Medicare Program; Physicians' Referrals to Health Care Entities With Which They Have Financial Relationships (Phase III), 51012-51099 [07-4252]

Agencies

• Centers for Medicare & Medicaid Services
• DEPARTMENT OF HEALTH AND HUMAN SERVICES

[Federal Register Volume 72, Number 171 (Wednesday, September 5, 2007)]
[Rules and Regulations]
[Pages 51012-51099]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 07-4252]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 411 and 424



 Medicare Program; Physicians' Referrals to Health Care Entities With 
Which They Have Financial Relationships (Phase III); Final Rule

Federal Register / Vol. 72, No. 171 / Wednesday, September 5, 2007 / 
Rules and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411 and 424

[CMS-1810-F]
RIN 0938-AK67


Medicare Program; Physicians' Referrals to Health Care Entities 
With Which They Have Financial Relationships (Phase III)

AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS.

ACTION: Final rule.

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SUMMARY: This final rule is the third phase (Phase III) of a final 
rulemaking amending our regulations regarding the physician self-
referral prohibition in section 1877 of the Social Security Act (the 
Act). Specifically, this rule finalizes, and responds to public 
comments regarding, the Phase II interim final rule with comment period 
published on March 26, 2004, which set forth the self-referral 
prohibition and applicable definitions, interpreted various statutory 
exceptions to the prohibition, and created additional regulatory 
exceptions for arrangements that do not pose a risk of program or 
patient abuse (69 FR 16054).
    In general, in response to public comments, in this Phase III final 
rule, we have reduced the regulatory burden on the health care industry 
through the interpretation of statutory exceptions and modification of 
the exceptions that were created using the Secretary's discretionary 
authority under section 1877(b)(4) of the Act to promulgate exceptions 
for financial relationships that pose no risk of program or patient 
abuse.

DATES: Effective date: This final rule is effective on December 4, 
2007.

FOR FURTHER INFORMATION CONTACT: Joanne Sinsheimer, (410) 786-4620. 
Lisa Ohrin, (410) 786-4565.

SUPPLEMENTARY INFORMATION: To help readers locate information in this 
final rule, we are providing the following Table of Contents.

I. Background
II. General Comments
    A. General
    B. Compliance With the Anti-Kickback Statute
III. Definitions--Sec.  411.351
    A. Employee
    B. Entity
    C. Fair Market Value
    D. ``Incident to'' Services
    E. Physician in the Group Practice
    F. Radiology and Certain Other Imaging Services and Radiation 
Therapy
    G. Referral
    H. Rural Area
IV. Group Practice--Sec.  411.352
V. Prohibition on Certain Referrals by Physicians and Limitations on 
Billing--Sec.  411.353
VI. Financial Relationship, Compensation, and Ownership or 
Investment Interest--Sec.  411.354
    A. Ownership
    B. Compensation
    C. Special Rules on Compensation
VII. General Exceptions to the Referral Prohibition Related to Both 
Ownership/Investment and Compensation--Sec.  411.355
    A. Physician Services
    B. In-office Ancillary Services
    C. Services Furnished by an Organization (or Its Contractors or 
Subcontractors) to Enrollees
    D. Reserved
    E. Academic Medical Centers
    F. Implants Furnished by an Ambulatory Surgical Center
    G. EPO and Other Dialysis-Related Drugs Furnished in or by an 
End-Stage Renal Dialysis Facility
    H. Preventive Screening Tests, Immunizations, and Vaccines
    I. Eyeglasses and Contact Lenses Following Cataract Surgery
    J. Intra-family Rural Referrals
VIII. Exceptions to the Referral Prohibition Related to Ownership or 
Investment Interests--Sec.  411.356
    A. Publicly-traded Securities and Mutual Funds
    B. Hospitals Located in Puerto Rico
    C. Rural Providers
    D. Ownership Interest in a Whole Hospital
IX. Exceptions to the Referral Prohibition Related to Compensation 
Arrangements--Sec.  411.357
    A. Rental of Office Space
    B. Rental of Equipment
    C. Bona Fide Employment Relationships
    D. Personal Service Arrangements
    E. Physician Recruitment
    F. Isolated Transactions
    G. Remuneration Unrelated to Designated Health Services
    H. Group Practice Arrangements with a Hospital
    I. Payments by a Physician
    J. Charitable Donations by a Physician
    K. Nonmonetary Compensation
    L. Fair Market Value Compensation
    M. Medical Staff Incidental Benefits
    N. Risk-sharing Arrangements
    O. Compliance Training
    P. Indirect Compensation Arrangements
    Q. Referral Services
    R. Obstetrical Malpractice Insurance Subsidies
    S. Professional Courtesy
    T. Retention Payments in Underserved Areas
    U. Community-Wide Health Information Systems
X. Reporting Requirements--Sec.  411.361
XI. Miscellaneous (Other)
XII. Provisions of the Final Rule
XIII. Technical Corrections
XIV. Collection of Information Requirements
XV. Regulatory Impact Analysis
    A. Overall Impact
    B. Anticipated Effects
    C. Alternatives Considered Regulation Text

I. Background

    Section 1877 of the Social Security Act (the Act), also known as 
the physician self-referral law: (1) Prohibits a physician from making 
referrals for certain ``designated health services'' (DHS) payable by 
Medicare to an entity with which he or she (or an immediate family 
member) has a financial relationship (ownership or compensation), 
unless an exception applies; and (2) prohibits the entity from filing 
claims with Medicare (or billing another individual, entity, or third 
party payer) for those referred services. The statute establishes a 
number of specific exceptions and grants the Secretary the authority to 
create regulatory exceptions for financial relationships that pose no 
risk of program or patient abuse. The current version of section 1877 
of the Act, which applies to referrals for 11 DHS, has been in effect 
and subject to enforcement since January 1, 1995.
    This is Phase III of a final rulemaking under section 1877 of the 
Act. Proposed regulations were published in the Federal Register on 
January 9, 1998 (63 FR 1659). Phase I of the final rulemaking was 
published in the Federal Register on January 4, 2001 (66 FR 856) 
(``Phase I'') as a final rule with comment period, and Phase II of the 
final rulemaking was published in the Federal Register on March 26, 
2004 (69 FR 16054) (``Phase II'') as an interim final rule with comment 
period. Due to a printing error, a portion of the Phase II preamble was 
omitted from the March 26, 2004 Federal Register publication. That 
portion of the preamble, which addressed reporting requirements and 
sanctions, was published on April 6, 2004 (69 FR 17933).
    Except for two provisions, the regulations published in Phase I 
became effective on January 4, 2002. We delayed the effective date of 
Sec.  424.22(d), relating to home health services until April 6, 2001 
(66 FR 8771.) We also delayed the effective date of the final sentence 
of Sec.  411.354(d)(1) relating to the definition of ``set in advance'' 
until the publication of Phase II; ultimately, it never became 
effective. The regulations in Phase II became effective on July 26, 
2004.

Phase I Covered--

     Sections 1877(a) and 1877(b) of the Act (the general 
prohibition against physician self-referral and the exceptions 
applicable to both ownership and compensation arrangements);

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     The statutory definitions at section 1877(h) of the Act;
     Certain additional regulatory definitions; and
     A number of new regulatory exceptions promulgated using 
the Secretary's authority under section 1877(b)(4) of the Act.

Phase II Covered--

     All provisions of section 1877 of the Act;
     Additional regulatory definitions;
     Additional new regulatory exceptions issued pursuant to 
the Secretary's authority under section 1877(b)(4) of the Act; and
     Responses to the public comments on the January 1998 
proposed rule and the Phase I regulations.
    This Phase III final rule responds to comments on Phase II and, 
thus, addresses the entire regulatory scheme. In developing Phase III 
of this rulemaking, we have carefully considered the history and 
structure of section 1877 of the Act, as well as the comments to the 
Phase II interim final rule. As with Phase I and Phase II, we believe 
that Phase III of this rulemaking addresses many of the industry's 
primary concerns, is consistent with the statute's goals and 
directives, and protects beneficiaries of Federal health care programs. 
In particular, we have attempted to preserve the core statutory 
prohibition, while providing sufficient flexibility to minimize the 
impact of the rule on many common business arrangements. We have 
endeavored to simplify the rules and provide additional guidance in 
response to comments, as well as to reduce any undue burden on the 
regulated community by modifying exceptions created using the 
Secretary's authority under section 1877(b)(4) of the Act to promulgate 
additional exceptions regarding financial relationships that pose no 
risk of program or patient abuse. As we did in Phase II, in evaluating 
our regulatory options, we have applied the same criteria that we 
discussed in detail in the Phase I rule (66 FR 859-863, 69 FR 16056.)
    The reasons for dividing the rulemaking into Phases I and II are 
explained in Phase I (66 FR 859-860). The reason for this Phase III 
final rule is explained in Phase II (69 FR 16055-16056) and in this 
preamble. Phases I, II, and III of this rulemaking are intended to be 
read together as a unified whole. Phase I contains a legislative and 
regulatory history of the physician self-referral law, which is not 
repeated here (66 FR 857-859). Unless otherwise expressly noted, to the 
extent the preamble in Phase III uses different language to describe a 
concept addressed in Phase I or Phase II, our intent is to elucidate 
that discussion, not to change its scope or meaning. For clarity and 
ease of access for the general public to the entire set of physician 
self-referral regulations, we are republishing in its entirety in this 
Phase III final rule the regulatory text for Sec. Sec.  411.350 through 
411.361 (omitting Sec. Sec.  411.370 through 411.389 relating to 
advisory opinions, which were the subject of a separate rulemaking and 
remain unchanged, except for a technical correction to Sec.  411.370 
discussed below in section XIII). Please note that, for ease of 
reference, the regulatory text for Sec.  411.357 includes paragraphs 
(v) and (w) relating to the exceptions for arrangements involving 
donations of electronic prescribing and electronic health records 
technology, respectively. Those two exceptions were proposed and 
finalized in a separate rulemaking (70 FR 59182, 71 FR 45140.)
    This Phase III preamble is generally organized to track the statute 
and current regulations. We first address the definitions (although 
certain key definitions, such as ``isolated transaction,'' are 
addressed in the discussions of the exceptions to which they mainly 
relate), then the general prohibition, then the exceptions. Summary 
discussions are intended to aid the reader in understanding the 
regulations. More detailed discussions of particular points are 
included in the responses to public comments for each topic.

II. General Comments

A. General

    Comment: We received numerous comments regarding both ownership and 
compensation arrangements in which the commenter requested confirmation 
that the particular arrangement described in the comment met the 
requirements of an exception and, thus, did not violate section 1877 of 
the Act.
    Response: In this final rule, we provide guidance with respect to 
the provisions of Phase I and Phase II. When possible, we respond to 
commenters' specific inquiries regarding compliance with the physician 
self-referral law. However, several of the inquiries failed to provide 
sufficient facts to enable us to evaluate or respond to the inquiry. 
Moreover, we consider several other inquiries to be in the nature of a 
request for a binding opinion, which, as provided in Sec.  411.386, can 
be made only through the issuance of a formal advisory opinion.

B. Compliance With the Anti-Kickback Statute

    Comment: Numerous commenters objected to the inclusion of the 
requirement that arrangements must not violate the Federal anti-
kickback statute (section 1128B(b) of the Act; 42 U.S.C. 1320a-7b(b), 
hereinafter referred to as the anti-kickback statute), which appears in 
the regulatory exceptions created pursuant to the Secretary's authority 
under section 1877(b)(4) of the Act. According to the commenters, the 
condition is unnecessary and undercuts our efforts to create ``bright 
lines.''
    Response: We disagree with the commenters for the reasons set forth 
in Phase I (66 FR 863) and Phase II (69 FR 16108). Wherever possible, 
we have attempted to create bright-line rules. However, given the 
limitations on our regulatory authority under section 1877(b)(4) of the 
Act, inclusion of the anti-kickback statute condition is necessary to 
ensure that the exceptions promulgated under that authority do not pose 
a risk of program or patient abuse. Moreover, because parties' 
arrangements must not violate the anti-kickback statute irrespective of 
whether they satisfy the other requirements of an exception, any 
additional burden associated with the requirement is minimal.
    Comment: Two commenters suggested that the exceptions under the 
physician self-referral law and safe harbors under the anti-kickback 
statute should more closely parallel each other. The first commenter 
stated that, without parallel safe harbors under the anti-kickback 
statute and exceptions to the physician self-referral law, the 
physician self-referral law exceptions will be underutilized and 
ineffective. The second commenter suggested that an arrangement that 
meets an exception under the physician self-referral law should be 
deemed to be within a safe harbor under the anti-kickback statute.
    Response: We addressed the issue raised by the first commenter in 
Phase II (69 FR 16115). As explained in detail there, we do not believe 
it is feasible to except financial relationships solely because they 
fit in an anti-kickback statute safe harbor. The second commenter's 
suggestion is outside the scope of this rulemaking and our authority. 
We note that several of the regulatory exceptions under the physician 
self-referral law do, in fact, correspond to safe harbors issued by the 
Office of Inspector General (OIG). For example, the exceptions for the 
donation of electronic prescribing items and services (Sec.  
411.357(v)) and electronic health records software and

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information technology and training services (Sec.  411.357(w)) 
correspond to safe harbors issued by the OIG. In addition, the 
exceptions for referral services and obstetrical malpractice insurance 
subsidies in Sec.  411.357(q) and (r), respectively, mirror anti-
kickback statute safe harbors.
    Comment: One commenter asserted that the exceptions in Sec.  
411.357(q) and (r) that cross-reference safe harbors relating to 
referral services and obstetrical malpractice insurance subsidies, 
respectively, are too narrow. The commenter stated that any arrangement 
that has received a favorable advisory opinion from the OIG, even if 
the agreement in question does not fall within a safe harbor, should be 
permitted under the self-referral law.
    Response: Under section 1877(b)(4) of the Act, we may issue 
additional exceptions (that is, exceptions not specified in the 
statute) only where doing so would create no risk of program or patient 
abuse. As noted above, it is not feasible to except financial 
relationships under section 1877 of the Act solely because they fit in 
an anti-kickback statute safe harbor, nor would it be feasible or 
appropriate to do so because an arrangement is the subject of a 
favorable OIG advisory opinion on a different statute. As we explained 
in Phase II, in some instances, it is appropriate for us to refer to 
the criteria in an anti-kickback safe harbor when creating an exception 
under the physician self-referral law (69 FR 16115).

III. Definitions--Sec.  411.351

    We received public comments only on the specific definitions set 
out below. In addition to technical changes to several definitions, we 
are adding definitions for ``downstream contractor,'' ``physician 
organization,'' and ``rural area'' and modifying the definitions of 
``fair market value,'' and `` `incident to' services.'' The new 
definitions of ``downstream contractor'' and ``physician organization'' 
are discussed in sections IX.D and VI.B, respectively, below, together 
with the relevant provisions to which they apply.

A. Employee

    We are making no changes to the definition of ``employee'' in this 
Phase III final rule.
    Comment: One commenter asked us to clarify that, in order to 
qualify as an employee of a group practice, a group practice must 
exercise control over the employee; that is, the group practice must 
supply the equipment, personnel, and support necessary for the 
individual to provide the service, and the group practice must control 
how the work is done and have hiring and firing authority over the 
individual providing services. The commenter asked for clarification on 
this issue out of concern regarding arrangements in which a group 
practice ``hires'' an individual as a part-time employee of the group 
practice but, in reality, exercises no control over the individual.
    Response: As set forth in section 1877(h)(2) of the Act and the 
definition of ``employee'' at Sec.  411.351, an individual is 
considered an ``employee'' for purposes of the physician self-referral 
prohibition if the individual is considered an employee under the 
common law rules applicable to determining the employer-employee 
relationship, as applied for purposes of section 3121(d)(2) of the 
Internal Revenue Code of 1986. We agree with the commenter that the 
actual conduct of the relationship is determinative. To determine 
whether an employer-employee relationship exists, the various factors, 
including those regarding supervision, used by the Internal Revenue 
Service (IRS) to determine employee status apply. Whereas the receipt 
of a W-2 from an entity and the written terms of the arrangement are 
relevant, neither controls whether an individual meets the definition 
of ``employee'' for purposes of the physician self-referral law; 
rather, the focus is on the actual relationship between the parties.

B. Entity

    We are making no substantive changes to the definition of 
``entity'' in this Phase III final rule.
    Comment: One commenter objected to certain language in the 
definition of ``entity'' specifying that, in general, a person or 
entity is considered to be ``furnishing DHS'' if CMS makes payment to 
that person or entity, either directly, upon assignment on the 
patient's behalf, or upon reassignment in certain cases. According to 
the commenter, some arrangements are structured so that referring 
physicians own entities that lease space, equipment, staff, or 
management services to entities that furnish DHS, and, in turn, submit 
claims to Medicare. The commenter suggested that ``entity furnishing 
DHS'' should be expanded to include entities that derive a substantial 
amount of their revenues from the provision of services to entities 
furnishing DHS.
    Response: We note that, after the close of the Phase II comment 
period, the Medicare Payment Advisory Commission (MedPAC), in its March 
2005 Report to Congress, recommended that the Secretary ``should expand 
the definition of physician ownership in the physician self-referral 
law to include interests in an entity that derives a substantial 
proportion of its revenue from a provider of designated health 
services.'' Specifically, MedPAC wrote:

    Physician ownership of entities that provide services and 
equipment to imaging centers and other providers creates financial 
incentives for physicians to refer patients to these providers, 
which could lead to higher use of services. Prohibiting these 
arrangements should help ensure that referrals are based on 
clinical, rather than financial, considerations. It would also help 
ensure that competition among health care facilities is based on 
quality and cost, rather than financial arrangements with entities 
owned by physicians who refer patients to the facility.

(See https://www.medpac.gov/publications/congressional_reports/Mar05_
EntireReport.pdf, at page 170.) We agree with the commenter that 
arrangements structured so that referring physicians own leasing, 
staffing, and similar entities that furnish items and services to 
entities furnishing DHS (also referred to herein as ``DHS entities''), 
but do not submit claims raise significant concerns under the fraud and 
abuse laws and would appear contrary to the plain intent of the 
physician self-referral law. These structures are particularly 
problematic because referrals by physician-owners of leasing, staffing, 
and similar entities to a contracting DHS entity can significantly 
increase the physician-owned entity's profits and investor returns, 
creating incentives for overutilization and corrupting medical 
decision-making. We intend to study further the types of arrangements 
described by the commenter and MedPAC, as well as other types of 
arrangements, to determine the best approach for addressing them in 
order to protect against program and patient abuse. We would make any 
change to address this issue, whether through the definition of 
``entity'' or otherwise, in a separate rulemaking that is subject to 
public comment.
    We note that the arrangements described by MedPAC remain subject to 
the physician self-referral prohibition. In most instances, these 
structures will constitute indirect compensation arrangements with DHS 
entities under Sec.  411.354(b) that must satisfy the requirements of 
the indirect compensation arrangements exception in Sec.  411.357(p). 
We intend to monitor these arrangements closely for compliance with the 
physician self-referral law. These arrangements appear

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highly suspect under the anti-kickback statute; participants in such 
arrangements should closely scrutinize the arrangements for compliance 
with that statute also. Importantly, we note that the indirect 
compensation arrangements exception in Sec.  411.357(p) includes a 
requirement that the arrangement not violate the anti-kickback statute.

C. Fair Market Value

    In Phase II, we created a ``safe harbor'' provision in the 
definition of ``fair market value'' at Sec.  411.351 for hourly 
payments to physicians for their personal services. The safe harbor 
consisted of two methodologies for calculating hourly rates that would 
be deemed ``fair market value'' for purposes of section 1877 of the 
Act. The first methodology requires that the hourly payment be less 
than or equal to the average hourly rate for emergency room physician 
services in the relevant physician market, provided there are at least 
three hospitals providing emergency room services in the market. The 
second methodology requires averaging the 50th percentile national 
compensation level for physicians in the same specialty, using at least 
four of six specified salary surveys, and dividing the result by 2,000 
hours to establish an hourly rate. If the relevant physician specialty 
does not appear in one of the recognized surveys, the parties must use 
the survey's reported compensation for general practice in order to be 
within the safe harbor. We emphasized that use of the safe harbor was 
entirely voluntary and that parties may establish fair market value 
through other methods. We received a large number of comments 
questioning the new safe harbor.
    Comment: Several commenters disliked the compensation survey 
methodology. In general, the commenters believed that the methodology 
was too prescriptive, and they urged more flexibility. Commenters noted 
that at least one of the listed surveys no longer exists, and that 
another is out of date. Another commenter stated that many of the 
survey companies will not sell their surveys to hospitals that do not 
participate in the surveys. According to the commenters, the available 
surveys are expensive. Another commenter asserted that other surveys, 
including the American Medical Group Association survey and Modern 
Healthcare's annual compilation of surveys, provide similar information 
at less expense. Several commenters objected to the use of national 
averages, because the national average masks significant regional 
differences in physician compensation.
    Some commenters suggested that the compensation survey methodology 
be modified in other respects. One commenter urged us to expand the 
fair market value safe harbor to compensation that falls within the 
25th to the 75th percentile of physician compensation. Commenters 
suggested that providers be able to use fewer than four surveys (for 
example, averaging the 50th percentile of any two surveys). Several 
commenters suggested that, where specialty-specific data is 
unavailable, providers should be able to use data from a similar 
specialty, rather than from general practitioners. According to the 
commenters, the compensation of physicians in one type of specialty is 
more similar to the compensation of physicians in other specialties 
than to the compensation of general practitioners. One commenter asked 
whether a contract could include a cost of living annual adjustment.
    Response: We share the commenters' concerns regarding the 
availability of the surveys identified in the safe harbor. We are aware 
that several of the surveys are no longer available (or may not be 
readily available to all DHS entities and physicians), making it 
impractical to utilize the safe harbor. In addition, it may be 
infeasible to obtain information regarding hourly rates for emergency 
room physicians at competitor hospitals. Therefore, we are not 
retaining the safe harbor within the definition of ``fair market 
value'' at Sec.  411.351. We emphasize, however, that we will continue 
to scrutinize the fair market value of arrangements as fair market 
value is an essential element of many exceptions.
    Reference to multiple, objective, independently published salary 
surveys remains a prudent practice for evaluating fair market value. 
Ultimately, the appropriate method for determining fair market value 
for purposes of the physician self-referral law will depend on the 
nature of the transaction, its location, and other factors. As we 
explained in Phase II, although a good faith reliance on an independent 
valuation (such as an appraisal) may be relevant to a party's intent, 
it does not establish the ultimate issue of the accuracy of the 
valuation figure itself (69 FR 16107). Our views regarding fair market 
value are discussed further in Phase I (66 FR 944) and Phase II (69 FR 
16107).
    Because we are eliminating the safe harbor, it is unnecessary to 
address the commenters' specific suggestions for identifying 
permissible surveys and expanding the range of acceptable physician 
compensation. With respect to the inquiry regarding cost of living 
adjustments, we note that contracts for physician services may include 
an annual salary adjustment, provided that the resulting compensation 
is fair market value and otherwise complies with an exception.
    Comment: A large number of nephrologists and groups representing 
nephrologists complained that the application of the safe harbor to 
their compensation for medical director duties at renal dialysis 
centers is inappropriate, especially given that the physician self-
referral prohibition does not apply to dialysis services for which 
payment is made under the ESRD composite rate. According to the 
commenters, the hourly rate under the safe harbor would not adequately 
compensate dialysis facility medical directors for the full array of 
their skills and services. Several commenters expressed concern that, 
notwithstanding the voluntary nature of the safe harbor, the 
methodology would become the preferred valuation methodology to the 
detriment of physicians.
    Response: For the reasons noted in the preceding response, we have 
eliminated the fair market value safe harbor in this Phase III final 
rule. With respect to existing arrangements, nothing in the physician 
self-referral regulations required use or application of the fair 
market value safe harbor; it was a wholly voluntary provision. 
Moreover, a physician's compensation arrangement with a dialysis 
facility implicates section 1877 of the Act only to the extent that the 
arrangement creates a direct or indirect financial arrangement with an 
entity that furnishes DHS, such as a dialysis facility that furnishes 
DHS not covered by the ESRD composite rate or a hospital that provides 
dialysis (66 FR 923-924).
    Comment: A number of commenters complained that the fair market 
value safe harbor methodology based on local hourly rates for emergency 
room physician services creates significant risk under the antitrust 
laws.
    Response: We have eliminated the fair market value safe harbor for 
payments to physicians.
    Comment: Two commenters asked us to comment on other valuation 
methodologies.
    Response: Nothing precludes parties from calculating fair market 
value using any commercially reasonable methodology that is appropriate 
under the circumstances and otherwise fits the definition at section 
1877(h) of the Act and Sec.  411.351. Ultimately, fair market value is 
determined based on facts and

[[Page 51016]]

circumstances. The appropriate method will depend on the nature of the 
transaction, its location, and other factors. Because the statute 
covers a broad range of transactions, we cannot comment definitively on 
particular valuation methodologies. We refer the commenter to previous 
discussions in Phase I and Phase II regarding valuation methodologies 
(66 FR 944-945, 69 FR 16107).
    Comment: One commenter wanted confirmation that a fair market value 
hourly rate could be used to compensate physicians for both 
administrative and clinical work. Another commenter asked whether the 
rate could be used to determine an annual salary.
    Response: A fair market value hourly rate may be used to compensate 
physicians for both administrative and clinical work, provided that the 
rate paid for clinical work is fair market value for the clinical work 
performed and the rate paid for administrative work is fair market 
value for the administrative work performed. We note that the fair 
market value of administrative services may differ from the fair market 
value of clinical services. A fair market value hourly rate may be used 
to determine an annual salary, provided that the multiplier used to 
calculate the annual salary accurately reflects the number of hours 
actually worked by the physician.

D. ``Incident to'' Services

    Under section 1877 of the Act, group practices are permitted to pay 
profit shares and productivity bonuses to their physicians in ways that 
other DHS entities cannot. Unlike other DHS entities, the statute 
permits group practices to pay a physician in the group a share of the 
overall profits of the group, or a productivity bonus based on services 
personally performed or services ``incident to'' such personally 
performed services, provided that the profit share or bonus is not 
determined in any manner that is directly related to the volume or 
value of the physician's referrals. At Sec.  411.351, we define 
``incident to'' services to mean those services that meet the 
requirements of section 1861(s)(2)(A) of the Act, the ``incident to'' 
billing rule in Sec.  410.26, and the relevant manual provisions, as 
those provisions may be amended or replaced from time to time, all of 
which set forth coverage criteria for ``services and supplies'' 
furnished ``incident to'' a physician's professional service.
    In the calendar year (CY) 2002 physician fee schedule final rule 
published on November 1, 2001 (66 FR 55246), we amended our ``incident 
to'' billing regulation in Sec.  410.26 to provide that ``incident to'' 
services and supplies means those services and supplies that are 
included in section 1861(s)(2)(A) of the Act and that are not 
specifically listed in the Act as a separate benefit. In the CY 2003 
physician fee schedule final rule (67 FR 79966), we clarified that only 
those services that do not have their own separate and independently 
listed benefit category may be billed as ``incident to'' a physician 
service, except as otherwise expressly permitted by statute (for 
example, physical therapy services to the extent authorized under 
section 1862(a)(20) of the Act) (67 FR 79994). Consequently, diagnostic 
x-ray tests, diagnostic laboratory tests, and other diagnostic tests, 
all of which comprise a single benefit category under section 
1861(s)(3) of the Act, may not be billed as ``incident to'' services 
under section 1861(s)(2)(A) of the Act. Thus, under section 1877 of the 
Act, a group practice physician may not receive a productivity bonus if 
the bonus is calculated based on such diagnostic tests, unless the 
physician personally performed the tests. Moreover, the bonus cannot be 
related directly to the volume or value of DHS referrals. We discuss 
the treatment of ``incident to'' services in further detail in section 
IV below.
    Given our intent to conform the physician self-referral regulations 
as much as possible to existing Medicare coverage and payment rules, we 
did not intend in Phase I or Phase II to distinguish between 
``services'' and ``supplies'' furnished ``incident to'' a physician's 
professional services. Accordingly, as discussed in more detail in 
section IV of this preamble, we are revising the definition of `` 
`incident to' services'' at Sec.  411.351 to clarify that the term 
includes both services and supplies (such as drugs) that meet the 
applicable requirements set forth in section 1861(s)(2)(A) of the Act, 
Sec.  410.26 of our regulations, and relevant manual provisions. We are 
also making a minor revision to make clear that the definition covers 
the terms `` `incident to' services'' and ``services `incident to' '' 
for purposes of these regulations.
    Comment: A commenter asserted that our interpretation in the CY 
2003 physician fee schedule final rule as to what services qualify as 
``incident to'' services (67 FR 79993-79994) is inconsistent with a 
previous interpretation we made in the CY 2002 physician fee schedule 
final rule (66 FR 55268). The commenter contends that ``incident to'' 
services may include separately listed and independent services, such 
as diagnostic tests. The commenter contends that our application of the 
``incident to'' billing rules in the physician self-referral context 
effectively prohibits group practice physicians from receiving a share 
of the group's overall profits or a productivity bonus based on 
diagnostic tests that were directly supervised by the physician or a 
member of his or her group practice. The commenter requested that we 
amend the definition of ``incident to'' at Sec.  411.351 to cover any 
services, including services that are listed separately and 
independently (such as diagnostic tests), that are directly supervised 
by the physician or a physician in the group practice, provided that 
they meet all of the other requirements under the ``incident to'' 
billing rules. According to the commenter, this interpretation appears 
consistent with the Congress' intent under section 1877 of the Act to 
favor group practice physicians with respect to the distribution of 
profits and productivity bonuses.
    Response: We are not amending the definition of ``incident to'' 
services at Sec.  411.351 as suggested by the commenter. We believe it 
would be confusing to define ``incident to'' services differently for 
physician self-referral purposes than for billing purposes. As we 
stated in Phase I, we intend to interpret the physician self-referral 
law in a manner that conforms to existing Medicare coverage and payment 
rules (66 FR 859). We specifically noted in Phase I (66 FR 909) and in 
the Phase II definition of ``incident to services'' (69 FR 16128) that 
the ``incident to'' services on which group practice physicians could 
be compensated must comply with existing billing requirements as they 
may be amended from time to time.
    We do not believe that our ``incident to'' billing rule in Sec.  
410.26 is inconsistent with the language of section 1877(h)(4)(B)(i) of 
the Act. Although ``incident to'' services are referrals for purposes 
of section 1877 of the Act, we believe that the Congress intended that 
these services nonetheless may be considered when calculating a 
physician's productivity bonus. For those services that are 
appropriately billed ``incident to'' under current Medicare rules, the 
group practice physician to whose personally performed services the 
``incident to'' services are incidental (that is, the ordering 
physician) may be paid a productivity bonus or profit share consistent 
with the special rules for such compensation set forth in Sec.  
411.352(i).
    As we discussed in the CY 2003 physician fee schedule final rule, 
we interpret Sec.  410.26(a)(7) literally; that is, ``incident to'' 
services and supplies

[[Page 51017]]

covered under section 1861(s)(2)(A) of the Act means services and 
supplies not having their own independent and separately listed 
statutory benefit category (67 FR 79994.) The commenter provided the 
example of diagnostic tests performed under the direct supervision of a 
physician and meeting the requirements under the ``incident to'' 
billing rules. Regardless of the physical possibility of diagnostic 
tests being performed under the direct supervision of a physician and 
meeting the requirements of certain billing rules, because these 
services have an independent and separately listed statutory benefit 
category (section 1861(s)(3) of the Act), they cannot be billed as 
``incident to'' a physician service. (We note that we are deleting 
Sec.  411.355(a)(3) because it is redundant and incorrectly suggests 
that diagnostic tests may be billed as ``incident to'' services.)

E. Physician in the Group Practice

    We are modifying the definition of ``physician in the group 
practice'' to clarify that an independent contractor physician must 
furnish patient care services for the group under a contractual 
arrangement directly with the group practice.
    Comment: A commenter asked that the definition of ``physician in 
the group practice'' be revised to delete the condition that a 
physician who is an independent contractor of a group practice is 
considered to be in the group practice only when he or she is 
performing services on the group practice's premises. The commenter 
noted that section 952 of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) revised the 
reassignment provisions in section 1842(b)(6) of the Act to permit 
independent contractor physicians to reassign their claims to a group 
practice for services performed off-premises (Sec.  424.80(b)(2)).
    Response: Section 1842(b)(6) of the Act generally prohibits Part B 
payment to any person or entity other than the beneficiary who received 
the service or the physician or other supplier who furnished the 
service. This section of the Act also enumerates specific exceptions, 
known as the reassignment exceptions, to this general rule. Prior to 
section 952 of the MMA, we were prohibited from making payment to an 
entity that received reassigned payments from a contractor physician or 
other contractor supplier, unless the physician or other supplier 
performed the service at issue on the premises of the entity billing 
for the service. Section 952 of the MMA amended section 1842(b)(6) of 
the Act, so that we are allowed to make payment to an entity that has 
received reassigned payments pursuant to a contractual arrangement, 
provided that the contractual arrangement meets the program integrity 
and other safeguards that the Secretary may determine are appropriate. 
Thus, although section 1842(b)(6) of the Act grants us general 
authority to honor certain reassignments made pursuant to a contractual 
arrangement, it does not require us to honor those we believe are 
potentially abusive. We note that section 952 of the MMA does not apply 
exclusively to arrangements with group practices, and, therefore, 
retains meaning in the context of reassignments between other parties. 
For these reasons, we do not believe that section 952 of the MMA 
requires us to change our definition of ``physician in the group 
practice'' so that an independent contractor physician qualifies as a 
``physician in the group practice'' irrespective of whether he or she 
is performing services on or off the group practice's premises. We draw 
attention to Sec.  424.80(a), which, in implementing section 952 of the 
MMA, we amended to state that nothing in Sec.  424.80 relieves a 
party's obligations under certain other rules, including the physician 
self-referral rules.
    We continue to believe that it is appropriate to consider an 
independent contractor physician a ``physician in the group practice'' 
only when he or she is performing services in the group practice's 
facilities and, thus, has a clear and meaningful nexus with the group's 
medical practice. The term ``physician in the group practice'' is 
central to the definition of a group practice and significant for 
purposes of two important exceptions in section 1877 of the Act: The 
physician services exception and the in-office ancillary services 
exception. These exceptions enable physicians to make referrals for DHS 
within their group practices provided that certain requirements are 
satisfied. Accordingly, the strong nexus with a group practice created 
by the requirement that an independent contractor physician practice in 
a group practice's facilities ensures that the physician is truly 
practicing ``in the group.''
    Comment: Two commenters expressed the need for clarification of the 
requirements for qualification as a ``physician in the group 
practice.'' These commenters asserted that a ``physician in the group 
practice'' is permitted to furnish only supervision services (which are 
not separately reimbursed by Medicare), and that any services for which 
a group practice actually bills Medicare must be provided by a member 
of the group. The commenters requested that we confirm their 
interpretation of the rules regarding billing for services of 
physicians in a group practice and members of a group practice. In the 
alternative, the commenters suggested that we require that any 
separately-billable services furnished by a ``physician in the group 
practice'' be provided in the same building where the group practice 
provides its full range of services, thus prohibiting a ``physician in 
the group practice'' from providing services in a centralized building. 
According to the commenters, this change would ensure that independent 
contractor physicians have a sufficient nexus to the group practice to 
justify the group's utilization of the in-office ancillary services 
exception.
    Response: The commenters are mistaken that, as defined at Sec.  
411.351, a ``physician in the group practice'' (who can be either a 
member of the group or an independent contractor) may furnish only non-
billable supervision services. The definition makes clear that a 
``physician in the group practice'' can include an independent 
contractor who is ``furnishing patient care services.'' ``Patient care 
services'' is defined at Sec.  411.351 to encompass a broad range of 
billable and non-billable services.
    In order to qualify as a ``group practice'' under Sec.  411.352, 
only members of the group practice (and not independent contractor 
physicians in the group practice) are required to furnish 
``substantially the full range of patient care services that the 
physician routinely furnishes, including medical care, consultation, 
diagnosis, and treatment, through the joint use of shared office space, 
facilities, equipment and personnel.'' In other words, an independent 
contractor ``physician in the group practice'' may furnish billable 
services, and may furnish services--in the group practice's 
facilities--that comprise less than the full range of the patient care 
services that he or she usually furnishes. This enables a group 
practice to hire, on a contract basis, a specialist or other physician 
without jeopardizing the group's ability to qualify as a group practice 
and utilize the in-office ancillary services exception, even if the 
contracted physician works for several physician practices or 
facilities. We note that qualifying as a group practice is not in and 
of itself sufficient to comply with the physician self-referral rules, 
and that use of the in-office ancillary services exception requires 
compliance with all of the conditions of that exception.

[[Page 51018]]

    Under our regulations, an independent contractor physician is a 
``physician in the group practice'' only when he or she is performing 
services in the group practice's facilities. We are concerned about 
reports that some group practices purport to rely on the in-office 
ancillary services exception in Sec.  411.355(b) when they: (1) 
Nominally comply with the centralized building requirements in Sec.  
411.355(b)(2)(ii) and (b)(2)(iii); (2) contract with independent 
contractor physicians to furnish or supervise services in the 
centralized building as ``physicians in the group practice''; (3) 
accept reassignment of the right to payment from those physicians; and 
(4) realize profits based on the services they refer to the independent 
contractor ``physicians in the group practice'' stationed in the 
centralized building. In the physician fee schedule proposed rule for 
CY 2007, we proposed changes to our reassignment rules and to the 
definition of ``centralized building'' to address potentially abusive 
arrangements (71 FR 48981, 49054-49057). We are reviewing the public 
comments to our proposal and intend to issue a final rulemaking on this 
subject.
    Comment: One commenter noted that the definition of ``member of the 
group'' at Sec.  411.351 specifically excludes leased employees who do 
not meet the definition of an ``employee'' at Sec.  411.351. The 
commenter questioned whether a leased employee who does not meet the 
definition of an employee may nevertheless meet the definition of a 
``physician in the group practice.'' The commenter noted that an 
independent contractor physician may be a ``physician in the group 
practice'' and asserted that there does not appear to be any 
distinction between an independent contractor and a leased employee who 
does not meet the definition of an ``employee'' that would justify 
excluding the latter type of individual from being a ``physician in the 
group practice.''
    Response: The definition of ``physician in the group practice'' 
clearly encompasses only members (that is, owners and employees) and 
independent contractors. We are not persuaded to include other types of 
employment relationships (such as arrangements involving a group 
practice ``leasing'' or borrowing a physician who is an employee or 
contractor of some other entity. In order to fit within the definition 
of ``physician in the group practice,'' an independent contractor must 
have ``a contractual arrangement with the group practice.'' We 
interpret this to require that the contractual arrangement be directly 
between the group practice and the independent contractor physician, 
and not between the group practice and another entity, such as a 
staffing company. We are expressly incorporating this interpretation 
into the regulations by modifying the definition of ``physician in the 
group practice'' at Sec.  411.351.
    Group practices receive favorable treatment under the physician 
self-referral law with respect to physician compensation. Accordingly, 
we believe that, in order to qualify as a group practice and receive 
such favorable treatment, the group practice's physicians must have a 
strong and meaningful nexus to the group practice. An independent 
contractor in direct contractual privity with a group practice has such 
a nexus; employees leased from other entities do not. We believe this 
justifies excluding a leased employee from being a ``physician in the 
group practice,'' contrary to the commenter's assertion that there is 
no distinction between an independent contractor and a leased employee. 
Moreover, we are concerned about potentially abusive arrangements, such 
as a situation in which a physician is employed by (and receives one W-
2 from) a staffing company that leases the physician to numerous group 
practices, none of which has to enter into an individual contract with 
the physician but all of which can consider the physician a ``physician 
in the group practice'' with the attendant benefits of such 
categorization.

F. Radiology and Certain Other Imaging Services and Radiation Therapy

    In Phase II, we defined ``radiology and certain other imaging 
services'' to exclude radiology procedures that are integral to the 
performance of a nonradiological medical procedure and performed during 
the nonradiological procedure, or immediately following the 
nonradiological procedure when necessary to confirm placement of an 
item placed during the nonradiological procedure (69 FR 16103). We 
declined to include nuclear medicine in the DHS category of ``radiology 
and certain other imaging services,'' but stated that we would continue 
to study the issue. One commenter stated that it disagreed with our 
decision. Based on this comment and further study, in the CY 2006 
physician fee schedule proposed rule, we proposed to include diagnostic 
nuclear medicine services within the meaning of ``radiology and certain 
other imaging services,'' and to include therapeutic nuclear medicine 
services within the meaning of ``radiation therapy and supplies'' (70 
FR 45854-45856). We adopted our proposal in the CY 2006 physician fee 
schedule final rule (70 FR 70283-70289), effective January 1, 2007.
    We are making no changes to the definition of ``radiology and 
certain other imaging services'' in this Phase III final rule.
    Comment: One commenter noted that, in Phase II, we specifically 
declined to exclude ophthalmic A-scans and B-scans from the definition 
of ``radiology and certain other imaging services'' (69 FR 16103). The 
commenter disagreed with our conclusion, particularly with respect to 
A-scans. The commenter stated that the applicable standard of care 
dictates that A-scans are integral to cataract and other refractive 
surgeries and that they are not diagnostic in nature because they guide 
how surgery will be performed, not whether surgery will be performed. 
According to the commenter, although the scan is not done during the 
operation, it is an integral part of the surgery and raises little risk 
of abuse or overutilization because it will be done only if cataract 
surgery has already been prescribed.
    Response: An A-scan involves the transmission of high-frequency 
sound waves through the eye and the measurement of their reflection 
from ocular structures. An A-scan provides a one-dimensional picture, 
most commonly used to measure the eye length and provide the data 
needed to calculate the power of the optical correction of the 
intraocular lens implant for cataract surgery. A B-scan, which is a 
two-dimensional cross section view of the eye, is used if the view 
inside the eye is obstructed by blood, an extremely dense cataract, or 
other cloudy media.
    The definition of ``radiology and certain other imaging services'' 
at Sec.  411.351 does not include radiology procedures that are 
integral to the performance of a nonradiological medical procedure and 
performed: (1) During the nonradiological medical procedure, or (2) 
immediately following the nonradiological medical procedure when 
necessary to confirm placement of an item placed during the 
nonradiological medical procedure. The commenter correctly states that 
often an A-scan (and a B-scan, as appropriate) is a pre-operative 
procedure performed prior to cataract surgery (which is a scheduled 
elective surgery). These scans are not performed during or just after 
cataract surgery. A-scans and B-scans are included in the definition of 
``radiology and certain other imaging services'' because, even though 
they are integral to the performance of a nonradiological medical 
procedure, they are not performed during the nonradiological medical 
procedure or

[[Page 51019]]

immediately following it to confirm placement of an item placed during 
the nonradiological medical procedure. However, in the CY 2008 
Outpatient Prospective Payment System notice of proposed rulemaking, we 
proposed to exclude from the definition of ``radiology and certain 
other imaging services'' at Sec.  411.351 radiology procedures that are 
``covered ancillary services'', as defined at Sec.  416.164(b) of this 
chapter for purposes of the revised ASC payment system. The term 
``covered ancillary services'' includes certain radiology services that 
are integral to, and performed on the same day as, a covered ambulatory 
surgical procedure.
    Comment: One commenter stated that it welcomed the exclusion from 
the definition of ``radiology and certain other imaging services'' of 
radiology services performed immediately after nonradiology services. 
The commenter asserted that it is standard protocol to order a CT scan 
in the aftermath of prostate brachytherapy in order to ensure that the 
radioisotopes have been placed properly. The commenter asserted that, 
although some may prefer to perform this service immediately after the 
procedure, it is better from a clinical standpoint to wait several 
weeks because the additional time allows for the prostate to become 
less swollen, thereby enabling the physician to determine more 
accurately whether the seeds were placed correctly. Therefore, the 
commenter suggested that we expand the exclusion from the definition to 
also include a CT scan taken within 6 weeks after the prostate 
brachytherapy to confirm proper placement of the isotopes.
    Response: We decline to adopt the commenter's proposal. As we 
stated in Phase I, where the radiology procedure is performed after the 
nonradiology procedure (as opposed to radiology procedures integral to 
and performed during a nonradiological procedure), referring physicians 
have discretion in choosing the entity that provides the radiology 
service independent of the entity providing the nonradiology procedure 
(66 FR 929). In Phase II, we excluded from the definition of 
``radiology and certain other imaging services'' radiology procedures 
performed immediately after the nonradiology procedure in order to 
confirm placement of an item because we believed there would be no risk 
of program or patient abuse by doing so (69 FR 16103). Where a 
radiology procedure is not performed immediately after the nonradiology 
procedure to confirm placement of an item, we believe there is a risk 
that the referring physician may direct referrals to an entity with 
which he or she has a financial interest, the very conduct addressed by 
the statute. As we noted in Phase II, depending on the facts and 
circumstances, exceptions, such as the in-office ancillary services 
exception in Sec.  411.355(b) or the rural provider exception in Sec.  
411.356(c)(1), may apply to referrals for radiology services furnished 
before or after the nonradiology procedure (69 FR 16103).
    We note also that, depending on the facts and circumstances, CT 
scans or other imaging ordered in the aftermath of prostate 
brachytherapy may qualify as ``necessary and integral'' ancillary 
services so as to come within the consultation exclusion from the 
definition of ``referral.'' We question whether a CT scan or other 
imaging performed as late as 6 weeks after the brachytherapy would be 
``necessary and integral'' to the brachytherapy, but decline to say 
that such a CT scan or other imaging could never be ``necessary and 
integral'' to the original procedure (and, thus, not be considered a 
``referral'' for purposes of the physician self-referral law); rather, 
the specific facts and circumstances control.

G. Referral

    Section 1877(h)(5)(c) of the Act defines ``referral'' as a request 
by a physician for an item or service for which payment may be made 
under Medicare Part B, including a request for a consultation and any 
DHS ordered or performed by the consulting physician or under the 
supervision of the consulting physician, and the request or 
establishment of a plan of care by a physician that includes the 
furnishing of DHS, with certain exceptions for a small subset of 
services provided or ordered by pathologists, diagnostic radiologists, 
and radiation oncologists in accordance with a consultation requested 
by another physician.
    In Phase I, we defined ``referral'' to exclude services personally 
performed by a physician who ordered the services, but to include DHS 
provided by the physician's employees or contractors or by other 
members of the physician's group practice (66 FR 871-872). In Phase II, 
we confirmed that a ``referral'' includes services performed by others 
``incident to'' the physician's services (69 FR 16063). Phase II also 
clarified that the definition of ``referral'' excludes referrals for 
necessary and integral DHS ordered and appropriately supervised by a 
radiation oncologist pursuant to a consultation (69 FR 16065).
    We received several comments addressing the issue of services 
performed by a physician's employees that are ``incident to'' the 
physician's personally-performed services. Other comments addressed the 
exclusions from the definition of ``referral'' for certain DHS 
requested by radiologists, pathologists, and radiation oncologists 
pursuant to a consultation. We are making no changes to the definition 
of ``referral'' in this Phase III final rule.
    Comment: Several commenters requested clarification of the 
statement in Phase II regarding whether there is a ``referral'' when 
antigens are prepared and furnished by a physician, or whether there is 
a ``referral'' when a physician refills an implantable pump (69 FR 
16063). The response in Phase II appeared, in the commenters' view, to 
indicate that, if a physician personally prepares and furnishes 
antigens or personally refills an implanted pump for a patient, there 
is no ``referral'' for purposes of the physician self-referral statute. 
From this statement, the commenter concluded that the physician could 
bill for these DHS without consideration as to whether the referrals 
satisfy the requirements of an exception.
    Response: In Phase II, we stated that the definition of 
``referral'' excludes services personally performed or provided by the 
referring physician, but specifically includes any services performed 
or provided by anyone else (69 FR 16063). This interpretation is 
codified in the definition of ``referral'' at Sec.  411.351. It is 
possible for a physician to order and personally furnish antigens to a 
patient and to order a refill for, and personally refill, an 
implantable pump. In such instances, there would be no ``referral'' for 
a designated health service, and no exception is needed.
    We note that the furnishing of durable medical equipment (DME) and 
supplies by a referring physician requires a different analysis than 
the mere refilling of an implantable pump. There are few, if any, 
situations in which a referring physician would personally furnish DME 
and supplies to a patient, because doing so would require that the 
physician himself or herself be enrolled in Medicare as a DME supplier 
and personally perform all of the duties of a supplier as set forth in 
the supplier standards in Sec.  424.57(c).
    DME suppliers are entities that provide services under the specific 
Part B benefit for the provision of medical equipment and supplies for 
use in the patient's home. These entities must be enrolled with the 
appropriate Medicare contractor as a DME supplier and must meet all of 
the professional supplier standards and quality standards that we 
require through regulations and

[[Page 51020]]

administrative or program instructions. The enrollment requirements and 
professional supplier standards are not waived in those situations in 
which a physician furnishes DME directly to the patient. The services 
to be personally performed by the physician would include, but not be 
limited to, the following, as appropriate--
     Personally fit the item for the beneficiary;
     Provide necessary information and instructions concerning 
use of the DME;
     Advise the beneficiary that he or she may either rent or 
purchase inexpensive or routinely purchased DME;
     Explain the purchase option for capped rental DME;
     Explain all warranties;
     (Usually) deliver the DME to the beneficiary at home; and
     Explain to the beneficiary at the time of delivery how to 
contact the physician in his or her capacity as a DME supplier by 
telephone.
    A referring physician claiming to provide DME personally would need 
to maintain adequate documentation to establish that the physician 
personally performed these and other required DME supplier activities. 
All of these supplier requirements would need to be satisfied in order 
for a physician to be considered to be providing personally DME items 
and supplies. This is true for all DME furnished by a physician, 
including, for example, continuous positive airway pressure (CPAP) 
equipment. We believe that it is highly unlikely that a referring 
physician would meet the criteria for personally performed services 
when dispensing CPAP or other DME equipment. Thus, the dispensing of 
CPAP equipment by a physician would almost always constitute a 
``referral'' for purposes of the physician self-referral statute, as 
would the dispensing of CPAP equipment by anyone else affiliated with 
the referring physician, such as a nurse or physician assistant. We 
note that CPAP equipment is DME that does not qualify for the in-office 
ancillary services exception.
    Comment: One commenter suggested that a ``referral'' should not 
include ``incident to'' services requested by a physician and performed 
by an employee or contractor, unless the services are performed by an 
employee or contractor who is licensed to provide the services without 
physician supervision and who could otherwise bill separately for the 
services. The commenter also requested that we provide further 
education to physicians on how these ``incident to'' services would fit 
into the in-office ancillary services exception.
    Response: The commenter provided no support for its suggestion, nor 
did the commenter explain why the in-office ancillary services 
exception does not provide adequate protection under the circumstances 
described. We decline to change our interpretation of ``referral'' as 
requested by the commenter. As we stated in Phase II:

We are adhering to our original determination that ``incident to'' 
services performed by others, as well as services performed by a 
physician's employees, are referrals within the meaning of section 
1877 of the Act. * * * As a practical matter, although ``incident 
to'' services and employee services are included in the definition 
of ``referrals'' for purposes of section 1877 of the Act, many of 
those referrals will fit in the in-office ancillary services 
[exception] or another exception.

(69 FR 16063.) We continue to conclude that requests for DHS performed 
by a physician's employees or independent contractors are ``referrals'' 
within the meaning of the physician self-referral prohibition, although 
these referrals may satisfy the requirements of an exception, including 
the in-office ancillary services exception in Sec.  411.355(b).
    Comment: Several commenters poi