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

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

42 CFR Part 1001

RIN 0991-AA74

Medicare and State Health Care Programs: Fraud and Abuse;

Clarification of the OIG Safe Harbor Anti-Kickback Provisions

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

ACTION: Proposed rule.

SUMMARY: This proposed rule would clarify various aspects of safe

harbor provisions originally published in the Federal Register on July

29, 1991 as a final rule (56 FR 35952). The safe harbor provisions have

been specifically designed to set forth those payment practices and

business arrangements that will be protected from criminal prosecution

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

This proposed rule would modify the original set of final safe harbor

provisions to give greater clarity to the rulemaking's original intent.

DATES: To assure consideration, public comments must be delivered to

the address provided below by September 19, 1994. Comments are

available for public inspection August 4, 1994.

ADDRESSES: Address comments to: Office of Inspector General, Department

of Health and Human Services, Attention: LRR-35-P, room 5246, 330

Independence Ave., SW., Washington, DC 20201.

If you prefer, you may deliver your comments to room 5551, 330

Independence Avenue, SW., Washington, DC. In commenting, please refer

to file code LRR-35-P. Comments are available for public inspection in

room 5551 330 Independence Avenue, SW., Washington, DC, on Monday

through Friday each week from 9 a.m. to 5 p.m., (202) 619-3270.

FOR FURTHER INFORMATION CONTACT:

Sandra Sands, Office of the General Counsel, (202) 619-1306

Joel Schaer, Office of Inspector General, (202) 619-3270

SUPPLEMENTARY INFORMATION:

I. Background

On July 29, 1991, we published in the Federal Register a final rule

setting forth various safe harbor provisions to the Medicare and

Medicaid anti-kickback statute (56 FR 35952). This regulation was

authorized under section 14 of Public Law 100-93, the Medicare and

Medicaid Patient and Program Protection Act of 1987. The final rule

specified those payment practices that will not be subject to criminal

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

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

exclusion from Medicare or the State health care programs under section

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

Since publication of the final rule, we have become aware of a

limited number of ambiguities that have created uncertainties for

health care providers trying to comply with the safe harbor provisions.

We have also become aware of certain instances where our intent, either

to protect or preclude protection for particular business arrangements,

is not fully reflected in the text of the regulation even though it is

reflected in the preamble. This proposed rule would serve to modify the

text of the July 29, 1991 final rule to conform to the rulemaking's

original intent.

The clarifications contained in this proposed rule do not represent

an attempt to reevaluate the wisdom of the original safe-harbor

decisions. Instead, the changes set forth in this proposed rule would

serve only to protect business practices originally intended to be

protected by removing ambiguities in the regulatory language. This

clarity should aid the formation of legal business practices without

establishing any new significant legal obligations on the parties

affected by the regulations.

II. Summary of the Proposed Changes

A. Clarification to the General Comments Section of Preamble

-- Several individuals have commented that the following

sentence in the preamble has created confusion:

``Because the statute is broad, the payment practices described in

these safe harbor provisions would be prohibited by the statute but for

their inclusion here.'' (56 FR 35958)

This sentence was not meant to imply that, in all instances

irrespective of the parties intent, the government could prosecute

conduct described in the regulation, but for its inclusion in the

regulation. Whether a particular payment practice violates the statute

is a question that can only be resolved by an analysis of the elements

of the statute as applied to that set of facts. Generally speaking,

however, the original final rule did describe payment practices that

would be prohibited, where the unlawful intent exists, but for the safe

harbor protection that has been granted.

-- In discussing the space and equipment rental and personal

services and management contracts, we stated that if a ``sham contract

is entered into * * * we will look behind the contract'' to its

substance in evaluating whether the arrangement qualifies for safe-

harbor protection (56 FR 35972). We received numerous inquiries as to

whether we would similarly look behind the form of other arrangements

to determine whether the substance of the arrangement fits within a

particular safe harbor.

In some cases, such inquiries have led us to clarify particular

safe harbors, as is illustrated by the following discussions of the

safe harbors for investment interests, space and equipment rental, and

personal services and management contracts. However, because of the

broad variety of transactions subject to the Medicare and Medicaid

anti-kickback statute and the ability of individuals to manipulate the

safe harbors in ways not contemplated, we believe that a general rule

preventing sham arrangements from receiving safe harbor protection

would be appropriate. Thus, we are proposing adding a new Sec. 1001.954

to the regulations. Such an approach has several precedents. The

Federal Trade Commission (FTC) with the concurrence of the Department

of Justice promulgated Sec. 801.90 of the FTC's rules implementing the

Hart-Scott-Rodino Antitrust Improvements Act of 1976 (16 CFR 801.90),

which disregards sham transactions entered into for the purpose of

avoiding obligations under the Act. In addition, other Federal agencies

(such as the Securities Exchange Commission and the Internal Revenue

Service) have promulgated regulations and policies that seek to protect

the government from making enforcement decisions based on information

that does not accurately reflect the substance of the transaction.

(See, for example, 17 CFR 240.12b-20; Estate of Korman versus Comm., TC

Memo 1987-120; and Rev. Rul. 81-149, 1981-1 CB 77.) Moreover, the

courts have historically disregarded sham arrangements when examining

the rights and obligations of the parties in tax cases. (See, for

example, Knetsch versus United States, 364 U.S. 361 (1960); and

Thompson versus Commissioner of Internal Revenue, 631 F.2d 642 (9th

Cir. 1981), cert. denied, 452 U.S. 961 (1981).)

B. Clarifications to Investment Interests Safe Harbor

(Sec. 1001.952(a))

-- Health Care Assets and Revenues

In qualifying for the ``large entity'' or ``small entity''

investment interest safe harbors, the monetary value or amount of

certain assets and revenues must be determined. Specifically, the safe

harbors include: (1) The $50,000,000 asset threshold in

Sec. 1001.952(a)(1); and (2) the gross revenues in the ``60-40 revenue

rule'' in Sec. 1001.952(a)(2)(vi). In these cases, only the assets or

revenues related to the furnishing of health care items or services

will be counted for the purposes of qualifying for these safe harbor

requirements. It would be an obvious sham, inconsistent with our

original intent, if a joint venture could merge with a non-health care

business and have those non-health care assets, and the revenues

derived from that non-health care line of business counted for the

purposes of qualifying for safe harbor protection. We are thus

proposing to revise these safe harbor provisions to further clarify our

original intent that only health care assets and revenues will be

counted in determining these values and amounts.

-- Acquisition of Investment Interests

As set forth in Sec. 1001.952(a)(1)(ii), an ``interested'' investor

(who is in a position to make or influence referrals to, furnish items

or services to, or otherwise generate business for the entity) must

obtain his or her investment interest through trading on a registered

national securities exchange on terms equally available to the public.

This does not mean that an interested investor may acquire his or her

interest in any way other than the methods available to the general

public to acquire investment interests. We believe that the investor

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

of the public--directly off of a registered national securities

exchange through a broker--and it must be the same type of investment

interest that is available to the public. For example, a transaction in

which the interested investor receives restricted or ``lettered'' stock

from the entity would not be considered a valid acquisition of

investment interests under this requirement.

The discussion above does not represent a change in this standard.

Rather, it serves only to emphasize that the investment interest ``must

be obtained on terms equally available to the public through trading on

a registered national securities exchange * * *''

(Sec. 1001.952(a)(1)(ii)) (Emphasis added). Moreover, to obtain an

investment interest ``on terms equally available to the public,'' there

cannot be any side agreements that require stock to be purchased or

that restrict in any manner the investor's ability to dispose of the

stock. Any such agreement would constitute a sham transaction which

would disqualify dividend payments to that investor from safe harbor

protection.

-- Loans for the Purchase of the Investment Interest

One of the standards in the large and small entity investment

interest safe harbors prohibits the entity from loaning an investor

funds that are used by the investor to purchase his or her investment

interest. (See Secs. 1001.952(a)(1)(iv) and 1001.952(a)(2)(vii).) We

are proposing to change this standard to prohibit other investors,

individuals or entities as well as the entity from making such loans.

-- Class of Investment Interests

In the 60-40 investor rule in the small entity investment interest

safe harbor (Sec. 1001.952(a)(2)(i)), we established two categories of

investors: (1) ``untainted'' or ``disinterested'' investors are those

who do no business with the entity, but hold the investment interest

purely as an investment; and (2) ``tainted'' or ``interested''

investors are those who are in a position to make or influence

referrals to, furnish items or services to, or otherwise generate

business for the entity. For purposes of determining in which category

to place an investor, we require ``each class of investments'' to meet

the 60-40 apportionment between the two categories.

We have become aware of the difficulty in applying the 60-40 rule

to each class of investors in a joint venture where the general

partners hold a separate class of stock or investment interest from the

limited partners. In such a situation, that class of investment

interest for the general partners consists of 100 percent ``tainted''

or ``interested'' investors since the general partners are providing

services to the entity. Therefore, we believe that the entire joint

venture does not qualify for safe harbor protection.

While it is not always true that an active investor holds a

different class of investment interest from a passive investor, we have

found that it is unnecessarily restrictive to have this 60-40 investor

rule only apply to each class of investment interest. Thus, we are

proposing to modify this first investment interest standard to allow an

alternative to the class-by-class analysis. The new alternative would

allow equity investment interests to be combined together or debt

investment interests to be combined together (separate from the equity

investments) for purposes of apportioning investors into ``untainted''

and ``tainted'' pools and meeting the 60-40 test. Only equivalent

classes of equity investment interests could be combined, and only

equivalent classes of debt investment interests could be combined. That

is, the classes of investment interests combined would have to be

similar in all material respects. For example, the classes to be

combined would have to have equivalent returns in proportion to amounts

invested. In addition, if one class is given preferential treatment

(e.g., in the case of disposition), such an interest could not be

combined with subservient interests for purposes of compliance with the

60-40 investor rule.

If a limited partnership has a general partner who holds 20 percent

of the value of the investment interests, referring physicians hold 20

percent, and all the other investors have no business relationship with

the partnerships, then the 60-40 investor rule would be met, as long as

all other requirements are satisfied.

The 60-40 investor rule would not be met if any of the other

disinterested investors in the above example holds a debt instrument

instead of an equity instrument. For example, if a joint venture raises

one-third of its capital through a debt instrument held by

disinterested investors, with the remaining two thirds of its capital

derived from equity instruments held equally by interested (physicians

and general partners) and disinterested investors, the safe harbor

would not be met. In this example, even though interested investors

hold only one-third of all the investment interests, they hold one-half

of the equity investment interests, and thus no safe harbor protection

would be available.

We note that other standards in this small entity safe harbor

preclude protection for abusive schemes to give referring investors

preferential treatment in any way by creating different classes of

investment. For example, if a joint venture creates two classes of

stock, with one of the classes reserved for referring physicians who

receive a higher dividend per share than non-referring investors in the

other class, such an arrangement would not comply with at least

sections 1001.952(a)(2) (ii), (iii) and (viii).

-- Items or Services Furnished by an Investor

As discussed above, when an investor furnishes items or services to

the joint venture, such as management services, he or she is a tainted

or interested investor for the purposes of complying with the 60-40

investor rule (Sec. 1001.952(a)(2)(vi)). It was not our intent to have

any revenues that the joint venture derives from this investor's

services to be considered tainted for the purpose of qualifying for the

60-40 revenue rule.

Because of the apparent confusion caused by the language ``items or

services furnished'' in this safe harbor standard, we are proposing

striking it. The focus of the inquiry in this standard is where the

business and clients are coming from. In other words, the revenues are

tainted, and may not exceed 40 percent of total revenues, if they are

derived ``from referrals* * * or business otherwise generated from

investors.'' We note that the language we are proposing to strike--

``items or services furnished''--is superfluous because, if the revenue

is ``generated'' (i.e., induced to come to the joint venture for items

or services by an investor), it is tainted. Thus, the language we are

proposing to delete appears not to have added anything and merely

caused confusion.

The following example demonstrates the confusion and our solution.

If a radiologist holds an investment interest in an imaging center and

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

not taint all the revenues from the referrals by non-investors.

However, we have received a few questions from people who read the 60-

40 revenue rule as making such referrals tainted because the investor

furnished services at the joint venture.

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

making referrals or otherwise generating business, then the revenues

the joint venture derives from that activity would become tainted. For

example, revenues would be tainted when a radiologist-investor takes

part in a consultation with a non-investor internist, and during that

consultation the radiologist recommends a procedure which is performed

at the joint venture.

C. Clarifications to Space and Equipment Rental and Personal Services

and Management Contracts Safe Harbors (Secs. 1001.952 (b), (c) and (d))

-- In the preamble discussing the safe harbor provisions for

space and equipment rental and personal services and management

contracts (56 FR 35971-74), we made clear that one of our concerns was

that health care providers in a position to make referrals to each

other who engaged in these business arrangements could renegotiate

their contracts on a regular basis depending on the volume of business

generated. It is for this reason that we require the leases or

contracts be for a term of not less than one year. (See

Secs. 1001.952(b)(4), 1001.952(c)(4), and 1001.952(d)(4).)

It has come to our attention that a small number of health care

providers believe they are complying with the literal terms of these

safe harbor provisions, but are circumventing our intent not to protect

agreements that are renegotiated based on the volume of business

generated between the parties. They believe that they are protected if

they enter into multiple agreements, each of which is for a period of

one year, but when all the agreements are viewed together

renegotiations are taking place more frequently (e.g., every month),

with the terms of the additional agreements based in part on the volume

of business being generated between the parties under existing

agreements. For example, a one year personal services contract between

a hospital and a high-volume referring physician is created for the

physician to perform certain services. The next month a new one year

contract is created for a slightly different service, with the amount

of payment influenced by the previous months referrals.

This scenario does not comply with the requirement in each of these

safe harbor provisions that the compensation not take ``into account

the volume or value of any referrals or business otherwise generated

between the parties * * * .'' (Secs. 1001.952(b)(5), 1001.952(c)(5),

and 1001.952(d)(5)). However, because the principal problem in this

situation is that the parties are creating multiple overlapping

agreements, we are proposing to revise these three safe harbor

provisions to expressly preclude such schemes.

In addition, it appears that some health care providers are

attempting to pay for referrals by renting more space than they

actually need from referral sources. Although such an arrangement would

not fit within a safe harbor because the aggregate rental charge would

be determined in a manner that would account for the volume or value of

referrals or business otherwise generated between the parties, we are

proposing to revise the safe harbor provisions in Secs. 1001.952

(b)(5), (c)(5) and (d)(5) to expressly preclude this practice.

D. Clarifications to Referral Services Safe-Harbor (Sec. 1001.952(f))

-- One of the standards in the referral services safe harbor

provision requires that any fee the referral service charges the

participant be ``based on the cost of operating the referral service,

and not on the volume or value of any referrals to or business

otherwise generated by the participants for the referral service * * *

.'' (Emphasis added) (Sec. 1001.952(f)(2)). This language precludes

protection where a referral service, such as one operated by a

hospital, lowers its referral service fee to one of its staff

physicians who participates in the service because that physician is a

high-volume referrer.

This language creates an ambiguity where the referral service tries

to adjust its fee based on the volume of referrals it makes to the

participant. Thus, we propose clarifying the second prong to preclude

safe harbor protection for payments that are based on the volume or

value of referrals to or business otherwise generated by either party

for the other party.

E. Clarifications To Discount Safe Harbor (Sec. 1001.952(h))

-- Many people requested clarification of the safe harbor for

discounts. Because there has been some uncertainty over what

obligations individuals or entities have to meet in order to receive

protection under this safe harbor, we propose dividing the parties into

three groups: buyers, sellers, and offerors of discounts. In describing

each party's obligations, we would revise paragraphs (h)(1) and (h)(2),

and add a new paragraph (h)(3).

In addition, through a proposed new paragraph (h)(4), we would

clarify that, for purposes of this regulation, a ``rebate'' is any

discount which is not given at the time of sale. Consequently, a rebate

transaction may be covered within the safe harbor if it involves a

buyer under Sec. 1001.952 (h)(1)(i) or (h)(1)(ii), but it is not

covered if it involves a buyer under Sec. 1001.952(h)(1)(iii) because,

under that provision, all discounts must be given at the time of sale.

We also wish to clarify what has to happen for sellers to receive

safe harbor protection. In the safe harbor regulation itself, we state

that discounts will be safe harbored if both the seller ``and'' the

buyer comply with the applicable standards as described in the rule.

Yet in the preamble we state that sellers should not be held liable for

the omissions of buyers. If a seller has done everything that it

reasonably could under the circumstances to ensure that the buyer

understands its obligations to accurately report the discount, the

seller is safe harbored irrespective of the omissions of the buyer. To

receive such protection, however, the seller must report the discount

to the buyer and inform the buyer of its obligation to report the

discount. To emphasize that the seller's obligations require more than

superficial compliance with the safe harbor, we propose to add to that

the seller must inform the buyer ``in an effective manner'' of its

obligations to report the discount. We also propose adding a

requirement that the seller ``refrain from doing anything that would

impede the buyer from meeting its obligations under this paragraph.''

Thus, if the seller, in good faith, meets its obligations under the

safe harbor and the buyer does not meet its obligations due to no fault

of the seller, the seller would receive safe harbor protection.

However, when the seller submits a claim or request for payment on

behalf of the buyer, the seller must fully and accurately report the

discount to Medicare or the State health care program. Likewise, when

an offeror of a discount meets its obligations under

Sec. 1001.952(h)(3), and the buyer or seller does not meet its

obligations due to no fault of the offeror, the offeror would receive

safe harbor protection.

In addition, we are proposing to clarify whether any reduction in

price offered to a beneficiary could be safe harbored under this

regulation. Congress protected ``a discount or other reduction in price

obtained by a provider of services or other entity'' (emphasis added)

and made no provision for such discounts obtained by a beneficiary. In

Sec. 1001.952(h)(3)(iv) of the regulation, we removed from safe harbor

protection a ``reduction in price offered to a beneficiary * * * .'' In

that section, all we intended to remove from this safe harbor was

``routine reduction or waiver of any coinsurance or deductible amount

owed by a program beneficiary.'' Thus, to the extent that a discount is

offered to a beneficiary and all other applicable standards in the safe

harbor are met, such a discount would receive safe harbor protection.

Many people have expressed confusion regarding the relationship

between the safe harbor for discounts and the statutory exception for

discounts. (See section 1128B(b)(3)(A) of the Act.) Specifically, we

are asked if there are any practices involving discounts which were

protected by Congress under the statutory exception which do not fit

within the safe harbor for discounts. Our intention is that all the

discounts or reductions in price that Congress intended to protect

under the statutory exception for discounts are protected under the

safe harbor for discounts. Moreover, as is illustrated by the

discussion above regarding discounts to beneficiaries, we are proposing

to expand the safe harbor for discounts to include additional practices

that we do not consider abusive.

In the preamble to the final regulation, we stated that when

reporting a discount, one only need report the actual purchase price

and note that it is a ``net discount'' (56 FR 35981). However, for

purposes of submitting a claim or request for payment, what is

necessary is that the value of the discount is accurately reflected in

the actual purchase price. It is not necessary to distinguish whether

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

Consequently, buyers who were uncertain about how and where to report

on a particular form the fact that the price was due to a discount need

not be concerned with reporting that fact, as long as the actual

purchase price accurately reflects the discount.

Finally, we are proposing some minor editorial changes that do not

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

understand.

F. Technical Correction

-- A typographical error at 56 FR 35978 gave a citation to a

HCFA rule on payment for intraocular lenses as ``55 FR 436.'' We would

correct this citation to the HCFA rule to read as ``55 FR 4536.''

-- We are proposing the deletion of Sec. 1001.953 which calls

for the completion of an OIG report on compliance with the investment

interest safe harbor at Sec. 1001.952(a)(2)(i) and 1001.952(a)(2)(vi)

within a specified period of time after publication of the original

safe harbor provisions. While the OIG is continuing its work on

evaluating this safe harbor provision, we believe completion of this

report to be an internal administrative process that need not be set

forth in the regulations.

III. Regulatory Impact Statement

As we indicated in the original safe harbor final rule published on

July 29, 1991, consistent with the intent of the statute, the original

safe harbor rulemaking and these proposed clarifications are designed

to permit individuals and entities to freely engage in business

practices and arrangements that encourage competition, innovation and

economy. In doing so, the regulations impose no requirements on any

party. Health care providers and others may voluntarily seek to comply

with these provisions so that they have the assurance that their

business practices are not subject to any enforcement action under the

anti-kickback statute. We believe that the economic impact of these

provisions would be minimal.

In addition, we generally prepare a regulatory flexibility analysis

that is consistent with the Regulatory Flexibility Act (5 U.S.C. 601-

612). We have determined, and the Secretary certifies, that this

proposed regulation would not have a significant economic impact on a

substantial number of small business entities, and we have, therefore,

not prepared a regulatory flexibility analysis.

List of Subjects in 42 CFR Part 1001

Administrative practice and procedure, Fraud, Health facilities,

Health professions, Medicaid, Medicare.

TITLE 42--PUBLIC HEALTH

CHAPTER V--OFFICE OF INSPECTOR GENERAL--HEALTH CARE, DEPARTMENT OF

HEALTH AND HUMAN SERVICES

42 CFR part 1001 would be amended as set forth below:

PART 1001--PROGRAM INTEGRITY--MEDICARE AND STATE HEALTH CARE

PROGRAMS

1. The authority citation for part 1001 would continue to read as

follow:

Authority: 42 U.S.C. 1302, 1320a-7, 1320a-7b, 1395u(j),

1395u(k), 1395y(d), 1395y(e), 1395cc(b)(2)(D), (E) and (F), and

1395hh, and section 14 of Public Law 100-93.

2. Section 1001.952 would be amended by:

a. republishing the introductory text for this section;

b. republishing the introductory text for paragraph (a)(1), and by

revising paragraphs (a)(1)(iv), (a)(2)(i), (a)(2)(vi) and (a)(2)(vii);

c. revising paragraphs (b)(2) and (b)(5);

d. adding a new paragraph (b)(6);

c. revising paragraphs (c)(2) and (c)(5);

f. adding a new paragraph (c)(6);

g. revising paragraphs (d)(2), (d)(5) and (d)(6);

h. adding a new paragraph (d)(7);

i. revising paragraphs (f)(2); and

j. revising paragraph (h), to read as follows--

Sec. 1001.952 Exceptions.

The following payment practices shall not be treated as a criminal

offense under section 1128B of the Act and shall not serve as the basis

for an exclusion:

(a) Investment interests. * * *

(1) If, within the previous fiscal year or previous 12 month

period, the entity possesses more than $50,000,000 in undepreciated net

tangible assets (based on the net acquisition cost of purchasing such

assets from an unrelated entity) related to the furnishing of health

care items and services, all of the following five applicable standards

must be met--

* * * * *

(iv) The entity or any investor (or other individual or entity

acting on behalf of the entity or any investor in the entity) must not

loan funds to or guarantee a loan for an investor who is in a position

to make or influence referrals to, furnish items or services to, or

otherwise generate business for the entity if the investor uses any

part of such loan to obtain the investment interest.

* * * * *

(2) * * *

(i) No more than 40 percent of the value of the investment

interests of each class of investment interests may be held in the

previous fiscal year or previous 12 month period by investors who are

in a position to make or influence referrals to, furnish items or

services to, or otherwise generate business for the entity. (For

purposes of Sec. 1001.952(a)(2)(i), equivalent classes of equity

investments may be combined, and equivalent classes of debt instruments

may be combined.)

* * * * *

(vi) No more than 40 percent of the entity's gross revenue related

to the furnishing of health care items and services in the previous

fiscal year or previous 12 month period may come from referrals, or

business otherwise generated from investors.

(vii) The entity or any investor must not loan funds to or

guarantee a loan for an investor who is in a position to make or

influence referrals to, furnish items or services to, or otherwise

generate business for the entity if the investor uses any part of such

loan to obtain the investment interest.

* * * * *

(b) Space rental. * * *

(2) The lease covers all of the premises leased between the parties

for the period of the lease and specifies the premises covered by the

lease.

* * * * *

(5) The aggregate space rented does not exceed that which is

reasonably necessary to accomplish the legitimate business purpose of

the rental.

(6) The aggregate rental charge is set in advance, is consistent

with fair market value in arms-length transactions and is not

determined in a manner that takes into account the volume or value of

any referrals or business otherwise generated between the parties for

which payment may be made in whole or in part under Medicare or a State

health care program.

* * * * *

(2) The lease covers all of the equipment leased between the

parties for the period of the lease and specifies the equipment covered

by the lease.

* * * * *

(5) The aggregate equipment rental does not exceed that which is

reasonably necessary to accomplish the legitimate business purpose of

the rental.

(6) The aggregate rental charge is set in advance, is consistent

with fair market value in arms-length transactions and is not

determined in a manner that takes into account the volume or value of

any referrals or business otherwise generated between the parties for

which payment may be made in whole or in part under Medicare or a State

health care program.

* * * * *

(d) Personal services and management contracts.

* * * * *

(2) The agency agreement covers all of the services the agent

provides to the principal for the period of the agreement and specifies

the services to be provided by the agent.

* * * * *

(5) The aggregate services contracted for do not exceed those which

are reasonably necessary to accomplish the legitimate business purpose

of the services.

(6) The aggregate compensation paid to the agent over the term of

the agreement is set in advance, is consistent with fair market value

in arms-length transactions and is not determined in a manner that

takes into account the volume or value of any referrals or business

otherwise generated between the parties for which payment may be made

in whole or in part under Medicare or a State health care program.

(7) The services performed under the agreement do not involve the

counseling or promotion of a business arrangement or other activity

that violates any State or Federal law.

* * * * *

(f) Referral services. * * *

(2) Any payment the participant makes to the referral service is

assessed equally against and collected equally from all participants,

and is only based on the cost of operating the referral service, and

not on the volume or value of any referrals to or business otherwise

generated by either party for the other party for which payment may be

made in whole or in part under Medicare or a State health care program.

* * * * *

(h) Discounts. As used in section 1128B of the Act,

``remuneration'' does not include a discount, as defined in paragraph

(h)(5) of this section, on an item or service for which payment may be

made, in whole or in part, under Medicare or a State health care

program for a buyer as long as the buyer complies with the applicable

standards of paragraph (h)(1) of this section; a seller as long as the

seller complies with the applicable standards of paragraph (h)(2) of

this section; and an offeror of a discount who is not a seller under

paragraph (h)(2) of this section so long as such offeror complies with

the applicable standards of paragraph (h)(3) of this section:

(1) With respect to the following three categories of buyers, the

buyer must comply with all of the applicable standards within one of

the three following categories--

(i) If the buyer is an entity which is a health maintenance

organization or a competitive medical plan acting in accordance with a

risk contract under section 1876(g) or 1903(m) of the Act, or under

another State health care program, it need not report the discount

except as otherwise may be required under the risk contract.

(ii) If the buyer is an entity which reports its costs on a cost

report required by the Department or a State health care program, it

must comply with all of the following four standards--

(A) the discount must be earned based on purchases of that same

good or service bought within a single fiscal year of the buyer.

(B) the buyer must claim the benefit of the discount in the fiscal

year in which the discount is earned or the following year.

applicable cost report; and

(D) the buyer must provide, upon request by the Secretary or a

State agency, information provided by the seller as specified in

paragraph (h)(2)(ii) of this section, or information provided by the

offeror as specified in paragraph (h)(3)(ii) of this section.

(iii) If the buyer is an individual or entity in whose name a claim

or request for payment is submitted for an item or service for which

payment may be made, in whole or in part, under Medicare or a State

health care program (not including individuals or entities receiving

items or services from entities defined as buyers in paragraph

(h)(1)(i) or (h)(1)(ii) of this section), the buyer must comply with

all of the following three standards--

(A) the discount must be made at the time of the sale of the good

or service (rebates are therefore not allowable);

(B) where an item or service is separately claimed for payment with

the Medicare program or a State health care program, the buyer (if

submitting the claim) must fully and accurately report the discount on

that item or service; and

by the Secretary or a State agency, information provided by the seller

as specified in paragraph (h)(2)(iii)(B) of this section, or

information provided by the offeror as specified in paragraph

(h)(3)(iii)(A) of this section.

(2) The seller is an individual or entity that furnishes an item or

service for which payment may be made, in whole or in part, under

Medicare or a State health care program to the buyer and who permits a

discount to be taken off the buyer's purchase price. The seller must

comply with all of the applicable standards within the following three

categories--

(i) If the buyer is an entity which is a health maintenance

organization or a competitive medical plan acting in accordance with a

risk contract under section 1876(g) or 1903(m) of the Act, or under

another State health care program, the seller need not report the

discount to the buyer for purposes of this provision.

(ii) If the buyer, is an entity that reports its costs on a cost

report required by the Department or a State agency, the seller must

comply with either of the following two standards--

(A) where a discount is required to be reported to Medicare or a

State health care program under paragraph (h)(1) of this section, the

seller must fully and accurately report such discount on the invoice,

coupon or statement submitted to the buyer, inform the buyer in an

effective manner of its obligations to report such discount, and

refrain from doing anything which would impede the buyer from meeting

its obligations under this paragraph; or

(B) where the value of the discount is not known at the time of

sale, the seller must fully and accurately report the existence of a

discount program on the invoice, coupon or statement submitted to the

buyer, inform the buyer in an effective manner of its obligations to

report such discount under paragraph (h)(1) of this section and, when

the value of the discount becomes known, provide the buyer with

documentation of the calculation of the discount identifying the

specific goods or services purchased to which the discount will be

applied, and refrain from doing anything which would impede the buyer

from meeting its obligations under this paragraph.

(iii) If the buyer is an individual or entity not included in

paragraph (h)(2)(i) or (h)(2)(ii) of this section, the seller must

comply with either of the following two standards--

(A) where the seller submits a claim or request for payment on

behalf of the buyer and the item or service is separately claimed, the

seller must fully and accurately report the discount on the claim or

request for payment to Medicare or a State health care program and the

seller must provide, upon request by the Secretary or a State agency,

information provided by the offeror as specified in paragraph

(h)(3)(iii)(A) of this section; or

(B) where the buyer submits a claim, the seller must fully and

accurately report such discount on the invoice, coupon or statement

submitted to the buyer; inform the buyer in an effective manner of its

obligations to report such discount; and refrain from doing anything

that would impede the buyer from meeting its obligations under this

paragraph.

(3) The offeror of a discount is an individual or entity who is not

a seller under paragraph (h)(2) of this section, but promotes the

purchase of an item or service by a buyer under paragraph (h)(1) of

this section at a reduced price for which payment may be made, in whole

or in part, under Medicare or a State health care program. The offeror

must comply with all of the applicable standards within the following

three categories--

(i) If the buyer is an entity which is a health maintenance

organization or a competitive medical plan acting in accordance with a

risk contract under section 1876(g) or 1903(m) of the Act, or under

another State health care program, the offeror need not report the

discount to the buyer for purposes of this provision.

(ii) If the buyer is an entity that reports its costs on a cost

report required by the Department or a State agency, the offeror must

comply with the following two standards--

(A) the offeror must inform the buyer in an effective manner of its

obligation to report such a discount; and

(B) the offeror of the discount must refrain from doing anything

that would impede the buyer's ability to meet its obligations under

this paragraph.

(iii) If the buyer is an individual or entity in whose name a

request for payment is submitted for an item or service for which

payment may be made, in whole or in part, under Medicare or a State

health care program (not including individuals or entities defined as

buyers in paragraph (h)(1)(i) or (h)(1)(ii) of this section), the

offeror must comply with the following two standards--

(A) the offeror must inform the individual or entity submitting the

claim or request for payment in an effective manner of their

obligations to report such a discount; and

(B) the offeror of the discount must refrain from doing anything

that would impede the buyer's or seller's ability to meet its

obligations under this paragraph.

(4) For purposes of this paragraph (a), a rebate is any discount

which is not given at the time of sale.

(5) For purposes of this paragraph (a), the term discount means a

reduction in the amount a buyer (who buys either directly or through a

wholesaler or a group purchasing organization) is charged for an item

or service based on an arms-length transaction. The term discount does

not include--

(i) Cash payment;

(ii) Furnishing one good or service without charge or at a reduced

charge to include the purchase of a different good or service;

(iii) A reduction in price applicable to one payer but not to

Medicare or a State health care program;

(iv) A routine reduction or waiver of any coinsurance or deductible

amount owned by a program beneficiary;

(v) Warranties;

(vi) Services provided in accordance with a personal or management

services contract; or

(vii) Other remuneration, in cash or in kind, not explicitly

described in this paragraph (a)(5).

* * * * *

Sec. 1001.953 [Removed]

3. Section 1001.953 would be removed.

4. Section 1001.954 would be added to read as follows:

Sec. 1001.954 Sham Transactions or Devices.

Any transaction or other device entered into or employed for the

purpose of appearing to fit within a safe harbor when the substance of

the transaction or device is not accurately reflected by the form will

be disregarded, and whether the arrangement receives the protection of

a safe harbor will be determined by the substance of the transaction or

device.

Dated: March 14, 1994.

June Gibbs Brown,

Inspector General.

Approved: April 22, 1994.

Donna E. Shalala,

Secretary, Department of Health and Human Services.

[FR Doc. 94-16873 Filed 7-20-94; 8:45 am]

BILLING CODE 4150-04-M