On November 19, 1999, the HHS Office of Inspector General ("OIG") published a final rule amending its existing anti-kickback safe harbors, and adding new safe harbors. These new and revised safe harbors were initially published for notice and comment in 1993 and 1994, but also reflect comments solicited from the public during the annual solicitations for safe harbor amendments and from the proposed transactions that have been brought to the attention of the OIG through the anti-kickback advisory opinion process.
Although the final rules were expected for over five years and were followed with great interest by many segments of the health care industry, not all of the changes reflect major policy shifts by the OIG. Nevertheless, any individual or entity affected by these safe harbors should consider taking a hard look at their existing organization, agreements, and compliance policies to determine if they can benefit from the new rules or if revisions to existing agreements and policies are prudent in light of these revisions. Even for those entities and agreements that do not fit squarely within one of the new or revised safe harbors, the OIG reiterated its willingness to respond to requests for advisory opinions.
Under the Federal health care anti-kickback law, 42 U.S.C. § 1320a-7b(b), it is a felony to knowingly and willfully offer, solicit, pay, or receive anything of value, whether directly or indirectly, in exchange for or to induce the referral of items or services for which a Federal health care program may make payment. Violations of the law are punishable by criminal fines of up to $25,000 per offense, incarceration for up to five years, or both. In addition, a violation of the anti-kickback law may trigger two civil sanctions: first; under 42 U.S.C. § 1320a-7(b)(7), the OIG may exclude the offending individual or entity from participation in the Medicare and Medicaid programs; second, under 42 U.S.C. § 1320a-7a(a)(7), the OIG can impose a civil monetary penalty of $50,000 per violation plus up to three times the amount of the underlying remuneration.
Congress was aware of the recognized the extraordinary reach of the anti-kickback law, and in 1987 amended the Social Security Act to permit the Secretary of Health and Human Services to publish regulations defining those practices that will be insulated from any sanction. Any transaction that fits squarely within the published "safe harbors" is not subject to sanction; all others will be evaluated on a case-by-case basis to determine if a violation has occurred and if enforcement is warranted.
The New Safe Harbors
The eight new safe harbors are a blend of four particular transactions and entities that the OIG believes can realize cost savings to the Medicare program without exposing the program to a significant risk of fraud or abuse, and four that provide explicit incentives for providers and suppliers to furnish items and services to residents of medically underserved areas. In the final rules, the OIG also addressed several types of agreements and entities that would not be covered by the new and revised safe harbors. These entities include integrated delivery systems or arrangements between wholly-owned entities. The OIG also abandoned its attempt to publish a "sham transaction" safe harbor, which would prohibit any individual or entity from claiming safe harbor protection when the underlying transaction or agreement appears on its face to comply with a safe harbor, but which actually is a disguise for a kickback. Even though the OIG did not expressly adopt the "sham transaction" regul ation, it has not retreated from its historical position that it can look behind transactions that are disguises for kickbacks and subject the affected individuals and entities to prosecution.
The OIG also rejected proposals by commenters to harmonize the anti-kickback safe harbors with the exceptions to 42 U.S.C. § 1395nn, popularly known as the Stark anti-referral law. The OIG explained that the Stark law is a civil statute, and compliance with that law does not turn on the intent of the parties. Under Stark, the failure to fit within one of the enumerated statutory exceptions is a violation of that law. By contrast, the anti-kickback provisions of the Social Security Act include the intent of the parties as an element of an offense, and the failure to fit within one of the safe harbors does not necessarily connote any illegal activity.
Ambulatory Surgical Centers
The most significant change in the new regulations is the creation of a safe harbor for investments in ambulatory surgical centers ("ASCs"). The OIG has divided this industry into four segments: (1) surgeon-owned ASCs, at which all physician-investors are either general surgeons or group practices composed of surgeons engaged in the same specialty with the ability to refer patients; (2) single-specialty ASCs, where all physician-investors are engaged in the same specialty or subspecialty, such as orthopedics; (3) multi-specialty ASCs, where the physician-investors can be a mix of specialties, including many mixed group practices; and (4) hospital-physician ASCs, where the investors consist of at least one hospital and physicians, group practices, or non-referral sources.
In each category, safe harbor protection for an ASC is available if the investors also include individuals or entities without any ability to refer patients to the ASC or to generate business either for the ASC or any of its investors. In the OIG's view, the intent of the ASC safe harbor is to protect those investments that represent a legitimate extension of the physician's or group's office practice.
In order to qualify for safe harbor protection, an ASC must at least meet the following conditions:
• the ASC must be certified under certification under 42 C.F.R. Part 416 (which includes including a requirement that the operating and recovery space in the facility be dedicated exclusively to the ASC);
• any physician investment interest must be fully disclosed to a program beneficiary who may be referred to the ASC;
• no investment in the ASC can be made with funds loaned from the ASC or from other investors;
• investment interests in the ASC cannot be offered on terms linked to the value or volume of referrals to the ASC;
• all payments to investors must be directly proportional to the individual's or entity's capital investment in the ASC (including the fair market value of any pre-operative services rendered);
• all ancillary services must be an integral part of the primary procedure performed at the ASC, and cannot be billed separately to Medicare or to any federal health care program; and
• neither the ASC nor physicians practicing at the ASC may discriminate against federal health program beneficiaries.
In addition, for the surgeon-owned, single specialty, and multi-specialty ASCs, the OIG further requires that each of the physician-investors derive at least one-third of their aggregate medical practice income during the preceding fiscal year or 12-month period from performing procedures covered by Medicare that require an ASC setting. This restriction may limit the number of practices that can take advantage of the new safe harbor, even though the ASC may represent a legitimate extension of an individual's or group's office practice. For example, in a practice consisting of three ophthalmologists, if one member of the group does not perform any surgery, the ASC owned and operated by that group will not qualify for safe harbor protection. Moreover, in order to minimize cross-referrals within multi-specialty groups, each member of this category of investors must also meet the requirement that at least one-third of his or her procedures that require an ASC or hospital surgical set ting be performed at the ASC in which each group member is investing. In the OIG's view, the "one-third/one-third" rule for multi-specialty ASCs was designed to ensure that physician-investors would not have a significant incentive beyond the receipt of their professional fees to make referrals to the ASC or to any of its investors, because the return on their investment would not be significantly enhanced by potential referrals of ASC business.
As part of its policy of assuring that safe harbor protection should be available when there are tangible cost savings to Medicare, the OIG has imposed special restrictions on hospital/physician-owned ASCs. In addition to the restrictions on investment terms and payments to investors, the OIG will also require that hospitals not be in a position to make or influence referrals to the ASC or to any of the investors in the ASC. This statement is difficult to reconcile with the OIG's statement in the preamble regarding the small entity safe harbor that hospitals can be in a position to refer, and may even control referrals (even though they place no orders for services). The OIG further requires that hospital/physician ASCs seeking safe harbor protection be located in dedicated space, and cannot be used to treat the hospital's outpatients. If the space for the ASC or the equipment used in the ASC is leased from the hospital, or if the hospital provides services to the ASC, the safe h arbor will be available only if these agreements satisfy the existing safe harbors for space rental, equipment rental, or personal services and management contracts as set out in 42 C.F.R. § 1001.952(b) - (d). Finally, the hospital cannot include the costs associated with the ASC on its cost report unless expressly authorized by HCFA.
The limits on the ASC safe harbor are also apparent from the OIG's refusal to extend protection to other entities such as lithotripsy facilities, end stage renal disease facilities, cardiac catheterization centers, radiation oncology facilities, and optical dispensing facilities, even though they can also be viewed as an extension of a specialized office practice, and can generate cost savings when compared to their hospital-based counterparts. In the OIG's view, the Medicare reimbursement methodologies for these entities was substantially dissimilar to the ASC reimbursement structure, and would not comport with the policy goals underlying the ASC safe harbor.
Investment Interests in Group Practices
Under the Stark anti-referral law, 42 U.S.C. § 1395nn, a physician who has an ownership interest in or a compensation arrangement with a group practice will not violate that law if he or she makes a referral to that group for a designated health service payable under Medicare or a State health care program, provided that the group satisfies the definition of a group practice in 42 U.S.C. § 1395nn(h)(4). However, it was unclear whether or not the anti-kickback law could be violated if such a referral occurred. A new safe harbor expressly protects investments by physicians in group practices provided that the practice satisfies the definition of a group practice in the Stark law. The group may consist of individual licensed professionals who practice in a group, or can consist of a solo practice in which the solo practitioner's professional corporation provides the services. The reference to solo practitioners is a broader standard than that in the proposed Stark II regulations, where HCFA suggested that, except for faculty practice plans, hospital-owned practices, and other special situations, a group practice must be owned by at least two physicians. See 63 Fed. Reg. 1646, 1721 (1998).
In order to qualify for this safe harbor, the equity interests in the group must be held by licensed professionals (or an individual professional corporation in the case of a solo practice) who practice in the group. Investment interests that take the form of bonds, notes, or other debt instruments are not considered in determining whether or not safe harbor protection is available; as a result, an equity interest in a group practice can be acquired with a loan from the group without jeopardizing the safe harbor protection. The equity interests must be in the group itself, and not in a subdivision of the group. The practice must meet the Stark law's definition of a group practice (except for solo practices). Finally, any distribution of profits derived from in-office ancillary services will be protected only if those services meet the Stark law's definition of in-office ancillary services in 42 U.S.C. § 1395nn(b)(2). The OIG was particularly concerned that investments by members of a group practice in entities that provide ancillary services created the potential for overutilization and abuse of those services. Nevertheless, it acknowledged that some investment interests in ancillary service providers might also qualify for the small entity safe harbor, which was amended in the same rulemaking package.
Referral Agreements for Specialty Services
In some cases requiring the coordination of care between a physicians with different areas of expertise, there may be an agreement that the patient will be referred to one physician (such as a specialist or subspecialist) and then referred back to the original treating physician when the patient has reached a particular level of recovery. The new safe harbor will insulate only those agreements in which a treating physician agrees to refer specific patients to a specialist or subspecialist in exchange for referring the same patient back at an agreed time or circumstance that is clinically appropriate. The referral must cover a service that is outside the scope of the referring practitioner's expertise and is within the expertise of the practitioner receiving the referral. Neither physician may receive payment from the other for the referral; payment is limited to the fees received from patients or third-party payors (including Medicare or Medicaid). Although the proposed ru le would have extended the safe harbor protection to referrals between primary care physicians and specialists (such as ophthalmologists and optometrists, or cardiac surgeons and cardiologists) who split a global fee under a co-management arrangement, the OIG deleted this proposal from the final rule on the belief that the potential for abuse was too great. Accordingly, safe harbor protection is not be available where the parties bill the Medicare program using the -54 or -55 modifiers to designate a split of a global fee.
Cooperative Hospital Service Organizations
In order to reduce costs and improve efficiency, tax exempt hospitals can establish cooperative hospital service organizations ("CHSOs") under Section 501(e) of the Internal Revenue Code to provide purchasing, billing, and clerical services to those hospitals, which as known as patron hospitals. The OIG adopted the safe harbor for CHSOs as proposed. The safe harbor will protect those CHSOs that are wholly owned by their patron hospitals, and will protect payments that are made by a patron hospital to the CHSO either for bona fide operating expenses or are distributions of net earnings from the CHSO in accord with Section 501(e)(2) of the Internal Revenue Code.
Safe Harbors For Medically Undeserved Areas
In 1993, the OIG proposed to adopt four new safe harbors to create incentives for providers to increase access to medical services in rural areas. In response to the comments it received, the OIG agreed to expand these safe harbors to include urban and suburban areas designated by the Health Resources and Services Administration as a Health Professional Shortage Area ("HPSAs") or as a Medically Underserved Area.1/ These safe harbors are discussed below.
Investment Interests in Underserved Areas
Under the existing safe harbor for investment interests in small entities, safe harbor protection turns on the ability of the entity to satisfy the "60-40 investor rule" or the "60-40 revenue rule" for investment interests codified at 42 C.F.R. § 1001.952(a)(2). Generally, these rules require that no more than 40% of the investment interests may be held by individuals in a position to refer to the entity, and no more than 40% of the gross revenues may be derived from referrals generated by investors. The OIG recognized that in Medically Underserved Areas it may be difficult or impossible to meet these rules, or that the rules themselves might be disincentive to prospective investors. Accordingly, the OIG has relaxed these rules for such investments: in place of the "60 - 40 rules," the new safe harbor will protect investments in Medically Underserved Areas if at least half of the investments in the entity in a medically underserved area must be held by non-referral sources. In ad dition, the rule contains a three-year grace period should the location in which the entity is located cease to be designated as a Medically Underserved Area.
In addition to the relaxed investor rule, this safe harbor has seven additional elements:
• the terms on which any passive investor is offered an investment interest cannot be altered based on that investor's ability to make or influence referrals or generate any business for the entity;
• the terms on which an investor in a position to make referrals to or generate business for the entity cannot be related to any expected volume of referrals or future business; a passive investor cannot be required to make referrals to the entity or otherwise generate business for the entity;
• the entity and any investor must market or furnish its services in the same fashion to passive investors and non-investors;
• at least 75% of the dollar volume of the entity's business during the preceding 12 months or fiscal year must come from residents of the Medically Underserved Area;
• neither the entity nor any investor can loan funds to or guarantee a loan for an investor in a position to make referrals or to generate business for the entity; and
• the amount of any payment to an investor must be directly proportional to that investor's capital investment.
Practitioner Recruitment in Medically Underserved Areas
Recruiting practitioners to relocate to Medically Underserved Areas can be made more difficult by the lack of legitimate incentives to attract and retain qualified professionals. In order to align the incentives for practitioner recruitment and the government's policy goals, the OIG has fashioned a safe harbor for recruitment packages when there is a demonstrated need for such practitioners, and when the affected practitioners actually serve residents of medically underserved areas.
The final rule permits recruitment for any HPSA for a given specialty, and does not require that the entity doing the recruiting be located in a medically underserved area. Other medically underserved areas that are not designated as HPSAs will not qualify for protection under this safe harbor. As a result, an urban hospital or health system can engage in recruitment under the safe harbor to staff its clinics located in HPSAs. However, the OIG stopped short of endorsing all such arrangements; for example, safe harbor protection will not be available if a hospital (or a hospital and a managed care organization) subsidizes a recruitment package offered by a physician practice to make the package more attractive. In the OIG's view, such arrangements could also be used as a mechanism for kickback payments. Since these agreements must now be evaluated on a case-by-case basis, interested partes can request advisory opinions from the OIG.
The practitioner recruitment safe harbor has nine elements, each of which must be satisfied:
• the payments must be made under a written agreement that specifies the benefits to be provided, the obligations of each party to the agreement, and the terms under which the benefits will be paid. No particular restrictions were placed on the terms and benefits that can be covered; the OIG decided to leave the terms to the parties to negotiate.
• if the practitioner is relocating, at least 75% of the revenues of the new practice must come from new patients. The OIG acknowledged that this standard might be difficult to enforce, it suggested that the parties "may use any reasonable method for establishing compliance, provided they use the same principles consistently over time . . . ."
• the recruitment benefits may be paid for up to three years, and cannot be substantially renegotiated during that period.
• the recruitment benefits cannot be conditioned on any requirement that the practitioner make any referrals to or generate any business for the recruiting entity.
• the recruited practitioner cannot be restricted from either seeking staff privileges at another provider or referring any service to that provider.
• the amount and nature of the benefits under the recruitment agreement cannot vary based on the value or volume of expected referrals or other business generated between the parties. In response to a comment, the OIG explained that income guarantees based on formulas would not be excluded from safe harbor protection provided that all of the prerequisites were met, even though the total amount paid to the practitioner under the guarantee might not be known in advance.
• the practitioner cannot discriminate against Medicare or Medicaid beneficiaries.
• at least 75% of the revenues of the new practice must be generated from patients residing in a HPSA or a Medically Underserved Area. If the service area for that practice is not classified as a HPSA for the entire three year period, the safe harbor will still apply if the practice was located in a HPSA or Medically Underserved Area as of the date of the initial agreement.
• the payment of recruitment benefits cannot benefit any third party who is in a position to make or influence referrals to the entity making the recruitment payments.
Sale of Practice Located in a Medically Underserved Area
In the original set of safe harbors published in 1991, the OIG created a safe harbor for a one-time sale of a medical practice. However, that safe harbor did not include transactions involving the purchase of an existing practice by a rural hospital as part of a practitioner recruitment program that complies with the new safe harbor for recruitment in Medically Underserved Areas. The revised safe harbor will also protect the purchase of a practice by a hospital or other entity if the sale is completed within three years and if the practice is located in a HPSA for the practitioner's specialty. In addition, the purchasing entity must undertake a good faith effort to recruit practitioners to take over the acquired practice within one year after the sale is completed, and must also satisfy the new practitioner recruitment safe harbor codified at 42 C.F.R. § 1001.952(n). As with the existing safe harbors covering the sale of a practice, the selling practitioner cannot be in a position to make referrals to or generate business for the practice after the sale is completed.
Obstetrical Malpractice Insurance Subsidies
In addition to adding incentives to recruit physicians to provide services in primary care HPSAs, the new safe harbors also permit hospitals or other entities to provide subsidies for obstetrical malpractice premiums for practitioners (including certified nurse midwives) who are engaged in obstetrical procedures as a routine part of their practice. The OIG explained that it will provide safe harbor protection on a pro rata basis for practitioners who divide their time between obstetrical procedures and other forms of care, and for those who divide their time between HPSAs and areas that are not underserved.
In order to qualify for safe harbor protection, the obstetrical malpractice subsidy must meet seven prerequisites. First, the subsidy payment must be made pursuant to a written agreement that specifies the terms under which the payments are to be made. Second, the practitioner must certify that for the first year of the agreement, there is a reasonable basis for believing that at least 75% of the obstetrical patients treated will reside in a HPSA or medically underserved area, or be part of a medically underserved population; for each succeeding year, the 75% rule must be met. Third, there can be no requirement that the practitioner make referrals to the entity providing the subsidy or generate business for such other entity in exchange for the subsidy. Fourth, the practitioner cannot be restricted from obtaining staff privileges at a provider other than the one furnishing the subsidy, or from referring patients or generating business to that provider. Fifth, the amount of the su bsidy cannot vary based on the value or volume of any referrals or other business generated between the practitioner and the entity providing the subsidy that may be paid by the Medicare or Medicaid program. Sixth, the practitioner cannot discriminate against any beneficiary of a federally-funded health care program. Finally, the subsidy must be for bona fide obstetrical malpractice coverage only; in the case of practitioners who do not engage in a full-time obstetrical practice in a primary care HPSA, the costs must be allocated to the non-obstetrical practice and/or to the non-HPSA portion of the practice.
Clarifications to Existing Safe Harbors
Large and Small Investment Interests
A safe harbor currently provides protection for investments in large entities, which are defined as those companies whose shares are traded on a national securities exchange (those with a capitalization of at least $50 million) and small entities (if they meet the "60 - 40" rules discussed above). 42 C.F.R. § 1001.952(a)
The clarifications specify that for investments in large entities, the investment interest must be obtained on the same terms as those available to the public through a securities broker. This restriction on safe harbor protection was targeted at health care companies acquire physician practices in exchange for stock or stock options value at an insider price. In the OIG's view, the spread between the market price and the insider price could be a vehicle for hiding payments for referrals. The OIG also explained that this limit was designed to prevent entities from obtaining safe harbor protection if there are any restrictions on the transferability of the interest that might influence the investor's referral patterns to the investment entity. Stock options may be subject to safe harbor protection if they are provided as compensation to physicians even where the public could only acquire similar interests through a stock exchange transaction; even in this situation, the entity may be required to disclose the granting of the option under SEC rules.
For small entities, the OIG has amended the rule to prohibit loans made to an investor by individuals or entities acting on behalf of the investment entity. The safe harbor would also preclude loan guarantees or collateral assignments on behalf of the health care entity in order to allow an investor to obtain a bank loan for the purpose of acquiring the investment interest in the entity. The preamble expressly includes prohibitions on loans by hospitals, nursing homes, or other institutions in this category. The preamble also clarifies that the analysis under the 60-40 revenue test refers to revenue related to the furnishing of health care items or services.
Space Rental, Equipment Rental, and Personal Service and Management Contracts
The OIG published two clarifications to 42 C.F.R. §§ 1001.952(b) - (d): First, it substituted the word "term" for "period" when describing the length of any agreement. Second, in the context of the requirement in the safe harbors that the agreement or contract serve a "legitimate business purpose," the OIG substituted the phrase "commercially reasonable business purpose" when describing the use of the rented space, equipment, or services. The OIG explained that it was shifting the test under these safe harbors to examine whether or not the underlying agreement serves a commercially reasonable business purpose of the lessee or purchaser. However, the definition of what is commercially reasonable is not entirely subjective; if the OIG were to conclude that a portion of the space, equipment, or services involved were not reasonably calculated to further the lessee's or purchaser's commercially reasonable business objectives, it might conclude that safe harbor protection was not warr anted. In addition, the preamble expressly excludes cost-or risk-sharing arrangements, joint research programs, and data collection arrangements from the scope of commercially reasonable business objectives.
In the preamble, the OIG provided some practical guidance covering the ability of an entity to terminate a contract or lease while not violating the provision in these safe harbors that the underlying agreement have a term of at least one year. It stated that a termination "for cause" can still comply with the safe harbor if the agreement defines the conditions that permit a termination "for cause," and also specifies that the terms of the agreement (or any other financial arrangement between the parties) cannot be renegotiated during the term of that agreement. The OIG refused to recognize any set of circumstances under which safe harbor protection would still be available if an agreement were terminated without cause. In the OIG's view, terminations without cause could camouflage payments under a sham agreement. Nevertheless, the OIG's new view of terminations for cause may provide an incentive for parties considering such an agreement to exercise great caution in drafting termi nation clauses in leases and contracts.
Discounts
The existing safe harbor at 42 C.F.R. § 1001.952(h) was clarified in two important respects. First, the OIG specifically extended safe harbor protection to rebate programs involving all types of providers, which are defined as any discount that is not given at the time of the sale. The rebate terms must be disclosed to the buyer at the time of the initial sale or first installment sale. Second, the OIG clarified the obligations that a seller must meet to comply with the safe harbor. If the seller reports the discount to the buyer and provides the buyer with a notice reasonably calculated to inform the buyer of its obligation to inform the Federal health care programs of the discount, the seller will be protected notwithstanding any failure by the buyer to perform in accord with the safe harbor.
The OIG provided additional technical amendments to the discount safe harbor that may make it easier to implement and administer. It noted that the obligation of charge-based buyers to disclose the amount of the discount on any claims submitted to Federally-funded health care programs was being eliminated. In addition, the OIG acknowledged that there are economic benefits to offering a discount on one good or service in order to provide an incentive to purchase another good or service provided by the same source, where the net value of the goods or services can be reported; in such cases, the buyer may be able to take advantage of lower prices offered as part of a volume discount. However, the final rule contains two important caveats: first, safe harbor protection will not be available where a discount is offered on one good or service to induce the purchase of a different good or service, unless the goods or services are reimbursed by the same federally-funded health care program using the same methodology. Second, any reduction in price or discount given to any payor must also be offered to the Medicare and State health care programs.
Finally, the OIG stated that safe harbor protection is available for coupons and credits, but are not available for discounts that are made available to one class of buyer and not made available to the Federal health care programs. The latter point is consistent with the OIG's policy that discounts or other inducements offered by clinical laboratories to hospitals for private pay or HMO patients in the hope of capturing their Medicare and Medicaid business is a potential anti-kickback violation.
Referral Services
The 1994 notice of proposed rulemaking included a clarification to 42 C.F.R. § 1001.952(f)(2) that would deny safe harbor protection to referral services that receive fees based on the "volume or value of any referrals to or business otherwise generated by the participants for the referral service . . . ." The clarification emphasizes that the safe harbor is not available when the payments are linked to the volume or value of services or other business generated between either party for the other party.
The new and revised safe harbors do recognize the changes in the structure and organization of health care providers brought about by changes in reimbursement by government and private payors as well as changes brought about by the expanded enforcement of fraud and abuse laws by the OIG. However, the OIG's explanation of its position does not dwell on the positive contributions to this process made by individuals and entities that have implemented voluntary compliance programs. When such programs are effective, they can result in savings to the government that allow it to allocate its resources more effectively. More importantly, when such programs are effective, they can provide the kind of internal oversight that can check many of the perceived abuses that led the OIG to strike a more cautious balance in these safe harbor revisions. As a result, the benefits of compliance programs may play a greater role during the next round of safe harbor revisions.