value-based enterprise is itself an include an entity (as defined at value-based purpose; (2) each of which ‘‘entity’’ as defined at § 411.351.) In § 411.351) and a physician; otherwise, is a party to a value-based arrangement addition, a value-based enterprise must the physician self-referral law’s with the other or at least one other VBE have an accountable body or person that prohibitions would not be implicated. participant in the value-based is responsible for the financial and Also, because the exceptions at final enterprise; (3) that have an accountable operational oversight of the enterprise. § 411.357(aa) apply only to body or person responsible for the This may be the governing board, a compensation arrangements (as defined financial and operational oversight of committee of the governing board, or a at § 411.354(c)), the value-based the value-based enterprise; and (4) that corporate officer of the legal entity that arrangement must be a compensation have a governing document that is the value-based enterprise, or this arrangement and not another type of describes the value-based enterprise and may be the party to a value-based financial relationship to which the how the VBE participants intend to arrangement that is designated as being physician self-referral law applies. achieve its value-based purpose(s). A responsible for the financial and Patient care coordination and ‘‘value-based enterprise’’ includes only operational oversight of the arrangement management are the foundation of a organized groups of health care between the parties (for example, if the value-based health care delivery system. providers, suppliers, and other ‘‘enterprise’’ consists of just the two Reform of the delivery of health care components of the health care system parties). Finally, a value-based through better care coordination— collaborating to achieve the goals of a enterprise must have a governing including more efficient transitions for value-based health care delivery and document that describes the enterprise patients moving between and across payment system. As we stated in the and how its VBE participants intend to 4 care settings and providers, reduction proposed rule, an ‘‘enterprise’’ may be achieve its value-based purpose(s). of orders for duplicative items and a distinct legal entity—such as an Implicit in this requirement is that the services, and open sharing of medical ACO—with a formal governing body, value-based enterprise must have at records and other important health data operating agreement or bylaws, and the least one value-based purpose. across care settings and among a ability to receive payment on behalf of patient’s providers (consistent with Also critical to qualifying as a value- its affiliated health care providers (84 based arrangement are the scope and privacy and security rules)—is FR 55774). An ‘‘enterprise’’ may also integrally connected to reforming health objective of the arrangement. As noted consist only of the two parties to a previously, only an arrangement for care payment systems to shift from value-based arrangement with the volume-driven to value-driven payment activities that are reasonably designed to written documentation recording the achieve at least one of the value-based models. We expect that most value- arrangement serving as the required based arrangements would involve enterprise’s value-based purposes may governing document that describes the qualify as a value-based arrangement to activities that coordinate and manage enterprise and how the parties intend to the care of a target patient population, which the exceptions at § 411.357(aa) achieve its value-based purpose(s). but did not propose to limit the universe apply. At final § 411.351, value-based Whatever its size and structure, a value- of compensation arrangements that will purpose is defined to mean: (1) based enterprise is essentially a network qualify as value-based arrangements to Coordinating and managing the care of of participants (such as clinicians, those arrangements specifically for the a target patient population; (2) providers, and suppliers) that have coordination and management of patient improving the quality of care for a target agreed to collaborate with regard to a care. Rather, we sought comment on our patient population; (3) appropriately target patient population to put the approach and whether we should revise reducing the costs to or growth in patient at the center of care through care the definition of ‘‘value-based expenditures of payors without coordination, increase efficiencies in the arrangement’’ to require care reducing the quality of care for a target coordination and management in order delivery of care, and improve outcomes patient population; or (4) transitioning to qualify as a value-based arrangement. for patients. The definition of ‘‘value- from health care delivery and payment As discussed in more detail later in this based enterprise’’ finalized at § 411.351 mechanisms based on the volume of section, the final definition of ‘‘value- is focused on the functions of the items and services provided to based arrangement’’ does not require enterprise, as it is not our intention to mechanisms based on the quality of care care coordination and management in dictate or limit the appropriate legal and control of costs of care for a target order to qualify as a value-based structures for qualifying as a value- patient population. As we stated in the arrangement; therefore, we are not based enterprise. proposed rule, some of these goals are including a corollary definition of ‘‘care To qualify as a value-based enterprise, recognizable as part of the successor coordination and management’’ in our among other things, each participant in frameworks to the ‘‘triple aim’’ that are final regulations. the enterprise, whom we refer to as a integral to CMS’ value-based programs The final exceptions at § 411.357(aa) VBE participant, must be a party to at and our larger quality strategy to reform apply only to value-based arrangements, least one value-based arrangement with how health care is delivered and the only parties to which, as described at least one other participant in the reimbursed (84 FR 55774). Our enterprise. If a value-based enterprise is definition of ‘‘value-based purpose’’ 4 For purposes of this section, the term comprised of only two VBE participants, identifies four core goals related to a ‘‘providers’’ includes both providers and suppliers they must have at least one value-based target patient population. One or more as those terms are defined in 42 CFR 400.202, as of these goals must anchor the activities well as other components of the health care system. arrangement with each other in order for The term is used generically unless otherwise the enterprise to qualify as a value- underlying every compensation noted. based enterprise. (Provided that a value- arrangement that qualifies as a value-

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based arrangement to which the use could result in some confusion for enterprise. The definition of ‘‘VBE exceptions at final § 411.357(aa) apply. stakeholders, we believe that it is less participant’’ finalized here does not In the proposed rule, we sought disruptive to use the already-common exclude any specific persons, entities, or comment on whether it would be phrase ‘‘person or entity’’ to define VBE organizations from qualifying as a VBE desirable or necessary to codify in participant. We may consider whether participant. regulation text what is meant by to replace the word ‘‘entity’’ throughout Lastly, we are finalizing the definition ‘‘coordinating and managing care’’ and, our regulations in those instances where of ‘‘target patient population’’ as if so, whether ‘‘coordinating and it is not intended to be limited to the proposed, without modification. managing care’’ should be defined to defined term at § 411.351. However, any Specifically, the target patient mean the deliberate organization of revisions to our regulations to achieve population for which VBE participants patient care activities and sharing of this substitution would occur through undertake value-based activities is information between two or more VBE future notice-and-comment rulemaking. defined at final § 411.351 to mean an participants, tailored to improving the In the proposed rule, we also identified patient population selected health outcomes of the target patient discussed the experiences of our law by a value-based enterprise or its VBE population, in order to achieve safer and enforcement partners, including participants based on legitimate and more effective care for the target patient oversight experience, and the resulting verifiable criteria that: (1) Are set out in population (84 FR 55775). This concern about protecting potentially writing in advance of the definition was intended to correspond abusive arrangements between certain commencement of the value-based arrangement; and (2) further the value- to a similar definition proposed by OIG. types of entities that furnish designated As described in more detail below, we based enterprise’s value-based health services for purposes of the are not finalizing a definition of purpose(s). We affirm in this final rule physician self-referral law (84 FR ‘‘coordinating and managing care’’ in that legitimate and verifiable criteria 55775). Specifically, we discussed our regulations. We also sought may include medical or health concerns about compensation comment regarding whether additional characteristics (for example, patients arrangements between physicians and interpretation of the other proposed undergoing knee replacement surgery or laboratories or suppliers of durable value-based purposes is necessary, but patients with newly diagnosed type 2 medical equipment, prosthetics, did not receive comments on the need diabetes), geographic characteristics (for orthotics, and supplies (DMEPOS) that for additional interpretation of any other example, all patients in an identified may be intended to improperly aspect of the definition of ‘‘value-based county or set of zip codes), payor status purpose.’’ We respond to comments on influence or capture referrals without (for example, all patients with a this topic below. contributing to the better coordination particular health insurance plan or We proposed to define VBE of care for patients (84 FR 55776). We payor), or other defining characteristics. participant (that is, a participant in a stated that we were considering whether As we stated in the proposed rule, value-based enterprise) to mean an to exclude laboratories and DMEPOS selecting a target patient population individual or entity that engages in at suppliers from the definition of VBE consisting of only lucrative or adherent least one value-based activity as part of participant or, in the alternative, patients (cherry-picking) and avoiding a value-based enterprise. We noted in whether to include in the exceptions at costly or noncompliant patients (lemon- the proposed rule that the word § 411.357(aa), a requirement that the dropping) would not be permissible ‘‘entity,’’ as used in the definition of arrangement is not between a physician under most circumstances, as we would ‘‘VBE participant,’’ is not limited to (or immediate family member of a not consider the selection criteria to be non-natural persons that qualify as physician) and a laboratory or DMEPOS legitimate (even if verifiable) (84 FR ‘‘entities’’ as defined at § 411.351 (84 FR supplier. We also stated that, in 55776). 55775). We proposed to use the word particular, we were uncertain as to We received comments on the ‘‘entity’’ in the definition of ‘‘VBE whether laboratories and DMEPOS proposed definitions of value-based participant’’ in order to align with the suppliers have the direct patient activity, value-based arrangement, definition proposed by OIG. We sought contacts that would justify their value-based enterprise, value-based comment regarding whether the use of inclusion as parties working under a purpose, VBE participant, and target the word ‘‘entity’’ in this definition protected value-based arrangement to patient population. Our responses would cause confusion due to the fact achieve the type of patient-centered care follow. that the universe of non-natural persons that is a core tenet of care coordination Comment: Most commenters (that is, entities) that could qualify as and a value-based health care system. In supported our proposed definition of VBE participants is greater than the addition, due to our (and our law value-based activity, but many universe of non-natural persons that enforcement partners’) ongoing program requested further guidance regarding qualify as ‘‘entities’’ under § 411.351 integrity concerns with certain other what CMS would consider appropriate and, if so, what alternatives exist for participants in the health care system value-based activities. Specifically, defining ‘‘VBE participant’’ for purposes and to maintain consistency with some commenters asked whether of the physician self-referral law. As policies proposed by OIG, we stated that particular items or services, such as discussed in more detail below, we are we were also considering whether to transportation services or the provision modifying the definition of VBE exclude the following providers, of non-medical personnel, would participant in this final rule to mean a suppliers, and other persons from the qualify as value-based activities. person or entity that engages in at least definition of ‘‘VBE participant’’: Commenters did not explain how the one value-based activity as part of a Pharmaceutical manufacturers; arrangements for those particular items value-based enterprise. The phrase manufacturers and distributors of or services would implicate the ‘‘person or entity’’ is used more DMEPOS; pharmacy benefit managers physician self-referral law; that is, frequently throughout our regulations (PBMs); wholesalers; and distributors. whether the items or services are in- and, even though the word ‘‘entity’’ (as At final § 411.351, ‘‘VBE participant’’ is kind remuneration provided by an included in the definition of ‘‘VBE defined to mean a person or entity that entity to a physician or an immediate participant’’) is not limited to an engages in at least one value-based family member of a physician under an ‘‘entity’’ as defined at § 411.351 and its activity as part of a value-based arrangement between a physician (or

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immediate family member of a of comments in the proposed rule could should substantiate their efforts. We physician), whether the items or be interpreted to signal that success is note that contemporaneous services are provided by one of the required in order for the protections of documentation is a best practice, and parties to a value-based arrangement the value-based exceptions to apply, we encourage parties to follow this and paid for by the recipient of the noting that success of a value-based practice. We also remind parties that the items or services, or whether the activity in achieving the intended value- burden of proof to show compliance services are provided to patients. based purpose is never guaranteed. One with the physician self-referral law is Response: We decline to provide a list of the commenters urged CMS to set forth at § 411.353 and is applicable of items or services, actions, and ways confirm that ‘‘satisfying the value-based to parties utilizing the new exceptions to refrain from taking an action that purposes element of various value-based for value-based arrangements at final qualify as value-based activities. We are definitions does not necessarily mean § 411.357(aa). We emphasize that the concerned that even a non-exhaustive actual success in achieving the purposes new exceptions do not impose an list of common value-based activities but means engaging in collaboration and additional or different burden of proof. could unintentionally limit innovation activities ‘reasonably designed to It is the responsibility of the entity and inhibit robust participation in achieve’ one or more of these value- submitting a claim for payment for value-based health care delivery and based purposes.’’ designated health services furnished payment systems. The final definition of Response: The determination pursuant to a referral from a physician ‘‘value-based activity’’ provides the regarding whether a value-based activity with which it has a financial flexibility for parties to design is reasonably designed to achieve at relationship to ensure compliance with arrangements that further the value- least one value-based purpose is a fact- the physician self-referral law at the based purpose(s) of value-based specific determination. Parties must time of submission of the claim. That is, enterprises. The determination have a good faith belief that the value- parties must ensure that their financial regarding whether the provision of an based activity will achieve or lead to the relationship satisfies all the item or service, the taking of an action, achievement of at least one value-based requirements of an applicable exception or the refraining from taking an action purpose of the value-based enterprise in at the time the physician makes a constitutes a value-based activity is a which the parties to the arrangement are referral for designated health service(s). fact-specific analysis and turns on VBE participants. We recognize that Comment: Several commenters whether the activity is reasonably parties may undertake activities that do expressed concern with our statement designed to achieve at least one value- not ultimately achieve the value-based that the making of a referral is not a based purpose of the value-based purpose(s) of the enterprise. Nothing in value-based activity and requested that enterprise. our final regulations requires that the CMS revise the definition of value-based With respect to the examples value-based purpose(s) must be activity to include the making of a provided by the commenters, we note achieved in order for a value-based referral. These commenters noted that that the scope of the physician self- arrangement to be protected under an the definition of ‘‘referral’’ at § 411.351 referral law is limited to a financial applicable exception at § 411.357(aa). includes the establishment of a plan of relationship between a physician (or the However, if the parties are aware that care that includes the provision of immediate family member of a the provision of the item or service, the designated health services. The physician) and the entity to which the taking of the action, or the refraining commenters also asserted that referrals physician makes referrals for designated from taking the action will not further are an integral part of a value-based health services. We assume that the the value-based purpose(s) of the value- health care delivery and payment commenters were referring to the based enterprise, it will cease to qualify system, especially with respect to care provision of transportation services to a as a value-based activity and the parties planning, and contended that excluding beneficiary, which would not implicate may need to amend or terminate their the making of a referral from the the law unless the beneficiary was a arrangement. As discussed in section definition of ‘‘value-based activity’’ physician or an immediate family II.A.2.b.(3). of this final rule, we are would significantly limit the utility of member of a physician. With respect to including a requirement in the final the exceptions. Some commenters urged the commenters’ inquiry regarding the exception for value-based arrangements CMS to revise the definition of ‘‘value- provision of non-medical personnel, at § 411.357(aa)(3)(vii) that parties must based activity’’ to specifically include assuming that the commenters were monitor whether they have furnished the making of a referral as a value-based referring to the provision of non- the value-based activities required activity. medical personnel to a physician by an under the arrangement and whether and Response: The commenters raise entity, we are uncertain whether the how continuation of the value-based important points about the scope of the commenter is referring to in-kind activities is expected to further the definition of ‘‘referral’’ at § 411.351 and remuneration between an entity and a value-based purpose(s) of the value- the exclusion of the making of a referral physician in the form of the services of based enterprise. from the definition of ‘‘value-based non-medical personnel without Comment: A few commenters activity.’’ It was not our intention to expectation of payment or whether the requested guidance on how parties can exclude the development of a care plan provision of non-medical personnel document or otherwise show that a that includes the furnishing of would be paid for in cash under the value-based activity is ‘‘reasonably designated health services from the terms of an arrangement between an designed’’ to achieve a value-based definition of ‘‘value-based activity.’’ entity and a physician. Therefore, we purpose. Accordingly, we are not finalizing the are unable to provide specific guidance Response: We do not dictate how reference to the making of a referral in in response to the inquiry. parties should analyze the design of the definition of ‘‘value-based activity.’’ Comment: A few commenters their value-based arrangements to We are defining value-based activity to requested guidance on what it means for ensure that the value-based activities mean any of the following activities, a value-based activity to be reasonably they undertake are reasonably designed provided that the activity is reasonably designed to achieve at least one value- to achieve at least one value-based designed to achieve at least one value- based purpose. Some of the commenters purpose of the value-based enterprise of based purpose of the value-based expressed concern that our solicitation which they are participants or how they enterprise: (1) The provision of an item

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or service; (2) the taking of an action; or Response: The design and structure of value-based arrangement. The definition (3) the refraining from taking an action. contracts is separate and distinct from of ‘‘value-based enterprise’’ is intended Care planning activities that meet the the analysis of financial relationships to include only organized groups of definition of ‘‘referral’’ at § 411.351 will under the physician self-referral law. health care providers, suppliers, and qualify as ‘‘the taking of an action’’ for Although nothing in our regulations other components of the health care purposes of applying the definition of prohibits having multiple parties to a system collaborating to achieve the ‘‘value-based activity.’’ As discussed in contract or adding parties after the goals of a value-based health care section II.D.2.c. of this final rule, we are effective date of the contract, each of the delivery and payment system. Whatever revising the definition of ‘‘referral’’ at financial relationships that results from its size and structure, a value-based § 411.351 to codify in regulation text our the contract must be analyzed separately enterprise is essentially a network of policy that a referral is not an item or under the physician self-referral law. participants (such as clinicians, service for purposes of section 1877 of The commenter described adding new providers, and suppliers) that have the Act and the physician self-referral physicians to an existing value-based agreed to collaborate with regard to a law regulations. arrangement. For purposes of target patient population to put the Comment: Most commenters determining compliance with the patient at the center of care through care supported the proposed definition of physician self-referral law, an coordination, increase efficiencies in the ‘‘value-based arrangement.’’ However, a arrangement between an entity and a delivery of care, and improve outcomes few commenters requested that we ‘‘new’’ physician engaging in value- for patients. Simply stated, a value- expand the definition to specifically based activities will not be viewed as an based enterprise is a network of include the following alternative ‘‘addition’’ to an existing value-based individuals and entities that are payment models (APMs): Advanced arrangement but, rather, a separate and collaborating to achieve one or more APMs, all-payor/other-payor APMs, and distinct compensation arrangement that value-based purposes of the value-based Merit-based Incentive Payment System must be analyzed for compliance with enterprise. We do not believe that it (MIPS) Alternative Payment Models an applicable exception. To illustrate, would be beneficial to dictate particular (APMs) under the Quality Payment assume that a hospital and a physician legal or other structural requirements for Program (QPP). The commenters also organization enter into a value-based a value-based enterprise. Rather, the requested that we include State-based arrangement under which the physician definition of ‘‘value-based enterprise’’ is Medicaid initiatives in the definition of organization agrees that all its intended to encompass a wide-range of ‘‘value-based arrangement.’’ physicians will abide by the hospital’s structures to help facilitate health care Response: We decline to adopt the care protocols for a period of 2 years. providers’ transition to a value-based commenters’ suggestion and are During the course of the value-based health care delivery and payment finalizing the definition as proposed. arrangement, the physician organization system. The models referenced by the hires a new physician who agrees to Comment: A few commenters commenters relate to value-based abide by the hospital’s care protocols as requested guidance with respect to the payments from a payor to a physician called for by the physician requirement that the value-based under a payment arrangement between organization’s arrangement with the the payor and the physician. For hospital. Assuming the new physician enterprise have an accountable body or purposes of the physician self-referral stands in the shoes of the physician person responsible for the financial and law, a compensation arrangement is an organization under § 411.354(c), the operational oversight of the value-based arrangement between a physician (or ‘‘addition’’ of the new physician to the enterprise, specifically with respect to immediate family member of a physician organization creates a the responsibilities, requirements, physician) and the entity to which the separate new financial relationship structure, and composition of the physician makes referrals for designated between the hospital and the new accountable body. One commenter health services. The definition of physician that must satisfy the requested confirmation that an ACO ‘‘value-based arrangement’’ relates to a requirements of an applicable exception could rely on its existing governing compensation arrangement between a to the physician self-referral law. body and would not need to establish a physician and an entity that participate Nothing in the definition of ‘‘value- separate accountable body or identify a in the same value-based enterprise. It based enterprise’’ will preclude a new person other than the ACO’s governing does not cover compensation VBE participant from providing value- body to be responsible for the financial arrangements between a payor and a based activities and participating in a and operational oversight of the value- physician. value-based arrangement with another based enterprise. Several commenters Comment: Most commenters generally VBE participant or the value-based expressed concern that requiring one supported our proposed definition of enterprise itself (if the value-based individual or entity to assume ‘‘value-based enterprise,’’ although one enterprise is an entity for purposes of responsibility for the financial and commenter had concerns with the the physician self-referral law). operational oversight of the value-based requirement that each VBE participant Comment: Many commenters sought enterprise could create tension between must be a party to a value-based additional guidance regarding the type VBE participants and limit the utility of arrangement with at least one other VBE of organized network or group of the exceptions for smaller value-based participant in the value-based persons or entities that may qualify as enterprises. Other commenters asserted enterprise. This commenter interpreted a value-based enterprise. that the establishment of the this requirement to preclude the Response: A value-based enterprise accountable body or person and the addition of VBE participants to a value- may be a distinct legal entity—such as development of the governing document based arrangement after the value-based an ACO—with a formal governing body, would require the expenditure of arrangement has begun. The commenter operating agreement or bylaws, and the significant resources, including legal requested that we permit parties to add ability to receive payment on behalf of expenses, and questioned whether this VBE participants to a value-based its affiliated health care providers and burden is necessary. One of these arrangement throughout the duration of suppliers. A value-based enterprise may commenters suggested that this the arrangement, either on an ongoing also be an informal affiliation, even requirement is especially burdensome basis or at least annually. consisting of only the two parties to a for small or rural practices that may not

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have sufficient resources to satisfy the achieve value-based purposes would commenters expressed concern that the requirement. Some commenters also utilize these same basic practices to exclusion of laboratories and DMEPOS requested explicit guidance regarding reduce their arrangements to writing, suppliers from participation in value- the governing document that describes including their arrangement to form a based enterprises would impact the the value-based enterprise and how its value-based enterprise. We believe that ability of health systems that own VBE participants intend to achieve the the same is true for the development of laboratories or DMEPOS suppliers from enterprise’s value-based purpose(s). a governing document that describes the participating in value-based health care Response: Transparency and value-based enterprise and how the VBE delivery. accountability are critical to a successful participants intend to achieve its value- Response: We are not excluding any transition to a value-based health care based purpose(s). We remind parties specific persons, entities, or delivery and payment system. It is that we are not dictating particular legal organizations from the definition of essential that CMS and our law or other structural requirements for a ‘‘VBE participant.’’ We find the enforcement partners are able to identify value-based enterprise; rather, the final commenters’ assertions that laboratories the person or organization ultimately regulations accommodate both formal and DMEPOS suppliers may play a responsible for the financial and and informal value-based enterprises. beneficial role in the delivery of value- operational oversight of a value-based As a result, the written agreements and based health care persuasive. However, enterprise. We do not believe that contracts that parties enter into in the we will continue to monitor the requiring a value-based enterprise to normal course of their business dealings evolution of the value-based health care have an accountable body or responsible could serve as the documentation delivery and payment system to ensure person and a governing document required under the new exception for that the inclusion of all types of creates an administrative or financial value-based arrangements. providers and suppliers as VBE burden beyond what parties that wish to It is simply not possible to establish participants does not create a program transition to value-based health care one set of financial and operational integrity risk. would already incur. oversight requirements that would be Comment: A number of commenters We are not persuaded to abandon the applicable to value-based enterprises of supported the inclusion of coordinating requirement that a value-based all types and sizes. The financial and and managing the care of a target patient enterprise must have an accountable operational oversight of a value-based population as an appropriate value- body or person that is responsible for enterprise and the related governing based purpose, although the majority of the financial and operational oversight document for a value-based enterprise these commenters urged CMS to not of the enterprise. As discussed in the made up of only a hospital and define ‘‘coordinating and managing proposed rule and as noted above, the physician will look very different from care’’ in regulation text, suggesting that accountable body or person that is that of an ACO that contracts with the phrase is self-explanatory and responsible for the financial and thousands of providers and suppliers. defining it could inadvertently limit or operational oversight of the enterprise Again, we do not dictate the structure or interfere with innovation. Commenters may be the governing board, a composition of the accountable body; that were open to the inclusion of a committee of the governing board, or a rather, we simply require that the definition of ‘‘coordinating and corporate officer of the legal entity that accountable body or responsible person managing care’’ stressed the need for is the value-based enterprise, or may be for the value-based enterprise exercise any such definition to be drafted the party to a value-based arrangement appropriate financial and operational broadly. Other commenters suggested that is designated as being responsible oversight of the value-based enterprise. that, if we codify a definition of for the financial and operational Similarly, we do not dictate the format ‘‘coordinating and managing care,’’ it oversight of the arrangement between or content of the governing document should align with any definition of the the parties (if the ‘‘enterprise’’ is a that describes the value-based enterprise same term adopted by OIG. network consisting of just the two and how the VBE participants intend to Response: We agree with the parties) (84 FR 55774). We expect that achieve its value-based purpose(s). The commenters that it is not necessary to a value-based enterprise would establish necessary infrastructure to effectively define ‘‘coordinating and managing an accountable body or designate a oversee the financial and operational care’’ for purposes of the definition of responsible person commensurate with activities of the value-based enterprise ‘‘value-based purpose.’’ In addition, we the scope and objectives of the value- and the governing document will do not believe that it is necessary to based enterprise and its available depend on the size and structure of the define ‘‘coordinating and managing resources. value-based enterprise. care’’ for purposes of the exceptions We are also maintaining the Comment: Several commenters finalized at § 411.357(aa), as they are not requirement that the enterprise must recommended that CMS not limit the limited only to value-based have a governing document that types of entities that may qualify as a arrangements for the coordination or describes the value-based enterprise and VBE participant out of concern that any management of care. how its VBE participants intend to such limitations could slow down or Comment: Many commenters achieve its value-based purpose(s). inhibit the movement of the entire requested that we include as a value- Parties regularly enter into payor health care industry towards value- based purpose the maintenance of contracts, employment relationships, based health care delivery and quality of care for the target population service arrangements, and other significantly limit the utility of the without requiring a reduction in costs to arrangements for items and services exceptions. The commenters provided payors. related to the provision of patient care detailed examples of how laboratories Response: We decline to include the services. It is a matter of general and DMEPOS suppliers, in particular, maintenance of quality of care as a contracting practice that these contracts contribute to the value-based health care permissible value-based purpose in the and written agreements specify the delivery and payment system by absence of reduction of the costs to or rights, responsibilities, and obligations collaborating with other sectors of the growth in expenditures of payors. of the parties. We expect that health care industry to improve care, Although we recognize that the independent health care providers that lower costs, and ensure that patients are maintenance of quality of care may wish to organize and collaborate to receiving appropriate care. Other advance the goals of a value-based

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enterprise or the specific parties to a purposes included in the definition are to mechanisms based on the quality of value-based arrangement, we do not sufficiently inclusive to allow for care and control of costs of care for the believe that the maintenance of quality innovative value-based arrangements target patient population (84 FR 55775). of care in the absence of a reduction in while protecting against program or Generally speaking, we interpret the costs to or growth in expenditures patient abuse. We do not believe that ‘‘transitioning’’ to mean undergoing the of payors advances the goals of the permitting a value-based enterprise to process or period of transition from one Regulatory Sprint. Thus, it is not exist solely for the purpose of reducing state or condition to another and, appropriate to include the maintenance costs to its VBE participants would specifically, with respect to this value- of quality of care as a stand-alone value- adequately protect the Medicare based purpose, the process or period of based purpose that would unlock access program and its beneficiaries from transition from furnishing patient care to the exceptions at § 411.357(aa). We abuse. Moreover, allowing parties to services in a FFS volume-based system note that numerous CMS programs and share in the reduction of costs without to furnishing patient care services in a Medicare payment mechanisms already also improving or maintaining quality of value-based health care delivery and require the maintenance of quality care for patients or otherwise benefitting payment system. Thus, this value-based across the care continuum and payors does not advance the transition purpose applies during the period of a encourage improvement and to a value-based health care delivery value-based enterprise’s start-up or maintenance of quality through use of and payment system. We note that preparatory activities. In the proposed payment incentives and payment nothing in this final rule precludes the rule, we interpreted this value-based reductions. For example, under the sharing of cost savings and other entity- purpose as a category that includes the Hospital Inpatient Quality Reporting specific savings programs, provided Program, CMS collects quality data from those programs are part of a value-based integration of VBE participants in team- hospitals paid under the IPPS. Data for arrangement for value-based activities based coordinated care models, selected measures are used for paying a reasonably designed to further at least establishing the infrastructure necessary portion of hospitals based on the quality one value-based purpose of the value- to provide patient-centered coordinated and efficiency of care, including the based enterprise of which the parties to care, and accepting (or preparing to Hospital-Acquired Condition Reduction the arrangement are VBE participants. accept) increased levels of financial risk Program, Hospital Readmissions The compensation to a physician under from payors or other VBE participants in Reduction Program, and Hospital Value- such a value-based arrangement could value-based arrangements (84 FR Based Purchasing Program, which include a share of the savings that result 55775). This purpose will also apply to rewards acute care hospitals with from a hospital’s internal cost sharing activities undertaken by an incentive payments based on the quality (or gainsharing) program. unincorporated value-based enterprise of care they provide, rather than just the Comment: A few commenters that wishes to formalize its legal and quantity of services they provide. specifically supported the inclusion as a operational structure, as well as the Comment: The majority of value-based purpose ‘‘transitioning from preparation by a value-based enterprise commenters supported the definition of health care delivery and payment to accept financial risk and the ‘‘value-based purpose’’ and urged CMS mechanisms based on the volume of preparation of VBE participants to to finalize the definition without items and services provided to furnish services in a manner focused on modifications. A few commenters mechanisms based on the quality of care the value of those services instead of requested that we revise the definition and control of costs of care for a target volume. of ‘‘value-based purpose’’ to include the patient population.’’ These commenters We agree that this value-based reduction in costs to or growth in stated that allowing a value-based purpose shares certain aspects of the expenditures of health care providers enterprise to operate for this purpose is pre-participation waiver under the and suppliers. These commenters necessary to achieve CMS’ goal of Shared Savings Program. In our asserted that limiting the definition of transitioning to a value-based health discussion of the Shared Savings value-based purpose to reducing the care delivery and payment system and Program pre-participation waiver in our costs to or growth in expenditures of strikes the right balance between , 2015 Shared Savings only payors fails to recognize the precision and flexibility. The Program Final Waivers in Connection benefits to Medicare that come from the commenters asserted that value-based with the Shared Savings Program Final reduction of provider costs, such as enterprises would rely on this purpose reporting lower costs to Medicare on the to cover the clinical integration and Rule (80 FR 66726) (the SSP waivers hospital’s cost report, which, in turn, infrastructure activities necessary to final rule), we provided examples of result in lower Medicare expenditures. develop and implement a value-based start-up arrangements as guideposts for These commenters pointed to internal enterprise and to meet future determining whether a particular cost savings programs that distribute operational and capital requirements. arrangement may qualify for protection savings generated from implementing Commenters likened this value-based under the pre-participation waiver (80 specific cost saving measures to purpose to the purpose underlying the FR 66733). We believe those examples, physicians. The commenters expressed pre-participation waiver for the Shared to the extent they create a compensation concern that hospital-initiated quality Savings Program. The commenters relationship for purposes of the and efficiency programs that drive down recommended that we make no further physician self-referral law, may be hospital costs, improve efficiency, and refinement to this value-based purpose. illustrative for purposes of interpreting improve quality of care would not be Response: The commenters’ the scope of ‘‘transitioning from health protected by the exceptions because the understanding of the scope of this care delivery and payment mechanisms hospital’s program would not directly value-based purpose is correct. As we based on the volume of items and reduce costs to or growth in discussed in the proposed rule, this services provided to mechanisms based expenditures of payors. value-based purpose is intended to on the quality of care and control of Response: We are not persuaded to accommodate efforts aimed at costs of care for a target patient revise the definition of ‘‘value-based transitioning from health care delivery population.’’ In the SSP waivers final purpose’’ as requested by the and payment mechanisms based on the rule (80 FR 66733), we stated that the commenters. We believe that the four volume of items and services provided following types of start-up arrangements

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may qualify under the Shared Savings specifically, what it means for selection have a chilling effect because they are, Program pre-participation waiver: criteria to be legitimate and verifiable. in practice, interpreted by the regulated • Infrastructure creation and Although several commenters supported industry as mandatory or otherwise provision. the standard that selection criteria must prescriptive rules. We believe the • Network development and be legitimate and verifiable, stating that approach we have finalized balances the management, including the it struck the right balance between need for clear guidelines with the need configuration of a correct ambulatory encouraging innovation and protecting for flexibility. Finally, with respect to network and the restructuring of against fraud and abuse, other the commenters’ request for existing providers and suppliers to commenters expressed concern with the confirmation that specific selection provide efficient care. use of the term ‘‘legitimate,’’ asserting criteria are permissible, we reiterate that • Care coordination mechanisms, that it is ambiguous and may expose the determination whether the selection including care coordination processes parties to litigation and enforcement criteria used to identify a target patient across multiple organizations. risk. Some commenters requested that population are legitimate and verifiable • Clinical management systems. we instead prohibit the specific is dependent on the facts and • Quality improvement mechanisms selection criteria that we believe are circumstances of the parties. If the including a mechanism to improve inappropriate, such as cherry-picking criteria are selected primarily for their patient experience of care. and lemon-dropping, while others effect on the parties’ profits or purely • Creation of governance and requested that we provide a list of financial concerns, they will not be management structure. considered legitimate and, therefore, are • selection criteria that would be deemed Care utilization management, permissible. A few commenters asked impermissible. None of the selection including chronic disease management, whether specific selection criteria criteria examples shared by the limiting hospital readmissions, creation would be acceptable, such as identifying commenters are per se impermissible. of care protocols, and patient education. Comment: Some commenters • the target patient population by the MS– Creation of incentives for DRG assigned to the patient, geography, expressed concern with our statement in performance-based payment systems demographic criteria (for example, age the proposed rule that choosing a target and the transition from fee-for-service or socioeconomic status), or payor (for patient population in a manner driven payment system to one of shared risk of example, Medicaid or non-Federal by profit motive or purely financial losses. payor). concerns would not be legitimate (84 FR • Hiring of new staff, including care 55776). These commenters suggested coordinators (including nurses, Response: At final § 411.351, ‘‘target that this calls into question proven cost- technicians, physicians, and/or non- patient population’’ means an identified saving techniques, such as product physician practitioners), umbrella patient population selected by a value- standardization, aimed at reductions in organization management, quality based enterprise or its VBE participants cost or unnecessary care that impact leadership, analytical team, liaison based on legitimate and verifiable financial performance. The commenters team, IT support, financial management, criteria that are set out in writing in requested that CMS clarify the contracting, and risk management. advance of the commencement of the distinction between reducing costs and • IT, including EHR systems, value-based arrangement and further the problematic criteria, and asked us to electronic health information exchanges value-based enterprise’s value-based explicitly acknowledge that it is that allow for electronic data exchange purpose(s). We do not believe that it is permissible to choose a target patient across multiple platforms, data necessary to further define the term population that could generate cost reporting systems (including all payor ‘‘legitimate.’’ It has been used reductions from activities like product claims data reporting systems), and data throughout the physician self-referral standardization alone. analytics (including staff and systems, regulations for decades. For example, Response: It appears to us that these such as software tools, to perform such the exception for personal service commenters have conflated the analytic functions). arrangements includes a requirement at acceptable criteria for selecting a target • Consultant and other professional § 411.357(d)(1)(iii) that the aggregate patient population and the requirements support, including market analysis for services covered by the arrangement do for selecting activities to be performed antitrust review, legal services, and not exceed those that are reasonable and under a value-based arrangement. The financial and accounting services. necessary for the legitimate business target patient population is the group of • Organization and staff training purposes of the arrangement. The term individuals for whom the parties to a costs. ‘‘legitimate’’ does not carry a new or value-based arrangement are • Incentives to attract primary care different definition for purposes of undertaking value-based activities. Our physicians. interpreting the value-based definitions statement regarding profit motive or • Capital investments, including or the exceptions at § 411.357(aa). We purely financial concerns relates to loans, capital contributions, grants, and refer readers to section II.B.2. of this choosing the patient population for withholds. final rule for further discussion of the which the parties will undertake value- Many of these activities similarly term ‘‘legitimate’’ within our based activities and not the value-based facilitate a value-based enterprise’s (and regulations. With respect to the activities themselves. We reiterate that its VBE participants’) transition from commenters’ requests for lists of the selection of the target patient health care delivery and payment impermissible and permissible selection population may not be driven by profit mechanisms based on the volume of criteria, it is not feasible to provide such motive or purely financial concerns. As items and services provided to an exhaustive list of selection criteria we stated in the proposed rule, selecting mechanisms based on the quality of care that we consider unacceptable. a target patient population consisting of and control of costs of care for a target Similarly, we believe that providing a only lucrative or adherent patients patient population. list of acceptable selection criteria could (cherry-picking) and avoiding costly or Comment: We received a number of serve to interfere with or limit a value- noncompliant patients (lemon- comments regarding the selection based enterprise’s or VBE participant’s dropping) would not be permissible criteria that may be used to choose a ability to identify and utilize selection under most circumstances, as we will target patient population and, criteria. Deeming provisions sometimes not consider the selection criteria to be

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legitimate (even if verifiable) (84 FR value-based arrangement. Where a target objected to the use of the term ‘‘entity’’ 55776). Choosing a target patient patient population is ascribed to the in the definition of ‘‘VBE participant,’’ population solely because it appears value-based enterprise (or the VBE because the term ‘‘entity’’ is ascribed a likely to reduce the costs to one of the participants that are parties to the specific meaning at § 411.351, but, as parties to a value-based arrangement specific value-based arrangement) by used in the definition of ‘‘VBE would be suspect. As described earlier the payor, the payor establishes the participant,’’ would not be limited to in this section and in our response to criteria for selecting the target patient that meaning. Commenters noted that other comments, a value-based activity population. However, this does not using the same term in two different must be reasonably designed to achieve affect the obligation of the value-based ways within the same regulatory scheme at least one value-based purpose of the enterprise or its VBE participants to creates unnecessary complexity and value-based enterprise. With respect to select the target patient population for compliance concerns. Commenters the commenter’s specific inquiry, we purposes of the physician self-referral sought clarity on this issue, and note that a value-based activity that law and qualification to use the requested that we either revise the requires a physician to utilize a exceptions at § 411.357(aa). The definition of ‘‘entity’’ at § 411.351 or use standardized list of products, where definition of ‘‘target patient population’’ a different term for purposes of the appropriate, may be reasonably at final § 411.351 requires that the target definition of ‘‘VBE participant.’’ designed to achieve at least one value- patient population is selected by the Response: Although we understand based purpose of the value-based value-based enterprise or its VBE the commenter’s concerns, we are not enterprise, depending on the participants based on legitimate and revising the definition of ‘‘VBE enterprise’s value-based purposes. verifiable criteria that are set out in participant’’ to replace the term ‘‘entity’’ Comment: A large number of writing in advance of the with another term, nor are we revising commenters expressed concern with a commencement of the value-based the definition of ‘‘entity’’ at § 411.351. requirement that the patients in the arrangement under which value-based In the physician self-referral regulations, target patient population have at least activities are undertaken for the target the term ‘‘entity’’ is used to indicate an one chronic condition to be addressed patient population and that further the entity (as defined at § 411.351) by the value-based arrangement and value-based enterprise’s value-based furnishing designated health services urged CMS to not limit the target patient purpose(s). Thus, where a target patient and also to indicate its general meaning population to chronic patients. The population is ascribed to the value- of an organization (such as a business) commenters stated that such a based enterprise (or the VBE that has an identity separate from those requirement would severely constrict participants that are parties to the of its members. As used in the final the types of value-based arrangements specific value-based arrangement) by definition of ‘‘VBE participant,’’ the protected under the new exceptions. the payor, the value-based enterprise or term ‘‘entity’’ is not limited to an entity Response: Although we sought its VBE participants must ensure that furnishing designated health services. comment as to whether we should the requirements of the definition of Rather, it has its general meaning. incorporate a requirement that patients ‘‘target patient population’’ are satisfied. Although we retain the term ‘‘entity’’ in the target patient population have at In the circumstances described by the in the definition of ‘‘VBE participant,’’ least one chronic condition in order to commenters, the selection criteria for we are replacing the term ‘‘individual’’ align with OIG’s proposals, we are not the target patient population could be (as proposed) with the term ‘‘person.’’ including this provision in the final described as ‘‘the target patient Thus, under our final regulation, VBE definition of ‘‘target patient population’’ population to be identified by the payor participant means a person or entity that at § 411.351. As finalized, target patient in accordance with criteria established engages in at least one value-based population means an identified patient by the payor for retrospective activity as part of a value-based population selected by a value-based attribution.’’ The value-based enterprise enterprise. We intend for ‘‘person or enterprise or its VBE participants based or the VBE participants that are parties entity’’ to refer to both natural and non- on legitimate and verifiable criteria that to the specific value-based arrangement natural persons. Again, the term are set out in writing in advance of the under which value-based activities are ‘‘entity’’ in this context is not limited to commencement of the value-based undertaken for the target patient an entity that furnishes designated arrangement and further the value-based population must ensure that the payor’s health services. Our review of the enterprise’s value-based purpose(s). We methodology for attribution of the target physician self-referral regulations are not limiting a target patient patient population are legitimate and indicates that the term ‘‘person or population to patients with at least one verifiable and that they will further the entity’’ is used numerous times chronic condition. value-based enterprise’s value-based throughout the regulations. For Comment: A few commenters purpose(s). In addition, the selection example, as defined at § 411.351, a requested clarification that the criteria must be documented in advance ‘‘referring physician’’ is a physician definition of ‘‘target patient population’’ of the commencement of the value- who makes a referral or who directs would include patient populations that based arrangement. It is not sufficient another person or entity to make a are retroactively attributed, noting as an for the value-based enterprise or its VBE referral or who controls referrals made example the use of a retrospective participants to merely state that the by another person or entity. The claims-based methodology. selection criteria will be determined by regulations regarding indirect Response: A target patient population another party (in this case, the payor). compensation arrangements at must be selected based on legitimate The value-based enterprise or its VBE § 411.354(c)(2) state that one element of and verifiable criteria that are set out in participants may need to collaborate an indirect compensation arrangement writing in advance of the with the payor to ensure that the patient is that there exists between the referring commencement of the value-based population attributed meets the physician (or a member of his or her arrangement. The commenter’s concerns definition of ‘‘target patient immediate family member) and the appear to relate to the requirement that population.’’ entity furnishing designated health selection criteria for the target patient Comment: Most commenters services an unbroken chain of any population must be set out in writing in supported the proposed definition of number (but not fewer than one) of advance of the commencement of the ‘‘VBE participant.’’ A few commenters persons or entities that have financial

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relationships between them. The which services are preferable, and who when considered in concert with: (1) regulations also use this term in the should provide them. He noted that the The program integrity and other context of the person or entity from physician self-referral law would requirements integrated in the whom the referring physician or improve consumers’ confidence in their definitions used to apply the exceptions immediate family member receives physicians and the health care system only to compensation arrangements that aggregate compensation under the generally. In other words, the legislation qualify as ‘‘value-based arrangements;’’ arrangement. The exceptions for the was proposed (and the law ultimately and (2) the disincentives to perpetrate rental of office space and the rental of enacted) to counter the effects of the harms the physician self-referral law equipment reference a person or entity physician decision making driven by was intended to deter that are intrinsic in the exclusive use requirements at financial self-interest—overutilization of in the assumption of substantial § 411.357(a)(3) and (b)(2). For health care services, the suppression of downside financial risk and meaningful consistency with our existing patient choice, and the impact on the participation in value-based health care regulations, we are including the term medical marketplace. delivery and payment models. ‘‘person or entity’’ in our final definition As discussed in section I.B.2.a. of this In removing regulatory barriers to of ‘‘VBE participant.’’ final rule, in 1989 and 1993, the vast innovative care coordination and value- majority of Medicare services were b. Exceptions based arrangements, we are faced with reimbursed based on volume under a the challenge of designing protection for The physician self-referral law (along retrospective FFS system. The statutory emerging health care arrangements, the with other Federal fraud and abuse exceptions to the physician self-referral optimal form, design, and efficacy of laws) provides critical protection law’s referral and billing prohibitions which remains unknown or unproven. against a range of troubling patient and were developed during this time of FFS, This is a fundamental challenge of program abuses that may result from volume-based payment, with conditions regulating during a period of innovation volume-driven, FFS payment. These which, if met, would allow the and experimentation. Matters are further abuses include unnecessary utilization, physician’s ownership or investment complicated by the substantial variation increased costs to payors and patients, interest or compensation arrangement to in care coordination and value-based inappropriate steering of patients, proceed without triggering the ban on arrangements contemplated by the corruption of medical decision making, the physician’s referrals or the entity’s health care industry, variation among and competition based on buying claims submission. We believe that the patient populations and providers, referrals instead of delivering quality, exceptions in section 1877 of the Act convenient care. While value-based indicate the Congress’ stance on what emerging health technologies and data payment models hold promise for safeguards are necessary to protect capabilities, and our desire not to chill addressing these abuses, they may pose against program or patient abuse in a beneficial innovations. Thus, a one-size- risks of their own, including risks of system where Medicare payment is fits-all approach to protection from the stinting on care (underutilization), available for each service referred by a physician self-referral law’s prohibitions cherry-picking, lemon-dropping, and physician and furnished by a provider is not optimal. The design and structure manipulation or falsification of data or supplier. To date, the exceptions for of our exceptions are intended to further used to verify outcomes. Moreover, compensation arrangements issued several complementary goals. First, we during the transformation to value- under section 1877(b)(4) of the Act, have endeavored to remove regulatory based payment, many new delivery and which grants the Secretary authority to barriers, real or perceived, to create payment models include both FFS and establish exceptions for financial space and flexibility for industry-led value-based payment mechanisms in the relationships that the Secretary innovation in the delivery of better and same model, subjecting providers to determines do not pose a risk of more efficient coordinated health care mixed incentives, and presenting the program or patient abuse, have generally for patients and improved health possibility of arrangements that pose followed the blueprint established by outcomes. Second, consistent with the both traditional FFS risk and emerging the Congress for compensation Secretary’s priorities, the historical value-based payment risks. arrangements that exist in a FFS system. trend toward improving health care When the physician self-referral law Value-based health care delivery and through better care coordination, and was expanded in 1993 to apply to payment shifts the paradigm of our the increasing adoption of value-based designated health services beyond the analysis under section 1877(b)(4) of the models in the health care industry, the clinical laboratory services to which the Act. When no longer operating in a final exceptions are intended to create original 1989 law applied, according to volume-based system, or operating in a additional incentives for the industry to the sponsor of the legislation, the system that reduces the amount of FFS move away from volume-based health Honorable Fortney ‘‘Pete’’ Stark, the payment by combining it with some care delivery and payment and toward physician self-referral law was intended level of value-based payment, our population health and other non-FFS to address physician referrals that drive exceptions need fewer ‘‘traditional’’ payment models. In this regard, our up health care costs and result in requirements to ensure the exception structure incorporates unnecessary utilization of services. (See arrangements they protect do not pose a additional flexibilities for compensation Opening Statement of the Honorable risk of program or patient abuse. This is arrangements between parties that have Pete Stark, Physician Ownership and because a value-based health care increased their participation in mature Referral Arrangements and H.R. 345, delivery and payment system, by value-based payment models and their ‘‘The Comprehensive Physician design, provides safeguards against assumption of downside financial risk Ownership and Referral Act of 1993,’’ harms such as overutilization, care under such models. As discussed in the House of Representatives, Committee on stinting, patient steering, and negative proposed rule (84 FR 55776) and in Ways and Means, Subcommittee on impacts on the medical marketplace. more detail in this section II.A.2.b. of Health, , 1993, p. 144.) Mr. Using the Secretary’s authority under the final rule, our expectation is that Stark went on to emphasize the section 1877(b)(4) of the Act, we are meaningful assumption of downside importance of a physician’s ability to adding three exceptions for financial risk would not only serve the offer patients neutral advice about compensation arrangements that do not overall transformation of industry whether or not services are necessary, pose a risk of program or patient abuse payment systems, but could also curb, at

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least to some degree, FFS incentives to arrangements at § 411.357(aa) would purpose(s), the regulation adequately order medically unnecessary or overly conflict with our goal of addressing protects a patient’s choice of health care costly items and services, key patient regulatory barriers to value-based care provider, the physician’s medical and program harms addressed by the transformation. As discussed in more judgment, and the ability of health physician self-referral law (and other detail below, we are not including these insurers to efficiently provide care to Federal fraud and abuse laws). requirements in the final exceptions for their members. Specifically, even if the The current exceptions to the value-based arrangements at applicable exception at § 411.357(aa) physician self-referral law include § 411.357(aa). We note that two of the does not require that the arrangement is requirements that may create significant final exceptions for value-based set out in writing, any requirement to challenges for parties that wish to arrangements are available to protect make referrals to a particular provider, develop novel financial arrangements to arrangements even when payments from practitioner, or supplier must be set out facilitate their successful participation the payor are made on a FFS basis. Even in writing and signed by the parties, and in health care delivery and payment so, we are not finalizing a requirement the requirement may not apply if the reform efforts (84 FR 55776 through that remuneration is consistent with fair patient expresses a preference for a 55778). Most of the commonly relied market value and not determined in any different provider, practitioner, or upon exceptions to the physician self- manner that takes into account the supplier; the patient’s insurer referral law include requirements volume or value of a physician’s determines the provider, practitioner, or related to compensation that may be referrals or the other business generated supplier; or the referral is not in the difficult to satisfy where the by the physician for the entity. Instead, patient’s best medical interests in the arrangement is designed to foster the we are finalizing a carefully woven physician’s judgment. behavior shaping necessary for the fabric of safeguards, including We believe that well-coordinated and provision of high-quality patient care requirements incorporated through the managed patient care is the cornerstone that is not reimbursed on a traditional applicable value-based definitions. The of a value-based health care system. We FFS basis. Requirements that disincentives for overutilization, solicited comments regarding whether it compensation be set in advance, fair stinting on patient care, and other harms is necessary to include in the exceptions market value, and not take into account the physician self-referral law was for value-based arrangements, a the volume or value of a physician’s intended to address that are built into requirement that the parties to a value- referrals or the other business generated the value-based definitions will operate based arrangement engage in value- by the physician may inhibit the in tandem with the requirements based activities that include, at a innovation necessary to achieve well- included in the exceptions and are minimum, the coordination and coordinated care that results in better sufficient to protect against program and management of the care of the target health outcomes and reduced patient abuse. This is especially true patient population or that the value- expenditures (or reduced growth in where a value-based enterprise assumes based arrangement is reasonably expenditures). For example, depending full or meaningful downside financial designed, at a minimum, to coordinate on their structure, arrangements for the risk. and manage the care of the target patient distribution of shared savings or population (84 FR 55780). We are not repayment of shared losses, gainsharing The beneficiary’s right to choose a including such a requirement in the arrangements, and pay-for-performance provider of care is expressed and final exceptions at § 411.357(aa). In our arrangements that provide for payments reinforced in almost every aspect of the experience, and as confirmed by to refrain from ordering unnecessary Medicare program. We believe that a commenters, most arrangements that care, among others, may be unable to patient’s control over who provides his qualify as value-based arrangements, by satisfy the requirements of an existing or her care directly contributes to their nature, have care coordination and exception to the physician self-referral improved health outcomes and patient management at their heart, eliminating law. Thus, rather than being a check on satisfaction, enhanced quality of care the need for an explicit requirement. bad actors, in the context of value-based and efficiency in the delivery of care, Moreover, we remain concerned that care models, the physician self-referral increased competition among providers, requiring every value-based law may actually be having a chilling and reduced medical costs, all of which arrangement to include the coordination effect on models and arrangements are aims of the Medicare program. and management of care of the target designed to bend the cost curve and Protection of patient choice is especially patient population could leave improve quality of care to patients. critical in the context of referrals made beneficial value-based arrangements We have carefully considered the by a physician to an entity with which that do not directly coordinate or CMS RFI comments, the comments to the physician has a financial manage the care of the target patient the proposed rule, and anecdotal relationship, as the physician’s financial population without access to any of the information shared by stakeholders self-interest may impact, if not infringe new exceptions at § 411.357(aa) and regarding the impact of the specific on, patients’ rights to control who potentially unable to meet the requirements that compensation must furnishes their care. For this reason, we requirements of any existing exception be set in advance, fair market value, and are making compliance with to the physician self-referral law. not determined in any manner that takes § 411.354(d)(4)(iv) a requirement of the Finally, we have endeavored to be as into account the volume or value of a exceptions that apply to employment neutral as possible with respect to the physician’s referrals or the other arrangements, personal service types of value-based enterprises and business generated by the physician, arrangements, or managed care contracts value-based arrangements the final law enforcement and judicial activity that purport to restrict or direct exceptions will cover in order to allow related to these requirements, and our physician referrals, including the for innovation and experimentation in own observations from our work exceptions at § 411.357(aa) for value- the health care marketplace and so that (including our work on fraud and abuse based arrangements. We are finalizing in compliance with the physician self- waivers for CMS accountable care and all three exceptions at § 411.357(aa) a referral law is not the driver of other models). We remain concerned separate requirement to ensure that, innovation or the barrier to innovation. that the inclusion of such requirements regardless of the nature of the value- The final exceptions at § 411.357(aa) are in the exceptions for value-based based arrangement and its value-based applicable to the compensation

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arrangements between parties in a CMS- law as having little value if the safe or the physician who is a party to the sponsored model, program, or other harbors to the anti-kickback statute are value-based arrangement and the initiative (provided that the not revised to mirror the exceptions characteristics of the value-based compensation arrangement at issue noting that participants are likely to arrangement. We disagree with the qualifies as ‘‘value-based arrangement’’), abide by the more stringent commenters that one exception would and we believe that compensation requirements included in the safe be less complex and burdensome, and arrangements between parties in a CMS- harbors. do not believe that a one-size fits all sponsored model, program, or other Response: We share the commenters’ approach to exceptions to the physician initiative can be structured to satisfy the concerns about dual regulatory schemes self-referral law to facilitate the requirements of at least one of the and the challenges for stakeholders in transition to a value-based health care exceptions at § 411.357(aa). It is our ensuring compliance with both. We delivery and payment system is expectation that the suite of value-based have worked closely with OIG to ensure possible. exceptions finalized here will eliminate consistency between our respective Comment: The majority of the need for any new waivers of section rules to reduce administrative burden commenters strongly urged CMS to not 1877 of the Act for value-based on the regulated industry. As noted in include in any of the final value-based arrangements. (We note that parties are section II.A.2.a. of this final rule, the exceptions the ‘‘traditional’’ not required to utilize the value-based final value-based definitions at requirements that compensation is set in exceptions and may elect to use the § 411.351 are aligned in nearly all advance, fair market value, and not waivers applicable to the CMS- respects with OIG’s final value-based determined in any manner that takes definitions. However, because of the sponsored models, programs, or into account the volume or value of a fundamental differences in the statutory initiatives in which they participate.) physician’s referrals or other business structure, operation, and penalties However, the final exceptions are not generated by the physician for the between the physician self-referral law limited to CMS-sponsored models (that entity. Some commenters also requested and the anti-kickback statute, complete is, Innovation Center models) or that we not include a requirement that alignment between the exceptions to the establish separate exceptions with the value-based arrangement is physician self-referral law and safe different criteria for arrangements that commercially reasonable. The exist outside of CMS-sponsored models. harbors to the anti-kickback statute is commenters opined that inclusion of At § 411.357(aa)(1), we are finalizing not feasible. Reflecting these statutory these standards in the context of value- an exception that applies to a value- differences, the regulations that CMS based arrangement where a value-based and OIG are finalizing include based health care delivery and payment enterprise has, during the entire intentional differences that allow the is neither appropriate nor necessary, duration of the arrangement, assumed anti-kickback statute to provide and asserted that inclusion of these full financial risk from a payor for ‘‘backstop’’ protection for Federal health standards would create a barrier to the patient care services for a target patient care programs and beneficiaries against transition to a value-based health care population. At § 411.357(aa)(2), we are abusive arrangements that involve the delivery and payment system, leaving finalizing an exception that applies to a exchange of remuneration intended to the value-based exceptions of limited or value-based arrangement under which induce or reward referrals under no utility. These commenters noted that the physician is at meaningful downside arrangements that could potentially nonmonetary remuneration, in financial risk for failure to achieve the satisfy the requirements of an exception particular, that is provided under a value-based purposes of the value-based to the physician self-referral law. In this value-based arrangement is not enterprise during the entire duration of way, the CMS and OIG regulations, necessarily consistent with the fair the arrangement. Finally, at operating together, balance the need for market value of items or services § 411.357(aa)(3), we are finalizing an parties entering into arrangements that provided by the recipient (or value- exception that applies to any value- are subject to both laws to develop and based activities undertaken by the based arrangement, provided that the implement value-based arrangements recipient) and asserted that requiring arrangement satisfies specified that avoid the strict liability referral and that such compensation is fair market requirements. billing prohibitions of the physician value would impact the ability of parties We received the following general self-referral law, while ensuring that law to share necessary infrastructure, care comments on the value-based enforcement, including OIG, can take coordination, and patient engagement exceptions and our responses follow. action against parties engaging in tools. The commenters also stated that Comment: Several commenters arrangements that are intentional many value-based arrangements are, by encouraged CMS and OIG to work kickback schemes. nature, related to the volume or value of together to more closely align their final Comment: A few commenters referrals, and requiring that rules. The commenters expressed recommended that we finalize one all- compensation is not determined in any concern that notable differences inclusive exception to the physician manner that takes into account the between the two rules, if finalized as self-referral law for any type of value- volume or value of a physician’s proposed, would create a dual based arrangement rather than the three- referrals or other business generated by regulatory environment, where a value- exception structure proposed. These the physician would limit the utility of based arrangement could meet the commenters asserted that replacing the the exceptions. Finally, a few requirements for protection under one three value-based exceptions with one commenters asserted that there is no law but not the other, which could exception would reduce the complexity need for a commercial reasonableness hinder the transition to a value-based of the regulatory scheme and the burden standard in light of the definition of health care delivery and payment associated with the transition to value- ‘‘value-based purpose,’’ which the system. These commenters expressed based health care delivery and payment. commenters interpreted to serve the concern with administrative burden and Response: We are finalizing our same function and require the same compliance concerns in the event that proposed structure with three analysis as that of the commercial the OIG and CMS final rules are not exceptions to the physician self-referral reasonableness of an arrangement. aligned. One commenter viewed the law that apply based on the level of risk These commenters also asserted that exceptions to the physician self-referral assumed by the value-based enterprise value-based arrangements are, by their

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nature, commercially reasonable. In quality are likely commercially program, or initiative as requested by contrast, a few commenters urged CMS reasonable. Even so, we believe that this the commenters. Importantly, the to include requirements that the value- additional program integrity safeguard existing model-specific or program- based arrangement is commercially is warranted. As defined at final specific fraud and abuse waivers will reasonable, the compensation is not § 411.351, ‘‘commercially reasonable’’ remain in place and are not affected by determined in any manner that takes means that the particular arrangement the existence of the value-based into account the volume or value of a furthers a legitimate business purpose of exceptions. Also, the Secretary retains physician’s referrals or other business the parties to the arrangement and is authority under section 1115A(d)(1) of generated by the physician, and the sensible, considering the characteristics the Act to waive certain fraud and abuse compensation is fair market value in of the parties, including their size, type, laws as necessary solely for purposes of order to protect against program or scope, and specialty. The requirement at testing payment and service delivery patient abuse. The commenters did not final § 411.357(aa)(3)(vi) will ensure that models developed by the Innovation explain why omitting these parties to a value-based arrangement Center, and this authority can be used requirements creates a risk of program structure the arrangement in a manner to address future financial arrangements or patient abuse. intended to further their legitimate under Innovation Center models that Response: As noted above and for the business purposes, which must include may not fit within the final value-based reasons described in the proposed rule, achievement of the value-based exceptions framework. Finally, the final we are not including in the final purpose(s) of the value-based enterprise fraud and abuse waivers issued in exceptions at § 411.357(aa) the of which they are participants. connection with the Shared Savings traditional requirements that Comment: Several commenters urged Program are permanent waivers that are compensation is set in advance, us to create separate exceptions for unaffected by the value-based consistent with fair market value of the CMS-sponsored model arrangements exceptions finalized in this final rule. value-based activities provided under and CMS-sponsored model patient Comment: Some commenters sought the value-based arrangement, and not incentives consistent with existing clarification regarding the interaction determined in any manner that takes waivers for these programs that would between the value-based exceptions and into account the volume or value of a work in conjunction with or mirror the existing exceptions to the physician physician’s referrals or the other safe harbors at proposed 42 CFR self-referral law. A few commenters business generated by the physician for 1001.952(ii). Some commenters questioned whether an entity currently the entity. However, we are requiring expressed concern over parties having relies on the exception for bona fide that the compensation arrangement is to identify and comply with an employment relationships at commercially reasonable. As we stated applicable exception to the physician § 411.357(c) to protect compensation in the proposed rule, disincentives for self-referral law and also comply with arrangements with employed physicians overutilization, stinting on patient care, the safe harbor under the anti-kickback may continue to utilize the exception at and other harms the physician self- statute for CMS-sponsored programs. § 411.357(c), or whether its referral law was intended to address are Several other commenters requested compensation arrangements that qualify built into the value-based definitions assurance that all existing fraud and as value-based arrangements must and will operate in tandem with the abuse waivers for CMS-sponsored satisfy the requirements of one of the requirements included in the exceptions models, programs, and initiatives will new value-based exceptions at to protect against program and patient remain in effect as implemented and § 411.357(aa). The commenters stated a abuse (84 FR 55777). It is this will not be impacted by the new desire to continue to utilize the framework that allows us to forgo the exceptions for value-based exception at § 411.357(c) for value-based requirements in the current exceptions arrangements. arrangements with employed physicians to the physician self-referral law that Response: The commenters did not rather than the new value-based may create significant challenges to provide any specific examples of exceptions. The commenters also sought innovation in a value-based health care existing financial arrangements under a guidance regarding whether the value- delivery and payment system. CMS-sponsored model, program, or based exceptions could be utilized We are cognizant that requirements other initiative between an entity and a concurrently with ‘‘traditional that remuneration be fair market value physician (or immediate family exceptions’’ when an entity has and not take into account the volume or member) to which none of the multiple compensation arrangements value of a physician’s referrals or the exceptions at final § 411.357(aa)(3) with the same physician and, if so, how other business generated by a physician would apply. We carefully evaluated requirements of the exceptions, such as may inhibit the innovation necessary to our final exceptions against the existing the requirement that compensation is achieve well-coordinated care that CMS-sponsored models, programs, and fair market value, would apply if the results in better health outcomes and other initiatives, and are confident that parties are utilizing multiple exceptions. reduced expenditures (or reduced at least one of the new exceptions at A few commenters requested that we growth in expenditures). We agree with § 411.357(aa) is applicable to the types confirm that compensation for care the commenters that these standards, of compensation arrangements coordination, quality improvement, and which play an important role in the contemplated under each model, cost containment activities are not other exceptions to the physician self- program, or initiative. The design of the prohibited under the exception for bona referral law, may be counter to the final exceptions should result in a fide employment relationships or the underlying policy goals of value-based smooth transition from participation in services exceptions at § 411.355. health care delivery and payment. We a CMS-sponsored model, program, or Response: Nothing in this final rule also agree that compensation initiative if the parties wish to continue mandates the use of the value-based arrangements that qualify as value-based their compensation arrangements and exceptions. As we have stated before, arrangements under the new value- rely on the new value-based exceptions parties may use any applicable based definitions at § 411.351, satisfy all at § 411.357(aa). Thus, it is not exception to the physician self-referral the requirements of an applicable necessary to establish an exception law provided that all the requirements exception at final § 411.357(aa), and are specific to arrangements undertaken of the exception are satisfied (66 FR 916 aimed at reducing cost and improving pursuant to a CMS-sponsored model, and 72 FR 51047). The value-based

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exceptions, however, are only available requirements under the value-based the value-based arrangement with a 12- to parties that qualify under the value- exceptions applicable to these providers month timeframe. Thus, under this final based definitions. Parties may utilize and suppliers. We understand the rule, the value-based enterprise must be the exception at § 411.357(c) to protect challenges faced by rural providers and financially responsible (or must be a value-based arrangement, however, small physician practices, including contractually obligated to be financially the value-based arrangement must resource limitations, and appreciate the responsible within the 12 months satisfy all the requirements of the important role of rural providers as a following the commencement date of exception in order to avoid the referral safety net for their communities. The the value-based arrangement) on a and billing prohibitions of the physician value-based arrangements exception prospective basis for the cost of all self-referral law. The same is true with finalized at § 411.357(aa)(3) is patient care items and services covered respect to the availability of and applicable to all value-based by the applicable payor for each patient compliance with any other existing arrangements, regardless of the size or in the target patient population for a exception that is applicable to the nature of the parties to the arrangement, specified period of time. As described in parties’ financial relationship or the the financial risk undertaken by the more detail below, we believe that physician’s referrals of designated value-based enterprise, or the financial extending this ‘‘pre-risk period’’ to 12 health services. The exception for bona risk undertaken by the physician who is months is consistent with the timeframe fide employment relationships includes a party to the value-based arrangement. established in the Shared Savings requirements that the arrangement is We expect that this exception may be Program pre-participation waiver (80 FR commercially reasonable, the utilized by rural providers and small 66742), and, as with the Shared Savings compensation paid to the physician is physician practices more frequently Program pre-participation waiver, we do fair market value, and the compensation than the full financial risk and not believe that establishing a 12-month is not determined in any manner that meaningful downside financial risk pre-risk period poses a risk of program takes into account the volume or value exceptions. As discussed elsewhere in or patient abuse. of the physician’s referrals. None of this final rule, we are not requiring a As we stated in the proposed rule, full these requirements are included in the financial contribution from the recipient financial risk may take the form of final exceptions at § 411.357(aa). Thus, of remuneration under any of our final capitation payments (that is, a depending on the terms and conditions value-based exceptions. We believe this predetermined payment per patient per of the value-based arrangement, the addresses some of the commenters’ month or other period of time) or global arrangement may be unable to satisfy all concerns. budget payment from a payor that the requirements of the exception for compensates the value-based enterprise (1) Full Financial Risk (§ 411.357(aa)(1)) bona fide employment relationships. for providing all patient care items and That determination is, of course, fact- We proposed at § 411.357(aa)(1) an services for a target patient population specific. exception to the physician self-referral for a predetermined period of time (84 Comment: Several commenters law (the ‘‘full financial risk exception’’) FR 55779). We noted that the full expressed concern that the requirements that applies to value-based financial risk exception would not of the value-based definitions and arrangements between VBE participants prohibit other approaches to full exceptions could disadvantage rural in a value-based enterprise that has financial risk and sought comment on providers and small physician practices assumed ‘‘full financial risk’’ for the other approaches to full financial risk that desire to participate in value-based cost of all patient care items and that may exist currently or that arrangements, and that these providers services covered by the applicable payor stakeholders anticipate for the future. and suppliers face greater challenges for each patient in the target patient We are not prescribing a specific when transitioning to a value-based population for a specified period of manner for the assumption of full health care delivery and payment time; that is, the value-based enterprise financial risk in this final rule. system. The commenters stated that is financially responsible (or is A value-based enterprise need not be these challenges include financial contractually obligated to be financially a separate legal entity with the power to burdens, the complexity of the value- responsible within the 6 months contract on its own (84 FR 55779). based exceptions and definitions, and following the commencement date of Rather, networks of physicians, entities inadequate resources to successfully the value-based arrangement) on a furnishing designated health services, implement value-based arrangements. prospective basis for the cost of such and other components of the health care Commenters urged CMS to make patient care items and services. For system collaborating to achieve the revisions to the proposed value-based Medicare beneficiaries, we noted that goals of a value-based health care exceptions to accommodate rural we intend for this requirement to mean system, organized with legal formality providers and small physician practices, that the value-based enterprise, at a or not, may qualify as a value-based specifically suggesting that we either minimum, is responsible for all items enterprise. A value-based enterprise limit the number of requirements under and services covered under Parts A and may assume legal obligations in the value-based exceptions that would B. We are finalizing the exception with different ways. For example, all VBE be applicable to rural providers and one modification. We are extending the participants in a value-based enterprise small physician practices to help period of time during which the could each sign the contract for the alleviate the burden associated with exception will be available prior to the value-based enterprise to assume full complying with the exceptions or value-based enterprise’s financial financial risk from a payor. Or, the VBE establish a separate, less onerous responsibility for the cost of all patient participants in a value-based enterprise exception applicable only to these care items and services covered by the could have contractual arrangements providers and suppliers. applicable payor for each patient in the among themselves that assign risk Response: We are not persuaded that target patient population. Specifically, jointly and severally. Or, similar to an exception for value-based we are replacing the requirement that physicians in an independent practice arrangements that is exclusively the value-based enterprise is association (IPA), VBE participants available to rural providers and small contractually obligated to be financially could vest the authority to bind all VBE physician practices is necessary, nor are responsible within the 6 months participants in the value-based we revising the exceptions to limit the following the commencement date of enterprise with a designated person that

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contracts for the assumption of full diminished. Even when downstream by the recipient of the remuneration for financial risk on behalf of the value- contractors are paid on something other patients in the target patient population based enterprise and its VBE than a full-risk basis, the value-based addresses this issue. We intend for this participants. As explained in more enterprise itself is incented to monitor to be an objective standard; that is, the detail below, we are not requiring that for appropriate utilization, referral remuneration must, in fact, be for or the value-based enterprise is a separate patterns, and quality performance, result from value-based activities legal entity with contracting powers or which we believe helps to reduce the undertaken by the recipient of the requiring a particular structure for the risk of program or patient abuse. remuneration for patients in the target value-based enterprise. Accordingly, these kinds of payment patient population (84 FR 55780). The The value-based enterprise’s financial limitations provide stronger and more final exception, therefore, will not risk must be prospective; that is, the effective safeguards against increases in protect payments for referrals or any contract between the value-based the volume and costs of services than other actions or business unrelated to enterprise and the payor may not allow the physician self-referral law ever the target patient population, such as for any additional payment to placed on the FFS system. Nonetheless, general marketing or sales arrangements. compensate for costs incurred by the as a precaution, we proposed and are With respect to in-kind remuneration, it value-based enterprise in providing finalizing several important safeguards is our position that the remuneration specific patient care items and services in the full financial risk exception. must be necessary and not simply to the target patient population, nor may The value-based enterprise must be at duplicate technology or other any VBE participant claim payment full financial risk during the entire infrastructure that the recipient already from the payor for such items or duration of the value-based arrangement has. Finally, although the remuneration services. We define ‘‘prospective basis’’ for which the parties to the arrangement must be for or result from value-based in this final rule at § 411.357(aa)(1)(vii) seek protection (84 FR 55780). Thus, the activities undertaken by the recipient of to mean that the value-based enterprise final exception will not protect the remuneration for patients in the has assumed financial responsibility for arrangements that begin at some point target patient population, parties would the cost of all patient care items and during a period when the value-based not be prohibited from using the services covered by the applicable payor enterprise has assumed full financial remuneration for the benefit of patients prior to providing patient care items and risk, but that continue into a timeframe who are not part of the target patient services to patients in the target patient when the safeguards intrinsic to full- population. population. As noted in the proposed financial risk payment, such as the In the proposed rule, we discussed rule (84 FR 55780) and discussed more disincentive to overutilize or stint on the fact that integrated into most of the fully below, the final definition of ‘‘full medically necessary care, no longer CMS-sponsored models is a requirement financial risk’’ does not prohibit a payor exist. However, one or both of the other that any remuneration between parties from making payments to a value-based exceptions finalized at § 411.357(aa)(2) to an allowable financial arrangement is enterprise to offset losses incurred by and (3) may be available to protect not provided as an inducement to the enterprise above those prospectively value-based arrangements that exist reduce or limit medically necessary agreed to by the parties. The payment of during a period when the value-based items or services to any patient in the shared savings or other incentive enterprise is not at full financial risk (or assigned patient population (84 FR payments for achieving quality, contractually obligated to be at full 55780). This is an important safeguard performance, or other benchmarks are financial risk within the 12 months for patient safety and quality of care, also not prohibited. The final exception following the commencement of the regardless of whether Medicare is the is available to protect value-based value-based arrangement) for the cost of ultimate payor for the services. arrangements entered into in all patient care items and services Therefore, we proposed a requirement at preparation for the implementation of covered by the applicable payor for each § 411.357(aa)(1)(iii) that remuneration the value-based enterprise’s full patient in the target patient population. under a value-based arrangement is not financial risk payor contract where such We also proposed and are finalizing a provided as an inducement to reduce or arrangements begin after the value- requirement that the remuneration limit medically necessary items or based enterprise is contractually under the value-based arrangement is services to any patient, whether in the obligated to assume full financial risk for or results from value-based activities target patient population or not. We are for the cost of patient care items and undertaken by the recipient of the finalizing this requirement at services for the target patient population remuneration for patients in the target § 411.357(aa)(1)(iii). We note that but prior to the date the provision of patient population. As we discussed in remuneration that leads to a reduction patient care items and services under the proposed rule, we recognize that in medically necessary services would the contract begin. As stated above, the payments under certain incentive be inherently suspect and could final exception limits this period to the payment arrangements, such as implicate sections 1128A(b)(1) and (2) 12 months prior to the effective date of gainsharing arrangements, may be of the Act. the full financial risk payor contract. In difficult to tie to specific items or In addition, we proposed to protect other words, the value-based enterprise services furnished by a VBE participant only those value-based arrangements must be at full financial risk within the (84 FR 55780). We do not interpret the under which remuneration is not 12 months following the requirement at § 411.357(aa)(1)(ii) as conditioned on referrals of patients who commencement of the value-based mandating a one-to-one payment for an are not part of the target patient arrangement. item or service (or other value-based population or business not covered We believe that full financial risk is activity). Gainsharing payments, shared under the value-based arrangement (84 one of the defining characteristic of a savings distributions, and similar FR 55781). Although this requirement is mature value-based payment system. payments may result from value-based similar to the requirement that When a value-based enterprise is at full activities undertaken by the recipient of remuneration is for or results from financial risk for the cost of all patient the payment for patients in the target value-based activities undertaken by the care services, the incentives to order patient population. The requirement recipient of the remuneration for unnecessary services or steer patients to that the remuneration is for or results patients in the target patient population, higher-cost sites of service are from value-based activities undertaken as discussed in the proposed rule, it is

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intended to address a different concern. regulations in the group practice rules at monitor and confirm that an We are finalizing at § 411.357(aa)(1)(iv) § 411.352(d)(2) and (i), the exception for arrangement is operating as intended. the requirement that the remuneration is physician recruitment at We received the following comments not conditioned on referrals of patients § 411.357(e)(4)(iv), and the exception for and our responses follow. who are not part of the target patient assistance to compensate a Comment: Several commenters urged population or business not covered nonphysician practitioner at CMS to expand the definition of ‘‘full under the value-based arrangement. The § 411.357(x)(2) (84 FR 55781). We are financial risk’’ at § 411.357(aa)(1)(vii) to final exception does not protect finalizing at § 411.357(aa)(3)(xi) the exclude defined sets of patient care arrangements where one or both parties requirement that records of the items or services for a target patient have made referrals or other business methodology for determining and the population, or specific diseases or conditions, similar to episode-based not covered by the value-based actual amount of remuneration paid bundled payment models. By way of arrangement a condition of the under the value-based arrangement example, commenters suggested that remuneration. By way of example, if the must be maintained for a period of at full financial risk should be limited to value-based enterprise is at full least 6 years and made available to the financial risk for the total cost of care for only the items and services required to Secretary upon request. We expect that treat patients with diabetes or during an all of a commercial payor’s enrollees in parties are familiar with these a particular county, the exception will episode of care for a knee replacement. requirements and that the maintenance not protect a value-based arrangement Commenters perceived the full financial of such records is part of their routine between an entity and a physician that risk exception as having limited utility, business practices. are VBE participants in the value-based asserting that the health care industry is enterprise if the entity requires the As we discussed in the proposed rule currently not well-positioned to take on physician to refer Medicare patients (84 FR 55781), we consider the full financial risk for all patient care who are not part of the target patient exception at § 411.357(aa)(1) items and services covered by the population for designated health comparable, in some respects, to the applicable payor for each patient in the services furnished by the entity. exception at § 411.357(n) for risk- target patient population. Commenters Similarly, the exception will not protect sharing arrangements, which, as we suggested that allowing protection a value-based arrangement related to noted in Phase II, is intended to be a under the full financial risk exception knee replacement services furnished to broad exception with maximum for arrangements where the parties take Medicare beneficiaries if the flexibility, covering all risk-sharing on full financial risk for only a subset arrangement requires that the physician compensation paid to a physician by of items or services covered by the perform all his or her other orthopedic any type of health plan, insurance applicable payor, such as joint surgeries at the hospital. company, or health maintenance replacement surgery, would increase the We also proposed and are finalizing a organization (that is, any ‘‘managed care utility of the full financial exception requirement at § 411.357(aa)(1)(v) organization’’ (MCO)) or IPA, provided and help to facilitate the transition to a related to directing a physician’s the arrangement relates to enrollees and value-based health care delivery and referrals to a particular provider, meets the conditions set forth in the payment system. Response: We are not revising the practitioner, or supplier (84 FR 55781). exception (69 FR 16114). A downstream definition of ‘‘full financial risk’’ to Under final § 411.357(aa)(1)(v), if arrangement that creates an indirect mean a defined set of patient care items remuneration paid to the physician is compensation arrangement between an or services (similar to episode-based conditioned on the physician’s referrals MCO or IPA and a physician is included to a particular provider, practitioner, or bundled payment models) or anything within the scope of the exception for less than financial responsibility, on a supplier, the value-based arrangement risk-sharing arrangements. (See section complies with both of the following prospective basis, for the cost of all II.A.2.b.(4) of this final rule for a full patient care items and services covered conditions: (A) The requirement to discussion of the applicability or the make referrals to a particular provider, by the applicable payor for each patient exception for risk-sharing arrangements practitioner, or supplier must be set out in the target patient population. To do at § 411.357(n).) Although the final in writing and signed by the parties; and so could undermine the Secretary’s exception at § 411.357(aa)(1) is not (B) the requirement to make referrals to policy goals of moving more health care limited to ‘‘risk-sharing compensation’’ a particular provider, practitioner, or providers and practitioners into two- supplier may not apply if the patient paid to a physician, but, rather, covers sided risk payment structures. The full expresses a preference for a different any type of remuneration paid under a financial risk exception applies to provider, practitioner, or supplier; the value-based arrangement that is for or value-based arrangements between VBE patient’s insurer determines the results from value-based activities participants in a value-based enterprise provider, practitioner, or supplier; or undertaken by the recipient of the that has assumed ‘‘full financial risk’’ on the referral is not in the patient’s best remuneration, for the reasons discussed a prospective basis for the cost of all medical interests in the physician’s throughout section II.A. of this final patient care items and services covered judgment. See section II.B.4. of this final rule, we believe that the flexibility by the applicable payor for each patient rule for a complete discussion of our provided in the exception for risk- in the target patient population for a interpretation of this requirement. sharing arrangements is also warranted specified period of time. It also applies Finally, we proposed to require that in the full financial risk exception. to a value-based arrangement between records of the methodology for Finally, like the exception at the value-based enterprise (if it is an determining and the actual amount of § 411.357(n) for risk-sharing entity as defined at § 411.351) and a remuneration paid under the value- arrangements, we did not propose, nor physician who is a VBE participant in based arrangement be maintained for a are we finalizing, documentation the value-based enterprise. The value- period of at least 6 years and made requirements in the full financial risk based enterprise must be financially available to the Secretary upon request exception. Nevertheless, it is a good responsible (or be contractually (84 FR 55781). We noted in the business practice to reduce to writing obligated to be financially responsible proposed rule that requirements similar any arrangement between referral within the 12 months following the to this are found in our existing sources as it allows the parties to commencement date of the value-based

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arrangement) on a prospective basis for Similarly, these commenters requested form of stop-loss assurance to mitigate the cost of all patient care items and clarification regarding the ability of the financial risk. services covered by the applicable payor value-based enterprise to offset losses Finally, there is nothing in this final for each patient in the target patient while still meeting the definition of full rule that will prohibit a value-based population for a specified period of financial risk for purposes of the enterprise and a payor from negotiating time. As noted in the proposed rule and exception. Other commenters urged and designing a full financial risk payor above, we believe that full financial risk CMS to allow a value-based enterprise arrangement that would address the is an important defining characteristic to enter into payor arrangements with concerns raised by the commenters. We of a mature value-based health care risk mitigation terms to protect against are not imposing a specific limit on the delivery and payment system (84 FR catastrophic losses, such as risk amount of loss coverage a value-based 55780). When a value-based enterprise corridors, global risk adjustments, enterprise may have, but we caution is at full financial risk for the cost of all reinsurance, stop loss agreements. that we will expect any stop-loss or patient care items and services, the Response: We decline to carve out other risk adjustment provisions to act incentives to order unnecessary services high-cost or specialty items or services as protection for the value-based or steer patients to high-cost sites of from the definition of ‘‘full financial enterprise against catastrophic losses services are diminished. Those same risk.’’ In addition, we do not believe that and not a means by which to shift incentives are not necessarily present in revisions are necessary to specifically material financial risk back to the payor. episode-based bundled payment address mechanisms by which parties to To be clear, the definition of ‘‘full models. Expanding the applicability of a full financial risk payor arrangement financial risk’’ would not permit the full the exception at § 411.357(aa)(1) to may protect against significant or offset of a value-based enterprise’s protect value-based arrangements under catastrophic losses. Further, the losses. Comment: The majority of episode-based bundled payment models exclusion of high-cost or specialty items commenters agreed that the full would result in heightened program and services could potentially interfere financial risk exception should extend integrity concerns, and therefore, would with private payor contracts among to compensation arrangements related to not fall within the Secretary’s authority health care providers, suppliers, and activities taken in preparation for the under section 1877(b)(4) of the Act upon physicians. Importantly, nothing in the implementation of the value-based which we relied to establish this final full financial risk exception or the enterprises’ full financial risk payor exception. We recognize that providers definition of ‘‘full financial risk’’ contract, but requested that CMS extend may not be well-positioned at this time prohibits a value-based enterprise from the 6-month ‘‘pre-risk’’ period to a 12- to transition to a full financial risk contracting with a payor for stop-loss month period. The commenters noted model; however, it is our hope that, by protection or applying risk corridors to that at least 12 months of preparation reducing the burden of the physician limit exposure to significant losses are often necessary to develop and self-referral law, we can provide a related to such high-cost items or operationalize a successful value-based pathway for participants in the value- services or overall expenses. A payor enterprise, even when it will not be based system to evolve and more arrangement may include risk assuming full financial risk. meaningfully participate in the value- mitigation terms such as risk corridors, Commenters highlighted activities such based system. As discussed in detail in global risk adjustments, reinsurance, or as the development of care redesign II.A.2.b.(3). of this final rule, we are stop-loss provisions to protect against protocols, implementation of IT finalizing at § 411.357(aa)(3) an significant and catastrophic losses. As infrastructure, and deployment of care exception applicable to value-based noted above, the financial risk assumed coordinators as necessary for the arrangements where the value-based by the value-based enterprise must be successful undertaking of full financial enterprise assumes less than full prospective; thus, the contract between risk by a value-based enterprise and its financial risk, including arrangements the value-based enterprise and the payor VBE participants. where neither the value-based may not allow for any additional fee for Response: We are persuaded to extend enterprise nor the parties to the service or other payments to the ‘‘pre-risk’’ period under the full particular arrangement have assumed compensate for costs incurred by the financial risk exception to 12 months. any financial risk. That exception may value-based enterprise in providing Under the regulation finalized in this facilitate the entry of providers and specific patient care items and services final rule, the value-based enterprise suppliers into value-based health care to the target patient population, nor may must be financially responsible (or be delivery and payment with the goal of any VBE participant claim payment contractually obligated to be financially moving eventually to two-sided risk from the payor for such items or responsible within the 12 months models. services. following the commencement date of Comment: Several commenters stated Risk mitigation tools are not new to the value-based arrangement) on a that the full financial risk exception CMS-sponsored value-based initiatives. prospective basis for the cost of all would be of limited utility if high-cost In fact, some of the initiatives of the patient care items and services covered or specialty items and services, such as Innovation Center, where Medicare is by the applicable payor for each patient organ transplants or pharmacy benefits, the payor, anticipate potential burdens in the target patient population for a are not carved out of the definition of on participants related to high cost specified period of time. Extending this ‘‘full financial risk.’’ The commenters items and services and the need for pre-risk period to 12 months should noted that, even in more advanced protection against significant and allow parties sufficient time to work value-based arrangements, payors catastrophic losses. These Innovation together in preparation for taking on full exclude high-cost or specialty items or Center initiatives include stop-loss financial risk. A 12-month period is services from the risk arrangement. The provisions to mitigate the risk of overall consistent with the Shared Savings commenters urged CMS to permit a costs being higher than expected. For Program pre-participation waiver, and value-based enterprise to qualify as instance, the Bundled Payment for Care we are not aware of any program being at full financial risk without Improvement, Next Gen ACO, and integrity concerns with respect to the taking on the responsibility for high cost Comprehensive Care for Joint 12-month start-up period to date. We or specialty items and services. Replacement models all include some see no reason why providing for a 12-

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month pre-risk period in the full applicable payor for which the VBE provider, practitioner, or supplier; or financial risk exception would pose a participants have not assumed full the referral is not in the patient’s best risk of program or patient abuse. financial risk, the value-based enterprise medical interests in the physician’s Comment: Some commenters will be at full financial risk for purposes judgment. We have included this explained that certain States, such as of § 411.357(aa)(1). We see no reason language in all three of the value-based California, require providers or why allocating the full financial risk exceptions. suppliers that assume full financial risk among the VBE participants of the Comment: A few commenters for health care items and services are value-based enterprise—as opposed to a questioned whether the full financial required to become licensed as a health single organization (the value-based risk exception is even necessary, plan. The commenters noted that the enterprise) assuming the full financial suggesting that CMS should instead expense and regulatory burden risk—would pose an additional risk of modify the exception at § 411.357(n) for associated with becoming a licensed program or patient abuse. Finally, we risk-sharing arrangements to health plan would deter most providers note that nothing in this final rule accommodate value-based arrangements or suppliers from taking that step, preempts any applicable State law, and where the value-based enterprise is at making the full financial risk exception we remind parties that other exceptions full financial risk. of no utility to them. The commenters may be available to protect Response: We decline to modify the recommended that CMS modify the full arrangements where State law exception at § 411.357(n) to financial risk exception to address this restrictions make satisfaction of certain accommodate value-based arrangements State law issue. Some of the requirements of an exception as requested by the commenters. As commenters also noted that certain challenging or impossible. discussed more fully in section States prohibit a provider or supplier Comment: Many commenters II.A.2.b.(4) of this final rule, the from assuming financial risk for items acknowledged the importance of exception at § 411.357(n) applies to and services other than those typically preserving patient choice but stressed compensation arrangements between an provided by that provider or supplier that, in a value-based health care MCO or an IPA and a physician for type. For instance, a hospital could not delivery and payment system, the services provided to enrollees of a assume financial risk for physician ability to guide a patient to a high health plan, provided that the services and vice versa. quality provider is imperative. The compensation arrangement qualifies as a Response: We are not prescribing a commenters requested that we include risk-sharing arrangement. The specific manner for the assumption of any patient choice requirements in the compensation arrangement between the full financial risk by a value-based regulation text of the value-based MCO or IPA and the physician may be enterprise. The full financial risk exceptions rather than cross-referencing direct or indirect. The exception does exception applies to value-based the requirements of the special rules on not apply to a compensation arrangements between VBE participants compensation at § 411.354(d)(4)(iv). arrangement—whether direct or in a value-based enterprise that has Response: As discussed above, indirect—between a physician and an assumed full financial risk on a protection of patient choice is especially entity that is anything other than an prospective basis for the cost of all critical in the context of referrals made MCO or IPA. The value-based patient care items and services covered by a physician to an entity with which exceptions finalized in this final rule by the applicable payor for each patient the physician has a financial will apply to any value-based in the target patient population for a relationship, as the physician’s financial arrangement, direct or indirect, between specified period of time. Nothing in this self-interest may impact, if not infringe a physician and any entity that final rule precludes the various VBE on, a patient’s right to control who furnishes designated health services to participants in the value-based furnishes his or her care. We are which the physician makes referrals. enterprise from aggregating the risk that finalizing in the full financial risk Thus, the value-based exceptions are each individual VBE participant exception a separate requirement to broader in applicability than the assumes to reach full financial risk for ensure that, regardless of the nature of exception for risk-sharing arrangements. the value-based enterprise as a whole. the value-based arrangement and the As discussed in the proposed rule and For instance, assume a value-based value-based enterprise’s value-based above, we have designed a carefully enterprise has as its VBE participants a purpose(s), the regulation adequately woven fabric of definitions and hospital, skilled nursing facility, protects a patient’s choice of health care exceptions that protect against program physicians, and a full complement of provider, the physician’s medical and patient abuse while providing providers and suppliers that, together, judgment, and the ability of health flexibility for experimentation in the provide all the patient care services insurers to efficiently provide care to design and implementation of value- covered by an applicable payor. If each their members. The final exception based care arrangements (84 FR 55777). of the VBE participants is at full provides at § 411.357(aa)(1)(v) that, if We believe that this framework is financial risk for the cost of all patient remuneration paid to the physician is crucial to achieving the Department’s care items or services that it furnishes, conditioned on the physician’s referrals goal of moving to a value-based health the VBE participants could aggregate to a particular provider, practitioner, or care delivery and payment system, and their risk so that the value-based supplier, the value-based arrangement that most value-based arrangements enterprise is, in total, at full financial complies with both of the following between an entity and a physician in a risk for the cost of all patient care items conditions: (A) The requirement to value-based enterprise that has assumed or services covered by the applicable make referrals to a particular provider, full financial risk should remain within payor. Essentially, the hospital could practitioner, or supplier is set out in this framework. assume full financial risk for hospital writing and signed by the parties; and services, the skilled nursing facility (B) the requirement to make referrals to (2) Value-Based Arrangements With could assume full financial risk for a particular provider, practitioner, or Meaningful Downside Financial Risk to skilled nursing services, the physicians supplier does not apply if the patient the Physician (§ 411.357(aa)(2)) could assume full financial risk for expresses a preference for a different As we stated in the proposed rule, a physician services, etc. As long as there provider, practitioner, or supplier; the few CMS RFI commenters opined that are no services covered by the patient’s insurer determines the the health care industry is in the early

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stages of its transition to value-based definition of ‘‘meaningful downside finalizing this requirement at health care delivery and payment (84 FR financial risk’’ to the 25 percent § 411.357(aa)(2)(ii). We note that this is 55781). After reviewing the comments threshold determined by the Secretary also a good business practice that allows on the CMS RFI and the proposed rule, for the statutory and regulatory the parties to monitor their value-based we acknowledge that, although CMS, exceptions for physician incentive plans arrangements and ensure that they are non-Federal payors, and a significant at section 1877(e)(3)(B) of the Act and operating as intended. For similar segment of the health care industry have § 411.357(d)(2), respectively, which reasons, but also as a safeguard against made advancements in value-based reference ‘‘substantial financial risk’’ to manipulating a value-based arrangement health care delivery and payment, many a physician (or physician group), and to reward referrals, we proposed to physicians and providers are not yet sought comment on whether defining require that the methodology used to prepared or willing to be responsible for meaningful downside financial risk as determine the amount of the the total cost of patient care services for 25 percent of the value of the remuneration is set in advance of the a target patient population. However, remuneration the physician receives furnishing of the items or services for we are also aware that some physicians under the value-based arrangement is which the remuneration is provided. We are participating in or considering appropriate. Upon consideration of the noted that the special rule on participating in alternative payment public comments, we are revising the compensation at § 411.354(d)(1) that models that provide for potential definition of ‘‘meaningful downside deems compensation to be set in financial gain in exchange for the financial risk’’ to mean that the advance when certain conditions are undertaking of some level of downside physician is responsible to repay or met would apply, however, that financial risk. forgo no less than 10 percent of the total provision is merely a deeming provision Financial risk assumed directly by a value of the remuneration the physician and parties are free to confirm physician will likely affect his or her receives under the value-based satisfaction of the requirement another practice and referral patterns in a way arrangement. Because the exception way. We are finalizing this requirement that curbs the influence of traditional does not limit the type of remuneration at § 411.357(aa)(2)(iii). FFS, volume-based payment. Further, that may be provided, under the final Integrated into most of the CMS- financial risk is tied to the achievement regulation, the risk of repayment or the sponsored models is a requirement that or, or failure to achieve, value-based amount the physician must be at risk to any remuneration between parties to an purposes incents the type of behavior- forgo may be no less than 10 percent of allowable financial arrangement is not shaping necessary to transform our the value of the remuneration to account provided as an inducement to reduce or health care delivery system into one that for remuneration that may be provided limit medically necessary items or improves patient outcomes, eliminates in-kind, such as infrastructure or care services to any patient in the assigned waste and inefficiencies, and reduces coordination services. In the proposed patient population (84 FR 55782). This the costs to or growth in expenditures rule, we also provided an alternative is an important safeguard for patient of payors. Arrangements under which a definition to meaningful downside safety and quality of care, regardless of physician is at meaningful downside financial risk that would also include whether Medicare is the ultimate payor financial risk for failure to achieve the physician’s full financial risk to the for the services, and we proposed predetermined cost, quality, or other entity, recognizing that a physician who including this safeguard in the performance benchmarks contain assumes full financial risk for all or a meaningful downside financial risk exception by requiring that inherent protections against program or defined set of patient care services for patient abuse. In recognition of this, we remuneration is not provided as an the target patient population would proposed an exception that would inducement to reduce or limit medically certainly be considered at ‘‘meaningful protect remuneration paid under a necessary items or services to any downside financial risk’’ (84 FR 55782). value-based arrangement where the patient, whether in the target patient We are not finalizing our proposal for an physician is at meaningful downside population or not. Remuneration that expanded definition of ‘‘meaningful financial risk for failure to achieve the leads to a reduction in medically downside financial risk.’’ value-based purpose(s) of the value- necessary services would be inherently based enterprise (the ‘‘meaningful As discussed in the proposed rule, suspect and could implicate sections downside financial risk exception’’) (84 because the exception at 1128A(b)(1) and (2) of the Act. We are FR 55781). Under the meaningful § 411.357(aa)(2) does not require the finalizing this requirement at downside financial risk exception, type of global risk to the value-based § 411.357(aa)(2)(v). although the physician must be at enterprise that is required in the full For the reasons we explained with meaningful downside financial risk for financial risk exception, additional or respect to the full financial risk the entire term of the value-based different requirements are necessary to exception, we proposed to include in arrangement, the remuneration could be protect against program or patient abuse the meaningful downside financial risk paid to or from the physician. (84 FR 55782). We proposed requiring exception requirements that the We proposed to define ‘‘meaningful that the physician must be at remuneration is for or results from downside financial risk’’ to mean that meaningful downside financial risk for value-based activities undertaken by the the physician is responsible to pay the the entire duration of the value-based recipient of the remuneration for entity no less than 25 percent of the arrangement to curtail any gaming that patients in the target patient population; value of the remuneration the physician could occur by adding meaningful remuneration is not conditioned on receives under the value-based downside financial risk to a physician referrals of patients who are not part of arrangement. We stated that we believe during only a short portion of an the target patient population or business that this level of financial risk is high arrangement. We are finalizing this not covered under the value-based enough to curb the influence of requirement at § 411.357(aa)(2)(i). To arrangement; and that records of the traditional FFS, volume-based payment buttress our oversight ability and that of methodology for determining and the and achieve the type of behavior- our law enforcement partners, we actual amount of remuneration paid shaping necessary to facilitate proposed a requirement that the nature under the value-based arrangement achievement of the goals set forth in this and extent of the physician’s financial must be maintained for a period of at final rule (84 FR 55782). We related the risk is set forth in writing. We are least 6 years and made available to the

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Secretary upon request. We are exception covers individual advanced APMs and MIPS APMs, set finalizing our proposals to include these compensation arrangements that qualify financial risk percentages for physicians requirements in the meaningful as value-based arrangements between an ranging from 5 to 9 percent. A few downside financial risk exception at entity and a physician that are VBE commenters suggested that we adopt a § 411.357(aa)(2)(iv), (vi), and (viii). participants in the same value-based threshold of 15 percent for consistency We also proposed a requirement at enterprise, regardless of whether the with the contribution requirement § 411.357(aa)(2)(vii) related to directing value-based enterprise or the entity has under the exception for EHR items and a physician’s referrals to a particular assumed financial risk from a payor. services at § 411.357(w). Some of the provider, practitioner, or supplier (84 The exception is available to protect commenters suggested a scaled FR 55781). Under final value-based arrangements under which approach under which the exception § 411.357(aa)(2)(vii), if remuneration the physician has assumed financial risk initially would require a lower level of paid to the physician is conditioned on from the entity that is party to the downside financial risk and increase to the physician’s referrals to a particular arrangement, and where such risk is tied a higher level of downside financial risk provider, practitioner, or supplier, the to the achievement of the value-based as the physician acclimates to and value-based arrangement complies with purpose(s) of the value-based enterprise participates in the value-based health both of the following conditions: (1) The of which the physician and the entity care delivery and payment system. The requirement to make referrals to a are VBE participants. The value-based commenters suggested that, in the particular provider, practitioner, or exceptions at § 411.357(aa) are designed alternative, CMS could set a lower supplier must be set out in writing and to accommodate movement toward two- threshold for meaningful downside signed by the parties; and (2) the sided financial risk. Although we financial risk in this final rule and requirement to make referrals to a recognize that many physicians may not increase the threshold in a future particular provider, practitioner, or be prepared or willing to assume full (or rulemaking. A few commenters viewed supplier may not apply if the patient substantially full) financial risk, the the 25 percent threshold as appropriate expresses a preference for a different exception at § 411.357(aa)(2) is available and consistent with the physician provider, practitioner, or supplier; the to protect those value-based incentive plan rules applicable to patient’s insurer determines the arrangements under which either Medicare and Medicaid managed care provider, practitioner, or supplier; or meaningful downside financial risk is plans and federal health maintenance the referral is not in the patient’s best incorporated into the physician’s organizations. medical interests in the physician’s compensation. There is great potential Response: We find the commenters’ judgment. See section II.B.4. of this final for behavior-shaping when a physician’s statements and the Deloitte Study rule for a complete discussion of our failure to achieve value-based purposes compelling, and our final regulation interpretation of this requirement. is tied to his or her remuneration. This incorporates a lower threshold for We received the following comments behavior-shaping is critical to meaningful downside financial risk of on the proposed meaningful downside transforming our health care delivery no less than 10 percent of the total value financial risk exception. Our responses system into one that improves patient of the remuneration the physician follow. outcomes, eliminates waste and receives under the value-based Comment: Several commenters inefficiencies, and reduces costs to or arrangement. The Deloitte Study found disagreed with the design of the growth in expenditures of payors. that physicians are willing to tie a meaningful downside financial risk Comment: Most of the commenters greater percentage of their compensation exception and the focus of the exception that addressed the proposed exception (10 percent) to cost and quality on the physician’s level of risk rather at § 411.357(aa)(2), disliked the 25 measures than they have been than that of the entity. The commenters percent threshold for qualification as previously, but physicians still need viewed the meaningful downside meaningful downside financial risk. cost and quality data and analytic tools financial risk exception, as proposed, as These commenters asserted that a 25 that may not be readily available to all being of limited utility and not percent threshold is too high and would physicians to find success in a value- reflective of current real-world financial limit physician participation in value- based health care delivery and payment risk arrangements. Some commenters based health care delivery and payment system. We believe that the assumption urged CMS to modify the meaningful systems. Some of the commenters by a physician of 10 percent downside downside financial risk exception to suggested that physicians who are new financial risk is sufficient to curb the protect arrangements where the entity to value-based health care would be influences of traditional FFS payment assumes the financial risk noting that reluctant to put 25 percent of their systems. We reiterate that, the downside entities, such as hospitals, are better compensation at risk. These financial risk threshold, for purposes of positioned to assume risk from payors. commenters requested that we reduce the exception at § 411.357(aa)(2), relates These commenters expressed concern as the threshold to 10 percent, referencing to remuneration from an entity to a to whether physician behavior has a 2018 Deloitte Survey of U.S. physician. Therefore, we do not believe evolved to the point of being able to physicians 5 that surveyed 624 primary that it is appropriate to link this assume meaningful downside financial care and specialty physicians practicing threshold to the level of risk related to risk as required by the exception. Some in a variety of health care settings and payments for services from a payor, for commenters requested that we permit found that most physicians are willing example, by linking to risk levels under an entity to assume meaningful to tie approximately 10 percent of their MIPS or the Medicare Access and CHIP downside financial risk and then compensation to quality and cost Reauthorization Act (MACRA). allocate the risk down to the physician. measures (the Deloitte Study). Several Comment: Several commenters urged Response: We are not making the other commenters suggested a 5 percent us to revise the definition of modifications suggested by the threshold, noting that certain CMS ‘‘meaningful downside financial risk’’ to commenters. These commenters appear payment systems or programs, such as mirror the risk levels found in OIG’s to misunderstand the scope of the proposed safe harbor for value-based meaningful downside financial risk 5 https://www2.deloitte.com/us/en/insights/ arrangements with substantial downside exception and the intent behind it. The industry/health-care/volume-to-value-based- financial risk. The commenters meaningful downside financial risk care.html (last accessed , 2020). suggested this would avoid the need for

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parties to navigate different regulatory forgo no less than 10 percent of the total $20,000 withhold in this example frameworks under the anti-kickback value of the remuneration the physician exceeds the 10 percent requirement. statute and physician self-referral law. receives under the value-based Comment: Some commenters shared These commenters asserted that the lack arrangement. The scope of the their confusion regarding the proposed of alignment between OIG and CMS meaningful downside financial risk alternative definition of meaningful could create unnecessary burden on the exception is not limited to value-based downside financial risk under which a regulated industry. arrangements under which a physician physician would be considered to be at Response: It appears that the is required to repay remuneration meaningful downside financial risk if comments are based on a perception of already received from the entity. The the physician is financially responsible the meaningful downside financial risk structures of the financial terms of a to the entity on a prospective basis for exception as a parallel to the OIG value-based arrangement described by the cost of all or a defined set of patient substantial downside financial risk safe the commenters are permissible, care items and services covered by the harbor. It is not. Under the substantial provided that the arrangement applicable payor for each patient in the downside financial risk safe harbor, the target patient population for a specified otherwise complies with the value- required financial risk is at the value- period of time. The commenters based definitions and satisfies all the based enterprise level. That is, the requested that CMS revise or omit the requirements of the meaningful value-based enterprise, either directly or alternative definition. The commenters through its VBE participants, must downside financial risk exception. also questioned the utility of the assume substantial downside financial Withholds, repayment requirements, or definition, noting that it is unlikely that risk in order for the safe harbor to be incentive pay tied to meeting goals or an individual physician would assume available. Under the meaningful outcome measures are all permissible full financial risk from an entity (or a downside financial risk exception, the options for structuring the financial payor). focus is on the risk assumed by the terms of a value-based arrangement Response: We agree with the individual physician to the value-based between an entity and a physician, commenters that it is unlikely that an arrangement being assessed for provided that the physician’s downside individual physician would assume full satisfaction of the requirements of the financial risk is tied to the achievement financial risk from the entity with exception. It would be incongruous to of the value-based purpose(s) of the which the physician has the value-based match the risk requirements in the value-based enterprise and not the goals arrangement for the cost of all or a exception and safe harbor as requested of the parties or the arrangement (unless defined set of items and services by the commenters. the parties alone comprise the value- covered by the applicable payor for each Comment: Some commenters based enterprise). In addition, the patient in the target patient population questioned whether the meaningful meaningful downside financial risk for a specified period of time. We are downside financial risk exception exception applies only where the not finalizing this portion of the applies only when a physician is physician is at risk for failure to achieve definition of ‘‘meaningful downside required to repay remuneration already the value-based purpose(s) of the value- financial risk’’ and have omitted the received or whether the exception based enterprise during the entire language from the final regulation. As would also apply to value-based duration of the value-based set forth at final § 411.357(aa)(2)(ix), arrangements under which a portion of arrangement. To illustrate, if a physician meaningful downside financial risk the physician’s compensation is is entitled to a base payment of $50,000 means that the physician is responsible withheld until achievement of the with the ability to earn an additional to repay or forgo no less than 10 percent value-based purpose(s) of the value- $25,000 for performing certain value- of the total value of the remuneration based enterprise. Other commenters based activities, meaningful downside the physician receives under the value- asked whether the meaningful downside financial risk equals at least 10 percent based arrangement. Comment: A number of commenters financial risk exception is applicable to of the total compensation of $75,000, or requested that CMS adopt the same value-based arrangements under which $7,500. The $25,000 that is at risk for the physician is eligible to receive or ‘‘pre-risk’’ period during which the purposes of this example exceeds the 10 would forgo incentive pay, depending exception is applicable prior to the percent requirement. However, unless on whether the physician satisfies the assumption of financial risk that was the receipt of the $25,000 is tied to the goals of the value-based arrangement or included in the proposed full financial the performance or quality standards achievement of the value-based risk exception, but did not explain the required under the value-based purpose(s) of the value-based enterprise, need for a pre-risk period under the arrangement. A few commenters the arrangement will not satisfy the meaningful downside financial risk expressed concern that a repayment requirement at final § 411.357(aa)(2)(i). exception, which applies only to a requirement could result in By way of another example, assume that single arrangement between an entity noncompliance where cash flow or there exists a value-based arrangement and a physician. Most of the other factors impact the ability of the between an entity and a physician that commenters requested a 12-month ‘‘pre- physician to make repayment. The are the only VBE participants in the risk’’ period. commenters also asserted that a value-based enterprise (that is, they are Response: We are not permitting the ‘‘repayment-only’’ policy is inconsistent a value-based enterprise of two) under use of the meaningful downside with the structure of many financial risk which the total remuneration financial risk exception during the arrangements that permit payments to potentially due to the physician is period prior to the physician’s either be withheld, reduced, or repaid $100,000, but $20,000 is withheld and assumption of meaningful downside for not meeting stated goals or payable only upon successfully financial risk. We see no need to allow performance and quality standards. completing the value-based activities the use of the exception at Response: We are clarifying the called for under the arrangement. § 411.357(aa)(2) prior to the physician’s regulation at § 411.357(aa)(2)(ix) to Meaningful downside financial risk assumption of meaningful downside explicitly state that meaningful equals at least 10 percent of the total financial risk and believe that it would downside financial risk means that the compensation of the $100,000 total be a program integrity risk to do so. The physician is responsible to repay or available remuneration, or $10,000. The Secretary’s authority at section

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1877(b)(4) of the Act to issue exceptions the compensation) is set in advance comments, as well as our belief that to the physician self-referral law is before the furnishing of the items or bold reforms to the physician self- limited to only those financial services for which the compensation is referral regulations are necessary to relationships that the Secretary to be paid. In the final meaningful foster the delivery of coordinated determines do not pose a risk of downside risk exception, we are patient care and achieve the Secretary’s program or patient abuse. We are requiring only that the methodology vision of transitioning to a truly value- concerned that unscrupulous parties used to determine the amount of the based health care delivery and payment could ‘‘front load’’ the remuneration by remuneration is set in advance of the system, we proposed an exception at providing high-value remuneration to undertaking of value-based activities for § 411.357(aa)(3) for compensation the physician in the ‘‘pre-risk’’ period which the remuneration is paid. Parties arrangements that qualify as value-based before the physician is required to need not know the ultimate amount of arrangements, regardless of the level of assume meaningful downside financial remuneration under the value-based risk undertaken by the value-based risk. This concern is heightened in light arrangement. Thus, prior to the enterprise or any of its VBE participants of the final definition of ‘‘meaningful commencement of a value-based (the ‘‘value-based arrangement downside financial risk,’’ which sets the arrangement, if the parties agree that a exception’’) (84 FR 55783). threshold for downside financial risk at physician will be paid $10 for each As proposed, the value-based 10 percent of the value of the completed patient assessment (assuming arrangement exception would permit remuneration rather than the 25 percent the completion of the patient both monetary and nonmonetary threshold proposed. Further, we note assessment qualifies as a ‘‘value-based remuneration between the parties, that financial risk in an arrangement activity’’), the methodology for although we considered whether to between an entity and an individual determining the amount of the limit the scope of the exception to physician, which is the foundation of physician’s remuneration is set in nonmonetary remuneration only and the meaningful downside financial risk advance. If the parties later determine to sought comment regarding the impact exception, is not an analog to the increase the payment to $12 for each such a limitation may have on the financial risk assumed by a value-based completed patient assessment, the transition to a value-based health care enterprise, which is the foundation of revised remuneration would be delivery and payment system (84 FR the full financial risk exception. As we considered set in advance, provided that 55783). The final exception is not explained in section II.A.2.b.(1). of this the new remuneration terms are limited to the provision of only final rule, VBE participants may need to effective on a prospective basis only. We nonmonetary compensation. We also develop infrastructure and perform explore our policies regarding proposed to include in the value-based certain activities necessary to be compensation that is set in advance arrangement exception certain successful in a full financial risk with respect to outcome measures in our requirements that were included in the payment model before the enterprise’s discussion of the value-based proposed meaningful downside assumption of full financial risk. The arrangements exception at financial risk exception, some of which same is not true with respect to a § 411.357(aa)(3) in section II.A.1.2.b.(3). were also included in the proposed full physician who assumes meaningful and more generally in section II.D.5. of downside financial risk under an this final rule. financial risk exception (84 FR 55783). individual value-based arrangement We stated that we would interpret these (3) Value-Based Arrangements with an entity. requirements in the same way as in the Comment: Several commenters (§ 411.357(aa)(3)) proposed full financial risk and asserted that the requirement that the The transformation to a value-based meaningful downside financial risk methodology used to determine the health care delivery and payment exceptions, and included them in the amount of the remuneration under the system is heavily dependent on value-based arrangement exception for value-based arrangement is set in physician engagement. As we noted in the same reasons articulated with advance of the undertaking of the value- the proposed rule, commenters on the respect to those exceptions. These based activities for which the CMS RFI stated that, because physician requirements are: The remuneration is remuneration is paid fails to provide decisions drive the overwhelming for or results from value-based activities sufficient flexibility. The commenters majority of all health care spending and undertaken by the recipient of the requested that we ‘‘soften’’ the set in patient outcomes, it is not possible to remuneration for patients in the target advance requirement to accommodate transform health care without a strong, patient population; remuneration is not the change of compensation formulas or aligned partnership between entities provided as an inducement to reduce or other requirements established by furnishing designated health services limit medically necessary items or payors. and physicians (84 FR 55783). Those services to a patient in the target patient Response: We decline to revise the commenters noted that this alignment of population; remuneration is not requirement as requested by the financial interests is key to the behavior conditioned on referrals of patients who commenters. As a safeguard against shaping necessary to succeed in a value- are not part of the target patient gaming or manipulating a value-based based payment system. They also population or business not covered by arrangement to reward referrals, we asserted that permitting physicians and the value-based arrangement; the require in the final meaningful physician groups (especially smaller methodology used to determine the downside financial risk exception that practices that are not used to risk- amount of the remuneration is set in the methodology used to determine the sharing or are too small to absorb advance of the furnishing of the items amount of the remuneration is set in downside financial risk) to assume only or services for which the remuneration advance of the undertaking of the value- upside risk—or, for that matter, no is provided; and records of the based activities for which the financial risk—would encourage more methodology for determining and the remuneration is paid. We interpret this physicians to participate in care actual amount of remuneration paid requirement in the same way as the coordination activities now while they under the value-based arrangement requirement found throughout the continue to build toward entering into must be maintained for a period of at exceptions to the physician self-referral two-sided risk-sharing arrangements. In least 6 years and made available to the law that compensation (or a formula for consideration of these and similar Secretary upon request (84 FR 55783).

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Because the exception at proposed which is included in the regulations for § 411.357(aa)(3)(xii) to mean a § 411.357(aa)(3) would be applicable all three of the value-based exceptions. benchmark that quantifies: (A) even to value-based arrangements where See section II.B.4. of this final rule for Improvements in or maintenance of the neither party, but especially not the a complete discussion of our quality of patient care; or (B) reductions physician, has undertaken any interpretation of this requirement. in the costs to or reductions in growth downside financial risk, we stated that In addition, we proposed in expenditures of payors while safeguards beyond those included in the requirements in the exception at maintaining or improving the quality of meaningful downside financial risk § 411.357(aa)(3) that the value-based patient care. Final § 411.357(aa)(3)(ii) exception are necessary to protect arrangement is set forth in writing and requires that the outcome measures against program or patient abuse (84 FR signed by the parties, and that the against which the recipient of 55783). To address this, we proposed to writing includes a description of the remuneration will be assessed, if any, replace the requirement that value-based activities to be undertaken are objective, measurable, and selected remuneration is not conditioned on under the arrangement; how the value- based on clinical evidence or credible referrals of patients who are not part of based activities are expected to further medical support. To promote clarity, we the target patient population or business the value-based purpose(s) of the value- discuss our proposals and respond to not covered by the value-based based enterprise; the target patient comments on our proposals regarding arrangement with a requirement that population for the arrangement; the type the performance or quality standards remuneration is not conditioned on the or nature of the remuneration; the against which a recipient of volume or value of referrals of any methodology used to determine the remuneration will be assessed in terms amount of the remuneration; and the patients, including patients in the target of the ‘‘outcome measures’’ against performance or quality standards patient population, to the entity or the which the recipient of the remuneration against which the recipient of the volume or value of any other business will be assessed. We discuss this remuneration will be measured, if any generated, including business covered modification more fully below. (84 FR 55783). We believe that the by the value-based arrangement, by the We recognize that outcome measures documentation requirements are self- physician for the entity. We did not may not be applicable to all value-based explanatory. We stated that, although propose to include a requirement that arrangements—for example, an we expect that parties would plan to the remuneration is not determined in arrangement under which a hospital satisfy the writing requirement in provides needed infrastructure to a any manner that takes into account the advance of the commencement of the volume or value of a physician’s value-based arrangement, the special physician in the same value-based referrals or the other business generated rule at § 411.354(e)(3) (modified, in part, enterprise may not require the physician by the physician for the entity. We from existing § 411.353(g)(1)(ii)) would to meet specific outcome measures in sought comments regarding this apply. We are finalizing our proposal order to receive or keep the alternative proposal; the interplay of the regarding the writing and signature infrastructure items or services. alternative requirement with our requirements in the exception at However, if the value-based longstanding policy that the entity of § 411.357(aa)(3). We remind readers that arrangement does include outcome which the physician is a bona fide the value-based purpose of the measures that relate to the receipt of the employee or independent contractor, or arrangement must relate to the value- remuneration—for example, an that is a party to a managed care based enterprise as a whole (which, as arrangement to share the internal cost contract with the physician, may direct noted previously in section II.A.2.a. of savings achieved if the physician the physician’s referrals to a particular this final rule, may be the two parties to meaningfully participates in the provider, practitioner, or supplier, as the value-based arrangement), and that hospital’s quality and outcomes long as the compensation arrangement the exception will not protect a ‘‘side’’ improvement program and reaches or meets specified conditions designed to arrangement between two VBE exceeds predetermined benchmarks for preserve the physician’s judgment as to participants that is unrelated to the his or her personal performance or the patient’s best medical interests, goals and objectives (that is, the value- quality measurement—such outcome avoid interfering in an insurer’s based purposes) of the value-based measures must be determined in operations, and protect patient choice; enterprise of which they are advance of their implementation. The and whether including such an participants, even if the arrangement exception would not protect alternative requirement would impede itself serves a value-based purpose. arrangements where the outcome parties’ ability to achieve the value- We also proposed to require that the measures are set retrospectively (84 FR based purposes on which their value- performance or quality standards 55784). In the proposed rule, to align based arrangement is premised if the against which the recipient of the with OIG’s proposals, we considered entity cannot direct referrals as remuneration will be measured, if any, whether to require that outcome historically permitted. We are finalizing are objective and measurable, and that measures be designed to drive the proposed safeguards that are also such standards must be determined meaningful improvements in physician included in the meaningful downside prospectively, with any changes to the performance, quality, health outcomes, risk exception at § 411.357(aa)(2), but performance or quality standards set or efficiencies in care delivery (84 FR we are not finalizing the alternative forth in writing and applicable only 55784). We sought comment regarding proposal regarding the conditioning of prospectively (84 FR 55784). Because whether we should include this as a remuneration. Final § 411.357(aa)(3)(ix) commenters expressed concern requirement of the value-based requires that the remuneration under regarding the term ‘‘performance or arrangement exception and the burden the value-based arrangement is not quality standards,’’ and in an effort to or cost of including such a requirement. conditioned on referrals of patients who reduce burden on stakeholders by As discussed more fully below, we are are not part of the target patient aligning our terminology with OIG, we not including a requirement in this final population or business not covered are modifying this requirement to apply rule that outcome measures must be under the value-based arrangement. to ‘‘outcome measures’’ rather than designed to drive meaningful However, we are finalizing a ‘‘performance or quality standards’’ and improvements in physician requirement regarding patient choice, defining ‘‘outcome measure’’ at performance, quality, health outcomes,

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or efficiencies in care delivery in this the value-based enterprise; and (2) if the parties complete the required action final rule. value-based activities will be unable to within the applicable timeframe, the As we stated in the proposed rule, we achieve the value-based purpose(s) of ineffective value-based activity is expect that, as a prudent business the arrangement, require the physician deemed to be reasonably designed to practice, parties would monitor their to cease referring designated health achieve at least one value-based purpose arrangements to determine whether they services to the entity, either of the value-based enterprise during the are operating as intended and serving immediately upon the determination entire period during which it was their intended purposes—regardless of that the value-based purpose(s) will not undertaken by the parties. In addition, whether the arrangements are value- be achieved through the value-based during the same timeframes, either the based—and have in place mechanisms activities or within 60 days of such value-based enterprise or one or more of to address identified deficiencies, as determination (84 FR 55785). We sought the parties to the arrangement must appropriate (84 FR 55784). We comment regarding whether we should monitor progress toward attainment of explained that there is an implicit include these as requirements of the the outcome measure(s), if any, against ongoing obligation for an entity to value-based arrangement exception, which the recipient of the remuneration monitor each of its financial how parties could monitor for is assessed. If the monitoring indicates relationships with a physician for achievement of value-based purposes, that an outcome measure is unattainable compliance with an applicable and the burden or cost of including such during the remaining term of the exception. In general, if a physician has a requirement. Specifically, we sought arrangement, the parties must terminate a financial relationship with an entity comment regarding whether we should or replace the unattainable outcome that does not satisfy all the requirements require that monitoring should occur at measure within 90 consecutive calendar of an applicable exception (after specified intervals and, if so, what the days after completion of the monitoring. applying any special rules), section intervals should be. Recognizing that If the parties fail to monitor outcome 1877(a)(1)(A) of the Act prohibits the cost savings, in particular, may take an measures within the prescribed physician from making a referral to the extended period of time to achieve, we timeframes, or fail to terminate or entity for the furnishing of designated also sought comment regarding whether replace an unattainable outcome health services for which payment may to impose time limits with respect to a measure within the prescribed otherwise be made under Medicare, value-based enterprise’s or VBE timeframe, the value-based arrangement section 1877(a)(1)(B) of the Act participant’s determination that the will no longer satisfy the requirements prohibits the entity from presenting or value-based purpose of the enterprise of the exception at § 411.357(aa)(3). We causing to present a claim under will not be achieved through the value- emphasize that parties may amend their Medicare for the designated health based activities required under the value-based arrangements to address services furnished pursuant to a arrangement; that is, require that the identified deficiencies at any time, prohibited referral, and section value-based purpose must be achieved provided that the amendments are 1877(g)(1) of the Act prohibits Medicare within a certain timeframe, such as 3 prospective only, including any from making payment for a designated years, and, if it is not, the value-based amendments to the compensation terms health service that is provided pursuant purpose would be deemed not of the arrangement. We refer readers to to a prohibited referral. Thus, parties achievable through the value-based section II.E.1. of this final rule for a must ensure the compliance of their activities required under the discussion of the provisions on financial relationship with an arrangement. amending arrangements newly codified applicable exception at the time the at § 411.354(d)(1). physician makes a referral for As explained in our response to designated health service(s). comments below, we are including an We believe that requiring immediate In the proposed rule, we discussed at explicit monitoring requirement at final termination of a value-based length the importance of monitoring § 411.357(aa)(3)(vii). Parties seeking to arrangement due to an ineffective value- arrangements that implicate the utilize the value-based arrangement based activity would be physician self-referral law (84 FR exception (or the value-based enterprise counterproductive to the underlying 55784). More specifically, we discussed in which they participate) must monitor goal of encouraging the transition to a the implicit ongoing compliance the value-based arrangement no less value-based health care delivery and monitoring obligation for arrangements frequently than annually, or at least payment system. We are providing for that would qualify for protection under once during the term of the arrangement the noted ‘‘grace periods’’ because we the value-based arrangement exception if the arrangement has a duration of less recognize that parties to a value-based at § 411.357(aa)(3). We provided a than 1 year, to determine whether the arrangement may need time to address detailed example of appropriate parties have furnished the value-based an ineffective value-based activity monitoring of a value-based activities required under the identified through their monitoring. As arrangement for compliance with the arrangement, and whether and how discussed in the proposed rule, the proposed exception at § 411.357(aa)(3), continuation of the value-based physician self-referral law would including the consequences of value- activities is expected to further the prohibit a physician from making based activities that can no longer be value-based purpose(s) of the value- referrals to an entity, and prohibit the considered to be reasonably designed to based enterprise. If the monitoring entity from submitting claims for achieve the value-based purpose(s) of a indicates that a value-based activity is designated health services referred by value-based enterprise (84 FR 55784 not expected to further the value-based the physician, if the value-based through 55785). We considered whether purpose(s) of the value-based enterprise, arrangement does not satisfy all the to include program integrity safeguards the parties must terminate the requirements of an applicable exception that: (1) Require the value-based ineffective value-based activity. The at the time of the referral. This includes enterprise or the VBE participant parties may do so by terminating the the requirement that the value-based providing the remuneration to monitor value-based arrangement or by activities undertaken under the to determine whether the value-based modifying the arrangement to terminate arrangement, by definition, are activities under the arrangement are the ineffective value-based activity after reasonably designed to achieve one or furthering the value-based purpose(s) of completion of the monitoring. If the more value-base purposes of the value-

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based enterprise (84 FR 55785). We physician behavior to always follow the compliance with the physician self- believe that it is necessary to allow recommended care protocol (except referral law. Under final parties an appropriate amount of time to when not medically appropriate for the § 411.357(aa)(3)(vii)(B), the parties address the findings of their monitoring particular patient). Assume that both could terminate the arrangement within without fear of violating the physician single-modality and dual-modality 30 consecutive calendar days of the date self-referral law. We also believe that a screening are designated health services of completion of the monitoring policy under which parties that act payable by Medicare. In this illustration, indicating that the value-based activity quickly to rectify the ineffectiveness of the value-based enterprise is the was ineffective, or the parties could their value-based activities will not run hospital and identified community modify the arrangement to terminate the afoul of the physician self-referral law physicians. (The hospital and the ineffective value-based activity within does not pose a risk of program or community physicians could also be 90 consecutive calendar days of patient abuse. As described above, we part of a larger value-based enterprise.) completion of the monitoring and, if are finalizing a policy under which a The target patient population is patients they choose, replace it with a different value-based activity will be deemed to in the hospital’s service area that receive value-based activity with prospective be reasonably designed to achieve at screening for the particular disease. The applicability. If the parties fail to take least one value-based purpose of the value-based activity is adherence with one of these actions, the physician value-based enterprise during the entire the hospital’s revised care protocol by would be prohibited from making period during which it was undertaken ordering dual-modality screening referrals of any designated health by the parties if the parties terminate the instead of single-modality screening. services to the hospital from the date the arrangement within 30 consecutive The value-based purpose of the value- hospital became aware that its value- calendar days after the completion of based enterprise is to improve the based arrangement no longer satisfied the required monitoring or modify their quality of care for patients in the the requirements of § 411.357(aa)(3) arrangement to terminate the ineffective hospital’s service area by detecting more (unless the arrangement satisfies the value-based activity within 90 cancers and avoiding potential requirements of another applicable consecutive calendar days after unnecessary overtreatment of false exception to the physician self-referral completion of the monitoring. Similarly, positive results. law, which it likely would not). In we are finalizing a policy that provides At its inception, provided that an addition, the hospital would be for 90 consecutive calendar days for arrangement between the hospital and a prohibited from submitting claims to parties to terminate or replace an physician satisfies all the requirements Medicare for any improperly referred outcome measure that their monitoring of § 411.357(aa)(3), the physician’s designated health services. The parties’ indicates is unattainable. referrals of designated health services to lack of knowledge does not affect To illustrate the monitoring the hospital and the hospital’s compliance with the physician self- requirement at final § 411.357(aa)(3)(vii) submission of claims to Medicare for the referral law. The hospital’s (or value- with respect to monitoring of value- designated health services referred by based enterprise’s) failure to monitor as based activities, we apply it here in the the physician would not violate the required under our final regulations for context of the scenario described in the physician self-referral law. However, progress toward achievement of the proposed rule (84 FR 55784 through assume that during the first year of the value-based purpose of the value-based 55785). Assume a hospital revised its arrangement, the hospital determines enterprise would not nullify the parties’ care protocol for screening for a certain through its monitoring that its data noncompliance with the physician self- type of cancer to incorporate newly analysis indicates that the use of dual- referral law. The physician’s referrals issued guidelines from a nationally modality screening not only does not would be prohibited due to the fact that recognized organization. The new result in earlier detection of cancer, but adherence to the revised care protocol guidelines, and the revised protocol, no results in more false positive results, could not, in fact, achieve the value- longer support a single screening invasive biopsies, and unnecessary based purpose of the value-based modality for the disease. Instead, the treatment than single-modality enterprise and would no longer qualify organization recommends screening by screening. As a result, the hospital as a ‘‘value-based activity’’ as that term combining two modalities to achieve determines that the use of dual-modality is defined at final § 411.351. In turn, the more accurate results. The revised screening, despite the nationally- arrangement would not qualify as a guidelines and hospital care protocol recognized recommendations, will not ‘‘value-based arrangement’’ and the are intended to improve the quality of achieve the goal of improving the exception at § 411.357(aa)(3) would no care for patients by detecting more quality of care for patients in the longer be available to protect the cancers and avoiding potential hospital’s service area by detecting more physician’s referrals. unnecessary overtreatment of false cancers and avoiding potential In the proposed rule, we also positive results (which can be frequent unnecessary overtreatment of false considered whether to require the for single-modality screening for the positive results. The compliance recipient of any nonmonetary disease). The hospital observes that monitoring, which occurred in the first remuneration under a value-based most community physicians continue to year of the arrangement, has identified arrangement to contribute at least 15 refer patients to the hospital for single- that the continuation of the value-based percent of the donor’s cost of the modality screening. To align referring activity, dual-modality screening, is no nonmonetary remuneration (84 FR physician practices with the hospital’s longer expected to further the value- 55785 through 55786). We stated that revised care protocol, the hospital offers based purpose of improving the quality requiring financial participation by a to pay physicians $10 for each instance of care for patients in the hospital’s recipient of nonmonetary remuneration that they order dual-modality screening service area by detecting more cancers under a value-based arrangement would in accordance with the revised care and avoiding potential unnecessary help ensure that the nonmonetary protocol during a 2-year period overtreatment of false positive results. remuneration is appropriate and beginning on January 1, 2021. The Once the hospital has identified the beneficial for the achievement of the hospital expects that it would take ineffective value-based activity, the value-based purpose(s) of the value- approximately 2 years to shape hospital has two options to maintain based enterprise, as well as ensuring

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that the recipient will actually use the and patient abuse found in the value- arrangement must be set forth in writing nonmonetary remuneration. However, based definitions and exceptions will and signed by the parties. These we also stated our concern that such a ensure that even ‘‘no risk’’ value-based commenters viewed these requirement could inhibit the adoption arrangements that satisfy all the documentation requirements as of value-based arrangements. As requirements of the definitions and the unnecessary and creating an discussed in section II.D.11.d.(1). of this requirements of § 411.357(aa)(3) will not administrative burden. A few final rule, even though many pose a risk of program or patient abuse. commenters requested confirmation that commenters asserted that the 15 percent Comment: The majority of the writing requirements of contribution requirement under the commenters urged CMS not to limit the § 411.357(aa)(3) may be satisfied existing exception for EHR items and value-based arrangement exception to through a collection of services is burdensome to some nonmonetary remuneration. The contemporaneous documents recipients and acts as a barrier to commenters pointed to value-based evidencing the conduct between the adoption of EHR technology, we are arrangements commonplace in the parties and that a single, formal contract retaining the 15 percent contribution industry, such as payment for adherence is not required. These same commenters requirement for the existing EHR to care protocols or shared savings also requested confirmation that the exception as an important program models that utilize cash incentives to special rule for signature requirements integrity safeguard where the shape physician behavior, improve at § 411.354(e) (formerly at § 411.353(g)) compensation arrangement between the quality, and reduce waste. One would apply to value-based parties is not a value-based commenter expressed concern that, by arrangements. One commenter arrangement. We are concerned, limiting the type of remuneration requested that we eliminate the however, that requiring a 15 percent permissible under the exception, CMS signature requirement from the value- contribution from the recipient of would create a complicated patchwork based arrangement exception to avoid nonmonetary compensation under a of protections depending on the type of what the commenter called ‘‘technical value-based arrangement could inhibit remuneration at issue. violations.’’ the goal of transitioning to a value-based Response: We are not limiting the Response: We do not consider the health care delivery and payment value-based arrangement exception to documentation requirements under the system. We are not including a nonmonetary remuneration only. final value-based arrangement exception contribution requirement in the value- Limiting the exception to nonmonetary burdensome. As discussed above, we based arrangement exception finalized remuneration could undermine the view the documentation requirements in this final rule. Secretary’s goal of robust participation as self-explanatory and a necessary We received the following comments in a value-based health care delivery program integrity safeguard. As we have and our responses follow. and payment system by artificially stated in prior rulemakings, we believe Comment: The vast majority of restricting the types of arrangements that it is a usual and customary business commenters supported the adoption of that are appropriate for protection from practice to document and sign a value-based arrangement exception the prohibitions of the physician self- arrangements and the requirements of and urged CMS to finalize the exception referral law. the exceptions to the physician self- without modification in order to Comment: Commenters nearly referral law do not add burden to these support the transition to a value-based universally opposed the inclusion of a practices. (See, for example, 83 FR health care delivery and payment contribution requirement for 59993.) Nothing in the final value-based system. Commenters expressed nonmonetary remuneration provided arrangement exception at appreciation for the creation of a value- under a value-based arrangement. § 411.357(aa)(3)—or any other exception based exception with no downside risk, Commenters asserted that such a to the physician self-referral law— asserting that the exception will be contribution requirement would create a requires a single formal contract to beneficial to rural providers, small barrier to widespread participation in a satisfy the writing requirement of the practices, and others wanting to explore value-based health care delivery and exceptions. value-based health care delivery and payment system. Many commenters Comment: Several commenters raised payment, but not yet well-positioned to echoed our concerns in the proposed concerns with our discussion in the take on meaningful financial risk. A few rule that a contribution requirement for proposed rule that parties have an commenters suggested that the value- nonmonetary remuneration would implicit obligation to monitor their based arrangement exception is complex unfairly impact small and rural arrangements for compliance with the and burdensome, and could act as a physician practices, providers, and physician self-referral law (84 FR deterrent to participation in value-based suppliers that cannot afford the 55784). These commenters asserted that health care. A small number of contribution (84 FR 55786). the use of the term ‘‘implicit’’ commenters urged us not to finalize the Response: We agree with the introduces ambiguity that is not value-based arrangement exception, commenters that requiring a 15 percent appropriate for a strict liability statute. citing program integrity concerns. contribution for nonmonetary The commenters requested that any Response: We agree with the remuneration provided under a value- monitoring obligations, including the commenters that the exception at based arrangement could create barriers scope and frequency of the monitoring, § 411.357(aa)(3) is necessary to facilitate to the transition to a value-based health be clearly stated in the regulations. A robust participation in a value-based care delivery and payment system, few of the commenters suggested that health care delivery and payment particularly for small and rural CMS provide flexibility in monitoring system. We are finalizing the exception physician practices, providers, and and assessing progress of a value-based with the modifications discussed above suppliers. The final value-based arrangement, asserting that the and in our response to other comments arrangement exception does not require monitoring requirement should be in this section II.A.2. Although we a contribution for nonmonetary tailored to the resources and appreciate the program integrity remuneration. sophistication of the parties to the concerns raised by some commenters, Comment: A few commenters value-based arrangement. Some we are confident that the integrated expressed concern regarding the commenters stated that monitoring for approach to safeguards against program requirement that a value-based compliance with the requirements of an

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applicable exception at the outset of an Federal Register. To facilitate the activity no longer furthering the value- arrangement and upon renewal of the assessment of ongoing compliance with based purpose of the value-based arrangement is a common industry the physician self-referral law, we are enterprise. These commenters practice and suggested that we adopt a finalizing our proposal to require that recommended that we establish a similar policy for monitoring value- the value-based enterprise or one or timeframe for ‘‘curing’’ noncompliance based arrangements. more of the parties to the value-based or create a transition period that allows Response: The commenters’ arrangement must monitor whether the the parties to the value-based statements regarding parties’ obligations parties have furnished the value-based arrangement to redesign or replace the to monitor for ongoing compliance with activities required under the deficient value-based activity, with a the physician self-referral law are arrangement and whether and how couple commenters suggesting 90 days surprising, as are their statements that continuation of the value-based for that timeframe. A few commenters references to this implicit obligation activities is expected to further the suggested giving parties the option of would introduce ambiguity into their value-based purpose(s) of the value- terminating the arrangement in its ability to utilize the value-based based enterprise. If the monitoring entirety or allowing them to implement arrangement exception. Our expectation indicates that a value-based activity is a written plan to remediate the of monitoring for ongoing compliance in not expected to further the value-based noncompliance no later than 60 days the context of the physician self-referral purpose(s) of the value-based enterprise, from the date they determine that the law is not a new concept. As we stated the parties must terminate the value-based activities are unable to in Phase II, section 1877 of the Act is ineffective value-based activity. In achieve the value-based purposes. One clearly intended to make entities addition, during the same timeframes, commenter requested that we adopt a responsible for monitoring their either the value-based enterprise or one policy that an arrangement would not compensation arrangements with or more of the parties to the lose protection under the value-based physicians (69 FR 16112). As discussed arrangement must monitor progress arrangement exception for a period of 12 above, the core principle of the toward attainment of the outcome months from the date of commencement physician self-referral law is that, if a measure(s), if any, against which the of the arrangement as long as the value- physician has a financial relationship recipient of the remuneration is based activities were reasonably with an entity that does not satisfy all assessed. If the monitoring indicates designed to achieve the value-based the requirements of an applicable that an outcome measure is unattainable purpose at its outset. Some commenters exception (after applying any special during the remaining term of the suggested that a policy under which a rules), section 1877(a)(1)(A) of the Act arrangement, the parties must terminate physician’s referrals are considered to prohibits the physician from making a or replace the unattainable outcome violate the physician self-referral law if referral to the entity for the furnishing measure. value-based activities do not of designated health services for which As discussed in response to the immediately succeed in achieving the payment may otherwise be made under comment below, the final regulation at value-based purpose(s) of the value- Medicare, section 1877(a)(1)(B) of the § 411.357(aa)(3)(vii) sets forth specific based enterprise would create a ‘‘fear of Act prohibits the entity from presenting timeframes in which the parties must failure’’ that would dissuade parties or causing to present a claim under take action following completion of from attempting to deliver health care in Medicare for the designated health monitoring that identifies an ineffective new and innovative value-based ways. services furnished pursuant to a value-based activity or that an outcome These commenters asserted that prohibited referral, and section measure is unattainable during the allowing parties to cure defects in 1877(g)(1) of the Act prohibits Medicare remaining term of the arrangement. If arrangements would remove the ‘‘fear of from making payment for a designated the parties take action within the failure’’ and promote value-based health health service that is provided pursuant timeframe specific to the chosen action care delivery. A different commenter to a prohibited referral. Parties must (that is, termination or modification of requested that we establish a specific ensure the compliance of their financial the value-based arrangement), a value- timeframe for a value-based relationships with an applicable based activity will be deemed to be arrangement to achieve its value-based exception at the time the physician reasonably designed to achieve at least purpose without risking violation of the makes a referral for designated health one value-based purpose of the value- physician self-referral law. service(s). based enterprise for the entire period We agree with the commenters that during which it was undertaken by the Response: As discussed above, if the government’s expectations regarding parties. Similarly, the arrangement will parties to a value-based arrangement, monitoring of value-based arrangements not fail to satisfy the requirements of the through monitoring efforts or otherwise, should be explicitly stated in regulation exception at § 411.357(aa)(3) if, within determine that a value-based activity no text, and we are including at final 90 consecutive calendar days after longer furthers the value-based § 411.357(aa)(3)(vii) a monitoring completion of the monitoring, the purpose(s) of the value-based enterprise, requirement that provides the parties terminate or replace an outcome the parties may either terminate the guidelines requested by the measure determined to be unattainable. arrangement or modify the arrangement commenters. Under the final regulation, We are not prescribing in this final rule to remove the ineffective value-based the value-based enterprise or one or how value-based enterprises, entities, activity. The commenters mistakenly more of the parties to a value-based and physicians should monitor their assumed that termination of a value- arrangement must monitor the value-based arrangements; rather, we based arrangement is required if a value- arrangement no less frequently than expect value-based enterprises, entities, based activity is no longer reasonably annually, or at least once during the and physicians to design their designed to further the value-based term of the arrangement if the monitoring and other compliance efforts purpose(s) of the value-based enterprise. arrangement has a duration of less than in a manner that is appropriate for the Our proposal required the cessation of 1 year. This timeframe coincides with particular value-based arrangement. the physician’s referrals of designated that proposed by OIG in its safe harbors Comment: Several commenters urged health services, either immediately or for value-based arrangements and us not to require termination of a value- within 60 days of the determination that finalized elsewhere in this issue of the based arrangement due to a value-based the value-based activities would be

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unable to achieve the value-based order to protect against program and patient care. This definition is intended purpose(s) of the value-based enterprise. patient abuse that could arise with an to align with OIG’s final regulations. We We did not intend to prohibit unlimited timeframe in which to are sympathetic to commenters’ modification of arrangements that terminate specific value-based activities, concerns regarding the difficulty in would allow continuation of physician we are establishing at ascertaining that a measure is designed referrals. § 411.357(aa)(3)(vii)(B)(2) a 90-day to drive meaningful improvements in We recognize that the design and timeframe for the termination of value- physician performance, quality, health implementation of value-based based activities that are not expected to outcomes, or efficiencies in care arrangements require a certain level of further the value-based purpose(s) of the delivery. We are not adopting our fluidity, although we are not persuaded value-based enterprise. To maintain alternative proposal to require that to implement a 12-month ‘‘deeming’’ consistency with other regulations that outcome measures against which timeframe under which a value-based require remedial action within certain recipients of remuneration are measured arrangement would be deemed to satisfy timeframes, the regulation requires that are designed to drive meaningful the requirement that its value-based the termination of the arrangement or improvements in physician activities are reasonably designed to the ineffective value-based activity must performance, quality, health outcomes, further the value-based purpose(s) of the occur within the specified number of or efficiencies in care delivery. value-based enterprise for a period of 12 consecutive calendar days. The Comment: Many commenters appear months from their implementation. provisions of final to have misinterpreted the meaning of Such a policy would permit parties with § 411.357(aa)(3)(vii)(B)(1) and (2) should the requirement at § 411.357(aa)(3)(ii) actual knowledge that the value-based address the concerns raised by the that the outcome measures against activities will be unable to achieve the commenters without risking program or which the recipient of the remuneration value-based purpose(s) to make referrals patient abuse. will be measured, if any, are objective and submit claims for designated health Comment: Several commenters and measurable, and any changes to the services potentially much longer than inquired about the proposed outcome measures must be made we believe is necessary to make requirement that performance or quality prospectively and set forth in writing. appropriate modifications to their standards against which the recipient of The commenters interpreted this arrangement. the remuneration will be measured, if provision to require the inclusion of We agree with the commenters that any, are objective and measurable. The outcome measures in all value-based identified 90 days as the amount of time commenters generally supported a arrangements and questioned whether that parties would need to make requirement that performance or quality that is practical. Some of the adjustments to their value-based standards must be objective and commenters noted that preventive care arrangements when they are aware that measurable, but requested additional and primary care services do not a value-based activity will no longer guidance regarding what qualifies as a necessarily lend themselves to outcome further the value-based purpose(s) of the ‘‘performance or quality standards.’’ The measures, asserting that benefits of these value-based enterprise. We note that commenters generally opposed our services may not be immediately this timeframe is consistent with other alternative proposal to require that measureable. timeframes for remediating temporary performance or quality standards must noncompliance, documentation be designed to drive meaningful Response: The requirements at final deficiencies, and other discrepancies in improvements in physician § 411.357(aa)(3)(i)(F) and (ii) specifically our regulations. We do not believe that performance, quality, health outcomes, include the language ‘‘if any’’ to parties that elect to terminate their or efficiencies in care delivery. indicate that outcome measures are not value-based arrangement would need as Commenters asserted that this required in every value-based much time. Accordingly, we have alternative proposal and the use of the arrangement. We recognize that established in our final regulation language ‘‘designed to drive meaningful outcome measures may not be available timeframes in which the parties to a improvements’’ created ambiguity that for or applicable to certain value-based value-based arrangement may address would hinder participation in value- activities. For instance, the adoption of any identified deficiencies with their based arrangements. the same EHR system or the completion value-based activities without running Response: The final regulations at of training on the EHR system are afoul of the physician self-referral law. § 411.357(aa)(3)(i)(F) and (ii) replace the potential value-based activities that Under the final regulations at term ‘‘performance and quality likely would not have an associated § 411.357(aa)(3)(vii)(B)(1) and (2), a standards’’ with the term ‘‘outcome outcome measure. However, if outcome value-based activity will be deemed to measures.’’ The final exception requires measures are included as part of the be reasonably designed to achieve at at § 411.357(aa)(3)(ii) that the outcome value-based arrangement, those outcome least one value-based purpose of the measures against which the recipient of measures must be objective and value-based enterprise for the entire remuneration under a value-based measurable and determined period during which it was undertaken arrangement will be measured, if any, prospectively. In addition, under final if the parties terminate the arrangement are objective and measurable, and any § 411.357(aa)(3)(vii), either the value- within 30 consecutive calendar days or changes to the outcome measures must based enterprise or one or more of the modify the arrangement within 90 be made prospectively and set forth in parties to the arrangement must monitor consecutive calendar days after writing. We have also added a new progress toward attainment of the completion of the monitoring. We paragraph (xii) that defines ‘‘outcome outcome measure(s) against which the believe that parties to a value-based measure,’’ for purposes of the value- recipient of the remuneration is arrangement that identify ineffective based arrangement exception, to mean a assessed. If the monitoring indicates value-based activities should be able to benchmark that quantifies: (A) that an outcome measure is unattainable decide whether to terminate the entire Improvements in or maintenance of the during the remaining term of the arrangement and effectuate such a quality of patient care; or (B) reductions arrangement, the parties must terminate termination within 30 consecutive in the costs to or reductions in growth or replace the unattainable outcome calendar days of identifying the in expenditures of payors while measure within 90 consecutive calendar ineffective value-based activities. In maintaining or improving the quality of days after completion of the monitoring.

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Comment: A few commenters stated physician’s remuneration for providing and the entity to which he or she refers that they interpreted the requirement post-discharge follow-up services under designated health services (66 FR 864). that the outcome measures against the arrangement may be, in whole or in For purposes of applying these which the recipient of the remuneration part, dependent on whether the hospital regulations, in the FY 2009 IPPS final will be measured, if any, are objective reduces its readmission rate to 65 rule, we finalized additional regulations and measurable, and any changes to the percent or lower for patients treated by that deem a physician to stand in the outcome measures must be made the physician. The ‘‘outcome measure’’ shoes of his or her physician prospectively and set forth in writing to is the readmission rate. If the parties organization if the physician has an mean that constant improvement or the wish to revise this outcome measure— ownership or investment interest in the achievement of the outcome measures is for example, because the hospital physician organization that is not required. Some of the commenters also realizes that a readmission rate of 65 merely a titular interest (73 FR 48693). interpreted this requirement to mean percent or lower is too easily attainable These regulations are found at that parties to a value-based or is unrealistic given the severity of the § 411.354(c)(2) and (3). arrangement may not substitute medical conditions of the patients in the Under our current regulations, if an outcome measures or make other target patient population and, indirect compensation arrangement adjustments to the outcome measures specifically, the patients treated by the exists, the exception for indirect during the term of the value-based physician—they may make necessary compensation arrangements at arrangement. These commenters adjustments to the readmission § 411.357(p) is available to protect the asserted that it is common for parties to measure, provided any changes to the compensation arrangement. In addition, value-based arrangements to reevaluate measure are prospective only and set if the entity with which the physician outcome measures and make forth in writing. It would not be has the indirect compensation modifications necessary to continue permissible to change the outcome arrangement is a MCO or IPA, the moving towards achievement of the measure to a lower, more attainable exception at § 411.357(n) is also purposes of the value-based enterprise. readmission percentage and apply that available to protect the compensation The commenters sought confirmation new outcome measure retroactively in arrangement. If all the requirements of that parties are permitted to modify order to allow the physician to earn the one of the applicable exceptions are their arrangements, including making incentive payment under the value- satisfied, the physician would not be changes to outcome measures, and make based arrangement as originally barred from referring patients to the other necessary adjustments over the designed. To the extent that commenters entity for designated health services and course of a value-based arrangement were concerned that parties may not the entity would not be barred from without losing the protection of the amend their value-based arrangements submitting claims for the referred exception. to require more or different value-based services. No other exception in Response: The commenters may have activities than those included in the § 411.357 is applicable to indirect misinterpreted the requirements of the arrangement as originally designed, we compensation arrangements. However, proposed exception. We are defining emphasize that nothing in final the parties may elect to protect ‘‘outcome measure’’ in this final rule to § 411.357(aa)(3) prohibits termination or individual referrals of and claims for mean a benchmark that quantifies: (A) substitution of value-based activities to designated health services using an Improvements in or maintenance of the be undertaken under a value-based applicable exception in § 411.355 of our quality of patient care; or (B) reductions arrangement, provided that all regulations. in the costs to or reductions in growth modifications to the value-based As we stated in the proposed rule (84 in expenditures of payors while arrangement are effective prospectively FR 55786), an unbroken chain of maintaining or improving the quality of and comply with any applicable financial relationships described in patient care. Outcome measures are regulations regarding the modification § 411.354(c)(2)(i) may include a value- used to evaluate the provision and of compensation arrangements. based arrangement as defined at effectiveness of value-based activities to § 411.351 in this final rule. Thus, an ensure that the value-based activities are (4) Indirect Compensation unbroken chain of financial continuing to further the value-based Arrangements to Which the Exceptions relationships that includes a value- purposes of the value-based enterprise. at § 411.357(aa) Are Applicable based arrangement could form an Nothing in this final rule prohibits the (§ 411.354(c)(4)) ‘‘indirect compensation arrangement’’ replacement or substitution of outcome The prohibitions of section 1877 of for purposes of the physician self- measures against which the recipient of the Act apply if a physician (or an referral law if the circumstances the remuneration is measured under a immediate family member of a described in § 411.354(c)(2)(ii) and (iii) value-based arrangement, provided that physician) has an ownership or also exist. Unless the entity furnishing any changes to the outcome measures investment interest in an entity or a the designated health services is a MCO are made prospectively and set forth in compensation arrangement with an or IPA, the parties would have to rely writing. entity. For purposes of the physician on the exception at § 411.357(p), which For example, assume that a physician self-referral law, a compensation includes requirements not found in the can earn incentive pay under a value- arrangement is any arrangement exceptions for value-based arrangements based arrangement for providing certain involving direct or indirect at § 411.357(aa), in order to ensure the post-discharge follow-up services to remuneration between a physician (or permissibility of all the physician’s patients in a target patient population an immediate family member of the referrals to the entity (assuming no other following their discharge from the physician) and an entity, and financial relationships exist between the hospital, and that the value-based remuneration means any payment or parties). (If the parties elect to utilize a purpose of the value-based enterprise is other benefit made directly, indirectly, ‘‘services’’ exception at § 411.355, to improve the quality of patient care by overtly, covertly, in cash, or in kind. designated health services are protected facilitating a smooth transition from an (See §§ 411.351 and 411.354(c).) In only on a service-by-service basis, and acute care setting to the appropriate Phase I, we finalized regulations that satisfaction of the requirements of an post-acute care setting and lowering define when an indirect compensation applicable exception permits only the readmissions to the hospital. The arrangement exists between a physician referral of and claims submission for the

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particular designated health service that relationships described in for the referred designated health satisfied the requirements of the § 411.354(c)(2)(i). Specifically, under services, the indirect compensation exception.) As commenters on the CMS the regulation finalized at arrangement must satisfy the RFI noted and commenters on the § 411.354(c)(4)(iii), the exceptions at requirements of an applicable proposed rule confirmed, because § 411.357(aa) are available to protect the exception. Under the final regulation at compensation to the physician under a physician’s referrals to the entity when § 411.354(c)(4)(iii), if the compensation value-based arrangement could take into an indirect compensation arrangement arrangement in this example between account the volume or value of referrals (as defined at § 411.354(c)(4)(2)) the physician practice and the physician or other business generated by the includes a value-based arrangement (as qualifies as a value-based arrangement physician for the entity or may not be defined at § 411.351) to which the (as defined at § 411.351 in this final fair market value for specific items or physician (or the physician organization rule), the exceptions at § 411.357(aa) services provided by the physician, an in whose shoes the physician stands) is would be available to protect the value- indirect compensation arrangement that a direct party. To be clear, the link based arrangement (that is, the indirect includes a value-based arrangement in closest to the physician may not be an compensation arrangement) between the the unbroken chain of financial ownership interest; it must be a hospital and the physician. (The parties relationships that forms the indirect compensation arrangement that meets could also utilize an applicable compensation arrangement may be the definition of value-based exception in § 411.355 to protect unable to satisfy the requirements of arrangement finalized at § 411.351. individual referrals for designated § 411.357(p). To avoid a blanket Under this final rule, parties would health services or the exception at prohibition on indirect compensation first determine if an indirect § 411.357(p) to protect the indirect arrangements that enhance value-based compensation arrangement exists and, if compensation arrangement between the health care delivery and payment, we it does, determine whether the hospital and the physician, but it is are finalizing our proposal to make compensation arrangement to which the unlikely that all the requirements of additional exceptions available to physician (or the physician organization § 411.357(p) would be satisfied in this certain indirect compensation in whose shoes the physician stands) is hypothetical fact pattern.) arrangements that include a value-based a direct party qualifies as a value-based In the proposed rule, we described an arrangement in the unbroken chain of arrangement. If so, the exceptions at alternative proposal under which we financial relationships described in § 411.357(aa) for value-based would define ‘‘indirect value-based § 411.354(c)(2)(i). arrangements would be applicable. To arrangement’’ and specify in regulation As described in section II.A.2.b. of illustrate, assume an unbroken chain of that the exceptions at § 411.357(aa) this final rule, we are finalizing financial relationships between a would be available to protect an indirect exceptions available only to hospital and a physician that runs: value-based arrangement (84 FR 55787). compensation arrangements that qualify Hospital—(owned by)—parent Under our alternative proposal, an as value-based arrangements. Although organization—(owns)—physician indirect value-based arrangement would the exceptions do not limit their practice—(employs)—physician. Thus, exist if: (1) Between the physician and applicability to value-based the links in the unbroken chain are the entity there exists an unbroken arrangements directly between a ownership or investment interest— chain of any number (but not fewer than physician and the entity to which he or ownership or investment interest— one) of persons (including but not she refers designated health services, compensation arrangement. For limited to natural persons, corporations, the definition of ‘‘value-based purposes of determining whether an and municipal organizations) that have arrangement’’ finalized at § 411.351 indirect compensation arrangement financial relationships (as defined at establishes that the only potential exists between the physician and the § 411.354(a)) between them (that is, each parties to a value-based arrangement are hospital, under § 411.354(c)(2)(ii), we person in the unbroken chain is linked the value-based enterprise and VBE would analyze the compensation to the preceding person by either an participants. In order to fully support arrangement between the physician ownership or investment interest or a the transition to a value-based health practice and the physician. Assume also compensation arrangement); (2) the care delivery and payment system, we that the compensation paid to the financial relationship between the believe that it is important to make the physician under her employment physician and the person with which he exceptions at § 411.357(aa) applicable to arrangement varies with the volume or or she is directly linked is a value-based certain indirect compensation value of her referrals to the hospital arrangement; and (3) the entity has arrangements that include a value-based because she is paid a bonus for each actual knowledge of the value-based arrangement in the unbroken chain of referral for designated health services arrangement in subparagraph (2). We financial relationships described in furnished by the hospital, provided that proposed that, if an unbroken chain of § 411.354(c)(2)(i). Following review of she adheres to redesigned care protocols financial relationships between a the comments on our proposed intended to further one or more value- physician and an entity qualifies as an alternative approaches for addressing based purposes (as defined at § 411.351 ‘‘indirect value-based arrangement,’’ the indirect compensation arrangements in in this final rule). Finally, assume that exceptions at § 411.357(aa) would be which one link in the unbroken chain the hospital has actual knowledge that applicable and the requirements of at of financial relationships between an the physician receives aggregate least one of the applicable exceptions entity and a physician is a value-based compensation that varies with the must be satisfied in order for the arrangement, with technical revisions to volume or value of her referrals to the physician to refer patients to the the proposed regulation text, we are hospital. The unbroken chain of hospital for designated health services finalizing our primary proposal to make financial relationships establishes an and for the hospital to submit claims to the exceptions at § 411.357(aa) indirect compensation arrangement; Medicare for the referred designated applicable to certain indirect therefore, in order for the physician to health services. Following review of the compensation arrangements that refer patients to the hospital for comments on our alternative approach include a value-based arrangement in designated health services and for the for addressing indirect compensation the unbroken chain of financial hospital to submit claims to Medicare arrangements in which one link in the

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unbroken chain of financial provide that the exceptions at physician and a health plan. There, we relationships between an entity and a § 411.357(aa) are applicable when an stated that physicians generally are physician is a value-based arrangement, unbroken chain described in compensated for services to managed we are not finalizing the alternative § 411.354(c)(2)(i) includes a value-based care enrollees in one of three ways, the proposal. arrangement (as defined in § 411.351) to first two of which do not vary based on We also stated in the proposed rule which the physician (or the physician the volume or value of referrals: (1) A that we were considering whether to organization in whose shoes the salary, in the case of a physician who exclude an unbroken chain of financial physician stands) is a direct party. In is an employee; (2) a ‘‘fee-for-service’’ relationships between an entity and a order to determine whether the contractual arrangement under which physician from the definition of physician’s referrals to the entity with the physician assumes no risk; or (3) a ‘‘indirect value-based arrangement’’ if which the physician has the indirect risk-sharing arrangement, under which the link closest to the physician (that is, compensation arrangement do not the physician assumes risk for the costs the value-based arrangement to which violate the physician self-referral law, of services, either through a capitation the physician is a party) is a parties would determine whether the arrangement, or through a withhold, compensation arrangement between the value-based arrangement to which the bonus, or risk-corridor approach. We physician and a pharmaceutical physician (or the physician organization noted that the first two types of manufacturer; manufacturer, distributor, in whose shoes the physician stands) is compensation arrangements are eligible or supplier of DMEPOS; laboratory; a direct party satisfies all the for the statutory exceptions for bona pharmacy benefit manager; wholesaler; requirements of one of the exceptions fide employment relationships and or distributor. In the alternative, we finalized at § 411.357(aa) (or another personal service arrangements,6 while stated that we were considering whether applicable exception). If the value-based the third is potentially eligible for the to exclude an unbroken chain of arrangement to which the physician is exception for risk-sharing arrangements financial relationships between an a direct party is with an entity (as at § 411.357(n). The exception at entity and a physician from the defined at § 411.351) other than the § 411.357(n) does not apply to a definition of ‘‘indirect value-based entity with which the physician has the compensation arrangement—whether arrangement’’ if one of these persons or indirect compensation arrangement, that direct or indirect—between a physician organizations is a party to any financial direct compensation arrangement must and an entity that is anything other than relationship in the chain of financial also satisfy the requirements of an relationships. Finally, we stated that we applicable exception in order for the a MCO or IPA. were considering whether to include physician to make referrals to that The risk-sharing arrangement between health technology companies in any entity. the MCO or IPA and the physician may such exclusion in order to align our Comment: A few commenters be direct or indirect. An indirect risk- policies with policies proposed by OIG expressed concern regarding our sharing arrangement would run MCO or (84 FR 55786 through 55787). We statement in the proposed rule that, IPA—subcontractor—physician; for sought comment on these approaches besides the exception at § 411.357(p), no example, MCO—(compensation and their effectiveness in enhancing other exception in § 411.357 is arrangement)—hospital—(compensation program integrity. We are not finalizing applicable to indirect compensation arrangement)—physician. In this any of the proposed restrictions on the arrangements (84 FR 55786). The example, if the MCO is an ‘‘entity’’ (as identity of the parties to the financial commenters requested that we confirm defined at § 411.351), the unbroken relationships in the unbroken chain of that the exception at § 411.357(n) for chain of financial relationships may financial relationships between an risk-sharing arrangements is applicable constitute an indirect compensation entity and a physician. to indirect compensation arrangements, arrangement under § 411.354(c)(2). If so, We received the following comments including an indirect compensation the exception at § 411.357(n) would be and our responses follow. arrangement that involves a value-based available to protect the physician’s Comment: The majority of the arrangement. One of the commenters referrals to the MCO, provided that all commenters that commented on this noted that the exception for risk-sharing the requirements of the exception are proposal preferred our primary arrangements expressly references satisfied. The exception for indirect approach for addressing indirect compensation conveyed ‘‘directly or compensation arrangements at compensation arrangements in which indirectly’’ to a physician. This § 411.357(p) would also apply. If the one of the financial relationships commenter and others asserted that the MCO or IPA is not itself furnishing between a physician (or the immediate exception for risk-sharing arrangements designated health services (as described family member of the physician) and the should remain available to entities, such in § 411.351), it would not be an entity to which the physician refers as hospitals, that have indirect ‘‘entity’’ and, in the example above, patients for designated health services is compensation arrangements with would not have a direct or indirect a value-based arrangement. Commenters physicians resulting from risk-sharing compensation arrangement with the noted that an indirect compensation arrangements. physician. (Note that, in Phase I, we arrangement that involves a value-based Response: Some of the commenters clarified and significantly narrowed the arrangement may not satisfy the misunderstand the application of the situations in which a MCO will be requirements of the exception at exception for risk-sharing arrangements. considered an entity furnishing § 411.357(p) because the compensation The exception at § 411.357(n) applies to designated health services by refocusing paid to the physician may take into compensation arrangements between a the definition on the party submitting a account the volume or value of the MCO or an IPA and a physician for claim to Medicare rather than the party services provided to enrollees of a physician’s referrals or the other ‘‘providing for’’ or ‘‘arranging for’’ the health plan, provided that the business generated by the physician for furnishing of designated health services the entity, or the compensation may not compensation arrangement qualifies as a meet the fair market value requirement risk-sharing arrangement. In Phase I, we 6 In and since the publication of Phase I, we of the exception. established the exception at § 411.357(n) established additional regulatory exceptions that Response: We are finalizing for remuneration provided pursuant to a may be applicable to the first two types of regulations at § 411.354(c)(4)(iii) to risk-sharing arrangement between a compensation arrangements discussed at 66 FR 912.

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for which a claim is submitted to exception for risk-sharing arrangements empowered to take charge of their Medicare.) is not applicable to the indirect health care and better assist their To be clear, the exception for risk- compensation arrangement. providers in fulfilling their health care sharing arrangements at § 411.357(n) is needs. Several commenters shared (5) Price Transparency not applicable to all risk-sharing similar support for transparency efforts. arrangements between entities and Price transparency is a critical Another commenter stated that physicians that provide services to component of a health care system that transparency of a physician’s financial enrollees of the same health plan. pays for value and aligns with our relationships along with price and Contrary to commenters’ stated desire to reinforce and support patient quality of care information would be understanding of the application of freedom of choice. We believe that valuable to patients in choosing § 411.357(n), the exception for risk- transparency in pricing can empower providers and care pathways. This sharing arrangements does not apply to consumers of health care services to commenter maintained that these indirect compensation arrangements make more informed decisions about actions would also engage patients in between hospitals and physicians, even their care and lower the rate of growth protecting against possible unintended if both are contractors (or in health care costs. Health care consequences of value-based subcontractors) of the same MCO or consumers today lack meaningful and arrangements. Other commenters raised IPA. In Phase II, a commenter requested timely access to pricing information that concerns that information on price confirmation that the exception at could, if available, help them choose a transparency and a physician’s financial § 411.357(n) is meant to cover all risk- lower-cost setting or a higher-value relationships with other health care sharing compensation paid to provider. Patients are often unaware of providers, in combination with already- physicians by an entity downstream of site-of-care cost differentials until it is required disclosures under HIPAA, any type of health plan, insurance too late (see Aparna Higgins & German informed consent information and company, or health maintenance Veselovskiy, Does the Cite of Care forms, insurance payment authorization organization. We confirmed the Change the Cost of Care, Health Affairs forms, and other paperwork that commenter’s understanding of the (, 2016), https:// patients receive or must complete applicability of the exception (69 FR www.healthaffairs.org/do/10.1377/ would serve only to inundate patients 16114), and stated that all downstream hblog20160602.055132/full/). Multiple with paperwork that they will find entities are included. We purposefully surveys and studies have revealed that confusing or simply not read. These declined to define the term ‘‘managed patients want their health care providers commenters contended that, although care organization’’ so as to create a to engage in cost discussions, and one transparency is an appealing concept, broad exception with maximum recent national survey found that a requiring additional disclosures would flexibility. Although we did not in majority of physicians want to have cost result in more burden than benefit. Phase II (or any subsequent rulemaking) of care discussions with their patients The , 2019 Executive Order on modify the text of § 411.357(n) to extend (see Caroline E. Sloan, MD & Peter A. Improving Price and Quality the applicability of the exception to Ubel, MD, The 7 Habits of Highly Transparency in American Healthcare to compensation pursuant to a risk-sharing Effective Cost-of-Care Conversations, Put Patients First 7 recognizes the arrangement (directly or indirectly) Annals of Internal Medicine (, importance of price transparency. The between a physician and any entity 2019), https://annals.org/aim/issue/ Executive Order directs Federal other than a MCO or IPA, we recognize 937992, and Let’s Talk About Money, agencies to take historic steps toward why the commenters on the proposed The (2018), https:// getting patients the information they rule could be under the impression that uofuhealth.utah.edu/value/lets-talk- need and when they need it to make our response in the Phase II preamble about-money.php). The point of referral well-informed decisions about their was intended to do so. For this reason, presents an ideal opportunity to have health care. CMS has already acted on we are finalizing revisions to the such cost-of-care discussions. the Executive Order in two ways. First, exception at § 411.357(n) to clarify the In the CMS RFI, we solicited by finalizing price transparency scope and application of the exception. comment on the role of transparency in requirements in the CY 2020 OPPS final The revisions are effective as of the date the context of the physician self-referral rule (84 FR 65524) to improve the set forth in this final rule and apply law. In particular, we solicited comment availability of meaningful pricing prospectively only. on whether, if provided by the referring information to the public by requiring Comment: A few commenters physician to a beneficiary, transparency hospitals to make public a machine- requested that we include a reference to about a physician’s financial readable file that contains a hospital’s § 411.357(n) in the regulation text relationships, price transparency, or the gross charges and payer-specific identifying which exceptions are availability of other data necessary for negotiated charges, plus discounted applicable to indirect compensation informed consumer purchasing (such as cash prices, the de-identified minimum arrangements that involve value-based data about quality of services provided) negotiated charge, and the de-identified arrangements. would reduce or eliminate the harms to maximum negotiated charge for all Response: To clarify the applicability the Medicare program and its items and services provided by the of the exception for risk-sharing beneficiaries that the physician self- hospital beginning January 1, 2021. arrangements, we are finalizing referral law is intended to address. Second, through the Transparency in regulations at § 411.354(c)(4)(ii) and Many commenters replied that making a Coverage final rule (85 FR 72158), HHS, (iii)(B) that expressly state that the physician’s financial relationships and along with the Departments of Labor exception at § 411.357(n) is applicable cost of care information available could and Treasury, finalized requirements for in the case of an indirect compensation be useful. One commenter suggested arrangement in which the entity that providing clear and transparent 7 Executive Order on Improving Price and Quality furnishing designated health services information was vital in the health care Transparency in American Healthcare to Put described in § 411.354(c)(2)(i) is a MCO industry where patients are often Patients First, June 24, 2019, available at: https:// www.whitehouse.gov/presidential-actions/ or IPA. If the entity with which the vulnerable, confused, and unsure of executive-order-improving-price-quality- physician has an indirect compensation their options. This commenter further transparency-american-healthcare-put-patients- arrangement is not a MCO or IPA, the opined that informed patients are first/.

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health insurance issuers and plans in how to overcome the technical, public. We refer readers to the Plain the individual and group markets to operational, legal, cultural, and other Writing Act of 2010 (Pub. L. 111–274, make health care prices and expected challenges to including price enacted on , 2010) for further out-of-pocket costs for enrollees transparency requirements in the information. We sought comment on available to the general public to help physician self-referral regulations (84 whether, if we finalize such a facilitate more informed health care FR 55788). Specifically, we requested requirement, it would be helpful for purchasing decisions with the goal of comments regarding the availability of CMS to provide a sample notice and, if driving down health care costs. We pricing information and out-of-pocket we provide a sample notice, whether we continue to believe that all consumers costs to patients (including information should deem such a notice to satisfy the need price and quality information in specific to a particular patient’s requirement described. We stated that advance to make an informed decision insurance, such as the satisfaction of the we would not require public notice in when they choose a good or service, patient’s applicable deductible, advance of referrals for emergency including at the point of a referral for copayment, and coinsurance hospital services to avoid delays in such goods or services. As we stated in obligations); the appropriate timing for urgently needed care. We solicited the proposed rule, by making the dissemination of information (that comment on other options for price meaningful price and quality is, whether the information should be transparency requirements in the value- information more broadly available, we provided at the time of the referral, the based exceptions to the physician self- can protect patients and increase time the service is scheduled, or some referral law, as well as whether we competition, innovation, and value in other time); and the burden associated should consider for a future rulemaking the health care system (84 FR 55788). with compliance with a requirement in the inclusion of price transparency We remain committed to ensuring an exception to the physician self- requirements in exceptions to the that physician self-referral law policies referral law to provide information physician self-referral law included in do not infringe on patient choice and about the factors that may affect the cost our existing regulations. the ability of physicians and patients to of services for which a patient is We received several comments from make health care decisions that are in referred. Finally, we sought comment both consumers of health care and the patient’s best interest. We continue regarding whether the inclusion of a entities that provide health care to believe that it is important for price transparency requirement in a services. Nearly all the commenters patients to have timely access to value-based exception would provide were united in their support that information about all aspects of their additional protections against program patients should have access to clear, care, including information about the or patient abuse through the active accurate, and actionable cost-sharing factors that may affect the cost of participation of patients in selecting information and recognized the services for which they are referred. As their health care providers and important role price transparency has in stated in the proposed rule, a patient suppliers. patient care. However, many supportive who is made aware, for example, that commenters also asserted that requiring costs may differ based on the site of In furtherance of our goal of price transparency for all patients, we price transparency disclosures as a service where the referred services are requirement of an exception to the furnished, may become a more solicited comments regarding whether to consider a requirement related to physician self-referral law is not an conscious consumer of health care appropriate mechanism for promoting services (84 FR 55788). Access to such price transparency in every exception for value-based arrangements at price transparency objectives given the information may also spark important strict liability nature of the law. We conversations between patients and § 411.357(aa) (84 FR 55789). While we did not propose regulatory changes, we continue to believe that health care their physicians, promoting patient markets work more efficiently and choice and the ability of physicians and considered whether to require that a physician provide a notice or have a provide consumers with higher-value patients to make health care decisions health care if we promote policies that that are in the patient’s best interest. In policy regarding the provision of a public notice that alerts patients that encourage choice and competition. We conjunction with their physicians’ thank the commenters for their determination of the need for their out-of-pocket costs for items and services for which they are referred by thoughtful responses, which will help recommended health care services and inform future agency policy making on the urgency of that need, information on the physician may vary based on the site this important objective. We are not the factors that may affect the cost of where the services are furnished and finalizing any price transparency such services could ensure that patients based on the type of insurance that they provisions in this rulemaking. have the information they need to shop have. Because of limits on currently and seek out high-quality care at the available pricing data, we continue to B. Fundamental Terminology and lowest possible cost. believe that such a requirement could be Requirements It remains CMS’ goal to establish an important first step in breaking down policies that facilitate consumers’ ability barriers to cost-of-care discussions that 1. Background to participate actively and meaningfully play a beneficial role in a value-based As described in the proposed rule and in decisions relating to their care. At the health care system. We further in greater detail in this section of the same time, we continue to be cognizant explained the public notice provided or final rule, many of the statutory and that including requirements regarding reflected in the policy could be made in regulatory exceptions to the physician price transparency in the exceptions to any form or manner that is accessible to self-referral law include one, two, or all the physician self-referral law raises patients. For example, a notice on the the following requirements: The certain challenges for the regulated physician’s website, a poster on the wall compensation arrangement itself is industry. In the proposed rule, we in the physician’s office, or a notice in commercially reasonable; the amount of sought comments on how to pursue our a patient portal used by the physician’s the compensation is fair market value; price transparency objectives in the patients would all be acceptable. We and the compensation paid under the context of the physician self-referral stated our expectation that any notice arrangement is not determined in a law, both in the context of a value-based would be written in plain language that manner that takes into account the health care system and otherwise, and would be understood by the general volume or value of referrals (or, in some

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cases, other business generated between • How did the parties calculate the arrangement. Commenters strongly the parties). These requirements are remuneration? agreed with our statements that these presented in various ways within the • Did the calculation result in requirements are separate and distinct statutory and regulatory exceptions, but compensation that is fair market value and should be disentangled from each it is clear that they are separate and for the asset, item, service, or rental other. distinct requirements, each of which property? Response: We agree with the must be satisfied when included in an These questions relate, respectively, commenters that it is important to exception. As we stated in the proposed to the definition of commercial reiterate that the statutory and rule, the regulated industry and its reasonableness, the volume or value regulatory requirements regarding complementary parts, such as the health standard and the other business compensation arrangements that are care valuation community, have sought generated standard, and the definition commercially reasonable, compensation additional guidance from CMS of fair market value. In this section of that is not determined in any manner regarding whether compliance with one the final rule, we provide detailed that takes into account the volume or of the requirements is dependent on descriptions of our final definitions and value of a physician’s referrals or the compliance with one or both of the special rules. Importantly, our final other business generated by a physician, others (84 FR 55789). In addition, these policies relate only to the application of and compensation that is fair market and other stakeholders have requested section 1877 of the Act and our value for items or services actually clarification on our policy with respect physician self-referral regulations. furnished are separate and distinct to when an arrangement is considered Although other laws and regulations, requirements, each of which must be commercially reasonable, under what including the anti-kickback statute and satisfied when included in an exception circumstances compensation is CMP law, may utilize the same or to the physician self-referral law. similar terminology, the policies considered to take into account the 2. Commercially Reasonable (§ 411.351) volume or value of referrals or other finalized in this final rule do not affect In the proposed rule, we proposed to business generated between the parties, or in any way bind OIG’s (or any other include at § 411.351 a definition for the and how to determine the fair market governmental agency’s) interpretation or term ‘‘commercially reasonable.’’ As value of compensation. According to ability to interpret such terms for described previously, many of the stakeholders and commenters on the purposes of laws or regulations other statutory and regulatory exceptions to proposed rule, False Claims Act (31 than the physician self-referral law. In the physician self-referral law include a U.S.C. 3729 through 3733) case law has addition, our interpretation of these key requirement that the compensation exacerbated the challenge of complying terms does not relate to and in no way arrangement is commercially with these three fundamental binds the Internal Revenue Service with respect to its rulings and interpretation reasonable. For example, the exception requirements. Endeavoring to establish of the Internal Revenue Code or State at section 1877(e)(2) of the Act for bona bright-line, objective regulations for agencies with respect to any State law fide employment relationships requires each of these fundamental requirements, or regulation that may utilize the same that the remuneration provided to the we proposed a new definition of or similar terminology. We note further physician is pursuant to an arrangement ‘‘commercially reasonable’’ at § 411.351, that, to the extent terminology is the that would be commercially reasonable proposed to establish special rules that same as or similar to terminology used (even if no referrals were made to the identify the universe of circumstances in the Quality Payment Program within employer). The exception at section under which compensation would be the PFS, our final policies do not affect 1877(e)(3)(A) of the Act for personal considered to take into account the or apply to the Quality Payment service arrangements uses slightly volume or value of a physician’s Program. different language to describe this referrals or the other business generated We received the following general general concept, and requires that the by a physician for the entity paying the comment on our discussion of the three aggregate services contracted for do not compensation, and proposed to revise key requirements in the exceptions to exceed those that are reasonable and the definitions of ‘‘fair market value’’ the physician self-referral law, and our necessary for the legitimate business and ‘‘general market value’’ in our response follows. We respond to purposes of the arrangement. The regulations at § 411.351. Our overall comments specific to each of the key exception at § 411.357(y) for timeshare intention with these policies is to requirements in sections II.B.2. through arrangements, which the Secretary reduce the burden of compliance with II.B.4. of this final rule. established in regulation using his the physician self-referral law, provide Comment: Several commenters authority at section 1877(b)(4) of the clarification where possible, and requested that CMS’ articulation of the Act, requires that the arrangement achieve the goals of the Regulatory ‘‘big three’’ requirements should be would be commercially reasonable even Sprint. As we stated in the proposed preserved in the final rule. Specifically, if no referrals were made between the rule, we believe that clear, bright-line commenters described as parties. Despite the prevalence of this rules would enhance both stakeholder ‘‘cornerstones’’ of exceptions to the requirement (in one form or another), as compliance efforts and our enforcement physician self-referral law the we stated in the proposed rule (84 FR capability. We believe that the policies requirements that: (1) The compensation 55790), we addressed the concept of finalized here will provide the clarity arrangement is commercially commercial reasonableness only once— that will benefit the regulated industry, reasonable; (2) the compensation is not in our 1998 proposed rule—where we CMS, and our law enforcement partners determined in any manner that takes stated that we are interpreting (84 FR 55789). into account the volume or value of a ‘‘commercially reasonable’’ to mean that In developing our proposals for physician’s referrals (the volume or an arrangement appears to be a sensible, guidance on the fundamental value standard) or the other business prudent business agreement, from the terminology and requirements, we generated by a physician for the entity perspective of the particular parties considered three basic questions— (the other business generated standard); involved, even in the absence of any • Does the arrangement make sense as and (3) the amount of compensation is potential referrals (63 FR 1700). Until a means to accomplish the parties’ fair market value for the items or now, the physician self-referral goals? services furnished under the regulations themselves lacked a codified

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definition for the term commercially well as input from stakeholders achieve the legitimate business reasonable. regarding other possible definitions that interest.’’ A small number of As discussed previously in this would provide clear guidance to enable commenters urged us not to finalize the section II.B.2., the key question to ask parties to structure their arrangements proposed definition so that parties when determining whether an in a manner that ensures compliance could rely on CMS’ statements in the arrangement is commercially reasonable with the requirement that their 1998 proposed rule, noting that it has is simply whether the arrangement particular arrangement is commercially been workable for industry stakeholders makes sense as a means to accomplish reasonable. We also proposed to clarify for many years. the parties’ goals. The determination of in regulation text that an arrangement Several commenters requested that, if commercial reasonableness is not one of may be commercially reasonable even if we finalize the first alternative proposed valuation. We continue to believe that it does not result in profit for one or definition, we strike the limitation that this determination should be made from more of the parties (84 FR 55790). After the arrangement is on similar terms and the perspective of the particular parties considering the comments on the conditions as like arrangements. These involved in the arrangement. In definition of ‘‘commercially commenters asserted that parties to an addition, the determination that an reasonable,’’ we are finalizing in our arrangement would not have access to arrangement is commercially reasonable regulation at § 411.351 that data to identify ‘‘like arrangements’’ or does not turn on whether the commercially reasonable means that the be aware of their terms and conditions. arrangement is profitable; compensation particular arrangement furthers a In addition, parties may enter into a arrangements that do not result in profit legitimate business purpose of the novel compensation arrangement that for one or more of the parties may parties to the arrangement and is bears minimal, if any, resemblance to nonetheless be commercially sensible, considering the characteristics existing arrangements against which it reasonable. In the proposed rule, we of the parties, including their size, type, could be compared for ‘‘similar terms.’’ described numerous examples of scope, and specialty. The final The commenters also highlighted the compensation arrangements that regulation also states that an burden associated with obtaining third commenters on the CMS RFI asserted arrangement may be commercially party opinions in order to satisfy this would be commercially reasonable, reasonable even if it does not result in requirement. Other commenters despite the fact that the party paying the profit for one or more of the parties. preferred the second alternative remuneration does not recognize an Finally, many of the exceptions to the definition because of its focus on the equivalent or greater financial benefit physician self-referral law require that comparison to other similarly situated from the items or services purchased in an arrangement is commercially providers, suppliers, and physicians, the transaction, or that the party reasonable ‘‘even if no referrals were although one of these commenters noted receiving the remuneration incurs costs made between the parties’’ or ‘‘even if that the requirement that an in furnishing the items or services that no referrals were made to the arrangement makes ‘‘commercial sense’’ are greater than the amount of the employer.’’ The exceptions use varying could exclude arrangements for remuneration received. We phrasing to describe this requirement noncommercial purposes, such as acknowledge that, even knowing in and we do not repeat each iteration meeting community needs. A few other advance that an arrangement may result here. Although we did not include this commenters suggested combining the in losses to one or more parties, it may language in the final definition of two proposed definitions in order to be reasonable, if not necessary, to ‘‘commercially reasonable,’’ it remains emphasize that the determination of nevertheless enter into the arrangement. an important constraint when commercial reasonableness should be Examples of reasons why parties would determining whether an arrangement from the perspective of, and further a enter into such transactions include satisfies the requirements of an legitimate business need of, the community need, timely access to applicable exception. As described particular parties to the arrangement, health care services, fulfillment of elsewhere in this final rule, we have and also that the arrangement should be licensure or regulatory obligations, revised the exception for fair market compared to arrangements with including those under the Emergency value compensation to include this similarly situated parties. One of these Medical Treatment and Labor Act important constraint in the requirement commenters also suggested that the (EMTALA), the provision of charity at § 411.357(l)(4) that a compensation definition of ‘‘commercially reasonable’’ care, and the improvement of quality arrangement is commercially should reflect the importance of and health outcomes. reasonable. In addition, we included evaluating the market conditions To provide the certainty requested by this requirement in the new exception relevant to the arrangement. A few other stakeholders, we proposed to codify in for limited remuneration to a physician commenters offered that CMS should regulation the definition of that we are finalizing at § 411.357(z). finalize a policy under which an ‘‘commercially reasonable’’ at § 411.351. We received the following comments arrangement would be commercially We proposed two alternative definitions and our responses follow. reasonable if it meets either of the for the term. First, we proposed to Comment: Most commenters proposed alternative definitions. define ‘‘commercially reasonable’’ to supported our proposal to define the Another commenter urged CMS to mean that the particular arrangement term ‘‘commercially reasonable’’ in ensure that the definition of furthers a legitimate business purpose of regulation, stating a preference for one ‘‘commercially reasonable’’ does not the parties and is on similar terms and of the two alternative definitions that shelter abusive arrangements. conditions as like arrangements. In the we proposed. A few commenters offered Response: We agree that a definition alternative, we proposed to define alternative definitions of ‘‘commercially requiring a compensation arrangement ‘‘commercially reasonable’’ to mean that reasonable,’’ such as an arrangement to be on similar terms as like the arrangement makes commercial that is ‘‘appropriately designed to meet arrangements in order to be sense and is entered into by a the parties’ legitimate business goals commercially reasonable does not reasonable entity of similar type and from the perspective of the parties to the provide for the clarity that we and size and a reasonable physician of arrangement’’ and an arrangement that stakeholders seek and, in fact, could similar scope and specialty. We sought is ‘‘entered into for a legitimate business increase the burden on parties that must comment on each of these definitions as interest and is reasonably structured to seek the expertise of outside

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organizations to ensure compliance with designee) documents in writing that the intended purpose would pose a risk of the requirement that their arrangement arrangement furthers the legitimate program or patient abuse. is commercially reasonable. We are business purpose of the parties. Another Comment: A few commenters finalizing a modified definition of commenter urged us to adopt an requested that we include in regulation ‘‘commercially reasonable’’ to address irrebuttable presumption that, if the text a non-exhaustive list of legitimate commenters’ concerns. In line with the purpose of an arrangement is business purposes for purposes of suggestion of some commenters, the documented and achieved, the applying the definition of final definition of ‘‘commercially commercial reasonableness of the ‘‘commercially reasonable.’’ One reasonable’’ incorporates aspects of each arrangement cannot be contradicted by commenter specifically referenced our of the proposed alternative definitions. extrinsic evidence. The commenter discussion in the proposed rule of Under the definition finalized at asserted that, in the absence of such a examples of compensation arrangements § 411.351, commercially reasonable presumption, entities are left that CMS RFI commenters believed means that the particular arrangement susceptible to the potential for False would be commercially reasonable even furthers a legitimate business purpose of Claims Act litigation predicated on an if they did not result in profit for one the parties to the arrangement and is unsupported inference of ill intent on or more of the parties. sensible, considering the characteristics behalf of the contracting parties. Response: As we stated in the proposed rule, we find compelling the of the parties, including their size, type, Response: We do not believe that comments of commenters on the CMS scope, and specialty. We believe that the merely documenting in writing that an RFI regarding the types of arrangements definition of ‘‘commercially reasonable’’ arrangement furthers a legitimate they believed would be commercially at final § 411.351 is consistent with the business purpose of the parties is guidance we provided in the 1998 reasonable even if they did not result in sufficient to ensure that the arrangement profit for one or more of the parties (84 proposed rule, appropriately considers is commercially reasonable, even if the the characteristics of the parties to the FR 55790). However, these types of identified purpose is achieved. arrangements do not depict the entire actual arrangement being assessed for its Moreover, our final definition of commercial reasonableness, and will universe of arrangements that could be ‘‘commercially reasonable’’ requires commercially reasonable. We decline to adequately ensure that parties cannot more than furtherance of a legitimate protect abusive arrangements under the provide examples in regulation text of business purpose of the parties. The guise of ‘‘commercial reasonableness.’’ arrangements that may be commercially arrangement must also be sensible, Comment: One commenter asked us reasonable, because the determination to confirm that the test of commercial considering the characteristics of the of whether a compensation arrangement reasonableness relates primarily to the parties, including their size, type, scope, is commercially reasonable is non-financial elements of an and specialty. If the only requirement to dependent on the facts and arrangement. demonstrate that an arrangement is circumstances of the parties. Even a Response: We understand the commercially reasonable is non-exhaustive list of the types of commenter to be inquiring whether the contemporaneous written arrangements that are potentially existence of the compensation documentation stating that it is commercially reasonable could arrangement must be commercially commercially reasonable, unscrupulous inadvertently limit or otherwise reasonable as opposed to whether the parties could satisfy the requirement proscribe the types of arrangements that precise compensation terms of the simply by including sufficient template parties undertake. Moreover, it is not arrangement must be commercially language in their documentation, even possible to know definitively that, in reasonable. That is, we understand the if, in reality, the arrangement could not every instance, a particular type of commenter to be seeking confirmation further the legitimate business purposes arrangement would be commercially that the concept of commercial of the parties (assuming they have a reasonable. An arrangement that is reasonableness does not relate to the legitimate business need for the commercially reasonable for one set of amount of or formula for compensation arrangement) or is not sensible, parties may not be commercially paid under an arrangement, but rather considering the characteristics of the reasonable for another. whether the entire arrangement is parties, including their size, type, scope, Comment: One commenter that asked commercially reasonable. As we stated and specialty. Further, the fact that an us to provide examples of arrangements in the proposed rule and previously in arrangement ultimately achieved a that would be considered commercially this final rule, when determining the legitimate business purpose of the reasonable asserted that examples are commercial reasonableness of an parties does not necessarily mean that it necessary so that parties may avoid arrangement, the question to ask is was a commercially reasonable unintentional noncompliance with the whether the arrangement makes sense as arrangement. Where a financial commercial reasonableness a means to accomplish the parties’ relationship exists between a physician requirement, particularly in the context goals. The test is not whether the (or an immediate family member of a of value-based arrangements for which compensation terms alone make sense physician) and an entity to which the the commercial reasonableness of the as a means to accomplish the parties’ physician makes referrals for designated arrangement is required. Another goals; however, the compensation terms health services, compliance with the commenter stated its assumption that of an arrangement are an integral part of physician self-referral law requires CMS ‘‘expects that value-based the arrangement and impact its ability to substantive compliance, not merely payments must still be tested for accomplish the parties’ goals (84 FR documentary (or ‘‘paper’’) compliance, commercial reasonableness’’ and asked 55790). with the requirements of an applicable us to confirm its belief. The commenter Comment: One commenter urged us exception. An irrebuttable presumption specifically requested us to confirm to adopt a policy under which an of commercial reasonableness that that, for any new exceptions for value- arrangement would be presumed to be ensures that parties are shielded from based arrangements, the determination commercially reasonable if, allegations of violation of the False of commercial reasonableness may be contemporaneously with the Claims Act if their documentation based on more than just cost savings to commencement of the arrangement, the includes specific language or their the value-based enterprise. The governing body of the entity (or its arrangement ultimately achieved its commenter asserted that, in

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arrangements where cost savings are be suddenly unable to ascertain the one medical director for the oncology negligible, enhanced access to care, meaning of the term. We see great department, but later enters into a increased care coordination, and benefit in using consistent terminology second arrangement with another improved quality of care may support a throughout our regulations where we physician for oversight of the determination of the value-based intend an identical policy or standard. department, the second arrangement arrangement’s commercial With respect to the second commenter’s merely duplicates the already-obtained reasonableness. question, we believe that the medical directorship services and may Response: As we explained in section requirement represents an objective not be commercially reasonable. II.A.2. of this final rule, the new standard. This requirement in the Although the evaluation of compliance exceptions for value-based arrangements definition of ‘‘commercially reasonable’’ with the physician self-referral law finalized at § 411.357(aa) do not include is similar to the requirements in the always requires a review of the facts and a requirement that the value-based exceptions referenced, all of which circumstances of the financial arrangement is commercially represent objective standards. Although relationship between the parties, the reasonable. Of course, parties may identifying the business purpose of an commercial reasonableness of multiple utilize any applicable exception to arrangement may entail an inquiry into arrangements for the same services is demonstrate compliance with the the parties’ intent for the arrangement, questionable. physician self-referral law. If the the requirement in the definition of In the proposed rule, we discussed exception upon which parties to a ‘‘commercially reasonable’’ that the numerous examples of compensation value-based arrangement rely includes a arrangement furthers a legitimate arrangements described by CMS RFI requirement that the arrangement is business purpose of the parties would commenters as commercially commercially reasonable, the be considered only after the reasonable, in their opinions, despite arrangement must further a legitimate determination that there actually exists the fact that the party paying the business purpose of the parties. In a legitimate business purpose for the remuneration does not recognize an addition, it must be sensible, arrangement. As we stated in the equivalent or greater financial benefit considering the characteristics of the proposed rule, conduct that violates a from the items or services purchased in parties, including their size, type, scope, criminal law, such as inducing or the transaction, or that the party and specialty. However, as we stated in rewarding referrals in violation of the receiving the remuneration incurs costs the proposed rule, the determination of anti-kickback statute, would not be a in furnishing the items or services that whether the arrangement is legitimate business purpose for an are greater than the amount of the commercially reasonable is not one of arrangement (84 FR 55791). Thus, the remuneration received (84 FR 55790). valuation (84 FR 55790), and an arrangement would not be commercially The underlying purposes of the arrangement may be commercially reasonable, and the question of whether compensation arrangements described reasonable even if it does not result in the arrangement furthers a legitimate by the CMS RFI commenters included profit for one or more of the parties. business purpose would not be reached. addressing community need, timely Comment: A few commenters Comment: One commenter agreed that access to health care services, expressed concern that the term an arrangement does not further the fulfillment of licensure or regulatory ‘‘legitimate business purpose’’ does not legitimate business purposes of the obligations (including those under the provide enough certainty for parties if, for example, a hospital Emergency Medical Treatment and stakeholders. Another commenter asked engages more medical directors than it Labor Act (EMTALA)), the provision of how the requirement that an needs to furnish required medical charity care, and the improvement of arrangement must further a legitimate direction, but asked for additional quality and health outcomes. We believe business purpose of the parties in order guidance on our interpretation of the that all of these purposes could qualify to be commercially reasonable is term ‘‘legitimate business purpose.’’ as ‘‘legitimate business purposes’’ of the different from a query into the Another commenter expressed concern parties to an arrangement, depending on subjective intent of the parties (that is, that unscrupulous parties could identify the facts and circumstances of the whether a purpose of the arrangement is the goal of attracting a physician’s parties. to induce or reward referrals). business as a ‘‘legitimate business We share the second commenter’s Response: The term ‘‘legitimate purpose’’ of its compensation concern that unscrupulous parties could business purpose’’ appears in both the arrangement with the physician. This claim that a compensation arrangement statutory and regulatory exceptions to commenter also suggested that an is commercially reasonable by claiming the physician self-referral law. The arrangement that is unprofitable should that attracting a physician’s business is commenter did not clearly explain how have discrete and well-documented a ‘‘legitimate business purpose’’ for their the use of this term in the definition of factors establishing that it furthers a arrangement. In the proposed rule, we ‘‘commercially reasonable’’ is any less legitimate business purpose of the explained that we were not proposing to clear or appropriate than its use in the parties (such as a regulatory or licensure include the phrase ‘‘even if no referrals special rule at § 411.354(d)(4)(v) or the requirement or a patient access issue) in were made’’ in the definition of exceptions for the rental of office space order to qualify as commercially ‘‘commercially reasonable’’ because this at § 411.357(a)(3), the rental of reasonable. qualifying phrase (or similar language) equipment at § 411.357(b)(2), personal Response: As we noted in the appears in the regulation text of many service arrangements at proposed rule, arrangements that, on exceptions that require an arrangement § 411.357(d)(1)(iii), and fair market their face, appear to further a legitimate to be commercially reasonable (84 FR value compensation at § 411.357(l)(4) business purpose of the parties may not 55791). Thus, it would be redundant to (prior to its revision in this final rule). be commercially reasonable if they include the language in the definition of Given that the language finalized in our merely duplicate other facially ‘‘commercially reasonable’’ itself. We definition of ‘‘commercially reasonable’’ legitimate arrangements (84 FR 55790). were clear that we were not proposing is identical to that used in longstanding For example, a hospital may enter into to remove this qualifying language from statutory and regulatory exceptions and an arrangement for the personal services the exceptions in which it appears. We our special rule at § 411.354(d)(4)(v), we of a physician to oversee its oncology believe that this qualifying language see no reason why stakeholders would department. If the hospital needs only provides critical protection against

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program or patient abuse, as an the language ‘‘even if no referrals were physician practice losses may indicate arrangement must be commercially made between the parties’’ and, for the arrangements that should be further reasonable even if no referrals were reasons explained in our response to the scrutinized as possible fraud and abuse made by the physician. As described in previous comment, have added this risks. greater detail in sections II.D.10. and language to the exception for fair market Response: We decline to adopt the II.E.1. of this final rule, we are adding value compensation at § 411.357(l) and commenters’ suggestions regarding the this language where it had not the new exception for limited extension of our policy. Although we previously been included in the remuneration to a physician at believe that compensation arrangements exception for fair market value § 411.357(z). Unless the context that do not result in profit for one or compensation at § 411.357(l) and in the indicates otherwise, the term ‘‘referral’’ more of the parties may nonetheless be new exception for limited remuneration has the meaning set forth in § 411.351 commercially reasonable, we are not to a physician finalized at § 411.357(z). throughout the physician self-referral convinced that the profitability of an An arrangement whose purpose is to regulations, including in this limiting arrangement is completely irrelevant or attract a physician’s business, even if phrase. always unrelated to a determination of the parties claim this purpose, would Comment: Most commenters that its commercial reasonableness, for not be commercially reasonable in the addressed the definition of instance, in a case where the parties absence of the physician’s referrals and, ‘‘commercially reasonable’’ expressed enter into an arrangement aware of its thus, would not satisfy this important appreciation for the clarification in the certain unprofitability and there exists no identifiable need or justification— requirement of the exceptions generally proposed rule of our position that other than to capture the physician’s applicable to compensation compensation arrangements that do not arrangements that call for items or referrals—for the arrangement. result in profit for one or more of the We agree with the commenters that it services to be provided by a physician. parties may nonetheless be Finally, in the proposed rule, we also is appropriate and helpful to include in commercially reasonable (84 FR 55790), discussed our review of Internal regulation text our policy regarding the and supported the inclusion of this Revenue Service (IRS) Revenue Ruling impact of an arrangement’s profitability policy statement at proposed § 411.351. 97–21 and its conclusion that a hospital on its ability to satisfy the requirement Commenters echoed the potential may not engage in substantial unlawful that it is commercially reasonable. We reasons set forth in the proposed rule activities and maintain its tax-exempt are not adopting the alternative why an arrangement may not be status because the conduct of an characterization of our policy as unlawful activity is inconsistent with profitable, but yet still commercially ‘‘profitability is not a requirement for an charitable purposes (84 FR 55790). In reasonable, and added that, despite the arrangement to be commercially this final rule, we are similarly taking parties’ prediction of profitability at the reasonable’’ because we do not believe the position that an activity that is in onset of an arrangement, an arrangement that this language is as clear or precise violation of a criminal law would not be may simply not ‘‘pan out.’’ Many of as the language we proposed. We are a legitimate business purpose of the these commenters requested that we finalizing in regulation text at § 411.351 parties and, therefore, would not be extend our policy regarding the effect our policy that ‘‘an arrangement may be commercially reasonable for purposes of that the profitability of a compensation commercially reasonable even if it does the physician self-referral law. We note arrangement has on the arrangement’s not result in profit for one or more of the that the absence of a criminal violation ability to satisfy the requirement that it parties.’’ would not, in and of itself, establish that is commercially reasonable to state that Comment: One commenter asked for an arrangement is commercially commercial reasonableness is unrelated, confirmation that any definition of reasonable. wholly unrelated, or irrelevant to the ‘‘commercially reasonable’’ finalized by Comment: Several commenters profitability of the arrangement to one CMS will not apply to regulations addressed our preamble discussion or more of the parties. One commenter enforced by the IRS, OIG or pursuant to regarding the requirement in our suggested that we state in regulation text state law. regulations that a compensation that profitability is not a requirement for Response: The commenter is correct. arrangement must be commercially an arrangement to be commercially The introductory language to § 411.351 reasonable even if no referrals were reasonable. Another commenter where the definition of ‘‘commercially made between the parties. One expressed concern that the use of the reasonable’’ appears in our regulation commenter suggested that, if CMS word ‘‘may’’ does not provide a bright- text states that the definitions in [Title intends that an arrangement should be line rule for stakeholders. One 42, part 411, Subpart J] apply only for commercially reasonable even in the commenter noted that the concept of purposes of section 1877 of the Act and absence of referrals, that phrase should commercial reasonableness has been [Subpart J]. be added to the exceptions or, if used as an enforcement tool for business Comment: One commenter asked how referrals may be considered, CMS decisions that might not have turned out CMS interprets the requirements at should so state. These commenters to be good business decisions, but were § 411.357(a)(3) and (b)(2) in the requested that we expressly confirm that made in good faith, or that are strategic exceptions for the rental of office space the term ‘‘referral’’ in these references in in nature without making absolute and equipment, respectively, that the our exceptions has the meaning set forth ‘‘commercial sense.’’ In contrast, a few leased office space or equipment does in § 411.351 of our regulations. Another commenters asserted that there are not exceed that which is reasonable and commenter asserted that the ‘‘even if no circumstances under which it would not necessary for the legitimate business referrals were made’’ requirement is an be commercially reasonable for parties purposes of the lease arrangement. The integral part of commercial to enter into an arrangement that they commenter noted that this requirement reasonableness in applying the know would result in substantial losses and a requirement that the physician self-referral law. This to one or more of the parties. One compensation arrangement is commenter suggested that we add this commenter, while agreeing that the commercially reasonable are included limiting phrase to § 411.357(l)(4). issue of commercial reasonableness is in each of these statutory (and Response: We agree with the not solely determined by physician regulatory) exceptions. The commenter commenters regarding the inclusion of practice profitability, stated that expressed confusion about our

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description in the proposed rule of the office space, the rental of equipment, arrangement is commercially requirement in the statutory exception and personal service arrangements, we reasonable, the other requirements in for personal service arrangements that are retracting our statement from the the exception guard against program or the aggregate services contracted for do proposed rule that the requirement at patient abuse in an important and not exceed those that are reasonable and section 1877(e)(3)(A) of the Act essentially equivalent way. necessary for the legitimate business (incorporated at § 411.357(d)(1)(iii)) We note that the exception for purposes of the arrangement as another equates to a requirement that the personal service arrangements at form of the requirement that an personal service arrangement is § 411.357(d)(1) includes a requirement arrangement is commercially reasonable commercially reasonable. that the arrangement covers all the (84 FR 55790). As we stated in this section II.B.2., services to be furnished by the Response: We believe that the with respect to lease arrangements for physician (or an immediate family requirement that the leased office space office space and equipment, we member of the physician) to the entity. or equipment does not exceed that interpret the ‘‘does not exceed what is The exception permits the use of a which is reasonable and necessary for reasonable and necessary’’ requirement master list of contracts that is the legitimate business purposes of the as a protection against sham lease maintained and updated centrally and lease arrangement is intended to prevent arrangements under which a lessee pays available for review by the Secretary sham lease arrangements under which a remuneration to the lessor under the upon request. In addition, a personal lessee pays remuneration to the lessor guise of rental charges where the rental service arrangement must have a duration of at least 1 year in order to under the guise of rental charges where charges are for office space or the rental charges are for office space or qualify for protection under the equipment for which the lessee has no equipment for which the lessee has no exception at § 411.357(d)(1). We are genuine or reasonable use. We similarly genuine or reasonable use. The statutory aware that, because personal service interpret this requirement in the context and regulatory exceptions for the rental arrangements may not satisfy these of the exception for personal service of office space and the rental of requirements, parties often rely on the arrangements as a protection against equipment also include a requirement exception at § 411.357(l) for fair market sham arrangements for the services of a that the lease arrangement would be value compensation to protect their physician for which the entity has no commercially reasonable even if no arrangements for the personal services genuine or reasonable use. In the referrals were made between the lessee of physicians and their immediate proposed rule, we stated that and the lessor. The new definition of family members. We remind readers ‘‘commercially reasonable’’ at final arrangements that, on their face, appear that the exception for fair market value § 411.351 applies for purposes of to further a legitimate business purpose compensation includes a requirement interpreting this requirement. Thus, the of the parties may not be commercially that the arrangement is commercially particular lease arrangement must reasonable if they merely duplicate reasonable, and as explained in section further a legitimate business purpose of other facially legitimate arrangements II.D.10. of this final rule, we are revising the parties to the arrangement and must (84 FR 55790). We provided the the regulation text of that exception to be sensible, considering the example of a hospital that enters into require that the arrangement is characteristics of the parties, including multiple arrangements for medical commercially reasonable even if no their size, type, scope, and specialty. director services for a single department referrals were made between the parties. The statutory exception at section even though the hospital needs only one 1877(e)(3)(A) of the Act for personal medical director for the department. We 3. The Volume or Value Standard and service arrangements includes a stated that the commercial the Other Business Generated Standard requirement that the aggregate services reasonableness of multiple (§ 411.354(d)(5) and (6)) contracted for under the personal arrangements for the same services is Many of the exceptions at section service arrangement do not exceed those questionable. Multiple arrangements for 1877(e) of the Act (‘‘Exceptions Relating that are reasonable and necessary for the the same personal services may also to Other Compensation Arrangements’’) legitimate business purposes of the result in the failure of the duplicate and in our regulations include a arrangement. We included this arrangements to satisfy the ‘‘reasonable requirement that the compensation paid requirement in the regulatory exception and necessary’’ requirement in the under the arrangement is not for personal service arrangements at exception for personal services at determined in any manner that takes § 411.357(d)(1)(iii). Unlike the section 1877(e)(3)(A) of the Act and into account the volume or value of exceptions for the rental of office space § 411.357(d)(1)(iii). In the proposed rule, referrals by the physician who is a party and the rental of equipment, the we also discussed our view that an to the arrangement, and some exception for personal service activity that is in violation of criminal exceptions also include a requirement arrangements does not include—either law would not be a legitimate business that the compensation is not determined in the statute or our regulations—a purpose of the parties and, therefore, in any manner that takes into account separate requirement that the would not be commercially reasonable other business generated between the arrangement is commercially for purposes of the physician self- parties. We refer to these as the ‘‘volume reasonable. The commenter raises a referral law (84 FR 55791). Activity that or value standard’’ and the ‘‘other valid point regarding our statement in is in violation of criminal law would business generated standard,’’ the proposed rule that, with respect to also fail to satisfy the requirement in the respectively. Throughout the regulatory the exception for personal services, the exception for personal service history of the physician self-referral law, ‘‘does not exceed what is reasonable and arrangements that the services to be we have shared our interpretation of necessary’’ requirement is a different furnished under the arrangement do not these standards and responded to form of the requirement that the involve the counseling or promotion of comments as they arose. Despite our arrangement is commercially a business arrangement or other activity attempt at establishing clear guidance reasonable. Upon further review of the that violates any Federal or State law. regarding the application of the volume similarities and differences in the Thus, although the exception for or value standard and the other business requirements in the statutory and personal service arrangements does not generated standard, commenters to regulatory exceptions for the rental of include a requirement that the several requests for information,

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including the CMS RFI, identified their rule for a discussion of the historical 877). This policy would apply also to lack of a clear understanding as to inclusion of Medicaid referrals in our the value of the physician’s referrals of whether compensation will be regulations and our revisions to the designated health services to his or her considered to take into account the group practice rules.) Outside of the practice if the compensation volume or value of referrals or other group practice context, these principles arrangement between the physician and business generated by the physician as apply generally to compensation from the practice satisfied the requirements one of the greatest risks they face when an entity to a physician. We also of an applicable exception. structuring arrangements between addressed the other business generated Also in Phase I, we established entities furnishing designated health standard in the 1998 proposed rule, special rules on compensation at services and the physicians who refer to stating that we believe that the Congress § 411.354(d)(2) and (3) that deem unit- them. They stated that, not only do they may not have wished to except based compensation not to take into face the risk of penalties under the arrangements that include additional account the volume or value of referrals physician self-referral law, but, because compensation for other business or other business generated between the a violation of the physician self-referral dealings and that, if a party’s parties if certain conditions are met (66 law may be the predicate for liability compensation contains payment for FR 876 through 877). These rules state under the False Claims Act, entities are other business generated between the that unit-based compensation will be susceptible to both government and parties, we would expect the parties to deemed not to take into account the whistleblower actions that can result in separately determine if this extra volume or value of referrals if the significant penalties through litigation payment falls within one of the compensation is fair market value for or settlement. In the proposed rule, we exceptions (63 FR 1700). items or services actually provided and does not vary during the course of the proposed regulations intended to In Phase I, we finalized our policy compensation arrangement in any provide objective tests for determining regarding the volume or value standard manner that takes into account referrals whether compensation takes into and the other business generated of designated health services. Unit- account the volume or value of referrals standard, responding to comments on based compensation will be deemed not or the volume or value of other business the proposals included in the 1998 to take into account the volume or value generated by the physician. We also proposed rule. Most importantly, we of other business generated between the provided a brief history of the guidance revised the scope of the volume or value parties to a compensation arrangement to date on the volume or value standard standard to permit time-based or unit of and the other business generated if the compensation is fair market value service-based compensation formulas for items or services actually provided standard. We believe it is useful to (66 FR 876). We also stated that the repeat that history in this final rule. and does not vary during the term of the phrase ‘‘does not take into account other compensation arrangement in any In the 1998 proposed rule, we business generated between the parties’’ manner that takes into account referrals discussed the volume or value standard means that the fixed, fair market value or other business generated by the as it pertains to the criteria that a payment cannot take into account, or referring physician, including private physician practice must meet to qualify vary with, referrals of designated health pay health care business. We note that as a ‘‘group practice’’ (63 FR 1690). We services payable by Medicare or the special rules use the phrase ‘‘takes also stated that we would apply this Medicaid or any other business into account referrals’’ (or other interpretation of the volume or value generated by the referring physician, business generated) rather than ‘‘takes standard throughout our regulations (63 including other Federal and private pay into account the volume or value of FR 1699 through 1700). In the business (66 FR 877), noting that the referrals’’ (or other business generated). discussion of group practices, we stated phrase ‘‘generated between the parties’’ Both special rules apply to time-based that we believe that the volume or value means business generated by the or per-unit of service-based (‘‘per-click’’) standard precludes a group practice referring physician for purposes of the compensation formulas. However, as we from paying physician members for physician self-referral law (66 FR 876). later noted in Phase II, the special rules each referral they personally make or We stated that section 1877 of the Act on unit-based compensation are based on the volume or value of the establishes a straightforward test that intended to be safe harbors, and there referred services (63 FR 1690). We went compensation should be at fair market may be some situations not described in on to state that the most straightforward value for the work or service performed § 411.354(d)(2) or (3) where an way for a physician practice to or the equipment or [office] space arrangement does not take into account demonstrate that it is meeting the leased—not inflated to compensate for the volume or value of referrals or other requirements for group practices would the physician’s ability to generate other business generated between the parties be for the practice to avoid a link revenue (66 FR 877). Finally, in (69 FR 16070). between physician compensation and response to a comment about whether In Phase II, we clarified that the volume or value of any referrals, the compensation paid to a physician personally performed services are not regardless of whether the referrals for the purchase of his or her practice considered other business generated by involve Medicare or Medicaid patients could include the value of the the referring physician (69 FR 16068). (63 FR 1690). However, because our physician’s referrals of designated We also stated that fixed compensation definition of ‘‘referral’’ at § 411.351 health services to the practice, we stated (that is, one lump-sum payment or includes only referrals for designated that compensation may include the several individual payments aggregated health services, we also noted that a value of designated health services together) can take into account or physician practice could compensate its made by the physician to his or her otherwise reflect the volume or value of members on the basis of non-Medicare practice if the designated health services referrals (for example, if the payment and non-Medicaid referrals, but would referred by the selling physician exceeds the fair market value for the be required to separately account for satisfied the requirements of an items or services provided) (69 FR revenues and distributions related to applicable exception, such as the in- 16059). We noted that a determination referrals for designated health services office ancillary services exception, and whether the compensation does, in fact, for Medicare and Medicaid patients (63 the purchase arrangement is not take into account or otherwise reflect FR 1690). (See section II.C. of this final contingent on future referrals (66 FR the volume or value of referrals will

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require a case-by-case examination § 411.354(c)(2) or applying the special referrals of designated health services based on the facts and circumstances. rule on compensation that is deemed to (66 FR 908). (We note that the language ‘‘otherwise be set in advance at § 411.354(d)(1). For In the proposed rule, we explained reflects’’ was determined to be the reasons discussed below in response that, even with nonsubstantive changes superfluous and removed from our to comments, the final special rules at to standardize (where possible) the regulation text in Phase III (72 FR § 411.354(d)(5) and (6) do not apply for language used to describe the volume or 51027).) purposes of applying the special rules value standard and the other business Until now, we had not codified for unit-based compensation at generated standard in our regulations, regulations defining the volume or value § 411.354(d)(2) and (3). We are due to the varying language used standard or the other business generated including regulation text at throughout the statutory and regulatory standard, although the special rule at § 411.354(d)(5)(iv) and (6)(iv) regarding schemes, we find it impossible to § 411.354(d)(4) sets forth the the application of the volume or value establish a single definition for the circumstances under which a standard and the other business volume or value and other business physician’s compensation under a bona generated standard for purposes of generated standards (84 FR 55793). fide employment relationship, personal applying the special rules for unit-based Therefore, instead of a definition at service arrangement, or managed care compensation. § 411.351, we proposed special rules for contract may be conditioned on the As we stated in the proposed rule, we compensation arrangements that would apply regardless of the exact language physician’s referrals to a particular believe there is great value in having an used to describe the standards in the provider, practitioner, or supplier objective test for determining whether statute and our regulations. We also without running afoul of the volume or the compensation is determined in any explained that, because section 1877 of value standard. For the reasons manner that takes into account the the Act defines a compensation explained in more detail below and in volume or value of referrals or takes into arrangement as any arrangement our responses to comments, in this final account other business generated involving any remuneration between a rule, we are finalizing special rules at between the parties (84 FR 55793). Our physician (or an immediate family § 411.354(d)(5) and (6) that supersede final rules establish such a test. We are member of such physician) and an our previous guidance, including finalizing an approach that, rather than entity, we believe that it is necessary deeming compensation under certain guidance with which they may be (or that the tests address circumstances appear to be) inconsistent. Our final circumstances not to have been where the compensation is from the policies relate to the volume or value determined in a manner that takes into entity to the physician, as well as where and other business generated standards account the volume or value of referrals the compensation is from the physician as they apply to the definition of or takes into account other business to the entity. Therefore, we proposed remuneration at section 1877(h)(1)(C) of generated between the parties, defines two separate special rules for the the Act and § 411.351 of our regulations, exactly when compensation will be volume or value standard and two the exception for academic medical considered to take into account the separate special rules for the other centers at § 411.355(e)(1)(ii), and various volume or value of referrals or take into business generated standard. exceptions for compensation account other business generated Under our proposals, compensation arrangements in section 1877(e) of the between the parties. Under our final from an entity to a physician (or Act and § 411.357 of our regulations, regulations, which we believe create the immediate family member of the including the new exception established bright-line rule sought by commenters physician) would take into account the in this final rule for limited and other stakeholders, outside of the volume or value of referrals only if the remuneration to a physician at circumstances at § 411.354(d)(5) and (6), formula used to calculate the § 411.357(z). In addition, the regulation compensation will not be considered to physician’s (or immediate family at final § 411.354(d)(5)(i) applies for take into account the volume or value of member’s) compensation includes the purposes of section 1877(h)(4) of the Act referrals or take into account other physician’s referrals to the entity as a and the group practice regulations at business generated between the parties, variable, resulting in an increase or § 411.352(g) and (i). The final policies respectively. In other words, only when decrease in the physician’s (or do not apply for purposes of applying the mathematical formula used to immediate family member’s) the exceptions at § 411.357(m), (s), (u), calculate the amount of the compensation that positively correlates (v), and (w), or for purposes of applying compensation includes referrals or other with the number or value of the the new exception finalized in this final business generated as a variable, and the physician’s referrals to the entity. For rule at § 411.357(bb) for cybersecurity amount of the compensation correlates example, if the physician (or immediate items and services. We are including with the number or value of the family member) receives additional regulation text at § 411.354(d)(5)(iv) and physician’s referrals to or the compensation as the number or value of (6)(iv) regarding the application of the physician’s generation of other business the physician’s referrals to the entity volume or value standard and the other for the entity, is the compensation increase, the physician’s (or immediate business generated standard for considered to take into account the family member’s) compensation would purposes of applying these exceptions. volume or value of referrals or take into positively correlate with the number or Given the revisions to our regulations at account the volume or value of other value of the physician’s referrals. In the § 411.354(c)(2) and (d)(1), which business generated. We believe that our proposed rule, we stated that, unless the eliminate language regarding final regulations are consistent with the special rule at § 411.354(d)(2) for unit- compensation that is determined in any position we articulated in Phase I where based compensation applies and its manner that takes into account the we stated that, in general, we believe conditions are met, the physician’s (or volume or value of referrals or other that a compensation structure does not immediate family member’s) business generated by a physician, the directly take into account the volume or compensation would take into account final special rules at § 411.354(d)(5) and value of referrals if there is no direct the volume or value of referrals (84 FR (6) do not apply for purposes of correlation between the total amount of 55793). For the reasons explained in our determining the existence of an indirect a physician’s compensation and the response to comments below, we are compensation arrangement under volume or value of the physician’s retracting this statement. Under the

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policies set forth in this final rule, as with the number or value of the designated at § 411.354(d)(5)(i), (ii), and described in our response to comments physician’s referrals to the entity. For (iii) (with respect to compensation from below, the special rules at example, if a physician (or immediate an entity to a physician (or immediate § 411.354(d)(2) and (3) are not family member) pays less compensation family member of a physician)) and applicable to compensation that takes as the number or value of the § 411.354(d)(6)(i), (ii), and (iii) (with into account the volume or value of physician’s referrals to the entity respect to compensation from a referrals under final § 411.354(d)(5)(i) or increases, the compensation from the physician (or immediate family member (6)(i) or to compensation that takes into physician to the entity would negatively of a physician) to an entity). As set forth account other business generated by a correlate with the number or value of at final § 411.354(d)(5)(iv) and (6)(iv), physician under final § 411.354(d)(5)(ii) the physician’s referrals. In the these special rules do not apply for or (6)(ii). We have revised the regulation proposed rule, we stated that, unless the purposes of applying the exceptions at text at § 411.354(d)(2) and (3) special rule at § 411.354(d)(2) for unit- § 411.357(m), (s), (u), (v), and (w), or for accordingly. If compensation takes into based compensation applies and its purposes of applying the new exception account the volume or value of referrals requirements are met (which seems established in this final rule at or the volume or value of other business unlikely), the compensation would take § 411.357(bb) for cybersecurity items generated under final § 411.354(d)(5) or into account the volume or value of and services. Although our final (6), that determination is final. The referrals (84 FR 55793). We are regulations are ‘‘special rules’’ on special rules at § 411.354(d)(2) and (3) retracting this statement. Under the compensation, we interpret them in the may not be applied to then deem the policies set forth in this final rule, as same manner as definitions. That is, the compensation not to take into account described above and in our response to special rules are intended to define the the volume or value of referrals or other comments below, the special rules at universe of circumstances under which business generated. § 411.354(d)(2) and (3) are not compensation is considered to take into To illustrate our proposed policy, in applicable to compensation that takes account the volume or value of referrals the proposed rule, we provided an into account the volume or value of or other business generated by the example under which a physician referrals under final § 411.354(d)(5)(i) or physician. If the methodology used to organization does not qualify as a group (6)(i) or to compensation that takes into determine the physician’s compensation practice under § 411.352 of the account the volume or value of other or the payment from the physician does physician self-referral regulations. business generated by the physician not fall squarely within the defined Under the example, the physician under final § 411.354(d)(5)(ii) or (6)(ii). circumstances, the compensation is not organization pays its physicians a If compensation takes into account the considered to take into account the percentage of collections attributed to volume or value of referrals or the volume or value of the physician’s the physician, including personally volume or value of other business referrals or other business generated by performed services and services generated under final § 411.354(d)(5) or the physician, as appropriate, for furnished by the physician organization (6), that determination is final. The purposes of the physician self-referral (the physician’s ‘‘pool’’). If a physician’s special rules at § 411.354(d)(2) and (3) law. pool includes amounts collected for may not be applied to then deem the designated health services furnished by compensation not to take into account We also proposed additional policies the physician organization that he the volume or value of referrals or other at proposed § 411.354(d)(5)(i)(B) and ordered but did not personally perform, business generated. (ii)(B), and at proposed the physician’s compensation takes into To illustrate our proposed policy, in § 411.354(d)(6)(i)(B) and (ii)(B), account the volume or value of his the proposed rule, we provided an outlining narrowly-defined referrals to the physician organization. example under which a physician leases circumstances under which fixed-rate Assuming the physician is paid 50 medical office space from a hospital. compensation (for example, a fixed percent of the amount in his pool, the Our example assumed that the rental annual salary or an unvarying per-unit mathematical formula that illustrates charges are $5,000 per month and the rate of compensation) would be the physician’s compensation would be: arrangement provides that the monthly considered to be determined in a Compensation = (.50 × collections from rental charges will be reduced by $5 for manner that takes into account the personally performed services) + (.50 × each diagnostic test ordered by the volume or value of referrals or other collections from referred designated physician and furnished in one of the business generated by a physician for health services) + (.50 × collections from hospital’s outpatient departments. the entity paying the compensation. For non-designated health services Under our proposal, the compensation the reasons described in response to referrals). The policy proposed with (that is, the rental charges) would take comments below and in section II.B.4. respect to when compensation from an into account the volume or value of the of this final rule, we are not finalizing entity to a physician (or immediate physician’s referrals to the hospital. The the proposed regulations. However, to family member of the physician) takes mathematical formula that illustrates address the concerns prompting the into account other business generated the rental charges paid by the physician policy described in the proposed rule would operate in the same manner (84 to the hospital would be: Compensation with respect to referrals of designated FR 55793). = $5,000¥($5 × the number of health services, we are revising Analogously, we proposed that designated health services referrals). § 411.354(d)(4), which sets forth compensation from a physician (or The proposed policy with respect to requirements that must be met if a immediate family member of the when compensation from a physician physician’s compensation is physician) to an entity takes into (or immediate family member of the conditioned on the physician’s referrals account the volume or value of referrals physician) to an entity takes into to a particular provider, practitioner, or only if the formula used to calculate the account other business generated would supplier; that is, if, under the bona fide compensation paid by the physician operate in the same manner (84 FR employment relationship, personal includes the physician’s referrals to the 55793 through 55794). service arrangement, or managed care entity as a variable, resulting in an We are finalizing our proposals with contract the physician’s referrals are increase or decrease in the modifications to the structure of the directed to a particular provider, compensation that negatively correlates regulations. The final regulations are practitioner, or supplier. The final

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policy is designated at commenter’s concern was that the arrangements directly between an entity § 411.354(d)(4)(vi) and states that, payment to the physician is inevitably and a physician or is an indirect regardless of whether the physician’s linked to a facility fee, which is a compensation arrangement analyzed compensation takes into account the designated health service (that is, a under the exception at § 411.357(p). Our volume or value of referrals by the hospital service). Accordingly, the position has not changed since the physician, neither the existence of the commenter wondered whether the publication of Phase II, and we reaffirm compensation arrangement nor the payment to the physician would be here our statements in the proposed amount of the compensation may be considered an improper productivity rule. An association between personally contingent on the volume or value of the bonus based on a referral of designated performed physician services and physician’s referrals to the particular health services (that is, the facility fee). designated health services furnished by provider, practitioner, or supplier. See In response, we stated that the fact that an entity does not convert compensation section II.B.4. of this final rule for corresponding hospital services are tied solely to the physician’s personal further discussion of § 411.354(d)(4)(vi). billed would not invalidate an productivity into compensation that In the proposed rule, we stated that employed physician’s personally takes into account the volume or value we believe that the modifier ‘‘directly or performed work, for which the of a physician’s referrals to the entity or indirectly’’ is implicit in the physician may be paid a productivity the volume or value of other business requirements that compensation is not bonus (subject to the fair market value generated by the physician for the determined in any manner that takes requirement). We acknowledged entity. Although commenters requested into account the volume or value of stakeholder concerns that, following the that we codify these policies in referrals or the volume or value of other 2, 2015 opinion of the United States regulation text, we decline to do so, as business generated (84 FR 55794). We Court of Appeals for the Fourth Circuit we do not believe that it is necessary are finalizing our proposal to remove in United States ex rel. Drakeford v. given the policies set forth in the final the modifier from the regulations where Tuomey Healthcare System, Inc. (792 regulations at § 411.354(d)(5) and (6). it appears in connection with the F.3d 364) (Tuomey), CMS may no longer However, as described below in our standards and the related requirements. endorse this policy. We stated that we response to comments, we are revising We also highlighted that, where the believe that the objective tests for the regulations at § 411.354(c)(2) statute or regulations specifically allow determining whether compensation regarding the existence (that is, parties to determine compensation in a takes into account the volume or value definition) of an indirect compensation manner that only indirectly takes into arrangement. We believe the revisions to account the volume or value of referrals of referrals or the volume or value of other business generated may address § 411.354(c)(2) may alleviate the (for example, in the exception for EHR commenters’ concerns. items and services at § 411.357(w)(6) these concerns; however, for clarity, we We received the following comments and the rules for a group practice’s reaffirmed the position we took in the and our responses follow. distribution of profit shares and Phase II regulation. We stated that, with payment of productivity bonuses at respect to employed physicians, a Comment: Most commenters section 1877(h)(4)(B) of the Act and productivity bonus will not take into supported the proposed special rules on § 411.352(i)), our regulations include account the volume or value of the the volume or value standard and the guidance regarding direct versus physician’s referrals solely because other business generated standard. indirect manners of determining corresponding hospital services (that is, Some commenters requested compensation. We solicited comment designated health services) are billed modification of the standards, as on the need for additional guidance or each time the employed physician described in other comments below. regulation text that includes deeming personally performs a service. We also The commenters in support of our provisions related to the volume or clarified that our guidance extends to proposed special rules generally value standard in these exceptions. compensation arrangements that do not appreciated the clarification of terms Based on the comments we received, we rely on the exception for bona fide that they asserted have been a source of are not revising our regulations to employment relationships at confusion among providers, physicians, provide further guidance on the § 411.357(c), and under which a qui tam relators, and courts. The deeming provisions (except as provided physician is paid using a unit-based commenters stated that the objective in section II.D.11. of this final rule with compensation formula for his or her tests established in the proposed special respect to the deeming provision in the personally performed services, provided rules are easily understood, which, in exception at § 411.357(w) for EHR items that the compensation meets the turn, will greatly ease the burden on and services). conditions in the special rule at providers and suppliers attempting to Finally, in the proposed rule, we § 411.354(d)(2). That is, under a ensure compliance with the volume or discussed related guidance in our Phase personal service arrangement, an entity value and other business generated II regulation (69 FR 16088 through may compensate a physician for his or standards, as well as make a clear path 16089). In Phase II, a commenter her personally performed services using for law enforcement and the regulated presented a scenario under which a a unit-based compensation formula— industry. Commenters urged CMS to hospital employs a physician at an even when the entity bills for finalize objective standards for this outpatient clinic and pays the physician designated health services that critical terminology. In contrast, one for each patient seen at the clinic; the correspond to such personally commenter asserted that the proposed physician reassigns his or her right to performed services—and the special rules do not adequately explain payment to the hospital, and the compensation will not take into account what is meant by ‘‘includes the hospital bills for the Part B physician the volume or value of the physician’s physician’s referrals to the entity as a service (with a site-of-service referrals if the compensation meets the variable’’ and would create significantly reduction); and the hospital also bills conditions in the special rule at more confusion than the current for the hospital outpatient services, § 411.354(d)(2) (see 69 FR 16067). This standard. This commenter asserted that which may include some procedures is true whether the compensation this lack of clarity could allow for furnished as ‘‘incident to’’ services in a arrangement is analyzed under an abusive compensation arrangements and hospital setting. The Phase II exception applicable to compensation hamper enforcement efforts.

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Response: We are finalizing most of to the entity, the formula used to whether or not it is possible to ascribe our proposals to establish objective tests calculate the physician’s compensation a fair market value to them. for whether compensation takes into is: (.20 × the value of the physician’s Comment: A large number of account the volume or value of a referrals of designated health services) + commenters requested that CMS physician’s referrals to an entity or the (.20 × the value of the other business specifically address personal volume or value of other business generated by the physician for the productivity compensation by finalizing generated by a physician for an entity. entity) + (.20 × the value of services in regulation text the interpretations we We agree with the commenters that our furnished by the entity that were not described in the proposed rule (84 FR final policies will establish a clear path referred or generated by the physician). 55795). Some commenters requested for parties to design compensation The value of the physician’s referrals to that CMS confirm that personal arrangements that comply with the the entity is a variable in this formula, productivity compensation is volume or value standard and other as is the value of the other business permissible in all settings. Others business generated standard found in generated by the physician. requested that we revise the exceptions many of the exceptions to the physician Comment: A small number of for personal service arrangements, fair self-referral law. In turn, the objective commenters did not support our market value compensation, and standards should assist in law proposals for special rules that identify indirect compensation arrangements to enforcement efforts by making it clear the universe of compensation formulas expressly permit compensation whether compensation paid to or from that take into account the volume or formulas based on a physician’s a physician takes into account the value of a physician’s referrals or the personal productivity. All of the volume or value of a physician’s other business generated by the commenters noted that productivity pay referrals to an entity or the volume or physician for an entity. One of the for personally performed services is value of other business generated by a commenters asserted that the standards among the most prevalent compensation physician for an entity. As discussed were too narrow to protect the Medicare methodologies used by hospitals and more fully in our response to other program from abuse, noting that, under other entities to compensate surgeons comments, we are also clarifying in our proposals, a hospital could make and other proceduralists, as well as regulation text that, if compensation payment to a physician in anticipation physicians who do not attend to takes into account the volume or value of future referrals without a patients in a hospital setting. of a physician’s referrals to an entity or mathematical formula explicitly Commenters stated that, despite our the volume or value of other business delineating it. Other commenters affirmative statements in the proposed generated by a physician for an entity opposed CMS finalizing any of its rule that, under a personal service under final § 411.354(d)(5) or (6), no proposals, while not specifically arrangement, an entity may compensate special rule, including those at opposing the proposed special rules for a physician for his or her personally § 411.354(d)(2) and (3), may be applied the volume or value and other business performed services using a unit-based to reverse that determination. generated standards. compensation formula even when the Response: Although we agree with the entity bills for designated health We disagree with the commenter that commenters regarding the importance of services that correspond to such asserted that the proposed special rules program integrity, we believe that the personally performed services, and the would create significantly more certainty afforded by the objective compensation will not take into account confusion related to the volume or value standards we are finalizing is critical to the volume or value of the physician’s standard and the other business reduce the burden associated with referrals if the compensation meets the generated standard, and note that nearly compliance with the physician self- conditions of the special rule at all other commenters that addressed referral law’s volume or value and other § 411.354(d)(2) (84 FR 55795), they these specific proposals asserted that business generated standards. We remain concerned that an entity may the proposed special rules would believe that the policies finalized at still have to defend its compensation provide clarity for parties seeking to § 411.354(d)(5) and (6), coupled with practices in the event of a False Claims ensure that compensation is not the new condition at § 411.354(d)(4)(vi) Act allegation because satisfaction of all determined in any manner that takes prohibiting an entity from making the the requirements of an applicable into account the volume or value of a existence of a compensation exception to the physician self-referral physician’s referrals or the other arrangement or the amount of the law is an affirmative defense. business generated by a physician. With compensation contingent on the volume Response: We decline to revise the respect to the meaning of ‘‘includes the or value of the physician’s referrals to text of the regulations as requested by physician’s referrals to the entity as a the particular provider, practitioner, or the commenters. We reaffirm our variable’’ as included in the regulation supplier (as well as the other statements in the proposed rule, text at final § 411.354(d)(5)(i) and (6)(i), requirements of our exceptions) including those with respect to we refer readers to the examples mitigates the potential for program or productivity-based compensation under provided in the proposed rule and patient abuse asserted by the a bona fide employment relationship. restated above that illustrate the commenters. We remind parties that We also confirm that our policy applies mathematical formulas for determining arrangements that involve remuneration to indirect compensation arrangements. compensation that takes into account from an entity to a physician (or vice To be clear, under a bona fide the volume or value of a physician’s versa) implicate the anti-kickback employment relationship, personal referrals. The term ‘‘variable’’ has the statute. An arrangement under which a service arrangement, or indirect meaning it does with respect to general hospital makes a payment to a physician compensation arrangement, a physician mathematical principles—a symbol for a in anticipation of future referrals would may be compensated for his or her number we do not yet know. Thus, if an be suspect under the anti-kickback personally performed services using a entity pays a physician one-fifth of a statute. Moreover, our revised definition unit-based compensation formula—even bonus pool that includes all collections of ‘‘referral’’ at § 411.351 clarifies that when the entity with which the from a set of services furnished by an referrals are not items or services to be physician has a direct or indirect entity, including those from designated protected under the exceptions to the compensation arrangement bills for health services referred by a physician physician self-referral law, regardless of designated health services that

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correspond to such personally standard and other business generated forward from the effective date of this performed services—and the standard that we are finalizing in this final rule. compensation will not take into account final rule—under which productivity Comment: Two commenters asked us the volume or value of the physician’s compensation would not trigger the to confirm whether a ‘‘tiered’’ referrals if the unit-based compensation volume or value standard of the compensation model would take into meets the conditions of the special rule exceptions for bona fide employment account the volume or value of a at § 411.354(d)(2). Similarly, under a relationships, personal service physician’s referrals. The commenters personal service arrangement or indirect arrangements, or fair market value both presented the following example: compensation arrangement, a physician compensation—with Tuomey’s For the first 50 procedures that a may be compensated for his or her ‘‘correlation theory.’’ The commenters physician performs at a hospital, the personally performed services using a also asserted that, under the policies physician is paid $X per procedure. For unit-based compensation formula—even finalized here, there would no longer be the next 25 procedures that the when the entity with which the a need for the productivity bonus ‘‘safe physician performs at the hospital, the physician is paid $X + $20. The physician has a direct or indirect harbor’’ at § 411.357(c)(4). compensation arrangement bills for commenters did not specify whether the other business that correspond to such Response: Productivity compensation physician made the referrals for the personally performed services—and the based solely on a physician’s personally corresponding designated health compensation will not take into account performed services does not take into services furnished by the hospital. other business generated by the account the volume or value of the Response: The commenters did not physician if the unit-based physician’s referrals or other business provide sufficient facts to enable us to compensation meets the conditions of generated by a physician under the respond to their request. Parties may use the special rule at § 411.354(d)(3). policies finalized in this final rule. Such the process set forth in our regulations We note that the policies described in compensation would satisfy the volume at §§ 411.370 through 411.389 to request the proposed rule (84 FR 55795) and in or value standard and the other business an advisory opinion on whether a this response regarding the application generated standard, where it appears, in specific referral or referrals relating to of the special rules for unit-based the exceptions for bona fide designated health services (other than compensation have been superseded by employment relationships, personal clinical laboratory services) is the policies finalized in this final rule. service arrangements, and fair market prohibited under section 1877 of the However, these policies would be value compensation, all of which apply Act. applied when analyzing compensation to direct compensation arrangements Comment: One commenter expressed arrangements for compliance with the between entities and physicians. support for the approach of identifying physician self-referral law during Although the productivity bonus ‘‘safe the universe of circumstances in which periods prior to the effective date of this harbor’’ at § 411.357(c)(4) would not be compensation will be considered to take final rule. They have never applied and necessary to protect productivity into account the volume or value of will continue not to apply for purposes compensation based solely on a referrals or other business generated, of analyzing ownership or investment physician’s personally performed rather than the current approach that identifies limited circumstances in interests for compliance with the services under this final rule, the which compensation is deemed to not physician self-referral law, as none of provision is included in section take into account the volume or value of our exceptions in § 411.356 include a 1877(e)(2) of the Act and, therefore, we a physician’s referrals or other business requirement identical or analogous to are not removing it from our regulations. the volume or value standard or other generated by the physician for an entity. Prior to this final rule, productivity The commenter asserted that the business generated standard. To compensation based solely on a reiterate, neither the special rules at regulatory certainty provided under our physician’s personally performed approach will allow hospitals to § 411.354(d)(2) and (3) nor any guidance services would not take into account the regarding our interpretation of the encourage physicians to improve volume or value of a physician’s volume or value standard or other quality, reduce cost, and provide referrals if the conditions of the special business generated standard are relevant leadership by permitting quality and rule at § 411.354(d)(2) were met. Thus, for purposes of applying the exceptions outcomes-based bonuses payable to even prior to this final rule, the at § 411.356(c)(1) and (3), both of which physicians, bonuses to physician incorporate the requirements of productivity bonus ‘‘safe harbor’’ at leaders based on system success, and § 411.362, including the requirement at § 411.357(c)(4) would not have been unit-based compensation based on § 411.362(b)(3)(ii)(B) that a hospital necessary to ensure that a physician’s personally performed services that must not condition any physician referrals to his or her employer did not sometimes, but not always, result in ownership or investment interests either violate the physician self-referral law referrals of designated health services. directly or indirectly on the physician due to the fact that the physician Another commenter asked whether owner or investor making or influencing received productivity compensation incentive compensation paid only in the referrals to the hospital or otherwise from the employer based solely on the event of the hospital’s achievement of generating business for the hospital. physician’s personally performed overall financial performance goals Comment: A significant number of services. As we stated in the proposed would take into account the volume or commenters requested that we clarify rule and repeated above, the special value of a particular physician’s that the positions CMS took in prior rules at § 411.354(d)(5) and (6), as compensation. The commenter gave the litigation, including Tuomey, and the finalized, supersede our previous example of a physician receiving a 15 discussion in the proposed rule guidance, including guidance with percent bonus if the system has a 2 regarding productivity-based which they may be (or appear to be) percent margin, and a 20 percent bonus compensation were based on its then- inconsistent (84 FR 55792). The policies if the system has a 4 percent margin. current policy, not on the policies finalized here are prospective only and Response: We agree that identifying finalized here. Commenters asserted represent CMS policy regarding the for stakeholders the universe of that this is necessary to avoid confusing volume or value standard and the other circumstances in which we believe the special rules on the volume or value business generated standard going compensation is determined in a

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manner that takes into account the services at § 411.357(w), and an indirect compensation arrangement volume or value of a physician’s cybersecurity technology and related exists under § 411.354(c)(2). For the referrals or other business generated by services at new § 411.357(bb). These reasons explained in the response to a the physician is preferable to our former exceptions have ‘‘volume or value’’ comment below, the special rules at policy, which articulated a general rule requirements that are somewhat unique final § 411.354(d)(5) and (6) do not that compensation may not be and the special rules are not a perfect apply for purposes of applying the determined in any manner that takes fit. We have included language at final special rules on unit-based into account the volume or value of § 411.354(d)(5)(iv) and (6)(iv) to indicate compensation at § 411.354(d)(2) and (3). referrals (or other business generated by the inapplicability of the special rules As described in section II.C.1. of this a physician) and provided a single ‘‘safe for purposes of applying these particular final rule, the terms ‘‘based on’’ and harbor’’ for assurance that the specific exceptions to the physician self-referral ‘‘related to’’ exist in the regulation text compensation does not violate the law. However, the requirement in the at § 411.352(g) and (i). We interpret general rule. We caution that outcomes- exception for nonmonetary these terms to equate to ‘‘takes into based bonuses, as described by the compensation at § 411.357(k)(1)(i), account’’ when referring to the volume commenter, could fall within the which requires that the nonmonetary or value of referrals. Thus, the special circumstances of the special rules at compensation is not determined in any rule at final § 411.354(d)(5)(i) applies for final § 411.354(d)(5) and (6), depending manner that takes into account the purposes of interpreting and applying on how they are structured and whether volume or value of referrals or other the group practice regulations at referrals to the entity or other business business generated by the referring § 411.352(g) and (i), which apply only to generated by the physician for the entity physician, is similar to those in the compensation from the group practice to are variables anywhere in the exceptions where cash remuneration the physician and the physician’s mathematical formula for determining may be provided and the special rules referrals (but do not apply to the other the compensation. Although bonus at final § 411.354(d)(5) and (6) can be business generated by the physician for compensation based on ‘‘system easily applied. the group practice). success’’ may not include referrals to or Comment: A few commenters Comment: Citing concerns related to other business generated for the entity requested that CMS confirm that the recent False Claims Act litigation, many as a variable in many instances, the proposed special rules at § 411.354(d)(5) commenters asked CMS to refrain from determination of whether the formula to and (6) would apply to the using the term ‘‘correlation’’ in the final determine the compensation includes determination of whether an indirect regulations. Commenters suggested that such variables must be made on a case- compensation arrangement exists. we use the term ‘‘causal relationship’’ in by-case basis. As we explain above and Another commenter requested lieu of ‘‘correlation’’ in the special rules. in our response to other comments, confirmation that the special rules set The commenters were concerned that unit-based compensation based solely forth at final § 411.354(d)(5) and (6) the term ‘‘correlation’’ could create an on personally performed services would would apply to the determination of inference that compensation could not include the physician’s referrals to whether a physician who is a member violate the volume or value or other or the other business generated by the of the group practice directly or business generated standards without a physician for the entity as a variable indirectly receives compensation based causal relationship between referrals or and, regardless of whether an entity on the volume or value of his or her other business generated and the furnishes designated health services in referrals (§ 411.352(g)) and the compensation to or from the physician. conjunction with the physician’s requirements under the special rules for Response: We have provided personally performed services, would profit shares and productivity bonuses definitions for ‘‘positive correlation’’ not take into account the volume or at § 411.352(i). and ‘‘negative correlation’’ to indicate value of the physician’s referrals or Response: Except as specified in specifically what mathematical formulas other business generated by the § 411.354(d)(5)(iv) and (6)(iv), the will be problematic under the final physician. proposed special rules interpreting the rules. We believe that our regulations, as Comment: Many commenters noted volume or value standard at finalized, are clear and express the that our proposed interpretations of the § 411.354(d)(5)(i) and (6)(i) apply in all agency’s interpretation of the volume or volume or value and other business instances where our regulations require value standard and the other business generated standards do not readily an analysis of whether compensation is generated standard. translate in the context of nonmonetary determined in any manner that takes Comment: A few commenters compensation such as the donation of into account the volume or value of a requested that CMS require that the EHR items and services or medical staff physician’s referrals. Likewise, except physician’s referrals are a written or incidental benefits. These commenters as specified in § 411.354(d)(5)(iv) and otherwise expressly articulated variable requested that we not apply the special (6)(iv), the proposed special rules in the formula for calculating the rules at § 411.354(d)(5) and (6) to the interpreting the other business compensation paid to a physician. The exceptions where the remuneration to or generated standard at § 411.354(d)(5)(ii) commenters asserted that, under the from a physician generally is not and (6)(ii) apply in all instances where proposed special rule, it is not clear calculated as a mathematical formula. our regulations require an analysis of how the formula would be assessed, and Response: We agree with the whether compensation is determined in recommended language would signify commenters in part. The final special any manner that takes into account the that, for purposes of applying rules at § 411.354(d)(5) and (6) do not volume or value of other business § 411.357(d)(5), the test is not one of apply for purposes of applying the generated by a physician. Given the subjective intent. The commenters made exceptions for medical staff incidental revisions to the regulations at the same request, for the same reasons, benefits at § 411.357(m), professional § 411.354(c)(2) finalized in this final with respect to the other business courtesy at § 411.357(s), community- rule, and because the special rules at generated standard. Another commenter wide health information systems at final § 411.354(d)(5) and (6) have only suggested that we require that the § 411.357(u), electronic prescribing prospective application, the special compensation formula has a ‘‘direct and items and services at § 411.357(v), rules at § 411.354(d)(5) and (6) do not explicit’’ variable that results in an electronic health records items and apply to the determination of whether increase or decrease in the physician’s

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compensation that ‘‘directly, explicitly Response: We agree with the generated standard, we are revising the and’’ positively (or negatively) commenters that the special rules for special rule at § 411.354(d)(4) to address correlates with the number of value of unit-based compensation at our concerns when a physician’s the physician’s referrals to (or other § 411.354(d)(2) and (3) essentially compensation under a bona fide business generated for) the entity in nullify the proposed special rule employment relationship, personal order to take into account the volume or regarding fixed-rate compensation that service arrangement, or managed care value of referrals (or other business takes into account the volume or value contract is conditioned on the generated). of a physician’s referrals or other physician’s referrals to a particular Response: We decline to adopt the business generated by the physician for provider, practitioner, or supplier commenter’s suggestions. We believe an entity. We are not finalizing our (including the entity providing the that the special rules finalized at proposals for additional special rules compensation to the physician)—in § 411.354(d)(5) and (6) sufficiently outlining the circumstances under other words, when the physician’s articulate objective tests for assessing which we would consider fixed-rate referrals are directed to a particular whether compensation takes into compensation to be determined in a provider, practitioner, or supplier. account the volume or value of a manner that takes into account the Under the policy at final physician’s referrals or the other volume or value of referrals or other § 411.354(d)(4)(vi), regardless of business generated by a physician for an business generated by a physician for whether the physician’s compensation entity. We disagree that the final special the entity paying the compensation. takes into account the volume or value rules lack clarity or imply that the In the proposed rule, we stated that of referrals by the physician as set forth volume or value standard and other merely hoping for or even anticipating at paragraph (d)(5) of this section, business generated standard are future referrals or other business is not neither the existence of the subjective tests. Compensation paid to a enough to show that compensation is compensation arrangement nor the physician takes into account the volume determined in a manner that takes into amount of the compensation is or value of referrals if the formula used account the volume or value of referrals contingent on the volume or value of the to calculate the physician’s (or or other business generated by the physician’s referrals to the particular immediate family member’s) physician for the entity; however, we provider, practitioner, or supplier. We compensation includes the physician’s also stated that we are concerned with discuss this revision in more detail in referrals to the entity as a variable, an ‘‘if X, then Y’’ correlation between section II.B.4. of this final rule. resulting in an increase or decrease in compensation in the current term and Comment: A few commenters the physician’s (or immediate family requested clarification of the examples member’s) compensation that positively prior referrals or previous other in the proposed rule regarding fixed-rate correlates with the number or value of business generated by a physician (84 tiered compensation set using a the physician’s referrals to the entity, FR 55794). Our proposed policy focused predetermined, ‘‘if X, then Y’’ regardless of whether the formula is on fixed-rate compensation under a methodology. One commenter suggested written in a particular place or manner. current arrangement where there is a that our statement in the proposed rule The same applies to compensation that predetermined, direct correlation that the tiered compensation takes into account other business between the volume or value of a methodology in the example provided generated by the physician for the entity physician’s prior referrals or the other (84 FR 55794) is at odds with our making the payment to the physician. business previously generated for the Comment: A large number of entity and the rate of compensation paid confirmation that a productivity bonus commenters requested that we not to or by the physician (or immediate will not take into account the volume or finalize our proposal to consider fixed- family member of the physician). We value of referrals solely because rate compensation for which there is a provided examples of objectionable corresponding hospital services (that is, predetermined, direct correlation to the tiered compensation structures that designated health services) are billed physician’s prior referrals to the entity condition a physician’s compensation each time the employed physician or the other business previously on the volume or value of his or her personally performs a service. generated by the physician for the entity referrals to an entity. The conditioning Response: The example of tiered to take into account the volume or value of the existence of a compensation compensation referenced by the of referrals or other business generated arrangement would also fall within such commenter related to our proposal by the physician. Noting that fixed rate a structure; for example, ‘‘if the value of regarding fixed-rate compensation. We compensation (for example, $200,000 the physician’s referrals does not equal are not finalizing our proposal to per year) qualifies as unit-based $1,000,000 in the prior period, the consider fixed-rate compensation to take compensation, some commenters physician’s employment arrangement into account the volume or value of asserted that, even if we were to finalize will be terminated and his referrals or other business generated by this proposal, once the special rules for compensation from the entity will equal a physician. Therefore, it is unnecessary unit-based compensation at $0.’’ We believe that there is a risk of to further address the examples as § 411.354(d)(2) and (3) are applied, program or patient abuse when a requested by the commenters in the fixed-rate compensation that fails the physician will receive no future context of the volume or value standard. proposed test(s) would nonetheless be compensation if he or she fails to refer We note that the regulation at final deemed not to take into account the as required. The same is true if the § 411.354(d)(4)(vi) regarding making the volume or value of referrals or other amount of the physician’s compensation existence of a compensation business generated under the existing conditioned on the volume or value of arrangement or the amount of a regulations at § 411.354(d)(2) and (3). a physician’s referrals to an entity (or physician’s compensation contingent on Other commenters stated that the another provider, practitioner, or the volume or value of a physician’s proposal regarding fixed-rate supplier). Therefore, in lieu of the referrals to a particular provider, compensation would not establish the proposed policies treating ‘‘if X, then Y’’ practitioner, or supplier may apply to objective rule we sought and would compensation methodologies as the commenter’s examples. See section continue the uncertainty that the potential concerns under the volume or II.B.4. of this final rule for a further industry currently faces. value standard and other business discussion of final § 411.354(d)(4)(vi).

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Comment: A few commenters asserted into account the volume or value of arrangement being analyzed for that the existing special rules at other business generated and, therefore, compliance with the physician self- § 411.354(d)(2) and (3) regarding per- there would be no need to apply the referral law. unit compensation create confusion special rule at § 411.354(d)(3). If the Comment: Several commenters when considered in light of the new formula used to calculate a physician’s expressed strong support for the special rules interpreting the volume or (or immediate family member’s) proposal to remove the term ‘‘varies value standard and other business compensation does include the with’’ from the regulations at generated standard. Some of the physician’s referrals to the entity or § 411.354(c)(2)(ii) and (iii) identifying commenters suggested that CMS should other business generated by the when an indirect compensation remove the regulations at physician for the entity as a variable (for arrangement exists, stating that this § 411.354(d)(2) and (3), because they example, a payment of $50 to the would be consistent with CMS’ would no longer be necessary if we immediate family member of a expressed intent for the volume or value finalize our proposals at § 411.354(d)(5) physician for each patient who receives standard and other business generated and (6). The commenters suggested items or services furnished by the standard to have the same meaning revisions to § 411.354(d)(2) and (3) in DMEPOS supplier making the payment, wherever they occur in our regulations. the event CMS does not finalize the including items or service referred by Using the same example from the proposals for special rules at the physician), the compensation would immediately previous comment, one interpreting the volume or value take into account the volume or value of commenter asked whether, under the standard and other business generated the physician’s referrals or other regulation at proposed § 411.354(c)(2), standard § 411.354(d)(5) and (6). One business generated and, under the the compensation arrangement would commenter described a hypothetical revisions to § 411.354(d)(2) and (3) constitute an indirect compensation arrangement under which a hospital finalized here, the special rules for unit- arrangement if the compensation was contracts with a surgeon for professional based compensation would not apply. paid to the physician by an affiliate of the hospital with which the hospital has services, the surgeon performs surgeries On and after the effective date of this a financial relationship, forming an at the hospital, and the hospital pays the final rule, the special rules at unbroken chain of financial surgeon a fixed amount per personally- § 411.354(d)(2) and (3) will be either relationships between the hospital and performed relative value unit (RVU) that unnecessary or inapplicable to deem the physician. Other commenters is consistent with the fair market value unit-based compensation not to take of the physician’s services. Assuming questioned whether any unbroken chain into account the volume or value of a of financial relationships would create that the compensation would be viewed physician’s referrals or other business as not taking into account the volume or an indirect compensation arrangement if generated by a physician. However, it is CMS finalizes its proposals to remove value of the physician’s referrals to the important to preserve the regulations at hospital or other business generated by the term ‘‘varies with’’ from the § 411.354(d)(2) and (3) to assist parties, regulations at § 411.352(c)(2) and the physician for the hospital, the CMS, and law enforcement in applying commenter asked whether this is the establish the special rules interpreting the historical policies in effect at the the volume or value standard and other case based on the application of the time of the existence of the special rules at final § 411.354(d)(5) and business generated standard at compensation arrangement being § 411.354(d)(5) and (6). (6) or whether it is because the unit- analyzed for compliance with the Response: As we stated in the based compensation satisfies the physician self-referral law. Therefore, proposed rule, we proposed requirements of the special rules for per- we are not removing the regulations at nonsubstantive changes to standardize unit compensation at § 411.354(d)(2) § 411.354(d)(2) and (3) from the where possible the language used to and (3). The commenter then questioned physician self-referral regulations, describe the volume or value standard whether the special rules for unit-based although we are adding language to both and the other business generated compensation at § 411.354(d)(2) and (3) § 411.354(d)(2) and (3) to make clear standard in our regulations (84 FR would continue to be necessary if we that the regulations may not be applied 55793). Our proposal to remove the term finalize our proposals. to deem unit-based compensation not to ‘‘varies with’’ from the regulation at Response: We agree with the take into account the volume or value of § 411.354(c)(2) originated with our commenters that, under the policies referrals or other business generated by attempt at standardizing this language. finalized here, there is effectively no a physician if the compensation formula Upon consideration of the comments longer a need for the ‘‘unit-based used to calculate the physician’s (or and after developing our responses, we deeming provision’’ at § 411.354(d)(2). immediate family member’s) are not finalizing our proposal to The same is true for the deeming compensation is determined to take into remove the term ‘‘varies with’’ from provision at § 411.354(d)(3). Unit-based account the volume or value of referrals § 411.354(c)(2). If finalized as proposed, compensation that does not include a or other business generated under final the regulatory scheme outlining the physician’s referrals to the entity as a § 411.354(d)(5) or (6). Because the conditions under which an indirect variable in the formula used to calculate special rules at final § 411.354(d)(5) and compensation arrangement exists would the physician’s (or immediate family (6) have prospective application only, have eliminated most unbroken chains member’s) compensation would not take we are confirming in regulation text at of financial relationships between into account the volume or value of the § 411.354(d)(5)(iv) and (6)(iv) that they entities that furnish designated health physician’s referrals and, therefore, do not apply for purposes of applying services and the physicians who refer to there would be no need to apply the the special rules on unit-based them from the scrutiny of the physician special rule at § 411.354(d)(2). Similarly, compensation at § 411.354(d)(2) and (3), self-referral law without affording CMS unit-based compensation that does not which, as we explained, remain in our the opportunity to confirm that the include other business generated by a regulations only for historical purposes compensation paid to the physician physician for the entity as a variable in to assist parties, CMS, and law does not pose a risk of the harm section the formula used to calculate the enforcement in applying the historical 1877 of the Act is intended to avoid, physician’s (or immediate family policies in effect at the time of the namely, that the compensation could member’s) compensation would not take existence of the compensation improperly influence the physician’s

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medical decision making. We continue self-referral law (66 FR 867). The definition and then excepted under to believe in the importance of ensuring service-based exceptions are found in § 411.357(p) after applying the special that compensation paid to a physician § 411.355 of our regulations. Thus, even rules at § 411.354(d)(2) and (3). In by someone (or some organization) that if there is an indirect compensation response, we stated that, although we has a financial relationship with an arrangement between an entity and a agree that the ultimate result may be the entity does not improperly influence the physician, the service-based exceptions same—time, unit-of-service, or other physician’s medical decision making, may apply to and protect referrals of the ‘‘per click’’ based arrangements are resulting in the overutilization of particular services described in the generally permitted if they are at fair designated health services, patient exception. However, referrals for market value without reference to steering, or other program or patient designated health services that do not referrals—we believe that [the Phase I abuse. However, we believe that the satisfy the requirements of an applicable regulatory] construct more closely regulatory scheme that casts a wide net service-based exception would be corresponds to the statutory treatment of to include the vast majority of unbroken prohibited unless the indirect direct compensation arrangements (69 chains of financial relationships compensation arrangement satisfies all FR 16059). We elected to retain the between an entity and a physician and the requirements of the exception for regulatory structure finalized in Phase I, then weeds out most of those unbroken indirect compensation arrangements at noting a two-fold intent. We stated that chains through a showing of compliance § 411.357(p) (66 FR 867) or, if the entity we intended to include in the definition with the requirements of the special is a MCO or IPA, the exception at of ‘‘indirect compensation arrangement’’ rules at § 411.354(d)(2) and (3) and the § 411.357(n) for risk-sharing any compensation arrangements exception at § 411.357(p) is arrangements. (We refer readers to (including time-based or unit-of-service unnecessarily burdensome. The section II.A.2.b.(4). of this final rule for based compensation arrangements) identification of truly problematic a discussion of the applicability of the where the aggregate compensation physician compensation may be exception at § 411.357(n) to indirect received by the referring physician achieved at an earlier stage of analysis. compensation arrangements.) In Phase I, varies with, or otherwise takes into Therefore, we are revising we also finalized special rules related to account, the volume or value of referrals § 411.354(c)(2) to more precisely unit-based compensation at or other business generated between the identify compensation arrangements § 411.354(d)(2) and (3) to be applied parties, regardless of whether the that may pose a risk of program or when analyzing compliance with the individual unit of compensation patient abuse. requirements of the exceptions in qualifies under § 411.354(d)(2) and (3) As we stated in Phase I, the existence § 411.357, including the exception for (69 FR 16059). We continued that we of a financial relationship between an indirect compensation arrangements at intended to exclude under the exception entity and a physician (or the immediate § 411.357(p) (66 FR 876 through 878). at § 411.357(p) that subset of indirect family member of a physician) is the Following the publication of Phase I, compensation arrangements where the factual predicate triggering the we received comments regarding the compensation is fair market value and application of section 1877 of the Act interplay of the definition of ‘‘indirect does not reflect the volume or value of (66 FR 864). (For a similar discussion in compensation arrangement,’’ the referrals or other business generated Phase II, see 69 FR 16057.). Because exception at § 411.357(p) for indirect (and the other requirements of the section 1877 of the Act expressly compensation arrangements, and the exception are satisfied). We stated that contemplates that a financial special rules that deem unit-based per-unit compensation will meet this relationship and, specifically, a compensation not to take into account test if it complies with the conditions of compensation arrangement, may be the volume or value of referrals or other § 411.354(d)(2) and (3). directly or indirectly between an entity business generated at § 411.354(d)(2) In developing our response to the and a physician (or an immediate family and (3), respectively, when certain commenters to the proposed rule, we member of a physician), in Phase I, we conditions are met. The commenters revisited the regulatory construct for established a three-part test for questioned whether an indirect determining which unbroken chains of determining when an indirect compensation arrangement exists at all financial relationships between entities compensation arrangement exists (66 FR if a referring physician receives time- and physicians (or immediate family 865 through 866). Once all three parts based or unit-of-service based members of a physician) establish of the test are met, there exists an compensation that is fair market value indirect compensation arrangements indirect compensation arrangement that and does not vary over the term of the and how to determine if they pose a risk must satisfy the requirements of an arrangement—that is, compensation of program or patient abuse. One of the applicable exception in order to avoid that, by definition, does not take into driving goals of this final rulemaking, the referral and billing prohibitions of account the volume or value of referrals which is a shared goal of the Patients the physician self-referral law. Also in or other business generated under over Paperwork initiative and the Phase I, we finalized the exception at § 411.354(d)(2) and (3). Commenters Regulatory Sprint, is to reduce § 411.357(p) for indirect compensation noted that, similarly, the exception for unnecessary burden on providers and arrangements that would apply to indirect compensation arrangements at suppliers. As we discussed in section unbroken chains of financial § 411.357(p), like § 411.354(d)(2) and I.D. of this final rule, our final policies relationships that result in indirect (3), does not look to aggregate are intended to balance genuine compensation arrangements. In Phase I, compensation and incorporates a fair program integrity concerns against the we explained that some of the statutory market value test. Given this, the considerable burden of the physician and regulatory exceptions operate to commenters pointed out that the self-referral law’s referral and billing exclude certain categories of services ultimate result would be the same prohibitions. We see no need to from the reach of section 1877 of the Act whether time-based and unit-of-service continue to treat compensation when certain requirements are satisfied. based compensation arrangements are arrangements that may qualify as In effect, services described in those initially excluded from the definition of ‘‘indirect compensation arrangements’’ exceptions are not designated health ‘‘indirect compensation arrangement’’ at in the exact same way that the statute services for purposes of the physician § 411.354(c)(2) or included in the treats direct compensation arrangements

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when that construct creates unnecessary the physician’s (or immediate family that the physician self-referral law does burden on the regulated industry. We member’s) compensation that positively not apply because the parties do not believe that it is possible to simplify the correlates with the number or value of have a financial relationship within the analysis of whether an unbroken chain the physician’s referrals to the entity; or meaning of the physician self-referral of financial relationships between an (3) the individual unit of compensation law or, if the law does apply because the entity and a physician (or immediate received by the physician (or immediate parties have a financial relationship family member of a physician) poses a family member) is calculated using a within the meaning of the physician risk of program or patient abuse without formula that includes other business self-referral law, that all the raising program integrity concerns, and generated by the physician for the entity requirements of an applicable exception we are finalizing revisions to the furnishing designated health services as are satisfied. An entity’s mistaken belief regulations at § 411.354(c)(2) that we a variable, resulting in an increase or that no indirect compensation believe achieve the same result as the decrease in the physician’s (or arrangement exists does not eliminate Phase I regulatory construct in immediate family member’s) the need to satisfy the requirements of protecting against program or patient compensation that positively correlates an applicable exception to the physician abuse but reduce unnecessary burden with the physician’s generation of other self-referral law. on the regulated industry. business for the entity. In addition, the Comment: One commenter requested We are revising our regulations at entity must have actual knowledge of, or that we deem certain compensation formulas that do include the physician’s § 411.354(c)(2)(ii) to effectively act in reckless disregard or deliberate referrals to an entity or other business incorporate and apply the conditions of ignorance of, the fact that the referring generated by a physician for the entity the special rules on unit-based physician (or immediate family as a variable to nonetheless not take into compensation at the definitional level member) receives aggregate account the volume or value of referrals when determining whether an indirect compensation that varies with the or other business generated if the compensation arrangement exists that volume or value of referrals or other compensation arrangement is consistent must satisfy the requirements of an business generated by the referring with value-based care goals but does not applicable exception in order to avoid physician for the entity. qualify for or satisfy the requirements of the prohibitions of the physician self- We acknowledge that our final the new exceptions at § 411.357(aa). referral law. Unless all the elements of policies will reduce the number of Response: We decline to permit any final § 411.354(c)(2)(i), (ii) and (iii) exist, unbroken chains of financial arrangement under which compensation the unbroken chain of financial relationships that fall within the ambit is determined using a formula that relationships between an entity of the physician self-referral law as includes a physician’s referrals to or furnishing designated health services indirect compensation arrangements other business generated for the entity and a physician (or immediate family (although they may still implicate the as a variable and creates the positive or member of a physician) will not be anti-kickback statute, depending on the negative correlation with the considered an indirect compensation facts and circumstances). We also compensation paid to or from the arrangement. Nor will the unbroken acknowledge that, by analyzing unit- physician, as applicable. If a chain of financial relationships be based compensation at the definitional compensation arrangement does not considered a direct compensation stage at final § 411.354(c)(2)(ii), many qualify for or does not satisfy all the arrangement under § 411.354(c)(1). unbroken chains of financial requirements of an exception at new Therefore, the referral and billing relationships will no longer be required § 411.357(aa), the compensation paid prohibitions of the physician self- to satisfy the writing requirement at under the arrangement may not take referral law will not apply. Under the § 411.357(p)(2), potentially limiting our into account the volume or value of the regulations finalized in this final rule, and law enforcement’s visibility into the physician’s referrals or other business an unbroken chain of financial compensation received by physicians generated by the physician for the relationships between an entity and a who make referrals for designated entity. Although the new exceptions at physician will be considered an indirect health services to the entities at the § 411.357(aa) do not include a compensation arrangement if the other end of the unbroken chain of requirement that the compensation does physician (or immediate family member financial relationships between them. not take into account the volume or of the physician) receives aggregate However, as we have stated many times value of a physician’s referrals or other compensation from the person or entity in previous rulemakings and in this business generated by the physician, in the chain with which the physician final rule, we believe that it is a they include substitute safeguards (or immediate family member) has a common practice (if not the best against program or patient abuse direct financial relationship that varies practice), and required by other Federal through their limited application and with the volume or value of referrals or and State statutes and regulations, for included requirements. Permitting an other business generated by the parties to reduce their arrangements to arrangement to circumvent those physician for the entity furnishing the writing, including the compensation safeguards and the volume or value and designated health services, and any of and other terms of their arrangements. other business generated standards of the following are true: (1) The Also, we remind readers that the traditional exceptions would pose a individual unit of compensation compliance with the physician self- risk of program or patient abuse. received by the physician (or immediate referral law is a prerequisite for Comment: One commenter requested family member) is not fair market value submitting a claim to Medicare for a clarification of the term ‘‘other business for items or services actually provided; designated health service referred by a generated.’’ The commenter stated that (2) the individual unit of compensation physician who has (or whose immediate industry guidance suggests that other received by the physician (or immediate family member has) a financial business generated means services that family member) is calculated using a relationship with the entity submitting are not designated health services. The formula that includes the physician’s the claim. Included in the burden of commenter proposed that the definition referrals to the entity furnishing proof to show that a claim for of ‘‘other business generated’’ should designated health services as a variable, designated health services is include only services paid by resulting in an increase or decrease in permissible is the burden to show either government payors, and should not

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extend to services paid by private or not be fair market value for the otherwise comply with an applicable commercial payors. physician’s personally performed exception in § 411.355 or § 411.357. Response: Our interpretation of the services under our existing definition of We continue to believe in the term ‘‘other business generated’’ is ‘‘fair market value’’ and the revised importance of preserving patient choice, longstanding and settled. In Phase I, we definition of ‘‘fair market value’’ protecting the physician’s professional stated that, based on our review of the finalized in this final rule. See section medical judgment, and avoiding legislative history, we believe that the II.B.5. of this final rule for a detailed interference in the operations of a Congress intended the ‘‘other business discussion of our final policies with managed care organization. In the generated’’ language to be a limitation respect to the definition of ‘‘fair market proposed rule, we expressed concern on the compensation or payment value.’’ Also, as described above and in that, given our proposed interpretation formula parallel to the statutory and more detail in section II.B.4. of this final of the volume or value standard, regulatory prohibition on taking into rule, if any compensation paid to the § 411.354(d)(4) may apply in fewer account referrals of designated health referring physician is conditioned on instances, if at all, to serve these services. We further stated that, in the the physician’s referrals to a particular important goals. To reiterate how provisions in which the phrase appears, provider, practitioner, or supplier, the critical these protections are, we affected payments cannot be based or arrangement must satisfy the conditions proposed to include in the exceptions adjusted in any way on referrals of of § 411.354(d)(4). applicable to the types of contracts or designated health services or on any arrangements to which the special rule other business referred by the physician, 4. Patient Choice and Directed Referrals has historically applied an affirmative including other Federal and private pay (§ 411.354(d)(4)) requirement that the compensation business (66 FR 877). We see no reason arrangement meet the conditions of the Historically, when the conditions of to revisit this interpretation as suggested special rule at § 411.354(d)(4). To that the special rule at § 411.354(d)(4) are by the commenter. end, we proposed to include in the met, compensation from a bona fide Comment: A few commenters exceptions at § 411.355(e) for academic employer, under a managed care objected to our proposals to establish medical centers, § 411.357(c) for bona contract, or under a personal service special rules on the volume or value fide employment relationships, arrangement is deemed not to take into standard and the other business § 411.357(d)(1) for personal service account the volume or value of referrals, generated standard based on what arrangements, § 411.357(d)(2) for appear to be fair market value concerns. even if the physician’s compensation is physician incentive plans, § 411.357(h) The commenters provided the example predicated, either expressly or for group practice arrangements with a of a hospital that determines the amount otherwise, on the physician making hospital, § 411.357(l) for fair market of fixed-rate compensation at a higher referrals to a particular provider, value compensation, and § 411.357(p) level than a physician practice might practitioner, or supplier. This special for indirect compensation arrangements, pay the physician because the hospital rule was established in Phase I after a requirement that, in addition to knows that it can direct the physician’s many commenters objected to our satisfying the other requirements of the referrals to the hospital and its affiliates statement in the 1998 proposed rule that exception, the relevant arrangement to ‘‘make up the difference’’ in billings fixed payments to a physician could be must comply with the conditions of the for those services. considered to take into account the revised special rule at § 411.354(d)(4). In Response: We assume the commenters volume or value of referrals if a making this proposal, we relied on the are referring to compensation that is condition or requirement for receiving authority granted to the Secretary under based on the physician’s personally the payment was that the physician sections 1877(b)(4), (e)(2)(D), performed services and not referrals of refer designated health services to a (e)(3)(A)(vii), (e)(3)(B)(i)(II), and designated health services or other given entity, such as an employer or an (e)(7)(vii) of the Act. We solicited business generated by the physician for affiliated entity (63 FR 1700). In Phase comment as to whether, given the the entity paying the compensation, for I, we acknowledged that the proposed nature of academic medical centers, the instance, a salary of $300,000 per year. interpretation could have had far- conditions of revised § 411.354(d)(4) are Although the formula for calculating reaching effects, especially for managed necessary. We are finalizing our fixed-rate compensation for a care arrangements and group practices proposal to include an affirmative physician’s personally performed (66 FR 878). We determined that we requirement that the compensation services would not include the would not consider a physician’s arrangement meet the conditions of the physician’s referrals to the entity or compensation to take into account the special rule at § 411.354(d)(4) in all of other business generated by the volume or value of his or her referrals, the exceptions identified in the physician for the entity as variables—in as long as the directed referral proposed rule. As explained in section our example, the physician’s requirement does not apply if a patient II.E.1. of this final rule, we are also compensation would be $300,000 × the expresses a preference for a different finalizing this requirement in the new number of years of the arrangement’s provider, practitioner, or supplier; the exception for limited remuneration to a duration—the compensation patient’s insurer determines the physician at § 411.357(z). Although the arrangement must satisfy all the provider, practitioner, or supplier; or requirement is not included in the new requirements of an applicable exception the referral is not in the patient’s best exceptions for value-based arrangements in order not to trigger the referral and medical interests in the physician’s at final § 411.357(aa), as discussed in billing prohibitions of the physician judgment (66 FR 878). In addition, the section II.A.2. of this final rule, we have self-referral law. Compensation that is referral requirement must be set out in incorporated into these exceptions inflated to recognize the ability of the writing and signed by the parties, and specific requirements related to hospital to receive payment under the the compensation to the physician must remuneration paid to a physician that is IPPS and OPPS for designated health be: (1) Set in advance for the term of the conditioned on the physician’s referrals services that it requires the physician to compensation arrangement; and (2) to a particular provider, practitioner, or refer to the hospital or a specific consistent with fair market value for the supplier. provider, practitioner, or supplier services performed. Finally, the In the 1998 proposed rule, within the hospital’s health system may compensation arrangement must highlighting stakeholder inquiries

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regarding whether an arrangement fails of designated health services to a given volume or value of referrals if there is to meet the volume or value standard entity, such as an employer or an a predetermined, direct correlation only in situations in which a affiliated entity, should be evaluated for between the physician’s prior referrals physician’s payments from an entity compliance with the special rule at to the entity and the prospective rate of fluctuate in a manner that reflects § 411.354(d)(4), which is mandatory compensation to be paid over the entire referrals, we expressed our view that an under the policies finalized in this final duration of the arrangement for which arrangement can also fail to meet this rule. the compensation is determined. standard in some cases when a As we explained in the proposed rule We provide the following example to physician’s payments from an entity are (84 FR 55794) and our response to illustrate the application of our final stable, but predicated, either expressly comments in section II.B.3. of this final regulation at § 411.354(d)(4)(vi). Assume or otherwise, on the physician making rule, there is a risk of program or patient that a hospital directly employs a referrals to a particular provider. We abuse when a physician will receive no cardiologist to treat patients in the gave the example of a hospital that future compensation if he or she fails to hospital’s outpatient cardiology includes as a condition of a physician’s refer as required. The same is true if the department. The physician is paid a employment the requirement that the amount of the physician’s compensation predetermined, unvarying annual physician refer only within the is tied to the physician’s referral to a salary. Under the employment hospital’s own network of ancillary particular provider, practitioner, or arrangement, the hospital requires the service providers, such as to the supplier. To address this risk, we are physician to refer patients to the hospital’s own home health agency. We revising § 411.354(d)(4) to include a hospital or other providers and condition at § 411.354(d)(4)(vi) that stated that, in these situations, a suppliers wholly owned by the hospital, neither the existence of the physician’s compensation reflects the unless the patient expresses a compensation arrangement nor the volume or value of his or her referrals preference for a different provider, amount of the compensation is in the sense that the physician will practitioner, or supplier; the patient’s contingent on the number or value of receive no future compensation if he or insurer determines the provider, the physician’s referrals to the particular she fails to refer as required. We practitioner or supplier; or the referral is provider, practitioner, or supplier. This continue to believe that conditioning a not in the patient’s best medical condition must be met regardless of physician’s future compensation on his interests in the physician’s judgment. whether the physician’s compensation or her referrals could improperly When negotiating an extension of the takes into account the volume or value influence the physician’s medical employment arrangement and revised decision making, potentially impacting of his or her referrals to the entity with which the physician has the compensation terms, the hospital patient choice or the utilization of reviews the past performance of the services. However, upon further compensation arrangement. As applied, under final § 411.354(d)(4)(vi), where an physician, including the physician’s examination of the policy goals behind referrals for diagnostic testing. At final our statements in the 1998 proposed entity requires a physician to refer patients for designated health services § 411.357(c)(5), the exception for bona rule (63 FR 1700), the special rule fide employment relationships requires finalized in Phase I (66 FR 878), and the to a particular provider, practitioner, or supplier and the applicable exception compliance with the conditions of the comments on the proposed rule, we no special rule for directed referrals at longer believe that compensation requires compliance with § 411.354(d)(4), in addition to meeting § 411.354(d)(4). (The exceptions for predicated, either expressly or the other conditions of § 411.354(d)(4), personal service arrangements and fair otherwise, on the physician making neither the existence of the market value compensation have referrals of designated health services to compensation arrangement nor the identical requirements at a particular provider, practitioner, or amount of the compensation may be § 411.357(d)(1)(viii) and (l)(7), supplier should be evaluated for contingent on the number or value of respectively.) Under § 411.354(d)(4)(vi), compliance with the volume or value the physician’s referrals to the particular the amount of the physician’s standard. provider, practitioner, or supplier. The compensation may not be contingent on As described in the proposed rule (84 requirement to make referrals to a the number or value of the physician’s FR 55789) and in section II.B.3. of this particular provider, practitioner, or referrals under the directed referral final rule, after reviewing the statute supplier may require that the physician requirement. Thus, if, for example, the and our regulations in a fresh light, we refer an established percentage or ratio hospital increases the physician’s now believe that the volume or value of the physician’s referrals to a compensation in the renewal term only standard is most appropriately particular provider, practitioner, or if the physician made a targeted number interpreted as relating to how supplier. of referrals for diagnostic testing to the compensation is calculated; that is, In the proposed rule, we described hospital or the designated wholly- what formula is used to determine the this type of contingency as a direct ‘‘if owned providers and suppliers in the amount of the physician’s X, then Y’’ correlation (84 FR 55794). current term, the compensation would compensation. We are finalizing special The proposed special rule built upon not meet the condition at rules at § 411.354(d)(5)(i) and (6)(i) that the concerns described above, which we § 411.354(d)(4)(vi). Similarly, if, for set forth mathematical formulas that originally described in the 1998 example, the hospital refuses to renew identify compensation that takes into proposed rule as relating to a nexus the employment arrangement (or account the volume or value of a between fixed-rate compensation and terminates it in the current term) unless physician’s referrals. However, a review the volume or value of a physician’s the value of the physician’s diagnostic of the mathematical formula that compensation. We believe that the testing referrals generates sufficient determines the amount of the condition at final § 411.354(d)(4)(vi) profit to the hospital (or its wholly- physician’s compensation would not be provides a clearer standard for owned providers and suppliers), the sufficient to identify a referral stakeholders and better addresses our existence of the compensation requirement that could lead to program concerns than the proposed special rule arrangement would be contingent on the or patient abuse. Rather, payment that would have considered fixed-rate value of the physician’s referrals in conditioned on the physician’s referrals compensation to take into account the violation of § 411.354(d)(4)(vi).

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We also proposed to revise § 411.357(d)(1) for personal service referral requirement resulted only in § 411.354(d)(4) to eliminate certain arrangements, § 411.357(d)(2) for termination of the arrangement, rather language regarding: (1) Whether the ‘‘set physician incentive plans, § 411.357(h) than an impact on the amount of the in advance’’ and ‘‘fair market value’’ for group practice arrangements with a physician’s compensation from the conditions of the special rule apply to hospital, § 411.357(l) for fair market entity. This commenter provided a the compensation arrangement (as value compensation, and § 411.357(p) second example of a directed referral stated in the regulation) or to the for indirect compensation arrangements requirement that it stated would affect compensation itself; and (2) when an affirmative requirement for the amount of a physician’s compensation is considered fair market compliance with § 411.354(d)(4) when a compensation. Under that example, a value. The proposed revisions were physician’s compensation is physician is paid different stipulated intended to clarify that the physician’s conditioned on his or her referrals to a percentages of a bonus pool depending compensation must be set in advance. particular provider, practitioner, or on the percentage of the physician’s Any changes to the compensation (or supplier. referrals that are ‘‘in network’’ (that is, the formula for determining the Response: We agree with the to a particular provider, practitioner, or compensation) must also be set in commenters that patient choice, supplier). The commenter requested advance (that is, made prospectively). independent medical decision making, clarification of the applicability of the (See section II.D.5. of this final rule for and avoiding interference with managed special rule at § 411.354(d)(4) and a detailed discussion of the ‘‘set in care contracts should be protected. We whether provisions such as those advance’’ deeming provision at are finalizing our proposals and, as described would violate the volume or § 411.354(d)(1).) We proposed to clarify discussed in section II.E.1. of this final value standard as proposed. A different that the physician’s compensation must rule, are including the requirement in commenter described a compensation be consistent with the fair market value the new exception for limited arrangement under which a physician is of the services performed. In addition, remuneration to a physician at paid an amount that does not result we proposed to eliminate the § 411.357(z). As the previous from a mathematical model tied to parenthetical language in existing commenter described, directed referral individual referrals of designated health § 411.354(d)(4) as it conflates the requirements can take the form of services, but rather a ‘‘model’’ under concept of fair market value and the conditioning the existence of the which the entity knows it will generate volume or value standard. As noted in arrangement itself on the physician’s revenue by requiring physician referrals response to the comment in section referrals to a particular provider, to a particular provider, practitioner, or II.B.1. of this final rule, these are practitioner, or supplier, or they may supplier. The commenter stated that, separate standards, and compliance condition the amount of the physician’s under the scenario presented, the entity with one is not contingent on compensation on his or her referrals to is not rewarding (paying) the physician compliance with the other. We also a particular provider, practitioner, or for referrals but would terminate the proposed nonsubstantive revisions for supplier. Because both types of physician’s employment if he or she clarity. We noted that, although revised conditioning represent threats to patient does not actively participate in the § 411.354(d)(4) sets forth protections choice and the independence of a mandated referrals. The commenter that apply to both the compensation physician’s medical decision making, in asked whether CMS views this type of arrangement that includes a directed order to reflect both of these compensation model as taking into referral requirement and also conditioning requirements, we are account the volume or value of the revising the language of § 411.354(d)(4), specifically to the compensation itself, physician’s referrals. for continuity in the application of the with which the compensation regulation, we would leave the arrangement must comply under the Response: In light of this specific regulation in § 411.354(d), which sets exceptions at §§ 411.355(e) and comment and other similar comments, forth special rules on compensation, 411.357(c), (d)(1), (d)(2), (h), (l), (p), and we revisited the history of rather than include it in § 411.354(e), (z). In each of the exceptions noted, if § 411.354(d)(4) and our previously- which sets forth special rules for the physician referrals are directed to a stated concerns regarding directed compensation arrangements. We are particular provider, practitioner, or referral requirements that ultimately led finalizing the proposed restructuring of supplier, the arrangement must satisfy to the establishment of the special rule. and nonsubstantive revisions to the conditions of § 411.354(d)(4). As we stated in Phase I, we understand § 411.354(d)(4). Comment: A few commenters stated that directed referral requirements are a We received the following comments that they did not oppose the policy common and integral part of and our responses follow. stated in the proposed rule (84 FR employment relationships, personal Comment: Many commenters 55796) that § 411.354(d)(4) applies to service arrangements, and managed care recognized that directed referral both the situation where the contracts (66 FR 878). Even so, we requirements would be permitted compensation arrangement is continue to believe that payments tied without limitation if we finalized our contingent on the physician’s required to referral requirements can be abused, proposed interpretation of the volume referrals and the situation where the and appropriate safeguards should be in or value standard at § 411.354(d)(5). compensation amount is contingent on place to protect against the risk of Commenters agreed that compliance the physician’s required referrals, but program or patient abuse when an entity with the conditions of the special rule requested guidance on the precise directs a physician where to make at § 411.354(d)(4) provides important function of the special rule at referrals of designated health services. protections for patients and the § 411.354(d)(4) in light of our proposed After review of the regulatory history of independence of a physician’s medical interpretation of the volume or value our interpretation of the volume or decision making. Several commenters standard. One of these commenters value standard and the establishment of supported our proposal to continue this focused on the contractual terms the special rule at § 411.354(d)(4), we protection by including in the between the parties to the compensation now believe that the best approach to exceptions at § 411.355(e) for academic arrangement, and asked whether the addressing the risks of directed referral medical centers, § 411.357(c) for bona volume or value standard would be requirements is to affirmatively require fide employment relationships, violated if the breach of a directed compliance with the conditions of

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§ 411.354(d)(4) whenever an entity jeopardize compliance with the include compliance with the conditions conditions the compensation of a requirement of the applicable exception. of § 411.354(d)(4) as an affirmative physician with whom it has an With respect to the commenter’s requirement in exceptions applicable to employment relationship, personal second example that ties the amount of compensation for physician services in service arrangement, or managed care the physician’s compensation to those instances where the physician’s contract on the physician’s referrals for achievement of a directed referral compensation is conditioned on the designated health services to a requirement, the condition at physician’s referrals to a particular particular provider, practitioner, or § 411.354(d)(4)(vi) would apply in the provider, practitioner, or supplier. The supplier. Compensation conditioned, same manner. A directed referral commenter also supported leaving the either expressly or otherwise, on the requirement under which a physician is regulation in § 411.354(d)(4), rather than physician making referrals of designated paid different stipulated percentages of include it with other special rules health services to a particular provider, a bonus pool depending on the related to compensation arrangements at practitioner, or supplier should not be percentage of the physician’s referrals § 411.354(e). that are ‘‘in network’’ (that is, to a Response: We are finalizing our evaluated for compliance with the particular provider, practitioner, or proposals with the modifications volume or value standard. Because we supplier) would not be categorically explained in the responses to other are finalizing requirements in certain prohibited under § 411.354(d)(4)(vi); comments. We agree with the exceptions for affirmative compliance however, we caution that the commenter that the regulation should with the conditions of § 411.354(d)(4), composition of the bonus pool must be remain at § 411.354(d)(4). We believe and directed referral requirements will analyzed to ensure that the formula for this will avoid disruption with no longer be considered in the context the compensation ultimately paid to the stakeholder compliance efforts and our of compliance with the volume or value physician does not include referrals of enforcement efforts. standards, we are applying the designated health services or other Comment: One commenter urged condition at final § 411.354(d)(4)(vi), business generated by the physician as CMS not to adopt an affirmative rather than the final regulation at a variable. Also, if the directed referral requirement to comply with the § 411.354(d)(5)(i), in our response to the requirement was tied to the number or conditions of § 411.354(d)(4) when a commenters. value of the physician’s referrals, it physician’s compensation is The condition at § 411.354(d)(vi) would run afoul of the special rule at conditioned on the physician’s referrals applies to a directed referral § 411.354(d)(4) and and the to a particular provider, practitioner, or requirement which, if not achieved, compensation arrangement would not supplier. Despite its stated support for would result in the termination of a satisfy the applicable exception’s patient preference in referrals, the physician’s compensation arrangement, requirement of compliance with commenter asserted that the even if it would not impact the amount § 411.354(d)(4). requirement would place additional of the physician’s compensation from Comment: One commenter expressed burden on physicians and other the entity. The condition at support for the affirmative requirement providers. § 411.354(d)(4)(vi) prohibits making the for compliance with the conditions of Response: Where such referral requirements have existed, they have existence of a compensation § 411.354(d)(4) where a physician is historically implicated the volume or arrangement contingent on the number directed to refer patients to a particular value standard under our historic or value of the physician’s referrals to a provider, practitioner, or supplier under the physician’s compensation interpretation of that standard. Thus, particular provider, practitioner, or arrangement with the entity directing parties would have had to comply with supplier. If the compensation the referrals. The commenter the conditions of § 411.354(d)(4) in arrangement would be terminated if the recommended that we finalize our order to be assured not to run afoul of physician failed to refer a sufficient proposal to make the compliance the volume or value standard, or offer number of patients for designated health requirement mandatory, and that we some other proof of compliance with the services, or if the value of the apply the rule where the referral volume or value standard. This is not a physician’s referrals of designated requirement is not only express, but new requirement. health services failed to achieve the where it occurs as the practical result of Comment: A few commenters target established under the directed processes that steer a physician’s discussed what they termed ‘‘employee referral requirement, the directed referrals for designated health service to workplace requirements’’ that require an referral requirement would be a provider, practitioner, or supplier employed physician to treat the impermissible and the compensation selected by the entity. employer’s patients in a specified arrangement would not satisfy the Response: The affirmative obligation workplace, typically the location of a applicable exception’s requirement of finalized in the exceptions at medical practice or clinic and the compliance with § 411.354(d)(4). We §§ 411.355(e) and 411.357(c), (d)(1), address of an affiliated hospital. The emphasize that § 411.354(d)(4)(vi) does (d)(2), (h), (l), (p), and (z) is not limited commenters questioned whether such not prohibit directed referral to express or written requirements to requirements were of concern to CMS. requirements based on an established refer patients to particular provider, The commenters requested that CMS percentage—rather than the number or practitioner, or supplier selected by the provide guidance on employee value—of a physician’s referrals. entity paying the compensation. Rather, workplace requirements, suggesting that Therefore, if the directed referral the condition at § 411.354(d)(4)(vi), as several approaches might be requirement in the commenter’s finalized, prohibits making the appropriate. The commenters offered example provided for termination of the existence of the compensation that CMS could take the position that compensation arrangement if the arrangement or any compensation paid employee workplace requirements are physician failed to refer 90 percent, for to the referring physician contingent on not directed referral requirements that example, of his or her patients to a the physician’s referrals to a particular trigger the need for compliance with the particular provider, practitioner, or provider, practitioner, or supplier. volume or value standard because the supplier, it would not run afoul of the Comment: One commenter expressed employed physician is merely restricted special rule at § 411.354(d)(4) or general agreement with the proposals to by his or her employment from working

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elsewhere and is not expressly required Comment: Many commenters noted leases also means ‘‘the value of rental to refer patients to the employer. In the that the term ‘‘referrals’’ is used property for general commercial alternative, the commenters offered that throughout our physician self-referral purposes (not taking into account its CMS could take the position that such regulations. Commenters stated that, intended use).’’ Finally, with respect to workplace requirements are directed although the term is defined at the lease of office space, in particular, referral requirements because the § 411.351, they were uncertain whether the statutory definition further employer is effectively requiring the the term ‘‘referrals’’ has the meaning stipulates that fair market value also physician to refer his or her patients to ascribed to it at § 411.351 in all means that the value of the rental the employer and, for example, an instances in which it appears in the property is ‘‘not adjusted to reflect the affiliated hospital for designated health regulations. Several commenters asked additional value the prospective lessee services. If so, the commenters if the term ‘‘referrals’’ in § 411.354(d)(4) or lessor would attribute to the requested that CMS confirm that is intended to encompass more than the proximity or convenience to the lessor § 411.354(d)(4) requires only that the defined term ‘‘referrals’’ at § 411.351. where the lessor is a potential source of employer permits the physician to refer One commenter stated that, if the patient referrals to the lessee.’’ Most of the patient to another physician who meaning of ‘‘referrals,’’ as used at the statutory exceptions at section can provide the services (such as a § 411.354(d)(4), is not limited to the 1877(e) of the Act relating to surgery or other procedure) at a different definition at § 411.351, the proposed compensation arrangements include location based on patient preference, inclusion of a requirement for requirements pertaining to fair market payor requirements, or the best medical compliance with the conditions of value compensation, including the interest of the patient. The commenters § 411.354(d)(4) as an element of the exceptions for the rental of office space, requested specific confirmation that exceptions for bona fide employment the rental of equipment, bona fide § 411.354(d)(4) does not require the relationships, personal service employment relationships, personal employer to permit the employed arrangements, and others has the effect service arrangements, isolated physician to personally treat the patient of introducing an all-payor volume or transactions, and payments by a in a location other than that specified in value standard into these exceptions. physician. Many of the regulatory the physician’s employment contract. The commenters requested that CMS exceptions created using the Secretary’s expressly clarify in commentary that, Response: Under the policies authority under section 1877(b)(4) of the unless otherwise noted, when finalized in this final rule, a directed Act also include requirements ‘‘referrals’’ appears in the physician self- referral requirement will not trigger pertaining to fair market value referral regulations, it has the meaning analysis for compliance with the compensation, including the exceptions set forth at § 411.351. volume or value standard at final for academic medical centers, fair Response: The introductory language market value compensation, indirect § 411.354(d)(5). However, a to § 411.351 states clearly that, unless compensation arrangement will have to compensation arrangements, EHR items the context indicates otherwise, the and services, and assistance to satisfy the conditions of § 411.354(d)(4) term ‘‘referral’’ has the meaning set forth if any of the physician’s compensation compensate a nonphysician in § 411.351. The term ‘‘referral,’’ as practitioner. is conditioned on the physician’s used at § 411.354(d)(4) and the new referrals to a particular provider, requirement in certain exceptions that, The term ‘‘fair market value’’ is practitioner, or supplier and the parties if remuneration to the physician is defined in our regulations in § 411.351. intend to rely on the exception at conditioned on the physician’s referrals In the 1992 proposed rule (57 FR 8602) § 411.355(e) or § 411.357(c), (d)(1), to a particular provider, practitioner, or and the 1995 final rule (60 FR 41978), (d)(2), (h), (l), (p), or (z). The commenter supplier, the arrangement satisfies the we incorporated the statutory definition is correct that the requirement to conditions of § 411.354(d)(4) have the of ‘‘fair market value’’ into our comply with § 411.354(d)(4) is not meaning set forth in the definition of regulations without modification. In the intended to interfere with employer’s ‘‘referral’’ at § 411.351. In Phase I, we 1998 proposed rule (63 FR 1686), we rights or operations or infringe on the discussed the scope of the term proposed to include in our definition of employer-employee relationship. The ‘‘referral’’ with reference to a ‘‘fair market value’’ a definition of condition at § 411.354(d)(4)(iv)(B) requirement that a physician refer ‘‘general market value,’’ to explain what requires only that the requirement to designated health services to a given it means for a value to be ‘‘consistent make referrals to a particular provider, entity (66 FR 878). As we stated above with the general market value.’’ In an practitioner, or supplier does not apply in section II.B.2. of this final rule, unless attempt to ensure consistency across our if the patient expresses a preference for the context indicates otherwise, the regulations, we proposed to adopt the a different provider, practitioner, or term ‘‘referral’’ has the meaning set forth definition of ‘‘general market value’’ supplier; the patient’s insurer in § 411.351 throughout the physician from part 413 of our regulations, which determines the provider, practitioner, or self-referral regulations, including in the pertains to reasonable cost supplier; or the referral is not in the special rules on compensation at reimbursement for end stage renal patient’s best medical interests in the § 411.354(d). disease services. In the context of physician’s judgment. Requiring that the determining the cost incurred by a employed physician refer the patient to 5. Fair Market Value (§ 411.351) present owner in acquiring an asset, another physician for treatment is The term ‘‘fair market value,’’ as it is § 413.134(b)(2) defined ‘‘fair market permissible, provided that the referral is defined at section 1877(h)(3) of the Act, value’’ as ‘‘the price that the asset would appropriate. We wish to make clear that consists of three basic components. Fair bring by bona fide bargaining between the permissibility of the referral to market value is defined generally as well-informed buyers and sellers at the another physician for purposes of the ‘‘the value in arms length [sic] date of acquisition. Usually the fair physician self-referral law has no transactions, consistent with the general market price is the price that bona fide bearing on whether the employed market value.’’ The statutory definition sales have been consummated for assets physician complies with any State law includes additional qualifications for of like type, quality, and quantity in a and common law requirements, such as leases generally, providing that fair particular market at the time of laws regarding patient abandonment. market value with respect to rentals or acquisition.’’ We modified the

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definition drawn from § 413.134(b)(2) to other business generated (66 FR 877). In valuations where the parties to the include analogous provisions for a discussion of our then-interpretation transactions are at arm’s length but in a determining the fair market value of any of the fair market value standard in light position to refer to one another (69 FR items or services, including personal of our Phase I interpretation of the 16107). We made no substantive services, employment relationships, and requirement that compensation not take changes to the definition of ‘‘fair market rental arrangements. As proposed in the into account other business generated, value’’ in Phase III or in any of our 1998 proposed rule, ‘‘general market we stated that— subsequent rulemaking. value’’ would mean: [T]he additional limiting phrase ‘not As a preliminary matter and as The price that an asset would bring, taking into account * * * other described previously in section II.B.1. of as the result of bona fide bargaining business generated between the parties’ this final rule, a careful reading of the between well-informed buyers and means simply that the fixed, fair market statute shows that the fair market value sellers, or the compensation that would value payment cannot take into account, requirement is separate and distinct be included in a service agreement, as or vary with, referrals of Medicare or from the volume or value standard and the result of bona fide bargaining Medicaid [designated health services] or the other business generated standard. between well-informed parties to the any other business generated by the (See section II.B.3. of this final rule for agreement, on the date of acquisition of referring physician, including other a detailed discussion of the volume or the asset or at the time of the service Federal and private pay business. value standard and the other business agreement. Usually the fair market price Simply stated, section 1877 of the Act generated standard.) The volume or is the price at which bona fide sales establishes a straightforward test that value and other business generated have been consummated for assets of compensation arrangements should be standards do not merely serve as like type, quality, and quantity in a at fair market value for the work or ‘‘limiting phrases’’ to modify the fair particular market at the time of service performed or the equipment or market value requirement. In order to acquisition, or the compensation that space leased—not inflated to satisfy the requirements of the has been included in bona fide service compensate for the physician’s ability to exceptions in which these concepts agreements with comparable terms at generate other revenues. appear, compensation must both: (1) Be the time of the agreement. fair market value for items or services The proposed definition of ‘‘fair Despite our intimation in Phase I that provided; and (2) not take into account market value’’ in the 1998 proposed rule the concepts of fair market value and the volume or value of referrals (or the did not substantively modify the the volume and value of referrals or volume or value of other business provisions of the fair market value other business generated were generated by the physician, where such definition pertaining to leases in general fundamentally interrelated, the standard appears). We believe that the and office space leases in particular. definition of fair market value finalized appropriate reading of the statute is that In Phase I, we finalized the definition in Phase I did not include any reference the requirement that compensation does of ‘‘fair market value’’ from the 1998 to the volume or value of a physician’s not take into account the volume or proposed rule with one modification (66 referrals. value of referrals—which is plainly set FR 944 through 945). The definition of In Phase II, we made two significant out as an independent requirement of ‘‘fair market’’ value finalized in Phase I modifications to the definition of ‘‘fair the relevant exceptions—is not also part clarified that a rental payment ‘‘does not market value.’’ First, we proposed of the definition of ‘‘fair market value.’’ take into account intended use if it takes certain ‘‘safe harbors’’ for determining We note that the statutory definition of into account costs incurred by the lessor fair market value for hourly payments ‘‘fair market value’’ at section 1877(h)(3) in developing or upgrading the property made to physicians for physician of the Act includes no reference to the or maintaining the property or its services (69 FR 16092 and 16107). volume or value of referrals (or other improvements.’’ In Phase I we also (These safe harbors were not finalized.) business generated between the parties responded to commenters that requested Second, and more importantly, we or by the physician). For these reasons guidance on how to determine fair incorporated into the definition of ‘‘fair and as described further below, we are market value in a variety of market value’’ a reference to the volume finalizing our proposal to eliminate the circumstances. We stated that we would or value standard found in many connection to the volume or value accept any commercially reasonable exceptions to the physician self-referral standard in the definitions of ‘‘fair method for determining fair market law. The Phase II definition of ‘‘fair market value’’ and ‘‘general market value. However, we noted that, in most market value’’ provided, in relevant value.’’ exceptions, the fair market value part, that fair market value is usually the Our proposals to revise the definition requirement is further modified by price at which bona fide sales have been of ‘‘fair market value’’ at § 411.351 were language that precludes taking into consummated for assets of like type, premised on our goal to give meaning to account the volume or value of referrals, quality, and quantity in a particular the statutory language at section and, in some cases, other business market at the time of acquisition, or the 1877(h)(3) of the Act. As described generated by the referring physician. We compensation that has been included in previously in this section II.B.5., the concluded that, in determining whether bona fide service agreements with statute states a general definition of ‘‘fair compensation is fair market value, comparable terms at the time of the market value’’ and then modifies that requirements pertaining to the volume agreement, where the price or definition for application to leases of or value of referrals and other business compensation has not been determined equipment and office space. One of the generated may preclude reliance on in any manner that takes into account modifications applies to leases of both comparables that involve entities and the volume or value of anticipated or equipment and office space; the other physicians in a position to refer or actual referrals. We explained our view applies only to the lease of office space. generate business (66 FR 944). that the determination of fair market To illustrate this more clearly in our Elsewhere in Phase I, we suggested a value under the physician self-referral regulations, we proposed to modify the similar underlying connection between law differs in significant respects from definition of ‘‘fair market value’’ to the fair market value requirement and standard valuation techniques and provide for a definition of general requirements pertaining to the volume methodologies. In particular, we noted application, a definition applicable to or value of a physician’s referrals and that the methodology must exclude the rental of equipment, and a definition

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applicable to the rental of office space. well-informed buyers and sellers who ‘‘general market value’’ to principles of (We proposed to use the terms ‘‘rental’’ are not otherwise in a position to reasonable cost reimbursement for end of equipment and ‘‘rental’’ of office generate business for the other party, or stage renal disease services in order to space as those are the titles of the the compensation that would be explain what it means for a value to be statutory exceptions at section included in a service agreement as the consistent with general market value, as 1877(e)(1)(A) and (B) of the Act and our result of bona fide bargaining between required by the statute. Moreover, the regulatory exceptions at § 411.357(a) well-informed parties to the agreement definition at § 413.134(b)(2) upon which and (b).) We are finalizing our proposals who are not otherwise in a position to we relied states that fair market value to restructure the regulation in this way. generate business for the other party, on (not general market value) is defined as We believe that this approach provides the date of acquisition of the asset or at the price that the asset would bring by parties with ready access to the the time of the service agreement. bona fide bargaining between well- definition of ‘‘fair market value,’’ with (3) Usually, the fair market price is informed buyers and sellers at the date the attendant modifiers, that is the price at which bona fide sales have of acquisition. The regulation goes on to applicable to the specific type of been consummated for assets of like state that, usually the fair market price compensation arrangement at issue. type, quality, and quantity in a is the price that bona fide sales have Under the final regulation at § 411.351, particular market at the time of been consummated for assets of like generally, fair market value means the acquisition, or the compensation that type, quality, and quantity in a value in an arm’s-length transaction, has been included in bona fide service particular market at the time of consistent with the general market value agreements with comparable terms at acquisition. This definition more closely of the subject transaction. With respect the time of the agreement, where the ties to the widely accepted IRS to the rental of equipment, fair market price or compensation has not been definition of ‘‘fair market value,’’ 8 not value means the value in an arm’s- determined in any manner that takes general market value. Therefore, we length transaction of rental property for into account the volume or value of considered whether current § 411.351 general commercial purposes (not taking anticipated or actual referrals. includes an appropriate definition for into account its intended use), (4) With respect to rentals and leases ‘‘general market value.’’ consistent with the general market value described in § 411.357(a), (b), and (l) (as of the subject transaction. And with to equipment leases only), ‘‘fair market We stated in the proposed rule that respect to the rental of office space, fair value’’ means the value of rental we see no indication in the legislative market value means the value in an property for general commercial history or the statutory language itself arm’s length transaction of rental purposes (not taking into account its that the Congress intended that the property for general commercial intended use). definition of ‘‘general market value’’ for purposes (not taking into account its (5) In the case of a lease of space, this purposes of the physician self-referral intended use), without adjustment to value may not be adjusted to reflect the law should deviate from general reflect the additional value the additional value the prospective lessee concepts and principles in the valuation prospective lessee or lessor would or lessor would attribute to the community. We discussed in detail the attribute to the proximity or proximity or convenience to the lessor basis for our proposals to revise the convenience to the lessor where the when the lessor is a potential source of definition of ‘‘general market value’’ in lessor is a potential source of patient patient referrals to the lessee. accordance with our belief that the referrals to the lessee, and consistent (6) For purposes of this definition, a Congress used the term ‘‘general market with the general market value of the rental payment does not take into value’’ to ensure that the fair market subject transaction. We are not account intended use if it takes into value of the remuneration is generally finalizing the proposed references to account costs incurred by the lessor in consistent with the valuation that would ‘‘like parties and under like developing or upgrading the property or result using accepted valuation circumstances.’’ We note that the maintaining the property or its principles (84 FR 55798). However, after structure of the final regulation merely improvements. reviewing the comments, to which our reorganizes for clarity, but does not Items one, four, and five essentially detailed responses are provided below, significantly differ from, the statutory restate the language at section we believe that our proposals, if language at section 1877(h)(3) of the 1877(h)(3) of the Act, albeit with the finalized, could have had an unintended Act. intervening language in items two and limiting effect on the regulated We also proposed changes to the three, and item six was added in Phase community, as well as the valuation definition of ‘‘general market value,’’ I in response to a comment for the community. Our use of the term which, until now, was included within purpose of interpreting the modifier ‘‘market value’’ in our preamble the definition of fair market value at ‘‘(not taking into account its intended discussion, although not carried into the § 411.351. As we explained in the use)’’ in item four and at section proposed definition of ‘‘general market proposed rule, the definition of ‘‘fair 1877(h)(3) of the Act. We stated in the value,’’ may have been inaccurate. market value’’ finalized in Phase II 1998 proposed rule that items two and Therefore, we are retracting our states the following, some of which three were our attempt to give meaning statements equating ‘‘general market relates to fair market value and some of to the statutory requirement that the fair value,’’ as that term appears in the which relates to the included term, market value of compensation must be statute and our regulations, with ‘‘general market value’’ (84 FR 55797). ‘‘consistent with the general market ‘‘market value,’’ the term we identified Numerical references are added here for value.’’ In doing so, we relied on a as uniformly used in the valuation ease but did not appear in the regulation regulation that relates to the industry (84 FR 55798). at § 411.351: circumstances under which an (1) Fair market value means the value appropriate allowance for depreciation 8 Fair Market Value is defined as ‘‘the price at in arm’s-length transactions, consistent on buildings and equipment used in which the property would change hands between with the general market value. furnishing patient care can be an a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter (2) General market value means the allowable cost. We stated in the is not under any compulsion to sell, both parties price that an asset would bring as the proposed rule that we no longer see the having reasonable knowledge of relevant facts.’’ result of bona fide bargaining between benefit of connecting the definition of (IRS Rev. Ruling 59–60)

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We continue to believe that the services, with like buyers and sellers, salary surveys are available. However, general market value of a transaction is and under like circumstances), while the cost of living in the geographic based solely on consideration of the general market value relates to the value location of the hospital is very low economics of the subject transaction and of an asset or service to the actual despite its proximity to good schools should not include any consideration of parties to a transaction that is set to and desirable recreation opportunities, other business the parties may have occur within a specified timeframe. We and, due to declining reimbursement with one another. Thus, for example, provided examples of compensation rates and a somewhat poor payor mix, when parties to a potential medical arrangements under which the hospital’s economic position is director arrangement determine the compensation outside the parameters of tenuous. Although the physician may value of the physician’s administrative salary survey data could be appropriate request the $250,000 that the salary services, they must not consider that the (84 FR 55798 through 55799). Although survey indicates would be appropriate physician could also refer patients to we are not finalizing the proposed for a hypothetical (unidentified) the entity when not acting as its medical analytical framework related to physician to earn, and the hospital may director. After reviewing the comments ‘‘hypothetical’’ versus ‘‘actual’’ believe that it is compelled to pay the on our proposed definition of ‘‘general transactions, we continue to believe that physician this amount, the fair market market value’’ and the existing the fair market value of a transaction— value of the physician’s compensation regulation at § 411.351, we determined and particularly, compensation for may be less than $250,000 per year (84 that the best way to state this policy is physician services—may not always FR 55799). to remove the language regarding the align with published valuation data We also proposed to remove from the regulation text at § 411.351 the volume or value standard (item three compilations, such as salary surveys. In statement that, for purposes of the above) and restructure the definition to other words, the rate of compensation definition of ‘‘fair market value,’’ a emphasize our policy that the valuation set forth in a salary survey may not rental payment does not take into of the remuneration terms of a always be identical to the worth of a account intended use if it takes into transaction should not include any particular physician’s services. For this account costs incurred by the lessor in consideration of other business the reason, we are affirming the examples developing or upgrading the property or actual parties to the transaction may provided in the proposed rule and maintaining the property or its have with one another. Also, for clarity restate them here, with modifications to improvements (84 FR 55798). This and as supported by commenters, we eliminate terminology not included in are finalizing definitions of ‘‘general language was added to the regulation our final analytical framework and text as a result of our response in Phase market value’’ specific to each of the regulations. As we stated in the types of transactions contemplated in I to a commenter to the 1998 proposed proposed rule, extenuating rule, where we stated that a rental the exceptions to the physician self- circumstances may dictate that parties referral law—asset acquisition, payment does not violate the to an arm’s length transaction veer from requirement that the fair market value of compensation for services, and rental of values identified in salary surveys and equipment or office space. Under our rental property is the value of the other valuation data compilations that property for general commercial final regulation at § 411.351, ‘‘general are not specific to the actual parties to market value’’ means, with respect to purposes, not taking into account its the subject transaction (84 FR 55799). intended use, merely because it reflects the purchase of an asset, the price that By way of example, assume a hospital any costs that were incurred by the an asset would bring on the date of is engaged in negotiations to employ an lessor in developing or upgrading the acquisition of the asset as the result of orthopedic surgeon. Independent salary property, or maintaining the property or bona fide bargaining between a well- surveys indicate that compensation of its improvements, regardless of why the informed buyer and seller that are not $450,000 per year would be appropriate improvements were added (66 FR 945). otherwise in a position to generate for an orthopedic surgeon in the That is, the rental payment may reflect business for each other. With respect to geographic location of the hospital. the value of any similar commercial compensation for services, ‘‘general However, the orthopedic surgeon with property with improvements or market value’’ means the compensation whom the hospital is negotiating is one amenities of a similar value, regardless that would be paid at the time the of the top orthopedic surgeons in the of why the property was improved. This parties enter into the service entire country and is highly sought after regulation text appears to have caused arrangement as the result of bona fide by professional athletes with knee confusion among stakeholders. bargaining between well-informed injuries due to his specialized Although it remains our policy, to avoid parties that are not otherwise in a techniques and success rate. Thus, further confusion and provide certainty position to generate business for each although the employee compensation of in the final definitions of ‘‘fair market other. And, with respect to the rental of a hypothetical orthopedic surgeon may value’’ and ‘‘general market value,’’ we equipment or the rental of office space, be $450,000 per year, this particular are finalizing our proposal to remove ‘‘general market value’’ means the price physician commands a significantly this language from the definition of ‘‘fair that rental property would bring at the higher salary. In this example, market value’’ at § 411.351. time the parties enter into the rental compensation substantially above Lastly, we noted in the proposed rule arrangement as the result of bona fide $450,000 per year may be fair market that many CMS RFI commenters bargaining between a well-informed value. On the other hand, hypothetical requested that we simply return to the lessor and lessee that are not otherwise data may result in hospitals and other statutory language defining fair market in a position to generate business for entities paying more than they believe value (84 FR 55798). Some commenters each other. appropriate for physician services. on the proposed rule made similar In the proposed rule, we stated that it Assume a hospital is engaged in requests. We continue to disagree that is our view that the concept of fair negotiations to employ a family this would be the best approach. We market value relates to the value of an physician. Independent salary surveys believe that it is important to provide asset or service to hypothetical parties indicate that compensation of $250,000 guidance with respect to the in a hypothetical transaction (that is, per year would be appropriate for a requirement that compensation is fair typical transactions for like assets or family physician nationally; no local market value in order not to stymy our

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enforcement efforts (or those of our law self-referral law being distorted by consideration of the economics of the enforcement partners). This guidance is considerations of referrals. The subject transaction and should not also crucial to support the compliance commenter suggested that we include include any consideration of other efforts of the regulated industry. this statement at the end of the business the parties may have with one We received the following comments proposed definition of ‘‘general market another. Although we continue to and our responses follow. value’’ for clarity. believe that the determination of general Comment: Some commenters Response: Although we disagree with market value should be based solely on supported our proposal to remove the the characterization of our proposal to consideration of the economics of the language regarding bargaining between define general market value merely as subject transaction and should not well-informed buyers and sellers who the value determined by the parties to include any consideration of other are not otherwise in a position to the subject transaction, we find the business the parties may have with one generate business for the other party, program integrity concerns highlighted another, we do not believe that it is suggesting that this language essentially by the latter commenters compelling. It necessary to include this statement links the volume or value standard with was not our intention to define ‘‘general because the final definition of ‘‘general the definition of ‘‘fair market value.’’ market value’’ in a way that permits the market value’’ retains the essentially The commenters noted that CMS clearly inappropriate consideration of the value equivalent requirement for bona fide stated in the proposed rule that the of a physician’s referrals or the other bargaining between well-informed volume or value standard and other business that a physician could generate parties that are not otherwise in a business generated standard are distinct for an entity in a determination of the position to generate business for each and separate requirements of many fair market value of compensation. In other. exceptions to the physician self-referral Compensation to or from a physician Phase I, based on our then- law (84 FR 55797). These commenters should not be inflated or reduced interpretation that the ‘‘volume or value also referenced court opinions in which simply because the entity paying or restriction’’ in the exceptions to the they believe the standards were blended receiving the compensation values the physician self-referral law established a or conflated by the court, causing referrals or other business that the limitation on the fair market value of confusion, additional litigation, and physician may generate more than a compensation rather than represent a what they termed a ‘‘torrent of different potential buyer of the items or separate and distinct requirement of the unnecessary effort to reexamine services. This means that a hospital may arrangements long-believed to comply exceptions, we stated that, depending not value a physician’s services at a with the law.’’ The commenters on the circumstances, the ‘‘volume or higher rate than a private equity contended that parties should not have value’’ restriction will preclude reliance investor or another physician practice to search for market data that isolates on comparables that involve entities and simply because the hospital could bill transactions with physicians who are physicians in a position to refer or for designated health services referred not in a position to refer to the entities generate business for each other (66 FR by the physician under the OPPS, with which they have compensation 944). In Phase II, we stated that, if whereas a physician practice owned by arrangements. In contrast, one parties are using comparables to the private equity investor or other commenter strongly opposed our establish fair market value, they should physicians would have to bill under the proposal to remove the language take reasonable steps to ensure that the PFS, which may have lower payment regarding well-informed buyers and comparables are not distorted (69 FR rates. Put another way, the value of a sellers that are not otherwise in a 16107). Although we have renounced physician’s services should be the same position to generate business for each the interpretation of the volume or value regardless of the identity of the other from the definition of ‘‘general and other business generated standards purchaser of those services. We market value.’’ A few other commenters as merely limiting or modifying the fair recognize that reliance on similar asserted that, by defining general market market value requirement (84 FR transactions in the marketplace could value as the value determined by the 55797), we continue to believe that simplify the process of determining fair parties to the subject transaction, the precluding reliance on comparables that market value for purposes of the standard would simply be a subjective involve entities and physicians in a physician self-referral law, but adopting test of how parties to the transaction position to refer or generate business for such a standard would allow parties to value the services, which could include each other in the determination of fair consider the additional (or investment) additional payment for referrals or the market value and general market value value to certain types of entities, generation of business. These is an important program integrity skewing the buyer-neutral fair market commenters asserted that delinking the safeguard. We are finalizing a definition value. definition of ‘‘general market value’’ of ‘‘general market value’’ that retains Comment: One commenter asserted from the ability to generate business this language from the current that the definition of ‘‘fair market value’’ could result in the parties comparing regulation defining general market should include a statement that the subject transaction to other value. We believe this will be less organizations compensating individuals transactions under which compensation disruptive to the regulated industry and at an ongoing loss may create risk that is inflated by the value of referrals. One valuation professionals that have the compensation is not representative commenter suggested that we include in developed compliance protocols and of fair market value. The commenter regulation text our preamble statement valuation standards that have explained its concern in an example that [general] market value is based incorporated this requirement for the involving a hospital compensating a solely on consideration of the past two decades, while still achieving physician at an amount greater than the economics of the subject transaction and our goal of disentangling the volume or collections for the physician’s services, should not include any consideration of value and other business generated asserting that the hospital is able to do other business the parties may have standards from the requirement that so because it controls referrals within its with one another (84 FR 55798). The compensation is fair market value. We network and increased facility revenues commenter asserted that this would are not including in the definition of offset the physician practice losses. In address the legitimate concern about ‘‘general market value’’ a statement that the commenter’s view, this creates a valuations for purposes of the physician general market value is based solely on situation in which hospitals are taking

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into account the value of referrals when appropriate valuation methodologies for emphasize that our use of the language setting physician compensation. The purposes of the physician self-referral ‘‘commercially reasonable’’ in Phase I commenter noted that, from a fair law solely to the ‘‘market value’’ (and again in Phase III (72 FR 51015 market value and [general] market value approach. One commenter asserted that through 51016)) was also not intended perspective, two hypothetical parties stakeholders should not be restricted to to limit the valuation of assets, (that cannot consider the fact that one exclusive use of the market approach to compensation, or rental property to a party can generate business for the value a physician’s personal services or specific valuation approach or prescribe other) would never enter into a situation promote exclusive use by valuators of any other particular method for in which the physician’s compensation physician compensation survey data. determining the fair market value and and benefits exceeded direct revenue. A Other commenters requested that general market value of compensation. different commenter asserted that a hospitals should be permitted to use Rather, as stated in Phase II and payment to a physician above what the existing written offers to a physician reiterated in Phase III, we will consider entity collects for the physician’s from other similarly situated providers a range of methods of determining fair services is inherently not fair market to support a valuation. One of these market value and that the appropriate value. commenters requested guidance on how method will depend on the nature of the Response: We agree that, in some fair market value should be determined transaction, its location, and other circumstances, an entity’s compensation and documented for timeshare factors (69 FR 16107 and 72 FR 51015 of a physician at an ongoing loss may arrangements, citing the ‘‘cost plus’’ through 51016). We decline to affirm the present program integrity concerns, but guidance from Phase I regarding specific valuation suggestions of the see no need to include the language equipment leases as potentially commenters because the amount or type requested by the commenter in appropriate (66 FR 876 through 877). of documentation that will be sufficient regulation. As we stated earlier, we are Another of the commenters asked for to confirm fair market value (and retaining the language ‘‘not in a position additional guidance on recruiting and general market value) will vary to generate business’’ in the definition paying physicians in rural areas, depending on the circumstances in any of ‘‘general market value.’’ We believe including the use of supply, demand, given case (66 FR 944), but refer readers this addresses the commenter’s concern, access, and community need to support to the Phase I rulemaking for an at least in part, as it requires that the the fair market value of a physician’s extensive discussion on potentially nature or identity of the purchaser of the compensation. Another commenter acceptable valuation methods (66 FR items or services (in the commenter’s requested that CMS provide additional 944 through 945). example, the hospital) is irrelevant to a guidance or examples on what data, Comment: Several commenters determination of ‘‘general market value’’ facts, and circumstances should be and, thus, ‘‘fair market value.’’ In the expressed appreciation for the examples applied to evaluate fair market value. in the proposed rule regarding when an commenter’s example, the value of the The commenter requested specific physician’s services is the value to any arrangement may involve compensation guidance on the relevance of payor mix, above or below what national market willing buyer, and the fact that the market supply and demand data, cost of hospital could make up losses for the data (salary surveys) suggests would be living, physician skills, and experience. appropriate. The commenters stated that physician’s compensation through A different commenter noted costs of designated health services reimbursed at the ability to factor in unique care, costs for medical liability circumstances, such as whether a facility rates under OPPS rather than insurance, costs of equipment and PFS, may not be considered. Also, we physician is particularly remarkable in staffing, certificate of need laws, and disagree that parties would never enter his or her field, will allow entities to provider and related taxes on health into such an arrangement. As we stated design compensation packages that care services and centers as relevant above in section II.B.2 (with respect to more fully account for the broader factors when determining the fair the definition of ‘‘commercially circumstances of an arrangement. One market value of compensation. reasonable’’), there are many valid commenter emphasized that the reasons and legitimate business Response: As discussed above, we are analysis of fair market value is always purposes for entering into an retracting our statements in the predicated on an analysis of the actual arrangement that will not result in profit proposed rule equating ‘‘general market terms of a transaction and the actual for one or more of the parties to the value’’ with the valuation principle of facts and circumstances, while another arrangement. ‘‘market value’’ (84 FR 55798). We did commenter agreed specifically that Comment: A few commenters raised not intend to limit the valuation of extenuating circumstances may dictate the point that, with respect to our assets, compensation, or rental property that parties to an arm’s-length statements in the proposed rule to the market approach or prescribe any transaction veer from values identified connecting the statutory term ‘‘general other particular method for determining in salary surveys and other hypothetical market value’’ to the valuation principle the fair market value and general market valuation data that is not specific to the of ‘‘market value’’ (84 FR 55798), value of compensation. As we have actual parties. The commenter urged ‘‘general market value’’ does not equate stated consistently in prior rulemakings, CMS to include this language (or similar to the ‘‘market value’’ of a transaction, to establish the fair market value (and language) in regulation text to provide as that term is used in the valuation general market value) of a transaction further assurances to stakeholders of industry. One of these commenters that involves compensation paid for CMS’ policy. Another commenter suggested that what CMS described as assets or services, we intend to accept requested that we acknowledge that ‘‘market value’’ actually corresponds to any method that is commercially there are other factors that may justify ‘‘investment value’’ as defined by the reasonable and provides us with higher levels of compensation rates for four commercial valuation disciplines: evidence that the compensation is physician services in markets that may Business valuation, compensation comparable to what is ordinarily paid have relatively low cost of living valuation, machinery and equipment for an item or service in the location at standards due to market supply and valuation, and real estate valuation. issue, by parties in arm’s-length demand. A different commenter Commenters expressed concern that this transactions that are not in a position to discussed the difficulty of establishing focus would narrow the universe of refer to one another (66 FR 944). We fair market value in rural areas and

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other challenging markets. This We also agree with the commenter that property and goods; specifically, the commenter noted that, in some emphasized the need for an analysis of price, expressed in terms of cash instances, a hospital might need to the actual terms of a transaction and the equivalents, at which property, services, compensate a physician above what is actual facts and circumstances of the and resources would change hands indicated in some published salary parties. In our view, each compensation between a hypothetical willing and able schedules in order to convince the arrangement is different and must be buyer and a hypothetical willing and physician to relocate to the market area evaluated based on its unique factors. able seller, acting at arm’s-length in an and fill a dire patient need. The That is not to say that common open and unrestricted market, when commenter was concerned that the arrangements, where the services neither is under compulsion to buy or example in the proposed rule regarding required are identical regardless of the sell and when both have reasonable lower cost of living in certain markets identity of the physician providing knowledge of the relevant facts. The could be read to prohibit compensation them, do not lend themselves well to commenters asserted that this definition above what is found in salary schedules. the use of salary surveys for determining would not require valuators to limit Some commenters requested additional compensation that is fair market value. themselves to the market approach or examples of circumstances that could Our examples in the proposed rule depart from time-honored valuation justify deviating from salary survey were intended to show that a variety of principles of their profession, including data. A few other commenters objected factors could affect whether the amount consideration of more than just to the examples and disagreed that shown in a salary schedule is too high physician compensation survey data. extenuating circumstances could require or too low to be fair market value for the Ultimately, the commenters requested a downward deviation from salary services of the subject transaction. In that CMS not adopt a new definition of surveys. some instances, it is exactly right. ‘‘fair market value’’ (with or without a Response: It appears from the Parties do not necessarily fail to satisfy definition of ‘‘general market value’’) to comments that stakeholders may have the fair market value requirement take advantage of the consensus reached been under the impression that it is simply because the compensation within the valuation profession. CMS policy that reliance on salary exceeds a particular percentile in a Response: We decline to retain the surveys will result, in all cases, in a salary schedule; nor are parties required current definition of ‘‘fair market value’’ determination of fair market value for a to pay a physician what is shown in a (with or without a definition of ‘‘general physician’s professional services. It is salary schedule if the specific market value’’) as requested by the not CMS policy that salary surveys circumstances do not warrant that level commenters. First, the term ‘‘general necessarily provide an accurate of compensation. With respect to the market value’’ is included in the determination of fair market value in all commenters that took issue with the statutory definition of ‘‘fair market cases. However, we decline to include statements in the proposed rule that the value’’ and we cannot ignore it for in regulation text, as requested by one fair market value of a particular purposes of the statutory exceptions or of the commenters, a statement that physician’s services may be below what remove it from our regulations. Second, extenuating circumstances may dictate is indicated in a salary schedule, we we expect that our retraction of certain that parties to an arm’s-length believe that salary schedules should not statements from the proposed rule and transaction should veer from values be used by a physician to demand the clarification of previous identified in salary surveys and other compensation that is above what well- commentary on valuation methods will hypothetical valuation data that is not informed parties that are not in a specific to the actual parties to the position to generate business for each assuage the commenters’ concerns. As transaction when determining the fair other would agree is the fair market described above, we are finalizing only market value of the compensation under value of the physician’s services. We slight modifications to the existing their transaction. We believe such a wish to be perfectly clear that nothing definitions of ‘‘fair market value’’ and statement is unnecessary in light of our in our commentary was intended to ‘‘general market value’’ to clearly policy discussion in the proposed rule imply that an independent valuation is indicate the statute’s specific and this final rule and our concern that required for all compensation requirements for determining the fair it could reduce the clarity in the arrangements. market value of rental property and to definitions of ‘‘fair market value’’ and Comment: Two commenters, in disentangle the volume or value and ‘‘general market value’’ that we and identical statements, expressed concern other business generated standards of stakeholders seek. with the proposed definition of ‘‘general the exceptions to the physician self- Consulting salary schedules or other market value.’’ The commenters referral law from the definition of hypothetical data is an appropriate contended that, despite the statutory ‘‘general market value.’’ starting point in the determination of language that fair market value means Comment: Most commenters fair market value, and in many cases, it the value in an arm’s-length transaction, supported the reorganization of the may be all that is required. However, we consistent with the general market definitions, noting that the proposed agree with the commenter that asserted value, there is no reason to believe that structure provides better clarity. Some that a hospital may find it necessary to the reference to ‘‘general market value’’ commenters urged CMS to adopt the pay a physician above what is in the modifies ‘‘fair market value’’ such that definitions of ‘‘fair market value’’ and salary schedule, especially where there fair market value means anything other ‘‘general market value’’ as proposed. is a compelling need for the physician’s than what it means to the business The commenters expressed appreciation services. For example, in an area that valuation profession, and suggested that for the restructuring of the existing has two interventional cardiologists but CMS leave the determination of fair definition of ‘‘fair market value’’ to no cardiothoracic surgeon who could market value to the business valuation extract the separate term ‘‘general perform surgery in the event of an profession. These commenters shared a market value’’ and the link to the emergency during a catheterization, a definition of ‘‘fair market value’’ found volume or value standard. One of the hospital may need to pay above the in the International Glossary of Business commenters stated that the proposed amount indicated at a particular Valuation Terms, with slight definition of ‘‘fair market value’’ better percentile in a salary schedule to attract modification to recognize the valuation aligns with the definition set forth in the and employ a cardiothoracic surgeon. of services and resources as well as statute.

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Response: We agree that the final Response: For the reasons explained of this final rule, we proposed and are structure of the definitions of ‘‘fair in Phase I (66 FR 944 through 945), finalizing conforming changes market value’’ and ‘‘general market Phase II (69 FR 16092), and Phase III (72 throughout our regulations to delineate value’’ is clearer than our existing FR 51015), we decline to establish the these standards as a prohibition on regulations. As we discussed above and rebuttable presumptions and ‘‘safe compensation that takes into account in response to earlier comments, we are harbors’’ requested by the commenters. the volume or value of a physician’s finalizing slight modifications to the We are uncertain why the commenters referrals or other business generated by proposed definitions. We are finalizing believe that it is CMS policy that the physician for the entity providing our proposal to remove the link to the compensation set at or below the 75th the remuneration. However, because the volume or value standard in the percentile in a salary schedule is always language in § 411.352(g) and (i) mirrors definition of ‘‘general market value’’ as appropriate, and that compensation set the statutory language at section requested by the commenters. We above the 75th percentile is suspect, if 1877(h)(4)(iv) of the Act, we did not believe that structuring the definition of not presumed inappropriate. The propose changes to the ‘‘volume or ‘‘fair market value’’ to provide for a commenters are incorrect that this is value’’ regulation text in either of those definition of general application, a CMS policy. paragraphs. The terms ‘‘based on’’ and ‘‘related to’’ remain in the regulation definition applicable to the rental of C. Group Practices (§ 411.352) equipment, and a definition applicable text at § 411.352(g) and (i). We are to the rental of office space facilitate In the proposed rule, we proposed affirming here that we interpret the parties’ compliance with the fair market certain revisions to the group practice requirements of § 411.352(g) and (i) to value requirement in the exceptions to rules at § 411.352 that relate to incorporate the volume or value the physician self-referral law that apply corresponding proposals regarding the standard as it relates to a physician’s to the specific type of compensation definitions and special rules for referrals; that is, compensation to a arrangement between them. Similarly, ‘‘commercially reasonable’’ physician who is a member of a group we believe that definitions of ‘‘general compensation arrangements, ‘‘fair practice may not be determined in any market value’’ specific to each of the market value’’ compensation, and the manner that takes into account the types of transactions contemplated in volume or value standard applicable volume or value of the physician’s the exceptions to the physician self- throughout the physician self-referral referrals (except as provided in referral law—asset acquisition, law and regulations (84 FR 55799 § 411.352(i)), and profit shares and through 55802). We also proposed a compensation for services, and rental of productivity bonuses paid to a revision to the rules regarding the equipment or office space—will physician in the group may not be distribution of overall profits intended facilitate stakeholders’ understanding of determined in any manner that takes to support our policies related to the the requirements for fair market value into account the volume or value of the transition from a volume-based to a compensation that is consistent with the physician’s referrals (except that a value-based health care system (84 FR general market value and ease overall productivity bonus may directly take 55800 through 55801). We discuss these compliance efforts. into account the volume or value of the proposals and our final regulations in physician’s referrals if the referrals are Comment: A large number of section II.C.2. of this final rule. for services ‘‘incident to’’ the commenters requested that we establish physician’s personally performed rebuttable presumptions that 1. Interpretation of the ‘‘Volume or Value Standard’’ for Purposes of the services). compensation is fair market value or Prior to the revisions we are finalizing ‘‘safe harbors’’ that would deem Group Practice Regulations (§ 411.352(g)) in this final rule, the regulation at compensation to be fair market value if § 411.352(g) stated that ‘‘[n]o physician certain conditions are met. The As we discussed in the proposed rule, who is a member of the group practice commenters variously suggested that the in conjunction with our proposals directly or indirectly receives following should be deemed to be fair related to the volume or value compensation based on the volume or market value: Compensation set within standards, we reviewed the physician value of his or her referrals, except as a range of percentiles identified in self-referral regulations to ensure that provided in § 411.352(i)’’ (emphasis independent salary surveys (with a the standards related to the volume or added). We interpret this to mean that, wider band of permissible value of a physician’s referrals (the in order to satisfy this requirement for compensation for physicians who volume or value standard) and the other qualification as a ‘‘group practice,’’ no practice in medically underserved areas, business generated by the physician (the physician who is a member of the group health professional shortage areas, or other business generated standard) are practice receives compensation that rural areas), compensation set within expressed using standardized directly or indirectly takes into account the parameters of an independent third- terminology (84 FR 55799). We the volume or value of his or her party valuation, and compensation set identified several occurrences of referrals (unless permitted under in accordance with a valuation process inconsistent expression of the § 411.352(i)). Our interpretation is that meets certain conditions patterned standards. Although section 1877 of the consistent with the interpretation of after those set forth in IRS regulations at Act uses more than one phrase to ‘‘related to’’ set forth in Phase I, where 26 CFR 53.4958–6 (related to excess describe the volume or value and other we used the terms ‘‘based on,’’ ‘‘related benefit transactions). Some of the business generated standards, which to,’’ and ‘‘takes into account’’ commenters asserted that a ‘‘safe may be one reason for variations in the interchangeably when describing the harbor’’ based on a range of values in regulation text, we believe that the final group practice regulations (66 FR salary surveys would be consistent with references are all to the same underlying 908 through 910). what they stated was established CMS prohibition on compensation that Prior to the revisions we are finalizing policy that compensation set at or below fluctuates with the volume or value of in this final rule, the regulation at the 75th percentile in a salary schedule a physician’s referrals or the other § 411.352(i) stated that a physician in a is appropriate and compensation set business generated by a physician for group practice may be paid a share of above the 75th percentile is suspect, if the entity providing the remuneration. overall profits of the group practice, not presumed inappropriate. Therefore, as discussed in section II.B.3. provided that the share is not

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determined in any manner that is assuming it meets all the requirements a manner that only indirectly takes into directly related to the volume or value of the definitions and exceptions. Those account the volume or value of the two of referrals by the physician. We have exceptions do not include fair market physicians’ referrals. The commenters long interpreted ‘‘is directly related to’’ value or volume or value requirements. suggested that this restriction the volume or value of referrals to mean The regulations at § 411.352 apply to discourages physician participation in ‘‘takes into account’’ the volume or group practices that operate in a FFS alternative payment or other value- value of referrals. In Phase I, we payment environment. We do not agree based care models because physicians discussed this provision and stated that that our final regulations at § 411.352 cannot be suitably rewarded for their the Congress expressly limited profit will prohibit a group practice from accomplishments in advancing the goals shares for group practice members to participating and succeeding in a value- of the model, which is at odds with the methodologies that do not directly take based health care delivery and payment Secretary’s vision for achieving value- into account the member’s designated system. based transformation by pioneering bold health services referrals, and that, under new payment models. We also 2. Special Rules for Profit Shares and the statutory scheme, revenues described the assertion of another Productivity Bonuses (§ 411.352(i)) generated by designated health services commenter on the CMS RFI that, may be distributed to group practice a. Distribution of Profits Related to because physician decisions drive the members and physicians in the group in Participation in a Value-Based overwhelming majority of all health care accordance with methods that indirectly Enterprise spending and patient outcomes, it is not take into account referrals (emphasis We proposed a new § 411.352(i)(3) to possible to transform health care added) (66 FR 862 and 908). address downstream compensation that without the participation of physicians Despite the varying language of the derives from payments made to a group in value-based health care delivery and regulations, as detailed in the proposed practice, rather than payments made payment models with other health care rule (84 FR 55800), we consider the directly to a physician in the group, that providers. We stated that we share the regulations at § 411.352(g) and (i) to commenters’ concerns regarding prohibit compensation to physicians in relate to the physician’s participation in a value-based arrangement. Certain physician participation in value-based a group practice that is determined in health care delivery and payment any manner that takes into account the downstream distribution arrangements are currently protected under waivers in models and are also concerned that our volume or value of the physician’s regulations could undermine the referrals to the group practice. The new the Shared Savings Program and certain Innovation Center models. However, success of the Regulatory Sprint or the special rule at § 411.354(d)(5) larger transition to a value-based health establishes the universe of outside of the Shared Savings Program or an Innovation Center model, profit care system. Therefore, we proposed compensation that we consider to be changes to § 411.352(i) with respect to determined in a manner that takes into shares or productivity bonuses paid to a physician in a group practice that are the payment of profit shares to eliminate account the volume or value of a this potential barrier to robust physician physician’s referrals to the entity paying determined in any manner that directly takes into account the volume or value participation in value-based care the compensation. As described in delivery (84 FR 55800). We are section II.B.3. of this final rule, this of his or her referrals to the group practice are strictly prohibited by the finalizing our proposal with special rule applies in all instances modifications to the regulation text as where our regulations include the physician self-referral statute and regulations. proposed. As explained in our volume or value standard, except as responses to comments below, the specified in § 411.354(d)(5)(iv). The special rules for the profit shares policy will be codified at revised Therefore, with respect to both and productivity bonuses paid to § 411.352(i)(3) and effective on January § 411.352(g) and (i), when determining physicians in a group practice prohibit 1, 2022. whether the physician’s compensation, calculation methodologies that directly share of overall profits, or productivity take into account the volume or value of For the reasons described elsewhere bonus is based on, is directly or the recipient physician’s referrals to the in this final rule, in the exceptions for indirectly related to, or takes into group practice. Thus, by way of value-based arrangements at new account the volume or value of the example, in a 100-physician group § 411.357(aa), we did not propose to physician’s referrals to the group practice where only two of the prohibit remuneration that takes into practice, the special rule at final physicians participate with a hospital as account the volume or value of a § 411.354(d)(5) applies. a value-based enterprise in a physician’s referrals. The revisions We received the following general commercial payor-sponsored alternative finalized at § 411.352(i)(3) are an comment and our response follows. payment model, the profits from the extension of this policy. Specifically, we Comment: Some commenters argued designated health services ordered by are finalizing a provision related to the that we should not finalize our the physicians and furnished by the distribution of profits from designated proposals because group practices need group practice to beneficiaries assigned health services that are directly the utmost flexibility to participate and to the model may not be allocated attributable to a physician’s succeed in value-based health care directly to the two physicians. We participation in a value-based delivery and payment systems. explained in the proposed rule that enterprise. Under our final policy at Response: Nothing in our final commenters on the CMS RFI interpreted § 411.352(i)(3), such profits may be regulations prohibits a group practice this to mean that the special rules at distributed to the participating (or any physician practice) that § 411.352(i) would restrict the group physician and will not be considered to furnishes designated health services and practice to allocating alternative directly relate to (or take into account) the physicians who are owners, payment model-derived income that the volume or value of the physician’s employees, or independent contractors includes revenues from designated referrals. In other words, a group of the practice from qualifying as a health services among all physicians in practice may distribute directly to a value-based enterprise. The new the group (or a component of at least physician in the group the profits from exceptions at § 411.357(aa)(3) may be five physicians in the group) in order to designated health services furnished by available to such an enterprise, ensure that such income is allocated in the group that are derived from the

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physician’s participation in a value- practice’s participation may not be Comment: With respect to our based enterprise, including profits from warranted or desirable. proposal to permit the distribution of designated health services referred by Response: We agree with the profits from designated health services the physician, and such remuneration commenters regarding the potential that are directly attributable to a will be deemed not to be based on (or impact of the permitted distributions; physician’s participation in a value- take into account) the volume or value namely, that individual physicians in a based enterprise, we sought comment of the physician’s referrals. The group practice may be encouraged to regarding whether we should permit the regulation finalized at § 411.352(i)(3) participate in a value-based enterprise distribution of ‘‘revenue’’ from would permit the 100-physician group with providers and suppliers outside of designated health services, as opposed practice in the previous example to the physician’s own group practice even to ‘‘profits’’ from designated health distribute the profits from designated when the group practice does not services in order to effectuate the goals health services derived from the two participate as a whole in the value- described elsewhere in the proposed physicians’ participation in value-based based enterprise. We believe that the rule and this final rule. One commenter enterprise directly to those physicians. protection afforded by the safeguards in stated that the furnishing of certain Physician #1 could receive a profit the new definitions and exceptions designated health services does not distribution that considers his or her related to value-based care delivery and always result in profit for the group referrals to the group that are directly payment will ensure that distribution of practice and suggested that permitting attributable to his or her participation in profits to an individual physician (or the distribution of revenue from the value-based enterprise (and its subset of physicians) within a group designated health services would corresponding participation in the practice should not increase the risk of provide needed flexibility to encourage model), and Physician #2 could receive inappropriate utilization of designated physicians to participate in value-based a profit distribution that considers his or health services or program or patient care delivery. Another commenter her referrals to the group that are abuse. suggested that we permit the directly attributable to his or her Comment: One commenter noted that distribution of revenue from designated participation in the value-based proposed § 411.352(i)(3) was not health services to simplify the enterprise (and its corresponding structured in the same way as the regulation because revenues are easier participation in the model). Neither ‘‘special rules’’ for distribution of to calculate than profits. overall profits and payment of distribution would jeopardize the Response: We have no reason to doubt group’s ability to qualify as a ‘‘group productivity bonuses. The commenter expressed concern that the proposed the commenter’s assertion that a group practice’’ under § 411.352. In the practice does not realize a profit on proposed rule, we sought comment regulation text would not create the deeming provision we intended. The every designated health service that it regarding whether we should permit the commenter requested that we revise the furnishes. Thus, it is possible that a distribution of ‘‘revenue’’ from regulation to expressly state that, where group practice could have no profits to designated health services, as opposed a group practice’s profits from distribute to a physician in the group to ‘‘profits’’ from designated health designated health services are directly who makes a referral of designated services in order to effectuate the goals attributable to a physician’s health services for a patient in the target described elsewhere in the proposed participation in a value-based enterprise patient population while undertaking rule (84 FR 55801) and this final rule. and those profits are distributed to the value-based activities as a VBE As explained in our responses to physician, the compensation to the participant in a value-based enterprise. comments below, we are finalizing our physician is deemed not to take into Although it may be true that it is easier proposal to apply the rule at final account the volume or value of the to calculate revenues than to calculate § 411.352(i)(3) to ‘‘profits’’ from physician’s referrals under § 411.352(g). profits, in general, we believe that a designated health services, which will The commenter asserted that making group practice’s distribution of revenues be effective on January 1, 2022. these revisions would eliminate any to a referring physician rather than We received the following comments inference that § 411.352(i)(3) is not an profits, which are calculated by and our responses follow. exception to § 411.352(g). deducting the expenses incurred in Comment: Commenters widely Response: The commenter is correct furnishing the designated health service, supported our proposal to address the about the structure of the three could serve as an inducement to make distribution of profits from designated provisions in § 411.352(i) that describe additional and potentially inappropriate health services that are derived from the methodologies for the distribution of referrals to the group practice. This is participation in a value-based enterprise profits from designated health services consistent with our statement in the by a physician in a group practice. and the payment of productivity 1998 proposed rule that rewarding a Commenters urged us to finalize our bonuses. We agree that standard physician each time he or she self-refers proposal to permit the distribution of language and further clarification of the for a designated health service can profits from designated health services provision at § 411.352(i)(3) is warranted constitute an incentive to overutilize that are directly attributable to a to ensure the provision operates as a services (63 FR 1691). We are unclear physician’s participation in a value- deeming provision as we intend. We how the sharing of a group practice’s based enterprise without having to have revised the final regulation revenues with a physician would aggregate the profits with the overall accordingly. Specifically, final encourage the physician’s participation profits of the group practice or a § 411.352(i)(3) provides that in value-based care delivery or how the component of five physicians within the notwithstanding paragraph (g) of physician’s participation in his or her group practice. Commenters asserted § 411.352, profits from designated individual capacity in a value-based that this flexibility will encourage health services that are directly enterprise would mitigate our concerns physicians to incorporate value-based attributable to a physician’s regarding the inducement to refer any of elements into their practices, as well as participation in a value-based the physician’s patients outside the physician participation in value-based enterprise, as defined at § 411.351, may target patient population for designated enterprises on an individual basis and be distributed to the participating health services furnished by the group in circumstances where the entire group physician. practice. We are not adopting the

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commenters’ recommendation to permit group’s entire profits derived from group practice may not distribute profits the distribution of revenues from designated health services; and (2) the from designated health services on a designated health services that are profits derived from designated health service-by-service basis. To illustrate, directly attributable to a physician’s services of any component of the group suppose a physician practice provides participation in a value-based practice that consists of at least five both clinical laboratory services and enterprise. physicians. As stated in the proposed diagnostic imaging services—both rule, stakeholders informed us that they designated health services—to its b. Clarifying Revisions were confused about the definition. For patients in a centralized building (as (1) Restructuring of the Regulation at example, stakeholders informally defined at § 411.351) or a location that § 411.352(i) inquired whether the profits of a group qualifies as a ‘‘same building’’ under We proposed to restructure and practice that has only two, three, or four § 411.351 and meets the requirements at renumber § 411.352(i) as well as clarify physicians may be distributed at all. We § 411.355(b)(2)(i). If the practice wishes several provisions of the regulation. As proposed to revise the definition of to qualify as a group practice, it may not we stated in the proposed rule, we ‘‘overall profits’’ to mean the profits distribute the profits from clinical laboratory services to one subset of its believe that the revisions will enable derived from all the designated health physicians and distribute the profits groups to determine with more certainty services of any component of the group from diagnostic imaging to a different whether compensation paid to a that consists of at least five physicians, which may include all physicians in the subset of its physicians. physician in the group as profit shares We are cognizant that, under the or productivity bonuses takes into group. To further clarify this definition, we proposed regulation text at revised requirement at § 411.352(e), to qualify as account the volume or value of referrals a ‘‘group practice,’’ the overhead and, if it does, whether there is a direct § 411.352(i)(1)(ii) stating that, if there are fewer than five physicians in the expenses of, and income from, a or indirect connection to the volume or practice must be distributed according value of the physician’s referrals (84 FR group, ‘‘overall profits’’ means the profits derived from all the designated to methods that are determined before 55801). Except as noted above with the receipt of payment for the services respect to the uniformity of the structure health services of the group. We stated that we believe that this more precisely giving rise to the overhead expense or of the provisions in § 411.352(i), we producing the income. Essentially, a received no comments on the general states the policy articulated in Phase I (66 FR 909 through 910). For the reasons group practice’s compensation restructuring of the regulations, and are methodology must be established finalizing our proposal to restructure explained in our responses to comments, we are finalizing the prospectively. Based on the comments, and renumber the regulations at it is our understanding that group § 411.352(i) without modification to the definition of ‘‘overall profits’’ at § 411.352(i)(1)(ii) as proposed. practice physician compensation proposed numbering and headers of the methodologies are often established regulation. Our purpose in restructuring We highlight that the final regulation prior to the beginning of a calendar year. the regulation is to more closely adhere at § 411.352(i)(1)(ii) includes the words We are concerned that the regulations to the structure of section 1877(h)(4)(B) ‘‘all the’’ before ‘‘designated health we are finalizing in this final rule may of the Act and to express in affirmative services.’’ As we stated in the proposed require group practices that relied on language which profit shares and rule, stakeholders’ informal inquiries their interpretation of § 411.352(i) (as it productivity bonuses are permissible; regarding the permissible methods of existed prior to this final rule) to adjust that is, permitting the payment of a distributing profits from designated their compensation methodologies and, profit share or productivity bonus that health services indicated that the if so, they may not have sufficient time does not directly take into account the regulation text may not have precisely prior to the end of the current calendar volume or value of referrals is the evidenced our intent (84 FR 55801). year to make necessary adjustments to affirmative and more simple way of Such inquiries included whether it is their compensation methodologies. As saying, as our current regulations do, permissible to distribute profit shares of explained in our responses to comments that the profit share or productivity only some types of designated health below, we are delaying the effective date bonus is permissible but only if it does services provided by a group practice of revised § 411.352(i)(1) until January not directly take into account the without distributing the profits from the 1, 2022. Through , 2021, volume or value of referrals. In addition, other types of designated health services the definition of ‘‘overall profits’’ will the special rules for profit shares and provided by the group practice, and be as set forth at existing § 411.352(i)(2). productivity bonuses, as finalized, whether a group practice may share We also proposed to remove the follow the format of our special rules on profits from one type of designated reference to Medicaid from the compensation at § 411.354(d) and our health service with a subset of definition of ‘‘overall profits.’’ We special rules for compensation physicians in a group practice and the believe that the inclusion of this arrangements at § 411.354(e). As stated profits from another type of designated reference unnecessarily complicates the in the proposed rule, our addition of health service with a different (possibly regulation. In the proposed rule, we introductory language at § 411.352(i) overlapping) subset of physicians in the noted that it is possible that the and revised language at § 411.352(i)(1) group practice. As discussed, we are reference to designated health services and 411.352(i)(2) do not constitute a finalizing at § 411.352(i)(1)(ii) that payable by Medicaid is related to the substantive change to the noted overall profits means ‘‘the profits definition of ‘‘referral’’ in the 1998 provisions (84 FR 55801). derived from all the designated health proposed rule (63 FR 1692). There, with services.’’ Thus, the profits from all the respect to the definition of group (2) Overall Profits designated health services of any practice, we stated that, because of our We proposed revisions to clarify our component of the group that consists of interpretation of what constitutes a interpretation of the overall profits of a at least five physicians (which may ‘‘referral,’’ an entity wishing to be group that can be distributed to include all physicians in the group) considered a group practice in order to physicians in the group. Until now, the must be aggregated before distribution. use the in-office ancillary services term ‘‘overall profits’’ was defined to Under this final rule, a physician exception may not compensate its mean two different things: (1) The practice that wishes to qualify as a members based on the volume or value

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of referrals for designated health provisions relate to methods for volume or value of referrals if revenues services for Medicare or Medicaid distributing a share of overall profits, derived from designated health services patients but could do so in the case of not ‘‘profits’’ or ‘‘revenues.’’ To avoid constitute less than 5 percent of the other patients (63 FR 1690). However, complications associated with the group practice’s total revenues, and the when the 1998 proposed policies were restructuring of § 411.352(i), as allocated portion of those revenues to finalized, the definition of ‘‘referral’’ explained in our responses to comments each physician in the group practice omitted all references to Medicaid. below, we are delaying the effective date constitutes 5 percent or less of his or her Nonetheless, the reference to Medicaid of these updates until January 1, 2022 to total compensation from the group. We in final § 411.352(i)(2), which was also coincide with the effective date of the did, however, propose nonsubstantive proposed in the 1998 proposed rule (as revised definition of ‘‘overall profits.’’ updates to the language used in this a definition in § 411.351), was not We also proposed to revise the deeming provision and we are finalizing congruently omitted when finalized. We language related to one of the deemed those nonsubstantive changes. Final explained further in the proposed rule permissible methods for distributing § 411.352(i)(1)(iii)(C) deems as a that, under the definition of ‘‘designated shares of overall profits by replacing permissible methodology for health services’’ at § 411.351, ‘‘are not [designated health services] distributing overall profits a ‘‘designated health services payable by payable by any Federal health care methodology under which revenues . . . Medicaid’’ would not include any program or private [payor]’’ with ‘‘and derived from designated health services services. This is because the definition would not be considered designated constitute less than 5 percent of the of ‘‘designated health services’’ includes health services if they were payable by group’s total revenues, and the portion only those services payable in whole or Medicare.’’ This change is reflected in of those revenues distributed to each in part by Medicare. Although the revised § 411.352(i)(1)(iii)(B). Current physician in the group constitutes 5 qualifying language in this definition regulations provide that a share of percent or less of his or her total potentially allows for a different overall profits will be deemed not to compensation from the group. Again, to definition ‘‘as otherwise noted in this directly take into account the volume or avoid complications associated with the subpart,’’ the regulations at existing value of referrals if revenues derived restructuring of § 411.352(i), as § 411.352(i)(2) do not expressly from designated health services are explained in our responses to comments articulate an alternative definition for distributed based on the distribution of below, we are delaying the effective date ‘‘designated health services.’’ Rather, the group practice’s revenues attributed of these updates until January 1, 2022 to they simply state that the overall profits to services that are not designated coincide with the effective date of the of a group include profits derived from health services payable by ‘‘any Federal revised definition of ‘‘overall profits.’’ designated health services payable by health care program or private payer.’’ We received the following comments Medicare or Medicaid. For consistency As we explained in the proposed rule, and our responses follow. Comment: One commenter with the definitions and regulations we the definition of ‘‘designated health characterized our policy clarifications as proposed (and are finalizing here), we services’’ includes only those specified an attempt to micromanage the proposed to eliminate the references to services that are payable by Medicare organization, governance, and operation Medicaid in the definition of ‘‘overall (84 FR 55802). Thus, we believe a better of group practices. The commenter profits.’’ We are finalizing our proposal. way to reflect our policy that overall opposed any revisions to the group However, as explained in our responses profits may be distributed based on the distribution of the group practice’s practice regulations (except for the to comments below, we are delaying the revenues from services other than those addition of new § 411.352(i)(3), which effective date of these updates until in the categories of services that are the commenter found beneficial for January 1, 2022 to coincide with the ‘‘designated health services’’ is to deem group practices). The commenter effective date of the other revisions to the payment of a share of overall profits asserted that we should not finalize the the definition of ‘‘overall profits.’’ not to directly take into account the revisions to § 411.352(i)(1) because the Our group practice regulations also volume or value of a physician’s statute is not prescriptive with respect articulate the general rule that overall referrals if overall profits are distributed to what methodologies are permissible profits should be divided in a based on the distribution of the group’s for distributing overall profits to reasonable and verifiable manner that is revenues attributed to services that are physicians. Another commenter not directly related to the volume or not designated health services and asserted that we gave no rationale to value of the physician’s referrals of would not be considered designated support our interpretation of the designated health services. In this final health services if they were payable by statutory term ‘‘overall profits’’ as rule, we are finalizing our proposal to Medicare. We proposed to revise the meaning profits from all the designated move the prefatory language of this regulation in this manner and renumber health services of a group practice or a requirement from existing current § 411.352(i)(2)(ii) to component of at least five physicians in § 411.352(i)(2) to revised § 411.352(i)(1)(iii)(B). We are finalizing the group practice (which may include § 411.352(i)(1)(iii) without substantive this proposal. As noted, to avoid all physicians in the group practice). change. We are also finalizing our complications associated with the Response: The commenter is correct proposal to replace the varying language restructuring of § 411.352(i), as that section 1877(h)(4)(B) of the Act in the methods deemed not to relate explained in our responses to comments does not prescribe the methodology that directly to the volume or value of below, we are delaying the effective date a group practice may use to pay shares referrals (the deeming provisions). One of these updates until January 1, 2022 to of its overall profits, provided that the of the current deeming provisions coincide with the effective date of the share is not determined in any manner references ‘‘the group’s profits’’ and revised definition of ‘‘overall profits.’’ that is directly related to the volume or another references ‘‘revenues’’ where Lastly, we did not propose to revise value of referrals by the physician to both should reference ‘‘overall profits.’’ the third deeming provision to replace whom the share is paid. The commenter We are finalizing the revision to use the the term ‘‘revenues’’ with ‘‘overall appears to confuse our proposal to term ‘‘overall profits’’ in both of these profits.’’ The third deeming provision clarify our interpretation of the term deeming provisions in order to states that a share of overall profits will ‘‘overall profits’’ as used in section articulate more clearly that the deeming be deemed not to relate directly to the 1877(h)(4)(B) of the Act with a proposal

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to limit payment methodologies, guidance that states that overall profits consists of at least five physicians. Once although our final regulations may means the entire profits of the entire aggregated, the group practice may indeed result in some group practices group. It has not been revised until now. choose to retain some of the profits or modifying their physician compensation We note that, in § 411.351, the distribute all of the profits through with respect to payment of shares of regulation text provides a definition for shares of overall profits paid to its overall profits from designated health ‘‘designated health services (DHS).’’ The physicians. A group practice need not services. definition states that DHS means any of treat all components of at least five We have long interpreted the term the following services (other than those physicians the same with respect to the ‘‘overall profits’’ as the profits from the provided as emergency physician distribution of shares of overall profits group practice’s overall pooled revenues services furnished outside of the U.S.), from designated health services. That is, from designated health services (63 FR as they are defined in § 411.351, and the group practice may choose to 1691). In the 1998 proposed rule, we lists the various individual categories of distribute all of the overall profits from stated that we regard ‘‘overall profits of services that are considered designated designated health services of one of its the group’’ to mean all of the profits a health services. Stakeholders may have components of five physicians to the group can distribute in any form to evaluated this portion of the definition physicians in that component, and physicians in the group, even if the of ‘‘designated health services’’ within choose to retain some or all of the group is located in two different states the context of the definition of ‘‘overall overall profits from designated health or has many different locations within profits’’ and interpreted ‘‘overall services of another of its components of profits’’ to mean the group’s entire one state, and that we would not five physicians. Moreover, we are aware profits from any one of the individual interpret ‘‘overall profits’’ as the profits that group practices may utilize categories of designated health services that belong only to a particular specialty eligibility standards to determine identified in the definition at § 411.351. or subspecialty group (63 FR 1691). whether a physician is eligible for a This was not our intention when using When finalizing our proposals related to profit share, such as length of time with the acronym ‘‘DHS’’ in the definition of the payment of shares of overall profits the group practice, whether the ‘‘overall profits’’ in the regulation text at in Phase I, we stated that the Congress physician is an owner, employee, or § 411.352(i). independent contractor of the group recognized that, in the case of group We are finalizing our proposal to practices, revenues derived from practice, or the amount of time that the clarify our longstanding interpretation physician practices (for example, full- designated health services must be of the term ‘‘overall profits’’ as used in distributed to the group practice time or part-time). Nothing in our section 1877(h)(4)(B) of the Act at final regulations prohibits the use of physicians in some fashion, even § 411.352(i)(1)(ii). However, because the though the physicians generate the eligibility standards, provided that they regulation text at § 411.352(i) has not do not result in the payment of a profit revenue (66 FR 876). However, because fully and exactly depicted the policy set share that is determined in a manner the Congress wished to minimize the forth in our Phase I preamble guidance, that is directly related to the volume or economic incentives to generate we are making the revisions value of a physician’s referrals. In sum, unnecessary referrals for designated prospective. In addition, for the reasons a group practice may determine for itself health services, section 1877(h)(4)(B) of set forth in the response to comments how much of the aggregate overall the Act permits a physician in the group below, we are delaying the effective date profits it chooses to share with its practice to receive a share of the overall of the revisions to § 411.352(i) until physicians and which physicians are profits of the group practice, provided January 1, 2022. that the share is not determined in any Comment: Some commenters opposed entitled to a share of the group manner that is directly related to the our proposal to define ‘‘overall profits’’ practice’s overall profits; however, all volume or value of referrals by the to mean the profits derived from all the payments of shares of overall profits physician. We described our proposals designated health services of any must comply with the requirements of in the 1998 proposed rule as requiring component of the group that consists of § 411.352(g) and (i). that profits must be aggregated at the at least five physicians, which may Comment: A number of commenters group level and not at a component include all physicians in the group, opposed our proposal to define ‘‘overall level (66 FR 908). In Phase I, we defined asserting that group practices should be profits’’ from designated health services ‘‘share of overall profits’’ to mean a able to distribute profits of some types to mean the profits from all the share of the entire profits of the entire of designated health services, but not designated health services of the group group (or any component of the group others. Other commenters asked for practice (or a component of the group that consists of at least five physicians) clarification regarding whether a group that consists of at least five physicians), derived from designated health services practice could retain its profits (from asserting that group practices should be (66 FR 908) (emphasis added). We designated health services or otherwise), permitted to distribute the profits from stated that overall profit shares must be or whether our revisions would require designated health services on a service- derived from aggregations of the entire a group practice to distribute all of its by-service basis, which some of the practice or a component of the practice profits to physicians in the group in commenters referred to as ‘‘split consisting of at least five physicians (66 order to qualify as a group practice. pooling.’’ These commenters variously FR 907). The regulation text defining Response: Nothing in final stated that service-by-service profit ‘‘overall profits’’ finalized in Phase I § 411.352(i)(1)(ii) (or any other shares would allow physicians to stated that overall profits means the physician self-referral regulation) receive profits shares more closely group’s entire profits derived from requires the distribution of a group related to the services they referred, ‘‘DHS’’ payable by Medicare or practice’s profits from designated health their specialty, the services they Medicaid or the profits derived from services. However, if a group practice provide, or the expenses they have ‘‘DHS’’ payable by Medicare or wishes to pay shares of overall profits to personally incurred. One of the Medicaid of any component of the any of its physicians, it must first commenters explained that, for large or group practice that consists of at least aggregate: (1) The entire profits from the multispecialty group practices, in five physicians. The regulation text does entire group; or (2) the entire profits particular, different practice locations or not accord precisely with our preamble from any component of the group that specialties commonly use ancillary

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designated health services to varying that the practice is a unified business manner they wish. The unified business degrees in connection with the delivery with centralized decision making by a test permits group practices to use cost- of care in their location or specialty, and body representative of the practice that and location-based accounting with another stated that the proposed maintains effective control over the respect to services that are not ‘‘limits’’ may inadvertently penalize the practice’s assets and liabilities designated health services, and, in some ‘‘practices’’ within a group that are more (including, but not limited to, budgets, cases, with respect to services that are profitable due to efficiency and reward compensation, and salaries) and designated health services if the those that are less efficient. Another of consolidated billing, accounting, and compensation method is not directly the commenters asserted that a service- financial reporting. In addition, related to the volume or value of the by-service allocation methodology revenues from patient care services physician’s referrals and other aligns compensation with the must be treated as receipts of the conditions are satisfied (66 FR 895). physicians who are furnishing practice. Certain of the justifications for However, if a physician practice’s professional services in conjunction the commenters’ assertions that we payment methods do not indicate a with designated health services and should permit a group practice to share unified business (or indicate a business incurring the related expenses. The the profits from designated health that is unified solely with respect to the commenter complained that not services on a service-by-service basis provision of designated health services), allowing what it referred to as ‘‘pooling call into question whether a physician the physician practice may not qualify by designated health service,’’ practice that operates as described in as a group practice under section physicians who have no treatment the comments could satisfy the unified 1877(h)(4) of the Act and § 411.352 (66 involvement in the designated health business test at § 411.352(f) or, FR 907). services are nonetheless rewarded potentially, whether the revenues from With respect to the specific comments financially. A different commenter gave patient care services are treated as regarding the need for the payment of the example of a subset of physicians receipts of the practice, as required at profit shares on a service-by-service within a group practice that agree to § 411.352(d)(1). basis, we assume the reference to ‘‘practices’’ within a group practice assume all of the costs of expensive As we stated in Phase I, the Congress pertains to specialties or locations of the diagnostic testing equipment when intended to confer group practice status there is a dispute within the group as to group practice. We remind parties that, on bona fide group practices and not on whether to purchase the equipment. The if a ‘‘practice’’ within a group practice loose confederations of physicians who commenter asserted that service-by- is comprised of five or more physicians, come together substantially in order to service distribution of profits is the group practice may aggregate the capture the profits from referrals of appropriate so that the physicians who profits from all the designated health designated health services protected bear the cost of the equipment also services of the component and pay under the exception for in-office receive the profits arising from the use shares of the overall profits to the ancillary services (66 FR 875). For that of the equipment. One commenter physicians in the component, provided reason, we established the unified stated that distributing profits from that the group practice satisfies all the business test at § 411.352(f). To meet the designated health services on a service- requirements of § 411.352, including by-service basis is not an issue, but unified business test, a group practice § 411.352(g) and (i). If a ‘‘practice’’ offered no reason why this is the case. must be organized and operated on a within a group practice is not comprised In contrast, several commenters bona fide basis as a single integrated of at least five physicians, the group commended CMS for proposing the business enterprise with legal and practice would have to include clarifying language at § 411.352(i)(1)(ii) organizational integration (66 FR 906). additional physicians in the component and supported finalizing the regulatory We designed the group practice rules at and aggregate the profits from all the revisions. § 411.352 to preclude group practice designated health services of the Response: Section 1877(h)(4)(B) of the status for loose confederations of component. Act permits a group practice to pay a physicians that are group practices in Comment: One commenter stated that physician in the group practice a share name, but not operation. In Phase I, in disparate state certificate of need and of overall profits of the group. In Phase response to a comment on our 1998 self-referral laws result in a patchwork I, we shared our interpretation that the proposed rule, we stated that we of permitted and prohibited designated term ‘‘overall profits’’ means the entire generally agree that a group practice health services within different profits of the entire group (or any should consist of a single medical segments or practice locations of the component of the group that consists of business whose equity holders operate same group practice. The commenter at least five physicians) derived from as a single business by sharing such suggested that requiring group practices designated health services (66 FR 908) things as contracts, liability, facilities, that operate in multiple states to (emphasis added). The proposed equipment, support personnel, aggregate all their profits from revisions at § 411.352(i)(1)(ii), which we management, and a pension plan, and designated health services will be are finalizing in this final rule, that this aspect of a group practice is challenging, but did not elaborate on incorporate this long-held addressed by the unified business test at what those challenges are. interpretation. Commenters provided no § 411.352(f) (66 FR 898). The essential Response: Group practices may use justification for their preferred elements of a unified business are: (1) the ‘‘component of five’’ rule to interpretation of the statutory term Centralized decision making by a body aggregate and distribute profit shares. ‘‘overall profits’’—which makes no representative of the practice that We think that most large group reference to designated health services maintains effective control over the practices, including those that operate as the services that generated the group’s assets and liabilities (including in more than one state, will be able to profits—as meaning the profits from any budgets, compensation, and salaries); use the component of five rule to one type of designated health service. and (2) consolidated billing, accounting, establish workable profit distribution We remind readers that, in order to and financial reporting. As we stated in methodologies to address issues related qualify as a group practice, a physician Phase I, group practices may distribute to the distribution of profits from practice must meet all the requirements the revenues from services that are not designated health services for which all set forth in § 411.352. These include designated health services in any physicians in the group do not make

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referrals and discrepancies in the types designate more than one component of health services (which one of the of designated health services furnished at least five physicians for the allocation commenters referred to as ‘‘split among practice locations due to state of overall profits from designated health pooling’’). However, as noted by the certificate of need and self-referral laws. services as long as the profits from all commenters, the statement could appear Comment: Some of the commenters the designated health services referred to prohibit the use of different that objected to the proposed revisions by the physicians in a component are distribution methodologies for different to the group practice rules regarding the aggregated and the profits shared with components of five physicians in a distribution of shares of overall profits the physicians in that component. The group practice. To the extent that parties noted that our proposals, if finalized, commenter also sought confirmation understood this to be our policy and an would require changes to the internal that the various components could be indication of how we would interpret compensation practices in many established by grouping together the regulations, we are clarifying that a medical groups. Some of these physicians of the same specialty or by group practice may utilize different commenters requested that, if we any other pooling mechanism, as long as distribution methodologies to distribute finalize the proposed changes to the each component consists of at least five shares of the overall profits from all the regulation text, we provide a sufficient physicians. designated health services of each of its timeframe of at least one year for all Response: A group practice may components of at least five physicians, group practices to revise their designate more than one component of provided that the distribution to any compensation methodologies. Another at least five physicians for the allocation physician is not directly related to the commenter was generally supportive of of overall profits from designated health volume or value of the physician’s the revisions to § 411.352(i), but services as long as the profits from all referrals. To illustrate, assume a group expressed concern about the time and the designated health services referred practice comprised of 15 physicians effort involved in revising compensation by the physicians in a component are furnishes clinical laboratory services, arrangements for group practices that aggregated and the profits shared with diagnostic imaging services, and have separated profits by service type the physicians in that component. radiation oncology services. Assume until now. Provided that the share of overall profits further that the group practice has Response: We agree with the received by a physician is not divided its physicians into three commenters that parties may need time determined in any manner that is components of five physicians to revise compensation methodologies directly related to the volume or value (component A, component B, and and arrangements for group practice of the physician’s referrals, a group may physicians. For that reason, we are establish components of at least five component C) for purposes of delaying the effective date of final physicians by including physicians with distributing the overall profits from the § 411.352(i)(1) until January 1, 2022. We similar practice patterns, who practice designated services of the group believe this will provide group practices in the same location, with similar years practice. Under the final regulations, for sufficient time to evaluate their current of experience, with similar tenure with each component, the group practice compensation methodologies for the group practice, or who meet other must aggregate the profits from all the compliance with final § 411.352(i)(1) criteria determined by the group designated health services furnished by and make necessary revisions. Through practice. We continue to believe, as we the group and referred by any of the five December 31, 2021, the definition of stated in Phase I, that a threshold of at physicians in the component. The group ‘‘overall profits’’ will be as set forth at least five physicians is likely to be broad practice may distribute the overall existing § 411.352(i)(2). We note that the enough to attenuate the ties between profits from all the designated health delayed effective date applies to all compensation and referrals of services of component A using one revisions at final § 411.352(i)(1), designated health services (66 FR 909). methodology (for example, a per-capita including the removal of the reference Comment: Some commenters asked distribution methodology), distribute to ‘‘Medicaid.’’ Also, to avoid whether a group practice must use a the overall profits from all the complications associated with the single methodology for distributing the designated health services of component restructuring of § 411.352(i), we are also shares of overall profits attributable to B using a different methodology (for delaying the effective date of final each of its designated components of example, a personal productivity § 411.352(i)(2) and (4) to coincide with five physicians. In other words, if a methodology in compliance with the effective date of the revised group practice has three designated § 411.352(i)(1)(iii)(B)), and distribute the definition of ‘‘overall profits.’’ ‘‘pools’’ of at least five physicians overall profits from all the designated Comment: One commenter was (components A, B, and C), must the health services of component C using a concerned that new § 411.352(i)(3) group practice use the same third methodology that does not directly would negatively impact physicians methodology for distributing the profits relate to the volume or value of the who are employees or independent for components A, B, and C? The component physicians’ referrals (or the contractors of a group practice, noting commenters referenced the example in methodology used for component A or that only group practice owners are able the proposed rule where we stated that B). However, a group practice must to share in the group’s profits. a group practice may not distribute the utilize the same methodology for Response: The commenter is profits from clinical laboratory services distributing overall profits for every mistaken. Nothing in section 1877 of the to one subset of its physicians or using physician in the component. That is, Act or our physician self-referral a particular methodology and distribute using the illustration above, the group regulations limits the payment of a the profits from diagnostic imaging to a practice must use the per-capita share of overall profits to owners of a different subset of physicians (or the distribution methodology for each group practice. Under section same subset of its physicians but using physician in component A, the personal 1877(h)(4)(B) of the Act and our a different methodology) (84 FR 55801). productivity methodology for each regulations, any physician in the group Response: The example provided in physician in component B, and the may be paid a share of overall profits of the proposed rule was intended to same methodology (whichever it the group practice. illustrate the application of the policy utilizes) for each physician in Comment: One commenter requested that does not permit service-by-service component C. As described in our confirmation that a group practice may distribution of profits from designated responses to other comments in this

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section II.C.2.b., the group practice physician. We sought comment in the productivity bonus) paid by a group could not use different methodologies to proposed rule regarding whether this practice to a physician in the group is distribute the profits of the different provision should limit the methodology solely based on services personally types of designated health services to physician work relative value units as performed by the physician (which are within a component. defined at § 414.22(a) or whether any not referrals, even if they are designated Comment: Most commenters that personally-performed relative value health services), the productivity bonus commented on our proposals to revise units should be an acceptable basis for (or the portion of the productivity the group practice regulations supported calculating a productivity bonus that is bonus) would not violate § 411.352(g). the removal of the reference to Medicaid deemed not to relate directly to (that is, To the extent that a productivity bonus from the definition of ‘‘overall profits’’ directly take into account) the volume (or the portion of a productivity bonus) and the clarifying discussion in the or value of referrals. The regulation that paid by a group practice to a physician proposed rule. deems a productivity bonus not to in the group is solely based on services Response: As stated above, we are directly take into account the volume or performed by a member of the finalizing our proposal to revise value of a physician’s referrals under physician’s care team that are not § 411.352(i). However, we are delaying certain circumstances includes a designated health services, the the effective date of these updates until provision similar to that at final productivity bonus (or the portion of the January 1, 2022 to coincide with the § 411.352(i)(1)(iii)(B). Therefore, we productivity bonus) would not violate effective date of the other revisions to proposed corresponding revisions at § 411.352(g). To the extent that a the definition of ‘‘overall profits.’’ § 411.352(i)(2)(ii)(B) (to be renumbered productivity bonus (or the portion of a (3) Productivity Bonuses from current § 411.352(i)(3)(ii)) that productivity bonus) paid by a group would deem the payment of a practice to a physician in the group is For consistency with the regulations productivity bonus not to directly relate solely based on designated health related to the payment of a share of to (or, as explained in this section services ordered by the physician and overall profits, we proposed to revise II.C.2.b(1), take into account) the furnished by members of the physician’s the introductory language in the volume or value of a physician’s care team ‘‘incident to’’ the physician’s deeming provisions for productivity referrals if the services on which the services and billed to Medicare as such, bonuses at renumbered productivity bonus is based are not the productivity bonus (or the portion of § 411.352(i)(2)(ii) to state that a revenues derived from designated the productivity bonus) would not productivity bonus must be calculated health services and would not be violate § 411.352(g). To the extent that a in a reasonable and verifiable manner. considered designated health services if productivity bonus (or the portion of a We also proposed to renumber the they were payable by Medicare. Finally, productivity bonus) paid by a group regulation that lists the deeming we proposed to replace the term practice to a physician in the group is provisions related to the payment of ‘‘allocated’’ with ‘‘distributed’’ at solely based on designated health productivity bonuses from (redesignated) § 411.352(i)(1)(iii)(C) as services ordered by the physician and § 411.352(i)(3) to § 411.352(i)(2) and the latter term reflects the actual furnished by members of the physician’s proposed minor changes to the deeming payment of the profit share (84 FR care team, but not furnished ‘‘incident provisions themselves. In addition, we 55802). We are finalizing all of our to’’ the physician’s services, the proposed to update the language of proposals related to the payment of productivity bonus (or the portion of the existing § 411.352(i)(1) (relocated to productivity bonuses by a group productivity bonus) may only indirectly § 411.352(i)(2)(i)) to remove ‘‘or both’’ as practice. However, to avoid relate to the volume or value of the unnecessary because the word ‘‘or’’ is complications associated with the physician’s referrals for the designated interpreted to mean the conjunctive restructuring of § 411.352(i), as health services furnished by the ‘‘and’’ as well as the disjunctive ‘‘or.’’ explained in our responses to comments members of the physician’s care team. We stated that groups may continue to below, we are delaying the effective date Comment: Most commenters that pay a productivity bonus based on of these updates at final § 411.352(i)(2) commented on our solicitation services that the physician has until January 1, 2022 to coincide with regarding whether the deeming personally performed, or services the effective date of the revised provision related to the relative value ‘‘incident to’’ such personally definition of ‘‘overall profits.’’ units personally performed by a performed services, or both, provided We received the following comments physician did not support a limitation that the bonus does not directly take and our responses follow. of this deeming methodology to only the into account the volume or value of the Comment: One commenter requested physician’s relative value units as physician’s referrals (except that the that we permit a physician to receive a defined at § 414.22. Commenters urged bonus may directly take into account productivity bonus based on services us to finalize our proposal to include as the volume or value of referrals by the that the physician or the physician’s a deemed permissible productivity physician if the referrals are for services ‘‘care team’’ has personally performed, bonus methodology one that is based on ‘‘incident to’’ the physician’s personally provided that the productivity bonus is the physician’s total patient encounters. performed services). not determined in any manner that is One commenter urged us not to make To correct a misstatement about the directly related to the volume or value any revision to this regulation, stating nature of § 414.22 of this chapter of the physician’s referrals of designated that it works as currently structured and included in existing § 411.352(i)(3)(i), health services. revising it would create additional we proposed to revise the deeming Response: Whether or not a regulatory burden. provision related to the physician’s total productivity bonus paid to a physician Response: We are finalizing patient encounters or relative value in a group practice would violate the § 411.352(i)(2)(ii)(A) as proposed. Under units to state that a productivity bonus prohibition on compensation that takes our longstanding regulations, as well as will be deemed not to relate directly to into account the volume or value of the those proposed, a physician in the the volume or value of a physician’s physician’s referrals at § 411.352(g) group practice may be paid a referrals if it is based on the physician’s depends on the basis for the productivity bonus based on services total patient encounters or the relative productivity bonus. To the extent that a that he or she has personally performed value units personally performed by the productivity bonus (or the portion of a or services ‘‘incident to’’ such

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personally performed services (or both). 1. Decoupling the Physician Self- self-referral law with the anti-kickback The productivity bonus may not be Referral Law From the Federal Anti- statute and other billing and claims determined in any manner that is Kickback Statute and Federal and State submission laws, explaining the directly related to the volume or value Laws or Regulations Governing Billing significant burden associated with the of referrals by the physician, except that or Claims Submission inclusion of these requirements in the productivity bonus may directly Section 1877 of the Act established regulatory exceptions to the physician relate to the volume or value of referrals numerous exceptions to the statute’s self-referral law. CMS RFI commenters by the physician if the referrals are for referral and billing prohibitions and noted that the physician self-referral law services ‘‘incident to’’ the physician’s granted the Secretary authority to is a strict liability statute and personally performed services. The establish regulatory exceptions for other compliance with each element of an regulation at § 414.22(a) relates to the financial relationships that do not pose exception is mandatory if the entity establishment of physician work RVUs. a risk of program or patient abuse. The wishes to submit a claim for designated The regulation at § 414.22(b) relates to majority of the exceptions issued using health services referred by a physician with which it has a financial the computation of practice expense the Secretary’s authority under section relationship, while the anti-kickback RVUs. The regulation at § 414.22(c) 1877(b)(4) of the Act (which we often statute is an intent-based criminal relates to the computation of refer to as the ‘‘regulatory exceptions’’) statute and compliance with a safe malpractice expense RVUs. We believe require that the arrangement does not harbor is not required. These the reference to § 414.22 generally to violate the anti-kickback statute. Most of these exceptions also require that the commenters asserted that the inclusion describe a ‘‘physician’s RVUs’’ is of a requirement for compliance with misplaced in our current regulations. arrangement does not violate any Federal or State law or regulation the anti-kickback statute is misplaced in Our clarification is intended only to an exception to the physician self- marry the general requirement for governing billing or claims submission. In Phase I, we stated that the referral law because it introduces an productivity bonuses based on services requirements pertaining to the anti- intent-based requirement into a strict that are personally performed by a kickback statute and billing or claims liability statute. The commenters further physician with the deeming provision submission are necessary in regulatory noted that this requirement can make it that allows productivity bonuses based exceptions to ensure that the excepted unreasonably difficult for entities to on total patient encounters or RVUs. It financial relationships do not pose a meet their burden of proof under is not intended to, nor do we believe it risk of program or patient abuse (66 FR § 411.353(c)(2) that a referral and claim will, limit the payment of productivity 863). Even though we acknowledged for designated health services does not bonuses currently permissible under our that the physician self-referral law and violate the physician self-referral law. regulations. Therefore, we see no reason the anti-kickback statute are different CMS RFI commenters also noted that why the revisions finalized at statutes, we were concerned that, if the the requirement for compliance with the § 411.352(i)(2)(ii)(A) would create regulatory exceptions did not require anti-kickback statute and the additional regulatory burden for group compliance with the anti-kickback requirement pertaining to Federal or practices. statute, unscrupulous physicians and State laws or regulations governing entities could potentially protect billing or claims submission are not D. Recalibrating the Scope and necessary, because parties remain Application of the Regulations intentional unlawful and abusive conduct by complying with the minimal subject to these laws or regulations, As we stated previously and in our requirements of a regulatory exception. regardless of whether their financial Phase I rulemaking, our intent in In Phase II, we stated our interpretation relationships otherwise comply with the physician self-referral law. As discussed implementing section 1877 of the Act that the statutory ‘‘no risk’’ standard is below, commenters on the proposed was ‘‘to interpret the [referral and not limited to risks as determined under rule have many of these same concerns. billing] prohibitions narrowly and the the physician self-referral law (69 FR exceptions broadly, to the extent 16108). We added that many As we stated in the proposed rule, consistent with statutory language and arrangements that might otherwise based on our experience working with intent’’ (66 FR 860). One purpose of this warrant an exception under section our law enforcement partners in reviewing conduct that implicates the final rule is to reexamine our current 1877 of the Act—a strict liability physician self-referral law and other regulations to assess whether we have statute—pose some degree of risk under Federal fraud and abuse laws, when a held true to that intention. In doing so, the anti-kickback statute; these arrangements cannot, therefore, be said compensation arrangement violates the we have considered our own experience to pose no risk. Similarly, we stated that intent-based criminal anti-kickback in administering the SRDP, stakeholder some arrangements that may be statute, it will likely also fail to meet interactions, comments to the CMS RFI permissible under the physician self- one or more of the key requirements of and to our proposed rule, and our referral law could pose a risk of an exception to the physician self- experience working with our law violating certain laws pertaining to referral law (84 FR 55803). That is, the enforcement partners. In the proposed billing or claims submission. Therefore, compensation in such cases likely is not rule, we proposed revisions to, we concluded that the regulatory fair market value or is determined in a including deletions of, certain exceptions created using the Secretary’s manner that takes into account the requirements in our regulatory authority under section 1877(b)(4) of the volume or value of the physician’s exceptions. In this section II.D. of the Act must require that the excepted referrals or other business generated for final rule, we explain which of our financial relationship not violate the the entity. As noted in the proposed proposals to recalibrate the scope and anti-kickback statute or any Federal or rule, since the Phase I regulation was application of the physician self-referral State law or regulation governing billing issued, we are unaware of any instances regulations that we are finalizing and or claims submission. of noncompliance with the physician any modifications resulting from our A substantial number of CMS RFI self-referral law that turned solely on an consideration of the comments on the commenters expressed opposition to the underlying violation of the anti- proposed rule. continued coupling of the physician kickback statute (or any other Federal or

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State law governing billing or claims regulation governing billing or claims substitute requirements or safeguards, submission). We also emphasized in the submission.’’ Finally, we proposed to there is a possibility that certain proposed rule and reiterate here that, remove the definition of ‘‘does not potentially abusive arrangements that although we were considering removing violate the anti-kickback statute’’ in would not be permitted under a the requirement that the arrangement § 411.351. We noted that the exceptions statutory exception could be protected does not violate the anti-kickback for referral services at § 411.357(q) and by this regulatory exception. statute from some or all of the regulatory obstetrical malpractice subsidies at We believe that requiring that the exceptions, we believe that the § 411.357(r)(1) provide that arrangement does not violate the anti- Secretary has the authority under the arrangements satisfy the requirements of kickback statute in the exception for fair statute to impose a requirement that the the exception if the arrangements market value compensation at financial relationship not violate the comply with the requirements of certain § 411.357(l) serves as a substitute anti-kickback statute or any other specified safe harbors to the anti- safeguard, in lieu of certain safeguards requirement if the Secretary determines kickback statute, and stated that our that are included in the statutory it necessary and appropriate to ensure proposal did not apply to or affect these exceptions but omitted from that an excepted financial relationship provisions. § 411.357(l). The exclusive use does not pose a risk of program or After reviewing comments on our requirement in the statutory exceptions patient abuse. We also stated that we proposed rule, we no longer believe that for the rental of office space and intend to monitor excepted financial it is appropriate to remove the equipment, for example, prevents sham or ‘‘paper’’ leases, where a lessor relationships, and that we may propose requirement that the arrangement does receives payment from a lessee for space in a future rulemaking to reinstate the not violate the anti-kickback statute that the lessor continues to use (63 FR requirements for deletion in some or all from the exception for fair market value 1714 and 69 FR 16086). We believe that of the exceptions issued pursuant to the compensation at § 411.357(l), and we sham or paper lease arrangements Secretary’s statutory authority if we are not finalizing our proposal to would likely violate the anti-kickback determine such requirements are remove that requirement at statute. Therefore, the requirement at necessary or appropriate to protect § 411.357(l)(5). We are finalizing our § 411.357(l)(5) that the arrangement not against program or patient abuse (84 FR proposal to remove the requirement that violate the anti-kickback statute 55802 through 55803). the arrangement does not violate the provides a substitute safeguard for the Based on our experience working anti-kickback statute from all other statutory exclusive use requirement and with our law enforcement partners since regulatory exceptions, and to remove serves to prevent program or patient our regulations were finalized, as well requirements pertaining to Federal or abuse. Without the requirement that the as comments received in response to the State laws or regulations governing arrangement not violate the anti- CMS RFI, we stated in the proposed rule billing or claims submissions from all kickback statute, sham lease that we no longer believe that it is the regulatory exceptions, including arrangements or other abusive necessary or appropriate to include § 411.357(l)(5). In the proposed rule, we arrangements could potentially be requirements pertaining to compliance noted that the Congress did not require excepted under § 411.357(l), and the with the anti-kickback statute and compliance with the anti-kickback exception for fair market value Federal and State laws or regulations statute or any other law in existence at compensation would not satisfy the governing billing or claims submission the time of enactment of the statute or requirement at section 1877(b)(4) of the as requirements of the exceptions to the its subsequent revision in order to avoid Act that financial relationships physician self-referral law. We noted the physician self-referral law’s referral protected by the exception do not pose further that the Congress did not require and billing prohibitions (84 FR 55803). a risk of program or patient abuse. On compliance with the anti-kickback However, the regulatory exception for the other hand, we are no longer statute or any other law in existence at fair market value compensation at convinced that the requirement at the time of enactment of the statute or § 411.357(l) applies to many § 411.357(l)(5) that an arrangement must its subsequent revision in order to avoid arrangements that also could be not violate Federal or State laws or the law’s referral and billing protected by a statutory exception. In regulations governing billing or claims prohibitions. Therefore, we proposed to particular, as explained in section submission is needed as a substitute remove from the exceptions in 42 CFR II.D.10 of this final rule, we are safeguard to prevent program or patient part 411, subpart J the requirement that finalizing our proposal to permit abuse, and we are therefore finalizing the arrangement does not violate the arrangements for the lease of office the proposal to remove that requirement anti-kickback statute or any Federal or space to be excepted under § 411.357(l). from § 411.357(l)(5). In sum, the State law or regulation governing billing The statutory exception for the rental of exception for fair market value or claims submission wherever such office space at section 1877(e)(1) of the compensation offers greater flexibility requirements appear. Specifically, we Act and § 411.357(a) of our regulations than certain overlapping statutory proposed to remove the following requires, among other things, that the exceptions insofar as it omits some sections from our regulations: space rented or leased does not exceed statutory requirements, but the greater § 411.353(f)(1)(iii); § 411.355(b)(4)(v), that which is reasonable or necessary for flexibility could, in certain instances, (e)(1)(iv), (f)(3), (f)(4), (g)(2), (g)(3), the legitimate purposes of the lease and increase the risk of program or patient (h)(2), (h)(3), (i)(2), (i)(3), (j)(1)(iv); is used exclusively by the lessee when abuse. Therefore, the requirement that § 411.357(e)(4)(vii), (j)(3), (k)(1)(iii), being used by the lessee. There are the arrangement does not violate the (l)(5), (m)(7), (p)(3), (r)(2)(x), (s)(5), similar requirements in the statutory anti-kickback statute should not be (t)(3)(iv), (u)(3), (w)(12), (x)(1)(viii), and exception for the rental of equipment at deleted from § 411.357(l)(5). (y)(8). We also proposed to delete the § 411.357(b)(2). The regulatory We emphasized in the proposed rule following clause from § 411.357(e)(6)(i) exception for fair market value and reiterate here that our final rule in and (n): ‘‘, provided that the compensation, on the other hand, does no way affects parties’ liability under arrangement does not violate the anti- not include such requirements. To the the anti-kickback statute. Indeed, the kickback statute (section 1128B(b) of the extent that the exception for fair market Congress clarified when enacting Act), or any Federal or State law or value compensation does not contain section 1877 of the Act that ‘‘any

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prohibition, exemption, or exception of the physician self-referral law causes for fair market value compensation, we authorized under this provision in no confusion and compliance risk without are not convinced that it is appropriate way alters (or reflects on) the scope and affording any additional protection of to protect leases of office space and application of the anti-kickback the Medicare program. Commenters in certain other arrangements under provisions in section 1128B of the favor of removing the requirement that § 411.357(l) without the requirement Social Security Act’’ (H. Report 101– the arrangement does not violate the that the arrangement does not violate 386, 856 (1989)). Most importantly, the anti-kickback statute also requested that the anti-kickback statute. Thus, we are fact that a financial relationship satisfies CMS delete the definition of ‘‘does not not finalizing our proposal to remove the requirements of an applicable violate the anti-kickback statute’’ in this requirement from § 411.357(l)(5). exception to the physician self-referral § 411.351. One of these commenters Because we are not finalizing our law does not entail that the financial maintained that the definition is proposal to remove the requirement that relationship does not violate the anti- circular, because it includes the phrase the arrangement does not violate the kickback statute. (See 66 FR 879.) ‘‘does not violate the anti-kickback anti-kickback statute from the exception Similarly, compliance with the anti- provision in section 1128B(b) of the for fair market value compensation, we kickback statute does not entail Act.’’ Lastly, one commenter generally are not deleting the definition of ‘‘does compliance with the physician self- opposed removing the requirement that not violate the anti-kickback statute’’ at referral law. To the extent that a the arrangement does not violate the § 411.351. We note that the requirement financial relationship is governed by anti-kickback statute from the regulatory that the arrangement does not violate other laws or regulations, our action exceptions, stating that finalizing the the anti-kickback statute at does not affect the parties’ compliance proposal would lead to program or § 411.357(l)(5) does not and never has obligations under those other laws or patient abuse. required that an arrangement fit into a regulations. Specifically, claims Response: We agree with the majority safe harbor under the anti-kickback submitted to the Medicare program of the commenters that the requirement statute; rather the requirement remains must comply with all laws, regulations, that an arrangement not violate any that the arrangement does not violate and other requirements governing Federal or State law or regulation the anti-kickback statute. As the term is billing and claims submission. governing billing or claims submission defined at § 411.351, an arrangement After reviewing the comments on the should be removed from all the ‘‘does not violate the anti-kickback proposed rule, we are finalizing our regulatory exceptions. Parties have an statute’’ if it meets a safe harbor under proposal to remove the requirement that independent obligation to follow such the anti-kickback statute, has been an arrangement not violate the anti- laws, and we no longer believe that the specifically approved by OIG in a kickback statute from all the regulatory Secretary must require compliance with favorable advisory opinion issued to a exceptions except the exception for fair such laws and regulations to ensure that party to the particular arrangement with market value compensation at financial relationships excepted under a respect to the particular arrangement § 411.357(l). Because this requirement regulatory exception do not pose a risk (and not a similar arrangement), or does will remain in § 411.357(l), we are not of program or patient abuse. not violate the anti-kickback provisions finalizing our proposal to delete the With respect to the anti-kickback in section 1128B(b) of the Act. We did statute, we continue to believe that, as definition of ‘‘does not violate the anti- not propose and are not finalizing any a general matter, the requirement that kickback statute’’ at § 411.351. We are specific substantive modifications of the arrangement does not violate the finalizing without modification our this definition. anti-kickback statute in most regulatory proposal to remove from all the Lastly, we are taking this opportunity exceptions would not further protect applicable regulatory exceptions the to reiterate that the Secretary retains the against program or patient abuse requirement that an arrangement not authority to impose, in future because the parties to the compensation violate any Federal or State law or rulemaking, requirements pertaining to arrangement are already required to regulation governing billing and claims the anti-kickback statute and Federal or comply with all Federal laws, including submissions. State laws or regulations governing We received the following comments the anti-kickback statute. We billing or claims submissions in some or and our responses follow. understand the concerns raised by all of the regulatory exceptions issued Comment: Nearly all the commenters commenters that inclusion of the intent- under section 1877(b)(4) of the Act, if that addressed the proposal favored based anti-kickback statute in the strict removing provisions requiring that the liability framework of the physician the Secretary determines that such arrangement does not violate the anti- self-referral law may increase the requirements are necessary to prevent kickback statute or Federal and State burden of compliance with the program or patient abuse. We intend to laws or regulations governing billing physician self-referral law, and we are monitor excepted financial and claims submissions from the finalizing our proposal to remove this relationships, and we may propose in a regulatory exceptions. The commenters requirement from all regulatory future rulemaking to include the stated that the requirements are exceptions except the exception at requirements in some or all of the unnecessary because parties must § 411.357(l) for fair market value exceptions issued pursuant to the comply with these laws independently compensation. As previously noted in Secretary’s authority if we determine of the physician self-referral law. One of this final rule, the requirement that the such requirements are necessary or these commenters stated that removing arrangement does not violate the anti- appropriate to protect against program the requirement that an arrangement kickback statute in § 411.357(l)(5) is an or patient abuse. that satisfies an exception to the important substitute requirement for 2. Definitions (§ 411.351) physician self-referral law must also fit certain statutory requirements that within a safe harbor under the anti- would otherwise apply to arrangements a. Designated Health Services kickback is a welcome streamlining of to which the regulatory exception at Section 1877(1)(A) of the Act provides the regulations. Some commenters § 411.357(l) is applicable, such as the that, unless the requirements of an stressed that the incorporation of the exclusive use requirement for leases of applicable exception are satisfied, if a intent-based Federal anti-kickback office space and equipment. Given the physician (or an immediate family statute into the strict-liability framework current requirements in the exception member of a physician) has a financial

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relationship with an entity, the ‘‘constitutes a barrier to either Medicare the Act explicitly lists these services as physician may not make a referral to the program or patient abuse because the designated health services. We entity for the furnishing of a designated Medicare program will pay only a set explained in Phase I that our ultimate health service for which payment may amount to the facilities irrespective of definition of ‘‘designated health otherwise be made under Title XVIII of the number and frequency of laboratory services’’ was based on issues of the Act (that is, Medicare). The referral tests that are ordered’’ (60 FR 41940). In statutory construction (66 FR 923). In prohibition is codified in our the 1998 proposed rule, we proposed an particular, commenters on the 1998 regulations at § 411.353(a). In the 1998 amendment to § 411.355(d) that would proposed rule asserted that the proposed rule, we interpreted the have excepted services furnished under definition of designated health services phrase ‘‘designated health service for other payment rates that that the would have expanded the list of which payment otherwise may be Secretary determines provide no services that are considered to be made’’ broadly to mean ‘‘any designated financial incentive for under- or designated health services beyond the health service that ordinarily ‘may be’ overutilization or any other risk of services explicitly listed at section covered under Medicare (that is, that program or patient abuse (63 FR 1666). 1877(h)(1) of the Act. For example, could be a covered service under However, in Phase I, instead of clinical laboratory services furnished by Medicare in the community in which expanding the exception at § 411.355(d) a SNF and reimbursed under the SNF the service has been provided) for a to include services furnished under PPS would have been considered Medicare-eligible individual, regardless other payment rates, we narrowed the designated health services under the of whether Medicare would actually pay definition of ‘‘designated health definition, even though SNF services are for this particular service, at the time, services’’ to exclude certain services not included in the statutory list of for that particular individual (for that are paid as part of a composite rate, designated health services. The example, the individual may not have and solicited comments on whether the commenters maintained that, where the met his or her deductible)’’ (63 FR exception at § 411.355(d) was still Congress intended the physician self- 1694). Our definition of the term necessary in light of the narrowed referral law to cover specific services, ‘‘designated health services’’ in the 1998 definition of ‘‘designated health including services that are paid under a proposed rule was consistent with this services’’ (66 FR 923 through 924). We composite rate such as home health broad interpretation of the referral ultimately determined in Phase II that services, it did so by explicitly listing prohibition. § 411.355(d) was no longer necessary, the services at section 1877(h)(6) of the given the change to the definition of Section 1877(h)(6) of the Act defines Act. We agreed and finalized the ‘‘designated health services’’ finalized ‘‘designated health services’’ by listing definition of ‘‘designated health in Phase I, and we removed the various categories of services that services’’ to include only those services exception from our regulations (69 FR qualify as designated health services (for paid under a composite rate that are 16111). example, clinical laboratory services). In explicitly listed at section 1877(h)(1) of As finalized in Phase I, the definition the Act; that is, home health services the 1998 proposed rule, we stated that of ‘‘designated health services’’ includes a designated health service remains and inpatient and outpatient hospital only designated health services payable, services. such ‘‘even if it is billed as something in whole or in part, by Medicare, and else or is subsumed within another does not include services that would As we stated in the proposed rule, in service category by being bundled with otherwise constitute designated health light of our experience with the SRDP other services for billing purposes’’ (63 services, but that are reimbursed by and our review of the comments to the FR 1673). By way of example, we stated Medicare as part of a composite rate, CMS RFI, we reviewed the regulatory that clinical laboratory services that are except to the extent that the services are history of our definition of ‘‘designated provided by a skilled nursing facility specifically identified in § 411.351 and health services’’ at § 411.351 to identify (SNF) and reimbursed as part of the SNF are themselves payable through a whether further clarification regarding composite rate would remain designated composite rate. SNF services paid by what constitutes a designated health health services for purposes of section Medicare under the Part A composite service is necessary (84 FR 55805). We 1877 of the Act, even though SNF rate (that is, the Skilled Nursing Facility proposed to revise the definition of services are not listed as designated Prospective Payment System (SNF ‘‘designated health services’’ to clarify health services at section 1877(h)(6) of PPS)), for example, are not designated that a service provided by a hospital to the Act and Medicare would not health services, even if the bundle of an inpatient does not constitute a separately pay for the clinical laboratory services includes services that would designated health service payable, in service furnished by the SNF. The now- otherwise be designated health services, whole or in part, by Medicare, if the deleted exception at § 411.355(d), which such as clinical laboratory services.9 In furnishing of the service does not affect was first finalized in the 1995 final rule, contrast, although home health and the amount of Medicare’s payment to served as a counterbalance to the broad inpatient and outpatient hospital the hospital under the Acute Care interpretation of designated health services are paid under a composite Hospital Inpatient Prospective Payment services that was proposed in the 1998 rate, they remain designated health System (IPPS). To illustrate, suppose proposed rule. As finalized in the 1995 services under the definition finalized that, after an inpatient has been final rule, § 411.355(d) provided that the in Phase I because section 1877(h)(6) of admitted to a hospital under an referral prohibition in § 411.353 did not established Medicare Severity Diagnosis apply to services furnished in an 9 ESRD services are also reimbursed on a Related Group (MS–DRG), the patient’s ambulatory surgical center (ASC) or composite rate, and thus are not considered to be attending physician requests a end-stage renal disease (ESRD) facility, designated health services. In this context, we refer consultation with a specialist who was readers to the CY 2018 ERSD PPS Final Rule, where or by a hospice, if payment for those we explained that, for purposes of the physician not responsible for the patient’s services was included in the ASC rate, self-referral law, the ‘‘composite rate’’ for ESRD admission, and the specialist orders an the ESRD composite rate, or as part of services is interpreted as the per-treatment payment X-ray. By the time the specialist orders the per diem hospice charge (60 FR amount (82 FR 50751). To the extent that outpatient the X-ray, the rate of Medicare payment prescription drugs are included in the ESRD per- 41980). We explained that the treatment payment amount, they do not qualify as under the IPPS has already been application of a composite rate payment designated health services. established by the MS–DRG (diagnostic

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imaging is bundled into the payment for In this final rule, we are extending the of circumstances where physicians the inpatient admission), and, unless proposed policy to apply to hospital other than the ordering physician refer the X-ray results in an outlier payment, services furnished to inpatients that are outpatients for additional outpatient the hospital will not receive any paid under additional prospective services that would not be compensated additional payment for the service over payment systems. Specifically, we are separately under the OPPS; however, and above the payment rate established revising the definition of ‘‘designated none of these commenters provided a by the MS–DRG. Moreover, insofar as health services’’ to state that, for specific example or identified a specific the provision of the X-ray does not services furnished to inpatients by a APC. affect the rate of payment, the physician hospital, a service is not a designated Response: We believe that expanding has no financial incentive to over- health service payable, in whole or in our policy to other payment systems prescribe the service. As illustrated part, by Medicare if the furnishing of the applicable to the furnishing of services here, we do not believe that the X-ray service does not increase the amount of to inpatients would not pose a risk of is a designated health service that is Medicare’s payment to the hospital program or patient abuse. The IRF PPS, payable, in whole or part, by Medicare, under any of the following prospective IPF PPS, and LTCH PPS operate and our definition of ‘‘designated health payment systems (PPS): (i) Acute Care similarly to IPPS. No additional services’’ at § 411.351 would exclude Hospital Inpatient (IPPS); (ii) Inpatient payment is available where additional this service from the definition of Rehabilitation Facility (IRF PPS); (iii) hospital services are ordered after a designated health services, even though Inpatient Psychiatric Facility (IPF PPS); patient’s admission by a physician who it falls within a category of services that, or (iv) Long-Term Care Hospital (LTCH was not responsible for the patient’s admission, except in limited when billed separately, would be PPS). For the reasons explained in our circumstances. We are not persuaded to ‘‘designated health services.’’ Thus, response to comments below, we are not expand the policy to the OPPS. As we assuming the specialist had a financial extending the proposed policy to apply stated in the proposed rule, we believe relationship with the hospital that failed to hospital services furnished to that there is typically only one ordering to satisfy the requirements of an outpatients. We are also making physician for outpatient services, and it applicable exception to the physician nonsubstantive revisions to the definition of ‘‘designated health would be rare that a physician other self-referral law at the time the X-ray services’’ for consistency regarding the than the ordering physician would refer was ordered, the inpatient hospital terms ‘‘paid’’ and ‘‘payable’’ and making an outpatient for additional outpatient services would not be tainted by the a minor grammatical change. services that would not be paid unexcepted financial relationship, and We received the following comments separately under the OPPS (84 FR the hospital would not be prohibited and our responses follow. 55805). The commenters that asserted from billing Medicare for the admission. Comment: The vast majority of the existence of circumstances where On the other hand, if the physician who commenters that commented on this physicians other than the ordering ordered the inpatient hospital proposal supported our proposal to physician refer outpatients for admission had a financial relationship exclude from the definition of additional outpatient services that with the hospital that failed to satisfy ‘‘designated health service payable, in would not be paid separately under the the requirements of an applicable whole or in part, by Medicare’’ those OPPS provided no evidence or exception, § 411.353(b) would prohibit services furnished by a hospital to an examples of such circumstances for us the hospital for billing for the inpatient inpatient that do not affect the amount to confirm. Finally, we believe that hospital services. In the proposed rule, of Medicare’s payment to the hospital extending the rule to designated health we stated that we are aware that not all under the IPPS. Commenters indicated services paid under the OPPS would be hospitals are paid under the IPPS (84 FR that the revision would bring clarity to burdensome and challenging for 55805). We solicited comments as to hospitals when assessing compliance stakeholders, CMS, and our law whether our proposal regarding certain with the physician self-referral law and enforcement partners to implement and hospital services that are not calculating potential overpayments for enforce. We decline to extend the policy ‘‘designated health services payable, in violations of the law. Some commenters to the OPPS. whole or in part, by Medicare’’ should highlighted the onerous compliance Comment: One commenter questioned be extended to analogous services burdens associated with quantifying a whether a service would be considered provided by hospitals that are not paid potential overpayment when the a designated health service if the under the IPPS, and, if so, how we financial relationship that does not hospital’s furnishing of the service to an should effectuate this change in our satisfy the requirements of an applicable inpatient decreased the IPPS payment to regulation text. We also stated that, exception is with a physician other than the hospital. Another commenter although hospital outpatient services are the physician who referred the patient requested clarification of the meaning of also paid under a composite rate, we for the inpatient admission. Nearly all of ‘‘affects’’ the amount of Medicare believe that there is typically only one the commenters that supported our payment. A few commenters requested ordering physician for outpatient proposal requested that we expand the additional examples of hospital services services, and it would be rare for a policy to other composite rate payment that would or would not ‘‘affect’’ an physician other than the ordering systems under which hospitals are paid. IPPS payment under the revised physician to refer an outpatient for Some commenters suggested limiting definition of ‘‘designated health additional hospital outpatient services the expansion to payments for services services,’’ if finalized. that are compensated within the same to inpatients under the IRF PPS, IPF Response: Although we do not believe ambulatory payment classification PPS, and LTCH PPS. Other commenters it is likely that the ordering of (APC) under the Hospital Outpatient suggested that we expand the policy to additional services for an inpatient Prospective Payment System (OPPS). any composite rate payment system would decrease the amount of For this reason, we did not propose to under which a hospital is paid for either Medicare’s payment for the admission, apply the modified definition of inpatient or outpatient services, we are replacing the word ‘‘affect’’ with ‘‘designated health services’’ at including OPPS. The commenters ‘‘increase’’ to express our policy with § 411.351 to outpatient hospital services suggesting expansion to OPPS stated (in more precision. As noted, under the paid under the OPPS. identical language) that they are aware definition of ‘‘designated health

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services’’ finalized at § 411.351, for commenters asserted that this makes the ‘‘physician’’ at § 411.351 has services furnished to inpatients by a revised definition of ‘‘designated health consistently referred to the definition of hospital, a service is not a designated services’’ unworkable. ‘‘physician’’ at section 1861(r) of the health service payable, in whole or in Response: We see no reason why a Act. However, although the definition of part, by Medicare if the furnishing of the hospital would be unable to identify ‘‘physician’’ at § 411.351 cross- service does not increase the amount of referrals made by physicians with references section 1861(r) of the Act, the Medicare’s payment to the hospital whom the hospital has financial two definitions are not entirely under any of the following prospective relationships that do not satisfy the harmonious. In particular, the definition payment systems (PPS): (i) Acute Care requirements of an applicable of ‘‘physician’’ at § 411.351 does not Hospital Inpatient (IPPS); (ii) Inpatient exception. As we have stated repeatedly include all the limitations imposed by Rehabilitation Facility (IRF PPS); (iii) throughout our rulemaking history, the the definition of ‘‘physician’’ at section Inpatient Psychiatric Facility (IPF PPS); physician self-referral law’s billing 1861(r) of the Act. In order to correct or (iv) Long-Term Care Hospital (LTCH prohibition requires that the entity this discrepancy and provide uniformity PPS). submitting a claim to Medicare for between Title XVIII of the Act and our Comment: One commenter in payment for designated health services regulations with regard to the definition opposition to our proposal described a has the burden of ensuring that the of a ‘‘physician,’’ in the proposed rule, summary of the proposed rule prepared services were not furnished as a result we proposed to amend the definition of by an independent law firm that of a prohibited referral. It is incumbent ‘‘physician’’ at § 411.351 (84 FR 55805 identified what the law firm assumed upon hospitals to implement effective through 55806). Under the proposed the rationale behind our proposal to be: compliance programs to identify definition, the types of practitioners Physicians have no financial incentive financial relationships with physicians who qualify as ‘‘physicians’’ for to overprescribe services that do not that do not satisfy the requirements of purposes of the physician self-referral affect the rate of payment. The an applicable exception to the physician law would be defined by cross-reference commenter disagreed with that rationale self-referral law and take action not to to section 1861(r) of the Act. Therefore, as support for our proposal, and submit prohibited claims for payment. If the definition of ‘‘physician’’ at described a complicated situation that a hospital did not identify the financial § 411.351 would incorporate the could present a risk of abuse based on relationship with a referring physician statutory limitations imposed on the hospital referrals to service lines within until after a claim was submitted and definition of ‘‘physician’’ by section the hospital in which certain paid, the hospital would need to 1861(r) of the Act. As proposed, the physicians, but not the referring identify admissions for which payments definition at § 411.351 would continue physicians addressed in our proposal, in excess of the expected MS–DRG to provide that a physician is could profit. The commenter expressed payment (or other PPS payment) were considered the same as his or her concern that the revised definition of received and identify any prohibited professional corporation for purposes of ‘‘designated health services’’ would referrals for services furnished to the the physician self-referral law. After likely eliminate inpatient inpatients for whom the excess reviewing the comments, we are hospitalization from the reach of the payments relate. We believe that our finalizing the definition of ‘‘physician’’ physician self-referral law. The rules and regulations regarding outlier as proposed. commenter also asserted that there payments are clear and we are unaware We received the following comment exists no opposition to the current of any reason that a hospital would be and our response follows. definition of ‘‘designated health unable to utilize its medical record and Comment: Several commenters services’’ and urged CMS not to finalize billing systems to identify inpatient generally supported the regulatory the proposal. admissions that resulted in payments in change to cross-reference the definition Response: All inpatient and addition to the expected MS–DRG of ‘‘physician’’ at § 411.351 to the outpatient hospital services will remain payment (or other PPS payment) for the definition in section 1861 of the Act. A designated health services except for inpatient admission. few commenters maintained that the services furnished to an inpatient after definition of ‘‘physician’’ should be he or she becomes an inpatient and only b. Physician limited to doctors who have a Doctor of where those additional services do not In the 1992 proposed rule, we stated Medicine, Doctor of Osteopathic increase the amount of Medicare’s that, for purposes of the physician self- Medicine, or a recognized equivalent payment to the hospital for the inpatient referral law, physicians are certain physician degree. One commenter admission. For the reasons stated in the professionals who are ‘‘legally questioned the practical effect of proposed rule and in this final rule, we authorized to practice by the State in incorporating into our definition of are finalizing our proposal with the which they perform their professional physician at § 411.351 the statutory modification described above. functions or actions and when they are limitations imposed in the definition of Comment: A few commenters acting within the scope of their ‘‘physician’’ under section 1861(r) of the expressed uncertainty with respect to a licenses.’’ (57 FR 8593). We included in Act. Specifically, the commenter asked hospital’s ability to know whether the definition a doctor of medicine or whether the policy excludes podiatrists, services furnished to an inpatient osteopathy, a doctor of dental surgery or optometrists, and chiropractors from the pursuant to a prohibited referral from a dental medicine, a doctor of optometry, definition of ‘‘physician’’ for purposes physician other than the physician who and a chiropractor who meets certain of the physician self-referral law, made the referral for the inpatient qualifications. In Phase I, we finalized because, according to the commenter, admission result in outlier payments our definition of ‘‘physician’’ at the statutory limitations related to those under the IPPS such that the ‘‘caveat’’ § 411.351, defining the term as ‘‘a doctor three types of practitioners restrict when in the exclusion from the definition of medicine or osteopathy, a doctor of they are considered physicians under would apply. The commenters also dental surgery or dental medicine, a section 1861(r) of the Act to very limited stated that they lacked clarity regarding doctor of podiatric medicine, a doctor of circumstances, none of which reference when a hospital could know that an optometry, or a chiropractor, as defined the physician self-referral law. outlier payment is triggered by a at section 1861(r) of the Act.’’ (66 FR Response: We are finalizing the particular inpatient admission. The 955). Since Phase I, our definition of definition of ‘‘physician’’ as proposed.

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The revised definition will align the that a referral is not an item or service statutory requirement, they must be regulatory definition of ‘‘physician’’ at for purposes of section 1877 of the Act used solely to collect, transport, process, § 411.351 with the statutory definition and the physician self-referral or store specimens for the entity that of ‘‘physician’’ in section 1861(r) of the regulations (84 FR 55806). After provided the items and devices, or to Act to ensure that there are no reviewing the comments, we are order or communicate the results of inconsistencies between our regulations finalizing our modification of the tests or procedures for such entity. We and the statutory definition. Because the definition of ‘‘referral’’ as proposed. provided examples of items that could physician self-referral statute is in Title We received the following comment meet the ‘‘used solely’’ test, including XVIII of the Act, in the absence of a and our response follows. cups used for urine collection or vials definition of ‘‘physician’’ in section Comment: Numerous commenters used to hold and transport blood to the 1877 of the Act, definitions of general supported the proposed revision of the entity that supplied the items or applicability, such as the definition of definition of ‘‘referral.’’ We also devices. We emphasized that an item or ‘‘physician’’ at section 1861(r) of the received comments on our proposed device would not meet the ‘‘used Act, are applicable to the physician self- definition of ‘‘referral’’ that pertained to solely’’ requirement if it is used for any referral law. Under section 1861(r) of the volume or value standard and the purpose besides the purposes listed in the Act, a ‘‘physician’’ includes a doctor payment of productivity bonuses. the statute. In particular, we noted that of medicine or osteopathy, a doctor of Response: We are finalizing the certain surgical tools that can be used to dental surgery or dental medicine, a definition as proposed. Comments collect or store samples, but are also doctor of podiatric medicine, a doctor of pertaining to the volume or value routinely used as part of a surgical or optometry, and a chiropractor, but standard and the payment of medical procedure, would not satisfy provides for limitations on when such productivity bonuses are addressed in the ‘‘used solely’’ requirement. doctors are considered ‘‘physicians’’ for section II.B.3. of this final rule. As finalized in Phase I, the definition purposes of Title XVIII of the Act. We d. Remuneration of ‘‘remuneration’’ included a do not believe that the definition of parenthetical stipulating that the ‘‘physician’’ in our regulations should A compensation arrangement between provision of surgical items, devices, and be either more limited or more a physician (or an immediate family supplies would not qualify for the expansive than the statutory definition. member of such physician) and an carve-out to the definition of Thus, to the extent that the statutory entity (as defined at § 411.351) ‘‘remuneration’’ for items, devices, or definition of ‘‘physician’’ includes implicates the referral and billing supplies that are used solely for the doctors other than doctors of medicine prohibitions of the physician self- purposes listed at section and osteopathy, those practitioners fall referral law. Section 1877(h)(1)(A) of the 1877(h)(1)(C)(ii) of the Act (66 FR 947). within the ambit of the physician self- Act defines the term ‘‘compensation We explained that we did not believe referral law. However, we do not believe arrangement’’ as any arrangement that the Congress intended section that the referral prohibition at involving any ‘‘remuneration’’ between 1877(h)(1)(C)(ii) of the Act to allow § 411.353(a) should apply to any doctor a physician (or an immediate family entities to supply physicians with during the period he or she is not member of such physician) and an surgical items for free or below fair considered to be a physician for entity. However, section 1877(h)(1)(C) of market value prices, noting that such purposes of Title XVIII of the Act. In the Act identifies certain types of items may have independent economic those instances when a doctor of remuneration which, if provided, would value to physicians apart from the six medicine or osteopathy, doctor of dental not create a compensation arrangement statutorily permitted uses. We stated our surgery or dental medicine, doctor of subject to the referral and billing belief that the Congress intended to podiatric medicine, doctor of optometry, prohibitions of the physician self- include at section 1877(h)(1)(C)(ii) of or chiropractor is considered a referral law. Under section the Act single-use items, devices, and physician under section 1861(r) of the 1877(h)(1)(C)(ii) of the Act, the supplies of low value that are primarily Act, the doctor or chiropractor will be provision of the following does not provided by laboratories to ensure considered a physician for purposes of create a compensation arrangement proper collection of specimens. In this the physician self-referral law. between the parties: Items, devices, or context, we explained that reusable supplies that are used solely to collect, items may have value to physicians c. Referral transport, process, or store specimens unrelated to the collection of specimens, In Phase II, we stated that the for the entity providing the items, and therefore could not meet the ‘‘used exception for fair market value devices, or supplies, or to order or solely’’ requirement. Lastly, we stated compensation is not available to protect communicate the results of tests or that the provision of an excessive recruitment arrangements (69 FR procedures for such entity. Furthermore, number of collection supplies creates an 16096). We noted that a hospital is not under our definition of ‘‘remuneration’’ inference that the supplies are not permitted to pay a physician for the at § 411.351, the provision of such provided ‘‘solely’’ to collect, transport, benefit of receiving the physician’s items, devices, or supplies is not process, or store specimens for the referrals, and that such payments are considered to be remuneration. entity that furnished them. antithetical to the premise of the statute. In the 1998 proposed rule we We made no changes to the definition In the proposed rule, we reaffirmed that explained our interpretation of the of ‘‘remuneration’’ in Phase II or Phase a physician’s referrals are not items or phrase ‘‘used solely’’ at section III. In the CY 2016 PFS final rule, we services for which payment may be 1877(h)(1)(C)(ii) of the Act (66 FR 1693 clarified that the provision of an item, made under the physician self-referral through 1694). We observed that some device, or supply that is used for one or law, and that neither the existing pathology laboratories had been more of the six purposes listed in the exceptions to the physician self-referral furnishing physicians with materials statute, and no other purpose, does not law nor the exceptions proposed in the ranging from basic collection and constitute remuneration (80 FR 71321). proposed rule would protect such storage items to more specialized or In two advisory opinions issued in 2013 payments. We proposed to revise the sophisticated items, devices, or we applied the definition of definition of ‘‘referral’’ at § 411.351 to equipment. We clarified that, in order ‘‘remuneration’’ at § 411.351 to two explicitly state our longstanding policy for these items and devices to meet the proposed arrangements to provide

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certain devices to physicians free of physician self-referral law is whether and 66 FR 947 through 948, charge. In CMS–AO–2013–01, we the item, device, or supply is used respectively). concluded that, based on the specific solely for one or more of the statutory Although we proposed certain facts certified by the requestor of the purposes, regardless of whether the modifications to the definition of opinion, the provision of liquid-based device is also classified as a surgical ‘‘remuneration,’’ we did not propose to Pap smear specimen collection kits did device. To be clear, we continue to exclude from the definition of not constitute remuneration, because believe that the Congress intended the ‘‘remuneration’’ those items, devices, or the collection kits are not surgical carve-out at section 1877(h)(1)(C)(ii) of supplies whose main function is to devices, and because the devices are the Act to cover single-use items, prevent contamination or infection, used solely in the collection of devices, or supplies of low value 10 that even if the item, device, or supply could specimens. Among other things, our are primarily provided by laboratories to potentially be used for one or more of ‘‘used solely’’ analysis highlighted the ensure proper collection of specimens, the six statutory purposes at section following facts, as certified by the but we are no longer convinced that the 1877(h)(1)(C)(ii) of the Act. In Phase I, requestor: (1) The Pap smear collection mere fact that an item, supply, or device we made clear that, although sterile kits contain only disposable items that is classified as a ‘‘surgical device’’ gloves are essential to the proper cannot be reused after a specimen is means that it does not fall within the collection of specimens, we believe they collected; and (2) the entity furnishing carve-out. are not items, devices, or supplies that the Pap smear collection kits has a are used solely to collect, transport, In the proposed rule, we also clarified system in place to ensure that process, or store specimens (66 FR 948). the ‘‘used solely’’ requirement at physicians receive only the quantity of Sterile gloves are essential to the § 411.351. Although the furnished item, devices necessary for their practice specimen collection process, but their device, or supply may not be used for needs, and to address potential primary purpose is to prevent infection any purpose other than one or more of instances of separation of the devices or contamination. In addition, sterile the six purposes listed in the statute, we into their component parts for use other gloves are fungible, general purpose recognize that, in many instances, the than to collect specimens. In contrast, in items, and we continue to believe it item, device, or supply could CMS–AO–2013–02, we concluded that, would be impractical for parties to based on the specific facts certified by theoretically be used for numerous monitor the use of the gloves to ensure the requestor of the opinion, the purposes. For example, a specimen that they are used solely for one or more furnishing of certain disposable biopsy lockbox could potentially be used for of the purposes listed at section brushes for use in obtaining a biopsy of several purposes; it could be used to 1877(h)(1)(C)(ii) of the Act. Likewise, visible exocervical lesions constituted store unused specimen collection although there may be certain remuneration under the definition at supplies or as a doorstop. However, if, specialized equipment (including § 411.351. We noted that, as certified by during the course of the arrangement, surgical tools) that may be used for one the requestor, the biopsy brush is a the specimen box provided to the or more of the purposes described in the disposable, single-use, cervical biopsy physician is not used for any of these statute, in order not to be considered device that is used to collect a specimen purposes and is, in fact, used only for remuneration, the item, device, or to be sent to a laboratory. After one or more of the six purposes outlined supply must not have a primary reviewing FDA rules and regulations in the statute and our regulations, the function of preventing infection or contamination, or some other purpose and American Medical Association furnishing of the specimen box would besides one of the six purposes listed in guidelines, and consulting with CMS not be considered remuneration between parties. In other words, the the statute. medical officers, we concluded that the After reviewing the comments, we are device is a ‘‘surgical item, device, or mere fact that an item, device, or supply could be used for a purpose other than finalizing our revision of the definition supply’’ for purposes of the physician of ‘‘remuneration’’ as proposed. self-referral law and, therefore, that the one or more of the permitted purposes does not automatically mean that the We received the following comments provision of the device constitutes and our responses follow. remuneration under § 411.351. furnishing of the item, device, or supply at no cost constitutes remuneration. We Comment: Numerous commenters After further consideration of our supported our proposed revision of the proposed to add the phrase ‘‘in fact’’ to interpretation of section definition of ‘‘remuneration,’’ including the ‘‘used solely’’ requirement to clarify 1877(h)(1)(C)(ii) of the Act and the our proposal to remove the phrase ‘‘not that an item, device, or supply can have analysis set forth in the 2013 advisory including surgical supplies, devices, or several uses, including uses that are not opinions, in the proposed rule, we supplies’’ and our proposal to clarify among the six purposes listed in the proposed certain modifications to the that items, devices, and supplies are not statute; however, the furnishing of such definition of ‘‘remuneration’’ at remuneration if they are, ‘‘in fact,’’ used items, supplies, or devices would not be § 411.351 (84 FR 55806 through 55807). exclusively for one or more of the considered remuneration if the item, Specifically, we proposed to remove the permitted purposes. Several of the device, or supply in question is, in fact, parenthetical in the current definition of commenters that supported our only used for one or more of the six ‘‘remuneration,’’ which stipulates that proposed revision of the definition of purposes outlined in the statute. We the carve-out to the definition of ‘‘remuneration’’ also supported our again refer readers to the guidance ‘‘remuneration’’ does not apply to statement that those items, devices, or provided in the 1998 proposed rule and surgical items, devices, or supplies. We supplies whose main function is to in Phase I on steps that a party can take stated that we are no longer convinced prevent contamination or infection are to ensure that the furnished items, that the mere fact that an item, device, not carved out of the definition of supplies, or devices are used or supply is routinely used as part of a ‘‘remuneration.’’ One commenter appropriately (63 FR 1693 through 1694 surgical procedure means that the item, suggested that the proposed changes to device, or supply is not used solely for the definition will reduce physician 10 See, for example, the OBRA 1993 Conference hesitancy regarding the acceptance of one of the six purposes listed at section Report, H.R. 103–213 pp. 818 through 819, which 1877(h)(1)(C)(ii) of the Act. Rather, the characterized section 1877(h)(1)(C)(ii) of the Act as such items, devices, and supplies and relevant inquiry for purposes of the an ‘‘exception’’ for ‘‘certain minor remuneration.’’ will reduce administrative burden.

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Response: We agree that the revisions more of the permitted purposes under particular physician in fact only uses to the definition of ‘‘remuneration’’ will the statute. the item, device, or supply for one of the provide additional clarification and Response: The purpose of the revision permitted purposes. We do not disagree reduce administrative burden, and are to the definition of ‘‘remuneration’’ is to that it may be difficult for an entity to revising the definition of increase flexibility under our monitor how a physician ‘‘in fact’’ uses ‘‘remuneration’’ as proposed. regulations and to clarify the ‘‘used a multi-use item, device, or supply solely’’ requirement. As noted in the whose primary purpose is not one or Comment: One commenter objected to proposed rule, we no longer believe that more of the permitted purposes to the proposal to strike the parenthetical the mere fact that an item, device, or ensure that the physician in fact uses pertaining to surgical items, devices, or supply is classified as ‘‘surgical’’ means the item, device, or supply exclusively supplies from the definition of that the item, device, or supply is not for one or more of the permitted ‘‘remuneration’’ and urged CMS not to used solely for one or more of the purposes. However, because the finalize the proposal. The commenter permitted purposes. Although the provision of multi-use items, devices, or maintained that CMS did not explain categorical inclusion of surgical items, supplies whose primary purpose is not the rationale for the policy change in the devices, or supplies in the definition of one or more of the permitted purposes proposed rule, and that CMS did not ‘‘remuneration’’ may provide a bright will not be carved out of the definition provide any examples of surgical items, line test for determining which items of remuneration. devices, or supplies that would not be may be furnished to physicians at We continue to believe that the considered remuneration. According to reduced or no cost, it also may include Congress intended the carve-out at the commenter, it is relatively certain items, device, or supplies in the section 1877(h)(1)(C)(ii) of the Act to straightforward for a laboratory to definition of ‘‘remuneration’’ that the cover single-use items, devices, or determine if an item, device, or supply Congress meant to exclude in section supplies of low value that are primarily is classified as ‘‘surgical,’’ and thus is 1877(h)(1)(C)(ii) of the Act. Nothing in provided by laboratories to ensure not excluded from the definition of the regulation compels an entity to proper collection of specimens. We note remuneration. The commenter asserted provide any item, device, or supply to that, in the OBRA 1993 Conference that it would be more difficult, if not a physician below fair market value or Report, H.R. 103–213 pp. 818 through impossible, for a laboratory to determine for free. Entities concerned about 819, the Congress characterized section whether a physician in fact uses a monitoring for ‘‘sole use’’ may elect not 1877(h)(1)(C)(ii) of the Act as an surgical item, device, or supply for one to give away surgical (or any other) ‘‘exception’’ for ‘‘certain minor of the permitted purposes under the item, device, or supply. Moreover, remuneration.’’ Although we are not statute. The commenter noted that CMS items, devices, and supplies that do not finalizing a monetary limit for the carve- acknowledged in the proposed rule the constitute remuneration for purposes of out, we continue to believe that the difficulty of monitoring the use of sterile the physician self-referral law may items carved out of the definition of gloves. The commenter concluded that, nonetheless implicate the anti-kickback ‘‘remuneration’’ must be low value. We given the difficulty of monitoring actual statute. also reaffirm that the items, devices, or use, the proposal, if finalized, would Similarly, our clarification of the supplies provided to a physician must create a ‘‘slippery slope’’ that would ‘‘used solely’’ requirement was not have little or no independent value to permit unscrupulous actors to provide intended to loosen the requirement or to the physician. In this context, it is items, devices, or supplies that are create a slippery slope that will lead to important to note that both the statute abusive arrangements. Prior to the routinely used as part of a surgical and our regulations provide that the proposed rule, we received inquiries procedure as opposed to one of the items, devices, or supplies provided from stakeholders questioning whether permitted purposes under the statute. A must serve a purpose for the entity the mere fact that an item, device, or different commenter raised similar providing the items, devices, or supply could be used for a purpose supplies; for example, collecting objections to the proposal. This other than one or more of the permitted specimens for the entity. We believe that commenter acknowledged that the purposes means that the provision of the phrase ‘‘for the entity’’ underscores proposal to no longer categorically such an item, device, or supply that the items, devices, or supplies must include surgical items, devices, or constitutes ‘‘remuneration’’ under our have little, if any, independent value for supplies in the definition of regulations. We are adding the phrase the physician. Lastly, we emphasize ‘‘remuneration’’ provides some ‘‘in fact’’ to the definition to clarify that that, even if the provision of an item, additional flexibility under our this is not the case and to provide device, or supply is carved out of the regulations, but urged CMS to ensure certainty to parties regarding items, definition of ‘‘remuneration’’ under the that the items, devices, or supplies not devices, or supplies with potential physician self-referral law, the provision considered to be remuneration continue ancillary functions outside of one or of such items, devices, and supplies to be single-use items, devices, or more of the permitted purposes. At the implicates the anti-kickback statute. supplies with little, if any, independent same time, as indicated in our value to the physicians who receive discussion of the provision of sterile e. Transaction (and Isolated Financial them. The commenter expressed gloves, we continue to believe that, for Transaction) concern that, under the proposal, an item, device, or supply (including Section 1877(e)(6) of the Act provides valuable items, devices, or supplies, surgical tools) to satisfy the ‘‘used that an isolated financial transaction, such as bone marrow kits, would no solely’’ requirement, the primary such as a one-time sale of property or longer be considered remuneration, thus purpose of the item, device, or supply practice, is not a compensation increasing the risk of program or patient must be one or more of the uses arrangement for purposes of the abuse. The commenter also expressed permitted under the statute. Sterile physician self-referral law if: (1) The concern that it would increase the gloves and other multi-use items, amount of remuneration under the burden on parties to monitor the use of devices, or supplies whose primary transaction is consistent with the fair items, devices, or services, to ensure purpose is not one of the permitted market value of the transaction and is that physicians are in fact using the purposes are not excluded from the not determined in a manner that takes items, devices, or services for one or definition of ‘‘remuneration,’’ even if a into account (directly or indirectly) the

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volume or value of referrals by the persons doing business and an ‘‘isolated exceptions for personal service referring physician; (2) the transaction’’ as a transaction involving a arrangements or fair market value remuneration is pursuant to an single payment between two or more compensation. In fact, it is our policy arrangement that would be persons. The regulation at § 411.351 that the exception for isolated commercially reasonable even if no specified that a transaction involving transactions is not available to except referrals were made to the entity; and (3) long-term or installment payments is payments for multiple services provided the transaction meets any other not considered an isolated transaction. over an extended period of time, even requirements that the Secretary imposes In the 1998 proposed rule, we if there is only a single payment for all by regulation as needed to protect proposed to revise the definition of the services. We see no reason to unduly against program or patient abuse. As ‘‘transaction’’ at § 411.351 to clarify that stretch the meaning and applicability of enacted by OBRA 1989, the statutory a transaction can involve persons or the exception for isolated transactions exception identified a one-time sale of entities, but did not propose any beyond what was intended by the property as an example of an isolated substantive changes to the exception at Congress. As described elsewhere in financial transaction. In OBRA 1993, the § 411.357(f) (63 FR 1669). This this final rule, our final regulations Congress further clarified the statutory definition was finalized in Phase II, should facilitate compliance with the exception by providing an additional with modification to permit installment physician self-referral law in general example of an isolated transaction, payments (and post-closing and the writing and signature namely, a one-time sale of a practice. adjustments) under certain requirements in particular, including a (See House Conference Report at H.R. circumstances (69 FR 16098). In Phase 90-day period to reduce arrangements to Rep. No. 213, 103d Cong., 1st Sess. 813– II, we also responded to commenters a signed writing and an exception for 815 (1993).) that objected to the prohibition on other limited remuneration to a physician. We transactions within 6 months of the In the 1992 proposed rule, we believe that these final provisions will excepted transaction. We declined to proposed an exception (ultimately afford parties with sufficient flexibility modify the 6-month prohibition on codified at § 411.357(f)) to mirror the to ensure that personal service and other other transactions, and we explained statutory exception at section 1877(e)(6) compensation arrangements comply that the concept of an isolated with the physician self-referral law. of the Act for certain isolated financial transaction is incompatible with the To illustrate the kind of transactions transactions (both titled and together parties routinely engaging in multiple that section 1877(e)(6) of the Act is referred to as the exception for isolated transactions in a year or during a short meant to exempt, the Congress provided transactions) (57 FR 8591). In our period of time. In Phase III, we made no as examples a one-time sale of property proposal, we included a requirement— changes to the exception at § 411.357(f), and a one-time sale of a practice. In our in addition to the statutory but updated the term ‘‘isolated view, a one-time sale of property or a requirements—that there be no other transaction’’ at § 411.351 to refer to an practice is a unique, singular transactions (that is, financial ‘‘isolated financial transaction,’’ as that transaction. It is not possible for one relationships) between the parties for 1 specific term is used in the statutory party to repeatedly offer and sell the year before and 1 year after the financial and regulatory exceptions (72 FR same property or medical practice to transaction to ensure that financial 51084). another party. In contrast, in service transactions excepted under section Through our administration of the arrangements where multiple services 1877(e)(6) of the Act and § 411.357(f) are SRDP, work with our law enforcement are provided over an extended duration truly isolated in nature (57 FR 8599). In partners, and interactions with of time, the same services are provided the 1995 final rule, we finalized an stakeholders, it has come to our on a repeated basis, even if there is only exception for isolated financial attention that some parties may believe one payment for the multiple services transactions at § 411.357(f), and we that CMS’ policy is that the exceptions provided. Also, in a one-time sale of modified the proposed 1-year in section 1877(e)(6) of the Act and property or a practice, the consideration requirement in response to commenters § 411.357(f) for isolated transactions are for the transaction (that is, the transfer that asserted that the requirement would available to protect service of ownership of the property or practice) create substantial and unnecessary arrangements where a party makes a is exchanged at the time payment is problems (60 FR 41960). We stated that single payment for multiple services made in a single transaction (although a transaction would be considered an provided over an extended period of § 411.357(f) permits installment isolated transaction for purposes of time. To illustrate, assume that a payments under certain circumstances). § 411.357(f) if there were no other hospital makes a single payment to a In contrast, if a physician provides transactions between the parties for 6 physician for working multiple call multiple services to an entity over an months after the transaction, except coverage shifts over the course of a extended period of time, remuneration those transactions that are specifically month (or several months) and seeks to in the form of an in-kind benefit has excepted by another provision in utilize the exception at § 411.357(f) to passed repeatedly from the physician to §§ 411.355 through 411.357. We further avoid qualification of the payment as a the entity receiving the service prior to stated that individual payments financial relationship subject to the the payment date. between parties generally characterize a physician self-referral law’s referral and We remind parties that the provision compensation arrangement; however, billing prohibitions. That is, the parties of remuneration in the form of services debt, as described in the definition of wish to consider the single payment for commences a compensation ‘‘ownership or investment interest’’ at multiple services an ‘‘isolated financial arrangement at the time the services are section 1877(a)(2) of the Act, can transaction.’’ We have observed that provided, and the compensation constitute an ownership interest that parties turn to the exception for isolated arrangement must satisfy the continues to exist until the debt is paid transactions to protect single payments requirements of an applicable exception off (60 FR 41960). The 1995 final rule for multiple services when they at that time if the physician makes also established definitions of discover, typically after the services referrals for designated health services ‘‘transaction’’ and ‘‘isolated transaction’’ have been provided, that they failed to and the entity wishes to bill Medicare at § 411.351. We defined a ‘‘transaction’’ set forth the service arrangement in for such services. Thus, the exception as an instance or process of two or more writing, and thus cannot rely on the for isolated transactions is not available

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to retroactively cure noncompliance the exception from ‘‘isolated language at § 411.357(f). However, the with the physician self-referral law. Our transactions’’ to ‘‘isolated financial exception is not applicable to the position is buttressed by the fact that the transactions,’’ as the title of the statutory compensation arrangement that the Congress created an exception for exception is ‘‘isolated transactions.’’ parties dispute. personal service arrangements at section We received the following comments We agree with the commenters that 1877(e)(3) of the Act and required, and our responses follow. stated that settlement of a bona fide among other things, that the Comment: Many commenters dispute arising from an arrangement is arrangement is set out in writing and expressed concern that, given the fundamentally different from making a signed by the parties, that the term of proposed definition of ‘‘isolated payment, including a single payment, the arrangement is at least 1 year, and financial transaction,’’ the exception at for items or services provided under the that the compensation is set in advance. § 411.357(f) would not apply to the arrangement. Although the settlement of We do not believe that the Congress settlement of a bona fide legal dispute, a bona fide dispute may include a one- would impose such requirements for especially a dispute arising from an time payment made by a party (or service arrangements under this ongoing service arrangement, may not installment payments as permitted exception, and then permit parties to be excepted under § 411.357(f). under the exception), the cornerstone of avoid these requirements as long as the Commenters noted that parties to a a settlement of a bona fide dispute, as parties made one retrospective payment service arrangement may have a opposed to a payment for items or for multiple services provided over an legitimate dispute concerning the services, is that one or more of the extended period of time relying on the amount of compensation due under a parties forgoes a good faith claim to be exception for isolated transactions. service arrangement, for example, where paid more under the arrangement than the terms of a contract documenting the the party actually receives. Therefore, After reviewing the comments, we are arrangement are ambiguous. In these we are describing the settlement of a finalizing the proposed independent circumstances, a physician may have bona fide dispute in the definition of definition of ‘‘isolated financial reasonable belief that he or she is owed ‘‘isolated financial transaction’’ and in transaction’’ at § 411.351, which more money under the contract, while the exception at § 411.357(f) as an clarifies that an ‘‘isolated financial the entity may believe in good faith that instance of forgiveness of an amount transaction’’ does not include a single the physician is entitled to less than owed. We are further clarifying at payment for multiple services provided what the physician claims. Under such § 411.357(f)(4) that an isolated financial over an extended period, with the circumstances, the parties may wish to transaction that is an instance of following modifications: First, the final settle the matter to avoid litigation. The forgiveness of an amount owed in definition of ‘‘isolated financial commenters expressed concern that the settlement of a bona fide dispute is not transaction’’ specifies that an isolated settlement could be construed as a part of the compensation arrangement transaction is a one-time transaction. single payment for multiple services giving rise to the bona fide dispute. Second, subparagraph (2) of the previously provided by the physician Thus, a settlement of a bona fide legal definition of ‘‘isolated financial and, therefore, the exception at dispute under § 411.357(f) is a separate transaction’’ at § 411.351 and the § 411.357(f) would be unavailable to compensation arrangement from any introductory chapeau language in protect the compensation arrangement compensation arrangement between the § 411.357(f) provides as an additional arising from the settlement payment (or parties giving rise to the bona fide example of an isolated financial reduction in debt). Several commenters dispute, and settlement of a bona fide transaction a single instance of maintained that resolution of a bona dispute under § 411.357(f) does not forgiveness of an amount owed in fide dispute is altogether different from retroactively bring the compensation settlement of a bona fide dispute. Third, making a single payment for multiple arrangement that gave rise to the dispute we are clarifying at § 411.357(f)(4) that services provided over an extended into compliance with the physician self- an isolated financial transaction that is period of time. The commenters referral law. an instance of forgiveness of an amount requested that CMS expressly include a For the reasons explained above, we owed in settlement of a bona fide settlement of a bona fide legal dispute, decline to omit from subparagraph (2) dispute is not part of the compensation along with a one-time sale of a property the phrase ‘‘but does not include a arrangement giving rise to the bona fide or practice, in the definition of ‘‘isolated single payment for multiple or repeated dispute. Fourth, although we did not financial transaction,’’ and strike services (such as payment for services propose further changes to the language stating that an isolated previously provided but not yet definition of ‘‘transaction’’ at § 411.351, financial transaction does not include a compensated).’’ Parties may rely on the we are modifying the definition in single payment for multiple services. exception at § 411.357(f) to protect an response to comments to remove the Response: Our policy has always been isolated financial transaction that settles phrase ‘‘or process,’’ because the term that the exception for isolated a bona fide dispute arising from an ‘‘process’’ has led some stakeholders to transactions at § 411.357(f) is applicable arrangement for multiple, repeated, or conclude that the exception is available to a compensation arrangement arising ongoing services, but the exception is to protect a single payment for multiple from the settlement of a bona fide not available to protect a single payment services provided over an extended dispute, even if the dispute originates for multiple or repeated services. A period of time. Lastly, we are finalizing from a service arrangement where single payment for multiple or repeated corresponding revisions to the multiple services have been provided services is not an isolated financial exception for isolated transactions at over an extended period of time. To transaction, but rather an ongoing, § 411.357(f) to reference isolated clarify our longstanding policy, we are extended compensation arrangement financial transactions in order to align modifying the definition of ‘‘isolated that must satisfy the requirements of the exception text with the statutory financial transaction’’ at § 411.351 to another applicable exception. provisions at section 1877(e)(6) of the include in subparagraph (2) a single Comment: Several commenters Act. Even though the exception at instance of forgiveness of an amount maintained that our proposal to exclude § 411.357(f) applies to isolated financial owed in settlement of a bona fide a single payment for multiple services transactions, we did not propose and we dispute, and we are including similar from the definition of ‘‘isolated financial are not finalizing a change in the title of language in the introductory chapeau transaction’’ is inconsistent with the

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statutory exception for isolated during that timeframe. Even if the entity exception for isolated transactions for a transactions at section 1877(e)(6) of the only makes one payment for the one-time service arrangement that Act. According to the commenters’ services, this is not a one-time qualifies as an isolated financial interpretation of section 1877(e)(6) of transaction as contemplated by the transaction, the parties would not be the Act, the statutory examples of statute, but rather an ongoing service barred from entering into an ongoing isolated financial transactions, namely a arrangement. Because we interpret the arrangement for the same or similar one-time sale of property or a one-time exception for isolated transactions as services during the 6 months after the sale of a practice, are illustrative only, protecting one-time transactions, as isolated financial transaction, provided and non-exhaustive. The commenters indicated at section 1877(e)(6) of the that the subsequent service arrangement asserted that the exception may also be Act, we are modifying the definition of satisfied all the requirements of a used for payments for services, noting ‘‘isolated financial transaction’’ to different exception applicable to the that section 1877(e)(6) of the Act include the term ‘‘one-time.’’ subsequent service arrangement. The incorporates by reference certain Under our interpretation of the parties would, however, be barred from requirements of the exception at section statutory scheme, ongoing service using the exception for isolated 1877(e)(2) of the Act for bona fide arrangements, where a physician transactions for 6 months after the one- employment relationships, including provides multiple services to an entity time service arrangement, regardless of the requirement that the remuneration is over an extended period of time, must the subject matter or consideration of ‘‘consistent with the fair market value of satisfy all the requirements of another the transaction. the services’’ (emphasis added). Another applicable exception, such as the Comment: Some commenters commenter asserted that it is reasonable exception for personal service maintained that, under the plain to see a single payment for items or arrangements at § 411.357(d)(1) or the language of the exception for isolated services already furnished as an isolated exception for fair market value transactions and our previous guidance, transaction. The commenter provided as compensation at § 411.357(l). We do not the exception may be relied on to an example a hospital’s single payment believe that the Congress would have protect a single payment for multiple to a physician for fulfilling an required ongoing service arrangements services. The commenters noted that unanticipated need for call coverage to meet all the requirements of section ‘‘transaction’’ is currently defined to over a weekend or holiday, where the 1877(e)(3) of the Act, including writing, mean an ‘‘instance or process’’ of two or physician performs no others services signature, 1-year term, and set in more persons or entities doing business, for the hospital for the previous or advance requirements, and then permit and stated that a ‘‘process’’ suggests an subsequent 6-month periods. parties to sidestep these requirements ongoing relationship such as an by making a single, retrospective arrangement for repeated or multiple Response: We agree with the payment for multiple services relying on services provided over an extended commenters that the examples of the exception for isolated transactions. period of time. The commenters further isolated transactions in section We agree with the commenters that noted that the terms ‘‘isolated financial 1877(e)(6) of the Act are illustrative not all service arrangements are per se transaction’’ and ‘‘transaction’’ are only, not exhaustive. Among other excluded from protection under the defined together in the current things, as noted above, we believe that exception for isolated transactions. In regulations, and that ‘‘isolated financial a single transaction resolving a bona the proposed rule, we noted that the transaction’’ is defined as a transaction fide dispute is an example of an isolated same services can be provided by one involving a single payment. Another transaction that may be protected under party and purchased by another on a commenter objected to CMS’ statement the exception, if all the requirements of repeated basis, whereas a party cannot that the proposal is a clarification of the exception are met. What the repeatedly offer and sell the same longstanding policy and stated that statutory examples illustrate, however, property or medical practice to another there is nothing in the plain language of are one-time transactions, where there is party (84 FR 55808). We believe that the the exception to put parties on notice not only a single payment (or commenters may have inferred from this that the exception cannot be used to installment payments as permitted statement that our policy categorically protect a single payment for multiple under the exception) but also a single excludes services from the isolated services. exchange of value, typically occurring transaction exception. This is not our Response: We first introduced the on a specific date, involving policy. As noted above, the exception concept of a ‘‘process’’ of two or more consideration that is usually not the for isolated transactions protects one- persons doing business in the 1995 final subject of repeated or frequent exchange time transactions. With respect to an rule (60 FR 41979). There is very little over an extended period of time. In a arrangement for services, the exception commentary in the 1995 final rule or sale of property or a practice, for is available to protect a single payment subsequent rulemaking on the term example, there is typically a closing (or installment payments, as permitted ‘‘process’’ in the definition of date when value is exchanged, and the by the exception) for a one-time service ‘‘transaction,’’ though we did note in parties ordinarily do not repeatedly arrangement, as opposed to an Phase II, when declining to adopt a transact to buy and sell the same arrangement where multiple or repeated policy allowing a certain number of property or practice over an extended services are provided over an extended transactions per year, that the concept of period. The Congress’ inclusion of the period of time. Whether a one-time an isolated transaction is incompatible term ‘‘one-time’’ underscores that the service arrangement constitutes an with parties routinely engaging in exception is not available for isolated financial transaction depends multiple transactions each year or more transactions that are repeated over an on the facts and circumstances of the than one transaction during a short extended period of time. In contrast to arrangement, including whether the period of time (69 FR 16098). Moreover, a one-time sale of property or a practice, service (or bundle of integrally related in the FY 2009 IPPS final rule, we if a physician repeatedly provides services) is provided in its entirety explained that all the requirements of an services to an entity over the course of during a discrete time-period of short exception must be met at the time that months or years, then the physician has duration, such as a 24-hour or weekend a physician makes a referral, and that repeatedly provided remuneration to the shift. We note that, under parties may not turn back the clock to entity in the form of an in-kind benefit § 411.357(f)(3), if parties utilize the retroactively ‘‘cure’’ noncompliant

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arrangements (73 FR 48703). Under the commercial reasonableness, and context, because the compensation for statute and our regulations, a asserted that a single payment for the renewal term was not set in advance compensation arrangement is formed multiple services that meets these of the services already provided, and the when remuneration, including in-kind requirements and the other compensation would likely exceed the remuneration such as the provision of a requirements of § 411.357(f) does not $3,500 limit under the proposed service, is exchanged between a pose a risk of program or patient abuse. exception for limited remuneration to a physician and an entity. Thus, once a One commenter stated that parties often physician. physician begins providing services to seek to rely on the isolated transaction Response: Our policy that the an entity under an arrangement, a exception to make a single payment for exception for isolated transactions is not compensation arrangement is formed, items or service previously furnished, available to protect a single payment for and the compensation arrangement where the arrangement has not been multiple or repeated services is must satisfy all the requirements of an documented before payment is made, grounded in our interpretation of the exception at that time if the physician and the documentation deficiencies are statute and the mandate under sections makes referrals to the entity. The statute not discovered until after the items or 1877(b)(4) and 1877(e)(6)(B) of the Act and our previous policy statements in services have been furnished (which to protect only those financial Phase II and the FY 2009 IPPS final rule may be for a period of more than 90 relationships that do not pose a risk of are the basis for the policy articulated in days). program or patient abuse. We are not the proposed rule and this final rule, Several commenters asserted that the convinced that an ongoing service namely that parties may not rely on the proposal, if finalized, would have an arrangement is an isolated financial exception for isolated transactions to especially acute impact on hospitals transaction like a one-time sale of a protect or retroactively ‘‘cure’’ a service located in states that prohibit the property or a practice. Moreover, we do arrangement involving the provision of corporate practice of medicine. not believe that the Congress would multiple or repeated services over an According to the commenters, hospitals have required an ongoing service extended period of time. in states without such restrictions may arrangement to satisfy all the We recognize, however, that rely on the exception for bona fide requirements of the exception for stakeholders may have been under the employment relationships for instances personal service arrangements at section impression, given the use of the word in which fair market value 1877(e)(3) of the Act, including set in ‘‘process’’ in the definition of compensation has been paid to a advance, writing, and 1-year term ‘‘transaction,’’ that the exception for physician for services provided, but the requirements, and allowed the same isolated transactions was available to arrangement is not set out in writing arrangement to be excepted under the protect service arrangements involving and the compensation was not set in exception for isolated transactions, multiple or repeated services provided advance. The commenters noted that, in which does not include these over an extended period of time. We states where the employment of requirements. The commenters’ also acknowledge that, under the physicians is prohibited, the exception example of the anesthesiology practice current regulations, the definition of for bona fide employment relationships illustrates our concern with the use of ‘‘isolated financial transaction’’ is is not available, and the only available the exception for isolated transactions to subsumed under the definition of exception to protect the arrangement protect an ongoing service arrangement. ‘‘transaction,’’ and, although the may be the exception for isolated As explained in section II.D.5 of this definition of ‘‘isolated financial transactions. final rule, the ‘‘set in advance’’ transaction’’ requires a single payment A few commenters, using identical requirement is an important safeguard (or installment payments, if certain language, provided an example of an to prevent parties from adjusting, requirements are met), it does not arrangement that the commenters including retrospectively adjusting, the explicitly state that a single payment claimed should be covered by the compensation under an arrangement in cannot be made for repeated or multiple exception for isolated transactions. In a manner that takes into account the services. To clarify our policy, we are the example, an arrangement with an volume or value of a physician’s deleting the term ‘‘process’’ from the anesthesiology group is expiring, and referrals. In the commenters’ example, definition of ‘‘transaction’’ in § 411.351 despite good faith efforts to agree to the the parties would be permitted to rely and we are explicitly stating in terms of a renewal arrangement, the on the exception for isolated subparagraph (2) of the definition of parties disagree over the amount of transactions to compensate the ‘‘isolated financial transaction’’ at compensation to be paid under the physicians retroactively, thus § 411.351 that an isolated financial renewal. The commenters explained sidestepping the ‘‘set in advance’’ transaction does not include a single that the compensation formula in such requirement of other exceptions and payment for multiple or repeated a case may be very complex and take opening the door to adjustments of services. We stress that these revisions significant time to negotiate. In the compensation during the negotiation are effective as of the date set forth in commenters’ example, the period that take into account the volume this final rule and apply prospectively anesthesiology group agrees to keep or value of the physicians’ referrals or only. providing services to patients after the other business generated by the Comment: Many commenters previous arrangement expires while the physicians. maintained that our policy reduces parties continue to negotiate the terms The special rule for writing and flexibility and increases the burden of of the renewal. The commenters signature requirements at final compliance with the physician self- contended that there is no harm to the § 411.354(e)(4) and the exception for referral law. The commenters noted that Medicare program if, after the parties limited remuneration to a physician at the exception for isolated transactions agree on compensation for the renewal, final § 411.357(z) provide significant includes core safeguards of the the entity relies on the exception for flexibility under our regulations while physician self-referral law, such as isolated transactions to compensate the providing sufficient safeguards, requirements pertaining to fair market physicians for services already including an annual monetary limit of value, the volume or value of a furnished in the renewal term. The $5,000 (as adjusted for inflation) under physician’s referrals and other business commenters suggested that no other § 411.357(z), a 90-day period for generated by the physician, and exception would be available in this obtaining required writings under

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§ 411.354(e)(4), and the requirement except for financial relationships that extent practicable, create a provision under § 411.354(e)(4) that the satisfy all the requirements of another that would deem certain kinds of arrangement satisfy all the requirements exception in § 411.355 through financial relationships to last a of an applicable exception (other than § 411.357. The commenters contended prescribed period of time for purposes the writing and signature requirement), that their proposal incorporates the of determining the period of including the ‘‘set in advance’’ three central requirements of other disallowance. Assuming we were to requirement, for the first 90 days of the compensation exceptions—fair market prescribe a determinate amount of time arrangement and thereafter. In contrast, value compensation, commercial for the period of disallowance in certain the exception for isolated transactions reasonableness of the arrangement, and circumstances, we sought comments on does not limit the amount of compensation that is not determined in whether the period of disallowance compensation permissible under the any manner that takes into account the could be terminated if parties returned arrangement, does not require the volume or value of a physician’s or repaid the value of any problematic compensation arrangement to ever be in referrals or the other business generated compensation under an arrangement. writing, and does not require by the physician—but would not require In the FY 2009 IPPS proposed rule, compensation to be set in advance. a writing or compensation set in we proposed regulations at Given the limited requirements of the advance. § 411.353(c)(1) pertaining to the period exception for isolated financial Response: The exception suggested by of disallowance (73 FR 23690 through transactions, we believe that excepting the commenters does not differ 23692). Under that proposal, the period ongoing service arrangements under substantively from the exception for of disallowance would begin when the § 411.357(f), which could last for years isolated financial transactions at financial relationship failed to satisfy and be worth hundreds of thousands of § 411.357(f). For the reasons explained the requirements of any applicable dollars or more, would pose a risk of in response to the immediately previous exception. Where the noncompliance is program or patient abuse. comment, adopting the commenters’ unrelated to the payment of We note that, depending on the facts suggestions would pose a risk of compensation, the period of and circumstances, the parties in the program or patient abuse and, therefore, disallowance would be deemed to end commenters’ example of an we cannot issue the suggested exception no later than the date that the financial anesthesiology services arrangement under the authority at section 1877(b)(4) relationship satisfies all the could rely on the indefinite holdover of the Act. requirements of an applicable provision at § 411.357(d)(1)(vii) to exception. Correspondingly, where the 3. Denial of Payment for Services continue the arrangement on the same noncompliance is related to the Furnished Under a Prohibited Referral— terms and conditions of the original payment of excess or insufficient Period of Disallowance (§ 411.353(c)(1)) arrangement while the parties negotiate compensation, we proposed that the the compensation terms for the renewal In the CY 2008 PFS proposed rule, we period of disallowance would be arrangement. Once the parties finalize solicited comments on how to deemed to end no later than the date on the negotiations, compensation under determine the period of time during which the excess compensation was the arrangement could be amended which a physician may not make repaid or the additional required under new § 411.354(d)(1)(ii) (as referrals for designated health services compensation was paid, and the discussed in section II.D.5. of this final to an entity and the entity may not bill arrangement satisfied all the rule) or the parties could enter into a Medicare for the referred designated requirements of an applicable new arrangement that satisfies the health services when a financial exception. We emphasized that the requirements of § 411.357(d)(1) or relationship between the parties failed proposal only prescribed an outside another applicable exception to the to satisfy the requirements of any limit on the period of disallowance. We physician self-referral law. In either applicable exception (72 FR 38183). We acknowledged that, in certain cases, a case, to meet the ‘‘set in advance’’ referred to this timeframe as the ‘‘period financial relationship may end before requirement, the newly negotiated of disallowance.’’ We stated that, as a the excess compensation has been compensation terms may only be general matter, the period of returned or the insufficient applied prospectively. disallowance under the physician self- compensation paid in full, and that the Comment: A few commenters referral law should begin on the date period of disallowance in such cases requested that, if CMS finalizes its when a financial relationship fails to would end when the financial proposed definition of ‘‘isolated satisfy the requirements of any relationship ended. However, we did financial transaction,’’ it should also applicable exception and end on the not issue any regulations or guidance on finalize a new exception for isolated date that the financial relationship ends determining when a financial payments. The exception suggested by or is brought back into compliance (that relationship has ended in such cases, the commenters would permit an is, satisfies all the requirements of an and we stated that the period of isolated, one-time payment for services applicable exception). We noted, disallowance would have to be already furnished, if: (1) The payment is however, that it is not always clear determined in such instances on a case- consistent with fair market value and when a financial relationship has by-case basis. Lastly, we recognized that not determined in any manner that takes ended. By way of example, we stated noncompliance may also arise for other into account the volume or value of a that, if a physician paid less than fair reasons related to compensation, such physician’s referrals or other business market value for the rental of office as payments that take into account the generated; and (2) the remuneration is space, the below market rental volume or value of a physician’s provided under an arrangement that payments may have been in exchange referrals, but we did not propose any would be commercially reasonable even for future or anticipated referrals, so it regulations regarding how to determine if the physician made no referrals to the is not clear if the financial relationship the period of disallowance in such entity. Similar to the current exception ended on the date that the lease expires. cases. at § 411.357(f) for isolated transactions, We sought comments on whether we In the FY 2009 IPPS final rule, we there could be no additional exchanges should employ a case-by-case method finalized § 411.353(c)(1) as proposed, of remuneration between the parties for for determining when a financial without substantive modifications (73 6 months after the isolated payment, relationship ends or if we should, to the FR 48700 through 48705). We

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emphasized again that the regulation no way meant to undermine parties who never our intent (84 FR 55809 through only prescribed an outside date for the relied on § 411.353(c)(1)(ii) or (iii) in the 55810). However, the failure to remedy period of disallowance, and that parties past to establish that the period of such operational inconsistencies (that could determine that the period of disallowance has ended. The general is, payment discrepancies) could result disallowance ended earlier than the principle stated in the CY 2008 PFS in a distinct basis for noncompliance outside date prescribed by the proposed rule that the period of with the physician self-referral law. regulation on the theory that the disallowance under the physician self- In the proposed rule, endeavoring to financial relationship ended prior to referral law should begin on the date clarify statements in the FY 2009 IPPS this date. We made it clear in response when a financial relationship fails to final rule regarding whether parties can to commenters that the period of satisfy all the requirements of any ‘‘turn back the clock’’ or retroactively disallowance established at applicable exception and end on the ‘‘cure’’ noncompliance, we stated that § 411.353(c)(1) was not intended to date that the financial relationship ends parties that detect and correct extend the period of disallowance or satisfies all the requirements of an administrative or operational errors or beyond the end of a financial applicable exception remains true. And, payment discrepancies during the relationship. Rather, the regulation was we continue to believe that one way to course of the arrangement are not merely intended to give parties clear establish that the period of disallowance necessarily ‘‘turning back the clock’’ to guidance on steps that could be taken to has ended in such circumstances is to address past noncompliance (84 FR ensure that the period of disallowance recover any excess compensation and 55811). Rather, it is a normal business had ended. In addition, we explained bring the financial relationship back practice, and a key element of an the application of the provisions into compliance with the requirements effective compliance program, to regarding excess and insufficient of an applicable exception. However, we actively monitor ongoing financial compensation at § 411.353(c)(1)(ii) and are aware that the payment of excess or relationships, and to correct problems (iii). insufficient compensation may that such monitoring uncovers. An In the proposed rule, noting our complicate the question of when a entity that detects a problem in an experience administering the SRDP and financial relationship has ended or been ongoing financial relationship and stakeholder feedback that we have brought back into compliance with the corrects the problem while the financial received over the years, we proposed to requirements of an applicable exception relationship is still ongoing is delete in their entirety the provisions for purposes of the physician self- addressing a current problem and is not setting forth the period of disallowance referral law, and believe that removing ‘‘turning back the clock’’ to fix past at § 411.353(c)(1) because we believe the period of disallowance regulations is noncompliance. On the other hand, that, although the rules were initially the best way to ensure that what was once a financial relationship has ended, intended merely to establish an outside, intended as an elective ‘‘safe harbor’’ is parties cannot retroactively ‘‘cure’’ the bright-line limit for the period of not mistaken for a compulsory action previous noncompliance by recovering disallowance, in application, they required to ensure that the period of or repaying problematic compensation. appear to be overly prescriptive and disallowance has ended. Of course, to the extent that the impractical (84 FR 55809). We are financial relationship has ended, the finalizing this proposal. We emphasize As we stated in the proposed rule, period of disallowance has ended as that our action in this final rule does not since the publication of the FY 2009 well. We believe this policy encourages permit parties to a financial relationship IPPS final rule, stakeholders have active, regular review of arrangements to make referrals for designated health questioned whether our preamble for compliance with the physician self- services or to bill Medicare for the guidance was intended to state that referral law. We provided an example to services when their financial administrative or other operational illustrate our policy regarding payment relationship does not satisfy all the failures during the course of an discrepancies in the operation of a requirements of an applicable arrangement, such as the erroneous compensation arrangement (84 FR exception. It is a fundamental principle payment of excess compensation or the 55810 through 55811), and believe that of the physician self-referral law that a erroneous failure to pay the full amount it is useful to repeat the example from physician may not make a referral for of compensation due during the the proposed rule here. We have designated health services to an entity timeframes established under the terms modified some of the language of the with which he or she (or an immediate of an arrangement, would necessarily example for clarity. family member) has a financial result in noncompliance with the Assume there is a 1-year arrangement relationship, and the entity may not bill physician self-referral law (84 FR between an entity and a physician Medicare for the services, if the 55809). Through submissions to the beginning January 1 for the personal financial relationship between the SRDP and other interactions with services of the physician; the parties does not satisfy all the stakeholders, we are aware of questions arrangement is memorialized at the requirements of an applicable regarding whether administrative errors, outset in a writing signed by the parties; exception. Nothing in this final rule such as invoicing for the wrong amount the amount of compensation provided affects the billing and referral of rental charges (that is, an amount for in the writing does not exceed fair prohibitions at § 411.353(a) and (b). We other than the amount specified in the market value; and the arrangement stress that the analysis to determine written lease arrangement) or the otherwise fully complies with all the when a financial relationship has ended payment of compensation above what is requirements of an applicable is dependent in each case on the unique called for under a personal service exception. Assume further that the facts and circumstances of the financial arrangement due to a typographical entity provides compensation to the relationship, including the operation of error entered into an accounting system, physician in months 1 through 6 in an the financial relationship as negotiated create the type of ‘‘excess amount other than what is stipulated in between the parties, and it is not compensation’’ or ‘‘insufficient the writing, and the parties discover the possible for us to provide definitive compensation’’ described in our payment discrepancy early in month 7. rules that would be valid in all cases. preamble guidance and the period of For purposes of this illustration, assume We also emphasize that removing the disallowance rules. As we stated in the that a hospital pays a physician $150 period of disallowance regulations is in proposed rule and affirm here, this was per hour for medical director services

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when the writing evidencing the that the actual arrangement between exception at § 411.357(z). Thus, while arrangement between the parties parties does not always coincide with the parties are relying on the exception identifies $140 per hour as the the terms described in the written at § 411.357(z) and for up to 90 physician’s rate of pay. If the $150 per documentation. To properly ascertain consecutive calendar days after, they hour payment is due to an potential noncompliance, it is important would likely be developing the administrative or other operational to determine whether the actual amount documentation necessary to evidence error—that is, the payment discrepancy of compensation paid under the their arrangement for medical director was unintended—the parties may, while arrangement—that is, the amount the services under which the physician is the arrangement is ongoing during the physician actually received, as opposed paid $150 per hour. Depending on the term initially anticipated (in this to the amount stipulated in the written facts and circumstances, the parties may example, during the year of the agreement—exceeded fair market value be able to establish that the arrangement arrangement), correct the error by for the services actually provided. complied with the physician self- collecting the overage (or making up the Assuming that the actual amount paid referral law for its entire duration. underpayment, if that is the case). ($150 per hour) did not exceed fair Finally, as we stated in the proposed We expect entities and the physicians market value and was not determined in rule, in certain instances, the failure to who refer designated health services to any manner that took into account the collect money that is legally owed under them to operate effective compliance volume or value of the physician’s an arrangement may potentially give programs that identify administrative or referrals or other business generated for rise to a secondary (separate) financial operational errors and rectify them the hospital, then the potential relationship between the parties (84 FR 55810). In such circumstances, because promptly. We provided this example in noncompliance would relate primarily the proposed rule and include it in this forgiveness of an obligation or debt may to the failure to properly document the final rule to assure parties that constitute remuneration for purposes of actual arrangement (medical director unintended payment discrepancies that the physician self-referral law, the services compensated at $150 per hour) are corrected in a timely manner do not parties may conclude that the only in writing, provided that the cause a compensation arrangement to means to avoid noncompliance with the arrangement satisfied the remaining fail to satisfy the requirements of an physician self-referral law is to recoup requirements of an applicable exception to the physician self-referral the amount owed under the exception. We emphasize again in this law during the timeframe of the arrangement. Turning back to the final rule that various provisions in our erroneous operation of the arrangement. previous example, and assuming that We did not state in the proposed rule, regulations, including those finalized in the hospital corrected the error nor is it our view, that every error or this final rule, may offer parties a means beginning in month 7 but did not collect mistake will cause a compensation of limiting the scope of potential the excess compensation from the arrangement to fail to satisfy the noncompliance when the actions of the physician, the relevant inquiry is requirements of an exception or that parties differ from their documented whether the uncorrected payment errors every error or mistake must be corrected arrangement such that they create a during months 1 through 6—that is, the in order to maintain compliance with separate compensation arrangement that additional $10 per hour paid to the the physician self-referral law. However, must be analyzed for compliance with physician—gave rise to a secondary if parties identify an error that would the physician self-referral law. To financial relationship (for example, an cause the compensation arrangement to illustrate, assume the actual interest free loan or the complete fail to satisfy the requirements of an arrangement between the parties is for forgiveness of debt) that must satisfy the exception to the physician self-referral the provision of medical director requirements of an applicable law, they cannot simply ‘‘unring the services compensated at $150 per hour exception. bell’’ by correcting it at some date after and all the requirements of an We received the following comments the termination of the arrangement. We applicable exception are satisfied except and our responses follow. discuss below the comments that we for the requirements that the Comment: Commenters generally received regarding our statements in the compensation is set in advance, in supported the removal of the ‘‘period of proposed rule and this example. writing, and signed by the parties. The disallowance’’ provisions from In the proposed rule, we continued new exception finalized at § 411.357(z) § 411.353(c). One commenter stated that our analysis of the example provided, for limited remuneration to a physician these provisions were cumbersome to stating that, if the operational error— may be available to protect the first apply and raised questions for parties that is, payments of $150 per hour $5,000 paid to the physician (if the deciding whether the period of instead of the agreed upon $140 per exception has not yet been utilized disallowance ended. The commenter hour—was not timely discovered and during the current calendar year). In further stated that removal of the rectified, we would analyze the actual addition, the parties could rely on the provisions will help parties to establish compensation arrangement between the special rule for writing and signature the end of the period of disallowance on parties as we would any financial requirements finalized at a case-by-case basis without concern of relationship under the physician self- § 411.354(e)(3), coupled with the having to defend why an arrangement is referral law. For purposes of explaining clarification of the writing requirement believed to have ended prior to the our policies in this final rule, assume at § 411.354(e)(2), to establish that the deeming provision in the regulations. also that the payments to the physician actual amount of compensation One commenter agreed with our did not revert back to the intended $140 provided under the arrangement was set proposal, asserting that removing the per hour for months 7 through 12, and forth in writing within 90 consecutive period of disallowance regulations in the hospital did not recover any of the calendar days of the commencement of their entirety would offer providers $10 per hour paid in excess of the the arrangement via a collection of more flexibility to determine when a intended $140 per hour. Therefore, the documents, including documents financial relationship has ended. In physician was, in fact, paid $150 per evidencing the course of conduct contrast, two commenters requested that hour under the parties’ arrangement for between the parties. The 90-day clock we replace the period of disallowance the provision of medical director would begin when the parties could no regulation to provide for a date certain services. In the proposed rule, we noted longer use (or were no longer using) the by which a compensation arrangement

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would be deemed to end. Specifically, physician organization in whose shoes value exchange for items or services and the commenters (in identical phrasing) the physician stands under the amount of which is over the annual suggested that the arrangement and, § 411.354(c)). limit at § 411.357(k)(1), there is a thus, the period of disallowance, should Response: One-time payments that are rebuttable presumption that the period be deemed to end on the date that is 90 above or below fair market value may be of disallowance ends no later than days after the physician (or immediate an indication of a reward (that is, December 31st of the year in which the family member) last receives payment) for a physician’s referrals. excess nonmonetary compensation is remuneration from the entity under the Referrals are not items or services (see provided. There is no need to adopt the arrangement. section II.D.2.c. of this final rule); commenter’s suggestion with respect to Response: As we stated in the therefore, there is no exception available the period of disallowance for the proposed rule, although the period of to protect the payment for referrals. A payment of excess nonmonetary disallowance provisions were initially compensation arrangement that involves compensation. intended to establish an outside, bright- a one-time payment that is above or Comment: A large number of line limit for the period of disallowance, below fair market value does not lend commenters expressed appreciation for the rules, in application, were overly itself to a one-size-fits-all approach. We our proposed rule guidance on prescriptive and impractical (84 FR decline to adopt the commenter’s remedying payment discrepancies that 55809). We are finalizing our proposal suggestion with respect to one-time occur during the course of a to delete the provisions from payments that are above or below fair compensation arrangement. Most of § 411.353(c) of our regulations. We are market value. these commenters agreed that, if a party not persuaded to establish a rule under With respect to the provision of identifies an administrative or which the period of disallowance would nonmonetary compensation in excess of operational error or a payment end 90 days after the physician (or the annual limit established in discrepancy during the course of an immediate family member) last receives regulation, we offer the following arrangement, the parties do not fall out remuneration from the entity under the observations. In Phase II, when of compliance with the requirements of specific arrangement. Such a rule would explaining that the exception for an applicable exception if the payment be inappropriate in the case of temporary noncompliance does not discrepancy is remedied prior to the end remuneration to a physician that was apply to arrangements that previously of the arrangement. substantially in excess of fair market complied with the exception for Response: As described more fully value or that was determined in a nonmonetary compensation at above and in our responses to other manner that took into account the § 411.357(k), we noted that, in the case comments, an effective compliance volume or value of the physician’s of nonmonetary compensation, it is program should enable parties to referrals to the entity. In addition, the possible to be compliant in the next identify administrative and operational rule suggested by the commenters could year, since the exception permits errors that result in payment extend the period of disallowance in nonmonetary compensation up to $300 discrepancies under a compensation many cases, for instance, in a case annually (69 FR 16057). In Phase III, we arrangement. When payment where a lease arrangement has ended clarified that the aggregate limit in discrepancies are identified and and the noncompliance was related to § 411.357(k)(1) is to be calculated on a rectified in a timely manner, we do not the parties’ failure to properly document calendar year basis (72 FR 51058). Thus, believe that the discrepancies cause a it as required by our regulations. We on January 1 of the next calendar year, compensation arrangement to be out of believe that the determination of when the parties would no longer be over the compliance with the requirements of the the period of disallowance ends is best limit for the current calendar year. Put applicable exception during the time made on a case-by-case basis taking into another way, the period of disallowance that they existed. We are codifying in consideration the facts and for nonmonetary compensation overages regulation at new § 411.353(h) a special circumstances of the specific that are not repaid in accordance with rule for reconciling compensation to compensation arrangement between the § 411.357(k)(1) in most cases will end confirm our policy view. parties. on December 31st of the year in which Comment: One commenter noted that, Comment: Two commenters (in the excess nonmonetary compensation ideally, the impact of an effective essentially identical comments) claimed is provided. However, in rare instances, compliance program will be the that parties often have no way of the period of disallowance may identification of payment discrepancies knowing when certain types of continue if the nonmonetary within the term of an arrangement, compensation arrangements end. The compensation is so valuable that it providing the parties an opportunity to commenters highlighted as particularly cannot fairly be considered the type of cure the error. According to this problematic one-time payments that are token of appreciation anticipated by the commenter, however, even an effective above or below fair market value and exception (72 FR 51059). For example, compliance program may not identify the provision of nonmonetary if a hospital gifts a physician an all errors within the term of an compensation in excess of the annual expensive new car on December 30th of arrangement. The commenter requested limit established in regulation. The a calendar year, the compensation that CMS provide a grace period for commenter suggested that we adopt a arrangement that results from the correcting unintentional errors that rebuttable presumption that a transfer of the remuneration would not would begin upon termination or compensation arrangement resulting appropriately be considered to end the expiration of an arrangement, from a one-time payment in excess or next day. Rather, the remuneration expressing concern, along with other below fair market value or the payment should be viewed as a likely exchange commenters, with a policy that does not of nonmonetary compensation above the for the physician’s future referrals. allow for the correction of errors that are annual limit in § 411.357(k)(1) ends the Under our final regulation at § 411.351, discovered after the termination or earlier of 6 months after the payment it is clear that referrals are not items or expiration of an arrangement. Some of and the date the value causing the one- services for which an entity may these commenters asserted that it is time payment or excess nonmonetary provide remuneration. In essence, with unfair that errors discovered after compensation is corrected (paid or respect to the provision of nonmonetary several years of an ongoing multi-year repaid) by the physician (or the compensation that is not a fair market arrangement could be corrected to ‘‘right

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the ship,’’ while errors discovered even discrepancies that exceeds the period arrangement satisfied all the 1 week after the expiration of a 1-year for resolving temporary noncompliance requirements of an applicable exception arrangement could not. One commenter occurring for reasons beyond the control during the entire duration of the suggested that, provided that the parties of the entity. Specifically, permitting arrangement, after considering the to an arrangement correct any payment parties to reconcile payment reconciliation. discrepancies within 1 year of the discrepancies for a period of 1 year Comment: One commenter asserted termination or expiration of an following the expiration or termination that a result of our policy that payment arrangement, we should consider the of their compensation arrangement or discrepancies reconciled during the arrangement to have satisfied the for an unlimited period of time would course of an arrangement will prevent requirements of the applicable present a risk of program or patient the arrangement from being considered exception for its entire duration. Other abuse. Allowing a lengthy or unlimited out of compliance with the commenters asserted that ‘‘retroactive period of time to correct payment requirements of an exception to the curing’’ of an arrangement (or ‘‘turning discrepancies, especially in the case of physician self-referral law is that parties back the clock’’) should be permitted at significant payment discrepancies, will continue arrangements they would any time. would serve as a disincentive for parties otherwise wish to terminate in order to Response: In Phase II, when we to monitor arrangements for compliance keep the arrangement ‘‘live’’ or ongoing finalized the exception for temporary with the physician self-referral law so that identified payment discrepancies may be reconciled. noncompliance at § 411.353(f), we through an effective compliance Response: The flexibility provided stated that it was applicable in those program. Therefore, we decline to adopt under the final special rule for the commenters’ suggestions regarding instances where an arrangement has reconciling compensation at fully satisfied the requirements of the length of the reconciliation period. § 411.353(h) should provide parties another exception for at least 180 However, we are persuaded that a sufficient time to reconcile identified consecutive calendar days, but has limited ‘‘grace period’’ to reconcile payment discrepancies without fallen out of compliance with that payment discrepancies following the requiring the continuation of exception for reasons beyond the expiration or termination of a arrangements the parties no longer wish control of the entity. We also stated that compensation arrangement would not to have. parties must take steps to rectify their pose a risk of program or patient abuse. Comment: A few commenters asserted noncompliance or otherwise comply We believe that allowing the same that it is unfair that parties could with the statute as expeditiously as period of time to reconcile payment discover an error in the first few months possible under the circumstances (69 FR discrepancies as the period to rectify of a long-term arrangement but not have 16057). In regulation, we provided that noncompliance due to reasons beyond to correct it until the end of the the period of time in which an entity the control of the entity—but no arrangement, yet parties that discover an must rectify the noncompliance must longer—would not pose a risk of error after the termination or expiration not exceed 90 consecutive calendar program or patient abuse. Therefore, we of an arrangement would be unable to days. By the end of the 90-day exception are finalizing at § 411.353(h) a special take even immediate action to cure it in period, parties must either comply with rule that permits an entity to submit order to maintain compliance with the another exception or have terminated claims or bills for designated health physician self-referral law. their otherwise prohibited financial services and permits payment to be Response: We believe the new special relationship. We continue to believe in made to the entity for such designated rule at § 411.353(h) addresses the latter the importance of promptly rectifying health services if all payment part of the commenter’s concern. noncompliance in those instances discrepancies under the parties’ However, the commenter’s assumption where the noncompliance occurs for arrangement (or the arrangement that parties could discover an error in reasons beyond the control of the entity. between the entity and the immediate the first few months of a long-term Our belief that parties should promptly family member of the physician) are arrangement and suffer no consequences reconcile known payment discrepancies reconciled within 90 consecutive under the physician self-referral law if that occur through their own calendar days of expiration or they wait until the end of the administrative or operational errors in termination of the compensation arrangement to reconcile the order to maintain compliance with the arrangement, and following the discrepancies is incorrect. Although the requirements of an exception is a logical reconciliation, the entire amount of new special rule for reconciling extension of this policy. In Phase II, we remuneration for items or services has compensation at § 411.353(h) allows an also stated that the exception for been paid as required under the terms entity to avoid violating the billing temporary noncompliance is not and conditions of the arrangement. To prohibition of the physician self-referral intended to allow an entity to submit maintain consistency with other law if the parties reconcile all payment otherwise prohibited claims or bills regulations that require remedial action discrepancies under their arrangement when it purposefully takes or omits to within certain timeframes, the within 90 consecutive calendar days take actions or engages in conduct that regulation specifies that the following the expiration or termination causes its financial relationship to be reconciliation must occur within the of the arrangement, parties that fail to noncompliant with the requirements of specified number of consecutive reconcile known payment discrepancies an exception (69 FR 16057). It is our calendar days. Under the special rule risk establishing a second financial view that the knowing failure to comply for reconciling compensation at final relationship (for example, through the with the terms of an arrangement § 411.353(h), if the parties to a forgiveness of debt or the provision of negotiated by the parties is a purposeful compensation arrangement reconcile all an interest-free loan) that must satisfy or affirmative action or omission of the payment discrepancies in the the requirements of an applicable parties. It does not qualify as a reason arrangement within this timeframe, the exception in order to avoid the beyond the control of the entity, and we entity may submit a claim or bill and prohibitions of the physician self- are not persuaded by the commenters payment may be made to the entity for referral law. If the payment discrepancy that we should allow a period of time designated health services referred by or the failure to reconcile it (that is, for reconciliation of known payment the physician, assuming their recover excess compensation or collect

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compensation owed) is significant different formula for the compensation amount of money is at issue, a enough to give rise to a separate so that it does not run afoul of the reasonable effort might very well require financial relationship, that financial volume or value standard. To the extent a hospital, for example, to sue a relationship must satisfy the the commenter was suggesting this physician or physician practice, but a requirements of an applicable exception approach only with respect to the types lawsuit might not be reasonable for a once it exists. The commencement date of errors we discussed in the proposed dispute over a small amount of money of the second financial relationship rule, we believe our final policy or where the costs of the action would depends on the facts and circumstances, addresses the commenter’s concerns. dwarf the amount owed. The such as the amount of excess Comment: One commenter requested commenter also asserted that a compensation or unpaid compensation clarification whether a hospital that has compromise of the amount owed may be and how long the known overpayment paid a physician excess compensation justified if the physician or physician or underpayment of the compensation due to a technical error could ‘‘cure’’ the practice has equitable or legal defenses. has continued. For example, a large error by offsetting the amount to be Response: As we explained in the amount of excess compensation that is recouped against future compensation proposed rule, the now-removed period not recovered may give rise to a over multiple years to alleviate hardship of disallowance rules were never financial relationship in a shorter and navigate complex state employment intended as anything more than amount of time than a very small laws related to wage recoupment and deeming provisions so that parties could amount of unrecovered excess penalties charged to employees. know the absolute latest date that the compensation or unpaid compensation. Response: The special rule for period of disallowance would end when Thus, even if the entity is deemed not reconciling compensation at final the reason for the failure of their to have violated the physician self- § 411.353(h) requires that the compensation arrangement to satisfy the referral law’s billing prohibition once reconciliation of payment discrepancies requirements of an exception is the the original compensation arrangement occurs no later than 90 consecutive payment of excess compensation or the is ultimately reconciled, the entity calendar days following the expiration failure to pay all amounts due under the would be prohibited from submitting a or termination of a compensation arrangement (84 FR 55809). The now- claim or bill for a designated health arrangement. The commenter’s inquiry removed period of disallowance service referred by the physician relates to an ongoing compensation provisions never stated that a party beginning at the point where the second arrangement between the hospital and must recover any excess payments it has financial relationship exists. the physician. In such circumstances, made or recover any underpayment Comment: One commenter suggested the payment discrepancy could be owed to it in order to achieve that we allow parties an established recovered through an offset against compliance with the physician self- amount of time after the end of a future compensation. However, if the referral law, nor do we adopt such a financial relationship to cure parties wish to ensure that their policy here. However, we reiterate the noncompliance with one or more compensation arrangement is deemed to following points. requirements of an applicable satisfy the requirements of an applicable First, the new special rule for exception. The commenter did not exception throughout its entire reconciling compensation arrangements expressly limit its suggestions to duration, if their compensation permits the submission of a claim or bill payment discrepancies due to clerical arrangement expires or terminates and the payment of the claim or bill for errors or other unintentional deviation before the entire amount of the payment a designated health service even if a from the terms of a compensation discrepancy is recouped, the remaining compensation arrangement does not arrangement. The commenter asserted amounts must be recouped within 90 operate as intended with respect to its that this approach would acknowledge consecutive calendar days following the compensation terms, provided that: (1) the realities of the rhythms of expiration or termination of a No later than 90 consecutive calendar compliance programs and recognize that compensation arrangement. days following the expiration or it can take some time to identify, Comment: One commenter expressed termination of a compensation quantify, and cure defects in a financial concern with what it interpreted as a arrangement, the entity and the relationship with a referring physician. mandate for a party to recover any physician (or immediate family member The commenter claimed that this excess payments it has made in order to of a physician) that are parties to the approach would not absolve an entity of achieve compliance with the physician compensation arrangement reconcile all its responsibility to structure its self-referral law. The commenter discrepancies in payments under the financial relationships with physicians discussed the difficulty entities face arrangement such that, following the to comply with the requirements of an when trying to recover excess payments reconciliation, all remuneration for applicable exception or to monitor its or collect unmade payments from items or services has been paid as administration of those relationships. physicians and physician practices. The required under the terms and conditions Response: We are not adopting the commenter explained that disputes over of the arrangement; and (2) except for commenter’s suggestion to allow the whether excess payments have been the discrepancies in payments described correction of any aspect of a made or are owed are common and in paragraph (h)(1), the compensation compensation arrangement that fails to contribute to the difficulty entities face arrangement fully complies with an satisfy the requirement of the exception recovering excess payments or applicable exception. This regulation upon which the parties rely. As we underpayments in order to achieve assures an entity that its claims were not understand the commenter’s suggested compliance. The commenter suggested prohibited under section 1877(a)(1) of approach, parties would be able to that requiring the party to which money the Act or our regulations at retroactively restructure compensation is owed to make a ‘‘reasonable effort’’ to § 411.353(b). However, it is a deeming arrangements that failed to satisfy the be made whole would be sufficient, provision only and does not require the requirements of an applicable exception with the determination of ‘‘reasonable entity to reconcile payment for any reason. This approach would effort’’ dependent on the facts and discrepancies. allow parties to retroactively restructure circumstances of the arrangement, such Second, if payment discrepancies are compensation terms to comply with fair as the amount of money at issue. The not reconciled within 90 consecutive market value requirements or apply a commenter asserted that, if a large calendar days following the expiration

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or termination of a compensation collect amounts due under their at § 411.354(c) specifies that the arrangement, the parties may not compensation arrangement. arrangement involving remuneration ‘‘unring the bell’’ on any noncompliance Finally, as discussed in section may be direct or indirect, but otherwise resulting from the payment II.D.2.e. of this final rule, parties to a essentially incorporates the statutory discrepancies. In the event that the legitimate dispute regarding a definition. Neither of these definitions compensation arrangement failed to compensation arrangement may utilize limits a compensation arrangement to satisfy the requirements of an applicable the exception for isolated transactions at that described in written exception due to discrepancies in § 411.357(f) to protect the compensation documentation. Although many of the payment as required under the terms arrangement that arises from the exceptions to the physician self-referral and conditions of the arrangement, the forgiveness of an obligation related to law require that the arrangement period of noncompliance would begin at the settlement. However, the settlement between the parties is documented in the time the payment discrepancies of a dispute over payment discrepancies writing in order to avoid the law’s caused the arrangement to fail to satisfy that confers remuneration on the party prohibitions, the actions of the parties, the requirements of the exception. As that is relieved of some or all of its regardless of what they have described in response to other obligation to refund excess payments or documented an arrangement to be, comments below, not all payment pay amounts due under the original constitute the compensation discrepancies necessarily result in arrangement does not retroactively arrangement between them. noncompliance with the physician self- return the original arrangement to The commenters assert that, once a referral law. compliance with the requirements of an compensation arrangement is Third, although recoupment of exception. documented in writing and satisfies the amounts due to payment discrepancies Comment: A few commenters remaining requirements of an applicable questioned our analysis that the actual is not required to show that the period exception, the referral and billing activities and remuneration between of disallowance has ended, referrals are prohibitions of the physician self- parties constitutes the arrangement that prohibited and claims may not be referral law will not and cannot attach must be analyzed for compliance with submitted during the period that a from that point forward and during the the physician self-referral law. These financial relationship fails to satisfy the course of the arrangement, even if the commenters argued that the requirements of an applicable parties deviate from the terms and ‘‘arrangement’’ is what the parties exception. If a physician was regularly conditions—including the payment intended (as referenced in a written terms and conditions—of the paid more for services called for under agreement or otherwise). The documented arrangement. If this were an arrangement (due to an overpayment) commenters also stated a belief that this the case, parties would only need to or regularly paid less for items or position is unsupported by the statute. document an arrangement that, on its services actually received (due to failure Another commenter asserted that, once face, would satisfy the requirements of to pay all amounts owed), and the the parties have memorialized in an applicable exception. As noted, the discrepancies were not reconciled writing an arrangement that would physician self-referral law requires that, during the course of the arrangement satisfy the requirements of an applicable where a compensation arrangement (or, under the policies finalized in this exception, if the arrangement satisfied exists between a physician (or an final rule, within 90 consecutive all the requirements of an applicable immediate family member of the calendar days of the termination or exception at its inception, the referral physician) and the entity to which the expiration of the arrangement), from the and billing prohibitions of the physician physician makes referrals for designated point of the variance on, the self-referral law will not and cannot health services, unless the arrangement would not satisfy the attach during the course of the compensation arrangement satisfies all requirements of an applicable arrangement. the requirements of an applicable exception. Parties are free to Response: As we stated in Phase II exception, the physician is prohibited demonstrate that a financial relationship and continue to believe, section 1877 of from making referrals and the entity has ended as they see fit. As always, in the Act is clearly intended to make from submitting claims for designated the absence of a financial relationship, entities responsible for monitoring their health services. The physician self- the physician self-referral law is not compensation arrangements with referral law does not permit the implicated. physicians (69 FR 16112). Unless a physician to make referrals and the Fourth, we do not believe that compensation arrangement between a entity to submit claims for designated ‘‘reasonable efforts’’ to recover excess physician (or immediate family member health services merely because an payments or collect amounts due are of a physician) and an entity satisfies arrangement they documented would equivalent to the reconciliation of the requirements of an applicable comply with the requirements of an payment discrepancies. A policy exception, section 1877 of the Act and applicable exception. The actions of the requiring that the parties make § 411.353(a) and (b) of our regulations parties, regardless of what they have ‘‘reasonable efforts’’ would present prohibit a physician from making a documented an arrangement to be, compliance and enforcement referral for designated health services constitute the compensation challenges, and would not provide for and prohibit an entity from submitting arrangement between them. The the certainty that reduces burden on a claim to Medicare or bill any commenter’s assertion that the actual stakeholders. Moreover, we do not individual, third party payor, or other arrangement that exists between parties believe that the mere undertaking of entity for the designated health services need not satisfy the requirements of an ‘‘reasonable efforts’’ to recover excess furnished pursuant to a prohibited exception and the law’s prohibitions payments or collect amounts due is referral. As set forth in section would not apply as long as they have sufficient to warrant a deeming 1877(h)(1) of the Act, the term documentation of some arrangement provision allowing the submission of ‘‘compensation arrangement’’ means they state they intended, if true, would claims or bills for designated health any arrangement involving reduce the statute to a paper tiger. services and the payment for such remuneration between a physician (or To be clear, for purposes of services where parties make ‘‘reasonable an immediate family member of such determining compliance with the efforts’’ to recover excess payments or physician) and an entity. The regulation physician self-referral law, the

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arrangement under which the parties and are, therefore, unaware of the need or entitled to receive any of the financial operate is analyzed to determine to reconcile any payment discrepancies. benefits of ownership or investment, whether it satisfies all the requirements We agree that not all transfers of including, but not limited to, the of an applicable exception. As discussed remuneration create compensation distribution of profits, dividends, in the responses to other commenters, a arrangements. (See 66 FR 921 and 69 FR proceeds of sale, or similar returns on slight deviation from the terms set forth 16113.) In addition, theft generally does investment (73 FR 48694). The concept in the written documentation of an not create a compensation arrangement of titular ownership or investment arrangement may not result in a between the thief and the victim. For interests set forth in the FY 2009 IPPS different actual arrangement between example, the theft of items, the use of final rule applied only to the stand in the parties. office space that is not included in a the shoes provisions at § 411.354(c) Comment: Some commenters lease, and the use of equipment during which pertain to compensation expressed concern with a policy under periods outside those included in a arrangements. Because we were which—they assumed—even a single lease would not create a compensation responding to a comment on the 1998 mistake, for instance if a check for arrangement between the party whose proposed rule (and the Phase I single rental payment during an assets have been coopted and the party comments thereafter) regarding the arrangement was written for the wrong that took them or used them without application of the exceptions for amount, would turn the original permission or payment. Further, a slight compensation arrangements, we did not arrangement into a different actual deviation from the operation of the propose to extend the concept of titular arrangement. One of these commenters arrangement as anticipated and ownership or investment interests to the stated its disagreement that a mere documented (where written provisions at § 411.354(b) pertaining to mistaken payment of remuneration documentation is required under the ownership or investment interests. creates a financial relationship within applicable exception) that results in the Separately, we had previously the meaning of the physician self- payment of too much or too little concluded in a 2005 advisory opinion referral law, but conceded that, if an compensation under an arrangement— (CMS–AO–2005–08–01) that, for entity discovers that it has overpaid a for example, in the case of a single purposes of section 1877(a) of the Act, physician or has been underpaid by a rental payment over the course of an physician-shareholders of a group physician and fails to make reasonable entire lease arrangement that was paid practice who did not receive any of the efforts to recover the excess in the wrong amount—may not require purchase and ownership rights or compensation or recover the shortfall, a reconciliation by the party receiving the financial risks and benefits typically new financial relationship in the form of overpayment or failing to make the full associated with stock ownership would a gift (that is, the forgiveness of debt) payment due, especially if the parties not be considered to have an ownership may arise, for which there would be no are not aware of the discrepancy. or investment interest in the group applicable exception under the However, where a party is aware of the practice. physician self-referral law. mistakes (or payment discrepancies) in Response: We did not state in the In the proposed rule, we proposed to the operation of its arrangements, as the proposed rule, nor is it our view, that extend the concept of titular ownership commenter stated, the failure to correct every error or mistake will cause a or investment interests to our rules the mistake may indeed establish a compensation arrangement to fail to governing ownership or investment second financial relationship between satisfy the requirements of an exception interests at § 411.354(b). We explained the parties, depending on the facts and or that every error or mistake must be that, under proposed § 411.354(b)(3)(vi), circumstances. corrected in order to maintain ownership and investment interests compliance with the physician self- 4. Ownership or Investment Interests would not include titular ownership or referral law. However, if parties identify (§ 411.354(b)) investment interests. Consistent with the FY 2009 IPPS final rule, a ‘‘titular an error that would cause the a. Titular Ownership or Investment compensation arrangement to fail to ownership or investment interest’’ Interest (§ 411.354(b)(3)(vi)) satisfy the requirements of an exception would be an interest that excludes the to the physician self-referral law, they In the FY 2009 IPPS final rule, we ability or right to receive the financial cannot simply ‘‘unring the bell’’ by introduced the concept of titular benefits of ownership or investment, correcting it at some date after the ownership or investment interests in the including, but not limited to, the expiration or termination of the context of our rulemaking pertaining to distribution of profits, dividends, arrangement. the ‘‘stand in the shoes’’ provisions at proceeds of sale, or similar returns on Given the individual commenter’s § 411.354(c) (73 FR 48693 through investment. As noted in the FY 2009 concession that the failure to make 48699). Under the provisions finalized IPPS final rule, whether an ownership reasonable efforts to recover excess in the FY 2009 IPPS final rule, for or investment interest is titular is compensation or a shortfall in payment purposes of determining whether a determined by whether the physician may establish a new financial compensation arrangement between an has any right to the financial benefits relationship in the form of a gift (that is, entity and a physician organization is through ownership or investment (73 FR forgiveness of debt) for which there deemed to be a compensation 48694). We are finalizing would be no applicable exception under arrangement between the entity and the § 411.354(b)(3)(vi) as proposed. The new the physician self-referral law, we physician owners, employees, and regulation at § 411.354(b)(3)(vi) should assume that commenter’s assertion that contractors of the organization, a afford providers and suppliers with a mere mistaken payment of physician whose ownership or greater flexibility and certainty under remuneration under a compensation investment interest in the physician our regulations, especially in states arrangement does not create a second, organization is merely titular in nature where the corporate practice of separate financial relationship within is not required to stand in the shoes of medicine is prohibited. For the reasons the meaning of the physician self- the physician organization (73 FR similar to those stated in our advisory referral law refers to the situation in 48694). We explained that an ownership opinion CMS–AO–2005–08–01, namely which the parties never identify the or investment interest is considered to that a physician with a titular mistaken payment (or underpayment) be ‘‘titular’’ if the physician is not able ownership in an entity does not have a

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right to the distribution of profits or the employer, would instead be considered physician employees may find it proceeds of sale and, therefore, does not to be part of an employee’s overall necessary or practical, for reasons of have a financial incentive to make compensation. Federal law, State law, or taxation, to referrals to the entity in which the We made no changes to structure a retirement plan using a titular ownership or investment interest § 411.354(b)(3)(i) in Phase II. However, holding company. By way of example, exists, our interpretation and revised after publishing Phase II, we received a assume a home health agency desires to definition of ‘‘ownership or investment comment stating that, contrary to our sponsor a retirement plan for its interest’’ does not pose a risk of program intent, some physicians were using their employees and elects to establish such or patient abuse. We are finalizing retirement plans to purchase or invest in plan using a holding company whose § 411.354(b)(3)(vi) as proposed, without other entities (that is, entities other than primary asset will be the home health modification. the entity that sponsored the retirement agency. To effectuate the retirement We received the following comment plan) to which the physicians were plan, the home health agency’s assets and our response follows. making referrals for designated health are transferred to or purchased by the Comment: Nearly all the commenters services. We made no changes to holding company, which then employs that addressed the proposal to revise § 411.354(b)(3)(i) in Phase III, but the physicians and other staff of the § 411.354(b)(3) supported excluding proposed in the CY 2008 PFS proposed home health agency. The holding titular ownership from qualifying as an rule to address the potential abuse company sponsors the retirement plan ownership or investment interest under described by the commenter on Phase II for its employees, offering the § 411.354(b). One commenter (72 FR 38183). After reviewing the employees (including physician emphasized that the proposal, if comments received in response to that employees) an interest in the holding finalized, would afford physicians with proposal, in the FY 2009 IPPS final rule, company. Under our current regulation greater flexibility, especially in States we finalized changes to at § 411.354(b)(3)(i), the physician’s where the corporate practice of § 411.354(b)(3)(i) that restricted the interest in the holding company would medicine is prohibited. retirement interest carve-out to an not be considered an ownership or Response: We have long recognized interest in an entity that arises from a investment interest, because the that an interest in an entity that retirement plan offered by the entity to physician is employed by the holding excludes the ability or right to receive the physician (or an immediate family company, the holding company the financial benefits of ownership member) through the physician’s (or sponsors the retirement plan, and the should not be considered to constitute immediate family member’s) physician’s ownership interest in the an ownership or investment interest for employment with that entity (73 FR holding company arises through the purposes of the physician self-referral 48737 through 48738). Under the retirement plan sponsored by the law. (See CMS advisory opinion CMS– current regulation at § 411.354(b)(3)(i), holding company. However, because the AO–2005–08–01.) Our proposal at if, through his or her employment by physician has an interest in the § 411.354(b)(3)(vi) codifies this policy. Entity A, a physician has an interest in retirement plan that owns the holding The policy we are explicitly articulating a retirement plan offered by Entity A, company, and the holding company in regulatory text at § 411.354(b)(3)(vi) any interest the physician may have in will provide stakeholders greater owns the home health agency, the Entity A by virtue of his or her interest physician has an indirect ownership or certainty under our regulations. We in the retirement plan would not caution that any compensation investment interest in the home health constitute an ownership or investment agency that would not be excluded arrangement between a physician and interest for purposes of section 1877 of under § 411.354(b)(3)(i) and may not an entity in which the physician or an the Act. On the other hand, if the satisfy the requirements of an applicable immediate family member of the retirement plan sponsored by Entity A exception at § 411.356. physician holds only a titular purchased or invested in Entity B, the ownership or investment interest must physician would have an interest in It is our understanding that a nonetheless satisfy all the requirements Entity B that would not be excluded retirement plan structure involving of an applicable exception in § 411.355 from the definition of ‘‘ownership or ownership of a holding company and or § 411.357. investment interest’’ for purposes of the indirect ownership of a legally separate physician self-referral law. For the entity (as defined at § 411.351) may be b. Employee Stock Ownership Program particularly advantageous or necessary (§ 411.354(b)(3)(vii)) physician to make referrals for designated health services to Entity B, in certain circumstances for the We stated in the 1998 proposed rule the ownership or investment interest in establishment of an employee stock that an interest in an entity arising Entity B would have to satisfy the ownership plan (ESOP). An ESOP is an through a retirement fund constitutes an requirements of an applicable individually designed stock bonus plan, ownership or investment interest in the exception. We explained in the FY 2009 which is qualified under Internal entity for purposes of section 1877 of IPPS final rule that it would pose a risk Revenue Code (IRC) section 401(a), or a the Act (63 FR 1708). Our interpretation of program or patient abuse to permit a stock bonus and a money purchase plan, was based on the premise that a physician to own another entity that both of which are qualified under IRC retirement interest in an entity creates a furnishes designated health services section 401(a), and which are designed financial incentive to make referrals to (other than the entity which employs to invest primarily in qualifying the entity. In Phase I, we reconsidered the physician) through his or her employer securities. It is our the issue and withdrew the statement retirement plan, because the physician understanding that ESOPs must be regarding retirement interests that we could then use the retirement interest structured to comply with certain made in the 1998 proposed rule (66 FR carve-out to skirt the prohibitions of the safeguards under the Employee 870). As finalized in Phase I, physician self-referral law (73 FR 48737 Retirement Income Security Act of 1974 § 411.354(b)(3)(i) excluded an interest in through 48738). (ERISA) (Pub. L. 93–406), including a retirement plan from the definition of Since we published the 2009 IPPS certain nondiscrimination rules and ‘‘ownership or investment interest.’’ We final rule, stakeholders have informed vesting rules that, among other things, stated that retirement contributions, us that, in certain cases, employers do not allow an employee to receive the including contributions from an seeking to offer retirement plans to value of his or her employer stocks held

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through the retirement plan until at commenter on Phase II, we sought Response: We are convinced by the least 1 year after separation from the comment as to whether it is necessary commenters that the legal and employer. Given the statutory and to restrict the number or scope of regulatory protections applicable to regulatory safeguards that exist for entities owned by an ESOP that would ESOPs are sufficient to prevent program ESOPs, we believe that an interest in an not be considered an ownership or or patient abuse, and we are finalizing entity arising through participation in investment interest of its physician § 411.354(b)(3)(vii) without any an ESOP merits the same protection employees. It is our understanding that additional requirements. We remind from the physician self-referral law’s an ESOP is designed to invest primarily parties that employer contributions to prohibitions as an interest in an entity in ‘‘qualifying employer securities,’’ but the ESOP are considered part of an that arises from a retirement plan the ESOP may also invest in other employee’s overall compensation offered by that entity to the physician securities. We sought comment on arrangement with his or her employer through the physician’s employment whether the exclusion from the (see 66 FR 870). Thus, when with the entity. We do not believe that definition of ‘‘ownership or investment determining whether a compensation excluding from the definition of interest’’ should apply only to an arrangement satisfies all the ‘‘ownership or investment interest’’ an interest in an entity arising from an requirements of an applicable interest in an entity that arises through interest in ‘‘qualifying employer exception, including the requirements participation in an ESOP qualified securities’’ that are offered to a pertaining to fair market value and the under IRC section 401(a) poses a risk of physician as part of an ESOP. Finally, volume or value of the physician’s program or patient abuse, and we are we sought comment on whether the referrals, employer contributions to the finalizing our proposal at revision to § 411.354(b)(3)(vii) is ESOP must be considered as part of the § 411.354(b)(3)(vii) to remove such necessary; that is, whether existing employee’s compensation under the interests from the definition of § 411.354(b)(3)(i) affords entities arrangement. ‘‘ownership or investment interest’’ for furnishing designated health services 5. Special Rules on Compensation purposes of section 1877 of the Act. To sufficient regulatory flexibility to Arrangements (§ 411.354(e)) provide regulatory flexibility in structure nonabusive retirement plans, structuring retirement plans, including ESOPs or other plans that In the CY 2008 PFS proposed rule, we § 411.354(b)(3)(vii) is not restricted to an involve holding companies (84 FR proposed an alternative method for interest in an entity that both employs 55812). satisfying certain requirements of some the physician and sponsors the We are finalizing § 411.354(b)(3)(vii) of the exceptions in §§ 411.355 through retirement plan. as proposed, without modification. 411.357 (72 FR 38184 through 38186). To illustrate our policy, assume that We received the following comment We explained that, although we do not a holding company is owned by its and our response follows. have the authority to waive violations of employees, including physician Comment: Nearly all the commenters the physician self-referral law, we do employees, through an ESOP, and that that addressed the proposal at have the authority under section the holding company owns a separate § 411.354(b)(3)(vii) favored excluding an 1877(b)(4) of the Act to implement an legal entity that furnishes designated interest in an entity that arises by virtue alternative method for satisfying the health services (an ‘‘entity’’ for purposes of a physician’s participation in an requirements of an exception. The of section 1877 of the Act). Under ESOP from the regulation regarding proposed method would have required, § 411.354(b)(3)(vii), for purposes of the what constitutes an ownership or among other things, that an entity self- physician self-referral law, the investment interests under § 411.354(b). disclose the facts and circumstances of physician’s interest in the ESOP will not Commenters stated that no additional the arrangement at issue and that CMS constitute an ownership or investment safeguards or requirements are make a determination that the interest in the holding company or the necessary. Two commenters pointed to arrangement satisfied all but the legally separate entity the holding specific safeguards related to ESOPs that ‘‘procedural or ‘form’ requirements’’ of company owns. As with the current are imposed by ERISA, which they an exception (72 FR 38185). We cited retirement interest exclusion at asserted are sufficient to protect against the signature requirement of the § 411.354(b)(3)(i), employer program or patient abuse. One of the exception for personal service contributions to the ESOP on behalf of commenters highlighted that ERISA arrangements at § 411.357(d)(1) as an an employed physician will be requires a fiduciary to act with care, example of a procedural or ‘‘form’’ considered part of the physician’s skill, prudence, and diligence under the requirement, and explained that the overall compensation and will have to circumstances of a prudent person alternative method would not be meet the requirements of an applicable acting in a similar capacity, and ESOPs available for violations of requirements exception for compensation are required to have an independent such as compensation that is fair market arrangements at § 411.357 or the appraiser to establish value for all value, set in advance, and not physician’s individual referrals must securities which are not readily tradable determined in any manner that takes satisfy the requirements of an applicable on a market. The other commenter into account the volume or value of a exception in § 411.355. emphasized that ESOPs are also physician’s referrals. In the proposed rule, we sought regulated by the U.S. Department of In the FY 2009 IPPS final rule, we did comments on whether the safeguards Treasury. This commenter highlighted not finalize the alternative method that are imposed by ERISA are sufficient anti-abuse rules for ESOPs in section proposed in the CY 2008 PFS proposed for purposes of the physician self- 409(p) of the Internal Revenue Code, rule. Instead, relying on our authority referral law to ensure that an ownership which mandate broad-based employee under section 1877(b)(4) of the Act, we or investment interest in an ESOP does ownership and establish strict finalized a rule for temporary not pose a risk of program or patient repercussions for violations. According noncompliance with signature abuse and, if not, what additional to this commenter, since their requirements at § 411.353(g) (73 FR safeguards we should include to ensure enactment, these rules have been highly 48705 through 48709). As finalized in that such interests do not pose a risk of effective in ensuring that ESOPs serve the FY 2009 IPPS final rule, § 411.353(g) program or patient abuse. To prevent their intended purpose and are not applied only to the signature the kind of abuses identified by the subject to abuse. requirement of an applicable exception

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in § 411.357. We declined to extend the designated health services (80 FR 71316 at § 411.354(e) a special rule on special rule for temporary through 71317). In response, we noted compensation arrangements, which noncompliance to any other procedural that the special rule at § 411.353(g) codified in our regulations the or ‘‘form’’ requirement of an exception applied only to temporary clarification of the writing requirement (73 FR 48706) or to noncompliance noncompliance with the signature found at section 1877(h)(1)(D) of the Act arising from ‘‘minor payment errors’’ (73 requirement of an applicable exception, (83 FR 59715 through 59717). In FR 48703). The special rule at and we declined to extend the special addition, we removed the 3-year § 411.353(g) permitted an entity to rule to the writing requirement of limitation on the special rule on submit a bill and receive payment for a various exceptions at § 411.357. We temporary noncompliance with designated health service if the stated that a ‘‘grace period’’ for signature requirements at § 411.353(g)(2) compensation arrangement between the satisfying the writing requirement could in order to align the regulatory referring physician and the entity fully pose a risk of program or patient abuse; provision at § 411.353(g) with section complied with the requirements of an for example, if the rate of compensation 1877(h)(1)(E) of the Act. We proposed, applicable exception at § 411.357, is not documented before a physician in the alternative, to delete § 411.353(g) except with respect to the signature provides services to an entity, the entity in its entirety and to codify section requirement, and the parties obtained could adjust the rate of compensation 1877(h)(1)(E) of the Act in the newly the required signatures within 90 during the grace period in a manner that created special rules on compensation consecutive calendar days if the failure takes into account the volume or value arrangements at § 411.354(e). However, to obtain the signatures was inadvertent, of the physician’s referrals (80 FR we declined to finalize the alternative or within 30 consecutive calendar days 71317). We added that an entity could proposal in the CY 2019 PFS final rule, if the failure to obtain the signatures not satisfy the set in advance because we believed it would be less was not inadvertent (73 FR 48706). requirement at the outset of an disruptive to stakeholder compliance Entities were allowed to use the special arrangement if the only documents efforts to amend already-existing rule at § 411.353(g) only once every 3 stating the compensation term of an § 411.353(g). years with respect to the same arrangement were generated after the As stated in our proposed rule, we physician. We stated that we would arrangement began. Finally, we have reconsidered our policy on evaluate our experience with the special reminded parties that, even if an temporary noncompliance with the rule at § 411.353(g) and that we may arrangement is not sufficiently signature and writing requirements of propose modifications, either more or documented at the outset, depending on various compensation arrangement less restrictive, at a later date (73 FR the facts and circumstances, exceptions (84 FR 55813 through 48707). Subsequently, in the CY 2016 contemporaneous documents created 55814). In our administration of the PFS final rule, we removed the during the course of an arrangement SRDP, we have reviewed numerous distinction between failures to obtain may allow parties to satisfy the writing compensation arrangements that fully missing signatures that were inadvertent requirement and the set in advance satisfied all the requirements of an and not inadvertent, thereby allowing requirement for referrals made after the applicable exception, including all parties up to 90 consecutive calendar contemporaneous documents were requirements pertaining to fair market days to obtain the missing signatures (80 created (80 FR 71317). value compensation and the volume or FR 71333). As discussed in further value of referrals, except for the writing Section 50404 of the Bipartisan or signature requirements. In many detail in this section of the final rule, Budget Act of 2018 (Pub. L. 115–123, cases, there are short periods of following a revision to section 1877 of enacted 9, 2018) (BiBA) added noncompliance with the physician self- the Act, in the CY 2019 PFS final rule, provisions to section 1877(h)(1) of the referral law at the outset of a we removed the provision limiting the Act pertaining to the writing and compensation arrangement, because the use of the special rule at § 411.353(g) to signature requirements in certain parties begin performance under the once every 3 years with respect to the exceptions applicable to compensation arrangement before reducing the key same physician (83 FR 59715 through arrangements. As amended, section terms and conditions of the arrangement 59717). 1877(h)(1)(D) of the Act provides that to writing. As long as the compensation In the CY 2016 PFS final rule, we the writing requirement in various arrangement otherwise meets all the clarified that the writing requirement of exceptions applicable to compensation requirements of an applicable various exceptions in § 411.357 can be arrangements ‘‘shall be satisfied by such exception, and the parties memorialize satisfied with a collection of documents, means as determined by the Secretary,’’ the arrangement in writing and sign the including contemporaneous documents including by a collection of documents, written documentation within 90 evidencing the course of conduct including contemporaneous documents consecutive calendar days, we do not between the parties (80 FR 71314 evidencing the course of conduct believe that the arrangement poses a risk 11 through 71317). In response to our between the parties. Section of program or patient abuse. Therefore, proposals regarding satisfaction of the 1877(h)(1)(E) of the Act created a it is appropriate to provide entities and writing requirement, one commenter statutory special rule for temporary physicians flexibility under our rules to requested that CMS permit a 60- or 90- noncompliance with signature satisfy the writing or signature day grace period for satisfying the requirements, providing that the requirement of an applicable exception writing requirement of an applicable signature requirement of an applicable within 90 consecutive calendar days of exception, stating that such a grace exception shall be satisfied if the the inception of a compensation period is needed for last minute arrangement otherwise complies with arrangement. arrangements between physicians and all the requirements of the exception Relying on our authority at section entities to which they refer patients for and the parties obtain the required 1877(h)(1)(D) of the Act, which grants signatures no later than 90 consecutive the Secretary the authority to determine 11 Our guidance on the writing requirement was calendar days immediately following the means by which the writing subsequently codified in statute in section 1877(h)(1)(D) of the Act and incorporated into our the date on which the compensation requirement of a compensation regulations at § 411.354(e). See 83 FR 59715 arrangement became noncompliant. In arrangement exception may be satisfied, through 59717. the CY 2019 PFS final rule, we finalized and section 1877(h)(1)(E) of the Act,

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which establishes a statutory rule for expires or is terminated before the determining compensation) is set out in temporary noncompliance with compilation is complete or the end of writing before the furnishing of items or signature requirements, we proposed to the ‘‘grace period,’’ whichever comes services for which the modified create a special rule for noncompliance first, the parties may not rely on the compensation is to be paid, and it with the writing or signature special rule at § 411.354(e)(4) to specifically provides that parties do not requirement of an applicable exception establish compliance with the physician have 90 days under § 411.354(e)(4) to for compensation arrangements. self-referral law for their arrangement. reduce the modified compensation Specifically, we proposed to delete However, depending on the facts and terms to writing. We emphasize that the § 411.353(g) in its entirety, codify the circumstances, the new exception for requirements in new § 411.354(d)(1)(ii), statutory rule for noncompliance with limited remuneration to a physician at including the writing requirement, signature requirements at section § 411.357(z), which does not include a apply only when the parties modify the 1877(h)(1)(E) of the Act in a special rule writing or signature requirement, might compensation (or formula for on compensation arrangements at be available to protect a short-term determining compensation) during the § 411.354(e)(3), and incorporate a arrangement. course of an arrangement. special rule for noncompliance with the We stressed in the proposed rule and In this final rule, the current special writing requirement into the new reiterate here that our proposal to rule at § 411.354(d)(1) is redesignated as special rule at § 411.354(e)(3). In this permit parties up to 90 consecutive § 411.354(d)(1)(i). To underscore that final rule, the special rule on writing calendar days to satisfy the writing this rule is merely an optional ‘‘deeming and signature requirements is requirement of an applicable exception provision’’ and not a requirement, we designated as § 411.354(e)(4) and a new does not amend, nor does it affect, the are replacing the phrase ‘‘is considered rule on electronic signatures is included requirement under various exceptions ‘set in advance’ ’’ with ‘‘is deemed to be in our regulations at § 411.354(e)(3). in § 411.357 that compensation must be ‘set in advance’.’’ We are also deleting set in advance. The amount of or the phrase ‘‘and may not be changed or Under the special rule for writing and formula for calculating the modified during the course of the signature requirements at compensation must be set in advance arrangement in any manner that takes § 411.354(e)(4), the writing requirement and the arrangement must satisfy all into account the volume or value of or the signature requirement is deemed other requirements of an applicable referrals or other business generated by to be satisfied if: (1) The compensation exception, other than the writing or the referring physician,’’ because the arrangement satisfies all the signature requirements, in order for requirements for modifying the requirements of an applicable exception parties to an arrangement to establish compensation are codified in this final other than the writing or signature compliance with the physician self- rule at § 411.354(d)(1)(ii). requirement(s); and (2) the parties referral law by relying on Under § 411.354(d)(1)(i), obtain the required writing or § 411.354(e)(4). Section 1877(h)(1)(D) of compensation is deemed to be set in signature(s) within 90 consecutive the Act provides the Secretary with the advance if the compensation is ‘‘set out calendar days immediately after the date authority to determine the means by in writing before the furnishing of items on which the arrangement failed to which the writing requirement may be or services’’ and the other requirements satisfy the requirement(s) of the satisfied, but it does not provide the of § 411.354(d)(1)(i) are met. In the applicable exception. A party may rely Secretary similar authority with respect proposed rule, we stated that, because on § 411.354(e)(4) if an arrangement is to the set in advance requirement. the special rule on the set in advance neither in writing nor signed at the Moreover, we believe that the set in requirement at § 411.354(d)(1) is an outset, provided both the required advance requirement is necessary to optional deeming provision and not a writing and signature(s) are obtained prevent parties from retroactively requirement, in order to satisfy the set within 90 consecutive calendar days adjusting the amount of compensation in advance requirement included in and the arrangement otherwise satisfied paid under an arrangement in any various exceptions in § 411.357, it is not all the requirements of an applicable manner that takes into account the necessary that the parties reduce the exception. We remind readers that, as volume or value of a physician’s compensation to writing before the we explained in the CY 2016 PFS final referrals or the other business generated furnishing of items or services. Given rule and subsequently codified at by the physician over the course of the the writing requirement in the new rule § 411.354(e)(2), a single formal written arrangement, including the first 90 days at § 411.354(d)(1)(ii) on modifying contract is not necessary to satisfy the of the arrangement. compensation during the course of an writing requirement in the exceptions to In the proposed rule, we did not arrangement, we are qualifying this the physician self-referral law (80 FR propose to amend the special rule on statement in this final rule. As finalized 71314 through 71317). Depending on compensation that is considered to be in this rule, compensation may be set in the facts and circumstances, the writing set in advance at § 411.354(d)(1), though advance even if it is not set out in requirement may be satisfied by a we did clarify that § 411.354(d)(1) is a writing before the furnishing of items or collection of documents, including deeming provision, not a requirement services as long as the compensation is contemporaneous documents (84 FR 55782). As explained in more not modified at any time during the evidencing the course of conduct detail below, in response to comments, period the parties seek to show the between the parties. Thus, parties to an we are finalizing certain modifications compensation was set in advance. For arrangement would have 90 consecutive to the special rule at § 411.354(d)(1), example, assume that the parties to an calendar days to compile the collection including codifying requirements at arrangement agree on the rate of of documents if the parties determine to § 411.354(d)(1)(ii) for modifying the compensation before the furnishing of show compliance with the writing compensation (or formula for items or services, but do not reduce the requirement in this manner. We note determining the compensation) during compensation rate to writing at that that, because parties must compile the the course of an arrangement. The new point in time. Assume further that the documents that evidence their regulation related to modifying first payment under the arrangement is arrangement within 90 consecutive compensation terms during the course documented and that, under calendar days of the commencement of of an arrangement requires that the § 411.354(e)(4), during the 90-day the arrangement, if an arrangement modified compensation (or formula for period after the items or services are

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initially furnished, the parties compile or a formula for calculating the compensation under an arrangement to sufficient documentation of the compensation was set in advance before be set in advance, it must satisfy these arrangement to satisfy the writing the furnishing of items or services. Even requirements. We are also finalizing a requirement of an applicable exception. if the amount of or a formula for special rule for electronic signatures at Finally, assume that the written calculating the compensation is not set § 411.354(e)(3), codifying our documentation compiled during the 90- in advance, depending on the facts and longstanding policy that an electronic day period provides for a rate of circumstances, the parties may be able signature that is valid under Federal or compensation that is consistent with the to rely on the new exception for limited State law is sufficient to satisfy the documented amount of the first remuneration to a physician at signature requirement of various payment, that is, the rate of § 411.357(z). Under § 411.357(z), if an physician self-referral law exceptions. compensation was not modified during entity initially pays a physician for We received the following comments the 90-day period. Under these specific services utilizing the exception for and our responses follow. circumstances, we would consider the limited remuneration to a physician and Comment: We received nearly compensation to be set in advance. the parties subsequently decide to unanimous support for our proposal to More broadly speaking, records of a continue the arrangement utilizing an allow parties up to 90 consecutive consistent rate of payment over the exception that requires the calendar days to satisfy the writing and course of an arrangement, from the first compensation to be set in advance, such signature requirements of various payment to the last, typically support as the exception for personal service physician self-referral law exceptions. the inference that the rate of arrangements at § 411.357(d)(1), Commenters stated that the proposal, if compensation was set in advance. On depending on the facts and finalized, would reduce administrative the other hand, under circumstances, the parties may be able burden associated with the § 411.354(d)(1)(ii), if the parties modify to use documentation of the initial documentation requirements of the the compensation (or formula for payments made while utilizing exceptions to the physician self-referral determining the compensation) during § 411.357(z) to establish that the amount law, provide flexibility in situations the 90-day period (or thereafter), the of or a formula for calculating the where an arrangement begins before key modified compensation (or formula for compensation was set in advance before terms and conditions are reduced to determining the compensation) must be the furnishing of services under the writing, and allow entities to avoid so- set out in writing before the furnishing subsequent personal service called technical noncompliance that of items or services for which the arrangement. may lead to disclosures of nonabusive modified compensation is to be paid. To In the proposed rule, we clarified our arrangements to the SRDP. Response: We agree with the the extent that our preamble discussion longstanding policy that an electronic commenters that the policy as finalized in the CY 2016 PFS final rule suggested signature that is legally valid under affords greater flexibility and will that the rate of compensation must Federal or State law is sufficient to reduce the administrative burden always be set out in writing before the satisfy the signature requirement of various exceptions in our regulations associated with the writing and furnishing of items or services in order signature requirements. We believe that, to meet the set in advance requirement and sought comments on whether we should codify this policy in our with the clarification of the set in of an applicable exception, we are advance requirement detailed below, retracting that statement (80 FR 71317). regulations. We also noted that the collection of writings that parties may the special rule on writing and signature We noted in the proposed rule and rely on under § 411.354(e)(2) to satisfy requirements at § 411.354(e)(4) will not reiterate here that there are many ways the writing requirement of our pose a risk of program or patient abuse, in which the amount of or a formula for exceptions may include documents and and we are finalizing it as proposed. calculating the compensation under an records that are stored electronically (84 Comment: Several commenters arrangement may be documented before FR 55815). In response to commenters, supported our proposal to allow parties the furnishing of items or services (84 we are codifying a new special rule for additional time to obtain required FR 55815). It is not necessary that the electronic signatures at § 411.354(e)(3); writings and signatures, but encouraged document stating the amount of or a the special rule on writing and signature us to adopt a 120- or 180-day period formula for calculating the requirements, which was proposed at instead of the proposed 90-day period compensation, taken by itself, satisfies § 411.354(e)(3), will be designated as for obtaining required writings and the writing requirement of the § 411.354(e)(4). While we are not signatures. According to some applicable exception; the document codifying our policy on electronic commenters, if, as required under the stating the amount of or a formula for documents, we are reaffirming in this proposed special rule, a compensation calculating the compensation may be final rule our policy that the documents arrangement complies with all the one document among many which, that may be used to satisfy the writing requirements of an applicable exception taken together, constitute a collection of requirement under § 411.354(e)(2) except for the writing and signature documents sufficient to satisfy the include electronically stored requirements, a 180-day grace period for writing requirement of the applicable documents. compliance with the writing and exception as interpreted at After reviewing the comments, we are signature requirements poses a low risk § 411.354(e)(2). For example, depending finalizing the special rule for writing of program or patient abuse. One on the facts and circumstances, informal and signature requirements without commenter stated that a grace period of communications via email or text, modification at § 411.354(e)(4). In 120 days is necessary for a large health internal notes to file, similar payments addition, to clarify the set in advance care system to obtain required writings between the parties from prior requirement in various exceptions and and signatures, given the large number arrangements, generally applicable fee to prevent program or patient abuse, we of contracts the system must review and schedules, or other documents are finalizing requirements for the time it takes for staff to review the recording similar payments to or from modifying compensation (or the formula contracts. Another commenter stated other similarly situated physicians for used to calculate compensation) during that small practices may need up to 120 similar items or services, may be the course of an arrangement at days to comply with the writing and sufficient to establish that the amount of § 411.354(d)(1)(ii); for modified signature requirements.

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Response: We decline to extend the exception for personal service Congress in the BiBA codified in the special rule to allow parties up to 120 arrangements at § 411.357(d). Rather, substantively identical special rule for or 180 days to comply with the writing our proposal was made pursuant to signature requirements at section and signature requirements. With section 1877(h)(1)(D) of the Act, which 1877(h)(1)(E) of the Act. As with the respect to the signature requirement, expressly grants the Secretary the special rule for temporary section 1877(h)(1)(E) of the Act authority to determine the means by noncompliance with signature currently provides for a period of 90 which the writing requirement in requirements finalized in the FY 2009 consecutive calendar days for parties to various exceptions is satisfied. In this IPPS final rule, the Secretary has the obtain missing signatures, and we are context, the special rule we are authority under section 1877(b)(4) of the not persuaded that we could extend the finalizing at § 411.354(e)(4) functions as Act to propose alternative methods for period to 120 or 180 days under section a deeming provision. As long as parties compliance with the writing 1877(b)(4) of the Act without posing a obtain the required writings and requirement of various physician self- risk of program or patient abuse. signatures within 90 consecutive referral law exceptions, if the financial Regarding the writing requirement, we calendar days (and the other relationships ultimately protected under believe that the requirement is requirements of an applicable exception the exceptions do not pose a risk of important for ensuring transparency in are met), the arrangement is deemed to program or patient abuse. Based on our potentially lucrative compensation have met the writing and signature administration of the SRDP and our arrangements, and we believe that requirement, including for the first 90 experience working with our law extending the grace period to 120 or 180 days of the arrangement. Thus, with enforcement partners, we conclude that days could pose a risk of program or respect to the statutory special rule for an arrangement that satisfies all the patient abuse. signature requirements at section requirements of an applicable exception We believe that allowing a period of 1877(h)(1)(E) of the Act, if the parties for the duration of the arrangement, 90 consecutive calendar days to satisfy obtain the required writing within 90 including the set in advance the writing and signature requirements consecutive calendar days and the requirement as detailed below, but is sufficiently addresses legitimate arrangement satisfies all the other not initially set out in writing or signed concerns regarding the administrative requirements of an applicable (or both) for a period of no longer than burden of the writing and signature exception, then the arrangement 90 consecutive calendar days, does not requirements and inadvertent ‘‘otherwise complies with all criteria of pose a risk of program or patient abuse. ‘‘technical’’ noncompliance, especially the applicable exception’’ for the initial Therefore, the Secretary also has in light of the clarification of the writing 90-day period, including the writing authority under section 1877(b)(4) of the requirement at § 411.354(e)(2) and the requirement. While it is true that the Act to issue the new special rule for new exception for limited remuneration Congress did not explicitly extend the writing and signature requirements at to a physician at § 411.357(z), which 90-day period for signature § 411.357(e)(4). may be used to protect an arrangement requirements in section 1877(h)(1)(E) of Comment: In addition to the objection at its inception while parties collect the Act to the writing requirement in discussed above, one commenter required documentation and signatures various exceptions, we do not believe objected strongly to the proposed policy to satisfy the writing and signature that section 1877(h)(1)(E) of the Act to permit parties up to 90 consecutive requirements of other exceptions on a limits the grant of authority in section calendar days to document personal service arrangements. According to the going-forward basis. 1877(h)(1)(D) of the Act to determine Commenter: One commenter objected commenter, the proposal, if finalized, the means by which the writing on both legal and policy grounds (the would allow parties to routinely, requirement may be satisfied. policy objections are discussed in the intentionally, and repeatedly enter into next comment and response) to the We note that, in addition to the oral agreements worth thousands of proposal to allow parties up to 90 authority granted to the Secretary under dollars, without sufficient transparency consecutive calendar days to document section 1877(h)(1)(D) of the Act, the to determine if the arrangements comply arrangements in writing, especially for Secretary has authority under section with all the other requirements of an personal service arrangements excepted 1877(b)(4) of the Act to issue regulations exception. Specifically, the commenter under § 411.357(d). The commenter excepting financial relationships that do expressed concern that parties would stated that CMS lacks the legal authority not pose a risk of program or patient use the ‘‘grace period’’ to adjust to permit parties up to 90 consecutive abuse. In the FY 2009 IPPS final rule, compensation upward or downward calendar days to document an we explained that, although the based on a physician’s referrals, and arrangement in writing. The commenter Secretary cannot grant immunity for these adjustments would be virtually maintained that the codification of the violations or waive requirements of the impossible to detect, because the 90-day signature rule in the BiBA physician self-referral law, the Secretary original arrangement would not be expressly provides that, except for the is authorized under section 1877(b)(4) of documented. The commenter doubted signature requirement, an arrangement the Act to propose alternative methods whether parties that do not timely must comply with all the other for compliance with the physician self- document arrangements at their requirements of an exception, including referral law, including amendments to inception would assiduously comply the writing requirement. The our regulations that keep within the with all the other requirements of an commenter concluded that the Congress exceptions certain financial exception. did not intend that the 90-day signature relationships that would otherwise be Response: We believe that the set in rule to be expanded to include the out of compliance with the physician advance requirement, as clarified and writing requirement. self-referral law (73 FR 48707 through codified in this final rule, addresses the Response: Our proposal to allow 48709). Relying on this authority, in the commenter’s concern that parties will parties up to 90 consecutive calendar FY 2009 IPPS final rule, we finalized adjust the compensation under an days to document arrangements in the special rule for temporary arrangement upward or downward writing does not waive the writing noncompliance with signature during the first 90 days of the requirement in various statutory and requirements at § 411.353(g) (73 FR arrangement in a manner that takes into regulatory exceptions, including the 48702 through 48703), which the account the volume or value of referrals

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or other business generated by the any modification of the compensation 1. If, on day 70, the parties agree to physician, and that these adjustments terms of an arrangement. The set in modify the compensation to $600 per will be virtually impossible to detect. In advance requirements at 24-hour shift, the arrangement as the proposed rule, we emphasized that, § 411.354(d)(1)(ii) are based on amended must satisfy all the other than the writing and signature preamble guidance in the FY 2009 IPPS requirements of the exception for requirements, the special rule on final rule on the requirements for personal service arrangements; thus, the writing and signature requirements amending compensation arrangements compensation under the amended requires an arrangement to satisfy all the (73 FR 48696 through 48697). arrangement (that is, $600 per 24-hour requirements of an applicable Under final § 411.354(d)(1)(ii), shift) may not exceed fair market value exception, including the set in advance compensation (or a formula for for the call coverage and may not be requirement, for the entire term of the determining the compensation) that is determined in any manner that takes arrangement, including the first 90 days modified at any time during the course into account the volume or value of (84 FR 55814). Under the current special of a compensation arrangement, referrals or other business generated by rule for compensation that is considered including the first 90 days of the the physician, and the other set in advance at § 411.354(d)(1) (that is, arrangement, satisfies the set in advance requirements of the exception for the special rule in effect prior to the requirement of various exceptions only personal service arrangements must also effective date of this final rule), the if all of the following conditions are be satisfied. In addition, as required by formula for determining compensation met: (1) All requirements of an § 411.354(d)(1)(ii)(B), the amended cannot be changed or modified during applicable exception in §§ 411.355 compensation rate may not be the course of an arrangement in any through 411.357 are met on the effective retroactive (that is, the physician may manner that takes into account the date of the modified compensation (or not be paid at the rate of $600 per 24- volume or value of referrals or other the formula for determining the hour shift for services provided from business generated by the referring modified compensation); (2) the day 1 to day 69). Lastly, under physician. Thus, to the extent that modified compensation (or the formula § 411.354(d)(1)(ii)(C), the modified compensation is adjusted upwards or for determining the modified compensation (or formula for downwards during the first 90 days of compensation) is determined before the determining the compensation) must be an arrangement in a manner that takes furnishing of the items, services, office set forth sufficiently in writing before into account the volume or value of space, or equipment for which the the furnishing of the services for which referrals or other business generated, as modified compensation is to be paid; the modified compensation is to be described by the commenter, the and (3) before the furnishing of the paid. Thus, if the physician provides the compensation would not be considered items, services, office space, or first shift of call coverage at the rate of to be set in advance under current equipment for which the modified $600 per 24-hour shift on day 75, the § 411.354(d)(1). However, as we compensation is to be paid, the formula modified rate of compensation must be explained in the proposed rule, the for the modified compensation is set set forth in writing in sufficient detail so special rule at current § 411.354(d)(1) is forth in writing in sufficient detail so that it can be objectively verified before merely a deeming provision, not a that it can be objectively verified. the services are furnished on day 75. requirement (84 FR 55814). Importantly, parties will not have 90 Under § 411.354(e)(4), the parties will days under § 411.354(d)(1)(ii) to reduce We share the commenter’s concern still have through day 90 to reduce the the modified compensation (or the entire arrangement to writing and to regarding inappropriate and potentially formula for determining the modified obtain required signatures, but in order undetectable changes in compensation compensation) to writing. Rather, the for the modified compensation (or during the first 90 days of an modified compensation (or the formula formula for determining the arrangement and thereafter. Although for determining the modified compensation) to satisfy the set in modifications of the compensation compensation) must be set forth in advance requirement, it must be in terms of an arrangement are permissible writing in sufficient detail so that it can writing before the furnishing of services under the physician self-referral law be objectively verified before the on day 75. If the parties again modify (see 73 FR 48697), such modifications furnishing of items, services, office the compensation terms of the may pose a risk of program or patient space, or equipment for which the arrangement effective, for example, on abuse, because the modifications could modified compensation is to be paid. be made—either retroactively or Given our program integrity concerns, day 180, all the conditions for prospectively—in a manner that takes as well as the concerns identified by the modifying the compensation under into account the volume or value of a commenter with modifications to the § 411.354(d)(1)(ii) must be met again, physician’s referrals or other business compensation terms of an arrangement, and the modified compensation must be generated by the physician. We believe we believe that the transparency sufficiently set forth in writing before that, in order to prevent program or afforded by a writing requirement is the furnishing of services on day 180. patient abuse, including abuse of the 90- necessary for modifying compensation, (There is no signature requirement day ‘‘grace period’’ for documenting an including modifying compensation under § 411.354(d)(1)(ii), so the writing arrangement in writing under final during the first 90 days of an that documents the modified § 411.354(e)(4), it is necessary to codify arrangement. compensation need not be signed by the in our regulations certain requirements, Under § 411.354(d)(1)(ii)(A), the parties.) including a writing requirement, for amended arrangement, including the As noted in Phase III, in certain modified compensation to meet the set modified rate of compensation, must instances, modifications to an in advance requirement of various satisfy the requirements of an applicable arrangement may be material to the exceptions. Unlike the deeming exception anew. For example, suppose compensation terms of the arrangement, provision in current § 411.354(d)(1), that an arrangement for call coverage at without directly modifying the amount which will be redesignated as the rate of $500 per 24-hour shift of of compensation under an arrangement § 411.354(d)(1)(i), compliance with the coverage satisfies all the requirements of (72 FR 51044). Returning to the example new set in advance rule at the exception for personal service above, assume the parties modified the § 411.354(d)(1)(ii) will be required for arrangements at § 411.357(d)(1) on day arrangement on day 70 to reduce the

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call coverage shift from 24 to 12 hours, for the compensation to be set in fail to satisfy all the requirements of an but retained the compensation amount advance. If parties modify the applicable exception other than the of $500 per shift. For purposes of the compensation terms of an arrangement writing and signature requirement physician self-referral law, the during the first 90 days (or thereafter), during the first 90 days (and thereafter) modification is material to the the modified compensation arrangement would not be protected under compensation terms of the arrangement will have to satisfy all the requirements § 411.354(e)(4). because it raises questions as to whether of an applicable exception, including Comment: Several commenters the compensation under the amended applicable requirements pertaining to appreciated CMS’ statement that the set arrangement ($500 per 12-hour shift) fair market value and the volume or in advance requirement does not require satisfies requirements pertaining to fair value of referrals or other business parties to set out the compensation in market value and the volume or value generated by the referring physician. In writing in advance of the furnishing of of referrals or other business generated. addition, under § 411.354(d)(1)(ii)(C), items or services, and that the special It is our view that such an amendment the modified compensation (or formula rule on the set in advance requirement is a modification of the formula for for determining the compensation) must at § 411.354(d)(1) is a deeming determining compensation ($500 per 12- be sufficiently set forth in writing before provision, not a requirement. One hour shift versus $500 per 24-hour the furnishing of items, services, office commenter noted that the clarification shift), and this modification must meet space, or equipment for which the would greatly benefit hospitals that all conditions of § 411.354(d)(1)(ii) in modified compensation is to be paid, inadvertently fail to document their order to avoid the physician self-referral even if the modification occurs during compensation terms prior to starting law’s referral and billing prohibitions. the first 90 days of the arrangement. performance. Another commenter found On the other hand, modifications that Thus, notwithstanding the 90-day helpful our preamble guidance do not affect the compensation terms of period for obtaining required writings regarding the set in advance the arrangement need not meet the and signatures under § 411.354(e)(4), requirement and the use of practice conditions of § 411.354(d)(1)(ii); for parties will not be permitted to modify patterns, including consistent payments example, if the parties amend the the compensation terms of an patterns, to establish that the rate of schedule for the provision of call arrangement during the first 90 days compensation was set in advance. The coverage from Tuesdays to Thursdays without documenting the modification commenter stated that a grace period of but there are no other changes to their in writing, and modifications to the more than 90 days may be necessary in arrangement, § 411.354(d)(1)(ii) would compensation (or formula for some circumstances to establish an not be triggered. Lastly, reflecting our determining the compensation) may not identifiable pattern of payments. Response: As explained above, under current policy, § 411.354(d)(1)(ii) does be determined in any manner that takes § 411.354(e)(4), other than the writing not require that the modified into account the volume or value of and signature requirements, a compensation remain in place for at referrals or other business generated by compensation arrangement must satisfy least 1 year from the date of amendment the physician. all the requirements of an applicable and there is no prohibition on the Lastly, the commenter doubted that exception, including the set in advance number of times the parties may modify parties that fail to document their requirement, for the entire duration of the compensation, provided that the arrangements during the first 90 days of the arrangement, including the first 90 conditions of § 411.354(d)(1)(ii) are met the arrangement work diligently to days of the arrangement. Thus, the each time the compensation is modified. ensure compliance with other compensation (or formula for We caution against a practice of requirements of applicable exceptions. calculating the compensation) must be frequently or repeatedly modifying the Our experience administering the SRDP determined before the furnishing of compensation terms over the course of suggests otherwise. We have reviewed a items or services for which an arrangement and remind readers that, large number of arrangements that compensation is to be paid. A party under § 411.354(d)(1)(ii), each time the satisfied all the requirements of an submitting a claim for payment for a compensation is modified, the parties applicable exception except the writing designated health service retains the must establish anew that the and signature requirements. We have burden of proof under § 411.353(c)(2) to arrangement—as modified—satisfies all learned that parties neglect to document establish that all the requirements of an the requirements of an applicable arrangements in writing and sign the applicable exception, including the set exception. writings for a variety of reasons, such as in advance requirement, if applicable, Given our clarification and administrative oversight or personnel are met. The surest and most codification at § 411.354(d)(1)(ii) of the changes. At the same time, we continue straightforward way for a party to conditions that modified compensation to believe that the writing requirement establish that the compensation under must meet in order to be set in advance, functions as an important safeguard to an arrangement is set in advance is to we believe that our interpretation of provide transparency and prevent satisfy the deeming provision at writing and signature requirements as program or patient abuse, and we § 411.354(d)(1)(i). Under set forth at § 411.354(e)(4) does not pose reiterate that the best practice is to § 411.354(d)(1)(i), parties that document a risk of program or patient abuse. To document compensation arrangements the compensation in writing prior to the reiterate, with the exception of the in writing from the outset. We believe furnishing of items, services, office writing and signature requirements, a that § 411.354(e)(4) provides sufficient space, or equipment in sufficient detail compensation arrangement must satisfy flexibility for nonabusive arrangements so that it can be verified are deemed to all the requirements of an applicable that fully satisfy all the requirements of satisfy the set in advance requirement. exception, including the set in advance an exception other than the writing or However, we are reiterating in this final requirement, during the initial 90 days signature requirement, while incenting rule that the compensation (or the of the arrangement (and thereafter). Any parties to act diligently to sign and formula determining the compensation) modification of the compensation terms document arrangements within 90 does not need to be documented in of an arrangement during the initial 90 consecutive calendar days of the writing and it does not need to be days (or thereafter) must meet all the commencement of their arrangement. deemed to be set in advance under conditions of § 411.354(d)(1)(ii) in order We also stress that arrangements that § 411.354(d)(1)(i) in order to satisfy the

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set in advance requirement during the types of documents that, individually or into account the volume or value of the first 90 days of the arrangement. taken together and depending on the physician’s referrals prior to the In order for an arrangement to meet facts and circumstances, may establish commencement of the arrangement; (2) the writing requirement of an applicable that compensation is set in advance. the parties work with reasonable exception on an ongoing basis, the These documents include informal diligence to establish the specific compensation (or formula for communications via email or text, compensation amount or methodology; calculating compensation) must be internal notes to file, similar payments (3) the parties, in fact, establish the documented in writing by the time the between the same parties for similar specific compensation amount or 90-day period under § 411.354(e)(4) items or services under prior methodology within 90 days of the expires. As we explained in the CY 2016 arrangements, generally applicable fee commencement of the arrangement; and PFS, to determine compliance with the schedules, or, where no formal generally (4) the resulting compensation is fair writing requirement, the relevant applicable fee schedule exists, other market value and commercially inquiry is whether the available documents showing a pattern of reasonable without taking into account contemporaneous documents (that is, payments to or from other similarly the volume or value of referrals or other documents that are contemporaneous situated physicians for the same or business generated by the physician. with the arrangement) would permit a similar items or services. This list is The commenters asserted that, as long reasonable person to verify compliance illustrative only and is not exhaustive. as the compensation is ultimately fair with the applicable exception at the To avoid being overly prescriptive, we market value and the arrangement is time that a referral is made (80 FR are not providing more determinant commercially reasonable, then there is 71315). A reasonable person could not rules for establishing that compensation no risk of program or patient abuse. The verify whether the compensation under is set in advance. commenters further asserted that their an arrangement complies with an Comment: Several commenters stated proposal would be helpful for practices applicable fair market value that, even if the proposed special rule is located in States that prohibit the requirement, for example, if the person finalized, there would be continuing corporate practice of medicine, because could not determine from the uncertainty regarding how parties can providers in those States cannot rely on documentation what the compensation establish that compensation is set in the exception for bona fide employment was under the arrangement. Thus, by advance if there is no signed writing relationships, which does not include a day 91, the compensation terms of the and no steady, consistent stream of set in advance requirement. One arrangement must be documented in payments. Commenters noted that commenter stressed that the special rule writing in order to satisfy the writing informal writings between the parties is especially needed if CMS finalizes its requirement of an applicable exception. may not be detailed enough to satisfy proposed definition of ‘‘isolated As explained above, we decline to the set in advance requirement and that, financial transaction,’’ as parties may extend the ‘‘grace period’’ for collecting in certain instances, the compensation have relied on this exception in the past required writings beyond the 90-day may only have been determined through to compensate physicians for services period. We believe that 90 consecutive in-person conversations, with no paper furnished prior to the parties setting the calendar days provides sufficient time trail. The commenters also noted that compensation under the arrangement. to document an arrangement to show fee schedules and comparisons to other compliance with the requirements of an arrangements may not be useful for Response: We decline to adopt the applicable exception, including the set compensation arrangements where the deeming provision suggested by the first in advance requirement. payment methodology is more commenters and the new special rule Comment: One commenter requested complicated or customized to the recommended by the second additional guidance from CMS on the specific financial relationship. Given commenters. The set in advance interim systems and documents that these difficulties, the commenters requirement is a statutory requirement may be relied upon to satisfy the requested that compensation be deemed and, in our view, both proposals are requirement that rental rates are set in to comply with all the requirements of inconsistent with the statutory advance during the 90-day grace period. an applicable exception, except the requirement that the compensation is Specifically, the commenter asked writing and signature requirements, if set in advance. In addition, as explained whether a scheduling platform that the parties certify in the signed writing above, the set in advance requirement is tracks leasing arrangements and documenting the arrangement that the an important safeguard to prevent allocates leased square footage, arrangement met all the elements of the program or patient abuse, including scheduling actual space utilization and exception as of the commencement date abuse of the 90-day grace period under rent, would be sufficient to satisfy the of the arrangement. The commenters § 411.354(e)(4). We believe that both set in advance requirement. noted that this requirement would proposals would be subject to the kinds Response: The determination as to provide an additional safeguard, of abuses described by the commenter what constitutes sufficient because a false certification could above, namely undocumented and documentation to establish that expose a person to potential liability potentially undetectable adjustments of compensation under the arrangement is under the False Claims Act, because it the compensation during the first 90 set in advance depends on the facts and would be useful evidence of scienter. days of the arrangement that take into circumstances in each case. Therefore, A second group of commenters account the volume or value of referrals we cannot opine on whether the suggested that, to provide additional or other business generated by the scheduling platform described by the flexibility, CMS should create another physician. Even with a requirement that commenter would be sufficient to special rule on the set in advance compensation is, in fact, fair market establish that the set in advance requirement at § 411.354(d). Under the value, we believe that the proposals requirement was met. We discussed in commenters’ proposal, compensation could be subject to abuse. Typically, fair the proposed rule (and repeated above) would be considered set in advance if: market value is a range of values, and the various documents that, depending (1) The parties agree in advance that parties could use the 90-day period to on the facts and circumstances, may be compensation under the arrangement adjust compensation upwards or used to establish that compensation is will be fair market value and not downwards within this range. set in advance. We are clarifying the determined in any manner that takes Therefore, we do not believe that we

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have the authority under section set in advance requirement, coupled Response: Our longstanding policy is 1877(b)(4) of the Act to waive the set in with the newly proposed exception for that an electronic signature that is valid advance requirement for 90 days. In limited remuneration to a physician, under applicable Federal or State law is addition, although the Secretary has which does not require the sufficient to satisfy the signature authority under section 1877(h)(1)(D) of compensation to be set in advance, requirement in various physician self- the Act to determine how the writing would accommodate situations where a referral law exceptions. To provide requirement of various exceptions may physician’s services are needed on an greater clarity and certainty to be satisfied, we do not believe that this urgent basis, and the compensation stakeholders, we are codifying this authority does not extend to the set in arrangement commences before the policy at § 411.354(e)(3). We believe that advance requirement. parties can set the compensation in what constitutes a valid signature that is With respect to the first commenters’ advance or document the compensation. sufficient to satisfy the signature proposal, parties documenting an Response: We agree with the requirement of various exceptions to the arrangement after it has begun, as is commenters that, depending on the facts physician self-referral law depends on permitted under § 411.354(e)(4), may and circumstances, parties that do not the facts and circumstances. We decline choose to include memoranda or other have an opportunity to set to provide a general rule regarding notes describing earlier agreements, compensation in advance may utilize whether a sender’s typed or printed including verbal agreements or the exception for limited remuneration name on an email or letterhead agreements made by informal to a physician at § 411.357(z) to protect stationary would satisfy the requirement communications that set the an arrangement at its outset. If the that an arrangement is signed by the compensation (or formula for parties decide to continue the parties. However, we note that, if an determining the compensation) in arrangement on an ongoing basis, the individual’s typed or printed name on advance. The memoranda would not be parties may utilize another applicable an email sent by that individual sufficient for the compensation to be exception without an annual limit, such constitutes an electronic signature for deemed to be set in advance under as the exception for fair market value purposes of applicable Federal or State § 411.354(d)(1)(i), but, depending on the compensation at § 411.357(l). law, then it qualifies as a ‘‘signature’’ for facts and circumstances, the memoranda Depending on the facts and purposes of the physician self-referral could be used as evidence to help circumstances, records of payments law. Similarly, if the individual whose establish that the compensation was set made while utilizing the exception at name is printed on the letterhead of the in advance. We emphasize that there is § 411.357(z) may establish that the document being relied upon to satisfy no requirement under the physician compensation under the ongoing the signature requirement of an self-referral law that parties create or arrangement satisfied the set in advance applicable exception is also the sender retain such memoranda. As illustrated requirement of § 411.357(l). Parties that of the document and the document by our earlier discussion in this section utilize the exception at § 411.357(l) (or would be considered signed by the II.D.5., there are a variety of ways to another exception that requires the individual under applicable Federal or establish that compensation is set in arrangement to be in writing and signed State law, then it qualifies as a advance, and, other than the deeming ‘‘signature’’ for purposes of the by the parties) for the ongoing provision in § 411.354(d)(1)(i), we are physician self-referral law. While a arrangement have 90 consecutive not prescribing or recommending any hand-written ‘‘wet’’ signature is the calendar days to satisfy the writing and particular approach. paradigmatic example of a signature, signature requirements under With respect to the second there is no requirement under the § 411.354(e)(4) once the parties begin to commenters’ proposed special rule, we physician self-referral law that parties utilize that exception (or another note that the new rule for modifying sign a document by hand, nor is there applicable exception that requires the compensation at § 411.354(d)(1)(ii) a requirement that electronic signatures arrangement to be in writing and signed provides stakeholders certainty be scanned copies of hand-written by the parties). regarding the requirements that must be signatures. Any electronic signature that met in order for modified compensation Comment; Several commenters urged is valid under applicable Federal or to satisfy the set in advance us to finalize regulatory text, clearly State law is sufficient to satisfy the requirement. Parties to an arrangement stating CMS’ policy that electronic signature requirement under the are permitted to enter into an signatures that are legally valid under physician self-referral law. arrangement that satisfies all the Federal or State law are sufficient to requirements of an applicable satisfy the signature requirement of 6. Exceptions for Rental of Office Space exception, including the set in advance various exceptions. Some commenters and Rental of Equipment (§ 411.357(a) requirement, and later modify the also specifically asked that the and (b)) compensation terms of the arrangement, regulatory text clarify that assent Section 1877(e)(1) of the Act provided that the modified transmitted by email may satisfy the establishes an exception to the compensation is not retroactive and all signature requirement. Other physician self-referral law’s referral and the other conditions of commenters recognized that CMS has billing prohibitions for certain § 411.354(d)(1)(ii) are met. This policy, declined in the past to specify what arrangements involving the rental of coupled with the new exception for qualifies as a signature for purposes of office space or equipment. Among other limited remuneration to a physician at the physician self-referral law, because things, sections 1877(e)(1)(A)(ii) and § 411.357(z), which does not require CMS does not wish to be overly (e)(1)(B)(ii) of the Act require the office compensation to be set in advance, prescriptive. Nevertheless, the space or equipment to be used should provide sufficient flexibility for commenters requested that we explicitly exclusively by the lessee when being all providers, including providers confirm that a signature includes a used by the lessee. The exclusive use located in States that prohibit the sender’s typed or printed name on an requirements are incorporated into our corporate practice of medicine. email or letterhead stationary that is one regulations at § 411.357(a)(3) and (b)(2). Comment: Some commenters stated of the contemporaneous writings In the 1998 proposed rule, we stated that, if finalized, the proposed 90-day documenting an arrangement under our belief that the exclusive use grace period and the clarification of the § 411.354(e)(2). requirement in the statute was meant to

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prevent ‘‘paper leases,’’ where payment equipment rented by the lessee. concurrently, provided that all the other passes from a lessee to a lessor, even Moreover, we do not believe it would requirements of the exception are though the lessee is not actually using pose a risk of program or patient abuse satisfied and that the lessor (or any the office space or equipment (63 FR for multiple lessees (and their invitees) person or entity related to the lessor) is 1714). In Phase II, we further explained to use the space or equipment to the excluded. We remind readers that the our interpretation of the exclusive use exclusion of the lessor, provided that exceptions for the rental of office space requirement (69 FR 16086). We stated the arrangements satisfy all the and equipment both require, among that, after reviewing the statutory requirements of the applicable other things, that the rental charges are scheme, we believe that the purpose of exception for the rental of office space consistent with fair market value, that the exclusive use requirement is to or equipment, and any financial the space or equipment that is rented or ensure that the rented office space or relationships between the lessees (or leased does not exceed that which is equipment cannot be shared with the their invitees) that implicate the reasonable and necessary for the lessor when it is being used or rented by physician self-referral law likewise legitimate business purposes of the lease the lessee (or any subsequent sublessee). satisfy the requirements of an applicable arrangement, and that the lease In other words, a lessee (or sublessee) exception. Therefore, relying on the arrangement would be commercially cannot ‘‘rent’’ office space or equipment Secretary’s authority under section reasonable even if no referrals were that the lessor will be using 1877(b)(4) of the Act, we proposed to made between the lessee and lessor. If concurrently with, or in lieu of, the clarify our longstanding policy that the a lessor collects rental payments from lessee (or sublessee). We added that we lessor (or any person or entity related to multiple lessees for concurrent use of were concerned that unscrupulous the lessor) is the only party that must be office space or equipment, these physicians or physician groups might excluded from using the space or requirements and all the other attempt to skirt the exclusive use equipment under § 411.357(a)(3) and requirements of § 411.357(a) or (b) must requirement by establishing holding 411.357(b)(2). Specifically, we proposed still be satisfied. Comment: Multiple commenters companies to act as lessors. To foreclose to add the following clarification to the requested that CMS update the new this possibility, we modified the regulation text: For purposes of this exception, exclusive use means that the proposed language to permit lessors to exclusive use requirements at lessee (and any other lessees of the same use their own space or equipment along § 411.357(a)(3) and (b)(2), to stipulate office space or equipment) uses the with lessees, especially when the lease that the rented office space or office space or equipment to the provides access to space or equipment equipment may not be ‘‘shared with or exclusion of the lessor (or any person or on a part-time basis. One commenter used by the lessor or any person or entity related to the lessor). The lessor further explained that lessors should entity related to the lessor’’ when the (or any person or entity related to the have the opportunity to utilize or lease lessee is using the office space or lessor) may not be an invitee of the such space to other lessees when it is equipment. Disclosures to the SRDP lessee to use the office space or the not utilized as long as the leasing have included several arrangements equipment. arrangements are properly administered where multiple lessees use the same After reviewing the comments, we are and that any allocations of space, costs, rented office space or equipment either finalizing the proposal without or flow of funds can be audited, contemporaneously or in close modification. monitored and otherwise objectively succession to one another, while the We received the following comments verified to ensure accountability. lessor is excluded from using the and our responses follows. Another commenter stated that, if a premises or equipment. At least one Comment: Several commenters hospital leases space to a physician entity disclosed that it had invited a supported our clarification of the practice, the practice should be physician who was not the lessor into exclusive use requirement in permitted to sublease back an exam its office space to treat a mutual patient § 411.357(a)(3) and (b)(2) as proposed. room to the hospital for use by a for the patient’s convenience. The Commenters explained that as physician hospital-employed physician or disclosing parties assumed that the practices evolve to meet the rising costs technician, in order to coordinate care. arrangements violated the physician of health care, the uncertainty regarding The commenter stated that if CMS is self-referral law, because, based on their ‘‘exclusive use’’ is challenging when concerned about the risk of abuse, CMS understanding of the exceptions at multiple physicians use the same space could provide that space subleased back § 411.357(a) and (b), the arrangements or equipment, a practice which the to the lessor must be at the same rate did not satisfy the exclusive use commenter stated is common; for that the lessor leases the space to the requirement of the applicable exception. example, a physician may invite a guest tenant. As noted in the 1998 proposed rule and physician into the premises in order to Response: Both the statute and our in Phase II, the purpose of the exclusive coordinate and jointly treat a mutual regulations require that leased office use rule is to prevent sham leases where patient. Commenters stated it would not space or equipment is used exclusively a lessor ‘‘rents’’ space or equipment to pose a risk of program or patient abuse by the lessee when it is being used by a lessee, but continues to use the space to allow multiple parties to use space or the lessee. We believe that the or equipment during the period equipment concurrently. commenters’ proposal would render this ostensibly reserved for the lessee. We do Response: We agree with the requirement meaningless. In addition, not interpret sections 1877(e)(1)(A)(ii) commenters that the clarification of the the exclusive use requirement is an and (B)(ii) of the Act to prevent multiple exclusive use requirement in the important safeguard to prevent sham or lessees from using the rented space or exception for the rental of office space ‘‘paper’’ leases, where a lessor collects equipment at the same time, so long as at § 411.357(a)(3) and the exception for rent from a lessee while continuing to the lessor is excluded, nor do we the rental of equipment at use the leased office space or equipment interpret sections 1877(e)(1)(A)(ii) and § 411.357(b)(2) offers flexibility and during periods of time that are (B)(ii) of the Act to prohibit a lessee certainty to providers, and that it does ostensibly reserved for the lessee. We from inviting a party other than the not pose a risk of program or patient also note that, under § 411.357(a)(3) and lessor (or any person or entity related to abuse to permit multiple lessees (and § 411.357(b)(2), rented office space or the lessor) to use the office space or their invitees) to use space or equipment equipment may not exceed that which

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is reasonable and necessary for the § 411.357(e)(4) to address remuneration physician, and the physician practice legitimate business purposes of the lease from a hospital (or a federally qualified that the physician will be joining, if any, arrangement. We question if a lease health center (FQHC), which was added and explained that nothing in the arrangement satisfies this requirement if as a permissible recruiting entity under regulations precluded execution of the the lease includes space or equipment Phase II) to a physician who joins a agreement in counterparts. that is consistently not used by the physician practice. There, we We have reconsidered our position lessee. For example, assume a physician established requirements for regarding the signature requirement at owns a medical office building, a recruitment arrangements under which § 411.357(e)(4)(i). In the SRDP, we have hospital leases the entire building from remuneration is provided by a hospital seen arrangements in which a physician the physician, the hospital (sublessor) or FQHC indirectly to a physician practice that hired a physician who was subleases an office suite to the through payments made to his or her recruited by a hospital (or FQHC or physician (sublessee), and the physician practice as well as directly to rural health clinic) did not receive any remainder or a significant portion of the the physician who joins a physician financial benefit as a result of the medical office building remains unused practice (69 FR 16094 through 16095). hospital and physician’s recruitment and unoccupied. On these facts, the When payment is made to a physician arrangement. Examples of such amount of spaced leased by the hospital indirectly through a physician practice arrangements include arrangements (that is, the entire medical office that the recruited physician joins, the under which: (1) The recruited building) likely exceeds that which is practice is permitted to retain actual physician joined a physician practice reasonable and necessary for the costs incurred by the practice in but the hospital paid the recruitment legitimate business purposes of the lease recruiting the physician under remuneration to the recruited physician arrangement. § 411.357(e)(4)(ii), and, in the case of an directly; (2) remuneration was We note that, as amended in this final income guarantee made by the hospital transferred from the hospital to the rule, the exception for fair market value or FQHC to the recruited physician, the physician practice, but the practice compensation at § 411.357(l) may be practice may also retain the actual passed all of the remuneration from the used for office space and equipment additional incremental costs attributable hospital to the recruited physician (that lease arrangements. The exception for to the recruited physician under is, the practice served merely as an fair market value does not include an § 411.357(e)(4)(iii). Under the Phase II intermediary for the hospital’s payments exclusive use requirement. Rather, the regulation, if a recruited physician to the recruited physician and did not exception includes as a substitute the joined a physician practice, retain any actual costs for recruitment, requirement that the arrangement not § 411.357(e)(4)(i) required the party to actual additional incremental costs violate the anti-kickback statute. whom the payments are directly made Depending on the facts and attributable to the recruited physician, (that is, the physician practice that the or any other remuneration); and (3) the circumstances, the arrangements recruited physician joins) to sign the described by the commenters may be recruited physician joined the physician written recruitment agreement (69 FR practice after the period of the income permitted under the exception for fair 16139). market value compensation at guarantee but before the physician’s § 411.357(l). We note, however, that the In Phase III, we responded to a ‘‘community service’’ repayment arrangements would have to satisfy the commenter that requested clarification obligation was completed. In each of the commercial reasonableness requirement with respect to who must sign the arrangements disclosed to the SRDP, the at § 411.357(l)(4) and the remaining writing documenting the physician arrangement was determined by the requirements of the exception for fair recruitment arrangement (72 FR 51051). disclosing party not to satisfy the market value compensation. The commenter’s concern was that requirements of the exception at § 411.357(e)(4)(i) could be interpreted to § 411.357(e) solely because the 7. Exception for Physician Recruitment require that the recruiting entity (in the physician practice that the recruited (§ 411.357(e)) commenter’s example, a hospital), the physician joined had not signed the Section 1877(e)(5) of the Act physician practice, and the recruited writing evidencing the arrangement. We established an exception for physician all had to sign one document. do not believe, however, that, under the remuneration provided by a hospital to The commenter asserted that this would circumstances described by parties a physician to induce the physician to be unnecessary and would add to the disclosing to the SRDP, there exists a relocate to the geographic area served by transaction costs of the recruitment. The compensation arrangement between the the hospital in order to be a member of commenter suggested that we require a physician practice and the hospital (or the hospital’s medical staff. The written agreement between the hospital FQHC or rural health clinic) of the type exception at section 1877(e)(5) of the and either the recruited physician or the against which the statute is intended to Act authorizes the Secretary to impose physician practice to which the protect; that is, the type of financial self- additional requirements on recruitment payments would be made or, in the interest that impacts a physician’s arrangements as needed to protect alternative, that we should permit the medical decision making. Because the against program or patient abuse. The hospital and the physician practice physician practice is not receiving a 1995 final rule incorporated the receiving the payments to sign a written financial benefit from the recruitment provisions of section 1877(e)(5) of the recruitment agreement and require the arrangement, we do not believe it is Act into our regulations at § 411.357(e). recruited physician to sign a one-page necessary for the physician practice to As finalized in the 1995 final rule, acknowledgment agreeing to be bound also sign the writing documenting the § 411.357(e) requires the recruitment by the terms and conditions set forth in recruitment arrangement between the arrangement to be in writing and signed that agreement. We responded that the recruited physician and the hospital (or by both parties, that is, the recruited exception for physician recruitment FQHC or rural health clinic) in order to physician and the hospital. requires a writing that is signed by all protect against program or patient In Phase II, we substantially modified parties, including the recruiting hospital abuse. We also believe that eliminating § 411.357(e). Relying on our authority (or FQHC or rural health clinic, which the signature requirement for a under section 1877(b)(4) of the Act, we was added as a permissible recruiting physician practice that receives no expanded the exception at entity under Phase III), the recruited financial benefit under the recruitment

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arrangement would reduce undue 8. Exception for Remuneration and billing prohibitions. Although there burden without posing a risk of program Unrelated to the Provision of Designated are certain similarities between section and patient abuse. For these reasons, we Health Services (§ 411.357(g)) 1877(e)(4) of the Act and the OBRA proposed to modify the signature Under section 1877(e)(4) of the Act, 1990 exception, the exception at section requirement at § 411.357(e)(4)(i). We remuneration provided by a hospital to 1877(e)(4) of the Act is narrower than proposed to require the physician a physician does not create a the OBRA 1990 exception in several practice to sign the writing documenting compensation arrangement for purposes important respects: (1) The OBRA 1990 the recruitment arrangement, if the of the physician self-referral law, if the exception excepts both ownership remuneration is provided indirectly to remuneration does not relate to the interests and compensation the physician through payments made provision of designated health services. arrangements between hospitals and to the physician practice and the The statutory exception is codified in physicians, whereas section 1877(e)(4) physician practice does not pass our regulations at § 411.357(g). Because of the Act applies only to compensation directly through to the physician all of our prior rulemaking regarding arrangements under which the remuneration from the hospital. § 411.357(g) was based in part on an remuneration passes from the hospital After reviewing the comments, we are interpretation of legislative history, we to the physician; (2) the OBRA 1990 finalizing the proposal without exception protects a broad range of modification. reviewed the legislative history of section 1877(e)(4) of the Act and certain financial relationships that are We received the following comment unrelated to the provision of clinical and our response follows. provisions that preceded it in the proposed rule. laboratory services, whereas section Comment: Several commenters 1877(e)(4) of the Act has a narrower supported our proposal to modify the As originally enacted by OBRA 1989, the referral and billing prohibitions of application, applying only to signature requirement at remuneration unrelated to the provision § 411.357(e)(4)(i) to require a physician the physician self-referral law applied only to clinical laboratory services. of designated health services; and (3) practice to sign the writing documenting the OBRA 1990 exception applies to a recruitment arrangement between a OBRA 1989 created three general exceptions for both ownership and financial relationships between entities physician and a hospital only if and physicians or their immediate remuneration is provided to the compensation arrangements at sections family members, whereas section physician indirectly through payments 1877(b)(1) through (3) of the Act, and 1877(e)(4) of the Act applies only to made to the physician practice and the granted the Secretary the authority at compensation arrangements with physician practice does not pass section 1877(b)(4) of the Act to create physicians. directly through to the physician all the additional exceptions. Section 42017(e) remuneration from the hospital. One of OBRA 1990 (Pub. L. 101–508) In the 1998 proposed rule, we commenter stated that eliminating the redesignated section 1877(b)(4) as proposed to revise our regulation at signature requirement for a physician 1877(b)(5) of the Act, and added an § 411.357(g) to reflect our interpretation practice would reduce burden without exception at section 1877(b)(4) of the of section 1877(e)(4) of the Act (63 FR posing a risk of program and patient Act for financial relationships with 1702). (The prior regulation at abuse. hospitals that are unrelated to the § 411.357(g) was based on former Response: We agree with the provision of clinical laboratory services. sections 1877(b)(4) and (e)(4) of the Act commenters that the proposal will (To avoid confusion between the as they were effective on January 1, reduce the burden of compliance with exception added by OBRA 1990 at 1992 (63 FR 1669).) We stated that, for the physician self-referral law without section 1877(b)(4) of the Act and section remuneration from a hospital to a posing a risk of program or patient 1877(b)(4) of the Act as it currently physician to be excepted under abuse. Therefore, we are finalizing the exists, the exception for financial § 411.357(g), the remuneration must be modification of the exception as relationships unrelated to the provision ‘‘completely unrelated’’ to the proposed. We note in this context that of clinical laboratory services enacted furnishing of designated health services. a ‘‘physician practice’’ under by OBRA 1990 is referred to herein as We clarified that the remuneration § 411.357(e)(4) includes a sole practice the ‘‘OBRA 1990 exception.’’) The could not in any direct or indirect way consisting of only one physician. (See, OBRA 1990 exception applied to both involve designated health services, and for example, the definition of ‘‘entity’’ at ownership or investment interests and further that the exception would not § 411.351). Under the definition of compensation arrangements, and apply in any situation involving ‘‘physician’’ at § 411.351, a physician excepted financial relationships remuneration that might have a nexus and the professional corporation of between physicians (or immediate with the provision of, or referrals for, a which he or she is a sole owner are the family members of physicians) and designated health service (63 FR 1702). same for purposes of the physician self- hospitals that did not relate to the We further stated that the remuneration referral law. Thus, if a recruited provision of clinical laboratory services. could in no way reflect the volume or physician joins an existing sole OBRA 1993 eliminated the OBRA 1990 value of a physician’s referrals, and that physician practice, and the recruited exception, but the Social Security Act payments to physicians that were physician receives remuneration Amendments of 1994 (Pub. L. 103–432) ‘‘inordinately high’’ or above fair market indirectly through payments made to (SSA 1994) reinstated the exception value would be presumed to be related the sole physician practice and the sole through January 1, 1995. to the furnishing of designated health physician practice does not pass In place of the OBRA 1990 exception, services. We provided the following directly through to the recruited OBRA 1993 added a new exception at examples of remuneration that might be physician all the remuneration from the section 1877(e)(4) of the Act. Under completely unrelated to the furnishing hospital, then the physician in the sole section 1877(e)(4) of the Act, of designated health services and physician practice or someone remuneration provided by a hospital to excepted under § 411.357(g): (1) Fair authorized to sign on behalf of the a physician that does not relate to the market value rental payments made by physician’s professional corporation provision of designated health services a teaching hospital to a physician to rent must sign the writing documenting the is not considered a compensation his or her house in order to use the arrangement. arrangement for purposes of the referral house as a residence for a visiting

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faculty member; and (2) compensation section 1877(e)(4) of the Act, and In the proposed rule, we reconsidered for teaching, general utilization review, comments we received on our CMS RFI, what remuneration, if any, is or administrative services. we proposed certain modifications to permissible under the exception if the In Phase II, we finalized the exception the exception at § 411.357(g) to broaden exception does not apply to any item, at § 411.357(g) with modifications (69 the application of the exception. In the cost, or service that could be allocated FR 16093 through 16094). As finalized, proposed rule, we stated that we to Medicare or Medicaid under cost in addition to requiring that the continued to agree with the statement in reporting principles, or to remuneration remuneration does not in any way take Phase II that the exception at section that is offered in any preferential or into account the volume or value of the 1877(e)(4) of the Act is significantly selective manner whatsoever based on physician’s referrals, § 411.357(g) narrower than the OBRA 1990 comments received to the CMS RFI. We requires that the remuneration is wholly exception. There are many financial stated that we agreed with the unrelated (that is, neither directly nor relationships between hospitals and commenters that the current exception indirectly related) to the furnishing of physicians that would be permissible is too restrictive and that the current designated health services. The under the OBRA 1990 exception § 411.357(g) has an extremely limited regulation stipulates that remuneration because they do not relate, directly or application (84 FR 55818). relates to the furnishing of designated indirectly, to the provision of clinical To give appropriate meaning to the health services if it: (1) Is an item, laboratory services. On the other hand, statutory exception at section 1877(e)(4) service, or cost that could be allocated insofar as the exception at section of the Act, we proposed to delete the in whole or in part to Medicare or 1877(e)(4) of the Act requires the current provisions at § 411.357(g)(1) and Medicaid under cost reporting remuneration to be unrelated to the (2) in their entirety and to remove the principles; (2) is furnished, directly or provision of designated health services, phrase ‘‘directly or indirectly’’ from the indirectly, explicitly or implicitly, in a and OBRA 1993 defines this term to regulation text. In place of existing selective, targeted, preferential, or include inpatient and outpatient § 411.357(g)(1) and (2), we proposed conditioned manner to medical staff or services, the scope of protected language that incorporates the concept other persons in a position to make or compensation arrangements under of patient care services as the influence referrals; or (3) otherwise section 1877(e)(4) of the Act is much touchstone for determining when takes into account the volume or value narrower than that of the OBRA 1990 remuneration for an item or service is of referrals or other business generated exception. Generally speaking, most related to the provision of designated by the referring physician. We stated health services. In particular, we that we incorporated cost reporting financial relationships between principles in the regulation in order to hospitals and physicians relate to the proposed regulation text to clarify that provide the industry with bright-line furnishing of designated health services, remuneration from a hospital to a rules to determine whether in particular, inpatient or outpatient physician does not relate to the remuneration is related to the furnishing hospital services. That being said, we provision of designated health services of designated health services (69 FR also considered in the proposed rule if the remuneration is for items or 16093). At the same time, we retracted that OBRA 1993 did not merely strike services that are not related to patient the statement from the 1998 proposed the term ‘‘clinical laboratory services’’ care services. We noted that section rule that general utilization review or in the OBRA 1990 exception and 1877(e)(4) of the Act specifically excepts administrative services might not be substituted the term ‘‘designated health remuneration unrelated to the provision related to the furnishing of designated services.’’ Rather, OBRA 1993 of designated health services. For health services. We justified our narrow eliminated the OBRA 1990 exception purposes of applying the exception at interpretation of section 1877(e)(4) of and created a new (albeit somewhat section § 411.357(g), we interpreted the Act on the legislative history of the similar) exception at section 1877(e)(4) section 1877(e)(4) of the Act to except exception, noting that, initially, under of the Act. In light of this statutory remuneration unrelated to the act or the original statute, the exception was history, in the proposed rule we stated process of providing designated health necessary to insulate a hospital’s that the most accurate interpretation of services, a concept which is not as all- relationships with physicians that were section 1877(e)(4) of the Act is not as a encompassing as remuneration that is unrelated to the provision of clinical carryover of the 1990 OBRA exception unrelated in any manner whatsoever to laboratory services, a very small element into the significantly revised statutory designated health services. We stated of a hospital’s practice. We continued regime established by OBRA 1993, but our belief that patient care services that, since 1995, however, all hospital rather as a new exception that was provided by a physician, when the services are designated health services intentionally created by the Congress in physician is acting in his or her capacity and a narrower interpretation of the OBRA 1993, the very same legislation in as a medical professional, are integrally exception is required to prevent abuse which the Congress expanded the related to the act or process of providing (69 FR 16093). We have made no referral and billing prohibition of the designated health services, regardless of changes to § 411.357(g) since Phase II. physician self-referral law to inpatient whether such services are provided to Commenters on Phase II stated that the and outpatient hospital services. We patients of the hospital; thus, payment Congress intended hospitals to be able stated in the proposed rule that, in for such services relates to the provision to provide any amount of remuneration creating a new exception for of designated health services. Likewise, to physicians, provided that the remuneration unrelated to the provision we proposed that items that are used in remuneration did not directly relate to of designated health services and the act or process of furnishing patient designated health services. In Phase III, expanding the definition of ‘‘designated care services are integrally related to the based on our interpretation of the health services’’ to include inpatient provision of designated health services, legislative history at that time, we and outpatient hospital services, we and payments for such items relate to reaffirmed our narrow interpretation of believe that the Congress intended the the provision of designated health section 1877(e)(4) of the Act (72 FR exception to apply to a narrow—but not services. On the other hand, we also 51056). empty—subset of compensation stated our belief that remuneration from Based on our review of the statutory arrangements between hospitals and a hospital to a physician for services history of the OBRA 1990 exception and physicians. that are not patient care services or

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items that are not used in the act or physician to be available to provide provided that it is not determined in a process of providing designated health patient care services at the hospital. manner that takes into account the services does not relate to the provision Similarly, medical director services volume or value of the physician’s of designated health services and typically include, among other things, referrals. We noted in this context that would, therefore, not be prohibited establishing clinical pathways and ‘‘licensed medical professional’’ would under section 1877(e)(4) of the Act or overseeing the provision of designated include, but would not be limited to, a our regulations at proposed § 411.357(g) health services in a hospital. Under our licensed physician. That is, if a service (provided that the remuneration is not proposal, payments for such services could be provided legally by both a determined in any manner that takes would relate to the furnishing of physician and a medical professional into account the volume or value of the designated health services for purposes who is not a physician, such as a physician’s referrals). of applying the exception at proposed registered nurse, but the service could In the proposed rule, we stated our § 411.357(g). We also stated that not be provided by a person who is not belief that the concept of patient care utilization review services are closely a licensed medical professional, it services would provide a determinant related to patient care services, and for would still be considered a patient care and practicable principle for applying this reason, we considered service under § 411.357(g)(3) as § 411.357(g) to compensation remuneration for such services to be proposed. Thus, we proposed that arrangements between hospitals and related to the furnishing of designated remuneration provided by a hospital to physicians. We also noted that the health services (84 FR 55818). a physician for the service would not be proposed regulation at § 411.357(g) In contrast to the services described excepted under § 411.357(g), retained the requirement that the above, in the proposed rule we stated notwithstanding the fact that the service remuneration is not determined in any that the administrative services of a does not have to be performed by a manner that takes into account the physician pertaining solely to the physician (84 FR 55818 through 55819). volume or value of the physician’s business operations of a hospital are not In the proposed rule, we stated that referrals. Remuneration that is related to patient care services. Thus, with respect to remuneration from a determined in any manner that takes under our proposal, if a physician were hospital for items provided by a into account the volume or value of a a member of a governing board along physician, typical examples of physician’s referrals clearly relates to with persons who were not licensed remuneration that is related to the the provision of designated health medical professionals, and the provision of designated health services services, regardless of the nature of the include the rental of medical equipment item or service for which the physician physician received stipends or meals receives remuneration. Thus, the that were available to the other board and purchasing of medical devices from proposed provisions at § 411.357(g)(2) members, we would not have physicians. Because these items are and (g)(3), which were intended to considered the remuneration provided used in the provision of patient care clarify when remuneration does not to the physician to relate to the services, and patient care services may relate to the provision of designated provision of designated health services, be designated health services or be health services, would not have applied provided that the physician’s directly correlated with the provision of to remuneration that is determined in compensation for the administrative designated health services, we any manner that takes into account the services was not determined in a concluded that remuneration for such volume or value of a physician’s manner that takes into account the items clearly relates to the provision of referrals (84 FR 55816 through 55817). volume or value of his or her referrals. designated health services. We also In the proposed rule, we stated that In this instance, we stated that the stated that rental of office space where remuneration from a hospital to a dispositive factor in determining that a patient care services are provided, physician that pertains to the physician’s services are not related to including patient care services that are physician’s patient care services is the the provision of designated health not necessarily designated health paradigm of remuneration that relates to services is that the services are also services, is remuneration related to the the provision of designated health provided by persons who are not provision of designated health services. services. Most obviously, when a licensed medical professionals, and the In contrast, we stated that, if a physician physician provides patient care services physician is compensated on the same who joins another practice sells the to hospital patients, the physician’s terms and conditions as the non- furniture from his or her medical office patient care services are directly medical professionals. Because the to a hospital, and the hospital places the correlated with the provision of services could be provided by persons furniture in the hospital’s facilities, as designated health services. Thus, who are not licensed medical long as the payment is not determined remuneration from the hospital to the professionals, we concluded that the in a manner that takes into account the physician for such services is clearly services were not patient care services. physician’s referrals, the remuneration related to designated health services. To provide clarity for stakeholders, we would not be considered to be related to However, we noted in the proposed rule proposed a general principle at the provision of designated health that there does not have to be a direct § 411.357(g)(3) for determining when services under our proposal. Also, we one-to-one correlation between a remuneration for a particular service, stated our continued belief that, as first physician’s services and the provision when provided by a physician, is stated in the 1998 proposed rule, of designated health services in order related to the provision of designated § 411.357(g) is available to except rental for payments for the service to be health services. We stated that, if a payments made by a teaching hospital related to the provision of designated service can be provided legally by a to a physician to rent his or her house health services. For example, payment person who is not a licensed medical in order to use the house as a residence for emergency department call coverage professional and the service is of the for a visiting faculty member. To relates to the furnishing of designated type that is typically provided by such provide stakeholders with greater health services, even if the physician is persons, then payment for such a clarity, we proposed to stipulate in not as a matter of fact called to the service is unrelated to the provision of regulation that remuneration provided hospital to provide patient care services, designated health services and may be in exchange for any item, supply, because the hospital is paying the protected under proposed § 411.357(g), device, equipment, or office space that

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is used in the diagnosis or treatment of of designated health services in future not apply to items or services provided patients, or any technology that is used rulemaking. by entities to physicians. to communicate with patients regarding Following the publication of Phase II, 9. Exception for Payments by a patient care services, is presumed to be commenters complained that neither Physician (§ 411.357(i)) related to the provision of designated § 411.357(i) nor § 411.357(l) were health services for purposes of Section 1877(e)(8) of the Act excepts available to protect many arrangements § 411.357(g) (84 FR 55819). payments made by a physician to a wherein physicians purchased items In the proposed rule, we stated our laboratory in exchange for the provision and services from entities, because: (1) belief that § 411.357(g)(2) and (3) would of clinical laboratory services, or to an The exception for payments by a provide clarity regarding when entity as compensation for other items physician was limited to the purchase of payments for items and services relate or services if the items or services are items and services not specifically to the provision of designated health furnished at a price that is consistent excepted by another exception in services, and also give the meaning to with fair market value. The 1995 final §§ 411.355 through 411.357 (including the statutory exception. We stated that rule (60 FR 41929) incorporated the § 411.357(l)); and (2) the exception for the requirement pertaining to the provisions of section 1877(e)(8) of the fair market value compensation did not volume or value of a physician’s Act into our regulations at § 411.357(i). apply to items or services provided by referrals at § 411.357(g)(1) would ensure In the 1998 proposed rule, we proposed an entity to a physician (72 FR 51057). that payments to a physician for items to interpret ‘‘other items and services’’ In response to the commenters, we or services that are ostensibly not to mean any kind of item or service that expanded § 411.357(l) in Phase III to related to patient care services are not a physician might purchase (that is, not include both items and services in fact disguised payments for the limited to ‘‘services’’ for purposes of the furnished by physicians to entities and physician’s referrals. We sought Medicare program in § 400.202 of this items and services furnished by entities comments on our proposals, as well as Chapter), but not including clinical to physicians (72 FR 51094 through other possible ways for distinguishing laboratory services or those items or 51095). However, Phase III did not between remuneration that is related to services that are specifically excepted modify the exception for payments by a 12 the provision of designated health by another provision in §§ 411.355 physician, including the parenthetical services and remuneration that is through 411.357 (63 FR 1703). We stated indicating that § 411.357(i) could not be unrelated to the provision of designated that we did not believe that the used for items or services specifically health services. Specifically, we sought Congress meant the exception for excepted under § 411.357(l). We comment as to whether we should limit payments by a physician to protect acknowledged that the expansion of the what we consider to be ‘‘remuneration financial relationships that were exception for fair market value related to the provision of designated covered by more specific exceptions compensation to items or services health services’’ to remuneration paid with specific requirements, such as the furnished by entities to physicians explicitly for a physician’s provision of exceptions for rental arrangements at would require parties in some instances to rely on § 411.357(l) instead of designated health services to a section 1877(e)(1) of the Act. § 411.357(i). We concluded, however, hospital’s patients (84 FR 55819). In Phase II, we responded to that upon further consideration, we We received the following comment commenters that disagreed with our believe that the required application of and our response follows. position that the exception for payments the fair market value compensation Comment: Commenters on the by a physician is not available for exception, which contains conditions proposal generally supported our efforts arrangements involving any items or not found in the less transparent to restore utility to the statutory services excepted by another exception exception for payments by a physician exception, but a few commenters (69 FR 16099). We reiterated the to a hospital, further reduces the risk of expressed valid concerns that the statutory interpretation from the 1998 program abuse (72 FR 51057). We also expansion of the exception, especially proposed rule, explaining that the emphasized in Phase III that the without substantial guidance and determination that items and services exception for payments by a physician examples of its application, would risk addressed by another exception should could not be used to protect office space program or patient abuse. One not be covered in this exception is leases (72 FR 51044 through 51045). We commenter noted that ‘‘patient care consistent with the overall statutory explained that we did not believe that services’’ is a defined term under our scheme and purpose and is necessary to the lease of office space is an ‘‘item or regulations, and it is not clear whether prevent the exception for payments by service’’ and that parties seeking to the term ‘‘patient care services’’ as used a physician from negating the statute (69 protect arrangements for the rental of in § 411.357(g) was intended to have the FR 16099; see also 72 FR 51057). As a office space must rely on § 411.357(a) same meaning as ‘‘patient care services’’ result, we made no changes to the (72 FR 51059). In 2015, when we as defined at § 411.351. Many regulation at § 411.357(i) in Phase II. finalized the exception at § 411.357(y) commenters, citing uncertainty in Thus, as finalized in Phase II, the for timeshare arrangements, we applying the proposed exception, exception for payments by a physician reaffirmed our position that the requested codification of specific at § 411.357(i) stated that the exception exception for payments by a physician remuneration that would be deemed not could not be used for items or services to relate to the provision of designated that are specifically excepted by another 12 In the , 2007 Federal Register, the health services. exception in §§ 411.355 through regulation text of the exception for payments by a Response: Given the concerns raised 411.357, with a parenthetical clarifying physician was modified in error. Phase II stated that that this included the exception for fair § 411.357(i) is limited to payments for items or by commenters, we are not finalizing services that are ‘‘not specifically excepted by our proposed revision to § 411.357(g) at market value compensation at another provision in §§ 411.355 through 411.357’’ this time. We are continuing to evaluate § 411.357(l). However, at that time, the (69 FR 16140). The September 5, 2007 Federal the best way to restore utility to the exception for fair market value Register replaced ‘‘excepted’’ with ‘‘addressed’’ (72 compensation applied only to the FR 51094). The original language of the exception statutory exception, and we may finalize was restored in a correction notice to Phase III and revisions to the exception for provision of items or services by published in the , 2007 Federal Register remuneration unrelated to the provision physicians to entities; the exception did (72 FR 68076).

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is not available for arrangements 1877(e)(1) through (7) of the Act. As a rental of office space or the rental of involving the rental of office space (80 matter of statutory construction, the equipment. FR 71325 through 71327). catch-all exception at section 1877(e)(8) We are retracting our prior statements Commenters on the CMS RFI stated of the Act does not supersede the that office space is neither an ‘‘item’’ that our interpretation of the exception previous exceptions. With respect to nor a ‘‘service.’’ We made these for payments by a physician, especially arrangements for the rental of office statements, in significant part, to our determination that the exception is space or the rental of equipment, in emphasize that we do not believe that not available if any other exception particular, we note that the statutory the exception for payments by a would apply to an arrangement, exceptions for such arrangements at physician should be available to protect unreasonably narrowed the scope of the section 1877(e)(1) of the Act include the type of arrangement for which the statutory exception. Commenters also requirements that are specific to rental Congress established a specific noted that compliance with other arrangements, as well as general exception in statute. In this final rule, exceptions is generally more requirements that the arrangements are we have more clearly explained this burdensome than compliance with the commercially reasonable, that rental position and no longer believe it is statutory exception for payments by a charges are fair market value, and that necessary to preclude office space from physician, and urged us to conform the compensation is not determined in any the categories of ‘‘items’’ and ‘‘services.’’ language of the exception at § 411.357(i) manner that takes into account the (We note that we have not made prior to the statutory language at section volume or value of referrals or other similar statements regarding 1877(e)(8) of the Act. As noted in the business generated between the parties. equipment.) As such, and because the proposed rule, we found the CMS RFI We do not believe that the Congress exception at § 411.357(i) is unavailable to protect an arrangement for the rental comments regarding the narrowing of would have imposed these of office space or equipment, parties the statutory exception persuasive and, particularized requirements at section seeking to protect an arrangement for as a result, we reconsidered our position 1877(e)(1) of the Act, but also allowed the rental of office space or equipment regarding the availability of the parties to sidestep them by relying on must structure the arrangement to exception for payments by a physician the exception for payments by a for certain compensation arrangements satisfy the requirements of § 411.357(a), physician to protect rental § 411.357(b), § 411.357(l) (for direct (84 FR 55820). arrangements. To explain our proposal and the compensation arrangements), or policies we are setting forth in this final Although we maintain our policy § 411.357(p) (for indirect compensation rule regarding the availability of the with respect to the statutory exceptions, arrangements). Although we are exception at § 411.357(i), it is important we no longer believe that the regulatory retracting our statement that office space to distinguish between the statutory exceptions should limit the scope of the is not an ‘‘item or service,’’ parties may exceptions found at section 1877(e) of exception for payments by a physician. not rely on the exception for personal the Act (codified at § 411.357(a) through Thus, we proposed to remove from service arrangements at § 411.357(d)(1) § 411.357(i) of our regulations) and the § 411.357(i)(2) the reference to the to protect arrangements for the rental of regulatory exceptions (codified at regulatory exceptions, including the office space. We noted that § 411.357(i) § 411.357(j) et seq.) issued using the parenthetical referencing the exception may be available to protect payments by Secretary’s authority under section for fair market value compensation. We a physician for the lease or use of space 1877(b)(4) of the Act.13 We continue to also proposed that the exception at that is not office space, such as storage believe that the exception for payments § 411.357(i) would not be available to space or residential real estate. by a physician at section 1877(e)(8) of protect compensation arrangements We also proposed to remove from the Act was not meant to apply to specifically addressed by one of the § 411.357(i)(2) the reference to compensation arrangements that are statutory exceptions, codified in our exceptions in §§ 411.355 and 411.356. specifically excepted by other statutory regulations at § 411.357(a) through (h). As noted previously, we interpret the exceptions in section 1877 of the Act. Under the proposal, parties would exception at section 1877(e)(8) of the Given the placement of the exception generally be able to rely on the Act for payments by a physician to function in the statutory scheme as a for payments by a physician as the final exception at § 411.357(i) to protect fair catch-all, to apply to compensation statutory exception at section 1877(e) of market value payments by a physician arrangements for the furnishing of other the Act, we believe that this exception to an entity for items or services items or services by entities that are not functions as a catch-all to protect certain furnished by the entity, even if a specifically addressed at sections legitimate arrangements that are not regulatory exception at § 411.357(j) et 1877(e)(1) through (7) of the Act. covered by the exceptions at sections seq. may be applicable. However, for the Therefore, we no longer believe that the reasons noted previously in this section exception should be limited by the 13 Section 1877(b)(5) of the Act directs the II.D.9., § 411.357(i) would not be exceptions at sections 1877(b) and (c) of Secretary to establish a regulatory exception for applicable to arrangements for the rental the Act or the regulatory exceptions electronic prescribing, but does not provide any of office space or equipment.14 That is, statutory text or specific requirements for the codified in §§ 411.355 and 411.356. exception. Pursuant to this authority, we we believe that, as a matter of statutory Lastly, ‘‘items or services’’ furnished established an exception for electronic prescribing construction, the exception for by the entity under the exception for items and services at § 411.357(v). Although payments by a physician is not available § 411.357(v), unlike all the other exceptions at payments by a physician may not § 411.357(j) et seq., was not issued using the to protect any type of arrangement that include cash or cash equivalents. That Secretary’s authority under section 1877(b)(4) of the is specifically addressed by another is, the physician may not make in-kind Act, for purposes of our interpretation of the statutory exception at section 1877(e) of ‘‘payments’’ to the entity in exchange exception for payments by a physician, we treat the Act, including arrangements for the § 411.357(v) as a regulatory exception. In particular, for cash from the entity. We believe that we interpret section 1877(b)(5) of the Act as a grant cash provided by an entity to a of authority for the Secretary to issue a regulatory 14 Elsewhere in this final rule, we are finalizing physician poses a risk of program or exception; it is not itself a statutory exception, just our proposal to extend § 411.357(l) to arrangements as section 1877(b)(4) of the Act grants the Secretary for the rental of office space, including rentals of patient abuse, and that the Congress authority to create exceptions, but is not an less than 1 year, provided that all the requirements would have included additional exception in its own right. of the exception are satisfied. safeguards at section 1877(e)(8) of the

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Act if the exception were designed to statutory scheme of exceptions space, and emphasized that § 411.357(l) cover such arrangements. At the same applicable only to compensation applied only to payments from an entity time, we note that, if a physician pays arrangements, we no longer believe that to a physician for items and services an entity $10 in cash for a gift card it is necessary to distinguish office furnished by the physician. We worth $10, we do not believe that this space from items or services in order to modified our policy in Phase III and would constitute a financial ensure that the exception at § 411.357(i) extended the application of the relationship for purposes of the may not be used for rental of office exception at § 411.357(l) to payments physician self-referral law. Likewise, in space arrangements. As recognized by from a physician to an entity for items cases where a physician or an entity acts the commenters and explained in or services provided by the entity, but as a pure pass-through, taking money section II.D.10 of this final rule, parties continued to decline to make from one party and passing the exact may now use the exception for fair § 411.357(l) applicable to an same amount of money to another party, market value compensation at arrangement for the rental of office we do not believe that the pass-through § 411.357(l) to except arrangements for space (72 FR 51059 through 51060). We arrangement is a financial relationship the rental of office space. At the same explained our policy at that time that for purposes of the physician self- time, we are taking this opportunity to the rental of office space is not an ‘‘item referral law. clarify that office space is not a service, or service.’’ We added that, because After reviewing the comments, we are and therefore the exception for personal arrangements for the rental of office finalizing our proposal at § 411.357(i) service arrangements at § 411.357(d)(1) space had been subject to abuse, we without modification. is not available to protect arrangements believe that it could pose a risk of We received the following comments for the rental of office space or program or patient abuse to permit and our responses follow. timeshare arrangements. parties to protect such arrangements Comment: Most commenters that relying on § 411.357(l). In the CY 2016 10. Exception for Fair Market Value addressed this issue supported our PFS final rule, we reaffirmed our Compensation (§ 411.357(l)) proposed interpretation of the statutory position that the exception for fair payments by a physician exception and In the 1998 proposed rule, we market value compensation does not the proposed regulatory changes to proposed an exception at § 411.357(l) apply to arrangements for the rental of implement the interpretation. One for fair market value compensation (63 office space (80 FR 71327). commenter asserted that our previous FR 1699). We noted that the statutory We have reconsidered our policy interpretation of the statute exceptions at section 1877(e) of the Act regarding the application of § 411.357(l). inappropriately narrowed the utility of apply to specific categories of financial Through our administration of the the exception. Other commenters relationships and do not address many SRDP, we have seen legitimate, emphasized that finalizing our proposal common and legitimate compensation nonabusive arrangements for the rental would increase flexibility and reduce arrangements between physicians and of office space that could not satisfy the the cost and burden of compliance with the entities to which they refer requirements of § 411.357(a) because the the physician self-referral law. designated health services. The term of the arrangement was less than Commenters generally agreed that the exception for fair market value 1 year, and could not satisfy the exception should be available to protect compensation was proposed as an open- requirements of § 411.357(y) because the an arrangement even if the arrangement ended exception to protect certain arrangement conveyed a possessory is addressed by a regulatory exception, compensation arrangements that may leasehold interest in the office space. To but not if another statutory exception, not be specifically addressed in the provide flexibility to stakeholders to such as the exception for the rental of statutory exceptions. Among other protect such nonabusive arrangements, office space, is applicable to the things, we stated that the exception we proposed and are now finalizing arrangement. One commenter agreed might be used to protect arrangements modifications to § 411.357(l) to permit that the exception for payments by a for the sublease of office space (63 FR parties to rely on the exception for fair physician functions in the statutory 1714). We suggested that parties could market value compensation to protect scheme as a ‘‘catch-all’’ exception that use the exception for fair market value arrangements for the rental or lease of applies only to arrangements that are compensation if they had any doubts office space. not otherwise addressed in a statutory about whether they met the As discussed in many of our previous exception. requirements of another exception in rulemakings and most recently in the Response: We agree with the § 411.357. CY 2017 PFS proposed rule (81 FR commenters and are finalizing our In Phase I, we finalized § 411.357(l), 46448 through 46453) and final rule (81 revisions to § 411.357(i) as proposed. stating that parties could use the FR 80524 through 80534), we are Comment: Several commenters exception, even if another exception concerned about potential abuse that supported our retraction of our previous potentially applied to an arrangement may arise when rental charges for the policy that office space is neither an (66 FR 919). We explained our belief lease of office space or equipment are item nor a service. The commenters that the safeguards incorporated into the determined using a formula based on: recognized that, under the regulatory exception for fair market value (1) A percentage of the revenue raised, scheme of the physician self-referral compensation were sufficient to cover earned, billed, collected, or otherwise law, retraction of the policy is key to various compensation arrangements, attributable to the services performed or making the exception for fair market including arrangements covered by business generated in the office space (a value compensation at § 411.357(l) other exceptions. In Phase II, we ‘‘percentage-based compensation applicable to arrangements for the rental responded to commenters that requested formula’’); or (2) per-unit of service of office space. that the exception at § 411.357(l) be rental charges, to the extent that such Response: In this final rule, we are made available to protect arrangements charges reflect services provided to reiterating the retraction of our previous for the rental of office space, including patients referred by the lessor to the policy that office space is neither an arrangements where space is rented by lessee (a ‘‘per-click compensation item nor a service. Given our entities to physicians (69 FR 16111). We formula’’). We continue to believe that interpretation of the exception for declined to extend § 411.357(l) to arrangements based on percentage payments by a physician within the arrangements for the rental of office compensation or per-unit of service

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compensation formulas present a risk of § 411.353(c)(2) to establish that the However, we solicited comments on program or patient abuse because they terms of the arrangement and the whether this requirement is necessary to may incentivize overutilization and compensation for the same items, office protect against program or patient abuse patient steering. To address this risk, in space, or services did not change during or should be removed from the the FY 2009 IPPS final rule, we the renewal arrangement. Although we exception, and whether substitute included in the exceptions for the rental believe that, in most cases, parties safeguards such as those included in of equipment, fair market value seeking to lease office space prefer many of the statutory or regulatory compensation, and indirect leases with longer terms—for instance, exceptions to the physician self-referral compensation arrangements restrictions to justify expenses spent on property law would be appropriate. As explained on percentage-based compensation and improvements—as described by below, in this final rule we are not per-click compensation formulas when commenters, some parties, especially removing or modifying § 411.357(l)(6). determining the rental charges for the parties in rural areas, would prefer or In this final rule, we are taking the lease of equipment. Because the find necessary the flexibility of a short- opportunity to reorganize the exception exception at § 411.357(l), to date, has term rental of office space. Given the at § 411.357(l) to distinguish the writing not been applicable to arrangements for requirements of the exception for fair requirement of the exception for fair the rental of office space, it does not market value compensation, including market value compensation from other include a prohibition on percentage- the requirement that parties enter into requirements. As the exception is based compensation and per-click only one arrangement for the leased currently organized, § 411.357(l)(1) compensation formulas when office space over the course of a year requires the arrangement to be in determining the rental charges for the and the requirement that the writing and requires the writing to lease of office space. (The exceptions for arrangement does not violate the anti- specify the items or services covered by the rental of office space and indirect kickback statute, which, as explained the arrangement; § 411.357(l)(2) requires compensation arrangements currently below and in section II.D.1. of this final the timeframe of the arrangement to be include the prohibitions as they relate to rule, is not being removed from in writing, and also contains substantive the determination of rental charges for § 411.357(l)(5) in the final rule, we do requirements pertaining to timeframe of the lease of office space.) We remain not believe that short-term arrangements the arrangement and rules governing the concerned about the potential abuse for the rental of office space that satisfy frequency with which parties can enter related to percentage-based all the requirements of § 411.357(l) pose into an arrangement for the same items compensation and per-click a risk of program or patient abuse. We or services; § 411.357(l)(3) requires the compensation formulas for determining remind readers that, as explained in compensation of the arrangement to be the rental charges of both office space section II.D.9. of this final rule, the in writing, and also contains substantive and equipment. Therefore, we proposed exception for payments by a physician requirements pertaining to the to incorporate into the exception at at § 411.357(i) is not available to protect compensation under the arrangement. § 411.357(l) prohibitions on percentage- any leases of office space, including We are placing the writing requirement based compensation and per-unit of short-term leases. from these various provisions in § 411.357(l)(1). Specifically, service compensation formulas with In the proposed rule, we proposed to respect to the determination of rental § 411.357(l)(1) will require the remove the requirement at arrangement to be in writing and signed charges for the lease of office space, § 411.357(l)(5) that the arrangement by the parties; while § 411.357(l)(i) similar to the restrictions found in does not violate the anti-kickback through § 411.357(l)(iii) will list the § 411.357(a)(5)(ii) and statute or any Federal or State law or information that must be specified in § 411.357(p)(1)(ii). regulation governing billing or claims writing, as follows: The items, services, Unlike the exception for the rental of submissions. As explained in section office space, or equipment covered by office space at § 411.357(a), the II.D.1. of this final rule, with respect to the arrangement (§ 411.357(l)(1)(i)); the exception for fair market value the exception for fair market value compensation that will be provided compensation does not require a 1-year compensation, we are finalizing this under the arrangement term. Therefore, short-term proposal with respect to Federal or State (§ 411.357(l)(1)(ii)); and timeframe of the arrangements for the rental of office laws or regulations governing billing or arrangement (§ 411.357(l)(1)(iii)). These space of less than 1 year will be claims submissions, but we are not organizational modifications are permissible under the exception. finalizing the proposal with respect to intended to clarify the exception and do However, as with other compensation the requirement that the arrangement not affect or modify the requirements of arrangements permitted under does not violate the anti-kickback the exception in any way. § 411.357(l), the parties will be statute. We believe that the requirement In addition to the organizational permitted to enter into only one that the arrangement does not violate changes explained above, after arrangement for the rental of the same the anti-kickback statute in reviewing the comments, we are office space during the course of a year. § 411.357(l)(5) functions as an important finalizing our proposal to permit The parties will be able to renew the safeguard that substitutes for certain arrangements for the lease of office arrangement on the same terms and requirements included in certain space under § 411.357(l) with certain conditions any number of times, statutory exceptions but omitted from modifications to clarify the exception provided that the terms of the § 411.357(l), including the exclusive use and to protect against program or arrangement and the compensation for requirement in the exceptions for the patient abuse. First, we are clarifying in the same office space do not change. rental of office space and equipment. the introductory chapeau language that Parties are not required to renew their We did not propose to remove the exception may be used for the lease arrangement in writing. Renewals § 411.357(l)(6), which requires that any of office space and not only for the use effectuated through course of conduct or services to be performed under the of office space. Second, we are no longer by verbal agreement are permitted under arrangement do not involve the requiring at § 411.357(l)(5) that the the exception for fair market value counseling or promotion of a business arrangement not violate any Federal or compensation. However, parties retain arrangement or other activity that State law or regulation governing billing the burden of proof under violates a Federal or State law. or claims submission, but we are not

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finalizing our proposal to remove the arrangement is used predominantly for requirement at § 411.357(l)(6), we would requirement for compliance with the evaluation and management services to need to include additional safeguards to anti-kickback statute. Third, we are patients. Given the latter restrictions, an substitute for the statutory requirements adding the phrase ‘‘even if no referrals arrangement such as that identified by in order to ensure that excepted service were made between the parties’’ to the the commenter, under which a arrangements under § 411.357(l) do not commercially reasonable requirement in laboratory compensates a physician for pose a risk of program or patient abuse. § 411.357(l)(4). Fourth, as explained in space used on a short-term basis for Comment: One commenter supported section II.E.1. of this final rule, we are specimen collections, would not be removing the phrase ‘‘and furthers the modifying the requirement at permissible under either § 411.357(a) or legitimate business purpose of the § 411.357(l)(2) to permit parties to rely § 411.357(y). As modified in this final parties’’ from § 411.357(l)(4), but on § 411.357(l) and § 411.357(z) to rule, the exception for fair market value requested either that the term protect an arrangement for the same compensation at § 411.357(l) may be ‘‘commercially reasonable’’ be defined items, services, office space, or used to except such an arrangement, to include a requirement that the equipment during the course of a year. provided that all the requirements of the arrangement must be commercially Lastly, as explained in section II.B.4, we exception are satisfied. To clarify that reasonable even if no referrals were are requiring at § 411.357(l)(7) that any the exception at § 411.357(l) may be made between the parties or that arrangement that includes a directed used for leases of office space, where § 411.357(l)(4) be modified to require an referral requirement must satisfy all the dominion and control are transferred to arrangement to be commercially conditions of § 411.354(d)(4). the lessee, we are modifying the reasonable ‘‘even if no referrals were We received the following comments chapeau language of the exception to made between the parties.’’ and our responses follow. include the phrase ‘‘lease of office Response: As we discussed in section Comment: Commenters generally space.’’ II.B.2, we are not including the ‘‘even if supported our proposal to allow parties Comment: Commenters generally no referrals were made’’ requirement in to rely on the exception for fair market opposed inclusion of a requirement for the definition of ‘‘commercially value compensation at § 411.357(l) to compliance with the anti-kickback reasonable’’ at final § 411.351. Most protect arrangements for the rental of statute in regulatory exceptions, exceptions that include a commercial office space. Commenters recognized including the exception for fair market reasonableness requirement, including the flexibility afforded by the proposal, value compensation at § 411.357(l). One exceptions that apply to arrangements especially for office space leases with a commenter that addressed our request that could also be excepted by term of less than one year. One for comments on § 411.357(l)(6), which § 411.357(l), stipulate that the commenter noted that the proposal prohibits services furnished under an arrangement must be commercially would be helpful for rural providers, arrangement from involving the reasonable ‘‘even if no referrals’’ were where short-term rentals may be counseling or promotion of a business made between the parties. We are necessary to address community needs, arrangement or other activity that adopting the second approach such as the need to relocate a physician violates a Federal or State law, advocated by the commenter and are due to facility demands or renovations. specifically objected to including a revising the requirement at Another commenter stated that the requirement for compliance with the § 411.357(l)(4) to clarify that the exception could be helpful for situations anti-kickback statute in the exception arrangement must be commercially where a laboratory leases space from a for fair market value compensation. reasonable ‘‘even if no referrals were physician for a temporary patient Response: As explained in section made between the parties.’’ Without this service center for specimen collections II.D.1 of this final rule, we are not modification, some stakeholders may while a permanent space is renovated or removing the requirement for believe that the standard articulated at constructed. compliance with the anti-kickback § 411.357(l) is a different and less Response: We agree with the statute from the exception for fair demanding standard than the commenters that the proposal, once market value compensation at requirement in other exceptions. finalized, will afford greater flexibility § 411.357(l)(5). We believe that the Comment: One commenter supported for short-term leases of office space. requirement that the arrangement does our proposal at § 411.357(l)(3) to Under the current regulations, an not violate the anti-kickback statute in prohibit the use of percentage-based or arrangement for the lease of office, § 411.357(l)(5) functions as an important per-unit-of service based compensation which involves the transfer of dominion substitute safeguard for requirements formulas for determining the and control of the leased premises to the that are included in certain statutory compensation for the rental of office lessee, must have a term of at least 1 exceptions but omitted from space under the exception for fair year. On the other hand, arrangements § 411.357(l), including the exclusive use market value compensation. for the use of space, where dominion requirement in the exceptions for the Response: We are finalizing this and control over the space are not rental of office space and equipment. proposal. We believe that it is a transferred to the party making use of For similar reasons, we are also not necessary safeguard for the reasons the space, are permitted for durations of removing the requirement at stated in the CY 2017 PFS proposed rule less than 1 year under the exception for § 411.357(l)(6), which requires that the (81 FR 46448 through 46453) and final timeshare arrangements at § 411.357(y). services to be performed under the rule (81 FR 80524 through 80534). (See 80 FR 71325 through 71326). arrangement do not involve the Comment: One commenter requested However, the exception at § 411.357(y) counseling or promotion of a business that CMS permit indefinite holdovers includes several requirements not found arrangement or other activity that for arrangements under the exception in the exception for the rental of office violates a Federal or State law. This for fair market value compensation, space at § 411.357(a), such as a requirement applies to service similar to the indefinite holdover requirement at § 411.357(y)(2) that the arrangements and is carried over from provisions in the exceptions for rental of arrangement is between a physician and the statutory exception for personal office space, rental of equipment, and a hospital or a physician organization service arrangements, codified in our personal service arrangements. The and the requirement at § 411.357(y)(3)(i) regulations at § 411.357(d)(1)(vi). We are commenter noted that an arrangement that the premises covered by the concerned that, if we remove the may be for any period of time under

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§ 411.357(l), and the exception permits the types of entities that may donate that would impact § 411.357(w)(2) and the arrangement to be renewed any electronic health records items and (3) based on the Cures Act and the number of times if the terms of the services under the exception, and Office of the National Coordinator for arrangement and the compensation for updating the provision under which Health Information Technology (ONC), the same items or services do not electronic health records software is HHS Notice of Proposed Rulemaking, change. The commenter interpreted the deemed interoperable (78 FR 78751). ‘‘21st Century Cures Act: renewal provision under § 411.357(l) to Although we did not specifically Interoperability, Information Blocking, require written documentation that the request comments on the EHR exception and the ONC Health IT Certification renewed arrangement was on the same in the CMS RFI, we received several Program’’ (ONC NPRM), which terms and conditions, while there is no comments related to the exception. In proposed to implement key provisions such requirement under the indefinite addition, in its , 2018 request in Title IV of the Cures Act.15 Among holdover provisions. for information described in section other things, the ONC NPRM proposed Response: We believe that the I.B.1. of this final rule, OIG requested Conditions and Maintenance of commenter misunderstood the renewal comments on the safe harbor at 42 CFR Certification requirements for health IT provision in § 411.357(l)(2). Under 1001.952(y), which is substantively developers under the ONC Health IT § 411.357(l)(2), parties are permitted to similar to the EHR exception at Certification Program (certification renew an arrangement any number of § 411.357(w) (see 83 FR 43607). After program) and proposed to define times if the terms of the arrangement reviewing comments related to the EHR reasonable and necessary activities that and the compensation for the same exception and safe harbor submitted in do not constitute information blocking items, services, office space, or response to the CMS RFI and the OIG’s for purposes of section 3022(a)(1) of the equipment do not change. Likewise, the request for information, as well as Public Health Service Act (PHSA). We indefinite holdover provisions at recent statutory and regulatory discuss our specific proposals and our § 411.357(a)(7), § 411.357(b)(6), and developments arising from the 21st final policies and regulations pertaining § 411.357(d)(1)(vii) require the holdover Century Cures Act (Pub. L. 114–255, to § 411.357(w)(2) and (3) below in arrangement to continue on the same enacted on , 2016) (Cures subsections (1) and (2), respectively. terms and conditions. Neither the Act), in the proposed rule, we proposed indefinite holdover provisions in the to update provisions in the EHR (1) The ‘‘Deeming Provision’’ latter exceptions nor the renewal exception pertaining to interoperability (§ 411.357(w)(2)) provision in § 411.357(l)(2) require the (§ 411.357(w)(2)) and data lock-in The existing regulation at holdover arrangement or renewal (§ 411.357(w)(3)), clarify that donations § 411.357(w)(2) requires that software arrangement to be documented in a of certain cybersecurity software and donated under the EHR exception is formal writing. To be sure, parties services are permitted under the EHR interoperable. The deeming provision at renewing an arrangement under exception, remove the sunset provision § 411.357(w)(2) provides certainty to § 411.357(l)(2) retain the burden of proof at § 411.357(w)(13), and modify the parties that donated software satisfies under § 411.353(c)(2) to establish that definitions of ‘‘electronic health record’’ the interoperability requirement at the renewal arrangement is on the same and ‘‘interoperable’’ at § 411.351 to § 411.357(w)(2). Specifically, terms and conditions as the previous ensure consistency with the Cures Act § 411.357(w)(2) currently provides that arrangement, but parties to a holdover (84 FR 55822). We also proposed to software is deemed to be interoperable arrangement under one of the indefinite modify the requirement at if it has been certified under ONC’s holdover provisions have a similar § 411.357(w)(4) that a physician certification program to electronic burden. In sum, with respect to contributes at least 15 percent of the health record certification criteria documentation and writing cost of the donated electronic health identified in the then-applicable version requirements, there is no substantive records items and services and permit of 45 CFR part 170. In the 2013 EHR difference between the indefinite certain donations of replacement final rule, we modified the deeming holdover provisions and the renewal electronic health records items and provision to reflect developments in the provision in § 411.357(l)(2). Therefore, services (84 FR 55822). ONC certification program and to track we are not including an indefinite As discussed more fully below, in this ONC’s anticipated regulatory cycle. By holdover provision in § 411.357(l). final rule we are finalizing certain of our relying on ONC’s certification program proposals to revise the EHR exception. and related updates of criteria and 11. Electronic Health Records Items and Despite the fundamental differences in standards, we stated that the deeming Services (§ 411.357(w)) the statutory structure, operation, and provision would meet our objective of Relying on our authority at section penalties of the respective underlying ensuring that software is certified to the 1877(b)(4) of the Act, on , 2006, statutes, we have worked closely with current required standard of we published a final rule (the 2006 EHR OIG to ensure consistency between our interoperability when it is donated (78 final rule) that, among other things, revised EHR exception and the policies FR 78753). In the proposed rule, we established an exception at § 411.357(w) finalized by OIG related to its safe proposed to retain this general construct for certain arrangements involving the harbor and discussed elsewhere in this for the updated EHR exception, but donation of interoperable electronic issue of the Federal Register. proposed two clarifications to the health records software or information deeming provision at § 411.357(w)(2) technology and training services (the a. Requirements Regarding (84 FR 55823). Our current regulation at EHR exception) (71 FR 45140). The EHR Interoperability § 411.357(w)(2) specifies that the exception was initially set to expire on Currently, the requirements at software is deemed to be interoperable December 31, 2013. On , § 411.357(w)(2) and (3) require donated if, on the date it is provided to the 2013, we published a final rule (the software to be interoperable and physician, it has been certified by a 2013 EHR final rule) modifying the EHR prohibit the donor (or a person on the exception by, among other things, donor’s behalf) from taking action to 15 84 FR 7424 (, 2019). At the time our extending the expiration date of the limit the interoperability of the donated proposed rule was published on October 17, 2019, ONC had not yet issued its final rule implementing exception to December 31, 2021, items or services. In the proposed rule the Cures Act. ONC published its final rule on May excluding laboratory companies from (84 FR 55822), we proposed changes 1, 2020 (85 FR 25642).

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certifying body to an edition of the certification must be current as of the requirement of the EHR exception, we electronic health record certification date that the donor has entered into a disagree with the first commenter that criteria identified in the then-applicable binding agreement with the recipient or certification by a certifying body version of 45 CFR part 170. We the electronic health records vendor. authorized by ONC should be the only proposed to modify this language to This commenter stated that a reasonable way of meeting this requirement. This replace the phrase ‘‘has been certified’’ time limit, such as 1 year, could be certification provides donors and with the phrase ‘‘is certified’’ (84 FR applied in order to prevent potential recipients with assurance that the 55823). The proposed modification was fraud or abuse. electronic health records software intended to clarify that the certification Response: We are finalizing our donated under their arrangement is must be current as of the date of the proposal to modify § 411.357(w)(2) to interoperable for purposes of the EHR donation, as opposed to the software specify that the donated software ‘‘is’’ exception, but such certification is not having been certified at some point in certified on the date that it is donated, required under the exception. We the past (and potentially no longer as opposed to ‘‘has been certified’’ on emphasize that the exception does not maintaining certification on the date of that date, and to delete the phrase ‘‘an require that donated software is certified the donation). We also proposed to edition.’’ We agree that the certification as interoperable by a certifying body remove the reference to ‘‘an edition’’ of criteria should be the latest or current authorized by ONC; rather, the certification criteria to align with criteria; that is, current as of the date of exception requires that donated changes to ONC’s certification program donation. However, we believe that our software is interoperable. We believe (84 FR 55823). As we describe in more proposal, which provides that the that requiring only that donated detail below, we proposed and are software must be certified to the ‘‘then- software is interoperable—allowing finalizing an updated definition of applicable’’ version of 45 CFR part 170, parties to demonstrate that donated ‘‘interoperable’’ (84 FR 55824 through already includes this requirement, and software is interoperable even if it is not 55825). Although the revised definition we are finalizing the regulation text as certified as interoperable by a certifying would not require a change to the text proposed. As noted above, we are body authorized by ONC—coupled with of § 411.357(w)(2), the revision would removing the phrase ‘‘electronic health the optional method for assuring that impact the deeming provision, and we record’’ before ‘‘certification criteria’’ in software is interoperable through solicited comments regarding this § 411.357(w)(2), because the phrase satisfaction of the deeming provision at update to the definition of ‘‘electronic health records certification § 411.357(w)(2), affords parties ‘‘interoperable’’ (84 FR 55823). We criteria’’ has been removed from 45 CFR sufficient flexibility under the exception emphasized in the proposed rule and part 170 as of , 2020. We note for donations of electronic health reaffirm here that an arrangement for the that the latter change does not alter the records items or services. donation of software that met the scope of the remuneration to which the Comment: One commenter suggested definition of interoperable and that EHR exception applies. The exception that the proposed change to the deeming satisfied the requirements of continues to apply only to donations of provision creates compliance § 411.357(w) at the time the donation items or services that are necessary and uncertainty in the context of an ongoing was made will not cease to be protected used predominantly to create, maintain, software donation. In particular, the by the exception, even though we are transmit, receive, or protect electronic commenter was concerned that the finalizing certain changes to these health records. We also decline to adopt proposed wording change would mean provisions (84 FR 55823). the commenter’s suggestion that the that, if at any time after the initial After reviewing comments on our certification must be current on the date software donation the electronic health proposal, we are finalizing our that the donor has entered into a records software loses its certification, clarifying revisions to the deeming binding agreement with the recipient. the continued provision of the software, provision at § 411.357(w)(2) as To help ensure that donations of health including maintenance, would proposed, with one modification to the information technology will further the implicate the fraud and abuse laws. regulation text. We are removing the policy goal of fully interoperable health Other commenters supported the phrase ‘‘electronic health record’’ information systems (71 FR 45149), we proposal to require that software is preceding ‘‘certification criteria’’ believe that parties that enjoy the certified at the time it is provided to a because the phrase ‘‘electronic health benefit of donated software being recipient, with one commenter noting records certification criteria’’ has been deemed to be interoperable must ensure that any updates to donated systems removed from 45 CFR part 170 as of that it is certified to the current should also need to be certified to the June 30, 2020. certification criteria on the date it is most recent standards. Another We received the following comments donated. However, depending on the commenter requested that we provide and our responses follow. facts and circumstances, donations that for a 5-year grace period under the Comment: Commenters generally do not satisfy the requirements of the interoperability deeming provision so agreed with our proposal to clarify that deeming provision may still satisfy the that physicians not participating in the software would be deemed to be requirement at § 411.357(w)(2) that the Quality Payment Program could interoperable under § 411.357(w)(2) if, donated software is interoperable. continue to use donated electronic on the date it is donated, it ‘‘is’’ certified Comment: One commenter opposed health records software certified to the by a certifying body authorized by ONC, the concept of an ‘‘optional’’ deeming 2015 edition. rather than ‘‘has been certified.’’ Some provision, asserting that it is critical to Response: As we explained in commenters had questions about our require that software be certified by a response to the comment immediately removal of the phrase ‘‘an edition’’ certifying body authorized by ONC to above, the deeming provision is before ‘‘the electronic health record further support the goal of value-based optional. Certification of donated certification criteria’’ and inquired arrangements. In contrast, another electronic health records software by a whether we should specify that the commenter was concerned that the EHR certifying body authorized by ONC is criteria are the ‘‘latest’’ or ‘‘current’’ exception applies only to donations of not required to satisfy the requirement certification criteria. One commenter software that has been certified by ONC. at § 411.357(w)(2) that the software is recommended that we modify the Response: Although we agree that the interoperable, as defined at § 411.351; deeming provision to state that the interoperability of software is a critical the exception merely requires that the

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software is interoperable at the time it ‘‘the information blocking provision,’’ Cures Act (84 FR 55823).16 We solicited is provided to the recipient. Regardless which defines conduct that constitutes comments on aligning the requirement of whether the physician recipient information blocking by health care at § 411.357(w)(3) with the PHSA participates in the Quality Payment providers, health IT developers of information blocking provision and the Program, electronic health records certified health IT, health information information blocking definition in 45 software is not required to satisfy the exchanges, and health information CFR part 171. deeming provision at § 411.357(w)(2) in networks. Section 3022(a)(1) of the After reviewing comments on our order to be ‘‘interoperable’’ as defined at PHSA defines ‘‘information blocking’’ in proposal, we are not finalizing the § 411.351. With respect to ongoing broad terms, while section 3022(a)(3) of proposed modification of donations of maintenance, updates, or the PHSA authorizes and charges the § 411.357(w)(3). Rather, based on the comments and for the reasons explained other items or services in connection Secretary to identify reasonable and below, we are removing § 411.357(w)(3) with previously donated electronic necessary activities that do not health records software, we note the from our regulations. constitute information blocking for following. If the electronic health We received the following comments purposes of section 3022(a)(1) of the records software loses its certification, and our responses follow. PHSA. The ONC NPRM included then new donations of that electronic Comment: We received a number of health records software, including proposals to implement the statutory comments about incorporating the updates and patches of that software, definition of ‘‘information blocking,’’ ‘‘information blocking’’ prohibitions will not be deemed to be interoperable define certain terms related to the from the Cures Act or the ONC NPRM under the deeming provision in statutory definition of ‘‘information into the EHR exception at § 411.357(w)(2). However, if the blocking,’’ and establish exceptions to § 411.357(w)(3). Several commenters electronic health records software is still the definition of ‘‘information supported aligning the EHR exception interoperable (as defined at § 411.351), blocking.’’ ONC published its final rule with the concepts of interoperability then the EHR exception will remain on , 2020 (85 FR 25642). and information blocking from the available to protect ongoing donations In the proposed rule, we proposed Cures Act and the ONC NPRM, of such electronic health records modifications to § 411.357(w)(3) to including our proposal to expressly software, including updates and recognize these significant updates prohibit information blocking at patches, provided that all other since the 2013 EHR final rule (84 FR § 411.357(w)(3). One commenter agreed requirements of the exception are 55823). Specifically, we proposed at with CMS’ assessment that the incorporation of the concept of satisfied. If, on the other hand, software § 411.357(w)(3) to prohibit the donor (or information blocking into the regulation that loses its certification is no longer any person on the donor’s behalf) from does not change the underlying purpose interoperable (as defined at § 411.351), engaging in a practice constituting then new donations of such electronic of the existing interoperability information blocking, as defined in requirements. Another commenter that health records software, including section 3022 of the PHSA, in connection updates and patches of the software, supported the prohibition on with the donated items or services. We information blocking asserted that large would not be protected under the EHR stated that, should ONC finalize its exception. health systems can control referrals and proposals to implement section 3022 of increase market share by limiting access (2) Information Blocking and Data Lock- the PHSA at 45 CFR part 171, we would to patients’ records to specific providers in (§ 411.357(w)(3)) incorporate such regulations into the on the same health information The current requirement at requirement at § 411.357(w)(3) for network, thereby shutting out § 411.357(w)(3) prohibits the donor (or purposes of the physician self-referral independent providers and negatively any person on the donor’s behalf) from law, if we finalized the proposals impacting patient care. Other taking any action to limit or restrict the described in the proposed rule (84 FR commenters did not disagree that use, compatibility, or interoperability of 55823). information blocking should be the donated items or services with other We noted in the proposed rule that prohibited, but raised a number of electronic prescribing or electronic the current requirements of the EHR questions and concerns regarding how health records systems (including, but exception, while not using the term such a provision would work in the not limited to, health IT applications, ‘‘information blocking,’’ already include EHR exception. For example, a number products, or services). Beginning with concepts similar to those found in the of commenters expressed concern about the 2006 EHR final rule and reaffirmed Cures Act’s prohibition on information relying on the ONC NPRM, which was in the 2013 EHR final rule, blocking (84 FR 55823). For example, in not yet final at the time our proposed § 411.357(w)(3) has been designed to: (1) prior rulemaking, we stated our concern rule was published. Some commenters Prevent the misuse of the exception that about donors (or those on the donor’s were particularly concerned about the results in data and referral lock-in; and behalf) taking steps to limit the array of exceptions to the definition of (2) encourage the free exchange of data interoperability of donated software to ‘‘information blocking’’ and (in accordance with protections for lock in or steer referrals (see, for incorporation of the definition of privacy) (78 FR 78762). Since the ‘‘electronic health information’’ as example, 71 FR 45156 and 78 FR 78762 publication of the 2006 EHR final rule proposed in the ONC NPRM. and 2013 EHR final rule, significant through 78763). We stated in the Some commenters asked that we legislative, regulatory, policy, and other proposed rule that the proposed clarify which party is responsible to Federal government action further modifications of § 411.357(w)(3) were ensure that information blocking does defined the data lock-in problem (now not intended to change the underlying not occur, asserting that a donor cannot commonly referred to as ‘‘information purpose of this requirement, but instead blocking’’) and established penalties for further our longstanding goal of 16 We recognized in the proposed rule that the certain types of individuals and entities preventing abusive arrangements that ONC NPRM was not a final rule and was subject that engage in information blocking. lead to information blocking and referral to change (84 FR 55823). However, we based our lock-in through modern understandings proposals on both the statutory language and the Most notably, the Cures Act added language in ONC’s NPRM for purposes of soliciting section 3022 of the PHSA, known as of those concepts established in the public input on our proposals.

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control what happens to software after evolving functionality related to the information blocking practices, how it is donated. Several commenters interoperability of electronic health CMS would determine the party recommended removing or revising the record technology’’ (78 FR 78763). At responsible, and how the information requirement in the EHR exception that that time, the Department had few other blocking knowledge standards in the a donor (or any person on a donor’s authorities to directly address Cures Act and ONC final rule would be behalf) does not engage in a practice information blocking. However, there assessed in context of this exception constituting information blocking, are now other enforcement authorities and the strict-liability framework of the explaining that a vendor may engage in designed to address information physician self-referral law. We information blocking without the blocking. For example, the Cures Act emphasize that we are maintaining the donor’s knowledge. Another commenter gave ONC and OIG more direct interoperability requirement at expressed concern that, if a authority to address information § 411.357(w)(2). We believe that this determination of information blocking blocking. Additionally, CMS has requirement and the optional deeming against either a donor or recipient separate authority to address providers provision at § 411.357(w)(2) will ensure occurs at some time after the donation, that information block, and OCR has that donations of items and services the recipient may be vulnerable to authorities related to patient access. under § 411.357(w) that satisfy all the unexpected costs or loss of access to its The Cures Act and the ONC final rule requirements of the EHR exception health information technology if the recognize that certain practices likely to further the Department’s policy goal of arrangement suddenly ends. Another interfere with, prevent, or materially an interoperable health system and commenter asserted that the discourage access, exchange, or use of prevent donations of items and services incorporation of ONC’s proposals into electronic health information may intended to lock in referrals by limiting the exception at § 411.357(w)(3) would nonetheless be reasonable and the flow of electronic health introduce an intent-based requirement necessary. That is why the Cures Act information. into the strict-liability framework of the directed the Secretary to identify Comment: One commenter requested physician self-referral law. exceptions to the definition of that we include in the EHR exception a A few commenters suggested that, information blocking. The ONC final requirement that donors must also rather than including a prohibition on rule implements eight exceptions that provide access to electronic health information blocking (as that term is apply to practices likely to interfere records to pharmacists. The commenter defined in the Cures Act or in 45 CFR with the access, exchange, or use of stated that some health information part 171) as a requirement of the EHR electronic health information provided technology systems block pharmacists’ exception, CMS should assume that that the practice meets the conditions of visibility into relevant clinical information blocking will not be an exception. However, § 411.357(w)(3), information from other health care tolerated and will be enforced through as implemented by the 2006 EHR final providers. other authorities. One commenter rule, required that a party not take ‘‘any Response: The EHR exception does explained that, when the EHR exception action to limit or restrict the use, not limit the scope of permissible was first issued in 2006, interoperability compatibility, or interoperability’’ of the donors to those donors that grant access was in its infancy, and there was no donated electronic health records items to electronic health records to a separate regulatory guidance on or services. The requirement did not specified set of providers or suppliers. interoperability and information account for actions that may be However, for a donation to be blocking, whereas now these concepts reasonable and necessary, such as permissible under the EHR exception, are separately addressed and regulated implementing privacy and security among other things, the software must by ONC. Given these changes, the measures. be interoperable and should not commenters maintained that Recognizing the developments since inappropriately interfere with, prevent, incorporation of information blocking 2013, we agree with the commenter that or materially discourage legally provisions into the EHR exception is newer and separate authorities are better permissible access, exchange, or use of duplicative and unnecessary. suited than a requirement of an relevant clinical information. We Response: Based on the comments exception to the physician self-referral encourage parties to report concerns and after assessing the final rule law to deter information blocking and regarding potential information blocking published by ONC, ‘‘21st Century Cures hold individuals and entities that to https://healthit.gov/report-info- Act: Interoperability, Information engage in information blocking blocking. Blocking, and the ONC Health IT appropriately accountable. We also b. Cybersecurity Certification Program’’ (ONC final agree with commenters that a recipient rule),17 we are removing the is unlikely to have the capabilities to We proposed to amend the EHR requirement at § 411.357(w)(3) in its determine if a donor (or someone on the exception to clarify that the exception is entirety. This requirement, when donor’s behalf) engaged in information applicable (and always has been originally implemented in the 2006 EHR blocking, which includes a level of applicable) to certain cybersecurity final rule, was intended to ‘‘help ensure intent set by statute, or met an exception software and services,18 and to more that donations of health information to information blocking as set forth in broadly protect the donation of software technology will further the policy goal the ONC final rule. Given these and services related to cybersecurity (84 of fully interoperable health information potential issues with the proposed FR 55823). Currently, the exception at systems and will not be misused to steer modifications to § 411.357(w)(3) and § 411.357(w) protects electronic health business to the donor.’’ (71 FR 45156). limitations of the original requirement records software or information The 2013 EHR final rule also explained at § 411.357(w)(3) discussed above, we technology and training services that the Department was considering no longer believe that the requirement is necessary and used predominantly to other policies to improve an effective way to achieve the policy create, maintain, transmit, or receive interoperability and noted that those goals that served as its original basis. policy efforts are ‘‘better suited than this Removing the requirement at 18 For instance, a secure log-in or encrypted access mechanism included with an EHR system or exception to consider and respond to § 411.357(w)(3) should sufficiently EHR software suite would be cybersecurity features address the concerns of the commenters of the EHR items or services that may be protected 17 85 FR 25642 (May 1, 2020). that had questions about the scope of under the existing EHR exception.

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electronic health records. We proposed comply with the requirements of one cybersecurity-related clarifications to to modify this language to expressly applicable exception (84 FR 55824). the EHR exception would not be include software that ‘‘protects’’ After reviewing the comments on our necessary. One of the commenters electronic health records, and to proposed rule, we are finalizing our questioned how the cost contribution expressly include software and services proposal to expand the EHR exception requirement under the EHR exception at related to cybersecurity. to expressly include cybersecurity § 411.357(w)(4) would apply to In the 2006 EHR final rule, we software and services so that it is clear donations of cybersecurity software emphasized that software and that an entity donating electronic health under § 411.357(w), given that there is information technology and training records software and providing training no cost contribution requirement in the services donated under § 411.357(w) and other related services may also cybersecurity exception at proposed must create, maintain, transmit, or utilize the EHR exception to protect § 411.357(bb), and also asked whether receive electronic health records, and donations of related cybersecurity the electronic health records or those functions must predominate (71 software and services to protect the cybersecurity function must FR 54151). We stated that the core electronic health records, provided that predominate in software that includes functionality of the items and services all the requirements of the EHR both electronic health records and must be the creation, maintenance, exception are satisfied. In the final cybersecurity functions. A different transmission, or receipt of individual exception, we removed the word commenter requested that, if we finalize patients’ electronic health records, but, ‘‘certain’’ before ‘‘cybersecurity software protection for certain cybersecurity recognizing that electronic health and services’’ in the introductory software and services under the EHR records software is commonly integrated chapeau language to avoid ambiguity exception, we also clarify that the with other features, we also stated that regarding the scope of the EHR predominant purpose of the software or arrangements in which the software exception. service must be cybersecurity associated package included other functionality We received the following comments with electronic health records. Another related to the care and treatment of and our responses follow. commenter suggested that creating individual patients would be protected Comment: A number of commenters separate exceptions for electronic health supported stating in regulation text that (71 FR 45151). Under our proposal, the records items and services and the EHR exception applies to donations same criteria would apply to cybersecurity technology and related of cybersecurity software and services cybersecurity software and services, services is taking a piecemeal approach that protect electronic health records. provided that the predominant use of to tools that must work together for care These commenters stated that the the software or services is cybersecurity coordination. associated with the electronic health proposal, if finalized, would clarify the records. regulations, and one of the commenters Response: We recognize that there is In section II.E.2. of this final rule, we also noted that the revision would a certain amount of overlap between the discuss the new exception at reduce administrative overhead by cybersecurity exception established in § 411.357(bb), which applies avoiding real or perceived disparities this final rule at § 411.357(bb) and the specifically to arrangements involving between donations of electronic health EHR exception, as amended by this final the donation of cybersecurity records items and services and rule, although we do not agree that this technology and related services (the cybersecurity donations. One overlap will result in the type of cybersecurity exception), and the commenter supported our proposal to confusion suggested by the commenter. definition of ‘‘cybersecurity’’ at include certain cybersecurity donations The revision to the introductory § 411.351 that will apply to both the under the EHR exception, as well as in language of § 411.357(w) merely EHR exception and the cybersecurity proposed § 411.357(bb). The commenter confirms in regulation text that the EHR exception at § 411.357(bb). As finalized, appreciated our statement that exception has always been applicable to the cybersecurity exception at cybersecurity donations only need to (and remains applicable to) § 411.357(bb) is broader and includes satisfy one of the exceptions, and noted arrangements that include the donation fewer requirements than the EHR that having two exceptions available of cybersecurity software and services exception as applied to cybersecurity allows a donor to tailor its donation that have a predominant purpose of software and services that are necessary strategy. protecting electronic health records. In and used predominantly to protect Response: We are finalizing our application, if a party is donating electronic health records. Among other proposal to expressly permit donations electronic health records items and things, the cybersecurity exception at of cybersecurity software and services services under the EHR exception, and final § 411.357(bb) does not require that protect electronic health records the donation includes cybersecurity recipients to contribute to the cost of the under the EHR exception. We agree with software or services that are necessary donated cybersecurity technology or the commenter that having two and used predominantly to protect services, while the EHR exception exceptions available to protect electronic health records, the parties retains the cost contribution donations of cybersecurity software and may structure their entire arrangement requirement at § 411.357(w)(4) for services increases flexibility under our to satisfy the requirements of the EHR donations of electronic health records regulations. exception, instead of structuring the items or services. In the proposed rule, Comment: A few commenters arrangement to satisfy two different we solicited comments on whether it is expressed concern that the proposal exceptions. We believe that having this necessary to modify the EHR exception related to cybersecurity software and option available will reduce to expressly include cybersecurity, services with respect to the EHR administrative burden for some parties. given our proposed addition of a exception and the separately proposed Other parties may wish to structure standalone exception for cybersecurity cybersecurity exception at § 411.357(bb) such donations as two separate technology and related services at overlap significantly and could lead to arrangements that each satisfy the § 411.357(bb), and we stated that a party confusion if both are finalized. The requirements of the respective exception seeking to protect an arrangement commenters stated that, if CMS finalizes at § 411.357(w) and § 411.357(bb). As involving the donation of cybersecurity a separate cybersecurity exception at noted in the proposed rule and software and services only needs to § 411.357(bb), the proposed reiterated above, parties seeking to

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protect an arrangement involving the recipient’s location as long as the donor disappear. The continued availability of donation of cybersecurity software and retains title to or a leasehold interest in the EHR exception provides certainty services only need to satisfy the the equipment. with respect to the contribution costs requirements of one applicable Response: By including the word related to donations of electronic health exception (84 FR 55824). ‘‘protect’’ in the introductory chapeau records items and services for Regarding the requirement in the EHR language of § 411.357(w), we are recipients, facilitates adoption by exception that a physician recipient clarifying that the scope of the EHR physicians who are new entrants into must contribute 15 percent of the exception applies to cybersecurity medical practice or have postponed donor’s cost of the donated items and software or other information adoption based on financial concerns services, under this final rule, the EHR technology and training services that are regarding the ongoing costs of exception retains the 15 percent cost necessary and used predominantly to maintaining and supporting an contribution requirement at protect electronic health records. We electronic health records system, and § 411.357(w)(4), but there is no cost decline to expand the EHR exception to helps preserve the gains already made contribution requirement under the apply to additional services or in the adoption of interoperable standalone cybersecurity exception at hardware, including hardware that is electronic health records technology (84 § 411.357(bb). Thus, if parties rely on donated or loaned to a recipient. There FR 55824). Therefore, in the proposed the exception at § 411.357(w) to protect is a separate, standalone exception at rule, we proposed to eliminate the an arrangement for a donation that final § 411.357(bb) that applies to sunset provision at § 411.357(w)(13) (84 includes both electronic health records broader cybersecurity donations, FR 55824). In the alternative, we items and services and related including donations of cybersecurity considered an extension of the sunset cybersecurity software or services, the hardware, and that exception does not date. We sought comment on whether physician recipient must contribute 15 include a contribution requirement. we should extend the sunset date percent of the donor’s cost for the c. The Sunset Provision instead of making the exception cybersecurity software or services under permanent, and if so, the duration of § 411.357(w)(4). If parties structure such The EHR exception originally was any such extension. Based on the a donation to satisfy the requirements of scheduled to expire on December 31, comments we received on the proposed § 411.357(w) and § 411.357(bb) 2013. In the 2006 EHR final rule, we rule, we are finalizing our proposal to respectively, then the physician does stated that the need for an exception for make the EHR exception permanent by not have to pay the 15 percent cost donations of electronic health records removing the sunset provision at contribution for the cybersecurity items and services should diminish § 411.357(w)(13). software and services if the arrangement substantially over time as the use of We received the following comment related to the cybersecurity software and electronic health records technology and our response follows. services satisfies all the requirements of becomes a standard and expected part of Comment: We received almost § 411.357(bb). medical practice. In our 2013 proposal unanimous support to remove the We reiterate here that, with respect to to revise the EHR exception (78 FR sunset date in the EHR exception. cybersecurity technology and related 21308), we recognized that, although the Commenters asserted that the services, the scope of the EHR exception adoption of electronic health records elimination of the sunset date would is more limited than the standalone had risen dramatically, its use was not provide certainty regarding the cybersecurity exception at yet universal nationwide. Because availability of an exception to the § 411.357(bb). Arrangements for the continued adoption of electronic health physician self-referral law for ongoing donation of standalone cybersecurity records remained an important goal of donations of electronic health records hardware or items or services that are the Department, we solicited comments items and services. Commenters also not used predominantly to protect regarding an extension of the EHR agreed with our statement in the electronic health records (but are used exception (78 FR 21311 through 21312). proposed rule that the exception will predominantly to implement, maintain, In response to those comments, in the remain necessary after 2021, given new or reestablish cybersecurity) are not 2013 EHR final rule, we extended the entrants, aging electronic health records excepted under the EHR exception, but sunset date of the exception to technology at existing practices, and may be protected under the December 31, 2021, a date that emerging and improved technology. In cybersecurity exception if all the corresponds to the end of the electronic contrast, one commenter suggested that, requirements of § 411.357(bb) are health records Medicaid incentives (78 after 2021, the exception should only be satisfied. FR 78755 through 78757). We stated our available to rural providers and to Comment: Some commenters continued belief that, as progress on the physicians entering into solo practice in requested that CMS broaden the goal of nationwide electronic health a health professional shortage area or application of the EHR exception to records adoption is achieved, the need medically underserved area. According additional cybersecurity technology and for an exception for donations should to the commenter, making the current services, for example, to cybersecurity continue to diminish over time. exception permanent could incentivize hardware, such as network appliances. Nonetheless, commenters on the CMS entities to reward high referring One commenter requested that we make RFI and on OIG’s request for physicians with new electronic health the EHR exception applicable to information requested that we make the records systems or updates. donations of cybersecurity hardware, EHR exception and safe harbor Response: We are finalizing our software, infrastructure and services, permanent. proposal to make the EHR exception without exception and without a Although widespread (though not permanent by removing the sunset date. requirement that the recipient universal) adoption of electronic health We note that, as finalized, the exception contribute 15 percent of the donor’s cost records largely has been achieved at this continues to require at § 411.357(w)(6) for the items or services. Another time, we no longer believe that the need that neither the eligibility of a physician commenter suggested that, if the for an exception for arrangements to receive items or services nor the expanded exception does not protect involving the donation of electronic amount or nature of the items or hardware, CMS should permit donors to health records items and services will services may be determined in any place cybersecurity hardware at the diminish over time or completely manner that directly takes into account

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the volume or value of the physician’s Rather, we are retaining the current We did not intend for our proposed referrals or other business generated definition of ‘‘electronic health record’’ modifications to the definition of between the parties. Given this at § 411.351. ‘‘electronic health record’’ to make a requirement, as well as the other We received the following comments substantive change to the scope of the requirements of the exception, we do and our responses follow. exception at § 411.357(w). We agree not believe that making the EHR Comment: Several commenters with commenters that our proposed exception permanent poses a risk of expressed general support for our changes might have inadvertently program or patient abuse. proposed revision to the definition of introduced undesirable complexity. To ‘‘electronic health record,’’ particularly remain true to our intent, we are not d. Definitions to the extent that the definition would finalizing any of the proposed changes In the proposed rule, we proposed to align with the definition included in the to the definition of ‘‘electronic health modify the definitions of ‘‘electronic Cures Act. Some commenters supported record,’’ and we are retaining the health record’’ and ‘‘interoperable’’ (84 our proposal to incorporate the term existing definition in our regulations. FR 55824 through 55825). We adopted ‘‘electronic health information,’’ which We also note that ONC published its definitions for these terms in the 2006 ONC proposed to define in the ONC final definition of ‘‘electronic health EHR final rule based on NPRM. According to one commenter, information’’ in the Federal Register on contemporaneous terminology, the the broad definition of ‘‘electronic May 1, 2020, well after the comment emerging standards for electronic health health information’’ in the ONC NPRM period for our proposed rule closed on records, and other resources cited by would ensure that data related to December 31, 2019, and the final commenters at that time. Our proposed medical imaging, such as electronic definition of ‘‘electronic health modifications to these definitions were orders and referrals for radiology information’’ (85 FR 25955) differs from largely based on terms and provisions in services, would be subject to the the definition that ONC proposed (84 FR the Cures Act that update or supersede information blocking provisions. The 7601). Among other things, as ONC terminology we used in the 2006 EHR commenter suggested that, if ONC does explained in its final rule, the definition final rule (84 FR 55824 through 55825). not finalize a broad definition of of ‘‘electronic health information’’ in We discuss our specific proposals and ‘‘electronic health information,’’ CMS ONC’s final rule does not expressly our final policies and regulations should retain the term ‘‘consumer include or exclude price information (85 pertaining to definitions of ‘‘electronic health status information’’ in the FR 25804). Given that ONC’s final health record’’ and ‘‘interoperable’’ definition of ‘‘electronic health record.’’ definition differs from the definition in below in subsections (1) and (2), Another commenter maintained that, to the ONC NPRM, which we cited in our respectively. further the agency’s price transparency proposed rule, and that ONC’s final rule goals, CMS should explicitly define (1) ‘‘Electronic Health Record’’ was published after the comment period ‘‘electronic health record’’ to include for our proposed rule closed, we are The term ‘‘electronic health record’’ is electronic health information that concerned that the public may have not defined at § 411.351 as a repository of relates to the past, present, or future had sufficient information to comment consumer health status information in payment for the provision of health care on our proposal to incorporate the computer processable form used for to an individual. concept of ‘‘electronic health clinical diagnosis and treatment for a In contrast, several other commenters information’’ in the definition of broad array of clinical conditions. We objected to the inclusion of the term ‘‘electronic health record.’’ Finally, proposed to revise this definition so that ‘‘electronic health information’’ in the although CMS remains committed to the ‘‘electronic health record’’ would mean definition of ‘‘electronic health record.’’ price transparency initiative, at this a repository that includes electronic Noting that, at the time we issued our time, we do not believe that modifying health information that: (1) Is proposed rule, ONC had not finalized its the definition of ‘‘electronic health transmitted by or maintained in definition of ‘‘electronic health record’’ with the resulting impact on the electronic media; and (2) relates to the information,’’ these commenters scope and requirements of the EHR past, present, or future health or maintained that the definition proposed exception is the best means to achieve condition of an individual or the by ONC is overly broad. For example, this goal. provision of health care to an individual one commenter asserted that, under the (84 FR 55824). We proposed the proposed definition, a patient’s (2) ‘‘Interoperable’’ modifications to reflect the term computer or mobile telephone could be The term ‘‘interoperable’’ is currently ‘‘electronic health information’’ that is considered an electronic health record if defined at § 411.351 to mean able to used throughout the Cures Act and that the patient obtained a copy of his or her communicate and exchange data is central to the definition of health record through electronic accurately, effectively, securely, and interoperability at section 3000(9) of the transmittal. Some commenters consistently with different information PHSA and the information blocking specifically stated that the proposed technology systems, software provisions at section 3022 of the PHSA. definition of ‘‘electronic health record’’ applications, and networks, in various We based our proposed modifications, was too broad because, as proposed, it settings; and exchange data such that in part, on ONC’s proposed definition of would have included financial the clinical or operational purposes and ‘‘electronic health information’’ in the information pertaining to payment for meaning of the data are preserved and ONC NPRM (84 FR 7513), which reflects the provision of health care to an unaltered. This definition of more modern terminology used to individual. Several commenters also ‘‘interoperable’’ was based on 44 U.S.C. describe the type of information that is made suggestions to limit the scope of 3601(6) (pertaining to the management part of an electronic health record. We ‘‘electronic health information.’’ and promotion of electronic solicited comments on this updated Response: As stated in the proposed Government services) and several definition (84 FR 55824). rule and reiterated above, our proposal comments we received in response to After reviewing the comments on our to modify the definition of ‘‘electronic our 2005 rulemaking proposing proposed definition of ‘‘electronic health information’’ was meant to exceptions for certain electronic health record,’’ we are not finalizing our update terminology that we adopted in prescribing and electronic health proposal to modify the definition. the 2006 EHR final rule (84 FR 55824). records arrangements (70 FR 59182) that

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referenced emerging industry conjunction, we would revise the EHR authorities are better suited than the definitions and standards related to exception to incorporate the term EHR exception to deter information interoperability (71 FR 45155 through ‘‘interoperability’’ and remove the term blocking and hold individuals and 45156). ‘‘interoperable.’’ We sought comment entities that engage in information In the proposed rule, we proposed to regarding whether using terminology blocking appropriately accountable. We update the definition of ‘‘interoperable’’ identical to the PHSA and ONC are concerned that, if we include the to align with the statutory definition of regulations would facilitate compliance phrase ‘‘does not constitute information ‘‘interoperability’’ added by the Cures with the requirements of the EHR blocking’’ in the definition of Act to section 3000(9) of the PHSA (84 exception and reduce any regulatory ‘‘interoperable’’ at § 411.351, then FR 55824 through 55825). Consistent burden resulting from the differences in § 411.357(w)(2), which requires that the with section 3000(9) of the PHSA, we the agencies’ varying terminology donated software is interoperable, could proposed to define ‘‘interoperable’’ to related to the singular concept of be interpreted to prohibit parties from mean: (i) Able to securely exchange data interoperability (84 FR 55825). We are engaging in practices that constitute with and use data from other health not finalizing this alternative proposal. ‘‘information blocking’’ but that might information technology without special After reviewing the comments on our not be prohibited under ONC rules. effort on the part of the user; (ii) allows proposals, we are revising the definition Therefore, we are not including the for complete access, exchange, and use of ‘‘interoperable,’’ but omitting the phrase ‘‘does not constitute information of all electronically accessible health provision related to information blocking’’ in the definition of information for authorized use under blocking and deleting the phrase ‘‘interoperable’’ at § 411.351. applicable State or Federal law; and (iii) ‘‘without special effort on the part of the With respect to the phrase ‘‘without does not constitute information blocking user’’ from proposed subparagraph (1). special effort on the part of the user,’’ as defined in section 3022 of the PHSA Specifically, at revised § 411.351, we note that, the phrase is used in the (84 FR 55824 through 55825). We stated ‘‘interoperable’’ means: (1) Able to definition of ‘‘interoperability’’ at that, should ONC finalize its proposals securely exchange data with and use section 4003(a)(2) of the Cures Act and to implement section 3022 of the PHSA data from other health information the partial phrase ‘‘without special at 45 CFR part 171, and if we finalize technology; and (2) allows for complete effort’’ is used in the conditions of our proposed definition of access, exchange, and use of all certification at section 4002(a) of the ‘‘interoperable,’’ we would incorporate electronically accessible health Cures Act. As explained above, although the final ONC regulations into the information for authorized use under software certified by ONC is deemed to definition of ‘‘interoperable’’ at applicable State or Federal law. be interoperable for purposes of the § 411.351 by referencing 45 CFR part We received the following comments physician self-referral law, certification 171 instead of section 3022 of the PHSA and our response follows. is not required for compliance with Comment: We received general (84 FR 55825). § 411.357(w)(2). To avoid any support for our effort to align the We also noted in the proposed rule implication that we are incorporating a definition of ‘‘interoperable’’ with the that the statutory definition of certification requirement into the statutory definition of ‘‘interoperability’’ ‘‘interoperability’’ includes concepts definition of ‘‘interoperable’’ at in the Cures Act. However, citing similar to the existing definition of § 411.351, we are removing the phrase ‘‘interoperable’’ at § 411.351 (for uncertainty regarding the proposals in ‘‘without special effort on the part of the example, the ability to securely the ONC NPRM, one commenter user’’ from the definition. exchange data across different systems requested that CMS not define or technology) (84 FR 55825). Two new ‘‘interoperable’’ with reference to ONC’s e. Additional Proposals and concepts in the statutory definition were proposed definition. The commenter Considerations also requested that CMS not replace the included in our proposed modification (1) 15 Percent Recipient Contribution definition of ‘‘interoperable’’ with a of the definition: (1) Interoperable (§ 411.357(w)(4)) means the ability to exchange electronic definition of ‘‘interoperability’’ that health information without special cites ONC’s proposed definition at 45 In the 2006 EHR final rule, we agreed effort on the part of the user; and (2) CFR 170.102. One commenter supported with a number of commenters that interoperable expressly does not mean including a provision pertaining to suggested that cost sharing is an information blocking (Section 3000(9) of information blocking in the definition, appropriate method to address some of the PHSA; (42 U.S.C. 300jj(9)). We while several other commenters raised the program integrity risks inherent in stated that, as a practical matter, we questions about the incorporation of unlimited donations of electronic health believe that these two concepts are not information blocking in the definition of records items and services (71 FR 45160 substantively different from the existing ‘‘interoperable.’’ For example, these through 45161). Accordingly, we definition and only reflect an updated commenters asked when the test for incorporated a requirement at understanding of interoperability and interoperability occurs and whether a § 411.357(w)(4) that, before the receipt related terminology, and solicited prior donation of electronic health of the items or services, the physician comments on a definition that would records items or services would cease to pays 15 percent of the donor’s cost of align the definition of ‘‘interoperable’’ at satisfy the requirements of the EHR the items or services. We stated our § 411.351 (for purposes of the physician exception if there was a finding of belief that the 15 percent cost sharing self-referral law) with the statutory information blocking sometime after the requirement is high enough to definition ‘‘interoperability’’ at 3000(9) donation. One commenter asked for encourage prudent and robust electronic of the PHSA (84 FR 55825). further clarification of the phrase health records arrangements without As an alternative proposal, we ‘‘without special effort on the part of the imposing a prohibitive financial burden considered revising our regulations to user.’’ on recipients. Moreover, we stated that eliminate the term ‘‘interoperable’’ and Response: As we explain above in the this approach requires recipients to instead define the term discussion of our proposal to include contribute toward the benefits they may ‘‘interoperability’’ by reference to the concept of ‘‘information blocking’’ experience from the adoption of section 3000(9) of the PHSA and 45 CFR in the exception at § 411.357(w)(3), we interoperable electronic health records part 170 (if finalized) (84 FR 55825). In believe that newer and separate software (for example, a decrease in

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practice expenses or access to incentive of whether we determined to retain the percent of the donor’s cost for the items payments related to the adoption of 15 percent contribution requirement or and services. Commenters provided a electronic health records technology). reduce that contribution requirement for number of reasons in support of their We received a number of comments in some or all physician recipients (85 FR request to remove the contribution response to the CMS RFI, and OIG 55825). We solicited comments on this requirement. One commenter noted that received similar comments in response approach as well as what such a the contribution requirement may pose to its request for information, asserting modification should entail. For a barrier to physicians who have not yet that the 15 percent contribution example, we considered requiring a adopted electronic health records requirement of the EHR exception has contribution for the initial donation software, and added that, even if the been burdensome to some recipients only, as well as any new electronic contribution requirement is eliminated, and acts as a barrier to adoption of health records software modules, but physicians would still be required to electronic health records. Some not requiring a contribution for any bear other costs related to electronic commenters on the requests for update of the software already donated. health records implementation, such as information asserted that this burden We solicited comments on these hardware, staff time, and other may be particularly acute for small and alternatives, or another similar resources. A few commenters stated that rural practices that cannot afford the alternative that would still involve some the contribution requirement may be an contribution. Other suggested that contribution but could reduce the unreasonable constraint on how health applying the 15 percent contribution uncertainty and administrative burden systems and hospitals finance the requirement to upgrades and updates to associated with assessing a contribution needed infrastructure to implement new electronic health records software is for each update of the software already value-based payment models and restrictive and cumbersome and donated. promote coordination of care. One of similarly acts as a barrier. After reviewing the comments, we are these commenters asserted that a In the proposed rule, we considered retaining the 15 percent cost common electronic health records and solicited comments on two contribution requirement for all system across a network of hospitals alternatives to the existing requirement physician recipients. However, in and physicians fosters a higher degree of at § 411.357(w)(4) as outlined below, but response to comments, we are revising integrated care, better and more timely did not propose specific regulation text § 411.357(w)(4) as it pertains to the access to services through coordinated along with the proposals (85 FR 55825). timing of payments. Under revised systems, alignment of quality standards First, we considered eliminating the § 411.357(w)(4)(i), a physician must pay across all participating providers, and a contribution requirement or reducing the required cost contribution amount more structured approach to optimizing the percentage that small or rural before receiving an initial donation of utilization, thus contributing to higher physician organizations would be electronic health records items and quality and more affordable care. required to contribute. In conjunction services or a donation of replacement However, according to the commenter, with this proposal, we solicited items and services. However, with small and independent practices comments on how we should define respect to items or services donated typically cannot afford the electronic ‘‘small or rural physician organization.’’ after the initial donation or the health records systems used by a larger We also solicited comments on whether replacement donation, final health care system, even at a discount, ‘‘rural physician organization’’ should § 411.357(w)(4)(ii) requires that the cost which leads to a network of disjointed be defined as a physician organization contribution amount must be paid at care and service offerings. Other located in a rural area, as that term is reasonable intervals. Specifically, as commenters cited the added burden defined at § 411.351, or defined in line finalized, § 411.357(w)(4)(i) and (ii) involved in setting the contribution with the definition of ‘‘rural provider’’ require that: (i) Before receipt of the amount in writing and the necessary, at § 411.356(c)(1). We also solicited initial donation of items and services or ongoing monitoring to ensure comments on other subsets of potential the donation of replacement items and compliance. One of these commenters physician recipients for which the 15 services, the physician pays 15 percent also highlighted that eliminating the percent contribution is a particular of the donor’s cost for the items and requirement would align the EHR burden. As an alternative, we proposed services; and (ii) except as provided in exception with the proposed to reduce or eliminate the 15 percent subparagraph (i), with respect to items cybersecurity exception at contribution requirement in the EHR or services received from the donor after exception for all physician recipients. the initial donation of items and § 411.357(bb), which does not include a We solicited comments regarding the services or the donation of replacement contribution requirement. Several impact this might have on the use and items and services, the physician pays commenters that supported eliminating adoption of electronic health records 15 percent of the donor’s cost for the the contribution requirement as a technology, as well as any attendant items and services at reasonable requirement of the EHR exception program integrity concerns. We solicited intervals. We are not modifying suggested that CMS should still allow comments requesting specific examples § 411.357(w)(4)(iii), which requires that the donor to require a contribution. One of any prohibitive costs associated with the donor (or any party related to the of the commenters suggested that any the 15 percent contribution donor) does not finance the physician’s contribution requirement should be left requirement, both for the initial payment or loan funds to be used by the up to market forces and negotiation donation of electronic health records physician to pay for the items and between the parties, and another items and services, and subsequent services. suggested that the contribution amount upgrades and updates to previously We received the following comments should be at the discretion of the donor, donated electronic health records items and our responses follow. as long as the donor consistently and and services. Comment: A large number of fairly applies its policy to all recipients. Finally, in the proposed rule, we also commenters recommended that we In contrast, some commenters raised considered modifying or eliminating the remove the 15 percent contribution concerns about eliminating the contribution requirement for updates to requirement for all donations and for all contribution requirement. One of these previously donated electronic health recipients or, in the alternative, reduce commenters maintained that physician records software or services, regardless the contribution requirement to 5 adoption and use of an electronic health

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records system is improved when Some commenters that favored donation. Commenters noted that physicians have a certain level of buy- eliminating the contribution updates may ensure that an electronic in and share in the financial cost. requirement for a subset of physician health records donation continues to Similarly, other commenters suggested practices, such as small or rural function as needed and to meet current that 15 percent represents a fair practices and practices in underserved Federal standards for data exchange. contribution amount, the contribution areas, provided a variety of definitions One commenter stated that it is not requirement serves as a reasonable for small, rural, and underserved uncommon for a donor’s electronic safeguard to reduce wasteful spending, practices, including definitions based health records system to be linked to a and it is important for recipients to have on the Quality Payment Program; the recipient’s system, and the two systems a stake in the purchased technology. anti-kickback statute safe harbor for must be in sync if they share an Response: After careful consideration, local transportation; the North ‘‘instance’’ of electronic health records we continue to believe that the American Industry Classification software. According to the commenter, contribution requirement is an System for small businesses; and the updates to the donor’s system must also important safeguard to protect against Secretary’s designation of medically be passed on to the recipient’s program or patient abuse. When underserved areas and primary health electronic health records system, even if recipients of valuable remuneration care geographic health professional the recipient does not need, want, or use have some responsibility to contribute shortage areas. Some commenters the updates. The commenter contended to the cost of the items or services, they expressed concern that different that, with respect to such updates, the are more likely to make economically contribution requirements for different 15 percent cost contribution prudent decisions and accept only items sets of physician practices may be requirement functions as a tax that and services that they need. As difficult to administer and increase damages the financial stability of small described below, we are revising the burden and, therefore, supported practices. Another commenter requirement at § 411.357(w)(4) to removing the contribution requirement recommended that CMS consider increase flexibility in connection with for all physicians. retaining a contribution requirement administering the contribution Response: As we explained in only for the provision of replacement requirement. We note that, depending response to the immediately previous software while eliminating it for the on the facts and circumstances, comment, we are retaining the 15 initial donation and any updates to that donations of electronic health records percent contribution requirement for all initially donated system. items and services may be permissible recipients seeking to protect donations Response: As explained in response to under the new exceptions for of electronic health records items and comments above, we are retaining the arrangements that facilitate value-based services under the EHR exception. We contribution requirement for all health care delivery and payment at agree with the commenters that electronic health records donations, § 411.357(aa). There is no requirement identified the challenges of defining including updates. We recognize that in the exceptions at final subgroups of entities to exempt from updates are crucial for the continuing § 411.357(aa)(1), (2), or (3) that this requirement. Even if we were to functionality of an electronic health recipients of the electronic health adopt definitions for the categories of records system; however, we do not records items or services contribute to physician recipients who would be believe that it is appropriate to retain a the donor’s cost for the items or exempted from the contribution contribution requirement for certain services. requirement—whether by adopting donations and eliminate it for others. Comment: Many commenters definitions existing in other regulations We are concerned about gaming under suggested that, if CMS determines not to or definitions suggested by such a regulatory scheme; for example, eliminate the 15 percent contribution commenters—we are cognizant that the parties could structure the ‘‘initial’’ requirement for all physician recipients, qualification under a designation can donation to consist of a functionality it should eliminate the requirement for change over time (for example, a with a low cost, and consequently, a at least a subset of recipients, such as physician practice may qualify as a small required contribution, with the small, rural, or tribal physician ‘‘small practice’’ at some points in time most valuable functionality provided practices; free and charitable clinics; but not at others, depending on staffing later as an ‘‘update’’ with no required physicians with demonstrable financial changes), resulting in significant contribution. For this reason, we believe need; or physician practices located in compliance challenges when such a that a cost contribution requirement is underserved areas, including urban change occurs. In addition, the program appropriate for all donations, including practices serving low-income Medicaid integrity risks associated with donations updates. However, as explained in our populations. Several commenters stated of electronic health records items and response to comments below, for that the contribution requirement services apply regardless of the updates to previously donated presents a significant financial barrier geography or size of the donation electronic health records items or for these physician practices that could recipient. Again, we note that, to the services, we are no longer requiring that negatively impact patient care, and one extent that the donation of electronic the contribution be made before the commenter maintained that the health records items and services is receipt of items and services. contribution requirement ‘‘prices out’’ made under a value-based arrangement Comment: Some commenters physicians in small, rural, or (as defined at § 411.351), no recipient addressed other aspects of the underserved practices, while another contribution is required, provided that contribution requirement at stated that the 15 percent contribution the arrangement satisfies all the § 411.357(w)(4). For example, one requirement is ‘‘too steep’’ for many requirements of an applicable exception commenter expressed concern about the small practices. Another commenter at final § 411.357(aa). requirement that the physician recipient believed that the contribution Comment: A number of commenters must pay the required contribution requirement could be lowered for small asked that, if CMS retains a contribution before the items or services are received. and rural physician organizations, requirement on the initial donation of This commenter noted that recipients provided that the donor is still electronic health records items and may unintentionally fail to satisfy this permitted to decide the cost sharing services, the contribution requirement requirement due to inadvertent late amount required. be eliminated for updates to the original payments and requested that CMS add

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a remedy period for mistakes to be mistakes to be corrected, as suggested by as the commenter stated, that donations corrected. Another commenter the commenter. of items and services under the EHR recommended eliminating the Comment: One commenter exception are often made to a physician requirement that the physician make the recommended that we not require a 15 organization, as opposed to an required contribution payment prior to percent contribution for cybersecurity individual physician. When an the receipt of services and donations under the EHR exception. arrangement for the donation of recommended instead that CMS require The commenter noted that some electronic health records items and that the parties have in place a organizations will only permit practices services is between the donor entity and commercially reasonable collections to use their electronic health records a physician organization, under our process. systems if the practice has certain regulation at § 411.354(c)(1), each cybersecurity protections, and thus the physician who stands in the shoes of the Response: We are aware that assessing commenter suggested that the party physician organization is deemed to a contribution for each update could requiring the cybersecurity protection have the same compensation create compliance challenges and should pay any costs associated with it. arrangement as the physician increase administrative burden. We Response: We are not finalizing organization. Thus, the donation of the recognize that updates may need to take separate requirements for different types electronic health records items and place quickly to remedy security or of donations within this exception. If a services to the physician organization is other problems in an electronic health party seeks to protect a donation of deemed to establish a direct records system, and we understand the cybersecurity software or services under compensation arrangement between commenter’s concern about inadvertent the EHR exception, then a contribution each physician who stands in the shoes late payments under such toward the cost of the items and services of the physician organization and the circumstances. We do not believe that it is required. However, as explained in entity donating the electronic health would pose a risk of program or patient our response to comments above, a records items and services. Each of abuse to permit a physician to pay physician need not pay the 15 percent those ‘‘deemed direct’’ compensation required contribution amounts after cost contribution for cybersecurity arrangements must satisfy the receipt of an update, provided that technology and services donated in requirements of an applicable exception payments are made at reasonable conjunction with electronic health in order to avoid the physician self- intervals. In contrast, with respect to an records items and services if the referral law’s referral and billing initial donation of items or services, or donation of the cybersecurity prohibitions. However, unlike many a donation that will replace existing technology or services satisfies all the other forms of nonmonetary items or services, we believe that parties requirements of final § 411.357(bb). compensation, the cost of electronic Comment: One commenter stated that can effectively plan the donation, with health records items and services is donations of items and services under all expenses known in advance. Thus, oftentimes capable of being allocated on the EHR exception are typically made to there does not exist the same a per-user basis. Thus, when a donor a physician practice, as opposed to an administrative burden or potential for entity divides the cost of electronic inadvertent late payments that may exist individual physician. However, the cost contribution requirement at health records items and services among with the timing of payments for periodic § 411.357(w)(4) requires the physician physician recipients in an appropriate updates. In light of this, we are to pay 15 percent of the donor’s cost. manner (for example, per capita or by modifying the requirement at The commenter stated that, given this estimated usage based on their portions § 411.357(w)(4) to permit payments of language, it is unclear whether of the physician organization’s patient the cost contribution for items and individual physicians or the physician universe or visits), the donation of services received after the initial practice must pay the cost contribution. electronic health records items and donation or replacement donation at The commenter requested that CMS services to the physicians in a physician reasonable intervals, rather than in clarify that donations may be made to a organization is properly viewed as a advance of the receipt of the items and physician organization as the sole direct compensation arrangement services. Of course, parties remain free contracting party and as the sole between the donor entity and each to require advance payments under their contributor to the donor’s cost. recipient physician, rather than electronic health records donation Response: Because the physician self- ‘‘deemed direct’’ compensation arrangement. The regulation continues referral law is implicated when a arrangements that result from applying to require that the physician recipient financial relationship exists between a the ‘‘stand in the shoes’’ provisions at pays the cost contribution amount for physician (or an immediate family § 411.354(c)(1). In such circumstances, the initial donation of items or services member of a physician) and an entity, each physician recipient would be or the donation of replacement items or the exception for electronic health required to contribute 15 percent of the services before the items or services are records items or services at § 411.357(w) cost of the electronic health records received. We note that the EHR is structured to apply to remuneration items and services specifically allocated exception does not require a specific from an entity to a physician. The to him or her, rather than the cost of the billing method, but the contribution commenter correctly notes that the cost entire suite of electronic health records amounts must actually be paid by the contribution requirement at items and services provided to the physician and be paid at reasonable § 411.357(w)(4) requires the physician physician organization as a whole. The intervals. A donor could choose to bill to pay 15 percent of the donor’s cost. required contribution amount may be a recipient separately for each update or The required contribution amount may paid by each individual physician or on could bill the recipient monthly or be paid by the physician or on behalf of behalf of the physicians by the quarterly to combine the contribution the physician by his or her physician physician organization. payments for all updates during a select organization. To illustrate, assume that a donor period of time. Given the modifications With respect to donations to entity wishes to provide licenses for the to § 411.357(w)(4) that we are finalizing physicians in a physician organization physicians in a physician organization here, we do not believe that it is consisting of more than one physician, to access and utilize electronic health necessary to add a remedy period for we note the following. We acknowledge, records items and services, and the cost

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of the license is $100,000 per year for situations replacement electronic health systems made the solution less than 25 licenses. The donor entity may records items or services are appropriate optimal. The commenter explained that, divide the cost of the 25 licenses among but prohibitively expensive. In the if the restriction on donations of the potential licensees, and allocate proposed rule, we proposed to permit replacement items and services were $4,000 to each physician recipient. donations of replacement electronic lifted, it could achieve greater efficiency Thus, if the donor entity provided 10 health records items or services under and care coordination by migrating the licenses to a physician organization, it the EHR exception (84 FR 55826). We network to one unified electronic health could allocate $4,000 per physician specifically sought comment as to the records system. A different commenter recipient, establishing a direct types of situations in which the recommended that CMS eliminate the compensation arrangement with each donation of replacement items and requirement at § 411.357(w)(8) but physician recipient. In these services would be appropriate. We require a documented rationale for the circumstances, each physician recipient further solicited comment as to how we must pay 15 percent (or $600) of the might safeguard against donors need of replacement items and services, cost of the license before receipt of the inappropriately offering, or physician while another commenter suggested that license in order to satisfy the recipients inappropriately soliciting, donations of replacement items and requirement at § 411.357(w)(4). In unnecessary items and services instead services should be permitted only if the contrast, assume that a donor entity of upgrading their existing technology recipient contributes 15 percent of the provides information technology and for appropriate reasons. Based on our cost of the replacement software and training services that are not readily or review of the comments, we are services and demonstrates in writing, appropriately divisible by any particular finalizing our proposal to permit accompanied by documentation from an number of licensees or users. If the cost donations of replacement items and objective third party, that the recipient’s of the items and services provided to a services by removing the requirement at current electronic health records system physician organization cannot readily § 411.357(w)(8) that the donor does not is substandard such that it poses a threat and appropriately be divided among the have actual knowledge of, or and does to patient safety. Similarly, one individual physician recipients of the not act in reckless disregard or commenter suggested that donations of items and services, under the regulation deliberate ignorance of, the fact that the replacement software should only be at § 411.354(c)(1), the entirety of the physician possesses or has obtained permitted if the software that the items and services are deemed to be items or services equivalent to those physician is currently using no longer provided to each physician who stands provided by the donor, which we have meets certification criteria. in the shoes of the physician historically interpreted as a prohibition organization. on the donation of replacement Response: We are removing the technology. requirement at § 411.357(w)(8) from the (2) Equivalent Items and Services We received the following comment EHR exception. We recognize that there (§ 411.357(w)(8)) and our response follows. may be valid business or clinical In the 2013 EHR final rule, we Comment: Commenters broadly reasons for a physician recipient to highlighted a commenter’s assertion that supported removing the requirement at replace an entire electronic health the prohibition on donating equivalent § 411.357(w)(8) that effectively prohibits records system rather than update items or services currently included in a donor from donating replacement existing items and services, even if the the exception at § 411.357(w)(8) locks items and services under the EHR existing software meets current physician practices into a vendor, even exception. Commenters provided a certification criteria and does not pose if they are dissatisfied with the donated number of reasons for their support of a threat to patient safety. Under the items or services, because the recipient the elimination of this requirement, revised EHR exception, replacement must choose between paying the full highlighting that, because they cannot items and services are treated the same amount for a new electronic health afford the full cost to replace their as a new donation and arrangements for records system and continuing to pay 15 electronic health records systems, some percent of the cost of the substandard physician practices may work with an the donation of replacement electronic system (78 FR 78766). That commenter electronic health records system that no health records items and services would asserted that the cost differential longer meets their needs, is outdated, or need to satisfy all the requirements of between these two options is high is otherwise substandard. Similar to the the exception to avoid the referral and enough to effectively locks physician commenter on the 2013 EHR proposed billing prohibitions of the physician practices into electronic health records rule, a few commenters maintained that self-referral law. For example, under technology vendors. In the 2013 EHR the prohibition on replacement items § 411.357(w)(4)(i), a recipient of final rule, we responded that we and services locks a physician recipient replacement items and services would continued to believe that items and into a particular vendor, even if the be required to pay at least 15 percent of services are not necessary if the physician is not satisfied with its the donor’s cost for the items and recipient already possesses the current electronic health records services before receiving them. We equivalent items or services. We noted system, because the cost for a new believe that treating a donation of that providing equivalent items and system is significantly higher than replacement items and services the services confers independent value on continued payment of a 15 percent same as a new donation strikes an the physician recipient and stated our contribution for updates to the appropriate balance between making expectation that physicians would not physician’s current electronic health necessary replacements financially select or continue to use a substandard records software. One commenter stated feasible for recipients and maintaining system if it posed a threat to patient that one of its clinically integrated safeguards to protect against program or networks operates with more than two safety. patient abuse, such as recipients We appreciate that advancements in dozen electronic health records systems. inappropriately soliciting or accepting electronic health records technology are The commenter explained that, continuous and rapid. According to although it has developed a system to unnecessary electronic health records commenters on the CMS RFI and OIG’s aggregate all patient information, the items and services. request for information, in some diverse electronic health records

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12. Exception for Assistance to by a physician or a physician § 411.357(x)(4) for purposes of the Compensate a Nonphysician organization that has a medical practice exception. Specifically, we proposed to Practitioner (§ 411.357(x)) site located in the geographic area revise § 411.357(x) to change references Section 1877(e)(5) of the Act sets forth served by the hospital. Often, prior to to ‘‘referral’’ when describing the an exception for remuneration provided becoming an NPP, an individual may actions of an NPP to ‘‘NPP referral’’ and by a hospital to a physician to induce have been a registered nurse (or some revise § 411.357(x)(4) accordingly. We the physician to relocate to the other health care professional) and may stated, and affirm here, that it is geographic area served by the hospital have provided services to patients that unnecessary to have a general definition to be a member of the hospital’s medical are similar to the services provided by of ‘‘referral’’ at § 411.351 that is staff, subject to certain requirements. an NPP. For purposes of the exception applicable throughout our regulations This exception is codified in our at § 411.357(x), the question presented and a different definition of the same regulations at § 411.357(e). In Phase III, by stakeholders is whether the services term (‘‘referral’’) that applies only for we declined one commenter’s request to provided by the individual before the purposes of the exception at expand § 411.357(e) to cover the individual became an NPP constitute § 411.357(x). We did not propose recruitment of nonphysician ‘‘patient care services.’’ substantive changes to the definition As we explained in the proposed rule, practitioners (NPPs) into a hospital’s itself; however, we proposed to move the definition of ‘‘patient care services’’ service area, including into an existing the definition to § 411.357(x)(4)(ii) in found at § 411.351 relates to tasks order to accommodate the inclusion of physician practice, stating that the performed by a physician only (84 FR the related definition of ‘‘NPP patient exception for physician recruitment at 55826). To clarify the meaning of care services’’ within section § 411.357(e) applies only to payments ‘‘patient care services’’ for purposes of § 411.357(x)(4) (84 FR 55826). made directly (or, in some the exception for assistance to We also proposed a related change to circumstances, passed through) to a compensate an NPP, we proposed to § 411.357(x)(1)(v)(A). As drafted, recruited physician (72 FR 51049). revise § 411.357(x) to change the § 411.357(x)(1)(v)(A) requires the NPP to Recruitment payments made by a references to ‘‘patient care services’’ to not have practiced in the geographical hospital directly to an NPP would not ‘‘NPP patient care services’’ and include area served by the hospital within 1 year implicate the physician self-referral law, a definition of the term ‘‘NPP patient of the commencement of the unless the NPP serves as a conduit for care services’’ in the exception at compensation arrangement with the physician referrals or is an immediate § 411.357(x)(4)(i). We proposed to physician. According to stakeholders family member of a referring physician. define ‘‘NPP patient care services’’ to that requested guidance on the scope of We further stated that payments made mean direct patient care services the exception, the word ‘‘practiced’’ by a hospital to subsidize a physician furnished by an NPP that address the may be interpreted to include the practice’s costs of recruiting and medical needs of specific patients or provision of NPP patient care services employing NPPs would create a any task performed by an NPP that (as we proposed to define the term here) compensation arrangement between the promotes the care of patients of the and other services, for example, services hospital and the physician practice for physician or physician organization provided by a health care professional which no exception would apply, and with which the NPP has a compensation who is not an NPP at the time the that these kinds of subsidy arrangement. Under the definition of services are furnished. To resolve any arrangements pose a substantial risk of ‘‘NPP patient care services,’’ services potential stakeholder confusion, we fraud and abuse. Following the provided by an individual who is not an proposed to replace the term publication of Phase III, we NPP (as the term is defined at ‘‘practiced’’ with ‘‘furnished NPP reconsidered our position. There have § 411.357(x)(3)) at the time the services patient care services.’’ Under the been significant changes in our health are provided, are not NPP patient care proposal, a hospital would not run afoul care delivery and payment systems, as services for purposes of § 411.357(x). of § 411.357(x)(1)(v)(A) if the hospital well as projected shortages in the Thus, if an individual worked in the provided remuneration to a physician to primary care workforce. To address this geographic area served by the hospital compensate an NPP, and the individual changed landscape, in the CY 2016 PFS providing the assistance (for example, as receiving compensation from the final rule, we finalized a limited a registered nurse) for some period physician furnished services in the exception at § 411.357(x) for hospitals, immediately prior to the hospital’s geographic service area FQHCs, and rural health clinics (RHCs) commencement of his or her within 1 year of the commencement of to provide remuneration to a physician compensation arrangement with the his or her compensation arrangement to assist with the employment of (or physician or physician organization in with the physician, provided that the other compensation arrangement with) whose shoes the physician stands, but services furnished by the individual an NPP (80 FR 71301 through 71311). had not worked as an NPP in that area during the 1-year period were not NPP The exception at § 411.357(x) applies during that period, the exception at patient care services, as we proposed to to remuneration provided by a hospital § 411.357(x) would be available to define the term at § 411.357(x)(4)(i) (84 to a physician to compensate an NPP to protect remuneration from the hospital FR 55826 through 55827). provide patient care services. As we to the physician to compensate the NPP In addition to the inquiries related to noted in the proposed rule, we have to provide NPP patient care services, the meaning of the terms ‘‘patient care received several inquiries regarding the provided that all the requirements of the services’’ and ‘‘practice,’’ we noted our meaning of the term ‘‘patient care exception are satisfied. In this example, awareness of stakeholder uncertainty services’’ as it relates to an NPP. The the registered nursing services would regarding the timing of arrangements inquiries generally concentrate on the not be considered NPP patient care that may be permissible under requirement at § 411.357(x)(1)(v)(B) that services when determining whether the § 411.357(x). Specifically, stakeholders the NPP has not, within 1 year of the arrangement satisfies the 1-year have inquired whether an NPP must commencement of his or her restriction at § 411.357(x)(1)(v) (84 FR begin his or her compensation compensation arrangement with the 55826). arrangement with the physician (or physician, been employed or otherwise We also proposed conforming changes physician organization in whose shoes engaged to provide patient care services to the term ‘‘referral’’ as defined at the physician stands) on or after the

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commencement of the compensation and that the exception cannot be used that suggested an expansion to mental arrangement between the hospital, to reimburse physicians for health services provided convincing FQHC, or RHC and the physician, compensation, signing bonus, and evidence of the compelling need for noting that the exception includes no benefits expenses related to NPPs who access to mental health care services explicit prohibition on an entity were employed or contracted before the throughout the country (80 FR 71306). providing assistance to a physician to commencement of the compensation However, commenters that requested reimburse the physician for the arrangement between the hospital and the expansion of the exception to any compensation, signing bonus, or the physician. other specialty services provided no benefits paid to an NPP already Response: As discussed above, we are documentation or other evidence of the employed or contracted by the finalizing our clarifying revisions in the compelling need for such an expansion physician prior to the date of the exception for assistance to compensate (80 FR 71306 through 71307). commencement of the physician’s a nonphysician practitioner at We did not propose to expand the compensation arrangement with the § 411.357(x). We believe that the scope of the exception for assistance to hospital, FQHC, or RHC. As we stated revisions finalized here will provide the compensate a nonphysician practitioner when finalizing the exception at clarity sought by stakeholders prior to in the proposed rule, and make no § 411.357(x), our underlying goal is to the proposed rule. attempt to finalize such a regulatory increase access to needed care (80 FR Comment: Two commenters requested modification in this final rule. However, 71309). Permitting a hospital, FQHC, or that CMS revise the exception at we note that the commenters that made RHC to simply reimburse a physician § 411.357(x) to remove any limits on the the requests for expansion of the scope for overhead costs of current employees practice specialties of nonphysician of the exception, like those that or contractors already serving patients practitioners for whom physicians may commented on the CY 2016 PFS in the geographic area served by the receive assistance. One of the proposed rule, failed to provide any hospital, FQHC, or RHC does not commenters asserted that surgery, documentation or other evidence of the support this goal. Nonetheless, as neurology, urology, and many other compelling need for such an expansion stakeholders pointed out, there is no specialty services are areas of acute at this time. With respect to the express requirement regarding the need for many communities. The commenter that suggested the exception timing of the compensation arrangement commenter also recommended that we for assistance to compensate a between the NPP and the physician (or not limit the medical specialties of nonphysician practitioner at physician organization in whose shoes physicians who may receive assistance § 411.357(x) should be aligned with the the physician stands) in § 411.357(x). To under the exception to physicians who exception for physician recruitment at ensure that compensation arrangements provide ‘‘primary care services or § 411.357(e), we note that the exception protected under the exception do not mental health services.’’ The other for physician recruitment is statutory pose a risk of program or patient abuse, commenter asserted that, although most and covers only remuneration from a we proposed to amend § 411.357(x)(1)(i) nurse practitioners provide primary care hospital to a physician to induce the to expressly require that the or behavioral health services, nurse physician to relocate his or her medical compensation arrangement between the practitioners practice in nearly all practice to the geographic area served by hospital, FQHC, or RHC and the practice specialties, and these medical the hospital to become a member of the practices are also in need of nurse physician commences before the hospital’s medical staff. In contrast, the practitioners, particularly in rural and physician (or the physician organization underlying purpose of the exception to underserved communities. This in whose shoes the physician stands assist a physician to compensate a commenter suggested that CMS align under § 411.354(c)) enters into the nonphysician practitioner is to promote the exception for assistance to compensation arrangement with the expansion of access to primary care and compensate a nonphysician practitioner NPP (84 FR 55827). Put another way, mental health care services. There is no with the exception for physician the compensation arrangement between reason for the two exceptions to have recruitment, noting that the former the NPP and the physician (or physician identical requirements and scope. organization in whose shoes the exception is limited to nonphysician physician stands) must commence on or practitioners who, for the most part, 13. Updating and Eliminating Out-of- after the commencement of the provide primary care or behavioral Date References health services, while no similar compensation arrangement between the a. Medicare+Choice (§ 411.355(c)(5)) hospital, FQHC, or RHC and the restriction applies to physician physician. recruitment. Section 1877(b)(3) of the Act and We received a number of comments in Response: The exception for § 411.355(c) of the physician self- support of our clarifying proposals. assistance to compensate a referral regulations set forth exceptions Although we received a few comments nonphysician practitioner was proposed for designated health services furnished addressing issues outside the scope of in the CY 2016 PFS proposed rule (80 by various organizations to enrollees of our proposals, we did not receive any FR 41686) and finalized in the CY 2016 certain prepaid health plans. When the comments objecting to our proposals or PFS final rule (80 FR 70866). In the CY Medicare+Choice program was suggesting alternatives for clarifying the 2016 PFS proposed rule, we stated that established in the Balanced Budget Act requirements of the exception for our goal in proposing (and ultimately of 1997 (Pub. L. 105–33) (BBA), the assistance to compensate a finalizing) the exception was to promote Congress failed to update section nonphysician practitioner. We are the expansion of access to primary care 1877(b)(3) of the Act to except the finalizing the proposed revisions to services, but sought comment regarding designated health services furnished § 411.357(x) without modification. whether there was a compelling need to under Medicare+Choice coordinated We received the following comments expand the scope of the exception to care plans. Based on our belief that this and our responses follow. nonphysician practitioners who provide was an oversight, in the , 1998 Comment: Most commenters that services that are not considered primary interim final rule with comment period commented on our proposal supported care services (80 FR 41911). In response, (Medicare Program; Establishment of the the proposed modifications to clarify commenters requested that we broaden Medicare+Choice Program (63 FR the terminology used in the exception the scope of the exception. Commenters 34968)), we revised § 411.355(c) to

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accommodate the creation of the of Federal Regulations. For consistency We did not receive any comments Medicare+Choice program and, relying with the MMA directive and to ensure opposing these changes. on the Secretary’s authority to create the accuracy of our regulations, we Response: We are finalizing the new exceptions under section 1877(b)(4) proposed to revise § 411.355(c)(5) to changes as proposed. of the Act, we included more accurately reference Medicare E. Providing Flexibility for Nonabusive Medicare+Choice coordinated care Advantage plans. Under this proposal, Business Practices plans in § 411.355(c)(5) of our § 411.355(c)(5) would reference regulations (63 FR 35003 through designated health services furnished by 1. Limited Remuneration to a Physician 35004). (We declined to include an organization (or its contractors or (§ 411.357(z)) Medicare+Choice medical savings subcontractors) to enrollees of a In the 1998 proposed rule, we account plans and Medicare+Choice coordinated care plan (within the proposed an exception for de minimis private FFS plans due to the risk of meaning of section 1851(a)(2)(A) of the compensation in the form of noncash patient abuse related to financial Act) offered by a Medicare Advantage items or services (63 FR 1699). In Phase liability for premiums and cost sharing, organization in accordance with a I, using the Secretary’s authority at which were not limited by the BBA.) We contract with CMS under section 1857 section 1877(b)(4) of the Act, we included Medicare+Choice coordinated of the Act and part 422 of this chapter. finalized the proposal at § 411.357(k) care plans at § 411.355(c)(5), in part, to This proposal does not represent a and changed the name of the exception avoid contradiction with the BBA’s change in our policy. to nonmonetary compensation, noting establishment of provider-sponsored The Medicare Advantage program that, although free or discounted items organization (PSO) plans as coordinated varies from the Medicare+Choice and services such as free samples of care plans. PSOs are defined in the BBA program in ways other than its name certain drugs, chemicals from a as entities that must be organized and and has matured in the years since laboratory, or free coffee mugs or note operated by a provider (which may be passage of the MMA. More than 20 years pads from a hospital fall within the a physician) or a group of affiliated have passed since we determined to definition of ‘‘compensation health care providers (which may protect designated health services arrangement,’’ we believe that such include physicians). The BBA requires furnished to enrollees of coordinated compensation is unlikely to cause that the providers have at least a care plans and exclude medical savings overutilization, if held within majority financial interest in the entity account plans and private FFS plans reasonable limits (66 FR 920). The and share a substantial financial risk for from the scope of § 411.355(c)(5). In exception for nonmonetary the provision of items and services. If light of this, we sought comments compensation at § 411.357(k) permits an such ownership was not excepted, the regarding whether § 411.355(c)(5) is entity to provide compensation to a physician owners of PSOs would not be broad enough to protect designated physician in the form of items or permitted to refer enrollees for health services furnished to enrollees in services (other than cash or cash designated health services furnished by the full range of Medicare Advantage equivalents) up to an aggregate amount the coordinated care plan (or its plans that exist today and that do not of $300 per calendar year, adjusted contractors and subcontractors). pose a risk of program or patient abuse. annually for inflation and currently Subsequently, in 1999, the Congress Specifically, we were interested in $423 per calendar year, provided that amended section 1877(b)(3) of the Act to commenters’ views on which, if any, the compensation is not solicited by the create a similar statutory exception for other Medicare Advantage plans we physician and is not determined in any Medicare+Choice at section should include within the scope of manner that takes into account the 1877(b)(3)(E) of the Act (Pub. L. 106– § 411.355(c)(5). volume or value of referrals or other 113). We received the following comment business generated by the referring Section 201 of the Medicare and our response follows. physician. The exception does not Prescription Drug, Improvement, and Comment: Multiple commenters require that the physician provide Modernization Act of 2003 (Pub. L. 108– supported the proposed updates and anything to the entity in return for the 173, enacted on , 2003) elimination of references to nonmonetary compensation, nor does it (MMA) renamed the Medicare+Choice ‘‘Medicare+Choice.’’ We did not receive require that the arrangement is set forth program as the Medicare Advantage any comments opposing these changes. in writing and signed by the parties. program and provided that any statutory Response: We are finalizing the We also recognized in Phase I that reference to ‘‘Medicare+Choice’’ was changes as proposed. many of the incidental benefits that deemed to be a reference to the hospitals provide to medical staff b. Website Medicare Advantage program. In members do not qualify for the reviewing our regulations for out-of-date We proposed to modernize the exception at § 411.357(c) for bona fide references, including references to regulatory text by changing ‘‘Web site’’ employment relationships because most Medicare+Choice, as part of this to ‘‘website’’ throughout the physician members of a hospital’s medical staff are rulemaking, it came to our attention that self-referral regulations to conform to not hospital employees, nor would they the language of § 411.355(c)(5) may be the spelling of the term in the qualify for the exception at § 411.357(l) inconsistent with other program Government Publishing Office’s Style for fair market value compensation regulations. Current § 411.355(c)(5) Manual and other current style guides. because, to the extent that the medical excepts designated health services After reviewing the comments, we are staff membership is the only furnished by an organization (or its finalizing our proposal to change ‘‘Web relationship between the hospital and subcontractors) to enrollees of a site’’ to ‘‘website’’ wherever the term the physician, there is no written coordinated care plan (within the appears in our regulations. agreement between the parties to which meaning of section 1851(a)(2)(A) of the We received the following comment these incidental benefits could be Act) offered by an organization in and our response follows. added. We acknowledged that many accordance with a contract with CMS Comment: Multiple commenters medical staff incidental benefits are under section 1857 of the Act and Part supported the proposed updates and customary industry practices that are 422 of Title 42, Chapter IV of the Code elimination of references to ‘‘Web site.’’ intended to benefit the hospital and its

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patients; for example, free computer and referrals or other business generated by nonmonetary compensation and the per- internet access benefits the hospital and the physician, the arrangement could instance limit on medical staff its patients by facilitating the not satisfy all the requirements of any incidental benefits; that is, adjusted to maintenance of up-to-date, accurate applicable exception because the the nearest whole dollar by the increase medical records and the availability of compensation was not set in advance of in the Consumer Price Index—Urban All cutting edge medical information (66 FR the provision of the services and was Items (CPI–U) for the 12-month period 921). To address this, using the not reduced to writing and signed by the ending the preceding . We Secretary’s authority under section parties. Under arrangements such as stated our belief that an annual 1877(b)(4) of the Act, we finalized a this, insofar as the hospital paid the aggregate remuneration limit of $3,500 second exception for noncash items or physician in cash, the exception at would be sufficient to cover the typical services provided to a physician. The § 411.357(k) for nonmonetary range of commercially reasonable exception at § 411.357(m) for medical compensation would not apply to the arrangements for the provision of items staff incidental benefits permits a arrangement. Similarly, the exception at and services that a physician might hospital to provide noncash items or § 411.357(l) for fair market value provide to an entity on an infrequent or services to members of its medical staff compensation would not protect the short-term basis. We also proposed that when the item or service is used on the arrangement if it was not documented in the exception would not be applicable hospital’s campus and certain contemporaneous signed writings and to payments from an entity to a conditions are met, including that the the amount of or formula for calculating physician’s immediate family member compensation is reasonably related to the compensation was not set in or to payments for items or services the provision of (or designed to advance of the provision of the items or provided by the physician’s immediate facilitate) the delivery of medical services, even if the compensation did family member. We sought public services at the hospital and the item or not exceed fair market value for actual comment on whether the $3,500 annual service is provided only during periods items or services provided and was not aggregate remuneration limit is when the physician is making rounds or determined in a manner that takes into appropriate, too high, or too low to engaged in other services or activities account the volume or value of referrals accommodate nonabusive compensation that benefit the hospital or its patients or other business generated by the arrangements for the provision of items (66 FR 921). In addition, the physician. or services by a physician. We also compensation may not be offered in a In the proposed rule, we stated that, sought comments regarding whether it manner that takes into account the based on our review of numerous is necessary to limit the applicability of volume or value of referrals or other arrangements in the SRDP, we believe the exception to services that are business generated between the parties. that the provision of limited personally performed by the physician Under the exception, permissible remuneration to a physician would not and items provided by the physician in noncash compensation is limited on a pose a risk of program or patient abuse, order to further safeguard against per-instance basis, and the current limit even in the absence of documentation program or patient abuse. In keeping is $36 per instance. Like the exception regarding the arrangement and where with our proposal to decouple at § 411.357(k) for nonmonetary the amount of or a formula for exceptions issued under our authority at compensation, the exception at calculating the remuneration is not set section 1877(b)(4) of the Act from the § 411.357(m) for medical staff incidental in advance of the provision of items or anti-kickback statute, we did not services, if: (1) The arrangement is for benefits does not impose any propose to include a requirement under items or services actually provided by documentation or signature § 411.357(z) that the arrangement must the physician; (2) the amount of the requirements. not violate the anti-kickback statute or remuneration to the physician is other Federal or State law or regulation Through our administration of the limited; (3) the arrangement is governing billing or claims submission. SRDP, we have been made aware of commercially reasonable (4) the However, we solicited comment numerous nonabusive arrangements remuneration is not determined in any regarding whether such a safeguard is under which a limited amount of manner that takes into account the necessary here in light of the absence of remuneration was paid by an entity to volume or value of referrals or other requirements for set in advance a physician in exchange for the business generated by the physician; compensation and written physician’s provision of items and and (5) the remuneration does not services to the entity. In some instances, exceed the fair market value for the documentation of the arrangement. We the arrangements were ongoing service items or services. We stated that, under also proposed that the remuneration arrangements under which services these circumstances, remuneration that may not be determined in any manner were provided sporadically or for a low is held within reasonable limits is that takes into account the volume or rate of compensation; in others, services unlikely to cause overutilization or value of referrals or other business were provided during a short period of similar harms to the Medicare program. generated by the physician or exceed time and the arrangement did not Therefore, relying on the Secretary’s fair market value for the items or continue past the service period. For authority under section 1877(b)(4) of the services provided by the physician, and example, one submission to the SRDP Act, we proposed an exception for the compensation arrangement must be disclosed an arrangement with a limited remuneration from an entity to commercially reasonable. Finally, we physician for short-term medical a physician for items or services proposed limits on the percentage-based director services while the hospital was actually provided by the physician (84 and per-unit compensation formulas for finalizing the engagement of its new FR 55828 through 55829). the lease of office space, the lease of medical director following the We proposed that the exception for equipment, and the use of premises, unexpected resignation of its previous limited remuneration to a physician equipment, personnel, items, supplies, medical director. Despite the hospital’s would apply only when the or services (84 FR 55829). need for the services and compensation remuneration does not exceed an After reviewing the comments, we are that was fair market value and not aggregate of $3,500 per calendar year, finalizing the exception for limited determined in any manner that took into which would be adjusted for inflation in remuneration to a physician at account the volume or value of the the same manner as the annual limit on § 411.357(z) with several modifications.

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First, we are setting the annual aggregate for items or services actually provided or services provided by the physician, remuneration limit to the physician at by a physician, while the exception for we consider the parties to have a single $5,000 instead of at $3,500, adjusted nonmonetary compensation does not compensation arrangement for various annually for inflation and indexed to require a physician to provide actual items and services, and the aggregate of the CPI–U. Second, the exception items or services in exchange for the all the compensation provided under permits the physician to provide items nonmonetary compensation. the arrangement may not exceed the or services through employees whom The final exception at § 411.357(z) for annual aggregate remuneration limit of the physician has hired for the purpose limited remuneration to a physician § 411.357(z) during the calendar year in of performing the services; through a applies to the provision of both items order for the exception to protect the wholly-owned entity; or through locum and services by a physician. In the remuneration to the physician. To tenens physicians (as defined at proposed rule, we retracted our prior illustrate, assume the entity in the § 411.351, except that the regular statements that office space is neither an previous example also engages the physician need not be a member of a ‘‘item’’ nor a ‘‘service.’’ Thus, the physician to provide occasional EKG group practice). Third, we are requiring exception for limited remuneration to a interpretations during the course of the that the arrangement is commercially physician is available to protect year, and that the aggregate annual reasonable even if no referrals were compensation arrangements involving compensation for the supervision made between the parties. Fourth, to the lease of office space or equipment services and the EKG interpretation address our concerns regarding the from a physician. For the reasons services taken together exceeded the preservation of patient choice, we are articulated in section II.D.10. of this annual aggregate remuneration limit.19 requiring compliance with the special final rule and the CY 2017 PFS Assuming neither arrangement satisfies rule at § 411.354(d)(4) if remuneration to proposed rule (81 FR 46448 through the requirements of any other applicable the physician is conditioned on the 46453) and final rule (81 FR 80524 exception, the exception for limited physician’s referrals to a particular through 80534), the exception at remuneration to a physician will not provider, practitioner, or supplier. § 411.357(z) incorporates prohibitions protect either arrangement (which, as Lastly, we are modifying the per-click on percentage-based and per-unit of noted, we treat as a single arrangement and percentage-based compensation service compensation to the extent the for multiple services) after the annual provisions at § 411.357(z)(1)(v), to remuneration is for the use or lease of aggregate remuneration limit is clarify that these provisions only apply office space or equipment, similar to the exceeded during the calendar year. to timeshare arrangements for the use of provisions at existing § 411.357(p)(1)(ii) As we explained in the proposed rule, premises or equipment. for indirect compensation arrangements the exception for limited remuneration and § 411.357(y)(6)(ii) for timeshare to a physician may be used in Given the relatively low annual arrangements. conjunction with other exceptions to aggregate remuneration limit of the We explained in the proposed rule protect an arrangement during the exception and the other safeguards of and reaffirm here our policy that, in course of a calendar year in certain the exception, we believe that the determining whether payments to a circumstances (84 FR 55830). To exception for limited remuneration to a physician under the exception for illustrate, assume that an entity engages physician, as finalized, does not pose a limited remuneration to a physician a physician to provide call coverage risk of program or patient abuse. exceed the annual aggregate services, and that the arrangement is not However, when the remuneration a remuneration limit in § 411.357(z), we documented or the rate of compensation physician receives from an entity for will not count compensation to a has not been set in advance at the time items or services exceeds the annual physician for items or services provided the services are first provided. Further, aggregate remuneration limit of $5,000, outside of the arrangement, if the items assume that, after the services are as adjusted annually for inflation, the or services provided are protected under provided and payment is made, the additional safeguards of other an exception in § 411.355 or the parties agree to continue the applicable exceptions are necessary to arrangement for the other items or arrangement on a going forward basis protect against program or patient services fully complies with the and agree to a rate of compensation. abuse. For example, for long-term requirements of another exception in Assume also that the parties have no arrangements for items or services § 411.357. To illustrate, assume an other arrangements between them. provided on a more routine or frequent entity has an established call coverage Depending on the facts and basis, where the aggregate annual arrangement with a physician that fully circumstances, the parties may rely on compensation exceeds the annual satisfies the requirements of the exception at § 411.357(z) to protect aggregate remuneration limit of the § 411.357(d)(1) or § 411.357(l). Assume payments to the physician up to the exception at new § 411.357(z), the further that the entity later engages the $5,000 annual aggregate remuneration requirement that compensation is set in physician to provide supervision limit, provided that all the requirements advance before the provision of the services on a sporadic basis during the of the exception are satisfied. For the items or services is necessary to ensure same year but fails to document the ongoing compensation arrangement, the that various payments made over the arrangement in a writing signed by the parties could rely on another applicable term of the arrangement are not parties. In determining whether the exception, such as § 411.357(d)(1), to determined retrospectively to reward supervision arrangement satisfies the protect the arrangement once the past referrals or encourage increased requirements of the exception for compensation is set in advance and the referrals from the physician. We note limited remuneration to a physician, we other requirements of that exception are that the annual aggregate remuneration will not count the compensation satisfied. (We remind readers that, limit for the exception at § 411.357(z) is provided under the call coverage under § 411.354(e)(4), the parties would higher than the annual limit for the arrangement towards the annual exception for nonmonetary aggregate remuneration limit in 19 As noted, compensation paid under the call compensation at § 411.357(k) because § 411.357(z). However, if an entity has coverage arrangement would not be included when the exception for limited remuneration multiple undocumented, unsigned determining whether the annual aggregate remuneration limit was exceeded, because the call to a physician would protect a fair arrangements under which it provides coverage arrangement in this example fully market value exchange of remuneration compensation to a physician for items complies with an applicable exception.

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have up to 90 consecutive calendar days abuse and urged CMS to limit the employee, and $150 for items provided to document and sign the arrangement.) applicability of the exception to items or through the physician’s employee, In the proposed rule, we noted that services that are personally provided by assuming no other previous payments § 411.357(d)(1)(ii) requires that the the physician. One commenter for the calendar year, the sum of $1,550 personal service arrangement covers all suggested that the exception should is counted towards the annual aggregate the services provided by the physician apply to payments to a group practice remuneration limit applicable to the (or an immediate family member of the for the services of a midlevel physician. (See below for a discussion physician) to the entity (or incorporate practitioner employed by the group or to of payments to a group practice or other arrangements by reference or a physician’s immediate family physician organization, and the cross-reference a master list of contracts) members for items or services provided application of the physician ‘‘stand in and § 411.357(l)(2) requires that parties by the immediate family members. the shoes’’ rules at § 411.354(c) under enter into only one arrangement for the Response: In the 1998 proposed rule, the exception for limited remuneration same services in a year. As we stated in we interpreted the exception for to a physician.) Given our clarification the proposed rule, for purposes of personal service arrangements at that payments to a physician for items § 411.357(d)(1)(ii), we will not require § 411.357(d)(1) to permit physicians to or services provided through a an arrangement for items or services that provide services through employees (63 physician’s employee, wholly owned satisfies all the requirements of the final FR 1701). In Phase II, we added that a entity, or locum tenens physician count exception for limited remuneration to a physician may provide services under towards the physician’s annual physician to be covered by a personal § 411.357(d)(1)(ii) through a wholly aggregate remuneration limit and the service arrangement protected under owned entity or a locum tenens other requirements of the exception, § 411.357(d)(1) or listed in a master list physician, but we declined to permit including the low annual compensation of contracts (84 FR 55830). Likewise, physicians to provide services under the limit and requirements pertaining to fair with respect to the restriction in the exception through independent market value, the volume or value of exception for fair market value contractors (69 FR 16090 through referrals and other business generated, compensation at § 411.357(l)(2), we will 16093). We explained that, if physicians and commercial reasonableness, we do not consider an arrangement for items or were permitted to provide services not believe that our final policy poses a services that is protected under the through independent contractors, a risk of program or patient abuse. exception at § 411.357(z) to violate the physician could enter into a broad range We are not convinced that the prohibition on entering into an of service arrangements and take a fee exception at § 411.357(z) should be arrangement for the same items and as a middleperson without performing applicable to payments to a physician’s services during a calendar year. any actual service. In contrast, when a immediate family member for items or The vast majority of commenters physician provides services through an services provided by the family supported our proposal, stating that the employee or a wholly owned entity, the member. As explained above, the exception would increase flexibility relationship evidences a bona fide limited remuneration to a physician under our regulations and reduce the business operated by the physician to exception is designed in part to allow burden of compliance without posing a provide the services. We find this entities to compensate physicians for risk of program or patient abuse. After reasoning to be convincing and short-term or infrequent arrangements, reviewing the comments, we are applicable to the exception for limited many of which commence under finalizing the proposed exception for remuneration to a physician, and exigent circumstances, with little time limited remuneration to a physician at therefore we are clarifying at to reduce the arrangement to writing or § 411.357(z) with certain modifications, § 411.357(z)(2) that a physician may set the compensation in advance. We do as noted above. We are also making provide items or services through an not believe that such situations typically certain modifications to the exception employee, a wholly owned entity, or a arise with respect to physicians’ for personal service arrangements at locum tenens physician, but not through immediate family members. In addition, § 411.357(d)(1) and the exception for an independent contractor. With respect if each immediate family member had a fair market value compensation at to items, office space, or equipment separate annual aggregate remuneration § 411.357(l) to ensure that § 411.357(z) provided by a physician through a limit under the exception, the sum total may be used in conjunction with these physician’s employee, wholly-owned of remuneration to a physician and his exceptions. entity, or locum tenens physician, we or her immediate family members could We received the following comments stress that the items, office space, or be substantial, depending on the and our response follows. equipment provided must be the items, number of immediate family members. Comment: We received numerous office space, or equipment of the We believe that such a policy may pose comments regarding who may provide physician. a risk of program or patient abuse. We items and services and to whom the For purposes of determining whether note that an entity is permitted under payments for items and services under payments comply with the annual the exception to compensate a physician the new exception at § 411.357(z) may aggregate remuneration limit, any for services provided through the be made. Many commenters requested payments for items, office space, physician’s immediate family member if that we not limit the exception at equipment, or services provided the family member is an employee of § 411.357(z) to items or services that are through a physician’s employee, wholly the physician acting at the direction of personally provided by physicians. One owned entity, or locum tenens the physician, provided that all the commenter suggested that the exception physician would be counted towards requirements of the exception are met. should be available for payments to a the annual aggregate remuneration limit However, as noted above, any payments physician for items or services provided applicable to the physician. In other to the physician for such services would by someone at the direction of and words, there are not separate limits for be counted towards the physician’s under the control of the physician a physician and his or her employees. annual aggregate remuneration limit. through a contract or employment For example, if an entity pays a Comment: A significant number of arrangement. In contrast, one physician $1,000 for personally commenters supported the proposed commenter expressed concern that the performed services, $400 for services exception, but requested that the limit exception, as proposed, is subject to provided through the physician’s be higher than $3,500 per calendar year,

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as adjusted for inflation. Many remuneration limit greater than $5,000 That is, each physician who stands in commenters asserted that the proposed is appropriate. We believe that the per- the shoes of the physician organization limit of $3,500 could be easily exceeded episode methodology suggested by the will be deemed to have the same in a day or a weekend, for example, if commenter would increase burden, be compensation arrangement with the a hospital has a sudden and immediate difficult to administer and enforce, and entity making the payment to the need to secure emergency on-call could easily result in failure to comply physician organization. Compensation coverage in an area with high labor costs with the requirements of the exception received by the physician organization or a shortage of physicians. Other if parties do not meticulously track under such circumstances is counted commenters suggested that a higher payments to the physician. For these towards the annual aggregate annual aggregate remuneration limit reasons, we are finalizing a limit of remuneration limit of each physician would better reflect what they consider $5,000 per calendar year, as adjusted for who stands in the shoes of the physician the typical range of commercially inflation. organization. For example, if an entity reasonable arrangements that physicians Comment: One commenter requested pays a physician organization $1,000 might enter into with entities on a short- clarification whether the annual under § 411.357(z) for lease of the term or infrequent basis. Most aggregate remuneration limit on physician organization’s equipment, commenters requested an annual remuneration applies to an individual and the physician organization consists aggregate remuneration limit of either physician or a physician practice of two owners (Drs. A and B) who stand $5,000, $7,000, or $10,000. A few comprised of more than one physician. in the shoes of the organization, then commenters requested limits over Another commenter suggested that the $1,000 is counted towards the annual $10,000, such as $35,000 per calendar annual aggregate remuneration limit, aggregate remuneration limit of both year or 10 percent of the physician’s when applied to physicians in Drs. A and B. The $1,000 payment total cash compensation from an entity physician organizations, should apply would not count toward the annual (or its affiliates) over the most recent to physicians individually, as opposed aggregate remuneration limit of other fiscal year. One commenter stated that, to the entire physician organization. physicians in the physician organization as an alternative to raising the annual Response: Because the physician self- who are not required to stand in the aggregate remuneration limit, CMS referral law is implicated when a shoes of the physician organization and could cap the amount of remuneration financial relationship exists between are not treated as permissibly standing per episode of service during a defined physicians and entities that furnish in the shoes of the physician period of time, such as 2 or 3 months. designated health services, the organization. In contrast, one commenter urged us to exception for limited remuneration to a Remuneration from an entity to a not raise the annual aggregate physician at § 411.357(z) is structured to physician under a direct compensation apply to remuneration from an entity to remuneration limit above $3,500. arrangement between the entity and the a physician. We did not propose, nor are individual physician (as opposed to a Response: In establishing the we finalizing, an exception that permits ‘‘deemed direct’’ compensation appropriate annual aggregate a specific amount of remuneration from arrangement under the stand in the remuneration limit in the final an entity to a physician organization shoes rules) is counted only towards the exception for limited remuneration to a under the conditions outlined in the individual physician’s annual aggregate physician at § 411.357(z), we relied on new exception at § 411.357(z). remuneration limit under § 411.357(z). our experience administering the SRDP Under our regulations at § 411.354(c), Returning to the example earlier in this and working with law enforcement, as remuneration from an entity to a response, if, in a direct compensation well as comments we received on our physician organization would be arrangement under § 411.354(c)(1)(i), proposed rule. In light of the comments deemed to be a direct compensation the entity paid Dr. A $500 for her we received, we are convinced that the arrangement between the entity and services relying on § 411.357(z), proposed limit of $3,500 per calendar each physician who stands in the shoes assuming no other payments during the year, as adjusted for inflation, is not of the physician organization. A calendar year relying on § 411.357(z), high enough to accommodate the broad ‘‘deemed’’ direct compensation the amount counted towards Dr. A’s range of nonabusive infrequent or arrangement must satisfy the annual aggregate remuneration limit for temporary arrangements that an entity requirements of an applicable exception payments received from the entity and a physician might enter into over if the physician makes referrals to the under § 411.357(z) would be $1,500; the course of a year. Given the other entity and the entity bills the Medicare that is, $500 for the services provided requirements of the finalized exception, program for designated health services under the direct compensation an annual aggregate remuneration limit furnished as a result of the physician’s arrangement and $1,000 for the of $5,000 for items or services actually referrals. The exception for limited equipment rental arising from the provided by a physician to an entity remuneration to a physician is available ‘‘deemed’’ direct compensation does not pose a risk of program or to protect a direct compensation arrangement with the physician patient abuse. We believe that an annual arrangement between an entity organization. Importantly, the $500 paid amount of remuneration greater than providing remuneration to an individual under the direct compensation $5,000 per calendar year, as adjusted for physician, as well as a ‘‘deemed’’ direct arrangement between the entity and Dr. inflation, may be high enough in certain compensation arrangement between an A would not be counted towards the instances to improperly incent entity and a physician who stands in the annual aggregate remuneration limit of physicians and affect medical decision- shoes of the physician organization to Dr. B or any other physician in the making. Without transparency which the entity provides the physician organization. safeguards that require an arrangement remuneration. If an entity that makes Under certain circumstances, a to be set forth in writing and signed by payment to a physician organization payment from an entity to a physician the parties and the safeguard of relies on new § 411.357(z), under organization may be considered to be a requiring that compensation is set in § 411.354(c)(1), the payment will create payment directly to the physician who advance of the provision of items or a ‘‘deemed’’ direct compensation provided the items or services to the services under the arrangement, we do arrangement with each physician who entity, with the physician organization not believe that an annual aggregate stands in the shoes of the organization. only passing the remuneration through

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from the entity to the physician. What Response: An entity may rely on the counted toward the annual aggregate constitutes a direct compensation exception at § 411.357(z) up to the point remuneration limit for 2021. arrangement with an individual in a calendar year immediately prior to It is possible that the services for physician under § 411.354(c)(1)(i), as when the annual aggregate which the physician is paid will more opposed to an arrangement with a remuneration limit is exceeded. After directly straddle the change from one physician organization that creates a that point, if the arrangement does not calendar year to the next. For example, ‘‘deemed direct’’ compensation fit into another applicable exception, assume a physician is engaged to arrangement with a physician standing the physician is not permitted to make provide a single weekend of emergency in the shoes of the organization under referrals to the entity for designated call coverage and is paid $2,000 for § 411.354(c)(ii) or (iii), depends on the health services, and the entity may not coverage provided on December 31, facts and circumstances of each bill Medicare for such improperly 2021 and January 1, 2022, and the arrangement. Important factors include, referred services. For example, if the physician is paid for the services on but are not limited to, whether the aggregate payments from an entity to a , 2022. Assuming no unusual circumstances that would require the physician (or the physician’s employee, physician exceed the annual aggregate payment to be weighted for one day wholly owned entity, or locum tenens remuneration limit on of a given over another, $1,000 would be counted physician) provides the services under year, the exception is available to the arrangement, as opposed to the towards the physician’s 2021 annual protect referrals from January 1 to aggregate remuneration limit and $1,000 services being provided by another , but not for referrals from physician in the physician organization would be counted towards the April 1 to December 31. We stress, physician’s 2022 annual aggregate (or the physician organization’s however, that structuring arrangements employee, wholly owned entity, or remuneration limit. to satisfy the requirements of an Comment: One commenter requested locum tenens physician); whether any applicable exception that does not items, office space, or equipment that CMS clarify whether the exception impose a cap on the amount of for limited remuneration to a physician provided by the physician under the remuneration paid to the physician arrangement are owned or leased by the can apply to multiple types of services under the arrangement (other than the individual physician (as opposed to or arrangements. requirement that compensation is fair Response: During any given calendar being owned or leased by the physician market value for the items and services year, the exception at § 411.357(z) may organization); and whether payment is provided by the physician) is a best be applied to the provision of different made directly to the individual practice and the best way to avoid types of items or services, including physician or, if payment is made to the exceeding the annual aggregate office space and equipment. The annual physician organization, whether the remuneration limit imposed at aggregate remuneration limit on physician organization acts as a pure go- § 411.357(z)(1). remuneration from an entity to a between or middleman, transferring all The annual aggregate remuneration physician is determined by adding of the compensation received from the compensation for all of the various entity under the arrangement to the limit on remuneration under § 411.357(z) resets each calendar year. items and services provided by the physician who provided the items or physician. For example, if, in a calendar As explained in section II.D.2.e. of this services. (See section II.D.9. of this final year, a physician is paid $500 for one rule, the provision of remuneration in rule for a discussion of our policy on service, $350 for a separate service, $150 the form of items or services commences pure ‘‘pass-through’’ payments.) for certain items, and $400 for a short- a compensation arrangement at the time Payments made to and retained by a term lease of equipment, the amount physician organization for services the items or services are provided, and allocated to the annual aggregate provided through an employee of the the compensation arrangement must remuneration limit under § 411.357(z) physician organization are permitted satisfy the requirements of an applicable for that year is $1,400. As explained under § 411.357(z), but the payment exception at that time if the physician above, if the parties had additional amount would be counted toward the makes referrals for designated health arrangements in the same calendar year annual aggregate remuneration limit of services and the entity wishes to bill that fully satisfied all the requirements each physician who stands in the shoes Medicare for such services. Thus, for of an applicable exception other than of the organization. arrangements that straddle a calendar § 411.357(z), the remuneration under Comment: A number of commenters year, remuneration should be allocated those arrangements would not be requested clarification whether, if to the annual aggregate remuneration counted towards the physician’s annual compensation exceeds the proposed limit of a calendar year based on the limit under § 411.357(z). annual aggregate remuneration limit in date that the items or services are Comment: One commenter expressed a given calendar year (as adjusted for provided. To illustrate, assume that an concern that the exception for limited inflation), the entity can rely on the entity engages a physician to present at remuneration to a physician may allow exception up to the point immediately an educational program series held for business arrangements that the prior to when the remuneration periodically throughout an academic commenter deemed ‘‘questionable’’ and exceeded the limit. The commenters year spanning September 2020 through asserted are subject to abuse. This also requested clarification on how the May 2021. Assume also that, on commenter urged CMS to include exception would apply when , 2020, the entity pays the additional safeguards in the exception, remuneration straddles a calendar year. physician $2,000 for services provided including a requirement that the Specifically, the commenter asked if the during the fall semester and, on , arrangement does not violate the anti- remuneration limit resets at the 2021, the entity pays the physician kickback statute or other Federal or beginning of each calendar year, or $4,000 for services provided during the State law or regulation governing billing whether CMS would apply the spring semester. The $2,000 paid under or claims submission. Other exception for a different period, such as the arrangement for the fall semester is commenters objected to including any a 12-month period beginning with the counted toward the annual aggregate additional requirements pertaining to commencement of the compensation remuneration limit for 2020 and the the anti-kickback statute or Federal or arrangement. $4,000 paid for the spring semester is State laws or regulations governing

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billing or claims submissions. These raise the annual aggregate remuneration patient choice, protecting the commenters stressed that parties already limit under the exception from $3,500 to physician’s professional medical have an independent obligation to not $5,000. judgment, and avoiding interference in violate these other laws and expressed As proposed, the exception for the operations of a managed care concern that the introduction of the limited remuneration to a physician organization. Furthermore, prior to our intent-based anti-kickback statute into required the compensation arrangement interpretation of the volume or value the strict liability framework of the to be commercially reasonable. As standard in this final rule, a service physician self-referral law would explained elsewhere in this final rule, arrangement that included a directed increase the burden of compliance we believe that the requirement that an referral requirement would have had to without affording any additional arrangement is commercially reasonable comply § 411.354(d)(4) in order to be safeguards to protect against program or is uniformly interpreted wherever it deemed not to take into account the patient abuse. appears. Most exceptions that include a volume or value of a physician’s Response: As explained in sections commercial reasonableness referrals to the entity. Given our final II.D.1. and II.D.10. of this final rule, we requirement, including exceptions that rules interpreting the volume or value generally believe that certain regulatory apply to arrangements that could also be standard and other business generated exceptions need not include excepted by § 411.357(z), stipulate that standard, to ensure that arrangements requirements pertaining to the anti- the arrangement must be commercially excepted under § 411.357(z) protect kickback statute or other Federal or reasonable ‘‘even if no referrals were patient choice and the physician’s made’’ between the parties. We are State laws or regulations governing professional medical judgement and modifying the requirement at billing or claims submissions in order to avoid interfering in the operation of a § 411.357(z)(1)(iii) to clarify that the ensure that financial relationships to managed care organization, we are arrangement must be commercially which the exceptions apply do not pose requiring compliance with reasonable ‘‘even if no referrals were a risk of program or patient abuse. Even § 411.354(d)(4) for arrangements that made between the parties.’’ We are so, we believe that a requirement for condition a physician’s compensation concerned that, without this compliance with the anti-kickback on referrals to a particular provider, modification, some stakeholders may practitioner, or supplier. statute is appropriate in certain believe that the commercial We stress that, under instances, particularly where both a reasonableness standard in § 411.357(z) § 411.357(z)(1)(vi), the conditions of regulatory and statutory exception could is a different and less demanding § 411.354(d)(4), including the set in apply to an arrangement and the standard than the commercial advance and writing requirement, must regulatory exception does not contain reasonableness requirement in other be satisfied only if the arrangement to be all of the requirements or safeguards exceptions. excepted under § 411.357(z) conditions that are included in the statutory Because we do not have the same a physician’s compensation on referrals exception. For example, as explained in transparency into arrangements to a particular provider, practitioner, or section II.D.10, the requirement in the protected under the finalized exception supplier. To be excepted under regulatory exception for fair market at § 411.357(z) and, as explained § 411.357(z), an arrangement need not value compensation at § 411.357(l) that elsewhere in this final rule, because we satisfy the conditions of § 411.354(d)(4) the arrangement does not violate the prioritize the protection of patient if compensation under the arrangement anti-kickback statute acts as a substitute choice, we are also requiring at to be excepted is not conditioned in this safeguard for certain requirements that § 411.357(z)(1)(vi) that, if remuneration manner, even if the parties have other, are included in the statutory exception to the physician is conditioned on the separate arrangements that condition a for the rental of office space but omitted physician’s referrals to a particular physician’s compensation on referrals to in the regulatory exception, such as the provider, practitioner, or supplier, the a particular provider, practitioner, or exclusive use requirement at section arrangement must satisfy all the supplier. Likewise, if the parties begin 1877(e)(1)(A)(ii) of the Act and conditions of § 411.354(d)(4). As revised an arrangement relying on § 411.357(z) § 411.357(a)(3) of our regulations. With in this final rule, § 411.354(d)(4) and the arrangement at its outset does respect to the final exception for limited provides that, if a physician’s not condition compensation on referrals remuneration to a physician at compensation under a bona fide to a particular provider, practitioner, or § 411.357(z), the regulatory exception employment relationship, personal supplier, then the arrangement need not omits certain requirements that are service arrangement, or managed care comply with § 411.354(d)(4) at its found in many statutory exceptions that contract is conditioned on the outset. However, if the entity later are potentially applicable to physician’s referrals to a particular requires the physician to refer to a arrangements excepted under provider, practitioner, or supplier, then particular provider, practitioner, or § 411.357(z), such as the set in advance, certain conditions must be met, supplier, the parties must set the writing, and signature requirements. including that the compensation is set compensation and document the referral However, the low annual cap on in advance for the duration of the requirement in writing in advance of the aggregate remuneration under the arrangement; the requirement to make applicability of the requirement. exception provides a strong and referrals to a particular provider, Although we are not including a sufficient substitute safeguard for the practitioner, or supplier is set out in requirement for compliance with the omitted requirements. Therefore, we are writing and signed by the parties; and anti-kickback statute in § 411.357(z), we not requiring under § 411.357(z) that the neither the existence of the reiterate here that, to the extent that arrangement not violate the anti- compensation arrangement nor the remuneration implicates the anti- kickback statute or other Federal or amount of the compensation is kickback statute, nothing in our State law or regulation governing billing contingent on the volume or value of the proposals or this final rule affects the or claims submissions. Nonetheless, we physician’s referrals to the particular parties’ obligation to comply with the agree with the commenter that certain provider, practitioner, or supplier. As anti-kickback statute, and compliance additional safeguards are necessary to explained in section II.B.4. of this final with the exception for limited prevent program or patient abuse, rule, the conditions in § 411.354(d)(4) remuneration to a physician does not especially in light of our final policy to play an important role in preserving necessarily result in compliance with

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the anti-kickback statute. As we stated timeshare arrangement that is based on § 411.357(z), the parties could also rely in Phase I, section 1877 of the Act is percentage of revenue or per-unit of on § 411.357(l) to except an arrangement limited in its application and does not service fees that are not time-based for the same items and services during address every abuse in the health care relates to the use of premises (including a calendar year. industry. The fact that particular office space), and equipment protected Response: As explained in the referrals and claims are not prohibited under final § 411.357(z). Under proposed rule and in this final rule, the by section 1877 of the Act does not timeshare arrangements, where exception at § 411.357(z) may be used mean that the arrangement is not dominion and control are not during the course of a calendar year in abusive (66 FR 879). transferred for the use of premises, conjunction with other exceptions to the Comment: One commenter requested equipment, personnel, items, supplies, physician self-referral law. The that we limit the applicability of the or services, we believe that prohibitions commenters are correct that the exception for limited remuneration to a on percentage-based compensation and exception for limited remuneration to a physician to service arrangements and per-unit of service fees are required to physician may be used in succession not permit use of the exception for the ensure that excepted timeshare with another applicable exception to rental of office space or equipment or arrangements do not pose a risk of protect an ongoing arrangement. For for timeshare arrangements. The program or patient abuse. (See 80 FR example, if parties do not initially commenter stated that such 71331 through 71332.) Therefore, we are document an arrangement or set the arrangements carry a heightened risk not convinced that § 411.357(z)(1)(v) compensation in advance, the and, therefore, should be documented in should be removed. However, we agree arrangement may be excepted under writing so that they can be audited, that the requirement, as proposed, could § 411.357(z) if all its requirements are monitored, and objectively verified. have an unintended impact on satisfied, including that the Response: Although we appreciate the arrangements other than timeshare remuneration does not exceed the importance of ensuring that an arrangements, and we are revising the annual aggregate remuneration limit exception issued by the Secretary under requirement to address our specific established at final § 411.357(z)(1). If the his authority at section 1877(b)(4) of the concern. Under final § 411.357(z)(1)(v), parties continue the arrangement, they Act does not undermine the integrity of compensation for the use of premises may rely on another applicable the Medicare program, we believe that (including office space) or equipment exception to protect the arrangement on the safeguards incorporated in final may not be determined using a formula a going forward basis, provided that all § 411.357(z), including the annual based on: (1) A percentage of the the requirements of the other applicable aggregate remuneration limit capping revenue raised, earned, billed, collected, exception are met, including any the total remuneration permissible or otherwise attributable to the services writing, signature, and set in advance under the exception at a relatively low provided while using the premises requirements. All the requirements of level and the requirement that the (including office space) or equipment; the other applicable exception, remuneration is for items or services or (2) per-unit of service fees that are not including the set in advance actually provided by the physician, are time-based, to the extent that such fees requirement, would have to be met sufficient to protect against program or reflect services provided to patients beginning on the date that the parties patient abuse even with respect to referred by the party granting rely on the other exception, except that arrangements for the rental of office permission to use the premises the parties would have up to 90 space or equipment and timeshare consecutive calendar days to document (including office space) or equipment. arrangements. Therefore, the final and sign the arrangement under exception for limited remuneration to a Comment: Several commenters § 411.354(e)(4). Remuneration provided physician at § 411.357(z) is not limited supported our policy that the exception to a physician for items or services to arrangements for items and services for limited remuneration to a physician provided prior to the date that the that are not office space or equipment. be used in conjunction with other arrangement satisfies all the The prohibitions on percentage-based exceptions during the course of a requirements of an applicable exception compensation and per-unit of service calendar year, noting that the exception, other than § 411.357(z) would be (‘‘per-click’’) fees for the rental or use, if finalized, would provide relief for counted towards the annual aggregate as modified in this final rule, of office parties that begin an arrangement for remuneration limit in § 411.357(z)(1). space and equipment serve to protect items or services before the arrangement The provision at § 411.357(d)(1)(ii) against certain abusive arrangements. squarely fits in another exception. One requires that the personal service Comment: Some commenters commenter requested that we finalize arrangement covers all the services requested that CMS not finalize the certain modifications to the exceptions provided by the physician (or an proposed prohibition on certain for personal service arrangements at immediate family member) to the entity, percentage-based and per-unit of service § 411.357(d) and fair market value and states that this requirement is met compensation formulas for the use of compensation at § 411.357(l) to ensure if all the separate arrangements between premises, equipment, personnel, items, consistency with our policy regarding the entity and the physician (or supplies, or services under a timeshare the application of § 411.357(z). immediate family member) incorporate arrangement. The commenter assumed Specifically, the commenter requested each other by reference or if they cross that the proposed requirement is that we revise § 411.357(d)(1)(ii) to list a master list of contracts. We share apparently intended to address explicitly provide that an arrangement the commenter’s concern that this timeshare arrangements and other that satisfies all the requirements of requirement could undermine the arrangements similar to traditional lease § 411.357(z) need not be covered by a applicability and utility of the exception of office space and equipment, but personal service arrangement protected for personal service arrangements if the asserted that the requirement, as under § 411.357(d)(1) or be listed on a parties to an arrangement concurrently drafted, is so broad that its scope is master list of contracts. Similarly, the rely on the new exception at unclear. commenter requested that we revise § 411.357(z) to protect a separate Response: The commenter is correct § 411.357(l)(2) to explicitly provide that, arrangement for the provision of that the requirement prohibiting a if an arrangement for items or services personal services. Therefore, we are compensation formula under a fully satisfied the requirements of modifying § 411.357(d)(1)(ii) to state

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that a personal service arrangement annually for inflation. There are respectively, applicable to donations of excepted under § 411.357(d)(1) does not significant differences between these cybersecurity technology and related have to cover personal services that are exceptions. Among other things, the services.20 The digitization of health provided by a physician under an exception for limited remuneration to a care delivery and rules designed to arrangement that satisfies all the physician protects compensation that increase interoperability and data requirement of § 411.357(z). Without does not exceed fair market value for sharing in the delivery of health care this modification, there may be items or services actually provided by create abundant targets for cyberattacks. confusion as to whether the exception the physician. Unlike the exception for For instance, a large health system with for limited remuneration to a physician nonmonetary compensation at over 400 locations was recently the may be used for one service § 411.357(k), the new exception at victim of a system-wide cyberattack that arrangement while the parties § 411.357(z) does not permit entities to took medication, medical record, and concurrently use § 411.357(d)(1) for a provide remuneration to a physician, other patient care systems offline.21 The separate personal service arrangement. including valuable in-kind health care industry and the technology Insofar as personal services provided remuneration such as free or reduced used in health care delivery have been under an arrangement that satisfies all cost CME, without a fair market value described as an interconnected the requirements at § 411.357(z) are exchange for items or services actually ecosystem where the weakest link in the excluded from the ‘‘covers all services’’ provided by the physician. The system can compromise the entire requirement in § 411.357(d)(1)(ii), it is exception for nonmonetary system.22 Given the prevalence of not necessary to incorporate a personal compensation permits an entity to gift electronic health record storage, as well service arrangement excepted under (or otherwise provide) a physician a as the processing and transit of health § 411.357(z) by reference or list it on a limited amount of noncash records and other critical protected master list of contracts. remuneration during the course of a health information (PHI) between and The exception for fair market value calendar year, not to exceed $300, as within the components of the health compensation provides at § 411.357(l)(2) indexed to inflation and currently $423 care ecosystem, the risks associated that the parties may enter into only one per year, in the aggregate. No exchange with cyberattacks that originate with arrangement for the same items or of items or services from the physician ‘‘weak links’’ are borne by every services during the course of a year. We is required. An entity may provide CME component of the system. share the commenter’s concern that this to a physician under the exception at Although we did not specifically requirement could undermine the utility § 411.357(k), provided that the value of request comments on cybersecurity, of the exception for fair market value the CME does not exceed the annual numerous commenters on the CMS RFI compensation if parties first rely on the limit on nonmonetary compensation requested that we establish an exception new exception at § 411.357(z) to protect when aggregated with any other to protect the donation of cybersecurity an arrangement for the same items or nonmonetary compensation provided to technology and related services. In services during a single year. (We note the physician during the same calendar response to its request for information that a ‘‘year’’ for purposes of the year. specifically related to cybersecurity, exception at § 411.357(l) is not defined OIG received overwhelming support for as a ‘‘calendar year’’ and refers, instead, 2. Cybersecurity Technology and Related Services (§ 411.357(bb)) a safe harbor to protect the donation of to any 365-day period.) We are cybersecurity technology and related Relying on our authority under modifying this provision to state that, services. Many commenters on both other than an arrangement that satisfies section 1877(b)(4) of the Act, in the requests for information highlighted the all the requirements of § 411.357(z), the proposed rule, we proposed an increasing prevalence of cyberattacks parties may not enter into more than exception at § 411.357(bb) (the and other threats. These commenters one arrangement for the same items and cybersecurity exception) applicable to noted that cyberattacks pose a services during the course of a year. arrangements involving the donation of fundamental risk to the health care With this modification, parties may use cybersecurity technology and related ecosystem and that data breaches result the exception for limited remuneration services (84 FR 55830). We believe that in high costs to the health care industry to a physician to protect an arrangement establishing such an exception will help and may endanger patients. Moreover, for the provision of items and services, improve the cybersecurity posture of the disclosures of PHI through a data breach and, during the course of a year, also health care industry by removing a rely on § 411.357(l) to protect an perceived barrier to donations of can result in identity fraud, among other arrangement for the same items and technology and services that address the things. services. growing threat of cyberattacks that The Health Care Industry Comment: One commenter asked for infiltrate data systems and corrupt or Cybersecurity (HCIC) Task Force, clarification as to whether the proposed prevent access to health records and created by the Cybersecurity exception for limited remuneration to a other information essential to the Information Sharing Act of 2015 physician could be relied on by an delivery of health care. The OIG is entity to provide continuing medical establishing a similar safe harbor to the 20 See, for example, U.S. Department of Health and Human Services, Office of Inspector General, education (CME) to physicians for free anti-kickback statute elsewhere in this Semiannual Report to Congress, Apr. 1, 2018–Sept. or at a reduced cost. The commenter issue of the Federal Register. Despite 30, 2018, at 84. characterized our proposal as the differences in the respective 21 ‘‘Cyberattack hits major hospital system, ‘‘increasing the limit from $300 to underlying statutes, we attempted to possibly one of the largest in U.S. History,’’ NBC $3,500 per year.’’ ensure as much consistency as possible News, , 2020, available at https:// www.msn.com/en-us/news/us/cyberattack-hits- Response: We believe that the between the exception to the physician major-hospital-system-possibly-one-of-the-largest- commenter is confusing the new self-referral law and the safe harbor to in-u-s-history/ar-BB19vtPQ?li=BBnbcA1. exception for limited remuneration to a the anti-kickback statute. 22 See, for example, Health Care Industry physician at § 411.357(z) with the In recent years, both CMS and OIG Cybersecurity Task Force, Report on Improving Cybersecurity in the Health Care Industry, June exception for nonmonetary have received numerous comments and 2017 (HCIC Task Force Report), available at https:// compensation at § 411.357(k), which has suggestions urging the creation of an www.phe.gov/preparedness/planning/cybertf/ an annual limit of $300, adjusted exception and a safe harbor, documents/report2017.pdf.

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(CISA),23 was established in March 2016 believe that, with appropriate devices. The commenter added that and is comprised of government and safeguards, arrangements for the cyberattacks can result in disclosure of private sector experts. The HCIC Task donation of cybersecurity technology sensitive patient information and can Force produced its HCIC Task Force and related services will not pose a risk alter the treatment a patient is Report in June 2017.24 The HCIC Task of program or patient abuse, provided prescribed, among other negative Force recommended, among other that they satisfy all the requirements of consequences. One commenter things, that the Congress ‘‘evaluate an the exception at final § 411.357(bb). In highlighted the trend in health care amendment to [the physician self- addition, we believe that the exception towards greater interconnectivity, even referral law and the anti-kickback established in this final rule will as costs for cybersecurity rise, and statute] specifically for cybersecurity promote increased security for concluded that cybersecurity donations software that would allow health care interconnected and interoperable health make sense from affordability, organizations the ability to assist care IT systems without protecting efficiency, and social responsibility physicians in the acquisition of this potentially abusive arrangements. standpoints. Another commenter stated technology, through either donation or In the proposed rule, we proposed its belief that health care providers are subsidy,’’ and noted that the regulatory that the exception at § 411.357(bb) insufficiently prepared to meet exception to the physician self-referral would be applicable to nonmonetary cybersecurity challenges that arise in an law for EHR items and services and the remuneration in the form of certain increasingly digitized health care safe harbor to the anti-kickback statute types of cybersecurity technology and delivery system. The commenter stated for EHR items and services could serve related services (84 FR 55831). In an that the proposed cybersecurity as a template for a new statutory effort to foster beneficial cybersecurity exception would help address these exception.25 donation arrangements without challenges and be part of a national Based on responses to OIG’s request permitting arrangements that pose a risk strategy to improve the safety, for information and our proposed rule, of program or patient abuse, we resilience, and security of the health we understand that the cost of proposed the following requirements for care industry. cybersecurity technology and related cybersecurity donations made under Response: We believe that the services has increased dramatically, to § 411.357(bb): The technology and exception as finalized at § 411.357(bb) the point where many providers and services are necessary and used will remove real and perceived barriers suppliers are unable to invest in and, predominantly to implement, maintain, to beneficial cybersecurity technology therefore, have not invested in, adequate or reestablish cybersecurity; neither the donations, addressing an urgent need to cybersecurity measures. As previously eligibility of a physician for the improve cybersecurity hygiene in the noted, the risks associated with a technology or services, nor the amount health care industry and protect patients cyberattack on a single provider or or nature of the technology or services, and the health care ecosystem overall. supplier in an interconnected system is determined in any manner that With respect to care coordination, we are ultimately borne by every directly takes into account the volume note that, depending on the facts and component in the system. Therefore, an or value of referrals or other business circumstances, an arrangement for the entity wishing to protect itself by generated between the parties; neither donation of cybersecurity technology preventing, detecting, and responding to the physician nor the physician’s and services may qualify as a value- cyberattacks has a vested interest in practice (including employees and staff based arrangement (as defined at final ensuring that the physicians with whom members) makes the receipt of § 411.351) to which the new exceptions the entity exchanges data are also able technology or services, or the amount or at § 411.357(aa)(1), (2), and (3) for to prevent, detect, and respond to nature of the technology or services, a arrangements that facilitate value-based cyberattacks, particularly where the condition of doing business with the health care delivery and payments may connections allow the physicians to donor; and the arrangement is be applicable. establish bidirectional interfaces with documented in writing. After reviewing Comment: A few commenters the entity, which inherently present comments on our proposed rule, we are generally objected to the proposed higher risk than connections that permit finalizing the exception for cybersecurity exception. One commenter expressed concern that the physicians ‘‘read-only’’ access to the cybersecurity donations and related requirements of the proposed exception entity’s data systems. We believe that a services at § 411.357(bb) with certain are inadequate because, according to the primary reason that an entity would modifications related to the types of commenter, they are difficult to monitor provide cybersecurity technology and nonmonetary remuneration permitted and less stringent than the requirements related services to a physician is to under the exception, as well as of the EHR exception. Another protect itself from cyberattacks; nonsubstantive modifications to the text commenter asked CMS to reconsider the however, we recognize that donated of the regulation. We received the following general exception and whether cybersecurity cybersecurity technology and services comments and our responses follow. technology and arrangements involving may have value for a physician recipient Comment: The majority of the donation of such technology are insomuch as the recipient would be able commenters generally supported the understood sufficiently at this time to to use his or her resources for needs proposed exception for cybersecurity warrant an exception. Some other than cybersecurity expenses. Even technology and related services. commenters expressed concern that the so, it is our position that allowing Commenters noted that cybersecurity is exception could be used to support anti- entities to donate cybersecurity necessary to enable secure and effective competitive behavior. One of the technology and related services to exchange of health information and thus commenters maintained that, while physicians will lead to strengthening of is crucial for care coordination and health IT donations by large health care the entire health care ecosystem. We improved health outcomes. One entities appear to advance commenter explained that patient safety interoperability, the actual result is that 23 Public Law 114–113, 129 Stat. 2242. is the most critical concern when physician recipients lose their 24 HCIC Task Force Report, available at https:// www.phe.gov/preparedness/planning/cybertf/ cyberattacks occur, especially when the autonomy as independent providers, the documents/report2017.pdf. cyberattacks impact the patient’s lack of competition increases the costs 25 Id. at 27. electronic health records and medical of health care, and smaller providers are

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closed by the larger health system when a. Covered Technology and Services categories of technology in the they do not create a profit. Instead of In the proposed rule, we proposed to exception. finalizing the proposal, the commenter limit the applicability of the We also proposed that the urged CMS to fund a program that cybersecurity exception to nonmonetary cybersecurity exception would apply to would allow small or rural providers to remuneration consisting of technology a broad range of services (84 FR 55832). gain access to cybersecurity technology. or services that are necessary and used We stated that such services could Another commenter expressed concern predominantly to implement, maintain, include— • that the proposed cybersecurity or reestablish cybersecurity (84 FR Services associated with exception could inadvertently bolster 55832).27 We explained that our goal is developing, installing, and updating information blocking, as some providers to ensure that donations are made for cybersecurity software; • cite cybersecurity as a reason for not the purposes of addressing legitimate Cybersecurity training services, sharing data or providing data access to cybersecurity needs of donors and such as training recipients on how to physicians. recipients; therefore, the core function use the cybersecurity technology, how Response: We do not understand the of the donated technology or service to prevent, detect, and respond to cyber basis for the commeners’ assertions that must be to protect information by threats, and how to troubleshoot the provision of cybersecurity items and preventing, detecting, and responding to problems with the cybersecurity services to protect information by cyberattacks (84 FR 55832). As technology (for example, ‘‘help desk’’ preventing, detecting, and responding to proposed, the exception at § 411.357(bb) services specific to cybersecurity); • cyberattacks would limit physician would apply to the provision of a wide Cybersecurity services for business autonomy or lead to inappropriate range of technology and services that are continuity and data recovery services to information blocking. Although we are predominantly used for the purpose of, ensure the recipient’s operations can concerned, in general, about anti- and are necessary for, ensuring that continue during and after a competitive behavior, we believe that an donors and recipients have cybersecurity attack; exception for arrangements involving cybersecurity. • ‘‘Cybersecurity as a service’’ models the donation of cybersecurity We are taking a neutral position with that rely on a third-party service technology and related services is a respect to the types of technology to provider to manage, monitor, or operate necessary and critical tool to assist the which the final cybersecurity exception cybersecurity of a recipient; health care industry in addressing the is applicable, including the types and • Services associated with performing prevalent and increasing cybersecurity versions of software that an entity may a cybersecurity risk assessment or threats facing the industry, which, provide to a physician recipient when analysis, vulnerability analysis, or among other things, can negatively all the requirements of the exception are penetration test; or impact the quality of care delivered to satisfied. We did not propose to • Services associated with sharing beneficiaries.26 The cybersecurity distinguish, and the cybersecurity information about known cyber threats, exception incorporates many of the core exception as finalized here does not and assisting recipients responding to requirements of the EHR exception, distinguish, between cloud-based threats or attacks on their systems. including the requirements that: (1) The software and software that must be We stated further that these types of remuneration is necessary and used installed locally (84 FR 55832). The services are indicative of the types of predominantly for the purposes types of technology to which the services that are necessary and used outlined in the exception; (2) neither the cybersecurity exception is applicable predominantly to implement, maintain, eligibility of the physician for the include, but are not limited to, software or reestablish cybersecurity, and technology or services, nor the amount that provides malware prevention, solicited comments on the scope of the or nature of the technology or services, software security measures to protect services to which the cybersecurity is determined in any manner that endpoints that allow for network access exception should be applicable, as well directly takes into account the volume control, business continuity software, as whether we should expressly include or value of referrals or other business data protection and encryption, and (or exclude) other services or categories generated between the parties; (3) email traffic filtering (84 FR 55832). As of services (84 FR 55832). We noted in neither the physician recipient nor the we stated in the proposed rule, these the proposed rule and reiterate here physician’s practice makes the receipt of examples are indicative of the types of that, in all cases, the technology and the technology or services or the amount technology that are necessary and used services provided by an entity must be or nature of the technology or services predominantly to implement, maintain, nonmonetary. a condition of doing business with the or reestablish cybersecurity (84 FR With respect to both technology and donor entity; and (4) the arrangement is 55832). In addition, as explained in services, we emphasize that, although documented in writing. In addition, as section II.E.2.b. below, the cybersecurity donated technology or services may explained above, we believe that many exception as finalized also applies to have multiple uses, the cybersecurity donors will make cybersecurity hardware that is necessary and used exception only applies to technology donations as a self-protective measure. predominantly to implement, maintain, and services that are necessary and used Given these safeguards, we do not or reestablish cybersecurity. We predominantly to implement, maintain, believe that the cybersecurity exception, solicited comments on the scope of the and reestablish cybersecurity. The as finalized, permits financial technology to which the cybersecurity exception does not apply to technology relationships that pose a risk of program exception should be applicable, as well or services that are otherwise used or patient abuse. as whether we should expressly include predominantly in the normal course of (or exclude) other technology or the recipient’s business (for example, 26 See, for example, Health Care Industry general help desk services related to use Cybersecurity Task Force, Report on Improving 27 In the proposed rule, the ‘‘necessary and used of a practice’s IT). We solicited Cybersecurity in the Health Care Industry, June predominantly’’ condition was included in the comment on whether this limitation 2017 (HCIC Task Force Report), available at https:// proposed regulations at § 411.357(bb)(1)(i). As would prohibit the donation of www.phe.gov/preparedness/planning/cybertf/ explained at the end of this section, in the final documents/report2017.pdf. (recommending an rule, this condition appears in the chapeau of the cybersecurity technology and related exception for cybersecurity donations). exception at § 411.357(bb)(1). services that are vital to improving the

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cybersecurity posture of the health care law are structured such that the chapeau Response: We decline to permit industry. delineates the scope of remuneration reimbursement of previously incurred With respect to the requirement that that may be provided under the cybersecurity expenses, as well as the the technology or services are necessary exception, provided that the provision of cash remuneration to a to implement, maintain, or reestablish requirements enumerated under the physician that is intended to be used for cybersecurity, we considered, and chapeau language are satisfied. The the future purchase of cybersecurity sought comment on, whether to deem chapeau of an exception contains technology and services. We believe that certain arrangements to satisfy this specific pre-conditions that must be this would pose a risk of program or requirement (84 FR 55832). We satisfied in order for the exception to be patient abuse, as the former would explained in the proposed rule that such available to except a particular simply be a subsidy of practice expenses a deeming provision, if adopted, would arrangement. The ‘‘necessary and used that a physician—rather than the donor not affect the requirement that the predominantly’’ condition in the entity—determined to incur, and the technology or services are used cybersecurity exception serves this latter involves the provision of cash, predominantly to implement, maintain, function. The remuneration that may be some or all of which could be used to or reestablish cybersecurity. We provided under the cybersecurity offset other practice expenses without emphasized that parties would have to exception is limited to nonmonetary ultimately enhancing the cybersecurity show on a case-by-case basis that the compensation, consisting of technology posture of the donor entity or the health ‘‘used predominantly’’ requirement is and services, that are necessary and care ecosystem as a whole. We also met (84 FR 55832). In the proposed rule, used predominantly to implement, highlight that the example provided by we stated that, if we adopted a deeming maintain, or reestablish cybersecurity. the commenter likely would not satisfy provision for the purpose of applying In addition, the structural the other conditions of this exception the ‘‘necessary’’ requirement at reorganization of the final cybersecurity even if the exception permitted an proposed § 411.357(bb)(1)(i), we would exception creates greater consistency entity to provide monetary deem donors and recipients to satisfy with the EHR exception. As finalized, remuneration. For instance, if a the requirement if the parties the chapeau of the cybersecurity physician has already obtained demonstrated that the donation furthers exception mirrors the chapeau in the cybersecurity technology or services, the a recipient’s compliance with a written EHR exception at § 411.357(w)(1), provision of remuneration in the form of cybersecurity program that reasonably which provides that donated items or reimbursement would not be necessary conforms to a widely-recognized services must be necessary and used to implement, maintain, or reestablish cybersecurity framework or set of predominantly to create, maintain, cybersecurity. standards (84 FR 55832). Examples of transmit, receive, or protect electronic Comment: A number of commenters such frameworks and sets of standards health records. Inclusion of the supported the requirement at proposed include those developed or endorsed by ‘‘necessary and used predominantly’’ § 411.357(bb)(1)(i) that the technology the National Institute for Standards and condition in the chapeau of the and related services must be necessary Technology (NIST), another American cybersecurity exception underscores and used predominantly to implement, National Standards Institute-accredited that ‘‘necessary and used standards body, or an international predominantly’’ has the same meaning maintain, or reestablish cybersecurity. voluntary standards body such as the in both the EHR and cybersecurity One of the commenters suggested that International Organization for exceptions. We believe this consistency this provision would ensure the Standardization. As explained below in is especially important insofar as legitimacy of donations and help response to comments below, we are not cybersecurity software may be donated differentiate the technology and services adopting this proposed deeming under both exceptions. that may be donated under the provision. We received the following comments cybersecurity exception from We are finalizing our proposal to limit and our responses follow: technology and services that have the applicability of the cybersecurity Comment: One commenter urged multiple uses beyond cybersecurity. exception to technology and services CMS to permit, with appropriate Another commenter urged CMS to that are necessary and used safeguards, the donation of both require a clear nexus between the predominantly to implement, maintain, nonmonetary remuneration consisting cybersecurity donation and the business or reestablish cybersecurity. However, of cybersecurity technology and services relationship between the donor and in the final cybersecurity exception as and monetary remuneration to be used recipient. The commenter explained established here, we state the scope of for the purchase of cybersecurity that the cybersecurity technology the exception in the chapeau of the technologies and services. The should be necessary for the provision of exception at § 411.357(bb)(1) instead of commenter asserted that permitting the services involved, such as where a including a requirement in the monetary remuneration in appropriate hospital donates cybersecurity exception that the technology and circumstances could help alleviate what technology to a physician to ensure the services are necessary and used the commenter characterized as the secure transfer of personal health predominantly to implement, maintain, cybersecurity exception’s unintended information and thus improve care or reestablish cybersecurity. (The adverse effects on competition, such as coordination for shared patients. The remaining requirements of the exception a situation where a donor wished to commenter stated that the cybersecurity are redesignated to account for this supply cybersecurity technology to two exception should not protect donations organizational change; for example, competing small providers and one of that are used as a way to entice new proposed § 411.357(bb)(1)(ii) is finalized the small providers had already business. A different commenter at § 411.357(bb)(1)(i), and so forth). We purchased the technology but the other suggested that, provided that donated are also removing the phrase ‘‘certain had not. The commenter asserted that cybersecurity technology and services types of’’ before ‘‘cybersecurity protecting monetary reimbursement to substantially further the interests of technology and services’’ from the the first provider and an in-kind strengthening cybersecurity for the end chapeau to avoid ambiguity regarding donation to the second provider would user, their donation should be the scope of the exception. Most be fairer than permitting a donation to permissible. The commenter agreed exceptions to the physician self-referral one competitor and not the other. with CMS that donors should have the

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discretion to choose the amount and implement, maintain, or reestablish products that assist physicians in nature of cybersecurity technology and cybersecurity if the technology or developing policies and procedures in services they donate to physicians based services are not connected to the support of a risk assessment; on a risk assessment of the potential underlying services furnished by either implementation, management, and recipient or based on the risks party. We note also that we are remediation services; and provision of a associated with the type of interface finalizing a requirement that a donor full-time cybersecurity officer. Some between the parties. may not directly take into account the commenters noted that a cybersecurity- Response: As explained above, the volume or value of referrals or other specific help desk may not be realistic cybersecurity exception is limited to business generated between the parties and recommended that CMS permit technology and services that are when determining the eligibility of a donations of general help desk services, necessary and used predominantly to potential recipient for donated whether through the donor’s IT implement, maintain, or reestablish technology or services, or when department or the vendor’s help desk cybersecurity. However, we are determining the amount or nature of the services. including this limitation in the chapeau donated technology or services. This Although many commenters of the final cybersecurity exception requirement addresses the concern expressed concern about the utility of rather than as a separate requirement of expressed by the commenters regarding the exception if it does not apply to a the exception as we proposed. The parties that improperly use the broad enough scope of technology and change in the organization of the exception for donations to entice new services, other commenters exception does not affect or alter the business. With respect to the last recommended limiting the scope of meaning, scope, or application of the comment, we decline to adopt the cybersecurity technology and services requirement that donated technology commenter’s proposal that donations that may be provided to a physician and services must be necessary and should be permitted under the under the exception. One of these used predominantly to implement, cybersecurity exception if the donated commenters cautioned against maintain, or reestablish cybersecurity, technology or services ‘‘substantially permitting donations of ‘‘cybersecurity as that requirement was explained in further the interests of strengthening as a service.’’ The commenter asserted the proposed rule (84 FR 55831). cybersecurity for the end user.’’ We that the ‘‘cybersecurity as a service’’ The ‘‘necessary and used believe that stakeholders are familiar model, where a third-party manages, predominantly’’ language at final with the ‘‘necessary and used monitors, or operates the cybersecurity § 411.357(bb)(1) delineates the scope of predominantly’’ condition from the EHR of a recipient, goes beyond what is the exception and will ensure that exception, and, insofar as the EHR reasonable for donated cybersecurity, donations are made to address exception applies to cybersecurity but did not provide further detail as to legitimate cybersecurity needs of donors software and services, we believe that it how ‘‘cybersecurity as a service’’ would and recipients. With respect to reduces administrative burden to use a pose a risk of program or patient abuse. technology and services with multiple Response: As finalized, the exception similar standard for both the EHR and uses or functions other than protects donations of a broad range of cybersecurity exceptions. cybersecurity, we note the following. In technology and services. Cybersecurity the 2006 EHR final rule, we Comment: Most commenters technology and services include both acknowledged that electronic health recommended that we finalize an locally installed cybersecurity software records software is often integrated with exception that covers a broad range of and cloud-based cybersecurity software. other software and functionality, but we cybersecurity technology and services, As explained in section II.E.2.b. below, explained that such software may still and some requested specific language or the exception also applies to hardware be necessary and used predominantly to clarifications. In particular, several that is necessary and used create, maintain, transmit, or receive commenters asked CMS to consider how predominantly to implement, maintain, electronic health records if the the proposed exception would apply to or reestablish cybersecurity. We electronic health records functions cloud-based and subscription-based provided multiple examples of items predominate (71 FR 45151). We added products and services. One commenter and services to which the cybersecurity that the ‘‘core functionality’’ of the supported many of the examples from exception would apply in the preamble technology must be the creation, the proposed rule of services that could to the proposed rule (84 FR 55832), maintenance, transmission, or receipt of be covered under the cybersecurity which is repeated above in this final electronic health records. The same exception, while other commenters rule. We continue to believe that the principle applies to technology (as requested that CMS provide clarity cybersecurity exception is applicable to defined at § 411.357(bb)(2)) and services related to the scope of potentially the examples provided in the proposed donated under the cybersecurity permissible donations through rule. We also stated in the proposed rule exception. While donated technology additional examples of the types and and reiterate here that ‘‘cybersecurity as and services may include functions amounts of technology and services a service’’ may be protected, including other than cybersecurity, the core allowed. Specifically, commenters third-party services managing and functionality of the technology and asked CMS to clarify whether the monitoring the cybersecurity of a services must be implementing, exception is applicable to the following recipient. Other than a general maintaining, or reestablishing services: Assurance, assessment, and statement of caution, the commenter cybersecurity, and the cybersecurity use certification programs that allow that addressed ‘‘cybersecurity as a must predominate. Such technology and physicians to assess their own service’’ did not provide any specific services must also be necessary for cybersecurity and demonstrate that they reasons why such a service presents a implementing, maintaining, or are trusted participants in health care risk of program or patient abuse, and we reestablishing cybersecurity. Although data exchange; risk assessment and gap see no reason why this cybersecurity we are not adopting the ‘‘clear nexus’’ analysis services; consulting services to format requires a different analysis than standard suggested by the commenter, work with a physician to develop and cybersecurity installed locally or should we question whether donated implement specific cybersecurity be excluded from the scope of the technology or services would be policies and procedures; subscription cybersecurity exception. All of the necessary for the donor or recipient to fees required by vendor security examples provided in the proposed rule

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are illustrative only, and the list of necessary, the cybersecurity officer’s arrangement for the donation of examples in the proposed rule is not services must be used predominantly to cybersecurity technology or services exhaustive. We intend the exception to implement, maintain, or reestablish may account for the future provision of be applicable to technology and services cybersecurity, and all other patches and updates, relieving the that are currently available, as well as requirements of the exception at final parties from developing additional technologies and services that will be § 411.357(bb) must be satisfied in order documentation each time a patch or developed in the future. Donated to avoid violation of the physician self- update is issued. Also, as described technology and services, however, must referral law. below in section II.E.2.d., the exception be necessary and used predominantly to Comment: Several commenters at final § 411.357(bb) does not require a implement, maintain, or reestablish interpreted our discussion in the financial contribution from the cybersecurity. To the extent that the proposed rule of the difficulty of recipient. Therefore, routine patches services described by commenters are collecting cost contribution amounts for and upgrades provided to recipients at necessary and used predominantly to patches and updates to mean that no cost will not cause the arrangement implement, maintain, or reestablish donations of patches or updates to between the parties to fall out of cybersecurity, they may be donated previously donated technology would compliance with the physician self- under the cybersecurity exception (if all not fall within the scope of the referral law, provided that all the the remaining requirements of the cybersecurity exception. The requirements of the exception are exception are also satisfied). commenters highlighted that patching satisfied at the time of their issuance. and updates are critical to managing Regarding donations of cybersecurity We recognize that cybersecurity cybersecurity risks and prohibiting their technology or services to physicians functionality is often incorporated into donation could neutralize any benefits who already have some technology or software or other information resulting from the cybersecurity services, the final exception at technology whose primary use and exception. One of these commenters § 411.357(bb) does not prohibit the functionality is not cybersecurity and, noted that, given the fast-paced nature donation of replacement technology; further, that certain services may be of developments in cybersecurity, it is however, an arrangement for the useful for implementing, maintaining, likely that new tools will need to be provision of cybersecurity technology or reestablishing cybersecurity while deployed on at least an annual basis. and services must satisfy all the also generally serving purposes other The commenters asked that we ensure requirements of the exception. We note than cybersecurity (for example, general that the cybersecurity exception, if that donating replacement technology IT services that include a cybersecurity finalized, applies to ongoing could satisfy the requirement that the component). However, in order for cybersecurity software updates and technology or services are necessary to technology or services to be donated other patches. Another commenter implement, maintain, or reestablish under the cybersecurity exception, the requested clarification regarding cybersecurity if, for example, the core functionality of the technology or whether the provision to a physician of technology that is replaced is outdated services must be implementing, a routine or critical update would cause or poses a cybersecurity risk. maintaining, or reestablishing an arrangement to fail to satisfy all the Comment: One commenter cybersecurity, and the cybersecurity use requirements of the cybersecurity recommended that CMS clarify the must predominate. For instance, exception, noting that patching is scope of the intended ‘‘object’’ to be depending on the facts and sometimes given to physicians for free protected by the cybersecurity circumstances of a particular (because it is built into the contracts technology and services; for example, arrangement, donating a virtual desktop with vendors), and some patches may be cybersecurity to protect electronic that includes access to programs and focused on security while others may be health records, medical devices, or other services beyond cybersecurity software more general. A different commenter IT that uses, captures, or maintains likely would not be protected because asked CMS to provide greater clarity individually identifiable health the technology would include functions regarding donations of replacement information. The commenter noted that not necessary and predominantly used technology in light of the rapid the proposed cybersecurity exception to implement, maintain, or reestablish development of new cybersecurity was silent as to the ‘‘object’’ of the cybersecurity, such as, for example, technology. cybersecurity protection, and asserted word processing or claims and billing Response: Constant vigilance is that an explicit statement setting broad applications. Similarly, the exception is required to maintain the cybersecurity parameters about the purpose of likely not applicable to general IT help of the health care ecosystem, and we donated cybersecurity technology and desk services, because the services agree with the commenters that services would provide guidance and would not be used predominantly for patching and updates are critical to potentially cover future technology cybersecurity. However, we are aware of managing cybersecurity risks. As we advances. Another commenter cybersecurity-specific software and discussed in response to previous encouraged CMS to specifically permit services that include customer service comments, we are not excluding any donations of technology and services and help desk features for cybersecurity particular type of technology or related to medical device cybersecurity. assistance. The cybersecurity exception services—including patches and Response: We decline to set is applicable to such help desk services updates—from the application of the parameters or requirements for the if all the requirements of the exception final cybersecurity exception. The intended ‘‘object’’ (or ‘‘subject’’) of the are satisfied. The cybersecurity ongoing donation of cybersecurity cybersecurity protection because we are exception could also be applicable to patches and updates will not result in concerned that this could services provided through an entity’s noncompliance with the physician self- unintentionally limit the scope of the primary help desk, if the services are referral law, provided that all the technology and services to which the necessary and used predominantly for requirements of the cybersecurity cybersecurity exception is applicable. If cybersecurity (for example, to report exception (or another applicable all the requirements of the exception are cybersecurity incidents). The provision exception) are satisfied at the time of satisfied, the exception is applicable to of a full-time cybersecurity officer in a their donation. We note that the written cybersecurity technology and services physician recipient’s practice must be documentation evidencing the that, among other things, protect

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electronic health records, medical functions of the technology and the guidelines developed by the Department devices, or other IT that uses, captures, donation satisfy the requirements of a of Health and Human Services Office for or maintains individually identifiable single exception. Civil Rights (OCR) in collaboration with health information. Comment: One commenter that ONC. One commenter recommended Comment: One commenter objected to generally opposed the cybersecurity that, in cases where cybersecurity is what it considered to be CMS’ exception maintained that effective built into software that gives physicians ‘‘piecemeal’’ approach to health care cybersecurity protection could require a access to a hospital’s computer system, technology, with different exceptions whole suite of services, such as active the technology should be deemed to be for different types of technology (for management, monitoring, and necessary and used predominantly for example, EHR and cybersecurity) that developing an effective response system cybersecurity. The commenter the commenter asserted must work if an issue arises, and it may not be explained that such a deeming together to drive care coordination. The possible for an outside entity to provide provision is warranted because, as noted commenter urged CMS to broaden the such a broad range of services. The in the proposed rule (84 FR 55831), a scope of the cybersecurity and EHR commenter asserted that more limited hospital that has granted physicians exceptions to ensure flexibility to donations of cybersecurity technology access to its system has a vested interest protect technology that can help or services, on the other hand, may not in ensuring that the physicians with facilitate the transition to a value-based provide effective cybersecurity whom it shares information are also health care delivery and payment protection for the recipients and may protected from cyberattacks, particularly system. The commenter specifically expose the donor to liability in case of where the connections allow the recommended that we make any final a cyberattack. physicians to establish bidirectional cybersecurity exception applicable to Response: As described in our interfaces with the entity. A different data analytics and reporting responses to other comments, the final commenter recommended that any functionalities. The commenter cybersecurity exception applies to a deeming provision remain voluntary, provided as an example predictive data wide range of technology and services while another commenter supported a analytics tools that allow a hospital to that implement, maintain, or reestablish deeming provision when the cost of the identify and decrease the number of cybersecurity (as defined at final donation of technology and services high-risk heart failure patients § 411.351). Although we established the exceeds a specified monetary limit. One presenting for admission to the hospital cybersecurity exception to address real commenter supported the inclusion of a or emergency room. or perceived barriers to improving the deeming provision but only if the Response: We are not extending the cybersecurity posture of the health care parties to the donation arrangement, scope of the cybersecurity exception at industry, the exception does not apply through an independent third party, final § 411.357(bb) to all data analytics to all remuneration that may be relevant demonstrate and certify that the and reporting functionality specifically to cybersecurity needs. The final donation ensures compliance with a designed to facilitate the transition to a cybersecurity exception permits written cybersecurity program or value-based health care delivery and technology and services that are framework that conforms to NIST payment system, as requested by the necessary and used predominantly to standards. In contrast, several commenter. As illustrated by the implement, maintain, or reestablish commenters objected to the inclusion of commenter’s example, the use and cybersecurity. The protection afforded any deeming provision, maintaining purpose of data analytics and reporting under the exception is not limited to that it would add unnecessary burden functionality may differ significantly cybersecurity that is ‘‘effective.’’ In the without providing any meaningful from those of cybersecurity technology strict liability context of the physician protection against program and patient and services. The cybersecurity self-referral law, we are concerned that exception at § 411.357(bb) is limited to requiring ‘‘effective’’ cybersecurity at abuse. One of these commenters stated technology and services that are § 411.357(bb)(1) may chill otherwise that physicians may struggle to necessary and used predominantly to beneficial cybersecurity donations, as understand what ‘‘reasonable implement, maintain, and reestablish donors and recipients may lack the conformance’’ looks like or when a cybersecurity, and its requirements of expertise to understand and determine cybersecurity framework or standard is the exception at § 411.357(bb) are not what constitutes ‘‘effective’’ considered ‘‘widely recognized.’’ designed to adequately protect against cybersecurity or there may be Response: We are not including a Medicare program or patient abuse disagreement as to whether deeming provision for establishing where data analytics and reporting cybersecurity measures are ‘‘effective.’’ compliance with the condition that functionality are provided at no cost (or Although donor liability is outside the donated technology and services are reduced cost) to a physician. Other scope of this rulemaking, we note that necessary for cybersecurity in the final exceptions to the physician self-referral nothing in the cybersecurity exception rule. We are concerned that any law address the items and services prohibits donors and recipients from deeming provision that is specific described by the commenter. We believe addressing such issues through enough to address our program integrity that the requirements of those contracts or other agreements. concerns will be of limited or no utility exceptions are appropriate to protect the Comment: A number of commenters for stakeholders. We also agree with the Medicare program and its patients from supported the inclusion of a deeming commenter that parties may struggle to abuse when such remuneration is provision that would allow donors or understand what ‘‘reasonable provided by an entity to a physician (or recipients to demonstrate that the conformance’’ looks like or when a vice versa). With respect to the compensation arrangement satisfies the framework or standard is considered commenter’s concern regarding a requirement that the technology or ‘‘widely recognized.’’ Without selection piecemeal approach to exceptions under services are ‘‘necessary’’ if the donation of one or more specific frameworks, any the physician self-referral law, we note furthers a recipient’s compliance with a deeming provision could be challenging that parties seeking to except an written cybersecurity program that to understand and difficult to enforce. arrangement for the donation of reasonably conforms to a widely- Regarding the commenter’s suggestion technology are not required to utilize recognized cybersecurity framework, that software that grants access to a multiple exceptions if the separate such as those developed by NIST, or hospital’s system should be deemed to

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be necessary and used predominantly intended to affect the meaning of the recipient had a cybersecurity risk for cybersecurity, we agree that the type term ‘‘information technology’’ or the assessment that provided a reasonable of connection between a donor and a interpretation of § 411.357(w)(6)(iv). basis to determine that the donated physician (bidirectional read-write In the proposed rule, we proposed a cybersecurity hardware is needed to connection versus unidirectional read- broad definition of ‘‘cybersecurity’’ address a risk or threat identified by a only access) is an important factor in derived from the NIST Framework for risk assessment (84 FR 55834). determining whether particular Improving Critical Infrastructure,28 a We noted in the proposed rule and technology or services are necessary for framework that does not apply reiterate here that the exception at cybersecurity. However, we do not specifically to the health care industry, § 411.357(bb), both as proposed and believe that any software or other but applies generally to any United finalized, covers only items and services information technology should be States critical infrastructure (84 FR that qualify as cybersecurity technology deemed to be necessary for 55831). We proposed a broad definition and services (84 FR 55832). It does not cybersecurity simply because the of ‘‘cybersecurity’’ to avoid extend to other types of cybersecurity technology permits a physician to unintentionally limiting donations by measures outside of technology or access a hospital’s computer system. relying on a narrow definition or a services. For example, the exception Moreover, the determination of whether definition that might become obsolete does not apply to donations of technology or services are used over time, although we solicited installation, improvement, or repair of predominantly to implement, maintain, comments whether a definition tailored infrastructure related to physical or reestablish cybersecurity depends on to the health care industry would be safeguards, even if they could improve how the donated technology or services more appropriate (84 FR 55831). We cybersecurity (for example, upgraded are used in fact and, therefore, not proposed a similarly broad definition of wiring or installing high security doors). appropriate for a deeming provision. ‘‘technology’’ that is neutral with Donations of infrastructure upgrades are Although technology or services respect to the types of cybersecurity extremely valuable and have multiple donated under the cybersecurity technology to which the exception benefits in addition to cybersecurity, exception may have uses or functions applies (84 FR 55831). We explained in and, thus, permitting an entity to other than cybersecurity (for example, the proposed rule that the definition of provide such services at no cost to the software that allows a physician to ‘‘technology’’ is broad enough to physician recipient would present a risk access a hospital’s computer system), include cybersecurity software and of program or patient abuse. the cybersecurity use must in fact other IT, such as an Application As explained in more detail below, in predominate. Programming Interface (API)—which is response to comments we are finalizing neither software nor a service, as those the definition of ‘‘cybersecurity’’ as b. Definitions of ‘‘Cybersecurity’’ and terms are generally used—that is proposed, and finalizing the definition ‘‘Technology’’ available now, as well as technology of ‘‘technology’’ without the phrase In the proposed rule, we proposed to that may become available as the ‘‘other than hardware.’’ define the term ‘‘cybersecurity’’ to mean industry continues to develop. As We received the following comments the process of protecting information by proposed, ‘‘technology’’ would have and our responses follow. preventing, detecting, and responding to excluded hardware. We explained our Comment: Several commenters agreed cyberattacks and to define the term concern in the proposed rule that with the proposed industry-neutral ‘‘technology’’ to mean any software or donations of valuable multiuse definition of ‘‘cybersecurity,’’ derived other type of information technology, hardware could pose a risk of program from the NIST Cybersecurity Framework other than hardware (84 FR 55831). or patient abuse (84 FR 55832). (NIST CSF), and most commenters Because the term ‘‘cybersecurity’’ also In the proposed rule, we also generally agreed that the final rule appears in the EHR exception at considered two alternative proposals should include a broad definition of § 411.357(w), which expressly applies to that would allow for the donation of ‘‘cybersecurity’’ to provide sufficient the donation of cybersecurity software certain cybersecurity hardware (84 FR flexibility for future changes, and services, we proposed to include 55831 through 55832). Under the first adaptations, and variations in the the definition of ‘‘cybersecurity’’ in our alternative proposal, the cybersecurity dynamic world of cybersecurity. One regulations at § 411.351. Because the exception would cover certain hardware commenter was generally supportive of term ‘‘technology,’’ as used in the new that is necessary for cybersecurity, the proposed definition of exception for cybersecurity technology provided that the hardware is stand- ‘‘cybersecurity’’ but believed it should and related services, would be defined alone (that is, is not integrated within include the process of protecting solely for purposes of the exception at multifunctional equipment) and serves information through ‘‘identifying’’ and ‘‘recovering’’ from cyberattacks in order § 411.357(bb), we proposed to include only cybersecurity purposes (for to account for the entire lifecycle of a its definition at § 411.357(bb)(2) (84 FR example, a two-factor authentication cyberattack. The commenter presumed 55831). We note that the term dongle). We solicited comments on that the addition of ‘‘recovering’’ would ‘‘technology’’ is included in several what types of hardware might meet protect ‘‘back-up services’’ that support instances in our regulations as part of these criteria and whether such reestablishing cybersecurity and reduce the term ‘‘information technology’’ and hardware should fall within the scope of the impact of ransomware extortion. at § 411.357(w)(6)(iv) to describe one of the exception. Under the second Another commenter supported the the ways in which the determination of alternative proposal, parties would be definition of ‘‘cybersecurity’’ for being the eligibility of a physician for a permitted to make more robust fairly broad and including donations of donation of EHR items or services, or donations of cybersecurity hardware if APIs, but requested that we modify the the amount or nature of the items or the donor had a cybersecurity risk definition to account for what the services, would be deemed not to be assessment that identifies the recipient commenter identified as the three determined in a manner that directly as a risk to its cybersecurity, and the takes into account the volume or value pillars of information security: of referrals or other business generated 28 Appendix B, Version 1.1 (, 2018) Confidentiality of information, integrity between the parties. The proposed available at https://nvlpubs.nist.gov/nistpubs/ of information, and availability of definition of ‘‘technology’’ was not CSWP/NIST.CSWP.04162018.pdf. information.

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Response: We agree with the by an entity of any ransom on behalf of Response: We decline to modify the commenters that we should adopt a a physician recipient in response to a definition of ‘‘cybersecurity’’ as broad, industry-neutral definition of cyberattack (or to reimburse a physician suggested by the first commenter. We ‘‘cybersecurity.’’ Consequently, we are for a ransom paid by the physician). disagree with the commenter’s finalizing a definition derived from the Moreover, the payment or characterization of the definition, and NIST CSF. The NIST CSF is industry- reimbursement of a ransom would not do not believe that the final definition neutral and widely accepted across be nonmonetary remuneration. of ‘‘cybersecurity’’ at § 411.351 has the public and private sectors and We also decline to modify the effect of limiting donations of international organizations, and it definition of ‘‘cybersecurity’’ to cybersecurity technology and services to applies to any critical infrastructure in expressly include the three pillars of only those that prevent criminal the United States, which includes information security, as requested by misconduct. The definition of health care. It provides a commonly the last commenter. We agree that the ‘‘cybersecurity’’ adopted in this final understood language for donors and concepts described by the commenter as rule is unrelated to the intent—criminal recipients seeking to use the the ‘‘three pillars’’ of confidentiality, or otherwise—of an ‘‘unauthorized cybersecurity exception to improve their integrity, and availability of information user.’’ We believe that the definition cybersecurity posture. We are not are fundamental aspects of adopted in this final rule is broad adopting a definition of ‘‘cybersecurity’’ cybersecurity. The NIST CSF similarly enough to address the commenter’s that would incorporate specific recognizes these concepts; an outcome concerns about unauthorized users. technology solutions for cyberattacks. category under the ‘‘protect’’ function of We are also not adopting the We are concerned that, as new cybersecurity includes management of definition suggested by the second cybersecurity technologies are data ‘‘consistent with the organization’s commenter. The principles underlying developed and implemented, a risk strategy to protect the the commenter’s definition, which the definition that incorporates specific confidentiality, integrity, and commenter stated are derived from technology solutions for cyberattacks availability of information.’’ Therefore, NIST and other Federal government could become obsolete. We believe that the final definition of ‘‘cybersecurity’’ at sources, are already generally included the final definition of ‘‘cybersecurity’’ at § 411.351, which includes ‘‘the process in the definition of ‘‘cybersecurity.’’ § 411.351 provides sufficient flexibility of protecting information,’’ accounts for Moreover, we are concerned that some while also permitting parties a clear these principles while also providing of the language suggested by the understanding of the technology to flexibility and certainty to donors as to commenter would greatly expand the which the exception is applicable. the scope of the cybersecurity scope of the cybersecurity exception Although the cybersecurity exception exception. and the donation of such technology Comment: One commenter stated that does not require compliance with the and services could pose a risk of the proposed definition of NIST CSF, we encourage potential program or patient abuse. For example, ‘‘cybersecurity’’ seems oversimplified donors and recipients to ensure a ‘‘restoration of computers, electronic and not comprehensive. The commenter comprehensive, systematic approach to communications systems, electronic suggested that the definition of identifying, assessing, and managing communications services, wire ‘‘cybersecurity’’ should be inclusive of cybersecurity risks. communication, and electronic any unauthorized use, even without communication,’’ could be lead parties We decline to add the terms deliberate criminal activity or a specific to mistakenly believe that the ‘‘identifying’’ and ‘‘recovering’’ to the cyberattack, and recommended cybersecurity exception applies to definition of ‘‘cybersecurity,’’ as broadening the definition accordingly. donations of technology and services suggested by the commenter, and we A different commenter maintained that that are not necessary and used noted that these terms also appear in the the proposed definition of predominantly to implement, maintain, NIST CSF. The NIST CSF organizes ‘‘cybersecurity’’ fails to capture all or reestablish cybersecurity, such as basic ‘‘cybersecurity activities’’ into five aspects of security controls relevant to donations of entire communication functions: Identify, protect, detect, patient information, systems processing, systems. respond, and recover. The exception at or retention of patient information. The Comment: Most commenters that final § 411.357(bb) applies to donations commenter recommended that we commented on the proposed definition of cybersecurity technology and services define ‘‘cybersecurity’’ to mean: (1) The of ‘‘technology’’ generally agreed with that are necessary and used prevention of damage to, protection of, using the NIST CSF as a basis for the predominantly for one or more of these and restoration of computers, electronic definition. However, many of these five functions and the related communications systems, electronic commenters requested that we permit subfunctions and cybersecurity communications services, wire donations of certain cybersecurity outcomes that are part of the NIST CSF. communication, and electronic hardware under the exception and We are not persuaded to adopt a more communication, including information delete the phrase ‘‘other than hardware’’ specific definition of cybersecurity by contained therein, to ensure its in the proposed definition of incorporating additional terminology availability, integrity, authentication, ‘‘technology.’’ In support, some from the NIST CSF and are finalizing confidentiality, and nonrepudiation; (2) commenters asserted that the lines the definition of ‘‘cybersecurity’’ at the prevention of damage to, between hardware, software, services, § 411.351 as proposed. With respect to unauthorized use of, exploitation of, and other technology that is neither recovering from cyberattacks in and—if needed—the restoration of hardware, software, nor a service, are particular, we stress that, although the electronic information and increasingly blurred, and noted that cybersecurity exception applies to communications systems, and the such technologies are often packaged donations of nonmonetary remuneration information they contain, in order to together as a bundle. Other commenters consisting of technology and services strengthen the confidentiality, integrity suggested that hardware donations are a that are necessary and used and availability of these systems; or (3) foundational requirement to predominantly for reestablishing the process of protecting information by operationalize cybersecurity best cybersecurity, ‘‘reestablishing’’ preventing, detecting, and responding to practices. These commenters asserted cybersecurity does not include payment attacks. that including hardware within the

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definition of ‘‘technology’’ would allow cap is necessary. As explained in including the types described by the for more aggressive data security and section II.E.2.a. above, donated commenters. excluding hardware from the definition technology, including hardware, may Comment: We received several is shortsighted and could limit the use include other functionality or uses comments on our alternative proposal to of effective cybersecurity measures. A besides cybersecurity. However, the permit more robust donations of few commenters highlighted that certain cybersecurity use must predominate and cybersecurity hardware, provided that cybersecurity software requires specific the core functionality of the hardware both the donor and the recipient obtain hardware and requested that we expand must be implementing, maintaining, or risk assessments which provide a the scope of the exception to cover reestablishing cybersecurity. The reasonable basis to determine that the donations of such hardware. For hardware must also be necessary for donated cybersecurity hardware is example, a commenter noted that cybersecurity. necessary. A number of commenters firewalls involve the use of both Certain of the examples offered by generally favored the proposal. Some of hardware and software, and suggested commenters, including locks on doors, these commenters asserted that, because that many clinicians would not have the upgraded wiring, physical security the donation is based on the results or technical knowledge to configure the systems, fire retardant or warning recommendations of a risk assessment, firewalls. This commenter technology, and high security doors do there should be no cap or limit on the recommended that we permit the not qualify as ‘‘technology’’ under type or amount of hardware that may be donation of low-cost hardware, § 411.357(bb)(2) because they are donated and no requirement that a potentially up to a dollar threshold that physical infrastructure improvements, recipient contribute to the cost of could not be exceeded for the total not software or other information donated hardware. Other commenters donation. technology. Therefore, the cybersecurity favored allowing robust donations of Other commenters that supported exception is not applicable to these cybersecurity hardware, but opposed permitting the donation of hardware items. The cybersecurity exception is the requirement in the alternative under the cybersecurity exception applicable to hardware such as proposal that both the donor and the asserted that failing to extend the encrypted servers, encrypted drives, and recipient first obtain a risk assessment application of the exception to network appliances, but only if the supporting the donation. One donations of multifunctional hardware is necessary and used commenter stated that the alternative cybersecurity hardware (or software) predominantly to implement, maintain, proposal could pose a risk of program would limit the utility of the exception or reestablish cybersecurity. If, for abuse, while a different commenter because cybersecurity technology often example, an encrypted server is used found the alternative proposal to be too is not standalone in nature. Some of predominantly to host the computer limiting, and suggested that hardware these commenters provided examples of infrastructure of a recipient, it would donations be permitted if the hardware multifunctional hardware they deemed not satisfy the necessary and used is necessary and used predominantly to beneficial to cybersecurity hygiene, predominantly requirement of implement, maintain, or reestablish such as encrypted servers, encrypted § 411.357(bb)(1), even if the encrypted cybersecurity. drives, network appliances, locks on server has ancillary cybersecurity uses Response: We are not adopting a server closet doors, upgraded wiring, and functionality. policy that permits the donation of physical security systems, fire retardant Comment: A number of commenters cybersecurity hardware only when the or warning technology, and high suggested that CMS expand the donor has a cybersecurity risk security doors. Some of these proposed cybersecurity exception to assessment that identifies the recipient commenters stated that any program apply to single-function hardware as a risk to its cybersecurity, and the integrity concerns with hardware technologies that have limited or no recipient has a cybersecurity risk donations are adequately addressed by functionality outside of cybersecurity, assessment that provides a reasonable the requirement that donated such as computer privacy screens, two- basis to determine that the donated technology and services must be factor authentication dongles and cybersecurity hardware is needed to necessary and used predominantly to security tokens, facial recognition address a risk or threat identified by a implement, maintain, or reestablish cameras for secure access, biometric risk assessment. We believe that our cybersecurity. In contrast, a few authentication, secure identification expansion of the definition of commenters generally supported our card and device readers, intrusion ‘‘technology’’ to include hardware, proposal to exclude hardware from the detection systems, data backup systems, coupled with the requirement that any definition of technology, citing program and data recovery systems. One donated hardware is necessary and used integrity concerns. commenter asserted that the sole predominantly to implement, maintain, Response: We are modifying the purpose of most cybersecurity hardware or reestablish cybersecurity, provides definition of ‘‘technology’’ to remove is to maintain the security of patient sufficient flexibility for cybersecurity the phrase ‘‘other than hardware.’’ Thus, data. hardware donations while protecting the cybersecurity exception at final Response: The final definition of against program or patient abuse. § 411.357(bb) is applicable to hardware ‘‘technology’’ does not preclude Although we are not finalizing this that is necessary and used hardware and should address the alternative proposal, parties remain free, predominantly to implement, maintain, commenters’ concerns. We agree that and are encouraged, to perform risk or reestablish cybersecurity. We agree certain hardware is limited to assessments to determine donor and with the commenters that our program cybersecurity uses. Provided that all the recipient vulnerability to cyberattacks integrity concerns regarding donations requirements of the exception are and to assist in creating their own of valuable multifunctional hardware satisfied, including the requirement that cybersecurity programs. are adequately addressed by making the the donated hardware is necessary and Comment: One commenter explained exception available only to donated used predominantly to implement, that, typically, entities do not purchase technology and services are necessary maintain, or reestablish cybersecurity, the actual software that provides and used predominantly to implement, the exception at § 411.357(bb) will cybersecurity. Rather, entities purchase maintain, or reestablish cybersecurity, permit the donation of single-use or the right to use the software, which is and we do not believe that a monetary standalone cybersecurity hardware, accomplished through licensing, and

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donate a license to use the software to intended to require a donor to donate cybersecurity are different than those recipients. In these circumstances, the cybersecurity technology and related associated with arrangements for the software itself is not donated. The services to every physician that donation of other valuable technology, commenter also recommended that we connects to its system. Donors are such as EHR items and services. include installment and repairs among permitted to select recipients in a However, we solicited comments on the types of technology and services that variety of ways, provided that neither a whether we should narrow the scope of may be donated under the exception. physician’s eligibility, nor the amount entities that may provide remuneration Response: We recognize that, in some or nature of the cybersecurity under the cybersecurity exception as we instances, entities purchase the right to technology or related services donated, have done in other exceptions, such as use cybersecurity software, which is is determined in a manner that directly the EHR exception. As explained in accomplished through licensing, and takes into account the volume or value section II.E.2.e. below, we are not donate that use or license rather than of referrals or other business generated limiting the types of entities that are the software itself. The donation of a between the parties. For example, a permitted to make donations under final license to use cybersecurity software donor could perform a risk assessment § 411.357(bb). may be permissible under the final of a potential recipient (or require a Based on the comments, we are exception at § 411.357(bb) in the same potential recipient to provide the donor finalizing the requirement that neither way that donating software would be with a risk assessment) before the eligibility of a physician for the permissible, if all the requirements of determining whether to make a technology or services, nor the amount the exception are satisfied. We agree donation or the scope of a donation. If or nature of the technology or services, with the commenter that installment the donor is a hospital, it might choose is determined in any manner that and repairs should be included among to limit donations to physicians on the directly takes into account the volume the technology and services to which hospital’s medical staff. Or, the donor or value of referrals or other business the cybersecurity exception is might select recipients based on the generated between the parties, although applicable, and the final cybersecurity type of actual or proposed interface it is designated in the final exception at exception is applicable to such services. between them. For example, an entity § 411.357(bb)(1)(i). Final c. Requirement for Donors may elect to provide a higher level of § 411.357(bb)(1)(i) is identical to (§ 411.357(bb)(1)(i)) 29 cybersecurity technology and services to proposed § 411.357(bb)(1)(ii). As noted a physician with whom it has a higher- above and explained more fully below In the proposed rule, we proposed a risk, bi-directional read-write requirement that neither the eligibility in response to comments, we are not connection than the entity would adopting deeming provisions that would of a physician for the technology or provide to a physician with whom it has services, nor the amount or nature of the allow parties to demonstrate compliance a read-only connection to a properly with final § 411.357(bb)(1)(i), and we are technology or services, is determined in implemented, standards-based API that any manner that directly takes into not restricting the types of entities that enables only the secure transmission of may make donations under the final account the volume or value of referrals a copy of the patient’s record to the or other business generated between the cybersecurity exception at physician. § 411.357(bb). parties (84 FR 55833). It is our As discussed in the proposed rule, in understanding that the purpose of contrast to the similar requirement in We received the following comment donating cybersecurity technology and the EHR exception at § 411.357(w)(6), and our response follows. related services is to guard against the cybersecurity exception does not Comment: Commenters generally threats that come from interconnected include a list of selection criteria which, supported the requirement at final systems, and we expect that a donor if met, would be deemed not to directly § 411.357(bb)(1)(i) that neither the would provide the cybersecurity take into account the volume or value of eligibility of a physician for technology and related services only to referrals or other business generated by cybersecurity technology or services, physicians that connect to its systems, the physician (84 FR 55833). We nor the amount or nature of the which includes physicians that refer to solicited comments on whether we technology or services, is determined in the donor. However, this requirement should include deeming provisions in any manner that directly takes into would prohibit the donor from directly the exception for cybersecurity account the volume or value of referrals taking into account the volume or value donations that are similar to the or other business generated between the of a physician’s referrals or the other provisions at § 411.357(w)(6), and any parties. However, a number of these business generated by the physician other requirements or permitted commenters opposed our proposal to when determining: (1) Whether to make conduct that we should enumerate in establish a deeming provision, similar to a donation of cybersecurity technology the cybersecurity exception (84 FR the deeming provision in the EHR or services; or (2) how much or the 55833). As explained below, we are not exception at § 411.357(w)(6), under nature of the donated technology or adopting deeming provisions for which certain selection criteria would services. We are including this determining compliance with final be deemed to satisfy the requirement at requirement as proposed; however, it is § 411.357(bb)(1)(i). final § 411.357(bb)(1)(i). One commenter designated in the final regulation at We did not propose to restrict the maintained that it would create a risk of § 411.357(bb)(1)(i). types of entities that may make program or patient abuse to permit a Nothing in the requirements of the cybersecurity donations under the donor to choose recipients who will final cybersecurity exception is cybersecurity exception (84 FR 55833). receive donations of cybersecurity Although receiving donated through a deeming provision. In 29 In the proposed rule, the requirement that cybersecurity technology and related contrast, other commenters supported neither the eligibility of a physician for the technology or services, nor the amount or nature of services would relieve a physician of a the establishment of a deeming the technology or services, is determined in any cost that he or she otherwise would provision to provide clarity and manner that directly takes into account the volume incur, the program integrity risks guidance with respect to how parties or value of referrals or other business generated associated with arrangements for the may determine the eligibility of a between the parties was designated as § 411.357(bb)(1)(ii). However, this requirement is donation of technology and related physician recipient for cybersecurity designated as § 411.357(bb)(1)(i) in this final rule. services intended to promote technology or services, or the nature and

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amount of such services, without exception a requirement that the practice but required a low-referring violating the physician self-referral law. physician recipient of cybersecurity practice to contribute 20 percent of the Response: We are finalizing the technology or services must contribute cost, then the donation could violate the requirement that neither the eligibility to the cost of the technology or services. requirement at § 411.357(bb)(1)(i). of a physician for the technology or As explained earlier in this section Based on the comments, we are services, nor the amount or nature of the II.E.2., with this exception, we seek to finalizing the requirement that neither technology or services, is determined in remove a barrier to donations that the physician, nor the physician’s any manner that directly takes into improve cybersecurity throughout the practice (including employees or staff account the volume or value of referrals health care industry in response to the members), makes the receipt of or other business generated between the critical cybersecurity issues identified cybersecurity technology or services, or parties, but are not including a list of in the HCIC Task Force Report, by the amount or nature of the technology selection criteria that, if utilized, would commenters to the CMS RFI and OIG or services, a condition of doing be deemed not to directly take into request for information, and elsewhere. business with the donor as proposed. account the volume or value of referrals We proposed to include only those We received the following comments or other business generated between the requirements under the exception that and our responses follow. parties. As we explained in the we believe are necessary to ensure that Comment: Several commenters proposed rule, deeming provisions for the arrangements do not pose a risk of supported the proposed requirement selection criteria that pertain to a program or patient abuse. In the case of that neither the physician who receives prohibition on taking into account the cybersecurity technology and related the cybersecurity technology nor the volume or value of referrals or other services, we do not believe that physician’s practice (including business generated between parties are requiring a minimum contribution to employees and staff members) makes sometimes interpreted as prescriptive the cost by the recipient is necessary or, the receipt of technology or services, or requirements, especially in the context in some cases, practical. We recognize the amount or nature of the technology of a new exception that applies to that the level of services for each or services, a condition of doing business with the donor. One of these emerging and rapidly evolving recipient might vary, and might be commenters requested that CMS align arrangements such as the cybersecurity higher or lower each year, each month, its provision on conditioning business exception (84 FR 55833). In this context, or even each week, resulting in the on the receipt of cybersecurity we are concerned that a deeming inability of certain physician practices, technology or services with OIG’s safe provision may cause the parties to an especially solo practitioners or harbor condition at proposed 42 CFR arrangement to forgo legitimate and physician practices in rural areas, to 1001.952(jj)(3), while another acceptable selection criteria, thus make the required contribution, which, commenter requested that the limiting the scope and utility of the in turn, risks the overall cybersecurity of requirement in the cybersecurity cybersecurity exception. Because we do the health care ecosystem of which the exception mirror the similar not want to inhibit appropriate practices are a part. Similarly, donors requirement in the EHR exception at cybersecurity donations that are made may aggregate the cost of certain § 411.357(w)(5). using selection criteria that are not services across all recipients, such as Response: As proposed and finalized, expressly deemed to be permissible cybersecurity patches and updates, on a the prohibition on making the receipt of under the cybersecurity exception, we regular basis, which may result in a cybersecurity technology or services a are not finalizing any deeming contribution requirement becoming a condition of doing business with the provisions pertaining to the requirement barrier to widespread, low-cost donor at final § 411.357(bb)(1)(ii) is at final § 411.357(bb)(1)(i). improvements in cybersecurity because substantively identical to the OIG’s safe of the amount allocated to each d. Requirement for Recipients harbor condition at proposed 42 CFR recipient. Moreover, if physicians are (§ 411.357(bb)(1)(ii)) 30 1001.952(jj)(3) and the similar not required to utilize resources to requirement in the EHR exception at In the proposed rule, we proposed to contribute to the cost of cybersecurity § 411.357(w)(5). Variation in the include in the cybersecurity exception a that benefits both the donor and the wording of the regulations reflect requirement that neither the physician, physician, they will instead have the differences in the underlying statutes, nor the physician’s practice (including flexibility to contribute to the overall with respect to the anti-kickback safe employees or staff members), makes the cybersecurity of the health care harbor, and differences in the receipt of cybersecurity technology or ecosystem by using available resources application of the EHR and services, or the amount or nature of the for otherwise unprotected cybersecurity- cybersecurity exceptions, with respect technology or services, a condition of related hardware that is core to their to the similar provision in the EHR doing business with the donor (84 FR business, including updates or exception at § 411.357(w)(5). 55833). This requirement mirrors a replacements for outdated legacy Comment: Many commenters agreed requirement in the EHR exception at hardware that may pose a cybersecurity that we should not require a recipient of § 411.357(w)(5). At final risk. cybersecurity technology and services to § 411.357(bb)(1)(ii), we are finalizing the Importantly, although the final contribute to the overall cost of the requirement as proposed. cybersecurity exception does not require technology and services. Commenters We did not propose and, thus, are not a recipient to contribute to the cost of variously asserted that a contribution including in the final cybersecurity donated cybersecurity technology or requirement in the context of related services, donors are free to cybersecurity may act as a barrier to 30 In the proposed rule, the requirement that donations of technology and services neither the physician, nor the physician’s practice structure donation arrangements under (including employees or staff members), makes the § 411.357(bb) to require that recipients because calculations of the cost of receipt of cybersecurity technology or services, or contribute to the cost of cybersecurity technology and services may be the amount or nature of the technology or services, technology and related services. imprecise, it may be administratively a condition of doing business with the donor was burdensome to calculate or track designated at § 411.357(bb)(1)(iii). However, this However, if a donor gave a full suite of requirement is designated as § 411.357(bb)(1)(ii) in cybersecurity technology and related contributions, and contributing to the this final rule. services at no cost to a high-referring cost of cybersecurity technology and

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services may be impossible for some cybersecurity technology and related to satisfy the requirement. However, a physician recipients. In contrast, several services is documented in writing (84 few commenters supported the commenters supported a contribution FR 55834). We stated that, although we inclusion of a requirement to document requirement, although one of these would not interpret this requirement to the arrangement in a formal written commenters suggested that a mean that every item of cybersecurity agreement, noting that this would contribution requirement less than what technology and every potential related provide transparency with respect to the is required under the EHR exception cybersecurity service must be specified cybersecurity donation process, would be appropriate because, in the documentation evidencing the especially in the case of hardware according to the commenter, a 15 arrangement, we expect that the written donations. Another commenter opined percent contribution toward documentation evidencing the that requiring a formal written cybersecurity technology and services arrangement identifies the recipient of agreement between the donor and the may be too high for some physicians. A the donation and includes the recipient would be a reasonable few commenters that supported a following: a general description of the safeguard, as long as the requirements contribution requirement suggested that cybersecurity technology and related for the written agreement are limited in small and rural providers, those in services provided to the recipient over scope. The commenter asked CMS to medically underserved areas, and the course of the arrangement, the require documentation only of the federally qualified health centers should timeframe of donations made under the technology or services to be donated, be exempt from any such requirement. arrangement, a reasonable estimate of commercial terms as necessary to satisfy A few other commenters suggested that the value of the donation(s), and, if the requirements of the cybersecurity entities should have the choice whether applicable, the recipient’s financial exception, and warranties by both to require a contribution from responsibility for some (or all) of the parties to use the technology in recipients, with one of these cost of the cybersecurity technology and compliance with applicable laws and commenters supporting a prohibition on related services that are provided by the regulations. The commenter also determining the amount of the donor (84 FR 55834). We did not suggested that, if CMS requires a formal contribution from the physician propose and, thus, we are not including written agreement between the parties, recipient in any manner that takes into a requirement in the final cybersecurity to facilitate compliance, CMS should account the volume or value of the exception at § 411.357(bb) that the make available on the CMS website a physician’s referrals or the other parties sign the documentation that template agreement with standard business generated by the physician. evidences the arrangement or that the terms. In contrast, one commenter Response: We did not propose and, parties document their arrangement in a requested that CMS not impose thus, are not including a contribution formal signed contract, because we ‘‘burdensome’’ writing requirements on requirement in the final cybersecurity believe that this requirement may lead the parties. The commenter asserted exception at § 411.357(bb). For the to inadvertent violation of the physician that, although donors have a vested reasons stated in the proposed rule (84 self-referral law, especially in situations interest in more robust documentation, FR 55833 through 55834), as well as where donors need to act quickly and for example, requiring recipients to those identified by commenters, we do decisively—prior to obtaining the acknowledge applicable security rules, not believe that it is necessary or signature of each physician who is CMS should not mandate the advisable to require the physician considered a party to the arrangement— documentation of specific information recipient of cybersecurity technology or to provide needed cybersecurity in order for parties to avail themselves services to contribute to the cost of the technology or related services to of the cybersecurity exception. technology or services. The exception, physician recipients. In the proposed as finalized, includes sufficient rule (84 FR 55834), we solicited Response: We believe that the writing safeguards against program or patient comments on whether we should requirement at final § 411.357(bb)(1)(iii) abuse, and it is not necessary to include specify in regulation which terms are is reasonable in scope, and provides for a contribution requirement that might required to be in writing. We also adequate transparency to protect against undermine our goal of facilitating sought comment regarding whether we program or patient abuse without improvement and maintenance of the should include a signature requirement imposing undue burden. In the cybersecurity of the health care in the cybersecurity exception. proposed rule (84 FR 55834), we stated ecosystem. As we stated in the proposed Based on the comments, we are that written documentation of the rule (84 FR 55834), donors are free to finalizing the writing requirement as arrangement should include a general require recipients to contribute to the proposed. It is designated at final description of the cybersecurity costs of donated cybersecurity § 411.357(bb)(1)(iii). We are not technology and related services technology and services; however, we including regulatory text that specifies provided to the recipient over the caution that the determination of the which terms of the arrangement must be course of the arrangement, the amount of the required contribution in writing. Rather, we believe that the timeframe of donations made under the may not take into account the volume or appropriate standard, as described in arrangement, a reasonable estimate of value of the physician recipient’s the CY 2016 PFS, is that the writing the value of the donation(s), and, if referrals or other business generated requirement of the exception is satisfied applicable, the recipient’s financial between the parties. if contemporaneous documents would responsibility for some (or all) of the permit a reasonable person to verify cost of the cybersecurity technology and e. Written Documentation compliance with the exception at the related services that are provided by the (§ 411.357(bb)(1)(iii)) 31 time that a referral is made (80 FR donor (84 FR 55834). We are not We proposed to require that the 71315). persuaded to specify which terms of a arrangement for the provision of We received the following comments cybersecurity donation arrangement and our responses follow. must be in writing, and we decline to 31 In the proposed rule, the requirement that the Comment: Most commenters provide a template cybersecurity arrangement is documented in writing was supported a writing requirement that donation agreement or standard designated at § 411.357(bb)(1)(iv). However, this requirement is designated as § 411.357(bb)(1)(iii) in provides parties with flexibility in cybersecurity donation terms, as this final rule. compiling the documentation necessary suggested by the commenter. We remind

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stakeholders that the relevant inquiry satisfied at the time a referral is made. maintained that cybersecurity donations for determining compliance with the The failure to fully satisfy even a single should be based on risk assessments of writing requirement at final requirement of an exception triggers the the donor’s own software, systems, or § 411.357(bb)(iii) is whether physician self-referral law’s referral and networks. In addition, the commenter contemporaneous documents pertaining billing prohibitions where a financial suggested that cybersecurity donations to the arrangement would permit a relationship exists between a physician should be made available to all reasonable person to verify compliance and an entity that furnishes designated recipients with similar risk assessments with the cybersecurity exception at the health services. We are concerned that and without regard to business time that a referral is made (80 FR a detailed writing requirement or a relationships or affiliations. For 71315). We believe that providing signature requirement may result in example, the commenter stated that a parties with the flexibility to document inadvertent violations. We believe that donation would be appropriate if the their arrangements in any manner that our current standard for written level of connectivity between the donor meets this standard is preferable to documentation, which requires and recipient created a vulnerability detailed mandates that could result in contemporaneous documents that that could be targeted and exploited by noncompliance with the physician self- would permit a reasonable person to malicious actors. referral law due to even a slight verify compliance with the exception at Response: Although donors are departure from the documentation the time a referral is made, provides permitted under the cybersecurity requirement. Of course, parties are free sufficient transparency and facilitates exception to perform a risk assessment to include additional terms in a written compliance (80 FR 71315). For the same of a potential recipient (or require a agreement related to a cybersecurity reasons, we are not persuaded to potential recipient to provide the donor donation beyond those required under include a signature requirement in the with a risk assessment) before the exception at § 411.357(bb). cybersecurity exception. determining whether to make a Comment: One commenter requested donation or the scope of a donation, we that CMS address the differences e. Miscellaneous Comments decline to require donors to base between the documentation and In addition to the comments cybersecurity donations on a risk signature requirements in the discussed above, we received several assessment of either the donor or the cybersecurity exception and OIG’s comments unrelated to our specific recipient. We believe that this cybersecurity safe harbor. The proposals and our responses follow. requirement would be impractical, and commenter highlighted that the writing Comment: One commenter generally it may lead potential donors to not make requirement in the exception requires supported the proposed cybersecurity otherwise beneficial cybersecurity that the arrangement is documented in exception, but suggested that CMS donations. We also believe it is writing but does not require a formal adopt the same prohibition on cost- impracticable that donors would make written agreement that is signed by the shifting that was proposed in the donations available to all similar parties, whereas the corresponding cybersecurity safe harbor. The recipients with similar risk assessments, requirement in the OIG’s proposed commenter stated that, although a independent of the specific cybersecurity safe harbor requires that hospital’s own cybersecurity costs could cybersecurity needs inherent in the arrangement is set forth in a written be an administrative expense on its cost connecting to the specific systems with agreement that is signed by the parties report, hospitals should not be which the donor interacts. and describes the technology and permitted to include donations of Comment: Several organizations services being provided and the amount cybersecurity technology or services to representing individuals and entities in of the recipient’s contribution, if any (84 physicians as an administrative expense the laboratory industry recommended FR 55765). Another commenter on the hospital’s cost report. excluding laboratories from utilizing the suggested that a signed agreement Response: We do not believe that a cybersecurity exception to provide should be a necessary requirement of prohibition on cost-shifting is necessary cybersecurity technology and services to the exception, as it would ensure that in the cybersecurity exception. As physicians. One commenter opined that both the donor and recipient understand explained above, we believe that the concerns CMS discussed in the 2013 what is being donated and the terms of cybersecurity donations are often self- EHR final rule regarding the provision the donation. A different commenter protective in nature, and thus do not of EHR items and services by laboratory asserted that it is rare that the need for pose the same level of risk as donations companies similarly apply to cybersecurity is so pressing that there is of EHR items and services. There is no cybersecurity donations by these not time for parties to prepare and sign prohibition on cost-shifting in the EHR entities. According to another an agreement, and supported the exception, and we do not believe that commenter, during the period when inclusion of a signature requirement in such a prohibition is necessary in the laboratories were permitted to donate the cybersecurity exception. cybersecurity exception. We note also EHR items and services under the Response: We are not persuaded to that Medicare payment rules and exception at § 411.357(w), physicians add a requirement that the arrangement regulations that apply to claims for implicitly or explicitly conditioned is set forth in a single written agreement reimbursement address inappropriate referrals on EHR donations, and EHR that is signed by the parties. Although cost-shifting by hospitals through other vendors encouraged physicians to it is a best practice to reduce the key mechanisms. We believe that, as with request costlier EHR software and terms of an arrangement to a writing the EHR exception, the requirements of services from laboratories, putting that is signed by the parties, we are the cybersecurity exception, coupled laboratories in an untenable position. concerned that a signature requirement, with other Medicare rules and This commenter expressed concern that in particular, could delay an entity’s regulations pertaining to cost reports, the same could happen with ability to provide necessary and are sufficient to protect against abusive cybersecurity donations if laboratories beneficial cybersecurity technology and donations of cybersecurity technology are permitted to make donations under services to a physician. The physician and related services. the cybersecurity exception, if finalized self-referral law is a strict liability Comment: One commenter worried as proposed. The commenters stated statute, which requires all the that cybersecurity donations could be that the proposed requirements of the requirements of an exception to be used as a gift or financial incentive and exception, including both the

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requirements at § 411.357(bb)(1)(i) and relationships include direct (for example, changing ‘‘can’’ to ‘‘may’’ § 411.357(bb)(1)(ii), would not be compensation arrangements between an at § 411.357(d)(1)(ii) for conformity sufficient to curb the risk of program or entity that furnishes designated health between the exceptions for personal patient abuse. services and a physician (or an service arrangements and limited Response: Although we acknowledge immediate family member of a remuneration to a physician). We are the unique perspective and concerns of physician), as well as indirect also updating language to reflect the the commenters representing the compensation arrangements between agency’s current lexicon (for example, laboratory industry, particularly in light such parties. Indirect compensation changing ‘‘through’’ to ‘‘under’’ in of the laboratory industry’s experience arrangements exist where, among other paragraph (2) of the definition of with the EHR exception, the final things, between an entity furnishing ‘‘designated health services’’ at cybersecurity exception does not designated health services and a § 411.351). Finally, we made revisions exclude any type of entity from utilizing physician (or an immediate family to improve the grammar and clarity of the exception. All individuals and member of a physician) there is an certain regulations (for example, entities, including laboratories, play a unbroken chain of any number (but not changing ‘‘not including any designated role in protecting the health care fewer than one) of persons or entities health services’’ to ‘‘does not include ecosystem from cybersecurity threats. that have financial relationships any designated health services’’ in the As described in section II.E.2.d., we are between them. An organization that exception for assistance to compensate finalizing a requirement at does not furnish designated services, a nonphysician practitioner at § 411.357(bb)(1)(ii) that prohibits a such as a technology firm, or an § 411.357(x)(4)(ii)). physician (and the physician’s practice, individual who is not a physician may From time to time, changes in the including employees and staff members) be a ‘‘link’’ in such an unbroken chain conventions for regulations published in from making the receipt of technology of financial relationships. If all the the Code of Federal Regulations or services, or the amount or nature of conditions of § 411.354(c)(2), as revised necessitate nonsubstantive revisions of the technology or services, a condition in this final rule, exist, there would be existing regulations. In this final rule, of doing business with the donor. This an indirect compensation arrangement we are providing the entire text of requirement is similar to the that implicates the physician self- §§ 411.351 through 411.357 to aid the requirement in the EHR exception at referral law. If an organization that does regulated industry with compliance § 411.357(w)(5) and operates in the not furnish designated health services efforts. Because of this, we are taking same manner. We believe that the donates cybersecurity technology or the opportunity to update or include requirements of the final cybersecurity services to a physician (or an immediate new citations to chapters, section, and exception are sufficient to ensure family member of a physician), but the paragraphs that are referenced in certain against program or patient abuse. donation does not result in an indirect of our regulations in these sections. For Therefore, we are not categorically compensation arrangement between that example, we included precise paragraph excluding laboratory companies from physician (or immediate family references in § 411.357(t). In addition, the cybersecurity exception. member) and an entity that does furnish we are including headers for certain Comment: Several commenters designated health services, the donation paragraphs within our regulations, for requested that CMS permit does not implicate the physician self- example, § 411.354(d)(1) through (6). cybersecurity donations to physicians referral law. However, the provision of 2. Out-of-Scope Comments from organizations that do not furnish such remuneration may implicate the designated health services, such as anti-kickback statute. Similarly, We received several comments that clinical data registries, manufacturers of donations by an entity that furnishes are outside the scope of this rulemaking, medical products, and medical designated health services directly to a for example, comments requesting technology companies. The commenters person or organization that is not a revisions to the exception for in-office stated that medical technology physician (or the immediate family ancillary services, suggesting policy companies play a central role in the member of a physician), such as a changes related to physician-owned delivery of health care, and that such nonprofit organization or free or hospitals, and making recommendations entities should be permitted to make charitable clinic, would not create a for statutory changes to section 1877 of donations that directly relate to the safe direct compensation arrangement that the Act. In addition, some of the and effective use of the registry or the implicates the physician self-referral commenters described their product the entity manufactures. interpretations of various physician self- Another commenter requested law. However, if the recipient of the cybersecurity technology or services has referral issues or asked questions about confirmation that donations made to existing regulations that are not physicians by organizations that do not a financial relationship with a physician, there would exist an included in this rulemaking. furnish designated health services, such We appreciate these commenters unbroken chain of financial as technology firms, do not implicate taking the time to present these issues; relationships that must be analyzed to the physician self-referral law, and that however, these comments are beyond determine whether there exists an donations made by entities that do the scope of this rulemaking and are not indirect compensation arrangement that furnish designated health services to addressed in this final rule. The out-of- implicates the physician self-referral individuals other than physicians (or scope issues raised by these commenters law. immediate family members of may be addressed in future rulemaking. physicians) similarly do not implicate F. Nonsubstantive Changes and Out-of- We express no view on these issues, and the physician self-referral law. Scope Comments our silence should not be viewed as an Response: The physician self-referral affirmation of any commenter’s 1. Nonsubstantive Changes law’s referral and billing prohibitions interpretations or views. apply when there is a financial We are making some nonsubstantive relationship between a physician (or an revisions to our regulation text for III. Collection of Information immediate family member of a consistency with longstanding stated Requirements physician) and an entity that furnishes policy and to ensure conformity Under the Paperwork Reduction Act designated health services. Financial between the text of similar regulations of 1995, we are required to provide 30-

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day notice in the Federal Register and signature requirements is the time and for physicians and entities to innovate solicit public comment before a effort necessary to prepare written and work together while continuing to collection of information requirement is documents and obtain signatures of the protect the integrity of the Medicare submitted to the Office of Management parties. The burden associated with program. and Budget (OMB) for review and record retention requirements is the Commenters on the CMS RFI told us approval. In order to fairly evaluate time and effort necessary to compile and that they currently invest sizeable whether an information collection store the records. resources to comply with the physician should be approved by OMB, the While the writing, signature, and self-referral law’s referral and billing Paperwork Reduction Act of 1995 (44 record retention requirements are prohibitions and avoid substantial U.S.C. 3506(c)(2)(A)) requires that we subject to the PRA, we believe the penalties related to noncompliance with solicited comment on the following associated burden is exempt under 5 this and related laws, including the issues: CFR 1320.3(b)(2). We believe that the Federal False Claims Act. Commenters • The need for the information time, effort, and financial resources on the proposed rule echoed the collection and its usefulness in carrying necessary to comply with these significant cost burden of complying out the proper functions of our agency. requirements would be incurred by with the physician self-referral law. The • The accuracy of our estimate of the persons without federal regulation proposals finalized in this final rule that information collection burden. during the normal course of their do not directly address value-based • The quality, utility, and clarity of activities. Specifically, we believe that, arrangements seek to balance program the information to be collected. • for normal business operations integrity concerns against the stated Recommendations to minimize the purposes, health care providers and considerable burden faced by the information collection burden on the suppliers document their financial regulated industry. These finalized affected public, including automated arrangements with physicians and provisions reassess our regulations to collection techniques. others and retain these documents in ensure that they appropriately reflect We solicited public comment on each order to identify and be able to enforce the scope of the statute’s reach, establish of these issues for the following sections the legal obligations of the parties. exceptions for common nonabusive of this document that contain Therefore, we believe that the writing, compensation arrangements between information collection requirements signature and record retention physicians and the entities to which (ICRs): requirements should be considered they refer Medicare beneficiaries for A. ICRs Regarding Exceptions to the usual and customary business practices. designated health services, and provide Physician Self-Referral Law Related to We did not receive any public guidance for physicians and health care Compensation (§ 411.357) comments regarding our position that providers and suppliers whose financial We are finalizing new exceptions for the burden associated with these relationships are governed by the compensation arrangements that requirements is a usual and customary physician self-referral law. We believe facilitate value-based health care business practice that is exempt from that these reforms will significantly delivery and payment in a value-based the PRA. reduce compliance burden by providing enterprise (§ 411.357(aa)). A value-based IV. Regulatory Impact Statement (or additional flexibility to enable parties to enterprise is required to have a Analysis) (RIA) enter into nonabusive arrangements and governing document that describes the by making physician self-referral law enterprise and how its VBE participants A. Statement of Need compliance more straightforward. intend to achieve the value-based This final rule aims to remove B. Overall Impact purposes of that enterprise (see the potential regulatory barriers to care definition of ‘‘value-based enterprise’’ at coordination and value-based care 1. Executive Orders and the Regulatory § 411.351). The exception for value- created by the physician self-referral Flexibility Act based arrangements with meaningful law. Currently, certain beneficial We have examined the impact of this downside financial risk to the physician arrangements that would advance the rule as required by Executive Order at § 411.357(aa)(2) requires a description transition to value-based care and the 12866 on Regulatory Planning and of the nature and extent of the coordination of care among providers in Review (September 30, 1993), Executive physician’s downside financial risk to both the Federal and commercial sectors Order 13563 on Improving Regulation be set forth in writing. The exception for may be impermissible under the and Regulatory Review (, value-based arrangements at physician self-referral law. Industry 2011), the Regulatory Flexibility Act § 411.357(aa)(3) requires the stakeholders have informed us that, (RFA) (, 1980, Pub. L. 96– arrangement to be set forth in writing because the consequences of 354), section 1102(b) of the Act, section and signed by the parties. All noncompliance with the physician self- 202 of the Unfunded Mandates Reform exceptions at § 411.357(aa) require referral law are so dire, providers, Act of 1995 (, 1995; Pub. L. records of the methodology for suppliers, and physicians may be 104–4), Executive Order 13132 on determining and the actual amount of discouraged from entering into Federalism (, 1999), the remuneration paid under the innovative arrangements that would Congressional Review Act (5 U.S.C. arrangement to be maintained for a improve quality outcomes, produce 804(2)), and Executive Order 13771 on period of at least 6 years. We also added global health system efficiencies, and Reducing Regulation and Controlling a new exception for cybersecurity lower costs (or slow their rate of Regulatory Costs (, 2017). technology and related services growth). This final rule addresses this Executive Orders 12866 and 13563 (§ 411.357(bb)), and arrangements under issue by establishing three new direct agencies to assess all costs and this new exception have to be exceptions that protect certain benefits of available regulatory documented in writing. Finally, we arrangements for value-based activities alternatives and, if regulation is have streamlined the parties that must between physicians and entities that necessary, to select regulatory sign the writing in the exception for furnish designated health services in a approaches that maximize net benefits physician recruitment (§ 411.357(e)). value-based enterprise. These (including potential economic, The burden associated with writing and exceptions provide enhanced flexibility environmental, public health and safety

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effects, distributive impacts, and may have a significant impact on the Medicare—accounting for nearly 226.5 equity). An RIA must be prepared for operations of a substantial number of million Americans, or 77 percent of the major rules with economically small rural hospitals. This analysis must covered U.S. population, highlighted significant effects ($100 million or more conform to the provisions of section 603 the continued move away from a FFS in any 1 year). This rule is considered of the RFA. For purposes of section system that pays only on volume and to be economically significant. Pursuant 1102(b) of the Act, we define a small towards value-based health care to the Congressional Review Act (5 rural hospital as a hospital that is delivery and payment models.32 The U.S.C. 801 et seq.), the Office of located outside of a Metropolitan study showed that, in calendar year Information and Regulatory Affairs Statistical Area for Medicare payment 2018, 39.1 percent of health care dollars designated this rule as a major rule, as regulations and has fewer than 100 were traditional FFS or other legacy defined by 5 U.S.C. 804(2). beds. The impact of this rule on small payments not linked to quality, 25.1 The RFA requires agencies to analyze rural hospitals is minimal. In fact, percent of health care dollars were FFS options for regulatory relief of small several provisions of the rule benefit payment linked to quality and value entities. For purposes of the RFA, small small rural hospitals by giving them (described as pay-for-performance or entities include small businesses, more flexibility to maintain operations care coordination fees), 30.7 percent of nonprofit organizations, and small and participate in innovative health care dollars were a composite of governmental jurisdictions. For arrangements that enhance care shared savings, shared risk, and purposes of the RFA, most hospitals and coordination and advance the transition bundled payments in alternative most other providers and suppliers are to a value-based health care system. payment models built on a FFS considered small entities, either by Therefore, we are not preparing an architecture, and 5.1 percent of health nonprofit status or by having revenues analysis for section 1102(b) of the Act care dollars were population-based of less than $7.5 million to $38.5 because we have determined, and the payments (that is, capitation, global million in any 1 year. We anticipate that Secretary certifies, that this final rule budget, or percent of premium a large portion of affected entities are will not have a significant impact on the payments).33 Although the study small based on these standards. The operations of a substantial number of showed that payors made the majority specific affected entities are discussed small rural hospitals. of 2018 payments on a FFS basis (or in later in this section. Individuals and Section 202 of the Unfunded models built on a FFS architecture), the states are not included in the definition Mandates Reform Act of 1995 also 2018 payments represent a 4.6 percent of a ‘‘small entity.’’ HHS considers a requires that agencies assess anticipated decline in FFS payments not linked to rule to have a significant impact on a costs and benefits before issuing any quality from such payments in 2017 substantial number of small entities if it rule whose mandates require spending (from 41 percent in 2017 to 39.1 percent has an impact of at least three percent in any 1 year of $100 million in 1995 in 2018), and a 34.2 percent increase in of revenue on at least five percent of dollars, updated annually for inflation. population-based payments over such small entities. We are not preparing an In 2019, that threshold is approximately payments in 2017 (from 3.8 percent in 34 analysis for the RFA because we have $156 million. This rule imposes no 2017 to 5.1 percent in 2018). determined, and the Secretary certifies, mandates on state, local, or tribal In sections I.B. and II.A.1. of this final that this final rule will not have a governments, or on the private sector, rule, we described the current landscape significant economic impact on a and reduces regulatory burden on health of health care delivery and payment substantial number of small entities. care providers and suppliers. both within and outside the Medicare We determined that this final rule Executive Order 13132 establishes program. We explained that the does not have a significant impact on certain requirements that an agency application of the physician self-referral small businesses because it will likely must meet when it promulgates a law to all financial relationships reduce, not increase, regulatory burden. proposed rule (and subsequent final between entities and the physicians This final rule will not require existing rule) that imposes substantial direct who refer to them (or the immediate compliant financial relationships to be requirement costs on state and local family members of such physicians) has restructured. Instead, it will provide inhibited a more rapid advancement governments, preempts state law, or important new flexibilities to enable toward a health care system that pays otherwise has Federalism implications. parties to create new arrangements that for outcomes rather than procedures. Since this regulation does not impose advance the transition to a value-based Based on stakeholder responses to any costs on state or local governments, health care system and remove numerous CMS requests for the requirements of Executive Order regulatory barriers to certain beneficial information, including the CMS RFI that 13132 are not applicable. and nonabusive arrangements, such as is part of the Department’s Regulatory Executive Order 13771, titled the donation of cybersecurity Sprint, we proposed regulatory Reducing Regulation and Controlling technology and services. It will also revisions to address barriers to Regulatory Costs, was issued on January reduce burden by clarifying certain key innovative care coordination and value- 30, 2017 and requires that the costs provisions found in current regulations. based health care delivery and payment associated with significant new Also, although we expect entities to (84 FR 55766). After considering the incur costs, these costs are estimated to regulations ‘‘shall, to the extent comments on the proposed rule, we are be less than $1,000 per entity. These permitted by law, be offset by the finalizing policies intended to facilitate costs are unlikely to have an impact of elimination of existing costs associated the transition to value-based health care three percent of revenue, and we expect with at least two prior regulations.’’ delivery and payment by permitting they will be offset by savings resulting This final rule is a deregulatory action. appropriate compensation arrangements from this rule. Overall, this final rule is 2. Expected Outcomes and Benefits accommodating to legitimate financial 32 APM Measurement: Progress of Alternative a. Value-Based Health Care Delivery and relationships while reducing regulatory Payment Model; Health Care Payment Learning & Payment Action Network, October 2019; see https://hcp- burden and continuing to protect lan.org/apm-measurement-effort/ and http://hcp- against program and patient abuse. A 2019 study of 70 participants— lan.org/workproducts/apm-methodology-2019.pdf. In addition, section 1102(b) of the Act including 62 health plans, seven 33 Id. requires us to prepare an RIA if a rule Medicaid FFS states, and Traditional 34 Id.

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that further the goals of a value-based compensation arrangements that qualify visits, and exposing the patient to system without posing a risk of program as value-based arrangements may satisfy greater risk when emergencies or or patient abuse. Specifically, as the requirements of a ‘‘traditional’’ complications occur in the physician described in section II.A. of this final exception to the physician self-referral office, or could be used by primary care rule, we designed and are finalizing new law, most do not. These include physicians to obtain immediate input exceptions for value-based arrangements arrangements that: (1) Involve the from specialists while a patient is at final § 411.357(aa)—with safeguards provision of free or reduced cost items present in the primary care physician’s intended to: (1) Protect against program and services; (2) tie compensation to the office. or patient abuse that could lead to ordering or furnishing of designated • Provision of data analytics services. increased expenditures; and (2) health services; (3) tie compensation to A specialty physician practice (or other maximize the potential of value-based the refraining from ordering, delaying entity) may wish to provide free data care delivery and improved care the order of, or furnishing designated analytic services to a primary care coordination in reducing waste and health services; or (4) involve the physician practice with which it works program expenditures. The new sharing of profits or losses such that closely. The data analytics could, for exceptions are also applicable to those compensation does not directly relate to example, identify practice patterns that indirect compensation arrangements the items or services actually provided deviate from evidence-based protocols between an entity and a physician that by a physician. Based on our experience or determine whether follow-up care involve a value-based arrangement to administering the Shared Savings recommended by the specialty which the physician (or the physician Program and Innovation Center models, physician practice is being sought by organization in whose shoes the information provided by commenters on patients. In turn, the identification of physician stands) is a direct party. the CMS RFI and the proposed rule deviant practice patterns and when Although existing exceptions utilized (including payors that supported the follow up care is recommended could by parties to protect financial establishment of the exceptions at final lead to better, more effective care for relationships that exist outside of value- § 411.357(aa)), and information shared patients and reduced costs to Federal based health care delivery and payment publicly by providers, suppliers, health care programs. systems also include safeguards practitioners, health plans, and others, We cannot, however, predict the form designed to protect against program or following the issuance of this final of all potential value-based patient abuse, they do not promote the rule—and, specifically, once the arrangements or which entities and potential for improvements in quality exceptions at final § 411.357(aa) for physicians will enter into value-based and reductions in expenditures the way value-based arrangements are arrangements and what form their that that the new exceptions set forth in available—we reasonably expect parties specific arrangements will take. More this final rule may. By making available to enter into arrangements such as the specifically, based on comments the new exceptions for value-based following: submitted by stakeholders, our arrangements established in this final • Providing staff and other resources understanding of currently existing rule, we expect to achieve significant to physicians at below fair market value value-based arrangements and care progress in reducing program to help with patient education, pre- coordination arrangements, and our expenditures without sacrificing admission evaluations, and post- assumption that there will be continued program integrity. However, we are procedure follow-up and monitoring. innovation, we expect significant unable to quantify with certainty the • Shared savings and shared loss heterogeneity in the arrangements for overall net costs, including net arrangements under which the entity which the new exceptions at final expenditures of the Medicare program, and the physician share financial risk § 411.357(aa) will be utilized. for achievement of the value-based related to changes in industry behavior (2) Potential Outcomes and Benefits of purpose(s) of the value-based enterprise that we can reasonably expect following Value-Based Arrangements the effective date of this final rule. Even or the outcome measures against which so, we believe that our final policies are the recipient of the remuneration is As described above, we can reasonably likely to permit, if not assessed. reasonably predict that our final policies encourage, behavior that will reduce • Arrangements that enhance patient and the exceptions at final § 411.357(aa) waste in the U.S. health care system, care by providing items at no cost to will result in changes in stakeholder including Medicare and other Federal physicians. We note that an important behavior. Entities and physicians may health programs, and that these changes piece of ensuring good outcomes and increase their participation in beneficial will result in lower costs for both fewer complications is patient nonabusive value-based arrangements, patients and payors, and generate other education. Hospitals are often better- including care coordination benefits, such as improved quality of positioned or willing to develop video arrangements, that implicate the patient care and lower compliance costs or print materials to prepare surgical physician self-referral law. In this for providers and suppliers. patients for what to expect pre- and regard, and with respect to the intended post-surgery, but are not in direct outcomes and benefits related to this (1) Expectation of Value-Based contact with patients until the day of final rule, we anticipate that the policies Arrangements surgery. Under the new exceptions, in this final rule may: (1) Remove As discussed in section II.A. of this hospitals could provide those materials barriers to robust participation in value- final rule, compensation arrangements at no charge to physicians for use in based health care delivery and payment that qualify as value-based arrangements their practices, benefiting both hospitals systems, including those administered may take a variety of forms. Those that and physicians, as well as surgical by CMS and non-Federal payors; (2) implicate the physician self-referral law patients. facilitate arrangements for patient care will be directly or indirectly between an • Providing free telehealth equipment coordination among affiliated and entity that furnishes designated health to physicians for use while treating unaffiliated health care providers, services and a physician who refers to patients in their office locations. The practitioners, and suppliers; (3) provide that entity (or the immediate family technology could be utilized for certainty for participants in the Shared member of a physician who refers to consults with a donor hospital to avoid Savings Program that wish to establish that entity). Although some unnecessary ambulance transports, ER compensation arrangements outside of

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the Shared Savings Program similar to Waste in U.S. Health Care Study was Medicare spending per episode of care those among providers and suppliers in conducted in Medicare populations. by $5,577, or 20.8 percent, in cases Shared Savings Program ACOs; and (4) The 2019 Waste in U.S. Health Care without complications, and by $5,321, provide certainty for participants in Study noted compelling empirical or 13.8 percent, in cases with Innovation Center models that wish to evidence that interventions, such as complications.37 The hospitals also continue compensation arrangements aligning payment models with value or recognized $6.1 million in internal cost established while participating in an supporting delivery reform to enhance savings, along with slight decreases in Innovation Center model following the care coordination, safety, and value, can emergency room visits and readmission model’s conclusion or establish similar produce meaningful savings and reduce rates, and a decrease in cases with a arrangements outside of the model. waste by as much as half. The 2019 prolonged length-of-stay admission. Associated benefits that we anticipate Waste in U.S. Health Care Study also Over half of the internal cost savings will arise from these intended outcomes identified waste from administrative were attributable to reduced implant are: (1) Better care coordination for complexity (resulting from costs.38 We note that the product patients, including Medicare fragmentation in the health care system) standardization incentive programs that beneficiaries, resulting in the reduction as the greatest contributor to waste in contribute to such internal cost savings in costs to payors and patients from the U.S. health care system at an involve compensation arrangements poorly coordinated, duplicative care; (2) estimated $266 billion annually, and between hospitals and physicians improved quality of care and outcomes highlighted the opportunity to reduce which, depending on their structure, for patients, including Medicare waste in this category from enhanced may not satisfy the requirements of any beneficiaries; (3) substantial reduction payor collaboration with health care current exceptions to the physician self- in compliance costs to providers and providers and clinicians in the form of referral law, but to which the new suppliers to which the physician self- value-based payment models. According exceptions for value-based arrangements referral law’s prohibitions apply; and (4) to the 2019 Waste in U.S. Health Care apply. Relatedly, in 2018, a large health reduction in administrative complexity Study, as value-based care continues to plan announced that it was expanding and related waste from continued evolve, there is reason to believe that a bundled payment program for spinal progress toward interoperability of data such interventions can be coordinated surgeries and hip/knee replacements to and electronic health records. and scaled to produce better care at new markets, after finding savings of lower cost for all U.S. residents. $18,000 per procedure,39 and a health (3) Cost Impact of Value-Based Moreover, in value-based arrangements, network reported over $10 million in Arrangements improvements could reduce waste savings in 2017 with more anticipated A. General related to overtreatment and low-value savings in 2018.40 care, a separate category of waste in the B. Medicare Expenditures As noted above, we are unable to U.S. health care system. Other recently quantify with certainty the overall net published peer-reviewed articles also We cannot predict with certainty how costs, including net expenditures of the suggest that value-based arrangements many and which parties will avail Medicare program, related to the can reduce costs.36 themselves of the new and revised changes in industry behavior that we A case study targeted at determining exceptions or the changes in provider can reasonably expect following the the specific factors that reduce Medicare and supplier behaviors that could result. effective date of this final rule. payments and lead to hospital savings Influence on provider and supplier However, based on the studies and in bundled payment models for lower behavior could either reduce or increase reported experiences of payors, extremity joint replacement surgeries overall program spending, although the providers, suppliers, and patients that (which provide a lump sum payment to literature described in this section we discuss in this section IV.B. of this be shared among providers for an IV.B.2. of this final rule indicates great final rule, we believe that value-based episode of care instead of payment for potential for waste reduction and cost arrangements such as those described in every service performed) in one Texas savings across the U.S. health care section IV.B.2.a.(1). of this final rule health system found that, between July system, including the Medicare have great potential to reduce waste in 2008 and June 2015, the system’s five program. We note that any short-term the U.S. health care system, lower costs hospitals were able to reduce total increase in expenditures could result for both patients and payors, and generate other benefits such as 36 Brian W. Powers, et al., Impact of Complex 37 Amol Navathe, et al., Cost of Joint Replacement improved quality of patient care and Care Management on Spending and Utilization for Using Bundled Payment Models, JAMA Intern Med. lower compliance costs for providers High-Need, High-Cost Medicaid Patients, American 2017;177(2):214–222. doi:10.1001/ Journal of Managed Care, 26(2), e57–e63 (Feb. jamainternmed.2016.8263, available at https:// and suppliers. 2020), available at https://doi.org/10.37765/ jamanetwork.com/journals/jamainternalmedicine/ A recent review of literature from ajmc.2020.42402 (a study of a complex care article-abstract/2594805. January 2012 to May 2019 focusing on management program implemented in Tennessee 38 See Vera Gruessner, 3 Ways Bundled Payment for high-need, high-cost Medicaid patients, which Models Brought Hospital Cost Savings Down, unnecessary spending, or waste, in the found that the program reduced total medical Health Payer Intelligence (Jan. 2017), available at U.S. health care system (2019 Waste in expenditures by 37 percent and inpatient utilization https://healthpayerintelligence.com/news/3-ways- by 59 percent); and Shreya Kangovi, et al., U.S. Health Care Study) indicates that bundled-payment-models-brought-hospital-cost- Evidence-Based Community Health Worker waste related to the failure of care savings. Program Addresses Unmet Social Needs and 39 coordination alone results in annual Generates Positive Return on Investment, Health See David Muhlestein, et al., Recent Progress in costs of $27 billion to $78 billion.35 Affairs, 39(2), 207–13 (Feb. 2020), available at the Value Journey: Growth of ACOs and Value- Much of the research on waste and https://www.healthaffairs.org/doi/full/10.1377/ Based Payment Models in 2018, Health Affairs hlthaff.2019.00981 (a study that found that every (Aug. 2018) available at https:// improvement reviewed in the 2019 dollar invested in the Individualized Management www.healthaffairs.org/do/10.1377/ for Patient-Centered Targets (IMPaCT) intervention, hblog20180810.481968/full/. 35 William H. Shrank, MD, MSHS, et al., Waste in which is ‘‘a standardized community health worker 40 See Shane Wolverton, Providers Partner with the U.S. Health Care System, Estimated Costs and intervention that addresses socioeconomic and Payers for Bundled Payments, Becker’s Hospital Potential for Savings, 322(15) Journal of the behavioral barriers to health in low-income Review (May 2018), available at https:// American Medical Association 1501 (2019), populations,’’ yielded a return of $2.47 from the www.beckershospitalreview.com/payer-issues/ available at https://jamanetwork.com/journals/ perspective of a Medicaid payer. This return was providers-partner-with-payers-for-bundled- jama/fullarticle/2752664. realized within a single fiscal year). payments.html.

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from appropriate utilization of services to 26 percent by 2021.41 According to A collaboration between a physician- as patients seek and accept medically the payors surveyed, payors that led ACO and a health plan in North indicated care that they may have adopted value-based health care Carolina similarly reduced costs while forgone in the absence of care delivery and payment models reduced improving quality of care.44 coordination efforts and value-based health care costs by an average of 5.6 Specifically, a June 2020 study arrangements for which exceptions were percent, improved provider concluded that the 47 primary care previously unavailable, and that collaboration, and created more practices that participated in the appropriate utilization could prevent impactful member engagement. collaboration: (1) Reduced the total cost greater expenditures and other negative Although we cannot make any of care by 4.7 percent for commercial results to life over the longer term. quantitative estimates regarding cost patients; (2) reduced the total cost of Because of this uncertainty, we cannot savings or expenditures that may result care by 6.1 percent for Medicare quantify any impact on Medicare from this final rule, we are aware of the Advantage patients; and (3) improved expenditures. We are confident that the success of certain innovative value- their Medicare star ratings, on average, regulations established or revised in this based arrangements that resulted in cost from 3 to 4.5 stars. Another study, in final rule include sufficient and savings for third-party payors, 2020, by a different health plan appropriate safeguards to protect against improvements in quality of care, or analyzed the plan’s Medicare Advantage program or patient abuse, including both. The reported success of some of enrollees and network primary care inappropriate utilization due to a these programs exemplifies the physician practices. This health plan physician’s financial self-interest. We promising nature of value-based health determined that primary care physicians believe that our final policies fall care delivery and payment. paid under global capitation improved squarely within the Secretary’s There are numerous reported certain patient outcomes related to authority under section 1877(b)(4) of the examples of successful value-based preventive care and chronic conditions, Act to establish exceptions for financial health care delivery and payment such as higher screening rates for relationships that do not pose a risk of programs developed and implemented colorectal and breast cancer, higher program or patient abuse and, therefore, rates of medication review, and higher by commercial health plans. For 45 anticipate no increased spending due to example, one health plan recently controlled blood sugar levels. inappropriate utilization. We will reported that it saved $1 billion through There are also studies that suggest continue to assess the impact of our avoided costs in 3 years of its recent that improved care coordination may final policies on program expenditures. primary care pay-for-value program that decrease costs and enhance health As noted in more detail later in this offers primary care practices rewards for outcomes. One randomized, controlled RIA, our view of the beneficial their performance on quality, cost, and trial evaluated the cost-effectiveness of anticipated effects that will result from utilization measures, while also a home-based care coordination the policies in this final rule remains improving outcomes for its members.42 program that targeted older adults with largely unchanged from the proposed According to this health plan, members problems self-managing their chronic rule. treated by a primary care provider in the illnesses.46 Study participants in the test As noted above, we are not able to program had 11 percent fewer group received care coordination provide quantitative estimates of overall emergency room visits in 2017 than services from a nurse. They also savings to or expenditures of the members treated by a primary care received a pill organizer. The results of Medicare program that will result from physician not in the program. The this study showed that, for those this final rule. However, with respect to health plan also stated that members beneficiaries who participated in the parties currently participating in the with a primary care physician in the study for more than 3 months, total Shared Savings Program and Innovation program experienced 16 percent fewer Medicare costs were $491 lower per Center models, we have determined that inpatient admissions in 2017 compared month than in the control group. this final rule would not significantly to members seeing a primary care Another study conducted by the Centers alter the conditions upon which such physician not in the program, for Disease Control demonstrated that providers and suppliers operate. potentially saving the health plan $224 certain interventions, such as team- Although we do not know which new million in inpatient care costs.43 based or coordinated care, increase value-based models or programs will be patient medication adherence rates.47 implemented in the future, such 41 Finding the Value in Value-Based Care: The 44 programs and models will be associated State of Value-Based Care in 2018; a Signature See Press Release, Blue Cross and Blue Shield Research Report commissioned by Change of North Carolina, Primary Care ACOs from Blue with an estimated impact at the time Healthcare (June 2018); see also, Thomas Beaton, Cross NC and Aledade Show Significant Savings they are implemented. Thus, we have Value-Based Payment Adoption Drives 5.6% and Quality Improvements (, 2020), available determined that the policies set forth in Reduction in Care Costs, Health Payer Intelligence at https://mediacenter.bcbsnc.com/news/primary- this final rule will have no impact with (June 2018) available at https:// care-acos-from-blue-cross-nc-and-aledade-show- healthpayerintelligence.com/news/value-based- significant-savings-and-quality-improvements. regard to Medicare expenditures under payment-adoption-drives-5.6-reduction-in-care- 45 See Press Release, UnitedHealth Group, the Shared Savings Program and costs. Physicians Provide Higher Quality Care Under Set Innovation Center models. 42 See Press Release, Highmark, Inc., Highmark Monthly Payments Instead of Being Paid Per saves more than $1 billion in avoided cost with Service, UnitedHealth Group Study Shows (Aug. 11, C. Commercial Sector and Other Federal True Performance program (Oct. 5, 2020), available 2020), available at https:// Payors at https://www.highmark.com/newsroom/press- www.unitedhealthgroup.com/newsroom/2020/uhg- releases.html#!release/highmark-saves-more-than- study-shows-higher-quality-care-under-set-monthly- A recent survey of over 100 1-billion-in-avoided-cost-with-true-performance- payments-403552.html. program. 46 Karen Dorman Marek et al., Cost analysis of a commercial payors showed that, in 43 See Press Release, Highmark, Inc., Highmark’s home-based nurse care coordination program, J. 2018, ‘‘pure FFS’’ payment—where each True Performance Program Avoided Health Care Am. Geriatr. Soc. 2014;62(12):2369–2376. medical service is billed and paid for Costs by More Than $260 Million in 2017 (June 26, 47 Andrea B. Neiman, et al., CDC Grand Rounds: separately—accounts for only 37.2 2018), available at https://www.highmark.com/ Improving Medication Adherence for Chronic newsroom/press-releases.html#!release/highmarks- Disease Management — Innovations and percent of commercial payor true-performance-program-avoided-health-care- Opportunities, 66 Weekly 45 (Nov. 17, 2017), reimbursement, and is expected to drop costs-by-more-than-260-million-in-2017. Continued

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Specifically, in a 2015 study, patients § 411.357(z) for limited remuneration to applicable; (11) alleviates confusion assigned to team-based care—including a physician, intended to clarify the reported by stakeholders regarding the pharmacist-led medication scope of the prohibitions of the period of disallowance for referrals and reconciliation and tailoring, pharmacist- physician self-referral law and simplify billing following a violation of the led patient education, collaborative care compliance with the exceptions to the physician self-referral law; (12) permits between pharmacist and primary care law’s referral and billing prohibitions. parties to reconcile payment provider or cardiologist, and two types To this end, this final rule: (1) discrepancies in compensation of voice messaging—were significantly Establishes a definition of the term arrangements without running afoul of more adherent with their medication ‘‘commercially reasonable’’ at § 411.351; the physician self-referral law; (13) regimen 12 months after hospital (2) establishes special rules at removes certain interests held by a discharge (89 percent) compared with § 411.354(d)(5) and (6) that identify the physician from qualifying as an patients not receiving team-based care universe of compensation formulas that ownership or investment interest that (74 percent). are considered to be determined in a implicates the physician self-referral D. Conclusion manner that takes into account the law; (14) clarifies when compensation is volume or value of a physician’s considered to be ‘‘set in advance’’ for We believe that the experience of the referrals or the other business generated purposes of satisfying the requirements payors and organizations described in by a physician; (3) revises the definition of the exceptions to the physician self- this section IV.B.2. of this final rule of ‘‘fair market value’’ at § 411.351; (4) referral law; (15) revises CMS policy highlight the potential for eliminating a clarifies CMS policy regarding the regarding modifications to the financial significant amount of unnecessary terms of a compensation arrangement to expenditures (waste) in the U.S. health permissible methodologies for care system, including in the Medicare distributing profits from designated eliminate specific timeframe limitations program. As noted earlier, the 2019 health services within a group practice; for such modifications; (16) clarifies Waste in U.S. Health Care Study (5) clarifies CMS policy regarding CMS policy regarding the circumstances indicates annual costs of $27 billion to compensation formulas that will be under which an entity may direct a $78 billion from the failure of care deemed not to directly take into account physician’s referrals to a particular coordination alone.48 This study the referrals of a physician in a group provider, practitioner, or supplier; (17) identified $266 billion in annual costs practice; (6) recognizes the independent expressly prohibits an entity from from administrative complexity in the obligation to comply with the anti- conditioning the existence of a furnishing of care and compliance with kickback statute and governmental compensation arrangement or the laws and regulations. We cannot predict billing and claims submission rules by amount of a physician’s compensation with absolute certainty whether value- removing from most exceptions to the on the number or value of the based arrangements that parties enter physician self-referral law the physician’s referrals to a particular into as a result of our final policies will requirements that the financial provider, practitioner, or supplier; (18) reduce these annual costs, but we relationship between the entity and the clarifies that required signatures may be believe that it is likely that innovative physician (or immediate family member electronic or in any other form that is value-based arrangements and payment of the physician) does not violate the valid under applicable Federal or state for value-based health care delivery will anti-kickback statute and does not law; (19) allows parties 90 consecutive continue to achieve the results violate any Federal or state law or calendar days to obtain documentation described above in this section IV.B.2. regulation governing billing or claims necessary to satisfy the writing We are also unable to provide submission; (7) revises the definition of requirement of an applicable exception; quantitative estimates of the impact on ‘‘designated health services’’ at (20) clarifies the requirement for costs that such arrangements will have. § 411.351 to, in effect, remove inpatient exclusive use of office space or However, we believe there is great hospital services ordered after a equipment under the exceptions at potential for reducing the expense of patient’s admission to the hospital when § 411.357(a) and (b); (21) clarifies the waste in the U.S. health care system such services are ordered by a physician circumstances under which a physician through improved care coordination and who is not the physician who made the practice must sign the documentation of reduced administrative complexity. referral for the inpatient admission; (8) a recruitment arrangement between a revises the definition of ‘‘physician’’ at hospital and a physician; (22) clarifies b. Clarifying Revisions and New § 411.351 to limit the physician referrals and expands the application of the Exceptions for Nonabusive Financial to which the law’s prohibitions apply to exception at § 411.357(i) for payments Relationships only those physicians who qualify as a by a physician (or immediate family (1) Key Terminology, the Application ‘‘physician’’ under section 1861(r) of the member of a physician) to an entity; (23) and Scope of the Physician Self-Referral Act; (9) revises the definition of expands the application of the Law, and New Exception for Limited ‘‘remuneration’’ at § 411.351 to clarify exception at § 411.357(l) to fair market Remuneration to a Physician that the provision of certain items, value payments for the rental of office A. Summary of the Final Regulations devices, and supplies from an entity to space, even where the duration of the a referring physician does not establish arrangement is less than 1 year; (24) In addition to the final regulations a compensation arrangement when makes permanent the EHR exception; discussed in subsections 2.a. and 2.b.(2). those items, devices, or supplies are, in (25) clarifies the scope of the EHR of this section IV.B., this final rule fact, used solely by the physician for the exception to permit donations of revises numerous current regulations purpose(s) established in the statute and cybersecurity software and services that and establishes new regulations, regulation; (10) revises the definition of are necessary and used predominantly including a new exception at final ‘‘transaction’’ and establishes a new to create, maintain, transmit, receive, or definition of ‘‘isolated financial protect electronic health records; (26) available at https://www.cdc.gov/mmwr/volumes/ transaction’’ at § 411.351 to clarify CMS allows for flexible scheduling of 66/wr/mm6645a2.htm. policy regarding the types of physician contribution payments for 48 William H. Shrank, MD, MSHS, et al., Waste in the U.S. Health Care System, Estimated Costs and compensation arrangements to which electronic health records items and Potential for Savings. the exception at § 411.357(f) is services following the initial donation of

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such items and services; (27) permits parties that did not fully document an with the physician self-referral law.50 donations of replacement electronic arrangement in writing or set We expect that the clarifications and health records items and services, even compensation in advance than by regulatory revisions of this final rule if the physician already possesses parties that affirmatively choose not to will significantly reduce the costs to the equivalent items or services; (28) document their arrangement in writing regulated industry. (See section IV.C. of clarifies timing issues related to or set physician compensation in this final rule for further discussion of arrangements between a physician and advance when developing a new this study and the anticipated effects of NPP where the physician receives arrangement for physician services. this final rule on the burden identified assistance from a hospital to Finally, we anticipate that some in the study.) compensate the NPP; (29) updates and physician practices will revise their CMS publishes aggregate SRDP eliminates out-of-date references to compensation methodologies with settlement data on its website at https:// bolster clarity of the scope and respect to the distribution of profits www.cms.gov/Medicare/Fraud-and- application of the physician self-referral from designated health services Abuse/PhysicianSelfReferral/Self- regulations; (30) establishes a new furnished by the group in order to Referral-Disclosure-Protocol- exception for limited remuneration to a ensure compliance with the clarifying Settlements. To date, we have received physician that does not require regulations at § 411.352(i) that become over 1200 disclosures to the SRDP. As contemporaneous documentation of the effective January 1, 2022 and continued of December 31, 2019, we have settled terms of the arrangement or that the qualification as a ‘‘group practice’’ 335 disclosures by collecting an compensation is set in advance of the under the regulations at § 411.352. aggregate of $31.8 million from provision of the physician’s services; disclosing parties. Although we cannot C. Potential Outcomes, Benefits, and and (31) modifies other exceptions that estimate the number of compensation Costs of Final Policies Related to Key apply to arrangements for the personal arrangements included in the pending Terminology, the Application and Scope services of physicians to ensure disclosures that would be affected by of the Physician Self-Referral Law, and applicability on a going-forward basis the clarifications in this final rule, it is New Exception for Limited following the commencement of an our observation that a substantial Remuneration to a Physician arrangement that satisfies the portion of the conduct already settled requirements of the new exception for According to commenters, one of the through the SRDP involved the failure limited remuneration to a physician. most significant benefits of this final of a compensation arrangement to rule is the establishing of clear satisfy the writing or signature B. Expectation of Industry Behavior boundaries for parties in setting the requirements of an applicable Following the effective date of our financial terms of compensation exception, with many of those failures final policies, we anticipate a reduction arrangements that do not qualify as lasting for only a short period of time. in disclosures to the SRDP of potential value-based arrangements. We are Many disclosures involved the or actual violations of the physician unable to quantify with certainty the disclosing party’s incorrect self-referral law because stakeholders impact of our clarifications, expanded interpretation or misapplication of the will have a clearer understanding of the flexibilities, and the new exception at physician self-referral law or CMS scope and application of the physician final § 411.357(z) on costs to the policy. Therefore, we believe that the self-referral law, as well as CMS’ regulated industry; however, we believe clarifications in this final rule will interpretation of the law’s provisions. that most entities that have financial reduce the perceived need for disclosure We anticipate that entities will continue relationships with physicians to which to the SRDP and allow parties to avoid to provide electronic health records the physician self-referral law applies the costs—including costs of items and services to physicians with will see some level of reduced compliance professionals, attorneys, the same scope and frequency as the expenditures. market valuation experts, and industry has observed since the Many of the entities whose financial accountants—of preparing and issuance of the EHR exception in 2006. relationships with physicians are submitting a disclosure to the SRDP. As We also anticipate that parties that subject to the requirements of the noted above, we also expect that some made submissions to the SRDP that physician self-referral law are hospitals entities may withdraw a portion of or have not yet been settled may withdraw and physician groups. An October 2017 their entire SRDP disclosures following all or portions of their disclosures, study of 190 hospitals in 31 states across the issuance of this final rule. However, similar to what occurred following the United States revealed that an we are unable to quantify the avoidance clarifications of physician self-referral average community hospital (defined as of costs to the industry related to policies in the CY 2016 PFS final rule. 161 beds) annually dedicates 2.3 full- refraining from or withdrawing Although we expect that entities will time equivalent employees to, and disclosures. We note that recoveries utilize the new exception at § 411.357(z) spends almost $350,000 on, compliance from SRDP settlements may also for limited remuneration to a physician, with Federal fraud and abuse laws, diminish, but this does not represent a as explained in section II.E.1. of this defined in the study as including the cost to the Medicare program or trust final rule, we anticipate that the physician self-referral law, the anti- fund. Where there is no violation of the exception’s greatest utility will come kickback statute, and laws and protocols physician self-referral law’s referral and during retrospective review of requiring returning overpayments.49 billing prohibitions, there is no refund compliance with the physician self- This study affirms commenter due to the government under section referral law. As we noted in section statements included in a 2015 Senate 1877(g) of the Act for Medicare III.A. of this final rule, we believe that, Finance Committee report that noted the payments made to the entity. for normal business operations high cost and difficulty of complying purposes, entities document their 50 Senate Finance Committee Majority Staff financial arrangements with physicians 49 American Hospital Association, Regulatory Report, Why Stark, Why Now? Suggestions to and others in order to identify and be Overload: Assessing the Regulatory Burden on Improve the Stark Law to Encourage Innovated Health Systems, Hospitals and Post-Acute Care Payment Models (2015), available at https:// able to enforce the legal obligations of Providers (October 2017), available at https:// www.finance.senate.gov/imo/media/doc/Stark the parties. Thus, we believe that the www.aha.org/sites/default/files/regulatory- %20White%20Paper,%20SFC%20Majority exception will be utilized more often by overload-report.pdf. %20Staff.pdf.

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Finally, we believe that the related to operations across the United As described in section II.E.2 of this clarifications and revisions to the EHR States, requiring the use of back-up final rule, we received overwhelming exception, and the permanency of the processes, including paper medical support from across the health care exception, will facilitate the continued record charting and labeling industry in response to our proposal to adoption and use of electronic health medications by hand, for nearly three establish the new exception for records, especially in small physician weeks. cybersecurity items and services, and practices, by making permanent the According to the Health Sector we anticipate significant expansion of exception for the donation of such items Cybersecurity Coordination Center cybersecurity efforts through donations and services. (HC3), health care organizations should following the effective date of this final rule, similar to the expanded adoption (2) New Exception for Cybersecurity consider implementing strong risk of EHR items and services reported by Items and Services management practices to help prevent data breaches and minimize any stakeholders following the The average breached health care disruptions or loss if a breach occurs.56 establishment of the EHR exception in organization faces $8 million dollars in HC3 highlights that adequate prevention 2006. Support for the new cybersecurity costs as a result of the breach, or $400 exception came from many well- and preparation for data breaches will per patient record involved.51 One resourced organizations that are protect patients, minimize direct and hospital reported spending $10 million potential future donors of cybersecurity indirect costs, and allow for more to recover from a cyberattack, instead of technology, such as health plans and efficient operations of a health care paying a $30,000 ransom demanded by large health systems, as well as from organization.57 Separately, the HCIC hackers,52 while another hospital paid a likely recipients of donations and trade Task Force’s 2017 report, among other $55,000 ransom to hackers, despite groups representing practitioners. (We things, highlighted its review of many having backup copies of the affected note that not all of the potential donors concerns related to potential constraints files.53 A cyberattack on a hospital in and recipients are entities and imposed by the physician self-referral Germany is the suspected cause of the physicians to which the physician self- law and the Federal anti-kickback death of at least one patient.54 A referral law applies.) Because of the cost September 2020 cyberattack on a large Statute. The report encouraged the of cybersecurity attacks to organizations health care system in the United States Congress to evaluate an amendment to that wish to donate or receive affected nearly 400 facilities, causing these laws specifically for cybersecurity cybersecurity technology and services, hospitals to divert ambulances during software that would allow health care and the general support among donors the initial stages of the attack.55 In organizations the ability to assist and recipients for the new cybersecurity addition, staff reported that some lab physicians in the acquisition of this exception, we anticipate significant test results were delayed. The system technology, through either donation or investment in improvements to the 58 responded by suspending user access to subsidy. The HCIC Task Force noted cybersecurity hygiene of the health care its information technology applications that the existing regulatory exception to industry. An organization’s the physician self-referral law cybersecurity posture is only as strong 51 See Health Sector Cybersecurity Coordination (§ 411.357(w)) and the safe harbor to the as its weakest link, including Center, A Cost Analysis of Healthcare Sector Data Federal anti-kickback statute (42 CFR weaknesses of downstream providers, Breaches (Apr. 4, 2019), available at https:// 1001.952(y)) applicable to certain www.hhs.gov/sites/default/files/cost-analysis-of- suppliers, and practitioners that wish to healthcare-sector-data-breaches.pdf. donations of EHR items and services receive donations; thus, donors are 52 See Naveen Goud, ECMC Spends $10 Million could serve as a perfect template for an incented to protect themselves by 59 to Recover from a Cyberattack, Cybersecurity analogous cybersecurity provision. In donating cybersecurity technology and Insiders, available at https://www.cybersecurity- 2018, the American Medical Association insiders.com/ecmc-spends-10-million-to-recover- services that improves their from-a-cyber-attack/. surveyed over 1,300 physicians in a cybersecurity. 53 cybersecurity-related survey. See Samm Quinn, Hospital pays $55,000 We expect that the flexibilities Approximately 83 percent of the Ransom; No Patient Data Stolen, Greenfield Daily afforded by the cybersecurity exception Reporter (Jan. 15, 2018), available at http:// participants reported having will facilitate the enhancement of www.greenfieldreporter.com/2018/01/16/ experienced some sort of cybersecurity 01162018dr_hancock_health_pays_ransom/. protection against the corruption of or attack.60 The study also highlighted that 54 See Patrick Howell O’Neill, A patient has Died access to health records and other 50 percent of the surveyed physicians After Ransomware Hackers Hit a German Hospital, information essential to the safe and MIT Technology Review (Sept. 18, 2020), available wished they could receive donations of effective delivery of health care, as well at https://www.technologyreview.com/2020/09/18/ security-related hardware and software as reduce the impacts of cybersecurity 1008582/a-patient-has-died-after-ransomware- from other providers, and recommended hackers-hit-a-german-hospital/. attacks, including the improper 55 that we develop an exception to permit See Jeff Lagasse, Universal Health Services Hit disclosure of PHI. This could ultimately with Cyberattack that Shuts Down IT Systems, it. Healthcare Finance (Sept. 2020), available at reduce overall costs associated with https://www.healthcarefinancenews.com/news/ cybersecurity attacks, including ransom 56 See Health Sector Cybersecurity Coordination universal-health-services-hit-cyberattack-shuts- Center, A Cost Analysis of Healthcare Sector Data payments, costs to patients whose PHI down-it-systems-1; Jessica Davis, UHS Health Breaches. is improperly disclosed, and costs to System Confirms all US Sites Affected by 57 Ransomware Attack, Health IT Security (Oct. 2020), Id. providers and suppliers to reestablish available at https://healthitsecurity.com/news/uhs- 58 See HCIC Task Force Report, available at cybersecurity. However, there are a health-system-confirms-all-us-sites-affected-by- https://www.phe.gov/Preparedness/planning/ variety of factors integral to determining ransomware-attack; Jessica Davis, 3 Weeks After CyberTF/Documents/report2017.pdf. the extent of the impact of the Ransomware Attack, All 400 UHS Systems Back 59 Id. Online, Health IT Security (Oct. 2020), available at 60 See American Medical Association, Tackling cybersecurity exception on the https://healthitsecurity.com/news/3-weeks-after- Cyber Threats in Healthcare, available at https:// cybersecurity hygiene of the health care ransomware-attack-all-400-uhs-systems-back- www.ama-assn.org/sites/ama-assn.org/files/corp/ industry that remain too speculative to online; and Press Release, Universal Health media-browser/public/government/advocacy/ support a quantitative estimate of the Services, Statement from Universal Health Services medical-cybersecurity-findings.pdf and https:// (Oct. 29, 2020), available at https:// www.ama-assn.org/sites/ama-assn.org/files/corp/ impact of this final rule. For example, www.uhsinc.com/statement-from-universal-health- media-browser/public/government/advocacy/ we cannot predict with certainty: (1) services/. infographic-medical-cybersecurity.pdf. How many entities or physicians will

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donate cybersecurity technology or delivery and payment and realize the group practices will independently services for which the parties may seek potential cost savings that come from review this final rule. We requested protection under the cybersecurity improved quality and care coordination. public comment on the entities affected exception; (2) how such donations will Although we cannot estimate the by the rule. improve the cybersecurity hygiene of precise dollar amount of impact, as We anticipate that directly affected recipients, donors, and the health care described throughout this section entities will review this final rule in ecosystem as a whole; or (3) external IV.B.2. of this final rule, the potential order to determine whether to explore factors—such as other policies for reduced program expenditures is newly permissible value-based promoting cybersecurity within the significant, and the policies set forth in arrangements and to take advantage of health care industry, how hackers will this final rule are intended to maximize burden-reducing clarifications provided proliferate and develop new hacking this potential. by the rule. We estimate that all directly strategies, or how cyberattack recovery affected entities described above that C. Anticipated Effects costs and ransom costs will change— will be eligible to use the final rule will that could enable or hinder improved This final rule will affect entities that review the rule. In the proposed rule, cybersecurity hygiene and potentially furnish designated health services we estimated that reviewing the final result in increased or decreased costs payable by Medicare and the physicians rule would require an average of 3 hours associated with cyberattacks. Thus, we with whom they have financial of time each from the equivalent of a cannot predict the specific quantitative relationships. The following items or compliance officer and a lawyer (84 FR impact of the flexibility afforded by the services are designated health services: 55837). The final rule responds to new cybersecurity exception on the (1) Clinical laboratory services; (2) numerous comments received on the costs or benefits to the Medicare physical therapy services; (3) proposals discussed in the proposed program, or other Federal health care occupational therapy services; (4) rule, and includes significantly more programs, beneficiaries, or the health outpatient speech-language pathology information than the proposed rule. care industry as a whole. Nonetheless, services; (5) radiology and certain other Although we did not receive any we expect that the flexibility to donate imaging services; (6) radiation therapy comments on our proposed estimate of cybersecurity technology and services services and supplies; (7) durable three hours, in light of the increase in will benefit the health care ecosystem as medical equipment and supplies; (8) length from the proposed rule to the a whole, improve cybersecurity across parenteral and enteral nutrients, final rule, we have adjusted our estimate the industry, and reduce costs equipment, and supplies; (9) for the time required to review the final associated with cyberattacks (by prosthetics, orthotics, and prosthetic rule. We estimate that reviewing the reducing successful cyberattacks, and devices and supplies; (10) home health final rule will require an average of 6 consequently, ransom fees and recovery services; (11) outpatient prescription hours of time each from the equivalent costs). drugs; and (12) inpatient and outpatient of a compliance officer and a lawyer, 3. Comment and Response hospital services. We do not have data and note that parties may review only on the number of entities and the portions of the final rule that are We sought comment on the economic physicians that have financial applicable to their specific impact of this final rule, including any relationships, but we believe a circumstances and needs. For example, potential increase or decrease in substantial fraction of Medicare- parties that do not wish to participate in utilization, any potential effects due to enrolled physicians, group practices, value-based health care and delivery at behavioral changes, or any other hospitals, clinical laboratories, and this time may not review sections I.B. potential cost savings or expenses to the home health agencies are affected by the and II.A. of this final rule. Government as a result of this rule. physician self-referral law. We To estimate the costs associated with We received the following comment anticipate that this final rule will have this review, we use a 2019 wage rate of and our response follows. significant, ongoing benefits for the $35.03 for compliance officers and Comment: One commenter requested affected physicians and entities and the that we provide detailed estimates of $69.86 for lawyers from the Bureau of entire health care system. 62 changes in Medicare program spending Labor Statistics, and we double those To estimate the number of entities wages to account for overhead and that CMS expects to result from the directly affected by this rule, we use proposed new exceptions and other benefits. As a result, we estimate total Medicare enrollment data. According to regulatory review costs of $64 million in regulatory changes. The commenter this data, there were 2,265 single or asserted that certain successful value- the first year following publication of multispecialty clinics or group the final rule. We sought public based programs produce limited savings practices, 3,159 clinical laboratories and many value-based programs comment on these assumptions. (billing independently), 2,016 In developing this final rule, we took produce no savings or even increase outpatient physical therapy/speech spending. great care to ensure that the safeguards pathology providers, 2,739 independent against program and patient abuse in Response: We are unable to provide diagnostic testing facilities, 11,317 the detailed estimates requested by the our new exceptions impose the home health agencies, 6,072 inpatient minimum burden possible while commenter. It is impossible for CMS to hospitals, 4,402 rural health clinics, 172 provide quantitative estimates of providing robust protection against comprehensive outpatient rehabilitation improper utilization and other harms savings to or expenditures of the facilities, 8,836 federally qualified Medicare program that will result from against which the physician self-referral health centers, and 9,403 medical law is designed to protect. For example, the establishment of the new exceptions supply companies enrolled in Medicare at § 411.357(z), (aa), or (bb), or from we believe a value-based enterprise in 2018.61 In addition, we estimate that clarification of key terms integral to the would ordinarily develop a governing 400 physician practices unassociated physician self-referral law and other document that describes the value-based with single or multispecialty clinics or regulatory revisions. However, we 62 U.S. Department of Labor, Bureau of Labor emphasize that we engaged in the 61 CMS Program Statistics, https://www.cms.gov/ Statistics, May 2019 National Occupational Regulatory Sprint to facilitate the research-statistics-data-systems/cms-program- Employment and Wage Estimates United States, transition to value-based health care statistics/2018-medicare-providers. https://www.bls.gov/oes/current/oes_nat.htm.

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enterprise and how the VBE participants narrowly designed to apply solely to more complicated and burdensome intend to achieve its value-based one specific model, allowing parties to requirements of other exceptions. We purpose(s), so our requirement does not enter into value-based arrangements of anticipate that this added flexibility will impose any additional burden beyond their own design and to continue such provide substantial burden reduction what we anticipate parties would arrangements beyond expiration of through reduced compliance costs. ordinarily develop. We also believe that fraud and abuse waivers. We also We have also finalized numerous parties to an arrangement under which believe that applying the new other changes that, while relatively remuneration is paid already keep exceptions will make compliance more minor in scope, are intended to business records necessary for a variety straightforward for physicians and collectively reduce burden. For of purposes, such as income tax filings, entities participating in Innovation example, the new special rules on the records of compliance with state laws Center models, thus resulting in cost set in advance requirement clarifies the (including fee splitting laws), and, for savings for these parties. In addition, we requirements for modifying nonprofit entities, justification of tax- believe that the new exceptions for compensation terms during the course exempt status. Therefore, we do not arrangements intended to facilitate the of an arrangement and correct a believe the requirement to maintain transition to value-based health care common misperception among records of the methodology for delivery and payment will ensure that stakeholders that parties may only determining and the actual amount of the physician self-referral law continues modify the compensation terms of an remuneration paid under a value-based to provide meaningful protection arrangement once during the course of arrangement for a period of at least 6 against overutilization and other harms, a year. We anticipate that our changes years imposes additional burden. In thus preventing increased Medicare relating to isolated transactions, the addition, we believe that physicians and expenditures and associated beneficiary period of disallowance, the special rules entities routinely document their liability. We lack data to quantify these on compensation arrangements, the financial arrangements in writing as a effects and sought public comment on exceptions for rental of office space and common good business practice so that these impacts. rental of office equipment, the exception arrangements can be enforced. For We believe that the clarifications and for physician recruitment, and the example, we believe that an entity regulatory revisions of key terminology exception for assistance to compensate would ordinarily ensure that the details (specifically, the terms ‘‘commercially a nonphysician practitioner will also of a shared loss repayment agreement reasonable’’ and ‘‘fair market value,’’ the have a beneficial impact by reducing the are documented in writing to ensure volume or value standard, and the other existing burden on physicians and that the arrangement can be enforced business generated standard) discussed entities through the provision of under state law. Similarly, we believe in section II.B. of this final rule will additional guidance and clarifications. that entities working together to achieve have significant, ongoing benefits to all We lack data to quantify these effects a purpose would routinely monitor their physicians and entities affected by the and sought public comment on these operations to confirm that their plans physician self-referral law. These terms impacts. are working as intended. We sought are used throughout the physician self- As we stated in the proposed rule, the comments on these assumptions. referral regulations. Commenters on the American Hospital Association proposed rule indicated that additional estimated compliance costs faced by The new exceptions for arrangements guidance on these terms is necessary to hospitals.63 It estimated $350,000 64 in intended to facilitate the transition to reduce the complexity of structuring value-based health care delivery and annual costs for an average hospital to financial arrangements to comply with comply with fraud and abuse payment have numerous potential the physician self-referral law. benefits that will reduce costs and regulations, which include the We anticipate that the changes to physician self-referral law. To estimate improve quality, not only for Medicare decouple the physician self-referral law and its beneficiaries, but for patients aggregate fraud and abuse compliance regulations from the anti-kickback costs, we multiply this figure by the and the health care system in general. statute and federal and state laws or For example, the final exceptions number of Medicare enrolled hospitals, regulations governing billing or claims which implies $2.1 billion in total provide important new flexibility for submission will reduce burden by physicians and entities to work together annual costs across these hospitals. making compliance more Based on CMS RFI comments, to improve patient care and reduce straightforward for physicians and costs. This increased flexibility will compliance with the physician self- entities. We stress that the anti-kickback referral regulations comprises a provide new opportunities for the statute and billing laws remain in full private sector to develop and implement substantial fraction of these costs. We force and effect, so those laws will anticipate that clarifications provided in cost-saving, quality-improving programs continue to protect against program and that previously may have been this final rule may substantially reduce patient abuse. We anticipate that our the complexity of compliance for impermissible. We anticipate that changes to the definitions of implementation of improvements and affected entities. As a result, we expect ‘‘designated health services,’’ this rule will substantially reduce net efficiencies, such as care redesign ‘‘physician,’’ and ‘‘remuneration’’ and fraud and abuse compliance burden for protocols resulting from private sector the changes to the ownership and affected entities, although we lack data innovation, could have a beneficial investment interest provisions in to quantify these estimates. We note that effect on the care provided to Medicare § 411.354(b) will reduce compliance hospitals represent a fraction of entities beneficiaries and thereby result in burden by appropriately applying the affected by this final rule, and burden is savings for beneficiaries and the Trust physician self-referral law’s prohibitions likely to decline substantially for other Funds. We believe that these new and providing protection for nonabusive categories of entities affected by this exceptions will also increase financial relationships. Our changes for rule. We sought public comment on the participation in Innovation Center the exceptions for fair market value models because, unlike the fraud and payments by a physician and fair market 63 https://www.aha.org/sites/default/files/ abuse waivers that have been issued for value compensation will make these regulatory-overload-report.pdf. certain Innovation Models, the exceptions available to protect financial 64 Note that the figure is adjusted for inflation exceptions will not expire and are not arrangements that must currently meet between 2017 and 2018.

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extent to which this rule will reduce reduce burden on hospitals and other multiple or repeated services. This compliance burden for hospitals and entities. longstanding policy is based on our entities other than hospitals. Comment: A few commenters asserted interpretation of the statute and our Our final modifications to the EHR that the establishment of the mandate under sections 1877(b)(4) and exception are modest and clarify that accountable body or person and the 1877(e)(6)(B) of the Act to permit only the exception applies to certain development of the governing document those financial relationships that do not cybersecurity technology that is would require the expenditure of pose a risk of program or patient abuse. included as part of an electronic health significant resources, including legal We do not believe that clarifying records arrangement, make the expenses, and questioned whether existing policy will result in additional exception permanent, and clarify that adding this burden was necessary. burden, particularly in light of new contribution requirements collected Response: As discussed in detail in flexibilities included in this final rule. section II.A.2.a. of this final rule, we from physicians for updates to D. Alternatives Considered previously donated technology need continue to believe that a value-based only be collected at reasonable intervals. enterprise would ordinarily develop a This final rule contains a range of The EHR exception will continue to be governing document and that this final policies. The preceding preamble available to physicians and entities rule will not result in additional burden presents rationale for our policies and, other than laboratories. We expect that in that regard. In addition, we have where relevant, alternatives that were the same entities that currently use the provided additional guidance about considered. We carefully considered the EHR exception will continue to use the these requirements, including that we alternative of maintaining the status quo exception. We anticipate that our final are not dictating the format or content and not pursuing regulatory action. policies will result in an incremental of the governing document or the However, we believe that the transition reduction in compliance burden. structure or composition of the to a value-based health care delivery and payment system is urgently needed In section II.E. of this final rule, we accountable body. Each value-based enterprise has the flexibility to develop due to unsustainable costs inherent in discuss new exceptions for limited and implement the necessary the current volume-based system. We remuneration to a physician and the infrastructure to effectively oversee its believe this final rule addresses the provision of cybersecurity technology financial and operational activities critical need for additional flexibility and related services. We anticipate that commensurate with the size and that is necessary to advance the the new exception for limited structure of the value-based enterprise. transition to value-based health care and remuneration to a physician will ease Comment: One commenter expressed improve the coordination of care among compliance burden because it allows concern that the revised definition of providers in both the Federal and entities to compensate a physician for ‘‘remuneration’’ would increase the commercial sectors. items or services provided by the burden on parties to monitor the use of We also considered proposing to limit physician without being subject to all items, devices, or services to ensure that the new exceptions for arrangements the documentation and certain other physicians are in fact using the items, that facilitate the transition to value- requirements of existing exceptions to devices, or services for one or more of based health care delivery and payment the physician self-referral law. We the permitted purposes under the to CMS-sponsored models or believe that this new exception will also statute. establishing separate exceptions with provide additional flexibility where Response: As we mentioned in different criteria for arrangements that these arrangements are not covered by section II.D.2.d. of this final rule, we exist outside CMS-sponsored models. an existing exception. We anticipate believe that it would be impossible for However, we believe that, in their that the cybersecurity exception will be an entity to monitor how a physician current state, the physician self-referral widely used by physicians, group ‘‘in fact’’ uses a multi-use item, device, regulations impede the development practices, and hospitals. We believe that or supply whose primary purpose is not and adoption of innovative approaches this exception will help to address the one or more of the permitted purposes to delivering health care, across all growing threat of cyberattacks that to ensure that the physician in fact uses patient populations and payor types, infiltrate data systems and corrupt or the item, device, or supply exclusively and over indefinite periods of time. In prevent access to health records and for one or more of the permitted addition, we considered establishing an other information essential to the safe purposes. However, we believe that the exception to protect care coordination and effective delivery of health care. We final definition of ‘‘remuneration’’ will activities performed outside of a value- lack data to quantify these effects and not increase the burden of monitoring, based enterprise. We rejected this sought public comment on these because the provision of multi-use alternative due to program integrity impacts. items, devices, or supplies whose concerns that could exist without the We received the following comments primary purpose is not one or more of incentives and protections inherent in a and our responses follow. the permitted purposes will not be value-based enterprise and value-based Comment: The vast majority of carved out of the definition of arrangement, as defined at final commenters supported our proposals, ‘‘remuneration.’’ § 411.351. noting generally that the proposed Comment: Many commenters We considered including provisions provisions will facilitate compliance maintained that the proposed in the exceptions for value-based with the physician self-referral law and amendment to clarify the definition of arrangements that would require achieve the reduced burden CMS ‘‘transaction’’ at § 411.351 would reduce compensation to be set in advance, fair anticipates, although no commenters flexibility and increase the burden of market value, and not determined in provided data or other detail that would compliance. any manner that takes into account the allow us to quantify the anticipated Response: We discussed this policy in volume or value of a physician’s effects. section II.D.2.e. of this final rule and referrals or the other business generated Response: We appreciate commenters’ explained that the revision simply between the parties. We are concerned, feedback confirming our assessment that clarifies an existing policy that the however, that the inclusion of such this final rule will ease compliance with exception for isolated transactions is not requirements would conflict with our the physician self-referral law and available to protect a single payment for goal of dismantling and addressing

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regulatory barriers to value-based care Through our own experience does not pose a risk of program or transformation. We further believe that administering the physician self-referral patient abuse. For example, we the disincentives for overutilization, regulations and our thorough analysis of considered whether to eliminate the stinting on patient care, and other harms comments, we recognize the urgent and requirement that a physician must pay the physician self-referral law was compelling need for additional guidance 15 percent of the cost of donated intended to address that are built into on the physician self-referral law. In electronic health records items and the value-based definitions will operate preparing this rule, we conducted an in- service, but are concerned that doing so in tandem with the requirements depth review of our existing regulations would pose a risk of program or patient included in the exceptions and be to identify those matters that might abuse. We sought comments on these sufficient to protect against program and benefit from additional guidance. We regulatory alternatives. As discussed in patient abuse. We also considered took great care to provide this guidance section II.D.11.e. of this final rule, the whether to exclude laboratories and in the clearest, most straightforward EHR exception maintains the 15 percent DMEPOS suppliers from the definition manner possible. For example, we contribution requirement. of ‘‘VBE participant.’’ We stated in the considered addressing the need for proposed rule that it was not clear to us guidance on the applicability of the We received no comments specific to that laboratories and DMEPOS suppliers physician self-referral law to referrals the alternatives considered section of have the direct patient contacts that for inpatient hospital services after the proposed rule. would justify their inclusion as parties admission through modifying the E. Accounting Statement working under a protected value-based definition of ‘‘referral’’ rather than the arrangement to achieve the type of definition of ‘‘designated health As required by OMB Circular A–4 patient-centered care that is a core tenet services.’’ We are concerned that (available at http:// of care coordination and a value-based modifying the definition of ‘‘referral’’ www.whitehouse.gov/omb/circulars/ health care system. As discussed in could have a broader effect and would a004/a-4.pdf), we have prepared an Section II.A.2.a. of this final rule, we not be as clear, and declined to adopt accounting statement. The following have not excluded any entities from the that approach. We have also carefully table provides estimated annualized final definition of ‘‘VBE participant.’’ weighed each proposal to ensure that it costs through 2029.

ACCOUNTING STATEMENT—ESTIMATED ANNUALIZED COSTS

Discount Category Primary Low estimate High estimate Year dollar rate Period estimate (percent) covered

Costs Annualized Monetized ($millions/ year) ...... 4.3 0.0 0.0 2018 7% 2020–2029 3.6 0.0 0.0 2018 3 2020–2029 Annualized Quantified ...... 0.0 0.0 0.0 7 0.0 0.0 0.0 3 Qualitative

In accordance with the provisions of Subpart J—Financial Relationships prohibits a physician from making a Executive Order 12866, this final rule Between Physicians and Entities referral under Medicare for designated was reviewed by the Office of Furnishing Designated Health Services health services to an entity with which Management and Budget. the physician or a member of the ■ 2. Subpart J is amended by revising DISCLAIMER: Based on the tight time physician’s immediate family has a constraints and the need to expedite the §§ 411.350 through 411.357 to read as financial relationship. clearance process to ensure timely follows: (b) This subpart does not provide for publication, OSORA will continue to work Sec. exceptions or immunity from civil or with CM to ensure that regulations text is in * * * * * criminal prosecution or other sanctions compliance with the Office of the Federal 411.350 Scope of subpart. applicable under any State laws or Register standards and guidance. 411.351 Definitions. under Federal law other than section 411.352 Group practice. 1877 of the Act. For example, although List of Subjects in 42 CFR Part 411 411.353 Prohibition on certain referrals by a particular arrangement involving a physicians and limitations on billing. Diseases, Medicare, Reporting and 411.354 Financial relationship, physician’s financial relationship with recordkeeping requirements. compensation, and ownership or an entity may not prohibit the physician For the reasons set forth in the investment interest. from making referrals to the entity preamble, the Centers for Medicare & 411.355 General exceptions to the referral under this subpart, the arrangement may Medicaid Services amends 42 CFR part prohibition related to both ownership/ nevertheless violate another provision 411 as set forth below: investment and compensation. of the Act or other laws administered by 411.356 Exceptions to the referral HHS, the Federal Trade Commission, PART 411—EXCLUSIONS FROM prohibition related to ownership or the Securities and Exchange MEDICARE AND LIMITATIONS ON investment interests. Commission, the Internal Revenue 411.357 Exceptions to the referral MEDICARE PAYMENT prohibition related to compensation Service, or any other Federal or State arrangements. agency. ■ 1. The authority citation for part 411 (c) This subpart requires, with some continues to read as follows: § 411.350 Scope of subpart. exceptions, that certain entities Authority: 42 U.S.C. 1302, 1395w–101 (a) This subpart implements section furnishing covered services under through 1395w–152, 1395hh, and 1395nn. 1877 of the Act, which generally Medicare report information concerning

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ownership, investment, or laboratory service on the List of CPT/ services’’ or DHS means only DHS compensation arrangements in the form, HCPCS Codes is not a clinical laboratory payable, in whole or in part, by in the manner, and at the times service for purposes of this subpart. Medicare. DHS do not include services specified by CMS. Commercially reasonable means that that are paid by Medicare as part of a (d) This subpart does not alter an the particular arrangement furthers a composite rate (for example, SNF Part A individual’s or entity’s obligations legitimate business purpose of the payments or ASC services identified at under— parties to the arrangement and is § 416.164(a)), except to the extent that (1) The rules regarding reassignment sensible, considering the characteristics services listed in paragraphs (1)(i) of claims (§ 424.80 of this chapter); of the parties, including their size, type, through (1)(x) of this definition are (2) The rules regarding purchased scope, and specialty. An arrangement themselves payable under a composite diagnostic tests (§ 414.50 of this may be commercially reasonable even if rate (for example, all services provided chapter); it does not result in profit for one or as home health services or inpatient and (3) The rules regarding payment for more of the parties. outpatient hospital services are DHS). services and supplies incident to a Consultation means a professional For services furnished to inpatients by physician’s professional services service furnished to a patient by a a hospital, a service is not a designated (§ 410.26 of this chapter); or physician if the following conditions are health service payable, in whole or in (4) Any other applicable Medicare satisfied: part, by Medicare if the furnishing of the laws, rules, or regulations. (1) The physician’s opinion or advice service does not increase the amount of § 411.351 Definitions. regarding evaluation or management or Medicare’s payment to the hospital both of a specific medical problem is The definitions in this subpart apply under any of the following prospective requested by another physician. only for purposes of section 1877 of the payment systems (PPS): (2) The request and need for the Act and this subpart. As used in this (i) Acute Care Hospital Inpatient consultation are documented in the subpart, unless the context indicates (IPPS); patient’s medical record. (ii) Inpatient Rehabilitation Facility otherwise: (3) After the consultation is provided, Centralized building means all or part (IRF PPS); the physician prepares a written report of a building, including, for purposes of (iii) Inpatient Psychiatric Facility (IPF of his or her findings, which is provided this subpart only, a mobile vehicle, van, PPS); to the physician who requested the or trailer that is owned or leased on a or (iv) Long-Term Care Hospital consultation. (LTCH PPS). full-time basis (that is, 24 hours per day, (4) With respect to radiation therapy 7 days per week, for a term of not less Does not violate the anti-kickback services provided by a radiation statute, as used in this subpart only, than 6 months) by a group practice and oncologist, a course of radiation that is used exclusively by the group means that the particular arrangement— treatments over a period of time will be (1)(i) Meets a safe harbor under the practice. Space in a building or a mobile considered to be pursuant to a vehicle, van, or trailer that is shared by anti-kickback statute, as set forth at consultation, provided that the radiation § 1001.952 of this title, ‘‘Exceptions’’; more than one group practice, by a oncologist communicates with the group practice and one or more solo (ii) Has been specifically approved by referring physician on a regular basis the OIG in a favorable advisory opinion practitioners, or by a group practice and about the patient’s course of treatment another provider or supplier (for issued to a party to the particular and progress. arrangement (for example, the entity example, a diagnostic imaging facility) Cybersecurity means the process of furnishing DHS) with respect to the is not a centralized building for protecting information by preventing, particular arrangement (and not a purposes of this subpart. This provision detecting, and responding to similar arrangement), provided that the does not preclude a group practice from cyberattacks. arrangement is conducted in accordance providing services to other providers or Designated health services (DHS) with the facts certified by the requesting suppliers (for example, purchased means any of the following services party and the opinion is otherwise diagnostic tests) in the group practice’s (other than those provided as emergency issued in accordance with part 1008 of centralized building. A group practice physician services furnished outside of this title, ‘‘Advisory Opinions by the may have more than one centralized the U.S.), as they are defined in this OIG’’; or building. section: Clinical laboratory services means the (1)(i) Clinical laboratory services. (iii) Does not violate the anti-kickback biological, microbiological, serological, (ii) Physical therapy, occupational provisions in section 1128B(b) of the chemical, immunohematological, therapy, and outpatient speech-language Act. hematological, biophysical, cytological, pathology services. (2) For purposes of this definition, a pathological, or other examination of (iii) Radiology and certain other favorable advisory opinion means an materials derived from the human body imaging services. opinion in which the OIG opines that— for the purpose of providing information (iv) Radiation therapy services and (i) The party’s specific arrangement for the diagnosis, prevention, or supplies. does not implicate the anti-kickback treatment of any disease or impairment (v) Durable medical equipment and statute, does not constitute prohibited of, or the assessment of the health of, supplies. remuneration, or fits in a safe harbor human beings, including procedures to (vi) Parenteral and enteral nutrients, under § 1001.952 of this title; or determine, measure, or otherwise equipment, and supplies. (ii) The party will not be subject to describe the presence or absence of (vii) Prosthetics, orthotics, and any OIG sanctions arising under the various substances or organisms in the prosthetic devices and supplies. anti-kickback statute (for example, body, as specifically identified by the (viii) Home health services. under sections 1128A(a)(7) and List of CPT/HCPCS Codes. All services (ix) Outpatient prescription drugs. 1128(b)(7) of the Act) in connection so identified on the List of CPT/HCPCS (x) Inpatient and outpatient hospital with the party’s specific arrangement. Codes are clinical laboratory services for services. Downstream contractor means a ‘‘first purposes of this subpart. Any service (2) Except as otherwise noted in this tier contractor’’ as defined at not specifically identified as a clinical subpart, the term ‘‘designated health § 1001.952(t)(2)(iii) of this title or a

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‘‘downstream contractor’’ as defined at Medicare Claims Processing Manual, subsidiary, related entity, or other § 1001.952(t)(2)(i) of this title. Chapter 1, Section 30.2.9. entities that perform services for the Durable medical equipment (DME) Fair market value means— hospital’s patients and for which the and supplies has the meaning given in (1) General. The value in an arm’s- hospital bills. However, a ‘‘hospital’’ section 1861(n) of the Act and § 414.202 length transaction, consistent with the does not include entities that perform of this chapter. general market value of the subject services for hospital patients ‘‘under Electronic health record means a transaction. arrangements’’ with the hospital. repository of consumer health status (2) Rental of equipment. With respect HPSA means, for purposes of this information in computer processable to the rental of equipment, the value in subpart, an area designated as a health form used for clinical diagnosis and an arm’s-length transaction of rental professional shortage area under section treatment for a broad array of clinical property for general commercial 332(a)(1)(A) of the Public Health Service conditions. purposes (not taking into account its Act for primary medical care Employee means any individual who, intended use), consistent with the professionals (in accordance with the under the common law rules that apply general market value of the subject criteria specified in part 5 of this title). in determining the employer-employee transaction. Immediate family member or member relationship (as applied for purposes of (3) Rental of office space. With of a physician’s immediate family section 3121(d)(2) of the Internal respect to the rental of office space, the means husband or wife; birth or Revenue Code of 1986), is considered to value in an arm’s-length transaction of adoptive parent, child, or sibling; be employed by, or an employee of, an rental property for general commercial stepparent, stepchild, stepbrother, or entity. (Application of these common purposes (not taking into account its stepsister; father-in-law, mother-in-law, law rules is discussed in 20 CFR intended use), without adjustment to son-in-law, daughter-in-law, brother-in- 404.1007 and 26 CFR 31.3121(d)–1(c).) reflect the additional value the law, or sister-in-law; grandparent or grandchild; and spouse of a grandparent Entity means— prospective lessee or lessor would attribute to the proximity or or grandchild. (1) A physician’s sole practice or a ‘‘Incident to’’ services or services practice of multiple physicians or any convenience to the lessor where the lessor is a potential source of patient ‘‘incident to’’ means those services and other person, sole proprietorship, public supplies that meet the requirements of or private agency or trust, corporation, referrals to the lessee, and consistent with the general market value of the section 1861(s)(2)(A) of the Act, § 410.26 partnership, limited liability company, of this chapter, and Pub. 100–02, foundation, nonprofit corporation, or subject transaction. General market value means— Medicare Benefit Policy Manual, unincorporated association that (1) Assets. With respect to the Chapter 15, Sections 60, 60.1, 60.2, 60.3, furnishes DHS. An entity does not purchase of an asset, the price that an and 60.4. include the referring physician himself asset would bring on the date of Inpatient hospital services means or herself, but does include his or her acquisition of the asset as the result of those services defined in section 1861(b) medical practice. A person or entity is bona fide bargaining between a well- of the Act and § 409.10(a) and (b) of this considered to be furnishing DHS if it— informed buyer and seller that are not chapter and include inpatient (i) Is the person or entity that has otherwise in a position to generate psychiatric hospital services listed in performed services that are billed as business for each other. section 1861(c) of the Act and inpatient DHS; or (2) Compensation. With respect to critical access hospital services, as (ii) Is the person or entity that has compensation for services, the defined in section 1861(mm)(2) of the presented a claim to Medicare for the compensation that would be paid at the Act. ‘‘Inpatient hospital services’’ do not DHS, including the person or entity to time the parties enter into the service include emergency inpatient services which the right to payment for the DHS arrangement as the result of bona fide provided by a hospital located outside has been reassigned in accordance with bargaining between well-informed of the U.S. and covered under the § 424.80(b)(1) (employer) or (b)(2) parties that are not otherwise in a authority in section 1814(f)(2) of the Act (payment under a contractual position to generate business for each and part 424, subpart H of this chapter, arrangement) of this chapter (other than other. or emergency inpatient services a health care delivery system that is a (3) Rental of equipment or office provided by a nonparticipating hospital health plan (as defined at § 1001.952(l) space. With respect to the rental of within the U.S., as authorized by section of this title), and other than any equipment or the rental of office space, 1814(d) of the Act and described in part managed care organization (MCO), the price that rental property would 424, subpart G of this chapter. provider-sponsored organization (PSO), bring at the time the parties enter into ‘‘Inpatient hospital services’’ also do not or independent practice association the rental arrangement as the result of include dialysis furnished by a hospital (IPA) with which a health plan contracts bona fide bargaining between a well- that is not certified to provide end-stage for services provided to plan enrollees). informed lessor and lessee that are not renal dialysis (ESRD) services under (2) A health plan, MCO, PSO, or IPA otherwise in a position to generate subpart U of part 405 of this chapter. that employs a supplier or operates a business for each other. ‘‘Inpatient hospital services’’ include facility that could accept reassignment Home health services means the services that are furnished either by the from a supplier under § 424.80(b)(1) and services described in section 1861(m) of hospital directly or under arrangements (b)(2) of this chapter, with respect to any the Act and part 409, subpart E of this made by the hospital with others. DHS provided by that supplier. chapter. ‘‘Inpatient hospital services’’ do not (3) For purposes of this subpart, Hospital means any entity that include professional services performed ‘‘entity’’ does not include a physician’s qualifies as a ‘‘hospital’’ under section by physicians, physician assistants, practice when it bills Medicare for the 1861(e) of the Act, as a ‘‘psychiatric nurse practitioners, clinical nurse technical component or professional hospital’’ under section 1861(f) of the specialists, certified nurse midwives, component of a diagnostic test for Act, or as a ‘‘critical access hospital’’ and certified registered nurse which the anti-markup provision is under section 1861(mm)(1) of the Act, anesthetists and qualified psychologists applicable in accordance with § 414.50 and refers to any separate legally if Medicare reimburses the services of this chapter and Pub. 100–04, organized operating entity plus any independently and not as part of the

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inpatient hospital service (even if they the CMS website at http:// Outpatient prescription drugs means are billed by a hospital under an www.cms.hhs.gov/ all drugs covered by Medicare Part B or assignment or reassignment). PhysicianSelfReferral/11__List__of__ D, except for those drugs that are Interoperable means— Codes.asp#TopOfPage. ‘‘covered ancillary services,’’ as defined (1) Able to securely exchange data Locum tenens physician (or substitute at § 416.164(b) of this chapter, for which with and use data from other health physician) means a physician who separate payment is made to an information technology; and substitutes in exigent circumstances for ambulatory surgical center. (2) Allows for complete access, another physician, in accordance with Parenteral and enteral nutrients, exchange, and use of all electronically section 1842(b)(6)(D) of the Act and equipment, and supplies means the accessible health information for Pub. 100–04, Medicare Claims following services (including all HCPCS authorized use under applicable State or Processing Manual, Chapter 1, Section level 2 codes for these services): Federal law. 30.2.11. (1) Parenteral nutrients, equipment, Isolated financial transaction—(1) Member of the group or member of a and supplies, meaning those items and Isolated financial transaction means a group practice means, for purposes of supplies needed to provide nutriment to one-time transaction involving a single this subpart, a direct or indirect a patient with permanent, severe payment between two or more persons physician owner of a group practice pathology of the alimentary tract that or a one-time transaction that involves (including a physician whose interest is does not allow absorption of sufficient integrally related installment payments, held by his or her individual nutrients to maintain strength provided that— professional corporation or by another commensurate with the patient’s general (i) The total aggregate payment is entity), a physician employee of the condition, as described in Pub. 100–03, fixed before the first payment is made group practice (including a physician Medicare National Coverage and does not take into account the employed by his or her individual Determinations Manual, Chapter 1, volume or value of referrals or other professional corporation that has an Section 180.2, as amended or replaced business generated by the physician; equity interest in the group practice), a from time to time; and and locum tenens physician (as defined in (2) Enteral nutrients, equipment, and (ii) The payments are immediately this section), or an on-call physician supplies, meaning items and supplies negotiable, guaranteed by a third party, while the physician is providing on-call needed to provide enteral nutrition to a secured by a negotiable promissory services for members of the group patient with a functioning note, or subject to a similar mechanism practice. A physician is a member of the gastrointestinal tract who, due to to ensure payment even in the event of group during the time he or she pathology to or nonfunction of the default by the purchaser or obligated furnishes ‘‘patient care services’’ to the structures that normally permit food to party. group as defined in this section. An reach the digestive tract, cannot (2) An isolated financial transaction independent contractor or a leased maintain weight and strength includes a one-time sale of property or employee is not a member of the group commensurate with his or her general a practice, single instance of forgiveness (unless the leased employee meets the condition, as described in Pub. 100–03, of an amount owed in settlement of a definition of an ‘‘employee’’ under this Medicare National Coverage bona fide dispute, or similar one-time section). Determinations Manual, Chapter 1, transaction, but does not include a Outpatient hospital services means Section 180.2. single payment for multiple or repeated the therapeutic, diagnostic, and partial Patient care services means any services (such as payment for services hospitalization services listed under task(s) performed by a physician in the previously provided but not yet sections 1861(s)(2)(B) and (s)(2)(C) of group practice that address the medical compensated). the Act; outpatient services furnished by needs of specific patients or patients in Laboratory means an entity furnishing a psychiatric hospital, as defined in general, regardless of whether they biological, microbiological, serological, section 1861(f) of the Act; and involve direct patient encounters or chemical, immunohematological, outpatient critical access hospital generally benefit a particular practice. hematological, biophysical, cytological, services, as defined in section Patient care services can include, for pathological, or other examination of 1861(mm)(3) of the Act. ‘‘Outpatient example, the services of physicians who materials derived from the human body hospital services’’ do not include do not directly treat patients, such as for the purpose of providing information emergency services furnished by time spent by a physician consulting for the diagnosis, prevention, or nonparticipating hospitals and covered with other physicians or reviewing treatment of any disease or impairment under the conditions described in laboratory tests, or time spent training of, or the assessment of the health of, section 1835(b) of the Act and subpart staff members, arranging for equipment, human beings. These examinations also G of part 424 of this chapter. or performing administrative or include procedures to determine, ‘‘Outpatient hospital services’’ include management tasks. measure, or otherwise describe the services that are furnished either by the Physical therapy, occupational presence or absence of various hospital directly or under arrangements therapy, and outpatient speech- substances or organisms in the body. made by the hospital with others. language pathology services means Entities only collecting or preparing ‘‘Outpatient hospital services’’ do not those particular services so identified on specimens (or both) or only serving as include professional services performed the List of CPT/HCPCS Codes. All a mailing service and not performing by physicians, physician assistants, services so identified on the List of CPT/ testing are not considered laboratories. nurse practitioners, clinical nurse HCPCS Codes are physical therapy, List of CPT/HCPCS Codes means the specialists, certified nurse midwives, occupational therapy, and outpatient list of CPT and HCPCS codes that certified registered nurse anesthetists, speech-language pathology services for identifies those items and services that and qualified psychologists if Medicare purposes of this subpart. Any service are DHS under section 1877 of the Act reimburses the services independently not specifically identified as physical or that may qualify for certain and not as part of the outpatient therapy, occupational therapy or exceptions under section 1877 of the hospital service (even if they are billed outpatient speech-language pathology Act. It is updated annually, as published by a hospital under an assignment or on the List of CPT/HCPCS Codes is not in the Federal Register, and is posted on reassignment). a physical therapy, occupational

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therapy, or outpatient speech-language practice’s facilities. The contract must Radiation therapy services and pathology service for purposes of this contain the same restrictions on supplies means those particular services subpart. The list of codes identifying compensation that apply to members of and supplies, including (effective physical therapy, occupational therapy, the group practice under § 411.352(g) (or January 1, 2007) therapeutic nuclear and outpatient speech-language the contract must satisfy the medicine services and supplies, so pathology services for purposes of this requirements of the personal service identified on the List of CPT/HCPCS regulation includes the following: arrangements exception in § 411.357(d)), Codes. All services and supplies so (1) Physical therapy services, meaning and the independent contractor’s identified on the List of CPT/HCPCS those outpatient physical therapy arrangement with the group practice Codes are radiation therapy services and services described in section 1861(p) of must comply with the reassignment supplies for purposes of this subpart. the Act that are covered under Medicare rules in § 424.80(b)(2) of this chapter Any service or supply not specifically Part A or Part B, regardless of who (see also Pub. L. 100–04, Medicare identified as radiation therapy services provides them, if the services include— Claims Processing Manual, Chapter 1, or supplies on the List of CPT/HCPCS (i) Assessments, function tests, and Section 30.2.7, as amended or replaced Codes is not a radiation therapy service measurements of strength, balance, from time to time). Referrals from an or supply for purposes of this subpart. endurance, range of motion, and independent contractor who is a The list of codes identifying radiation activities of daily living; physician in the group practice are therapy services and supplies is based (ii) Therapeutic exercises, massage, subject to the prohibition on referrals in on section 1861(s)(4) of the Act and and use of physical medicine § 411.353(a), and the group practice is § 410.35 of this chapter. modalities, assistive devices, and subject to the limitation on billing for Radiology and certain other imaging adaptive equipment; or those referrals in § 411.353(b). services means those particular services (iii) Establishment of a maintenance Physician incentive plan means any so identified on the List of CPT/HCPCS therapy program for an individual compensation arrangement between an Codes. All services identified on the List whose restoration potential has been entity (or downstream contractor) and a of CPT/HCPCS Codes are radiology and reached; however, maintenance therapy physician or physician group that may certain other imaging services for itself is not covered as part of these directly or indirectly have the effect of purposes of this subpart. Any service services. reducing or limiting services furnished not specifically identified as radiology (2) Occupational therapy services, with respect to individuals enrolled and certain other imaging services on meaning those services described in with the entity. the List of CPT/HCPCS Codes is not a section 1861(g) of the Act that are Physician organization means a radiology or certain other imaging covered under Medicare Part A or Part physician, a physician practice, or a service for purposes of this subpart. The B, regardless of who provides them, if group practice that complies with the list of codes identifying radiology and the services include— requirements of § 411.352. certain other imaging services includes (i) Teaching of compensatory Plan of care means the establishment the professional and technical techniques to permit an individual with by a physician of a course of diagnosis components of any diagnostic test or a physical or cognitive impairment or or treatment (or both) for a particular procedure using x-rays, ultrasound, limitation to engage in daily activities; computerized axial tomography, (ii) Evaluation of an individual’s level patient, including the ordering of services. magnetic resonance imaging, nuclear of independent functioning; medicine (effective January 1, 2007), or (iii) Selection and teaching of task- Professional courtesy means the provision of free or discounted health other imaging services. All codes oriented therapeutic activities to restore identified as radiology and certain other sensory-integrative function; or care items or services to a physician or his or her immediate family members or imaging services are covered under (iv) Assessment of an individual’s section 1861(s)(3) of the Act and vocational potential, except when the office staff. Prosthetics, Orthotics, and Prosthetic §§ 410.32 and 410.34 of this chapter, but assessment is related solely to do not include— vocational rehabilitation. Devices and Supplies means the following services (including all HCPCS (1) X-ray, fluoroscopy, or ultrasound (3) Outpatient speech-language procedures that require the insertion of pathology services, meaning those level 2 codes for these items and services that are covered by Medicare): a needle, catheter, tube, or probe services as described in section through the skin or into a body orifice; (1) Orthotics, meaning leg, arm, back, 1861(ll)(2) of the Act that are for the (2) Radiology or certain other imaging and neck braces, as listed in section diagnosis and treatment of speech, services that are integral to the 1861(s)(9) of the Act. language, and cognitive disorders that performance of a medical procedure that include swallowing and other oral- (2) Prosthetics, meaning artificial legs, is not identified on the list of CPT/ motor dysfunctions. arms, and eyes, as described in section HCPCS codes as a radiology or certain Physician has the meaning set forth in 1861(s)(9) of the Act. other imaging service and is section 1861(r) of the Act. A physician (3) Prosthetic devices, meaning performed— and the professional corporation of devices (other than a dental device) (i) Immediately prior to or during the which he or she is a sole owner are the listed in section 1861(s)(8) of the Act medical procedure; or same for purposes of this subpart. that replace all or part of an internal (ii) Immediately following the Physician in the group practice means body organ, including colostomy bags, medical procedure when necessary to a member of the group practice, as well and one pair of conventional eyeglasses confirm placement of an item placed as an independent contractor physician or contact lenses furnished subsequent during the medical procedure. during the time the independent to each cataract surgery with insertion (3) Radiology and certain other contractor is furnishing patient care of an intraocular lens. imaging services that are ‘‘covered services (as defined in this section) for (4) Prosthetic supplies, meaning ancillary services,’’ as defined at the group practice under a contractual supplies that are necessary for the § 416.164(b), for which separate arrangement directly with the group effective use of a prosthetic device payment is made to an ASC. practice to provide services to the group (including supplies directly related to Referral— practice’s patients in the group colostomy care). (1) Means either of the following:

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(i) Except as provided in paragraph (2) (4) A referral is not an item or service manner that takes into account the of this definition, the request by a for purposes of section 1877 of the Act volume or value of referrals. physician for, or ordering of, or the and this subpart. Rural area means an area that is not certifying or recertifying of the need for, Referring physician means a an urban area as defined at any designated health service for which physician who makes a referral as § 412.62(f)(1)(ii) of this chapter. payment may be made under Medicare defined in this section or who directs Same building means a structure Part B, including a request for a another person or entity to make a with, or combination of structures that consultation with another physician and referral or who controls referrals made share, a single street address as assigned any test or procedure ordered by or to by another person or entity. A referring by the U.S. Postal Service, excluding all be performed by (or under the physician and the professional exterior spaces (for example, lawns, supervision of) that other physician, but corporation of which he or she is a sole courtyards, driveways, parking lots) and not including any designated health owner are the same for purposes of this interior loading docks or parking service personally performed or subpart. garages. For purposes of this section, the provided by the referring physician. A Remuneration means any payment or ‘‘same building’’ does not include a designated health service is not other benefit made directly or mobile vehicle, van, or trailer. personally performed or provided by the indirectly, overtly or covertly, in cash or Specialty hospital means: (1) A subsection (d) hospital (as referring physician if it is performed or in kind, except that the following are defined in section 1886(d)(1)(B) of the provided by any other person, not considered remuneration for Act) that is primarily or exclusively including, but not limited to, the purposes of this section: engaged in the care and treatment of one referring physician’s employees, (1) The forgiveness of amounts owed of the following: independent contractors, or group for inaccurate tests or procedures, mistakenly performed tests or (i) Patients with a cardiac condition; practice members. (ii) Patients with an orthopedic procedures, or the correction of minor (ii) Except as provided in paragraph condition; (2) of this definition, a request by a billing errors. (iii) Patients receiving a surgical (2) The furnishing of items, devices, physician that includes the provision of procedure; or any designated health service for which or supplies that are, in fact, used solely (iv) Any other specialized category of payment may be made under Medicare, for one or more of the following services that the Secretary designates as the establishment of a plan of care by a purposes: inconsistent with the purpose of physician that includes the provision of (i) Collecting specimens for the entity permitting physician ownership and such a designated health service, or the furnishing the items, devices or investment interests in a hospital. certifying or recertifying of the need for supplies; (2) A ‘‘specialty hospital’’ does not such a designated health service, but not (ii) Transporting specimens for the include any hospital— including any designated health service entity furnishing the items, devices or (i) Determined by the Secretary to be personally performed or provided by the supplies; in operation before or under (iii) Processing specimens for the referring physician. A designated health development as of , 2003; entity furnishing the items, devices or service is not personally performed or (ii) For which the number of supplies; provided by the referring physician if it physician investors at any time on or (iv) Storing specimens for the entity is performed or provided by any other after such date is no greater than the furnishing the items, devices or person including, but not limited to, the number of such investors as of such supplies; date; referring physician’s employees, (v) Ordering tests or procedures for independent contractors, or group (iii) For which the type of categories the entity furnishing the items, devices described above is no different at any practice members. or supplies; or (2) Does not include a request by a time on or after such date than the type (vi) Communicating the results of of such categories as of such date; pathologist for clinical diagnostic tests or procedures for the entity laboratory tests and pathological (iv) For which any increase in the furnishing the items, devices or number of beds occurs only in the examination services, by a radiologist supplies. for diagnostic radiology services, and by facilities on the main campus of the (3) A payment made by an insurer or hospital and does not exceed 50 percent a radiation oncologist for radiation a self-insured plan (or a subcontractor of therapy or ancillary services necessary of the number of beds in the hospital as the insurer or self-insured plan) to a of November 18, 2003, or 5 beds, for, and integral to, the provision of physician to satisfy a claim, submitted radiation therapy, if— whichever is greater; and on a fee-for-service basis, for the (v) That meets such other (i) The request results from a furnishing of health services by that requirements as the Secretary may consultation initiated by another physician to an individual who is specify. physician (whether the request for a covered by a policy with the insurer or Target patient population means an consultation was made to a particular by the self-insured plan, if— identified patient population selected physician or to an entity with which the (i) The health services are not by a value-based enterprise or its VBE physician is affiliated); and furnished, and the payment is not made, participants based on legitimate and (ii) The tests or services are furnished under a contract or other arrangement verifiable criteria that— by or under the supervision of the between the insurer or the self-insured (1) Are set out in writing in advance pathologist, radiologist, or radiation plan (or a subcontractor of the insurer of the commencement of the value- oncologist, or under the supervision of or self-insured plan) and the physician; based arrangement; and a pathologist, radiologist, or radiation (ii) The payment is made to the (2) Further the value-based oncologist, respectively, in the same physician on behalf of the covered enterprise’s value-based purpose(s). group practice as the pathologist, individual and would otherwise be Transaction means an instance of two radiologist, or radiation oncologist. made directly to the individual; and or more persons or entities doing (3) Can be in any form, including, but (iii) The amount of the payment is set business. not limited to, written, oral, or in advance, does not exceed fair market Value-based activity means any of the electronic. value, and is not determined in any following activities, provided that the

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activity is reasonably designed to nonprofit corporation, faculty practice and the amounts received must be achieve at least one value-based purpose plan, or similar association. The single treated as receipts of the group. Patient of the value-based enterprise: legal entity may be organized by any care services must be measured by one (1) The provision of an item or party or parties, including, but not of the following: service; limited to, physicians, health care (i) The total time each member spends (2) The taking of an action; or facilities, or other persons or entities on patient care services documented by (3) The refraining from taking an (including, but not limited to, any reasonable means (including, but action. physicians individually incorporated as not limited to, time cards, appointment Value-based arrangement means an professional corporations). The single schedules, or personal diaries). (For arrangement for the provision of at least legal entity may be organized or owned example, if a physician practices 40 one value-based activity for a target (in whole or in part) by another medical hours a week and spends 30 hours a patient population to which the only practice, provided that the other week on patient care services for a parties are— medical practice is not an operating group practice, the physician has spent (1) The value-based enterprise and physician practice (and regardless of 75 percent of his or her time providing one or more of its VBE participants; or whether the medical practice meets the patient care services for the group.) (2) VBE participants in the same conditions for a group practice under (ii) Any alternative measure that is value-based enterprise. this section). For purposes of this reasonable, fixed in advance of the Value-based enterprise (VBE) means subpart, a single legal entity does not performance of the services being two or more VBE participants— include informal affiliations of measured, uniformly applied over time, (1) Collaborating to achieve at least physicians formed substantially to share verifiable, and documented. one value-based purpose; profits from referrals, or separate group (2) The data used to calculate (2) Each of which is a party to a value- practices under common ownership or compliance with this substantially all based arrangement with the other or at control through a physician practice test and related supportive least one other VBE participant in the management company, hospital, health documentation must be made available value-based enterprise; system, or other entity or organization. to the Secretary upon request. (3) That have an accountable body or A group practice that is otherwise a (3) The substantially all test set forth person responsible for the financial and single legal entity may itself own in paragraph (d)(1) of this section does operational oversight of the value-based subsidiary entities. A group practice not apply to any group practice that is enterprise; and operating in more than one State will be located solely in a HPSA, as defined at (4) That have a governing document considered to be a single legal entity § 411.351. that describes the value-based enterprise notwithstanding that it is composed of (4) For a group practice located and how the VBE participants intend to multiple legal entities, provided that— outside of a HPSA (as defined at achieve its value-based purpose(s). (1) The States in which the group § 411.351), any time spent by a group Value-based purpose means any of practice is operating are contiguous practice member providing services in a the following: (although each State need not be HPSA should not be used to calculate (1) Coordinating and managing the contiguous to every other State); whether the group practice has met the care of a target patient population; (2) The legal entities are absolutely substantially all test, regardless of (2) Improving the quality of care for identical as to ownership, governance, whether the member’s time in the HPSA a target patient population; and operation; and is spent in a group practice, clinic, or (3) Appropriately reducing the costs (3) Organization of the group practice office setting. to or growth in expenditures of payors into multiple entities is necessary to (5) During the start up period (not to without reducing the quality of care for comply with jurisdictional licensing exceed 12 months) that begins on the a target patient population; or laws of the States in which the group date of the initial formation of a new (4) Transitioning from health care practice operates. group practice, a group practice must delivery and payment mechanisms (b) Physicians. The group practice make a reasonable, good faith effort to based on the volume of items and must have at least two physicians who ensure that the group practice complies services provided to mechanisms based are members of the group (whether with the substantially all test on the quality of care and control of employees or direct or indirect owners), requirement set forth in paragraph (d)(1) costs of care for a target patient as defined at § 411.351. of this section as soon as practicable, population. (c) Range of care. Each physician who but no later than 12 months from the VBE participant means a person or is a member of the group, as defined at date of the initial formation of the group entity that engages in at least one value- § 411.351, must furnish substantially the practice. This paragraph (d)(5) does not based activity as part of a value-based full range of patient care services that apply when an existing group practice enterprise. the physician routinely furnishes, admits a new member or reorganizes. including medical care, consultation, (6)(i) If the addition to an existing § 411.352 Group practice. diagnosis, and treatment, through the group practice of a new member who For purposes of this subpart, a group joint use of shared office space, would be considered to have relocated practice is a physician practice that facilities, equipment, and personnel. his or her medical practice under meets the following conditions: (d) Services furnished by group § 411.357(e)(2) would result in the (a) Single legal entity. The group practice members. (1) Except as existing group practice not meeting the practice must consist of a single legal otherwise provided in paragraphs (d)(3) substantially all test set forth in entity operating primarily for the through (6) of this section, substantially paragraph (d)(1) of this section, the purpose of being a physician group all of the patient care services of the group practice will have 12 months practice in any organizational form physicians who are members of the following the addition of the new recognized by the State in which the group (that is, at least 75 percent of the member to come back into full group practice achieves its legal status, total patient care services of the group compliance, provided that— including, but not limited to, a practice members) must be furnished (A) For the 12-month period the group partnership, professional corporation, through the group and billed under a practice is fully compliant with the limited liability company, foundation, billing number assigned to the group, substantially all test if the new member

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is not counted as a member of the group determined in any manner that is under paragraphs (i)(2) and (3) of this for purposes of § 411.352; and directly related to the volume or value section, and the resulting amount of (B) The new member’s employment of referrals of DHS by the physician compensation, must be made available with, or ownership interest in, the group (except that the bonus may directly to the Secretary upon request. practice is documented in writing no relate to the volume or value of DHS later than the beginning of his or her referrals by the physician if the referrals § 411.353 Prohibition on certain referrals new employment, ownership, or are for services ‘‘incident to’’ the by physicians and limitations on billing. investment. physician’s personally performed (a) Prohibition on referrals. Except as (ii) This paragraph (d)(6) does not services). provided in this subpart, a physician apply when an existing group practice (2) Overall profits means the group’s who has a direct or indirect financial reorganizes or admits a new member entire profits derived from DHS payable relationship with an entity, or who has who is not relocating his or her medical by Medicare or Medicaid or the profits an immediate family member who has practice. derived from DHS payable by Medicare a direct or indirect financial (e) Distribution of expenses and or Medicaid of any component of the relationship with the entity, may not income. The overhead expenses of, and group practice that consists of at least make a referral to that entity for the income from, the practice must be five physicians. Overall profits should furnishing of DHS for which payment distributed according to methods that be divided in a reasonable and verifiable otherwise may be made under Medicare. are determined before the receipt of manner that is not directly related to the A physician’s prohibited financial payment for the services giving rise to volume or value of the physician’s relationship with an entity that the overhead expense or producing the referrals of DHS. The share of overall furnishes DHS is not imputed to his or income. Nothing in this section prevents profits will be deemed not to relate her group practice or its members or its a group practice from adjusting its directly to the volume or value of staff. However, a referral made by a compensation methodology referrals if one of the following physician’s group practice, its members, prospectively, subject to restrictions on conditions is met: or its staff may be imputed to the the distribution of revenue from DHS (i) The group’s profits are divided per physician if the physician directs the under paragraph (i) of this section. capita (for example, per member of the group practice, its members, or its staff (f) Unified business. (1) The group group or per physician in the group). to make the referral or if the physician practice must be a unified business (ii) Revenues derived from DHS are controls referrals made by his or her having at least the following features: distributed based on the distribution of group practice, its members, or its staff. (i) Centralized decision-making by a the group practice’s revenues attributed (b) Limitations on billing. An entity body representative of the group to services that are not DHS payable by that furnishes DHS pursuant to a referral practice that maintains effective control any Federal health care program or that is prohibited by paragraph (a) of over the group’s assets and liabilities private payer. this section may not present or cause to (including, but not limited to, budgets, (iii) Revenues derived from DHS be presented a claim or bill to the compensation, and salaries); and constitute less than 5 percent of the Medicare program or to any individual, (ii) Consolidated billing, accounting, group practice’s total revenues, and the third party payer, or other entity for the and financial reporting. allocated portion of those revenues to DHS performed pursuant to the (2) Location and specialty-based each physician in the group practice prohibited referral. compensation practices are permitted constitutes 5 percent or less of his or her (c) Denial of payment for services with respect to revenues derived from total compensation from the group. furnished under a prohibited referral. services that are not DHS and may be (3) A productivity bonus must be (1) Except as provided in paragraph (e) permitted with respect to revenues calculated in a reasonable and verifiable of this section, no Medicare payment derived from DHS under paragraph (i) of manner that is not directly related to the may be made for a designated health this section. volume or value of the physician’s service that is furnished pursuant to a (g) Volume or value of referrals. No referrals of DHS. A productivity bonus prohibited referral. physician who is a member of the group will be deemed not to relate directly to (2) When payment for a designated practice directly or indirectly receives the volume or value of referrals of DHS health service is denied on the basis that compensation based on the volume or if one of the following conditions is met: the service was furnished pursuant to a value of his or her referrals, except as (i) The bonus is based on the prohibited referral, and such payment provided in paragraph (i) of this section. physician’s total patient encounters or denial is appealed— (h) Physician-patient encounters. relative value units (RVUs). (The (i) The ultimate burden of proof Members of the group must personally methodology for establishing RVUs is (burden of persuasion) at each level of conduct no less than 75 percent of the set forth in § 414.22 of this chapter.) appeal is on the entity submitting the physician-patient encounters of the (ii) The bonus is based on the claim for payment to establish that the group practice. allocation of the physician’s service was not furnished pursuant to a (i) Special rule for productivity compensation attributable to services prohibited referral (and not on CMS or bonuses and profit shares. (1) A that are not DHS payable by any Federal its contractors to establish that the physician in the group practice may be health care program or private payer. service was furnished pursuant to a paid a share of overall profits of the (iii) Revenues derived from DHS are prohibited referral); and group, provided that the share is not less than 5 percent of the group (ii) The burden of production on each determined in any manner that is practice’s total revenues, and the issue at each level of appeal is initially directly related to the volume or value allocated portion of those revenues to on the claimant, but may shift to CMS of referrals of DHS by the physician. A each physician in the group practice or its contractors during the course of physician in the group practice may be constitutes 5 percent or less of his or her the appellate proceeding, depending on paid a productivity bonus based on total compensation from the group the evidence presented by the claimant. services that he or she has personally practice. (d) Refunds. An entity that collects performed, or services ‘‘incident to’’ (4) Supporting documentation payment for a designated health service such personally performed services, or verifying the method used to calculate that was performed pursuant to a both, provided that the bonus is not the profit share or productivity bonus prohibited referral must refund all

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collected amounts on a timely basis, as reconciliation, the entire amount of entity to the physician (or a member of defined at § 1003.101 of this title. remuneration for items or services has his or her immediate family) through (e) Exception for certain entities. been paid as required under the terms the physician’s (or immediate family Payment may be made to an entity that and conditions of the arrangement; and member’s) employment with that entity; submits a claim for a designated health (2) Except for the discrepancies in (ii) Stock options and convertible service if— payments described in paragraph (h)(1) securities received as compensation (1) The entity did not have actual of this section, the compensation until the stock options are exercised or knowledge of, and did not act in arrangement fully complies with an the convertible securities are converted reckless disregard or deliberate applicable exception in this subpart. to equity (before this time the stock ignorance of, the identity of the options or convertible securities are physician who made the referral of the § 411.354 Financial relationship, compensation arrangements as defined designated health service to the entity; compensation, and ownership or investment interest. in paragraph (c) of this section); and (iii) An unsecured loan subordinated (2) The claim otherwise complies (a) Financial relationships—(1) to a credit facility (which is a with all applicable Federal and State Financial relationship means— compensation arrangement as defined in laws, rules, and regulations. (i) A direct or indirect ownership or paragraph (c) of this section); (f) Exception for certain arrangements investment interest (as defined in (iv) An ‘‘under arrangements’’ involving temporary noncompliance. (1) paragraph (b) of this section) in any contract between a hospital and an Except as provided in paragraphs (f)(2) entity that furnishes DHS; or entity owned by one or more physicians through (4) of this section, an entity may (ii) A direct or indirect compensation (or a group of physicians) providing submit a claim or bill and payment may arrangement (as defined in paragraph (c) DHS ‘‘under arrangements’’ with the be made to an entity that submits a of this section) with an entity that hospital (such a contract is a claim or bill for a designated health furnishes DHS. compensation arrangement as defined in service if— (2) Types of financial relationships. (i) paragraph (c) of this section); (i) The financial relationship between A direct financial relationship exists if (v) A security interest held by a the entity and the referring physician remuneration passes between the physician in equipment sold by the fully complied with an applicable referring physician (or a member of his physician to a hospital and financed exception under § 411.355, 411.356, or or her immediate family) and the entity through a loan from the physician to the 411.357 for at least 180 consecutive furnishing DHS without any intervening hospital (such an interest is a calendar days immediately preceding persons or entities between the entity compensation arrangement as defined in the date on which the financial furnishing DHS and the referring paragraph (c) of this section); relationship became noncompliant with physician (or a member of his or her (vi) A titular ownership or investment the exception; and immediate family). interest that excludes the ability or right (ii) The financial relationship has (ii) An indirect financial relationship to receive the financial benefits of fallen out of compliance with the exists under the conditions described in ownership or investment, including, but exception for reasons beyond the paragraphs (b)(5) and (c)(2) of this not limited to, the distribution of control of the entity, and the entity section. profits, dividends, proceeds of sale, or promptly takes steps to rectify the (b) Ownership or investment interest. similar returns on investment; or noncompliance. An ownership or investment interest in (vii) An interest in an entity that (2) Paragraph (f)(1) of this section the entity may be through equity, debt, arises from an employee stock applies only to DHS furnished during or other means, and includes an interest ownership plan (ESOP) that is qualified the period of time it takes the entity to in an entity that holds an ownership or under Internal Revenue Code section rectify the noncompliance, which must investment interest in any entity that 401(a). not exceed 90 consecutive calendar days furnishes DHS. (4) An ownership or investment following the date on which the (1) An ownership or investment interest that meets an exception set forth financial relationship became interest includes, but is not limited to, in § 411.355 or § 411.356 need not also noncompliant with an exception. stock, stock options other than those meet an exception for compensation (3) Paragraph (f)(1) may be used by an described in paragraph (b)(3)(ii) of this arrangements set forth in § 411.357 with entity only once every 3 years with section, partnership shares, limited respect to profit distributions, respect to the same referring physician. liability company memberships, as well dividends, or interest payments on (4) Paragraph (f)(1) does not apply if as loans, bonds, or other financial secured obligations. the exception with which the financial instruments that are secured with an (5)(i) An indirect ownership or relationship previously complied was entity’s property or revenue or a portion investment interest exists if— § 411.357(k) or (m). of that property or revenue. (A) Between the referring physician (g) [Reserved] (2) An ownership or investment (or immediate family member) and the (h) Special rule for reconciling interest in a subsidiary company is entity furnishing DHS there exists an compensation. An entity may submit a neither an ownership or investment unbroken chain of any number (but no claim or bill and payment may be made interest in the parent company, nor in fewer than one) of persons or entities to an entity that submits a claim or bill any other subsidiary of the parent, having ownership or investment for a designated health service if— unless the subsidiary company itself has interests; and (1) No later than 90 consecutive an ownership or investment interest in (B) The entity furnishing DHS has calendar days following the expiration the parent or such other subsidiaries. It actual knowledge of, or acts in reckless or termination of a compensation may, however, be part of an indirect disregard or deliberate ignorance of, the arrangement, the entity and the financial relationship. fact that the referring physician (or physician (or immediate family member (3) Ownership and investment immediate family member) has some of a physician) that are parties to the interests do not include, among other ownership or investment interest compensation arrangement reconcile all things— (through any number of intermediary discrepancies in payments under the (i) An interest in an entity that arises ownership or investment interests) in arrangement such that, following the from a retirement plan offered by that the entity furnishing the DHS.

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(ii) An indirect ownership or physician organization and have a direct whether the aggregate compensation investment interest exists even though compensation arrangement with an varies with the volume or value of the entity furnishing DHS does not entity furnishing DHS if the only referrals or other business generated by know, or acts in reckless disregard or intervening entity between the the referring physician for the entity deliberate ignorance of, the precise physician and the entity furnishing DHS furnishing the DHS will be measured by composition of the unbroken chain or is his or her physician organization. the nonownership or noninvestment the specific terms of the ownership or (2) An indirect compensation interest closest to the referring investment interests that form the links arrangement exists if all of the physician (or immediate family in the chain. conditions of paragraphs (c)(2)(i) member). (For example, if a referring (iii) Notwithstanding anything in this through (iii) of this section exist: physician has an ownership interest in paragraph (b)(5), common ownership or (i) Between the referring physician (or company A, which owns company B, investment in an entity does not, in and a member of his or her immediate which has a compensation arrangement of itself, establish an indirect ownership family) and the entity furnishing DHS with company C, which has a or investment interest by one common there exists an unbroken chain of any compensation arrangement with entity owner or investor in another common number (but not fewer than one) of D that furnishes DHS, we would look to owner or investor. persons or entities that have financial the aggregate compensation between (iv) An indirect ownership or relationships (as defined in paragraph company B and company C for purposes investment interest requires an (a) of this section) between them (that is, of this paragraph (c)(2)(ii)). unbroken chain of ownership interests each link in the chain has either an (iii) The entity furnishing DHS has between the referring physician and the ownership or investment interest or a actual knowledge of, or acts in reckless entity furnishing DHS such that the compensation arrangement with the disregard or deliberate ignorance of, the referring physician has an indirect preceding link). fact that the referring physician (or ownership or investment interest in the (ii)(A) The referring physician (or immediate family member) receives entity furnishing DHS. immediate family member) receives aggregate compensation that varies with (c) Compensation arrangement. A aggregate compensation from the person the volume or value of referrals or other compensation arrangement is any or entity in the chain with which the business generated by the referring arrangement involving remuneration, physician (or immediate family physician for the entity furnishing the direct or indirect, between a physician member) has a direct financial DHS. (or a member of a physician’s immediate relationship that varies with the volume (iv)(A) For purposes of paragraph family) and an entity. An ‘‘under or value of referrals or other business (c)(2)(i) of this section, except as arrangements’’ contract between a generated by the referring physician for provided in paragraph (c)(3)(ii)(C) of hospital and an entity providing DHS the entity furnishing the DHS and the this section, a physician is deemed to ‘‘under arrangements’’ to the hospital individual unit of compensation ‘‘stand in the shoes’’ of his or her creates a compensation arrangement for received by the physician (or immediate physician organization if the physician purposes of these regulations. A family member)— has an ownership or investment interest compensation arrangement does not (1) Is not fair market value for items in the physician organization. include the portion of any business or services actually provided; (B) For purposes of paragraph (c)(2)(i) arrangement that consists solely of the (2) Includes the physician’s referrals of this section, a physician (other than remuneration described in section to the entity furnishing DHS as a a physician described in paragraph 1877(h)(1)(C) of the Act and in variable, resulting in an increase or (c)(2)(iv)(A) of this section) is permitted paragraphs (1) through (3) of the decrease in the physician’s (or to ‘‘stand in the shoes’’ of his or her definition of the term ‘‘remuneration’’ at immediate family member’s) physician organization. § 411.351. (However, any other portion compensation that positively correlates (3)(i) For purposes of paragraphs of the arrangement may still constitute with the number or value of the (c)(1)(ii) and (c)(2)(iv) of this section, a a compensation arrangement.) physician’s referrals to the entity; or (1)(i) A direct compensation (3) Includes other business generated physician who ‘‘stands in the shoes’’ of arrangement exists if remuneration by the physician for the entity his or her physician organization is passes between the referring physician furnishing DHS as a variable, resulting deemed to have the same compensation (or a member of his or her immediate in an increase or decrease in the arrangements (with the same parties and family) and the entity furnishing DHS physician’s (or immediate family on the same terms) as the physician without any intervening persons or member’s) compensation that positively organization. When applying the entities. correlates with the physician’s exceptions in §§ 411.355 and 411.357 to (ii) Except as provided in paragraph generation of other business for the arrangements in which a physician (c)(3)(ii)(C) of this section, a physician entity. stands in the shoes of his or her is deemed to ‘‘stand in the shoes’’ of his (B) For purposes of applying physician organization, the ‘‘parties to or her physician organization and have paragraph (c)(2)(ii)(A) of this section, a the arrangements’’ are considered to a direct compensation arrangement with positive correlation between two be— an entity furnishing DHS if— variables exists when one variable (A) With respect to a signature (A) The only intervening entity decreases as the other variable requirement, the physician organization between the physician and the entity decreases, or one variable increases as and any physician who ‘‘stands in the furnishing DHS is his or her physician the other variable increases. shoes’’ of the physician organization as organization; and (C) If the financial relationship required under paragraph (c)(1)(ii) or (B) The physician has an ownership between the physician (or immediate (c)(2)(iv)(A) of this section; and or investment interest in the physician family member) and the person or entity (B) With respect to all other organization. in the chain with which the referring requirements of the exception, (iii) A physician (other than a physician (or immediate family including the relevant referrals and physician described in paragraph member) has a direct financial other business generated between the (c)(1)(ii)(B) of this section) is permitted relationship is an ownership or parties, the entity furnishing DHS and to ‘‘stand in the shoes’’ of his or her investment interest, the determination the physician organization (including

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all members, employees, and are applicable to the indirect Unit-based compensation (including independent contractor physicians). compensation arrangement if the entity time-based or per-unit of service-based (ii) The provisions of paragraphs furnishing DHS is a MCO or IPA. compensation) is deemed not to take (c)(1)(ii) and (c)(2)(iv)(A) of this (d) Special rules on compensation. into account other business generated section— The following special rules apply only between the parties or other business (A) Need not apply during the original to compensation under section 1877 of generated by the referring physician if term or current renewal term of an the Act and subpart J of this part: the compensation is fair market value arrangement that satisfied the (1) Set in advance. (i) Compensation for items and services actually provided requirements of § 411.357(p) as of is deemed to be ‘‘set in advance’’ if the and does not vary during the course of September 5, 2007 (see 42 CFR parts aggregate compensation, a time-based or the compensation arrangement in any 400–413, revised as of , 2007); per-unit of service-based (whether per- manner that takes into account referrals (B) Do not apply to an arrangement use or per-service) amount, or a specific or other business generated by the that satisfies the requirements of formula for calculating the referring physician, including private § 411.355(e); and compensation is set out in writing pay health care business (except for (C) Do not apply to a physician whose before the furnishing of the items, services personally performed by the ownership or investment interest is services, office space, or equipment for referring physician, which are not titular only. A titular ownership or which the compensation is to be paid. considered ‘‘other business generated’’ investment interest is an ownership or The formula for determining the by the referring physician). This investment interest that excludes the compensation must be set forth in paragraph (d)(3) does not apply for ability or right to receive the financial sufficient detail so that it can be purposes of paragraphs (d)(5)(ii) and benefits of ownership or investment, objectively verified. (d)(6)(ii) of this section. including, but not limited to, the (ii) Notwithstanding paragraph (4) Directed referral requirement. If a distribution of profits, dividends, (d)(1)(i) of this section, compensation physician’s compensation under a bona proceeds of sale, or similar returns on (or a formula for determining the fide employment relationship, personal investment. compensation) may be modified at any service arrangement, or managed care (iii) An arrangement structured to time during the course of a contract is conditioned on the comply with an exception in § 411.357 compensation arrangement and satisfy physician’s referrals to a particular (other than § 411.357(p)), but which the requirement that it is ‘‘set in provider, practitioner, or supplier, all of would otherwise qualify as an indirect advance’’ if all of the following the following conditions must be met. compensation arrangement under this conditions are met: (i) The compensation, or a formula for paragraph as of , 2008, need (A) All requirements of an applicable determining the compensation, is set in not be restructured to satisfy the exception in §§ 411.355 through 411.357 advance for the duration of the requirements of § 411.357(p) until the are met on the effective date of the arrangement. Any changes to the expiration of the original term or current modified compensation (or the formula compensation (or the formula for renewal term of the arrangement. for determining the modified determining the compensation) must be (4)(i) Exceptions applicable to indirect compensation). made prospectively. compensation arrangements—General. (B) The modified compensation (or (ii) The compensation is consistent Except as provided in this paragraph the formula for determining the with the fair market value of the (c)(4) of this section, only the exceptions modified compensation) is determined physician’s services. at §§ 411.355 and 411.357(p) are before the furnishing of the items, (iii) The compensation arrangement applicable to indirect compensation services, office space, or equipment for otherwise satisfies the requirements of arrangements. which the modified compensation is to an applicable exception at § 411.355 or (ii) Special rule for indirect be paid. § 411.357. compensation arrangements involving a (C) Before the furnishing of the items, (iv) The compensation arrangement MCO or IPA and a referring physician. services, office space, or equipment for complies with both of the following Only the exceptions at §§ 411.355, which the modified compensation is to conditions: 411.357(n), and 411.357(p) are be paid, the formula for the modified (A) The requirement to make referrals applicable in the case of an indirect compensation is set forth in writing in to a particular provider, practitioner, or compensation arrangement in which the sufficient detail so that it can be supplier is set out in writing and signed entity furnishing DHS described in objectively verified. Paragraph (e)(4) of by the parties. paragraph (c)(2)(i) of this section is a this section does not apply for purposes (B) The requirement to make referrals MCO or IPA. of this paragraph (d)(1)(ii)(C). to a particular provider, practitioner, or (iii) Special rule for indirect (2) Unit-based compensation and the supplier does not apply if the patient compensation arrangements involving volume or value standard. Unit-based expresses a preference for a different value-based arrangements. When an compensation (including time-based or provider, practitioner, or supplier; the unbroken chain described in paragraph per-unit of service-based compensation) patient’s insurer determines the (c)(2)(i) of this section includes a value- is deemed not to take into account the provider, practitioner, or supplier; or based arrangement (as defined at volume or value of referrals if the the referral is not in the patient’s best § 411.351) to which the physician (or compensation is fair market value for medical interests in the physician’s the physician organization in whose items or services actually provided and judgment. shoes the physician stands under this does not vary during the course of the (v) The required referrals relate solely paragraph) is a direct party— compensation arrangement in any to the physician’s services covered by (A) Only the exceptions at §§ 411.355, manner that takes into account referrals the scope of the employment, personal 411.357(p), and 411.357(aa) are of designated health services. This service arrangement, or managed care applicable to the indirect compensation paragraph (d)(2) does not apply for contract, and the referral requirement is arrangement if the entity furnishing purposes of paragraphs (d)(5)(i) and reasonably necessary to effectuate the DHS is not a MCO or IPA; and (6)(i) of this section. legitimate business purposes of the (B) Only the exceptions at §§ 411.355, (3) Unit-based compensation and the compensation arrangement. In no event 411.357(n), 411.357(p), and 411.357(aa) other business generated standard. may the physician be required to make

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referrals that relate to services that are physician) to an entity furnishing respect to the writing or signature not provided by the physician under the designated health services takes into requirement of the exception; and scope of his or her employment, account the volume or value of referrals (ii) The parties obtain the required personal service arrangement, or only if the formula used to calculate the writing(s) or signature(s) within 90 managed care contract. entity’s compensation includes the consecutive calendar days immediately (vi) Regardless of whether the physician’s referrals to the entity as a following the date on which the physician’s compensation takes into variable, resulting in an increase or compensation arrangement became account the volume or value of referrals decrease in the entity’s compensation noncompliant with the requirements of by the physician as set forth at that negatively correlates with the the applicable exception (that is, the paragraph (d)(5)(i) of this section, number or value of the physician’s date on which the writing(s) or neither the existence of the referrals to the entity. signature(s) were required under the compensation arrangement nor the (ii) Compensation from a physician applicable exception but the parties had amount of the compensation is (or immediate family member of the not yet obtained them). contingent on the number or value of physician) to an entity furnishing § 411.355 General exceptions to the the physician’s referrals to the particular designated health services takes into provider, practitioner, or supplier. The referral prohibition related to both account the volume or value of other ownership/investment and compensation. requirement to make referrals to a business generated only if the formula The prohibition on referrals set forth particular provider, practitioner, or used to calculate the entity’s in § 411.353 does not apply to the supplier may require that the physician compensation includes other business following types of services: refer an established percentage or ratio generated by the physician for the entity (a) Physician services. (1) Physician of the physician’s referrals to a as a variable, resulting in an increase or services as defined at § 410.20(a) of this particular provider, practitioner, or decrease in the entity’s compensation supplier. chapter that are furnished— that negatively correlates with the (i) Personally by another physician (5) Compensation to a physician. (i) physician’s generation of other business Compensation from an entity furnishing who is a member of the referring for the entity. physician’s group practice or is a designated health services to a (iii) For purposes of applying this physician (or immediate family member physician in the same group practice (as paragraph (d)(6), a negative correlation of the physician) takes into account the defined at § 411.351) as the referring between two variables exists when one volume or value of referrals only if the physician; or variable increases as the other variable formula used to calculate the (ii) Under the supervision of another decreases, or when one variable physician’s (or immediate family physician who is a member of the decreases as the other variable member’s) compensation includes the referring physician’s group practice or is increases. physician’s referrals to the entity as a a physician in the same group practice variable, resulting in an increase or (iv) This paragraph (d)(6) does not (as defined at § 411.351) as the referring decrease in the physician’s (or apply for purposes of applying the physician, provided that the supervision immediate family member’s) special rules in paragraphs (d)(2) and (3) complies with all other applicable compensation that positively correlates of this section or the exceptions at Medicare payment and coverage rules with the number or value of the § 411.357(m), (s), (u), (v), (w), and (bb). for the physician services. physician’s referrals to the entity. (e) Special rule on compensation (2) For purposes of this paragraph (a), (ii) Compensation from an entity arrangements—(1) Application. This ‘‘physician services’’ include only those furnishing designated health services to paragraph (e) applies only to ‘‘incident to’’ services (as defined at a physician (or immediate family compensation arrangements as defined § 411.351) that are physician services member of the physician) takes into in section 1877 of the Act and this under § 410.20(a) of this chapter. account the volume or value of other subpart. (b) In-office ancillary services. business generated only if the formula (2) Writing requirement. In the case of Services (including certain items of used to calculate the physician’s (or any requirement in this subpart for a durable medical equipment (DME), as immediate family member’s) compensation arrangement to be in defined in paragraph (b)(4) of this compensation includes other business writing, such requirement may be section, and infusion pumps that are generated by the physician for the entity satisfied by a collection of documents, DME (including external ambulatory as a variable, resulting in an increase or including contemporaneous documents infusion pumps), but excluding all other decrease in the physician’s (or evidencing the course of conduct DME and parenteral and enteral immediate family member’s) between the parties. nutrients, equipment, and supplies compensation that positively correlates (3) Signature requirement. In the case (such as infusion pumps used for PEN)), with the physician’s generation of other of any signature requirement in this that meet the following conditions: business for the entity. subpart, such requirement may be (1) Individual who furnishes the (iii) For purposes of applying this satisfied by an electronic or other service. They are furnished personally paragraph (d)(5), a positive correlation signature that is valid under applicable by one of the following individuals: between two variables exists when one Federal or State law. (i) The referring physician. variable decreases as the other variable (4) Special rule on writing and (ii) A physician who is a member of decreases, or one variable increases as signature requirements. In the case of the same group practice as the referring the other variable increases. any requirement in this subpart for a physician. (iv) This paragraph (d)(5) does not compensation arrangement to be in (iii) An individual who is supervised apply for purposes of applying the writing and signed by the parties, the by the referring physician or, if the special rules in paragraphs (d)(2) and (3) writing requirement or the signature referring physician is in a group of this section or the exceptions at requirement is satisfied if— practice, by another physician in the § 411.357(m), (s), (u), (v), (w), and (bb). (i) The compensation arrangement group practice, provided that the (6) Compensation from a physician. between the entity and the physician supervision complies with all other (i) Compensation from a physician (or fully complies with an applicable applicable Medicare payment and immediate family member of the exception in this subpart except with coverage rules for the services.

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(2) Location where service is hours per week. The 6 hours must furnishes outpatient diabetes self- furnished. They are furnished in one of include some physician services that are management training to the patient. the following locations: unrelated to the furnishing of DHS (ii) The item is furnished in a building (i) The same building (as defined at payable by Medicare, any other Federal that meets the ‘‘same building’’ § 411.351), but not necessarily in the health care payer, or a private payer, requirements in the in-office ancillary same space or part of the building, in even though the physician services may services exception as part of the which all of the conditions of paragraph lead to the ordering of DHS. treatment for the specific condition for (b)(2)(i)(A), (b)(2)(i)(B), or (b)(2)(i)(C) of (ii) A centralized building (as defined which the patient-physician encounter this section are satisfied: at § 411.351) that is used by the group occurred. (A)(1) The referring physician or his practice for the provision of some or all (iii) The item is furnished personally or her group practice (if any) has an of the group practice’s clinical by the physician who ordered the DME, office that is normally open to the laboratory services. by another physician in the group physician’s or group’s patients for (iii) A centralized building (as defined practice, or by an employee of the medical services at least 35 hours per at § 411.351) that is used by the group physician or the group practice. week; and practice for the provision of some or all (iv) A physician or group practice that (2) The referring physician or one or of the group practice’s DHS (other than furnishes the DME meets all DME more members of the referring clinical laboratory services). supplier standards set forth in physician’s group practice regularly (3) Billing of the service. They are § 424.57(c) of this chapter. practices medicine and furnishes billed by one of the following: (v) [Reserved] physician services to patients at least 30 (i) The physician performing or (vi) All other requirements of the in- hours per week. The 30 hours must supervising the service. office ancillary services exception in include some physician services that are (ii) The group practice of which the this paragraph (b) are met. unrelated to the furnishing of DHS performing or supervising physician is a (5) Furnishing a service. A designated payable by Medicare, any other Federal member under a billing number health service is ‘‘furnished’’ for health care payer, or a private payer, assigned to the group practice. purposes of this paragraph (b) in the even though the physician services may (iii) The group practice if the location where the service is actually lead to the ordering of DHS; or supervising physician is a ‘‘physician in performed upon a patient or where an (B)(1) The patient receiving the DHS the group practice’’ (as defined at item is dispensed to a patient in a usually receives physician services from § 411.351) under a billing number manner that is sufficient to meet the the referring physician or members of assigned to the group practice. applicable Medicare payment and the referring physician’s group practice (iv) An entity that is wholly owned by coverage rules. (if any); the performing or supervising physician (6) Special rule for home care (2) The referring physician or the or by that physician’s group practice physicians. In the case of a referring referring physician’s group practice under the entity’s own billing number physician whose principal medical owns or rents an office that is normally or under a billing number assigned to practice consists of treating patients in open to the physician’s or group’s the physician or group practice. their private homes, the ‘‘same patients for medical services at least 8 (v) An independent third party billing building’’ requirements of paragraph hours per week; and company acting as an agent of the (b)(2)(i) of this section are met if the (3) The referring physician regularly physician, group practice, or entity referring physician (or a qualified practices medicine and furnishes specified in paragraphs (b)(3)(i) through person accompanying the physician, physician services to patients at least 6 (iv) of this section under a billing such as a nurse or technician) provides hours per week. The 6 hours must number assigned to the physician, group the DHS contemporaneously with a include some physician services that are practice, or entity, provided that the physician service that is not a unrelated to the furnishing of DHS billing arrangement meets the designated health service provided by payable by Medicare, any other Federal requirements of § 424.80(b)(5) of this the referring physician to the patient in health care payer, or a private payer, chapter. For purposes of this paragraph the patient’s private home. For purposes even though the physician services may (b)(3), a group practice may have, and of paragraph (b)(5) of this section only, lead to the ordering of DHS; or bill under, more than one Medicare a private home does not include a (C)(1) The referring physician is billing number, subject to any nursing, long-term care, or other facility present and orders the DHS during a applicable Medicare program or institution, except that a patient may patient visit on the premises as set forth restrictions. have a private home in an assisted in paragraph (b)(2)(i)(C)(2) of this (4) Durable Medical Equipment. For living or independent living facility. section or the referring physician or a purposes of this paragraph (b), DME (7) Disclosure requirement for certain member of the referring physician’s covered by the in-office ancillary imaging services. (i) With respect to group practice (if any) is present while services exception means canes, magnetic resonance imaging, computed the DHS is furnished during occupancy crutches, walkers and folding manual tomography, and positron emission of the premises as set forth in paragraph wheelchairs, and blood glucose tomography services identified as (b)(2)(i)(C)(2) of this section; monitors, that meet the following ‘‘radiology and certain other imaging (2) The referring physician or the conditions: services’’ on the List of CPT/HCPCS referring physician’s group practice (i) The item is one that a patient Codes, the referring physician must owns or rents an office that is normally requires for the purpose of ambulating, provide written notice to the patient at open to the physician’s or group’s a patient uses in order to depart from the time of the referral that the patient patients for medical services at least 8 the physician’s office, or is a blood may receive the same services from a hours per week; and glucose monitor (including one starter person other than one described in (3) The referring physician or one or set of test strips and lancets, consisting paragraph (b)(1) of this section. Except more members of the referring of no more than 100 of each). A blood as set forth in paragraph (b)(7)(ii) of this physician’s group practice regularly glucose monitor may be furnished only section, the written notice must include practices medicine and furnishes by a physician or employee of a a list of at least 5 other suppliers (as physician services to patients at least 6 physician or group practice that also defined at § 400.202 of this chapter) that

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provide the services for which the (8) A health insuring organization (B) In the aggregate, the compensation individual is being referred and which (HIO) contracting with a State under paid by all academic medical center are located within a 25-mile radius of part 438, subpart D of this chapter. components to the referring physician the referring physician’s office location (9) An entity operating under a does not exceed fair market value for the at the time of the referral. The notice demonstration project under sections services provided. should be written in a manner sufficient 1115(a), 1915(a), 1915(b), or 1932(a) of (C) The total compensation paid by to be reasonably understood by all the Act. each academic medical center patients and should include for each (d) [Reserved] component is not determined in any supplier on the list, at a minimum, the (e) Academic medical centers. (1) manner that takes into account the supplier’s name, address, and telephone Services provided by an academic volume or value of referrals or other number. medical center if all of the following business generated by the referring (ii) If there are fewer than 5 other conditions are met: physician within the academic medical suppliers located within a 25-mile (i) The referring physician— center. radius of the physician’s office location (A) Is a bona fide employee of a (D) If any compensation paid to the at the time of the referral, the physician component of the academic medical referring physician is conditioned on must list all of the other suppliers of the center on a full-time or substantial part- the physician’s referrals to a particular imaging service that are present within time basis. (A ‘‘component’’ of an provider, practitioner, or supplier, the a 25-mile radius of the referring academic medical center means an arrangement satisfies the conditions of physician’s office location. Provision of affiliated medical school, faculty § 411.354(d)(4). the written list of alternate suppliers practice plan, hospital, teaching facility, (iii) The academic medical center will not be required if no other institution of higher education, must meet all of the following suppliers provide the services for which departmental professional corporation, conditions: the individual is being referred within or nonprofit support organization whose (A) All transfers of money between the 25-mile radius. primary purpose is supporting the components of the academic medical teaching mission of the academic (c) Services furnished by an center must directly or indirectly medical center.) The components need organization (or its contractors or support the missions of teaching, not be separate legal entities; subcontractors) to enrollees. Services indigent care, research, or community (B) Is licensed to practice medicine in furnished by an organization (or its service. the State(s) in which he or she practices (B) The relationship of the contractors or subcontractors) to medicine; components of the academic medical enrollees of one of the following prepaid (C) Has a bona fide faculty center must be set forth in one or more health plans (not including services appointment at the affiliated medical written agreements or other written provided to enrollees in any other plan school or at one or more of the documents that have been adopted by or line of business offered or educational programs at the accredited the governing body of each component. administered by the same organization): academic hospital (as defined at If the academic medical center is one (1) An HMO or a CMP in accordance § 411.355(e)(3)); and legal entity, this requirement will be with a contract with CMS under section (D) Provides either substantial satisfied if transfers of funds between 1876 of the Act and part 417, subparts academic services or substantial clinical components of the academic medical J through M of this chapter. teaching services (or a combination of center are reflected in the routine (2) A health care prepayment plan in academic services and clinical teaching financial reports covering the accordance with an agreement with services) for which the faculty member components. CMS under section 1833(a)(1)(A) of the receives compensation as part of his or (C) All money paid to a referring Act and part 417, subpart U of this her employment relationship with the physician for research must be used chapter. academic medical center. Parties should solely to support bona fide research or (3) An organization that is receiving use a reasonable and consistent method teaching and must be consistent with payments on a prepaid basis for for calculating a physician’s academic the terms and conditions of the grant. Medicare enrollees through a services and clinical teaching services. (2) The ‘‘academic medical center’’ for demonstration project under section A physician will be deemed to meet this purposes of this section consists of— 402(a) of the Social Security requirement if he or she spends at least (i) An accredited medical school Amendments of 1967 (42 U.S.C. 1395b– 20 percent of his or her professional (including a university, when 1) or under section 222(a) of the Social time or 8 hours per week providing appropriate) or an accredited academic Security Amendments of 1972 (42 academic services or clinical teaching hospital (as defined at paragraph (e)(3) U.S.C. 1395b–1 note). services (or a combination of academic of this section); (4) A qualified HMO (within the services or clinical teaching services). A (ii) One or more faculty practice plans meaning of section 1310(d) of the Public physician who does not spend at least affiliated with the medical school, the Health Service Act). 20 percent of his or her professional affiliated hospital(s), or the accredited (5) A coordinated care plan (within time or 8 hours per week providing academic hospital; and the meaning of section 1851(a)(2)(A) of academic services or clinical teaching (iii) One or more affiliated hospitals the Act) offered by a Medicare services (or a combination of academic in which a majority of the physicians on Advantage organization in accordance services or clinical teaching services) is the medical staff consists of physicians with a contract with CMS under section not precluded from qualifying under who are faculty members and a majority 1857 of the Act and part 422 of this this paragraph (e)(1)(i)(D). of all hospital admissions is made by chapter. (ii) The compensation paid to the physicians who are faculty members. (6) A MCO contracting with a State referring physician must meet all of the The hospital for purposes of this under section 1903(m) of the Act. following conditions: paragraph (e)(2)(iii) may be the same (7) A prepaid inpatient health plan (A) The total compensation paid by hospital that satisfies the requirement of (PIHP) or prepaid ambulance health each academic medical center paragraph (e)(2)(i) of this section. For plan (PAHP) contracting with a State component to the referring physician is purposes of this paragraph (e)(2)(iii), a under part 438 of this chapter. set in advance. faculty member is a physician who is

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either on the faculty of the affiliated the ESRD facility or, in the case of EPO to furnish the DHS. However, neither medical school or on the faculty of one or Aranesp (or equivalent drug the referring physician nor the or more of the educational programs at identified on the List of CPT/HCPCS immediate family member has any the accredited academic hospital. In Codes) only, are dispensed by the ESRD obligation to inquire as to the meeting this paragraph (e)(2)(iii), faculty facility for use at home. availability of persons or entities located from any affiliated medical school or (2) [Reserved] farther than 25 miles of or 45 minutes accredited academic hospital education (3) [Reserved] transportation time from (whichever test program may be aggregated, and (4) The exception set forth in this the referring physician utilized for residents and non-physician paragraph (g) does not apply to any purposes of paragraph (j)(1)(ii)) the professionals need not be counted. Any financial relationship between the patient’s residence. faculty member may be counted, referring physician and any entity other including courtesy and volunteer than the ESRD facility that furnishes the § 411.356 Exceptions to the referral faculty. For purposes of determining EPO and other dialysis-related drugs to prohibition related to ownership or investment interests. whether the majority of physicians on the patient. the medical staff consists of faculty (h) Preventive screening tests, For purposes of § 411.353, the members, the affiliated hospital must immunizations, and vaccines. following ownership or investment include or exclude all individual Preventive screening tests, interests do not constitute a financial physicians with the same class of immunizations, and vaccines that meet relationship: privileges at the affiliated hospital (for the following conditions: (a) Publicly traded securities. example, physicians holding courtesy (1) The preventive screening tests, Ownership of investment securities privileges). immunizations, and vaccines are subject (including shares or bonds, debentures, (3) An accredited academic hospital to CMS-mandated frequency limits. notes, or other debt instruments) that at for purposes of this section means a (2) [Reserved] the time the DHS referral was made hospital or a health system that (3) [Reserved] could be purchased on the open market sponsors four or more approved medical (4) The preventive screening tests, and that meet the requirements of education programs. immunizations, and vaccines must be paragraphs (a)(1) and (2) of this section. (f) Implants furnished by an ASC. covered by Medicare and must be listed (1) They are either— Implants furnished by an ASC, as eligible for this exception on the List (i) Listed for trading on the New York including, but not limited to, cochlear of CPT/HCPCS Codes. Stock Exchange, the American Stock implants, intraocular lenses, and other (i) Eyeglasses and contact lenses Exchange, or any regional exchange in implanted prosthetics, implanted following cataract surgery. Eyeglasses which quotations are published on a prosthetic devices, and implanted DME and contact lenses that are covered by daily basis, or foreign securities listed that meet the following conditions: Medicare when furnished to patients on a recognized foreign, national, or (1) The implant is implanted by the following cataract surgery that meet the regional exchange in which quotations referring physician or a member of the following conditions: are published on a daily basis; referring physician’s group practice in (1) The eyeglasses or contact lenses (ii) Traded under an automated an ASC that is certified by Medicare are provided in accordance with the interdealer quotation system operated under part 416 of this chapter and with coverage and payment provisions set by the National Association of which the referring physician has a forth in §§ 410.36(a)(2)(ii) and 414.228 Securities Dealers; or financial relationship. of this chapter, respectively. (iii) Listed for trading on an electronic (2) The implant is implanted in the (2) [Reserved] stock market or over-the-counter patient during a surgical procedure paid (j) Intra-family rural referrals. (1) quotation system in which quotations by Medicare to the ASC as an ASC Services provided pursuant to a referral are published on a daily basis and procedure under § 416.65 of this from a referring physician to his or her trades are standardized and publicly chapter. immediate family member or to an transparent. (3) [Reserved] entity furnishing DHS with which the (2) They are in a corporation that had (4) [Reserved] immediate family member has a stockholder equity exceeding $75 (5) The exception set forth in this financial relationship, if all of the million at the end of the corporation’s paragraph (f) does not apply to any following conditions are met: most recent fiscal year or on average financial relationships between the (i) The patient who is referred resides during the previous 3 fiscal years. referring physician and any entity other in a rural area as defined at § 411.351 of ‘‘Stockholder equity’’ is the difference than the ASC in which the implant is this subpart; in value between a corporation’s total furnished to, and implanted in, the (ii) Except as provided in paragraph assets and total liabilities. patient. (j)(1)(iii) of this section, in light of the (b) Mutual funds. Ownership of (g) EPO and other dialysis-related patient’s condition, no other person or shares in a regulated investment drugs. EPO and other dialysis-related entity is available to furnish the services company as defined in section 851(a) of drugs that meet the following in a timely manner within 25 miles of the Internal Revenue Code of 1986, if conditions: or 45 minutes transportation time from the company had, at the end of its most (1) The EPO and other dialysis-related the patient’s residence; recent fiscal year, or on average during drugs are furnished in or by an ESRD (iii) In the case of services furnished the previous 3 fiscal years, total assets facility. For purposes of this paragraph to patients where they reside (for exceeding $75 million. (g)(1), ‘‘EPO and other dialysis-related example, home health services or DME), (c) Specific providers. Ownership or drugs’’ means certain outpatient no other person or entity is available to investment interest in the following prescription drugs that are required for furnish the services in a timely manner entities, for purposes of the services the efficacy of dialysis and identified as in light of the patient’s condition; and specified: eligible for this exception on the List of (2) The referring physician or the (1) A rural provider, in the case of CPT/HCPCS Codes; and ‘‘furnished’’ immediate family member must make DHS furnished in a rural area (as means that the EPO or dialysis-related reasonable inquiries as to the defined at § 411.351 of this part) by the drugs are administered to a patient in availability of other persons or entities provider. A ‘‘rural provider’’ is an entity

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that furnishes substantially all (not less (other than common areas) occupied by person or entity related to the lessor). than 75 percent) of the DHS that it all persons using the common areas. For For purposes of this paragraph (b), furnishes to residents of a rural area purposes of this paragraph (a), exclusive exclusive use means that the lessee (and and, for the 18-month period beginning use means that the lessee (and any other any other lessees of the same on December 8, 2003 (or such other lessees of the same office space) uses the equipment) uses the equipment to the period as Congress may specify), is not office space to the exclusion of the exclusion of the lessor (or any person or a specialty hospital, and in the case lessor (or any person or entity related to entity related to the lessor). The lessor where the entity is a hospital, the the lessor). The lessor (or any person or (or any person or entity related to the hospital meets the requirements of entity related to the lessor) may not be lessor) may not be an invitee of the § 411.362 no later than , an invitee of the lessee to use the office lessee to use the equipment. 2011. space. (3) The duration of the lease (2) A hospital that is located in Puerto (4) The rental charges over the term of arrangement is at least 1 year. To meet Rico, in the case of DHS furnished by the lease arrangement are set in advance this requirement, if the lease such a hospital. and are consistent with fair market arrangement is terminated with or (3) A hospital that is located outside value. without cause, the parties may not enter of Puerto Rico, in the case of DHS (5) The rental charges over the term of into a new lease arrangement for the furnished by such a hospital, if— the lease arrangement are not same equipment during the first year of (i) The referring physician is determined— the original lease arrangement. authorized to perform services at the (i) In any manner that takes into (4) The rental charges over the term of hospital; account the volume or value of referrals the lease arrangement are set in (ii) Effective for the 18-month period or other business generated between the advance, are consistent with fair market beginning on December 8, 2003 (or such parties; or value, and are not determined— other period as Congress may specify), (ii) Using a formula based on— (i) In any manner that takes into the hospital is not a specialty hospital; (A) A percentage of the revenue account the volume or value of referrals (iii) The ownership or investment raised, earned, billed, collected, or or other business generated between the interest is in the entire hospital and not otherwise attributable to the services parties; or merely in a distinct part or department performed or business generated in the (ii) Using a formula based on— of the hospital; and office space; or (A) A percentage of the revenue (iv) The hospital meets the (B) Per-unit of service rental charges, raised, earned, billed, collected, or requirements described in § 411.362 not to the extent that such charges reflect otherwise attributable to the services later than September 23, 2011. services provided to patients referred by performed on or business generated the lessor to the lessee. through the use of the equipment; or § 411.357 Exceptions to the referral (6) The lease arrangement would be (B) Per-unit of service rental charges, prohibition related to compensation commercially reasonable even if no to the extent that such charges reflect arrangements. referrals were made between the lessee services provided to patients referred by For purposes of § 411.353, the and the lessor. the lessor to the lessee. following compensation arrangements (7) If the lease arrangement expires (5) The lease arrangement would be do not constitute a financial after a term of at least 1 year, a holdover commercially reasonable even if no relationship: lease arrangement immediately referrals were made between the parties. (a) Rental of office space. Payments following the expiration of the lease (6) If the lease arrangement expires for the use of office space made by a arrangement satisfies the requirements after a term of at least 1 year, a holdover lessee to a lessor if the arrangement of paragraph (a) of this section if the lease arrangement immediately meets the following requirements: following conditions are met: following the expiration of the lease (1) The lease arrangement is set out in (i) The lease arrangement met the arrangement satisfies the requirements writing, is signed by the parties, and conditions of paragraphs (a)(1) through of this paragraph (b) if the following specifies the premises it covers. (6) of this section when the arrangement conditions are met: (2) The duration of the lease expired; (i) The lease arrangement met the arrangement is at least 1 year. To meet (ii) The holdover lease arrangement is conditions of paragraphs (b)(1) through this requirement, if the lease on the same terms and conditions as the (5) of this section when the arrangement arrangement is terminated with or immediately preceding arrangement; expired; without cause, the parties may not enter and (ii) The holdover lease arrangement is into a new lease arrangement for the (iii) The holdover lease arrangement on the same terms and conditions as the same space during the first year of the continues to satisfy the conditions of immediately preceding lease original lease arrangement. paragraphs (a)(1) through (6) of this arrangement; and (3) The space rented or leased does section. (iii) The holdover lease arrangement not exceed that which is reasonable and (b) Rental of equipment. Payments continues to satisfy the conditions of necessary for the legitimate business made by a lessee to a lessor for the use paragraphs (b)(1) through (5) of this purposes of the lease arrangement and of equipment under the following section. is used exclusively by the lessee when conditions: (c) Bona fide employment being used by the lessee (and is not (1) The lease arrangement is set out in relationships. Any amount paid by an shared with or used by the lessor or any writing, is signed by the parties, and employer to a physician (or immediate person or entity related to the lessor), specifies the equipment it covers. family member) who has a bona fide except that the lessee may make (2) The equipment leased does not employment relationship with the payments for the use of space consisting exceed that which is reasonable and employer for the provision of services if of common areas if the payments do not necessary for the legitimate business the following conditions are met: exceed the lessee’s pro rata share of purposes of the lease arrangement and (1) The employment is for identifiable expenses for the space based upon the is used exclusively by the lessee when services. ratio of the space used exclusively by being used by the lessee (and is not (2) The amount of the remuneration the lessee to the total amount of space shared with or used by the lessor or any under the employment is—

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(i) Consistent with the fair market (iv) The duration of each arrangement (including any downstream contractor value of the services; and is at least 1 year. To meet this plans), in order to permit the Secretary (ii) Except as provided in paragraph requirement, if an arrangement is to determine whether the plan is in (c)(4) of this section, is not determined terminated with or without cause, the compliance with paragraph (d)(2) of this in any manner that takes into account parties may not enter into the same or section. the volume or value of referrals by the substantially the same arrangement (iii) In the case of a plan that places referring physician. during the first year of the original a physician or a physician group at (3) The remuneration is provided arrangement. substantial financial risk as defined at under an arrangement that would be (v) The compensation to be paid over § 422.208, the entity or any downstream commercially reasonable even if no the term of each arrangement is set in contractor (or both) complies with the referrals were made to the employer. advance, does not exceed fair market requirements concerning physician (4) Paragraph (c)(2)(ii) of this section value, and, except in the case of a incentive plans set forth in §§ 422.208 does not prohibit payment of physician incentive plan (as defined at and 422.210 of this chapter. remuneration in the form of a § 411.351), is not determined in any (iv) If remuneration to the physician productivity bonus based on services manner that takes into account the is conditioned on the physician’s performed personally by the physician volume or value of referrals or other referrals to a particular provider, (or immediate family member of the business generated between the parties. practitioner, or supplier, the physician). (vi) The services to be furnished arrangement satisfies the conditions of (5) If remuneration to the physician is under each arrangement do not involve § 411.354(d)(4). (e) Physician recruitment. (1) conditioned on the physician’s referrals the counseling or promotion of a Remuneration provided by a hospital to to a particular provider, practitioner, or business arrangement or other activity recruit a physician that is paid directly supplier, the arrangement satisfies the that violates any Federal or State law. to the physician and that is intended to conditions of § 411.354(d)(4). (vii) If the arrangement expires after a induce the physician to relocate his or (d) Personal service arrangements— term of at least 1 year, a holdover her medical practice to the geographic (1) General. Remuneration from an arrangement immediately following the area served by the hospital in order to entity under an arrangement or multiple expiration of the arrangement satisfies become a member of the hospital’s arrangements to a physician or his or the requirements of paragraph (d) of this medical staff, if all of the following her immediate family member, or to a section if the following conditions are conditions are met: group practice, including remuneration met: (A) The arrangement met the (i) The arrangement is set out in for specific physician services furnished conditions of paragraphs (d)(1)(i) writing and signed by both parties; to a nonprofit blood center, if the through (vi) of this section when the (ii) The arrangement is not following conditions are met: arrangement expired; conditioned on the physician’s referral (i) Each arrangement is set out in (B) The holdover arrangement is on of patients to the hospital; writing, is signed by the parties, and the same terms and conditions as the (iii) The amount of remuneration specifies the services covered by the immediately preceding arrangement; under the arrangement is not arrangement. and determined in any manner that takes (ii) Except for services provided under (C) The holdover arrangement into account the volume or value of an arrangement that satisfies all of the continues to satisfy the conditions of actual or anticipated referrals by the conditions of paragraph (z) of this paragraphs (d)(1)(i) through (vi) of this physician or other business generated section, the arrangement(s) covers all of section. between the parties; and the services to be furnished by the (viii) If remuneration to the physician (iv) The physician is allowed to physician (or an immediate family is conditioned on the physician’s establish staff privileges at any other member of the physician) to the entity. referrals to a particular provider, hospital(s) and to refer business to any This requirement is met if all separate practitioner, or supplier, the other entities (except as referrals may be arrangements between the entity and the arrangement satisfies the conditions of restricted under an employment or physician and the entity and any family § 411.354(d)(4). services arrangement that complies with members incorporate each other by (2) Physician incentive plan § 411.354(d)(4)). reference or if they cross-reference a exception. In the case of a physician (2)(i) Geographic area served by the master list of contracts that is incentive plan (as defined at § 411.351) hospital—defined. The ‘‘geographic area maintained and updated centrally and is between a physician and an entity (or served by the hospital’’ is the area available for review by the Secretary downstream contractor), the composed of the lowest number of upon request. The master list must be compensation may be determined in contiguous zip codes from which the maintained in a manner that preserves any manner (through a withhold, hospital draws at least 75 percent of its the historical record of contracts. A capitation, bonus, or otherwise) that inpatients. The geographic area served physician or family member may takes into account the volume or value by the hospital may include one or more ‘‘furnish’’ services through employees of referrals or other business generated zip codes from which the hospital whom they have hired for the purpose between the parties, if the plan meets draws no inpatients, provided that such of performing the services; through a the following requirements: zip codes are entirely surrounded by zip wholly-owned entity; or through locum (i) No specific payment is made codes in the geographic area described tenens physicians (as defined at directly or indirectly under the plan to above from which the hospital draws at § 411.351, except that the regular a physician or a physician group as an least 75 percent of its inpatients. physician need not be a member of a inducement to reduce or limit medically (ii) Noncontiguous zip codes. With group practice). necessary services furnished with respect to a hospital that draws fewer (iii) The aggregate services covered by respect to a specific individual enrolled than 75 percent of its inpatients from all the arrangement do not exceed those with the entity. of the contiguous zip codes from which that are reasonable and necessary for the (ii) Upon request of the Secretary, the it draws inpatients, the ‘‘geographic area legitimate business purposes of the entity provides the Secretary with served by the hospital’’ will be deemed arrangement(s). access to information regarding the plan to be the area composed of all of the

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contiguous zip codes from which the in addition to such full-time maintained for a period of at least 6 hospital draws its inpatients. employment): years and made available to the (iii) Special optional rule for rural (A) A Federal or State bureau of Secretary upon request. hospitals. In the case of a hospital prisons (or similar entity operating one (v) The remuneration from the located in a rural area (as defined at or more correctional facilities) to serve hospital under the arrangement is not § 411.351), the ‘‘geographic area served a prison population; determined in any manner that takes by the hospital’’ may also be the area (B) The Department of Defense or into account the volume or value of composed of the lowest number of Department of Veterans Affairs to serve actual or anticipated referrals by the contiguous zip codes from which the active or veteran military personnel and recruited physician or the physician hospital draws at least 90 percent of its their families; or practice (or any physician affiliated inpatients. If the hospital draws fewer (C) A facility of the Indian Health with the physician practice) receiving than 90 percent of its inpatients from all Service to serve patients who receive the direct payments from the hospital. of the contiguous zip codes from which medical care exclusively through the (vi) The physician practice may not it draws inpatients, the ‘‘geographic area Indian Health Service; or impose on the recruited physician served by the hospital’’ may include (iii) The Secretary has deemed in an practice restrictions that unreasonably noncontiguous zip codes, beginning advisory opinion issued under section restrict the recruited physician’s ability with the noncontiguous zip code in 1877(g) of the Act that the physician to practice medicine in the geographic which the highest percentage of the does not have an established medical area served by the hospital. hospital’s inpatients resides, and practice that serves or could serve a (5) Recruitment of a physician by a continuing to add noncontiguous zip significant number of patients who are hospital located in a rural area (as codes in decreasing order of percentage or could become patients of the defined at § 411.351) to an area outside of inpatients. recruiting hospital. the geographic area served by the (4) In the case of remuneration (iv) Relocation of medical practice. A hospital is permitted under this provided by a hospital to a physician physician will be considered to have exception if the Secretary determines in relocated his or her medical practice if either indirectly through payments an advisory opinion issued under the medical practice was located outside made to another physician practice, or section 1877(g) of the Act that the area the geographic area served by the directly to a physician who joins a has a demonstrated need for the hospital and— physician practice, the following recruited physician and all other (A) The physician moves his or her additional conditions must be met: requirements of this paragraph (e) are medical practice at least 25 miles and (i) The writing in paragraph (e)(1) of met. into the geographic area served by the this section is also signed by the hospital; or physician practice if the remuneration is (6)(i) This paragraph (e) applies to (B) The physician moves his medical provided indirectly to the physician remuneration provided by a federally practice into the geographic area served through payments made to the qualified health center or a rural health by the hospital, and the physician’s new physician practice and the physician clinic in the same manner as it applies medical practice derives at least 75 practice does not pass directly through to remuneration provided by a hospital. percent of its revenues from to the physician all of the remuneration (ii) The ‘‘geographic area served’’ by professional services furnished to from the hospital. a federally qualified health center or a patients (including hospital inpatients) (ii) Except for actual costs incurred by rural health clinic is the area composed not seen or treated by the physician at the physician practice in recruiting the of the lowest number of contiguous or his or her prior medical practice site new physician, the remuneration is noncontiguous zip codes from which during the preceding 3 years, measured passed directly through to or remains the federally qualified health center or on an annual basis (fiscal or calendar with the recruited physician. rural health clinic draws at least 90 year). For the initial ‘‘start up’’ year of (iii) In the case of an income percent of its patients, as determined on the recruited physician’s practice, the guarantee of any type made by the an encounter basis. The geographic area 75 percent test in the preceding hospital to a recruited physician who served by the federally qualified health sentence will be satisfied if there is a joins a physician practice, the costs center or rural health clinic may include reasonable expectation that the allocated by the physician practice to one or more zip codes from which the recruited physician’s medical practice the recruited physician do not exceed federally qualified health center or rural for the year will derive at least 75 the actual additional incremental costs health clinic draws no patients, percent of its revenues from attributable to the recruited physician. provided that such zip codes are professional services furnished to With respect to a physician recruited to entirely surrounded by zip codes in the patients not seen or treated by the join a physician practice located in a geographic area described above from physician at his or her prior medical rural area or HPSA, if the physician is which the federally qualified health practice site during the preceding 3 recruited to replace a physician who, center or rural health clinic draws at years. within the previous 12-month period, least 90 percent of its patients. (3) The recruited physician will not retired, relocated outside of the (f) Isolated transactions. Isolated be subject to the relocation requirement geographic area served by the hospital, financial transactions, such as a one- of this paragraph (e), provided that he or died, the costs allocated by the time sale of property or a practice, or a or she establishes his or her medical physician practice to the recruited single instance of forgiveness of an practice in the geographic area served physician do not exceed either— amount owed in settlement of a bona by the recruiting hospital, if— (A) The actual additional incremental fide dispute, if all of the following (i) He or she is a resident or physician costs attributable to the recruited conditions are met: who has been in practice 1 year or less; physician; or (1) The amount of remuneration (ii) He or she was employed on a full- (B) The lower of a per capita under the isolated financial transaction time basis for at least 2 years allocation or 20 percent of the practice’s is— immediately prior to the recruitment aggregate costs. (i) Consistent with the fair market arrangement by one of the following (iv) Records of the actual costs and value of the isolated financial (and did not maintain a private practice the passed-through amounts are transaction; and

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(ii) Not determined in any manner percent of these services furnished to (i) The compensation is not that takes into account the volume or patients of the hospital are furnished by determined in any manner that takes value of referrals by the referring the group under the arrangement. into account the volume or value of physician or other business generated (4) The arrangement is in accordance referrals or other business generated by between the parties. with a written agreement that specifies the referring physician. (2) The remuneration is provided the services to be furnished by the (ii) The compensation may not be under an arrangement that would be parties and the compensation for solicited by the physician or the commercially reasonable even if the services furnished under the agreement. physician’s practice (including physician made no referrals to the (5) The compensation paid over the employees and staff members). entity. term of the agreement is consistent with (2) The annual aggregate nonmonetary (3) There are no additional fair market value, and the compensation compensation limit in this paragraph (k) transactions between the parties for 6 per unit of service is fixed in advance is adjusted each calendar year to the months after the isolated transaction, and is not determined in any manner nearest whole dollar by the increase in except for transactions that are that takes into account the volume or the Consumer Price Index—Urban All specifically excepted under the other value of referrals or other business Items (CPI–U) for the 12-month period provisions in §§ 411.355 through generated between the parties. ending the preceding September 30. 411.357 and except for commercially (6) The compensation is provided in CMS displays after September 30 each reasonable post-closing adjustments that accordance with an agreement that year both the increase in the CPI–U for do not take into account the volume or would be commercially reasonable even the 12-month period and the new value of referrals or other business if no referrals were made to the entity. nonmonetary compensation limit on the generated by the referring physician. (7) If remuneration to the physician is physician self-referral website at http:// (4) An isolated financial transaction www.cms.hhs.gov/ conditioned on the physician’s referrals _ _ that is an instance of forgiveness of an to a particular provider, practitioner, or PhysicianSelfReferral/10 CPI-U amount owed in settlement of a bona supplier, the arrangement satisfies the Updates.asp. (3) Where an entity has inadvertently fide dispute is not part of the conditions of § 411.354(d)(4). provided nonmonetary compensation to compensation arrangement giving rise to (i) Payments by a physician. Payments a physician in excess of the limit (as set the bona fide dispute. made by a physician (or his or her forth in paragraph (k)(1) of this section), (g) Certain arrangements with immediate family member)— such compensation is deemed to be hospitals. Remuneration provided by a (1) To a laboratory in exchange for the within the limit if— hospital to a physician if the provision of clinical laboratory services; remuneration does not relate, directly or (i) The value of the excess or nonmonetary compensation is no more indirectly, to the furnishing of DHS. To (2) To an entity as compensation for qualify as ‘‘unrelated,’’ remuneration than 50 percent of the limit; and any other items or services— (ii) The physician returns to the entity must be wholly unrelated to the (i) That are furnished at a price that furnishing of DHS and must not in any the excess nonmonetary compensation is consistent with fair market value; and (or an amount equal to the value of the way take into account the volume or (ii) To which the exceptions in value of a physician’s referrals. excess nonmonetary compensation) by paragraphs (a) through (h) of this section the end of the calendar year in which Remuneration relates to the furnishing are not applicable. of DHS if it— the excess nonmonetary compensation (3) For purposes of this paragraph (i), (1) Is an item, service, or cost that was received or within 180 consecutive ‘‘services’’ means services of any kind could be allocated in whole or in part calendar days following the date the (not merely those defined as ‘‘services’’ to Medicare or Medicaid under cost excess nonmonetary compensation was for purposes of the Medicare program in reporting principles; received by the physician, whichever is (2) Is furnished, directly or indirectly, § 400.202 of this chapter). earlier. explicitly or implicitly, in a selective, (j) Charitable donations by a (iii) This paragraph (k)(3) may be used targeted, preferential, or conditioned physician. Bona fide charitable by an entity only once every 3 years manner to medical staff or other persons donations made by a physician (or with respect to the same referring in a position to make or influence immediate family member) to an entity physician. referrals; or if all of the following conditions are (4) In addition to nonmonetary (3) Otherwise takes into account the satisfied: compensation up to the limit described volume or value of referrals or other (1) The charitable donation is made to in paragraph (k)(1) of this section, an business generated by the referring an organization exempt from taxation entity that has a formal medical staff physician. under the Internal Revenue Code (or to may provide one local medical staff (h) Group practice arrangements with a supporting organization); appreciation event per year for the a hospital. An arrangement between a (2) The donation is neither solicited, entire medical staff. Any gifts or hospital and a group practice under nor offered, in any manner that takes gratuities provided in connection with which DHS are furnished by the group into account the volume or value of the medical staff appreciation event are but are billed by the hospital if the referrals or other business generated subject to the limit in paragraph (k)(1). following conditions are met: between the physician and the entity; (l) Fair market value compensation. (1) With respect to services furnished and Compensation resulting from an to an inpatient of the hospital, the (k) Nonmonetary compensation. (1) arrangement between an entity and a arrangement is pursuant to the Compensation from an entity in the physician (or an immediate family provision of inpatient hospital services form of items or services (not including member) or any group of physicians under section 1861(b)(3) of the Act. cash or cash equivalents) that does not (regardless of whether the group meets (2) The arrangement began before, and exceed an aggregate of $300 per the definition of a group practice set has continued in effect without calendar year, as adjusted for inflation forth in § 411.352) for the provision of interruption since, , 1989. in accordance with paragraph (k)(2) of items or services or for the lease of (3) With respect to the DHS covered this section, if all of the following office space or equipment by the under the arrangement, at least 75 conditions are satisfied: physician (or an immediate family

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member) or group of physicians to the (ii) Remuneration paid to the group of (6) The compensation is not entity, or by the entity to the physician physicians that is conditioned on one or determined in any manner that takes (or an immediate family member) or a more of the group’s physicians’ referrals into account the volume or value of group of physicians, if the arrangement to a particular provider, practitioner, or referrals or other business generated meets the following conditions: supplier. between the parties. (1) The arrangement is in writing, (m) Medical staff incidental benefits. (7) [Reserved] signed by the parties, and covers only Compensation in the form of items or (8) Other facilities and health care identifiable items, services, office space, services (not including cash or cash clinics (including, but not limited to, or equipment. The writing specifies— equivalents) from a hospital to a federally qualified health centers) that (i) The items, services, office space, or member of its medical staff when the have bona fide medical staffs may equipment covered under the item or service is used on the hospital’s provide compensation under this arrangement; campus, if all of the following paragraph (m) on the same terms and (ii) The compensation that will be conditions are met: conditions applied to hospitals under provided under the arrangement; and (1) The compensation is offered to all this paragraph (m). (iii) The timeframe for the members of the medical staff practicing (n) Risk-sharing arrangements. arrangement. in the same specialty (but not Compensation paid directly or (2) An arrangement may be for any necessarily accepted by every member indirectly by a MCO or an IPA to a period of time and contain a termination to whom it is offered) and is not offered physician pursuant to a risk-sharing clause. An arrangement may be renewed in any manner that takes into account arrangement (including, but not limited any number of times if the terms of the the volume or value of referrals or other to, withholds, bonuses, and risk pools) arrangement and the compensation for business generated between the parties. for services provided by the physician the same items, services, office space, or (2) Except with respect to to enrollees of a health plan. For equipment do not change. Other than an identification of medical staff on a purposes of this paragraph (n), ‘‘health arrangement that satisfies all of the hospital website or in hospital plan’’ and ‘‘enrollees’’ have the conditions of paragraph (z) of this advertising, the compensation is meanings set forth in § 1001.952(l) of section, the parties may not enter into provided only during periods when the this title. more than one arrangement for the same medical staff members are making (o) Compliance training. Compliance items, services, office space, or rounds or are engaged in other services training provided by an entity to a equipment during the course of a year. or activities that benefit the hospital or physician (or to the physician’s (3) The compensation must be set in its patients. immediate family member or office advance, consistent with fair market (3) The compensation is provided by staff) who practices in the entity’s local value, and not determined in any the hospital and used by the medical community or service area, provided manner that takes into account the staff members only on the hospital’s that the training is held in the local volume or value of referrals or other campus. Compensation, including, but community or service area. For business generated by the referring not limited to, internet access, pagers, or purposes of this paragraph (o), physician. Compensation for the rental two-way radios, used away from the ‘‘compliance training’’ means training of office space or equipment may not be campus only to access hospital medical regarding the basic elements of a determined using a formula based on— records or information or to access compliance program (for example, (i) A percentage of the revenue raised, patients or personnel who are on the establishing policies and procedures, earned, billed, collected, or otherwise hospital campus, as well as the training of staff, internal monitoring, or attributable to the services performed or identification of the medical staff on a reporting); specific training regarding business generated in the office space or hospital website or in hospital the requirements of Federal and State to the services performed on or business advertising, meets the ‘‘on campus’’ health care programs (for example, generated through the use of the requirement of this paragraph (m). billing, coding, reasonable and equipment; or (4) The compensation is reasonably necessary services, documentation, or (ii) Per-unit of service rental charges, related to the provision of, or designed unlawful referral arrangements); or to the extent that such charges reflect to facilitate directly or indirectly the training regarding other Federal, State, services provided to patients referred by delivery of, medical services at the or local laws, regulations, or rules the lessor to the lessee. hospital. governing the conduct of the party for (4) The arrangement would be (5) The compensation is of low value whom the training is provided. For commercially reasonable even if no (that is, less than $25) with respect to purposes of this paragraph, ‘‘compliance referrals were made between the parties. each occurrence of the benefit (for training’’ includes programs that offer (5) The arrangement does not violate example, each meal given to a physician continuing medical education credit, the anti-kickback statute (section while he or she is serving patients who provided that compliance training is the 1128B(b) of the Act). are hospitalized must be of low value). primary purpose of the program. (6) The services to be performed The $25 limit in this paragraph (m)(5) (p) Indirect compensation under the arrangement do not involve is adjusted each calendar year to the arrangements. Indirect compensation the counseling or promotion of a nearest whole dollar by the increase in arrangements, as defined at business arrangement or other activity the Consumer Price Index—Urban All § 411.354(c)(2), if all of the following that violates a Federal or State law. Items (CPI–I) for the 12 month period conditions are satisfied: (7) The arrangement satisfies the ending the preceding September 30. (1)(i) The compensation received by requirements of § 411.354(d)(4) in the CMS displays after September 30 each the referring physician (or immediate case of— year both the increase in the CPI–I for family member) described in (i) Remuneration to the physician that the 12 month period and the new limits § 411.354(c)(2)(ii) is fair market value is conditioned on the physician’s on the physician self-referral website at for services and items actually provided referrals to a particular provider, http://www.cms.hhs.gov/ and not determined in any manner that practitioner, or supplier; or PhysicianSelfReferral/10_CPI-U_ takes into account the volume or value Updates.asp. of referrals or other business generated

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by the referring physician for the entity the hospital, federally qualified health (1) Reside in a rural area, HPSA, furnishing DHS. center, or rural health clinic providing medically underserved area, or an area (ii) Compensation for the rental of the payment, and specifies the payment with a demonstrated need for the office space or equipment may not be to be made by the hospital, federally physician’s obstetrical services as determined using a formula based on— qualified health center, or rural health determined by the Secretary in an (A) A percentage of the revenue clinic and the terms under which the advisory opinion issued in accordance raised, earned, billed, collected, or payment is to be provided. with section 1877(g)(6) of the Act; or otherwise attributable to the services (iii) The arrangement is not (2) Be part of a medically underserved performed or business generated in the conditioned on the physician’s referral population. office space or to the services performed of patients to the hospital, federally (3) For purposes of paragraph (r)(2) of on or business generated through the qualified health center, or rural health this section, costs of malpractice use of the equipment; or clinic providing the payment. insurance premiums means: (B) Per-unit of service rental charges, (iv) The hospital, federally qualified (i) For physicians who engage in to the extent that such charges reflect health center, or rural health clinic does obstetrical practice on a full-time basis, services provided to patients referred by not determine the amount of the any costs attributable to malpractice the lessor to the lessee. payment in any manner that takes into insurance; or (2) The compensation arrangement account the volume or value of referrals (ii) For physicians who engage in described in § 411.354(c)(2)(ii) is set out by the physician or any other business obstetrical practice on a part-time or in writing, signed by the parties, and generated between the parties. sporadic basis, the costs attributable specifies the services covered by the (v) The physician is allowed to exclusively to the obstetrical portion of arrangement, except in the case of a establish staff privileges at any the physician’s malpractice insurance, bona fide employment relationship hospital(s), federally qualified health and related exclusively to obstetrical between an employer and an employee, center(s), or rural health clinic(s) and to services provided— in which case the arrangement need not refer business to any other entities (A) In a rural area, primary care be set out in writing, but must be for (except as referrals may be restricted HPSA, or an area with demonstrated identifiable services and be under an employment arrangement or need for the physician’s obstetrical commercially reasonable even if no services arrangement that complies with services, as determined by the Secretary referrals are made to the employer. § 411.354(d)(4)). in an advisory opinion issued in (3) [Reserved] (vi) The payment is made to a person accordance with section 1877(g)(6) of (4) If remuneration to the physician is or organization (other than the the Act; or (B) In any area, provided that at least conditioned on the physician’s referrals physician) that is providing malpractice 75 percent of the physician’s obstetrical to a particular provider, practitioner, or insurance (including a self-funded patients treated in the coverage period supplier, the compensation arrangement organization). described in § 411.354(c)(2)(ii) satisfies (not to exceed 1 year) resided in a (vii) The physician treats obstetrical the conditions of § 411.354(d)(4). medically underserved area or were part patients who receive medical benefits or (q) Referral services. Remuneration of a medically underserved population. assistance under any Federal health care that meets all of the conditions set forth (s) Professional courtesy. Professional program in a nondiscriminatory in § 1001.952(f) of this title. courtesy (as defined at § 411.351) (r) Obstetrical malpractice insurance manner. offered by an entity with a formal subsidies. Remuneration that meets all (viii) The insurance is a bona fide medical staff to a physician or a of the conditions of paragraph (r)(1) or malpractice insurance policy or physician’s immediate family member (2) of this section. program, and the premium, if any, is or office staff if all of the following (1) Remuneration that meets all of the calculated based on a bona fide conditions are met: conditions set forth in § 1001.952(o) of assessment of the liability risk covered (1) The professional courtesy is this title. under the insurance. offered to all physicians on the entity’s (2) A payment from a hospital, (ix)(A) For each coverage period (not bona fide medical staff or in such federally qualified health center, or to exceed 1 year), at least 75 percent of entity’s local community or service area, rural health clinic that is used to pay for the physician’s obstetrical patients and the offer does not take into account some or all of the costs of malpractice treated under the coverage of the the volume or value of referrals or other insurance premiums for a physician obstetrical malpractice insurance during business generated between the parties; who engages in obstetrical practice as a the prior period (not to exceed 1 year)— (2) The health care items and services routine part of his or her medical (1) Resided in a rural area, HPSA, provided are of a type routinely practice, if all of the following medically underserved area, or an area provided by the entity; conditions are met: with a demonstrated need for the (3) The entity has a professional (i)(A) The physician’s medical physician’s obstetrical services as courtesy policy that is set out in writing practice is located in a rural area, a determined by the Secretary in an and approved in advance by the entity’s primary care HPSA, or an area with advisory opinion issued in accordance governing body; demonstrated need for the physician’s with section 1877(g)(6) of the Act; or (4) The professional courtesy is not obstetrical services as determined by the (2) Were part of a medically offered to a physician (or immediate Secretary in an advisory opinion issued underserved population. family member) who is a Federal health in accordance with section 1877(g)(6) of (B) For the initial coverage period (not care program beneficiary, unless there the Act; or to exceed 1 year), the requirements of has been a good faith showing of (B) At least 75 percent of the paragraph (r)(2)(ix)(A) of this section financial need; and physician’s obstetrical patients reside in will be satisfied if the physician certifies (t) Retention payments in underserved a medically underserved area or are that he or she has a reasonable areas—(1) Bona fide written offer. members of a medically underserved expectation that at least 75 percent of Remuneration provided by a hospital population. the physician’s obstetrical patients directly to a physician on the hospital’s (ii) The arrangement is set out in treated under the coverage of the medical staff to retain the physician’s writing, is signed by the physician and malpractice insurance will— medical practice in the geographic area

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served by the hospital (as defined in served by the hospital. The certification (iii) The amount and terms of the paragraph (e)(2) of this section), if all of contains at least the following— retention payment are not altered during the following conditions are met: (A) Details regarding the steps taken the term of the arrangement in any (i) The physician has a bona fide firm, by the physician to effectuate the manner that takes into account the written recruitment offer or offer of employment opportunity; volume or value of referrals or other employment from a hospital, academic (B) Details of the physician’s business generated by the physician. medical center (as defined at employment opportunity, including the (4) Waiver of relocation requirement. § 411.355(e)), or physician organization identity and location of the physician’s The Secretary may waive the relocation (as defined at § 411.351) that is not future employer or employment location requirement of paragraphs (t)(1) and related to the hospital making the or both, and the anticipated income and (t)(2) of this section for payments made payment, and the offer specifies the benefits (or a range for income and to physicians practicing in a HPSA or an remuneration being offered and requires benefits); area with demonstrated need for the the physician to move the location of (C) A statement that the future physician through an advisory opinion his or her medical practice at least 25 employer is not related to the hospital issued in accordance with section miles and outside of the geographic area making the payment; 1877(g)(6) of the Act, if the retention served by the hospital making the (D) The date on which the physician payment arrangement otherwise retention payment. anticipates relocating his or her medical complies with all of the conditions of (ii) The requirements of paragraphs practice outside of the geographic area this paragraph (t). (e)(1)(i) through (iv) of this section are served by the hospital; and (5) Application to other entities. This satisfied. (E) Information sufficient for the paragraph (t) applies to remuneration (iii) Any retention payment is subject hospital to verify the information provided by a federally qualified health to the same obligations and restrictions, included in the written certification. center or a rural health clinic in the if any, on repayment or forgiveness of (ii) The hospital takes reasonable same manner as it applies to indebtedness as the written recruitment steps to verify that the physician has a remuneration provided by a hospital. offer or offer of employment. bona fide opportunity for future (u) Community-wide health employment that requires the physician (iv) The retention payment does not information systems. Items or services to relocate outside the geographic area exceed the lower of— of information technology provided by served by the hospital. (A) The amount obtained by an entity to a physician that allow (iii) The requirements of paragraphs subtracting the physician’s current access to, and sharing of, electronic (e)(1)(i) through (iv) of this section are income from physician and related health care records and any satisfied. complementary drug information services from the income the physician (iv) The retention payment does not systems, general health information, would receive from comparable exceed the lower of— physician and related services in the (A) An amount equal to 25 percent of medical alerts, and related information written recruitment or employment the physician’s current annual income for patients served by community offer, provided that the respective (averaged over the previous 24 months), providers and practitioners, in order to incomes are determined using a using a reasonable and consistent enhance the community’s overall reasonable and consistent methodology, methodology that is calculated health, provided that— and that they are calculated uniformly uniformly; or (1) The items or services are available over no more than a 24-month period; (B) The reasonable costs the hospital as necessary to enable the physician to or would otherwise have to expend to participate in a community-wide health (B) The reasonable costs the hospital recruit a new physician to the information system, are principally used would otherwise have to expend to geographic area served by the hospital by the physician as part of the recruit a new physician to the to join the medical staff of the hospital community-wide health information geographic area served by the hospital to replace the retained physician. system, and are not provided to the to join the medical staff of the hospital (v) The requirements of paragraph physician in any manner that takes into to replace the retained physician. (t)(3) of this section are satisfied. account the volume or value of referrals (v) The requirements of paragraph (3) Additional requirements. or other business generated by the (t)(3) of this setion are satisfied. Remuneration provided under physician; (2) Written certification from paragraph (t)(1) or (2) of this section (2) The community-wide health physician. Remuneration provided by a must meet the following additional information systems are available to all hospital directly to a physician on the requirements: providers, practitioners, and residents of hospital’s medical staff to retain the (i)(A) The physician’s current medical the community who desire to physician’s medical practice in the practice is located in a rural area or participate; and geographic area served by the hospital HPSA (regardless of the physician’s (v) Electronic prescribing items and (as defined in paragraph (e)(2) of this specialty) or is located in an area with services. Nonmonetary remuneration section), if all of the following demonstrated need for the physician as (consisting of items and services in the conditions are met: determined by the Secretary in an form of hardware, software, or (i) The physician furnishes to the advisory opinion issued in accordance information technology and training hospital before the retention payment is with section 1877(g)(6) of the Act; or services) necessary and used solely to made a written certification that the (B) At least 75 percent of the receive and transmit electronic physician has a bona fide opportunity physician’s patients reside in a prescription information, if all of the for future employment by a hospital, medically underserved area or are following conditions are met: academic medical center (as defined at members of a medically underserved (1) The items and services are § 411.355(e)), or physician organization population. provided by a— (as defined at § 411.351) that requires (ii) The hospital does not enter into a (i) Hospital to a physician who is a the physician to move the location of retention arrangement with a particular member of its medical staff; his or her medical practice at least 25 referring physician more frequently than (ii) Group practice (as defined at miles and outside the geographic area once every 5 years. § 411.352) to a physician who is a

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member of the group (as defined at services in the form of software or value of prescriptions dispensed or paid § 411.351); or information technology and training by the donor or billed to the program); (iii) PDP sponsor or MA organization services, including cybersecurity (ii) The determination is based on the to a prescribing physician. software and services) necessary and size of the physician’s medical practice (2) The items and services are used predominantly to create, maintain, (for example, total patients, total patient provided as part of, or are used to transmit, receive, or protect electronic encounters, or total relative value units); access, an electronic prescription drug health records, if all of the following (iii) The determination is based on the program that meets the applicable conditions are met: total number of hours that the physician standards under Medicare Part D at the (1) The items and services are practices medicine; time the items and services are provided to a physician by an entity (as (iv) The determination is based on the provided. defined at § 411.351) that is not a physician’s overall use of automated (3) The donor (or any person on the laboratory company. technology in his or her medical donor’s behalf) does not take any action (2) The software is interoperable (as practice (without specific reference to to limit or restrict the use or defined at § 411.351) at the time it is the use of technology in connection compatibility of the items or services provided to the physician. For purposes with referrals made to the donor); with other electronic prescribing or of this paragraph (w), software is (v) The determination is based on electronic health records systems. deemed to be interoperable if, on the whether the physician is a member of (4) For items or services that are of the date it is provided to the physician, it the donor’s medical staff, if the donor type that can be used for any patient is certified by a certifying body has a formal medical staff; without regard to payer status, the authorized by the National Coordinator (vi) The determination is based on the donor does not restrict, or take any for Health Information Technology to level of uncompensated care provided action to limit, the physician’s right or certification criteria identified in the by the physician; or ability to use the items or services for then-applicable version of 45 CFR part (vii) The determination is made in any patient. 170. any reasonable and verifiable manner that does not directly take into account (5) Neither the physician nor the (3) [Reserved] the volume or value of referrals or other physician’s practice (including (4)(i) Before receipt of the initial business generated between the parties. employees and staff members) makes donation of items and services or the (7) The arrangement is set forth in a the receipt of items or services, or the donation of replacement items and written agreement that— amount or nature of the items or services, the physician pays 15 percent services, a condition of doing business (i) Is signed by the parties; of the donor’s cost for the items and (ii) Specifies the items and services with the donor. services. (6) Neither the eligibility of a being provided, the donor’s cost of the (ii) Except as provided in paragraph physician for the items or services, nor items and services, and the amount of (w)(4)(i) of this section, with respect to the amount or nature of the items or the physician’s contribution; and items and services received from the services, is determined in a manner that (iii) Covers all of the electronic health donor after the initial donation of items takes into account the volume or value records items and services to be and services or the donation of of referrals or other business generated provided by the donor. This replacement items and services, the between the parties. requirement is met if all separate (7) The arrangement is set forth in a physician pays 15 percent of the donor’s agreements between the donor and the written agreement that— cost for the items and services at physician (and the donor and any (i) Is signed by the parties; reasonable intervals. family members of the physician) (ii) Specifies the items and services (iii) The donor (or any party related to incorporate each other by reference or if being provided and the donor’s cost of the donor) does not finance the they cross-reference a master list of the items and services; and physician’s payment or loan funds to be agreements that is maintained and (iii) Covers all of the electronic used by the physician to pay for the updated centrally and is available for prescribing items and services to be items and services. review by the Secretary upon request. provided by the donor. This (5) Neither the physician nor the The master list must be maintained in requirement is met if all separate physician’s practice (including a manner that preserves the historical agreements between the donor and the employees and staff members) makes record of agreements. physician (and the donor and any the receipt of items or services, or the (8) [Reserved] family members of the physician) amount or nature of the items or (9) For items or services that are of the incorporate each other by reference or if services, a condition of doing business type that can be used for any patient they cross-reference a master list of with the donor. without regard to payer status, the agreements that is maintained and (6) Neither the eligibility of a donor does not restrict, or take any updated centrally and is available for physician for the items or services, nor action to limit, the physician’s right or review by the Secretary upon request. the amount or nature of the items or ability to use the items or services for The master list must be maintained in services, is determined in any manner any patient. a manner that preserves the historical that directly takes into account the (10) The items and services do not record of agreements. volume or value of referrals or other include staffing of physician offices and (8) The donor does not have actual business generated between the parties. are not used primarily to conduct knowledge of, and does not act in For purposes of this paragraph (w), the personal business or business unrelated reckless disregard or deliberate determination is deemed not to directly to the physician’s medical practice. ignorance of, the fact that the physician take into account the volume or value of (x) Assistance to compensate a possesses or has obtained items or referrals or other business generated nonphysician practitioner. (1) services equivalent to those provided by between the parties if any one of the Remuneration provided by a hospital to the donor. following conditions is met: a physician to compensate a (w) Electronic health records items (i) The determination is based on the nonphysician practitioner to provide and services. Nonmonetary total number of prescriptions written by NPP patient care services, if all of the remuneration (consisting of items and the physician (but not the volume or following conditions are met:

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(i) The arrangement— directly with the physician or the (6) For purposes of paragraph (x)(1) of (A) Is set out in writing and signed by physician organization in whose shoes this section, a ‘‘compensation the hospital, the physician, and the the physician stands under § 411.354(c); arrangement’’ between a physician (or nonphysician practitioner; and and the physician organization in whose (B) Commences before the physician (B) Substantially all of the NPP shoes the physician stands under (or the physician organization in whose patient care services that the § 411.354(c)) and a nonphysician shoes the physician stands under nonphysician practitioner furnishes to practitioner— § 411.354(c)) enters into the patients of the physician’s practice are (i) Means an employment, compensation arrangement described in primary care services or mental health contractual, or other arrangement under paragraph (x)(1)(vi)(A) of this section. care services. which remuneration passes between the (ii) The arrangement is not (vii) The physician does not impose parties; and conditioned on— practice restrictions on the (ii) Does not include a nonphysician (A) The physician’s referrals to the nonphysician practitioner that practitioner’s ownership or investment hospital; or unreasonably restrict the nonphysician interest in a physician organization. (B) The nonphysician practitioner’s practitioner’s ability to provide NPP (7)(i) This paragraph (x) may be used NPP referrals to the hospital. patient care services in the geographic by a hospital, federally qualified health (iii) The remuneration from the area served by the hospital. center, or rural health clinic only once hospital— (2) Records of the actual amount of every 3 years with respect to the same (A) Does not exceed 50 percent of the remuneration provided under paragraph referring physician. actual compensation, signing bonus, (x)(1) of this section by the hospital to (ii) Paragraph (x)(7)(i) of this section and benefits paid by the physician to the physician, and by the physician to does not apply to remuneration the nonphysician practitioner during a the nonphysician practitioner, must be provided by a hospital, federally period not to exceed the first 2 maintained for a period of at least 6 qualified health center, or rural health consecutive years of the compensation years and made available to the clinic to a physician to compensate a arrangement between the nonphysician Secretary upon request. nonphysician practitioner to provide practitioner and the physician (or the (3) For purposes of this paragraph (x), NPP patient care services if— physician organization in whose shoes ‘‘nonphysician practitioner’’ means a (A) The nonphysician practitioner is the physician stands); and replacing a nonphysician practitioner (B) Is not determined in any manner physician assistant as defined in section who terminated his or her employment that takes into account the volume or 1861(aa)(5) of the Act, a nurse or contractual arrangement to provide value of actual or anticipated referrals practitioner or clinical nurse specialist NPP patient care services with the by— as defined in section 1861(aa)(5) of the (1) Referrals by the physician (or any Act, a certified nurse-midwife as physician (or the physician organization physician in the physician’s practice) or defined in section 1861(gg) of the Act, in whose shoes the physician stands) other business generated between the a clinical social worker as defined in within 1 year of the commencement of parties; or section 1861(hh) of the Act, or a clinical the employment or contractual (2) NPP referrals by the nonphysician psychologist as defined at § 410.71(d) of arrangement; and practitioner (or any nonphysician this subchapter. (B) The remuneration provided to the practitioner in the physician’s practice) (4) For purposes of this paragraph (x), physician is provided during a period or other business generated between the the following terms have the meanings that does not exceed 2 consecutive years parties. indicated. as measured from the commencement of (iv) The compensation, signing bonus, (i) ‘‘NPP patient care services’’ means the compensation arrangement between and benefits paid to the nonphysician direct patient care services furnished by the nonphysician practitioner who is practitioner by the physician does not a nonphysician practitioner that address being replaced and the physician (or the exceed fair market value for the NPP the medical needs of specific patients or physician organization in whose shoes patient care services furnished by the any task performed by a nonphysician the physician stands). nonphysician practitioner to patients of practitioner that promotes the care of (8)(i) This paragraph (x) applies to the physician’s practice. patients of the physician or physician remuneration provided by a federally (v) The nonphysician practitioner has organization with which the qualified health center or a rural health not, within 1 year of the commencement nonphysician practitioner has a clinic in the same manner as it applies of his or her compensation arrangement compensation arrangement. to remuneration provided by a hospital. with the physician (or the physician (ii) ‘‘NPP referral’’ means a request by (ii) The ‘‘geographic area served’’ by organization in whose shoes the a nonphysician practitioner that a federally qualified health center or a physician stands under § 411.354(c))— includes the provision of any designated rural health clinic has the meaning set (A) Furnished NPP patient care health service for which payment may forth in paragraph (e)(6)(ii) of this services in the geographic area served be made under Medicare, the section. by the hospital; or establishment of any plan of care by a (y) Timeshare arrangements. (B) Been employed or otherwise nonphysician practitioner that includes Remuneration provided under an engaged to provide NPP patient care the provision of such a designated arrangement for the use of premises, services by a physician or a physician health service, or the certifying or equipment, personnel, items, supplies, organization that has a medical practice recertifying of the need for such a or services if the following conditions site located in the geographic area designated health service, but does not are met: served by the hospital, regardless of include any designated health service (1) The arrangement is set out in whether the nonphysician practitioner personally performed or provided by the writing, signed by the parties, and furnished NPP patient care services at nonphysician practitioner. specifies the premises, equipment, the medical practice site located in the (5) For purposes of paragraph (x)(1) of personnel, items, supplies, and services geographic area served by the hospital. this section, ‘‘geographic area served by covered by the arrangement. (vi)(A) The nonphysician practitioner the hospital’’ has the meaning set forth (2) The arrangement is between a has a compensation arrangement in paragraph (e)(2) of this section. physician (or the physician organization

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in whose shoes the physician stands (z) Limited remuneration to a is adjusted each calendar year to the under § 411.354(c)) and— physician. (1) Remuneration from an nearest whole dollar by the increase in (i) A hospital; or entity to a physician for the provision of the Consumer Price Index—Urban All (ii) Physician organization of which items or services provided by the Items (CPI–U) for the 12-month period the physician is not an owner, physician to the entity that does not ending the preceding September 30. employee, or contractor. exceed an aggregate of $5,000 per CMS displays after September 30 each (3) The premises, equipment, calendar year, as adjusted for inflation year both the increase in the CPI–U for personnel, items, supplies, and services in accordance with paragraph (z)(3) of the 12-month period and the new covered by the arrangement are used— this section, if all of the following remuneration limit on the physician (i) Predominantly for the provision of conditions are satisfied: self-referral website at http:// evaluation and management services to (i) The compensation is not www.cms.hhs.gov/ patients; and determined in any manner that takes PhysicianSelfReferral/10_CPI-U_ (ii) On the same schedule. into account the volume or value of Updates.asp. (4) The equipment covered by the referrals or other business generated by (aa) Arrangements that facilitate arrangement is— the physician. value-based health care delivery and (i) Located in the same building (ii) The compensation does not payment—(1) Full financial risk— where the evaluation and management exceed the fair market value of the items Remuneration paid under a value-based services are furnished; or services. arrangement, as defined at § 411.351, if (ii) Not used to furnish designated (iii) The arrangement would be the following conditions are met: health services other than those commercially reasonable even if no (i) The value-based enterprise is at incidental to the evaluation and referrals were made between the parties. full financial risk (or is contractually management services furnished at the (iv) Compensation for the lease of obligated to be at full financial risk time of the patient’s evaluation and office space or equipment is not within the 12 months following the management visit; and determined using a formula based on— commencement of the value-based (iii) Not advanced imaging (A) A percentage of the revenue arrangement) during the entire duration equipment, radiation therapy raised, earned, billed, collected, or of the value-based arrangement. equipment, or clinical or pathology otherwise attributable to the services (ii) The remuneration is for or results laboratory equipment (other than performed or business generated in the from value-based activities undertaken equipment used to perform CLIA- office space or to the services performed by the recipient of the remuneration for waived laboratory tests). on or business generated through the patients in the target patient population. (5) The arrangement is not use of the equipment; or (iii) The remuneration is not an conditioned on the referral of patients (B) Per-unit of service rental charges, inducement to reduce or limit medically by the physician who is a party to the to the extent that such charges reflect necessary items or services to any arrangement to the hospital or physician services provided to patients referred by patient. organization of which the physician is the lessor to the lessee. (iv) The remuneration is not not an owner, employee, or contractor. (v) Compensation for the use of conditioned on referrals of patients who (6) The compensation over the term of premises or equipment is not are not part of the target patient the arrangement is set in advance, determined using a formula based on— population or business not covered consistent with fair market value, and (A) A percentage of the revenue under the value-based arrangement. not determined— raised, earned, billed, collected, or (v) If remuneration paid to the (i) In any manner that takes into otherwise attributable to the services physician is conditioned on the account the volume or value of referrals provided while using the premises or physician’s referrals to a particular or other business generated between the equipment covered by the arrangement; provider, practitioner, or supplier, the parties; or or value-based arrangement complies with (ii) Using a formula based on— (B) Per-unit of service fees that are not both of the following conditions: (A) A percentage of the revenue time-based, to the extent that such fees (A) The requirement to make referrals raised, earned, billed, collected, or reflect services provided to patients to a particular provider, practitioner, or otherwise attributable to the services referred by the party granting supplier is set out in writing and signed provided while using the premises, permission to use the premises or by the parties. equipment, personnel, items, supplies, equipment covered by the arrangement (B) The requirement to make referrals or services covered by the arrangement; to the party to which the permission is to a particular provider, practitioner, or or granted. supplier does not apply if the patient (B) Per-unit of service fees that are not (vi) If remuneration to the physician expresses a preference for a different time-based, to the extent that such fees is conditioned on the physician’s provider, practitioner, or supplier; the reflect services provided to patients referrals to a particular provider, patient’s insurer determines the referred by the party granting practitioner, or supplier, the provider, practitioner, or supplier; or permission to use the premises, arrangement satisfies the conditions of the referral is not in the patient’s best equipment, personnel, items, supplies, § 411.354(d)(4). medical interests in the physician’s or services covered by the arrangement (2) A physician may provide items or judgment. to the party to which the permission is services through employees whom the (vi) Records of the methodology for granted. physician has hired for the purpose of determining and the actual amount of (7) The arrangement would be performing the services; through a remuneration paid under the value- commercially reasonable even if no wholly-owned entity; or through locum based arrangement must be maintained referrals were made between the parties. tenens physicians (as defined at for a period of at least 6 years and made (8) [Reserved] § 411.351, except that the regular available to the Secretary upon request. (9) The arrangement does not convey physician need not be a member of a (vii) For purposes of this paragraph a possessory leasehold interest in the group practice). (aa), ‘‘full financial risk’’ means that the office space that is the subject of the (3) The annual aggregate value-based enterprise is financially arrangement. remuneration limit in this paragraph (z) responsible on a prospective basis for

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the cost of all patient care items and based arrangement must be maintained (B) If the monitoring indicates that a services covered by the applicable payor for a period of at least 6 years and made value-based activity is not expected to for each patient in the target patient available to the Secretary upon request. further the value-based purpose(s) of the population for a specified period of (ix) For purposes of this paragraph value-based enterprise, the parties must time. For purposes of this paragraph (aa), ‘‘meaningful downside financial terminate the ineffective value-based (aa), ‘‘prospective basis’’ means that the risk’’ means that the physician is activity. Following completion of value-based enterprise has assumed responsible to repay or forgo no less monitoring that identifies an ineffective financial responsibility for the cost of all than 10 percent of the total value of the value-based activity, the value-based patient care items and services covered remuneration the physician receives activity is deemed to be reasonably by the applicable payor prior to under the value-based arrangement. designed to achieve at least one value- providing patient care items and (3) Value-based arrangements. based purpose of the value-based services to patients in the target patient Remuneration paid under a value-based enterprise— population. arrangement, as defined at § 411.351, if (1) For 30 consecutive calendar days (2) Value-based arrangements with the following conditions are met: after completion of the monitoring, if meaningful downside financial risk to (i) The arrangement is set forth in the parties terminate the arrangement; the physician—Remuneration paid writing and signed by the parties. The or under a value-based arrangement, as writing includes a description of— (2) For 90 consecutive calendar days (A) The value-based activities to be defined at § 411.351, if the following after completion of the monitoring, if undertaken under the arrangement; conditions are met: the parties modify the arrangement to (i) The physician is at meaningful (B) How the value-based activities are expected to further the value-based terminate the ineffective value-based downside financial risk for failure to activity. achieve the value-based purpose(s) of purpose(s) of the value-based enterprise; (C) The target patient population for (C) If the monitoring indicates that an the value-based enterprise during the the arrangement; outcome measure is unattainable during entire duration of the value-based (D) The type or nature of the the remaining term of the arrangement, arrangement. remuneration; the parties must terminate or replace the (ii) A description of the nature and (E) The methodology used to unattainable outcome measure within extent of the physician’s downside determine the remuneration; and 90 consecutive calendar days after financial risk is set forth in writing. (F) The outcome measures against completion of the monitoring. (iii) The methodology used to which the recipient of the remuneration (viii) The remuneration is not an determine the amount of the is assessed, if any. inducement to reduce or limit medically remuneration is set in advance of the (ii) The outcome measures against necessary items or services to any undertaking of value-based activities for which the recipient of the remuneration patient. which the remuneration is paid. is assessed, if any, are objective, (ix) The remuneration is not (iv) The remuneration is for or results measurable, and selected based on conditioned on referrals of patients who from value-based activities undertaken clinical evidence or credible medical are not part of the target patient by the recipient of the remuneration for support. population or business not covered patients in the target patient population. (iii) Any changes to the outcome under the value-based arrangement. (v) The remuneration is not an measures against which the recipient of (x) If the remuneration paid to the inducement to reduce or limit medically the remuneration will be assessed are necessary items or services to any physician is conditioned on the made prospectively and set forth in physician’s referrals to a particular patient. writing. (vi) The remuneration is not provider, practitioner, or supplier, the (iv) The methodology used to value-based arrangement complies with conditioned on referrals of patients who determine the amount of the are not part of the target patient both of the following conditions: remuneration is set in advance of the (A) The requirement to make referrals population or business not covered undertaking of value-based activities for under the value-based arrangement. to a particular provider, practitioner, or which the remuneration is paid. supplier is set out in writing and signed (vii) If remuneration paid to the (v) The remuneration is for or results by the parties. physician is conditioned on the from value-based activities undertaken physician’s referrals to a particular by the recipient of the remuneration for (B) The requirement to make referrals provider, practitioner, or supplier, the patients in the target patient population. to a particular provider, practitioner, or value-based arrangement complies with (vi) The arrangement is commercially supplier does not apply if the patient both of the following conditions: reasonable. expresses a preference for a different (A) The requirement to make referrals (vii)(A) No less frequently than provider, practitioner, or supplier; the to a particular provider, practitioner, or annually, or at least once during the patient’s insurer determines the supplier is set out in writing and signed term of the arrangement if the provider, practitioner, or supplier; or by the parties. arrangement has a duration of less than the referral is not in the patient’s best (B) The requirement to make referrals 1 year, the value-based enterprise or one medical interests in the physician’s to a particular provider, practitioner, or or more of the parties monitor: judgment. supplier does not apply if the patient (1) Whether the parties have (xi) Records of the methodology for expresses a preference for a different furnished the value-based activities determining and the actual amount of provider, practitioner, or supplier; the required under the arrangement; remuneration paid under the value- patient’s insurer determines the (2) Whether and how continuation of based arrangement must be maintained provider, practitioner, or supplier; or the value-based activities is expected to for a period of at least 6 years and made the referral is not in the patient’s best further the value-based purpose(s) of the available to the Secretary upon request. medical interests in the physician’s value-based enterprise; and (xii) For purposes of this paragraph judgment. (3) Progress toward attainment of the (aa)(3), ‘‘outcome measure’’ means a (viii) Records of the methodology for outcome measure(s), if any, against benchmark that quantifies: determining and the actual amount of which the recipient of the remuneration (A) Improvements in or maintenance remuneration paid under the value- is assessed. of the quality of patient care; or

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(B) Reductions in the costs to or that consists of at least five physicians, volume or value of referrals if one of the reductions in growth in expenditures of which may include all physicians in the following conditions is met: payors while maintaining or improving group. If there are fewer than five (A) The productivity bonus is based the quality of patient care. physicians in the group, overall profits on the physician’s total patient (bb) Cybersecurity technology and means the profits derived from all the encounters or the relative value units related services. (1) Nonmonetary designated health services of the group. (RVUs) personally performed by the remuneration (consisting of technology (iii) Overall profits must be divided in physician. and services) necessary and used a reasonable and verifiable manner. The (B) The services on which the predominantly to implement, maintain, share of overall profits will be deemed productivity bonus is based are not or reestablish cybersecurity, if all of the not to directly relate to the volume or designated health services and would following conditions are met: value of referrals if one of the following not be considered designated health (i) Neither the eligibility of a conditions is met: services if they were payable by physician for the technology or services, (A) Overall profits are divided per Medicare. nor the amount or nature of the capita (for example, per member of the (C) Revenues derived from designated technology or services, is determined in group or per physician in the group). health services constitute less than 5 any manner that directly takes into (B) Overall profits are distributed percent of the group’s total revenues, account the volume or value of referrals based on the distribution of the group’s and the portion of those revenues or other business generated between the revenues attributed to services that are distributed to each physician in the parties. not designated health services and (ii) Neither the physician nor the group constitutes 5 percent or less of his would not be considered designated physician’s practice (including or her total compensation from the health services if they were payable by employees and staff members) makes group. Medicare. the receipt of technology or services, or (3) Value-based enterprise (C) Revenues derived from designated the amount or nature of the technology participation. Notwithstanding health services constitute less than 5 or services, a condition of doing paragraph (g) of this section, profits percent of the group’s total revenues, business with the donor. from designated health services that are (iii) The arrangement is documented and the portion of those revenues directly attributable to a physician’s in writing. distributed to each physician in the participation in a value-based (2) For purposes of this paragraph group constitutes 5 percent or less of his enterprise, as defined at § 411.351, may (bb), ‘‘technology’’ means any software or her total compensation from the be distributed to the participating or other types of information group. physician. technology. (2) Productivity bonuses. (i) (4) Supporting documentation. ■ 3. Effective January 1, 2022, § 411.352 Notwithstanding paragraph (g) of this Supporting documentation verifying the is further amended by revising section, a physician in the group may be method used to calculate the profit paragraph (i) to read as follows: paid a productivity bonus based on share or productivity bonus under services that he or she has personally paragraphs (i)(1), (2), and (3) of this § 411.352 Group practice. performed, or services ‘‘incident to’’ section, and the resulting amount of * * * * * such personally performed services, that compensation, must be made available (i) Special rules for profit shares and is not directly related to the volume or to the Secretary upon request. productivity bonuses—(1) Overall value of the physician’s referrals (except Dated: Novemeber 19, 2020. profits. (i) Notwithstanding paragraph that the bonus may directly relate to the (g) of this section, a physician in the volume or value of the physician’s Seema Verma, group may be paid a share of overall referrals if the referrals are for services Administrator, Centers for Medicare & profits that is not directly related to the ‘‘incident to’’ the physician’s personally Medicaid Services. volume or value of the physician’s performed services). Alex M. Azar II, referrals. (ii) A productivity bonus must be Secretary, Department of Health and Human (ii) Overall profits means the profits calculated in a reasonable and verifiable Services. derived from all the designated health manner. A productivity bonus will be [FR Doc. 2020–26140 Filed 11–20–20; 4:15 pm] services of any component of the group deemed not to relate directly to the BILLING CODE 4120–01–P

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