Order Code RL32494
CRS Report for Congress
Received through the CRS Web
Medicare: Physician Self-Referral (“Stark I and II”)
July 27, 2004
Jennifer O’Sullivan
Specialist in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress

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Medicare: Physician Self-Referral (“Stark I and II”)
Summary
“Self-referrals” occur when physicians refer patients to medical facilities in
which they have a financial interest. This interest can be in the form of ownership
or investment interest in the entity; it may also be structured as a compensation
arrangement between the physician and the entity.
Critics of self-referral arrangements state that they pose a conflict-of-interest
since the physician is in a position to benefit financially from the referral. They
suggest that such arrangements may encourage overutilization of services, which in
turn drives up health care costs. They also contend that such arrangements create a
captive referral system, which limits competition among health care providers.
Others respond to these concerns by stating that while problems may exist, they are
not widespread. Further, these observers contend that in many cases physician
investors are responding to a demonstrated need which would not otherwise be met,
particularly in a medically underserved area.
Congressional concern with the implications of self-referral arrangements led
to the inclusion in the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989) of
a provision barring self-referral arrangements for clinical laboratory services under
the Medicare program. This provision, known as “Stark I” (after Congressman Pete
Stark, the chief congressional sponsor), became effective January 1, 1992. The
Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) extended the ban,
effective January 1, 1995, to an additional list of services and applied it to Medicaid
at the same time. The OBRA 1993 provision is referred to as “Stark II.” The Social
Security Amendments of 1994 (P.L. 103-432) included several technical changes to
the self-referral provisions. More recently, the Medicare Prescription Drug
Improvement and Modernization Act of 2003 (MMA) included a temporary
provision related to referrals to specialty hospitals that focus on one category of care
(e.g., orthopedic care).
It took a number of years for most of the implementing regulations to be issued
for the self-referral ban. In part, this reflected the fact that Congress on several
occasions considered, and in a few cases enacted, significant modifications to the
original law. More important however, the delay reflected the very complicated and
continually evolving nature of business relationships in the health care industry. The
Centers for Medicare and Medicaid Services (CMS, the agency that administers
Medicare) tried to develop regulations which on the one hand were consistent with
the intention of the law while at the same time not interfering unduly with legitimate
business practices. The final phase of the implementing regulations were issued
March 26, 2004.
The major focus of legislative attention in the near future is likely to be the 18-
month moratorium, added by MMA, on referrals to specialty hospitals and whether
the ban will be extended, perhaps in modified form, after the June 8, 2005, ending
date. This report will be updated as events warrant.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Omnibus Budget Reconciliation Act of 1989 (OBRA 1989):
“Stark I” Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Enactment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Response of the Medical Profession . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Omnibus Budget Reconciliation Act of 1993 (OBRA 1993):
“Stark II” Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1992 Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1993 Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1994 Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Activities in the 104th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Concerns with Implementation of Stark II . . . . . . . . . . . . . . . . . . . . . . . 5
Balanced Budget Act of 1995 (BBA) . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Specialty Hospitals; Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA) . . . . . . . . . . . . . . . . . . . . . . 7
Specialty Hospitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
MMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Stark I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Stark II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Other Anti-Fraud Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Appendix: Summary of Law and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Designated Health Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Referral; Referring Physician . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Financial Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Ownership or Investment Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Compensation Arrangement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Volume or Value of Referrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Group Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
General Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Physicians’ Services Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
In-office Ancillary Services Exception . . . . . . . . . . . . . . . . . . . . . . . . 17
Prepaid Plans Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

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Electronic Prescribing Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Other exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Academic Medical Centers (AMCs) Exception . . . . . . . . . 20
Implants Furnished by an Ambulatory Surgical Center
(ASC) Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Erythropoietin (EPO) and Other Dialysis-related
Drugs Furnished in or by an End-stage Renal
Disease (ESRD) Facility Exception . . . . . . . . . . . . . . . 21
Preventive Screening Tests, Immunizations, and
Vaccines Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Eyeglasses and Contact Lenses Following Cataract
Surgery Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Intra-family Rural Referrals Exception . . . . . . . . . . . . . . . . 22
Exceptions Relating Only to Ownership or Investment Prohibition . . . . . . 22
Ownership of Publically Traded Investment Securities Exception . . . 22
Hospitals in Puerto Rico Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Hospital Ownership Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Rural Providers Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Exceptions Relating Only to Other Compensation Arrangements . . . . . . . 23
Rental of Office Space and Equipment Exception . . . . . . . . . . . . . . . 23
Bona Fide Employment Relationships Exception . . . . . . . . . . . . . . . . 24
Personal Service Arrangements Exception . . . . . . . . . . . . . . . . . . . . . 24
Remuneration Unrelated to the Provision of Designated Health
Services Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Physician Recruitment Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Isolated Transactions Exception . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Group Practice Arrangements with a Hospital Exception . . . . . . . . . . 26
Payments by a Physician for Items and Services Exception . . . . . . . . 26
Other Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Charitable Donations By a Physician Exception . . . . . . . . . 27
Non-Monetary Compensation Up to $300 Exception . . . . . 27
Fair Market Value Compensation Exception . . . . . . . . . . . . 27
Medical Staff Incidental Benefits Exception . . . . . . . . . . . . 27
Risk-Sharing Arrangements Exception . . . . . . . . . . . . . . . . 28
Compliance Training Exception . . . . . . . . . . . . . . . . . . . . . 28
Indirect Compensation Exception . . . . . . . . . . . . . . . . . . . . 28
Referral Services Exception . . . . . . . . . . . . . . . . . . . . . . . . . 28
Obstetrical Malpractice Insurance Subsidies Exception . . . 28
Professional Courtesy Exception . . . . . . . . . . . . . . . . . . . . . 28
Retention Payments in Underserved Areas Exception . . . . 29
Community-Wide Health Information Systems Exception . 29
Other Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Advisory Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

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Medicare: Physician Self-Referral
(“Stark I and II”)
Introduction
“Self-referrals” occur when physicians refer patients to medical facilities in
which they have a financial interest. This interest can be in the form of ownership
or investment interest in the entity; it may also be structured as a compensation
arrangement between the physician and the entity.
Critics of self-referral arrangements state that they pose a conflict-of-interest
since the physician is in a position to benefit financially from the referral. They
suggest that such arrangements may encourage overutilization of services, which in
turn drives up health care costs. They also contend that such arrangements create a
captive referral system, which limits competition among health care providers.
Others respond to these concerns by stating that while problems may exist, they are
not widespread. Further, these observers contend that in many cases physician
investors are responding to a demonstrated need which would not otherwise be met,
particularly in a medically underserved area.
Congressional concern with the implications of self-referral arrangements led
to the inclusion in the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989) of
a provision barring self-referral arrangements for clinical laboratory services under
the Medicare program. This provision, known as “Stark I” (after Congressman Pete
Stark, the chief congressional sponsor), became effective January 1, 1992. The
Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) extended the ban,
effective January 1, 1995, to an additional list of services and applied it to Medicaid
at the same time. The OBRA 1993 provision is referred to as “Stark II.” The Social
Security Amendments of 1994 (P.L. 103-432) included several technical changes to
the self-referral provisions. More recently, the Medicare Prescription Drug
Improvement and Modernization Act of 2003 (MMA) included a temporary
provision related to referrals to specialty hospitals.
Legislative History
Omnibus Budget Reconciliation Act of 1989 (OBRA 1989):
“Stark I” Provisions
Enactment. For several years, a number of articles appeared in magazines,
newspapers, and professional journals concerning the substantial profits that
physicians could make by becoming partners in providers to which they referred their
patients. In 1989, the Office of the Inspector General (OIG) of the Department of

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Health and Human Services (DHHS) reported that patients of referring physicians
who owned or invested in independent clinical labs received 45% more lab services
than Medicare patients in general and 34% more services directly from clinical labs
than Medicare patients in general. This increased utilization cost Medicare an
estimated $28 million in 1987.1
While several types of arrangements were the subject of both the press and OIG
studies, the most significant findings related to referrals to independent clinical
laboratories. The Congress responded to these reports by enacting the “Stark I” ban
as part of OBRA 1989. The Omnibus Budget Reconciliation Act of 1990 (OBRA
1990) included technical amendments.
Summary. The 1989 law established a ban, effective January 1, 1992, on
certain financial arrangements between physicians and clinical laboratories.
Specifically, a physician could not make a referral to a lab for services for which
Medicare would otherwise pay if the physician (or immediate family member) had
an ownership or investment interest in, or a compensation arrangement with, the lab.
Further, the lab could not bill for such services. For purposes of the ban, an
ownership or investment interest could be through equity, debt, or other means. A
compensation arrangement was defined as any arrangement involving remuneration
between a physician (or immediate family member) and an entity.
The law established a series of exceptions to the ban. Some were general
exceptions to both the ownership and compensation arrangement prohibitions. For
example, there were exceptions for services provided by another physician in the
same group practice or for in-office ancillary services. Other exceptions related only
to the ownership or investment prohibition or only to the compensation prohibition.
Studies. The issue of physician self-referrals continued to be of concern to
policymakers after enactment of the 1989 law. Several subsequent events focused
continuing attention on this issue. These included issuance of a Florida study, and
several follow-up studies, which added substantially to the body of evidence on the
implications of self-referrals.
The Florida study was issued by Florida State University in September 1991.
It was prepared under contract with the state’s Health Care Cost Containment Board
pursuant to a mandate by the Florida legislature. The authors of the study grouped
the 10 types of facilities surveyed into three categories based on the effect of joint
venture arrangements on access, charges, and utilization of services. The authors
concluded that joint venture arrangements had no apparent negative effects on
hospital and nursing home services. For the second category of facilities,
(ambulatory surgical centers, home health services, durable medical equipment
suppliers, and radiation therapy centers) some potential problems were identified, but
the data did not allow the authors to draw definitive conclusions. However, for the
third category (clinical laboratories, diagnostic imaging services, and physical therapy
1 U.S. Department of Health and Human Services, Office of the Inspector General,
Financial Arrangements Between Physicians and Health Care Businesses, OAI-12-88-
01410, May 1989.

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services) the results indicated significantly higher utilization and significantly higher
charges at joint venture facilities. Further, joint venture arrangements did not
increase access to rural or underserved patients.2
A follow-up analysis of the impact of physician ownership on physical therapy
and rehabilitation services showed that visits per patient were 39% to 45% higher in
joint venture facilities. Further, gross and net revenues per patient were 30% to 40%
higher in facilities owned by referring physicians.3 A follow-up examination of
radiation therapy centers showed that joint ventures provided less access to poorly
served populations (rural counties and inner cities) than nonjoint venture facilities;
further, the frequency and costs of radiation therapy treatments in free-standing
centers in Florida were 40% to 60% higher than in the rest of the U.S. where the
prevalence of joint venture arrangements was substantially lower.4
A follow-up analysis by GAO, showed that physician owners of diagnostic
imaging services referred their patients more frequently, for more expensive services,
than nonowners. Overall, MRI owners referred their patients for MRI scans twice
as often as nonowners. This evidence was presented to the Congress during its
consideration of OBRA 1993.5 The final report, issued subsequent to enactment of
OBRA 1993 provided additional evidence. That report found that physicians who
had ownership interests in some type of imaging facility ordered 54% more MRI
scans, 27% more computed tomography (CT) scans, 37% more nuclear medicine
scans, 27% more echocardiograms, 22% more ultrasound services, and 22% more
complex X-rays. The study also found that imaging patterns for physicians with
imaging facilities in their offices, group practices, or other practice affiliations
ordered tests more frequently than physicians who referred patients outside of their
practices.6
Response of the Medical Profession. Beginning in the mid-1980s, many
in the medical profession reexamined the appropriateness of self-referral
arrangements. The primary focus for this discussion was within the American
Medical Association (AMA). The organization’s 1986 Council on Ethical and
Judicial Affairs report (cited during consideration of the 1989 law) took the position
2 U.S. Congress, House, Committee on Ways and Means, Subcommittee on Health, Joint
Ventures Among Health Care Providers in Florida. Statement presented at hearing by Jean
Mitchell and Elton Scott, Hearing on Physician Ownership/Referral Arrangements, 102nd
Cong., 1st sess., Oct. 17, 1991, (Washington, GPO, 1991).
3 Jean M. Mitchell and Elton Scott, “Physician Ownership of Physical Therapy Services,”
JAMA, vol. 268, no. 16, Oct. 21, 1992, pp. 2055-2059.
4 Jean M.Mitchell and Jonathan Sunshine, “Consequences of Physicians’ Ownership of
Health Care Facilities — Joint Ventures in Radiation Therapy,” The New England Journal
of Medicine, vol. 327, no. 21, Nov. 19, 1992.
5 Testimony by Janet Shikles, in U.S. Congress, House Committee on Ways and Means,
Subcommittee on Health, Medicare: Physicians Who Invest in Imaging Centers Refer More
Patients for More Costly Services, Apr. 20, 1993 (Washington: GAO, 1993).
6 U.S. General Accounting Office, Medicare: Referrals to Physician-Owned Imaging
Facilities Warrant HCFA’s Scrutiny, GAO/HE’S-95-2, Oct. 1994.

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that physician ownership in a commercial venture was not itself unethical; potential
conflict-of-interest situations were to be addressed through certain safeguards such
as informing patients of the ownership interests.
In December 1991, the AMA Council, citing evidence of continuing problems,
recommended a new approach. It stated that, in general, physicians should not refer
patients to a health care facility outside their office practice at which they do not
directly provide care or services when they have an investment interest in the facility.
However, physicians could invest in and refer to an outside facility, if there was a
demonstrated need in the community for the facility and alternative financing was not
available.
Six months after the Council’s report, the AMA’s House of Delegates went on
record against the Council’s recommendation; it approved a policy stating that
referrals were ethical if the patient was fully informed of the financial interest and the
existence of available alternate facilities. However, in December 1992, the House
of Delegates reversed its position and affirmed the December 1991 policy of the
AMA Council. This general policy remains in effect today.7
The divergence of opinion within the AMA reflected the divergence of opinion
across the profession at the time. Some physicians strongly rejected the connotation
that referrals in and of themselves were unethical, while others supported the AMA
position.
Omnibus Budget Reconciliation Act of 1993 (OBRA 1993):
“Stark II” Provisions
1992 Legislation. The 102nd Congress passed H.R. 11, the Revenue Act of
1992, which was vetoed by President George H.W. Bush on November 4, 1992. This
legislation would have included several Medicare amendments including several
technical modifications to the Stark ban. Included were exemptions for facilities
shared by more than one physician practice (under specified conditions),
modifications in the definition of group practices, and clarification of permissible
compensation arrangements.
1993 Legislation. Modifications to the Stark ban were again considered
during 1993. The concern continued to be a balance between the concerns of
legitimate business arrangements with the goal of effective implementation of the
referral ban. The range of the discussion expanded considerably from that which had
occurred during 1992. Several issues were of particular concern including the scope
of the ban, the definition of group practice, and clarification of the definition of
compensation arrangements.
7 American Medical Association, Code of Medical Ethics, Current Opinions of the Council
on Ethical and Judicial Affairs, E-8.032, Conflicts of Interest: Health Facility Ownership
by a Physician, at [http://www.ama-assn.org/ama/pub/category/print/8472.html], accessed
June 15, 2004.

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During consideration of the bill, some attempts were made to extend the ban to
a broad range of additional services and to additional payers. The final law did
extend the ban to an additional list of “designated health services” beginning in 1995;
it also extended the ban to Medicaid. The legislation gave physicians over two years
to divest themselves of ownership interests; however, some groups had pushed for
a later start-up date.
A second area of concern was the definition of group practice; this definition is
important because referrals to other members within the same group practice are
exempt from the referral ban. There was agreement that the existing law required
technical improvements. However, many were also concerned that the definition had
to be sufficiently tight to exclude sham groups whose primary purpose was to
circumvent the referral ban. The final definition was modified to include a number
of additional requirements. However, it did not include a controversial proposal that
group practices maintain an average of five physicians per site.
OBRA 1993 also included significant modifications to the in-office ancillary
services exception. Under the revised version this exemption is provided for the
furnishing of clinical laboratory services by a lab even though it has multiple office
locations. However, for all other services the exception for group practices applies
only if the services are provided in a centralized location. The question of the
treatment of Medicare ancillary services in multiple stand-alone facilities was left to
the Secretary to address in regulations.
OBRA 1993 did not include an exception for facilities which are shared by
physicians who are not part of a formal group practice. A shared facility exception
for laboratory services had been included in the 1992 bill which was vetoed.
OBRA 1993 also contained significant clarifications in the language relating to
permissible compensation arrangements and to remuneration.
1994 Legislation
The Social Security Amendments of 1994 (P.L. 103-432) included technical
amendments to Medicare. Several minor changes to the self-referral provisions were
included in the package. These included a clarification of the definition of radiology
services included in the self-referral ban and a clarification that investment and
compensation arrangements are included within the reporting requirements.
Activities in the 104th Congress
Concerns with Implementation of Stark II. Passage of Stark II raised a
series of concerns on the part of many provider groups.8 While Stark I and II were
intended to remove potential conflicts of interest from physician decision making, a
number of persons argued that the legislation, particularly parts of Stark II,
8 Many of the concerns were presented to the Congress during Ways and Means Committee
hearings on the legislation on May 3, 1995. Much of the material in this section is from
testimony given on that date.

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represented an unwarranted intrusion into the practice of medical care. They stated
that the legislation, particularly the provisions relating to compensation
arrangements, were too complex and might in fact impede physicians’ ability to
participate in managed care networks. They suggested that while the referral
prohibitions were designed primarily for a fee-for-service environment, the health
care system was moving rapidly toward integrated health care networks.
Many observers also objected to implementation of Stark I and Stark II
(including the potential imposition of sanctions) prior to the issuance of final
regulations. They argued that the law was complex and that guidance was needed on
some complex business arrangements. The Centers for Medicare and Medicaid
Services (CMS, the agency that administers Medicare)9 stated that it did not have
leeway on the effective dates. In January 1995, CMS issued an information
memorandum outlining the provisions of Stark II. While this was intended to inform
physicians about prohibited referrals, many argued that it was too general to answer
any specific questions. In August 1995, CMS issued final regulations on Stark I.
The application of these regulations was limited to physician referrals to clinical
laboratories. However, the preamble noted that the policy interpretations were
generally expected to apply with respect to other “designated health services.”10
Despite this statement, many groups contended that in view of the array of
existing financial arrangements, more guidance was needed.. They raised a series of
concerns about the potential application of the referral ban in specific situations.
Balanced Budget Act of 1995 (BBA). In 1995, an attempt was made to
significantly scale back the application of the self-referral ban. On November 20,
1995, Congress gave final approval to the conference report on H.R. 2491, the
Balanced Budget Act of 1995 (BBA 95). The President vetoed the measure on
December 6, 1995, in part because of the size of the proposed Medicare savings
(attributable primarily to reductions in the growth rate of payments to health care
providers). BBA 95 included several amendments to the physician self-referral
provisions. Many of the changes were in response to the objections raised by various
provider groups. There were two major changes. The first would have repealed the
self-referral prohibitions based on compensation arrangements. The second change
limited the application of the prohibition to the following designated services: (1)
clinical laboratory services; (2) parenteral and enteral nutrients, equipment and
supplies; (3) radiology services, including magnetic resonance imaging and
computerized tomography and ultrasound services; and (4) outpatient physical or
occupational therapy services.
A modified version of BBA 95 was considered and ultimately passed as the
Balanced Budget Act of 1997 (BBA 97). As part of the effort to develop a
compromise measure, several of the items which were included in the 1995 bill were
not considered as part of the 1997 bill. As a result, major physician self-referral
changes were not considered during the 1997 debate. However, the legislation did
9 CMS officially came into existence on July 1, 2001. Prior to that date the agency
was known as the Health Care Financing Administration (HCFA).
10 60 Federal Register 41916, Aug. 14, 1995.

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include a provision which requires the Secretary of HHS to issue written advisory
opinions concerning whether physician referrals relating to designated health services
(other than clinical lab services) were prohibited.
Specialty Hospitals; Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 (MMA)
Specialty Hospitals. Recent years have seen the growth of specialty
hospitals. These generally for-profit entities focus on one category of care, such as
cardiac care or orthopedic surgery. Proponents of specialty hospitals contend that the
focused mission improves quality and reduces costs. Other observers suggest that
these hospitals are siphoning off the more lucrative cases from nearby general
community hospitals, thus having an adverse impact on the latter’s viability and
ability to deliver a range of services including emergency care.11
A related concern is the impact of physician ownership of specialty hospitals on
physicians’ clinical behavior and referral patterns. While a physician is barred from
referring patients for inpatient or outpatient hospital services to entities in which the
physician has a financial interest, the law includes an exception if the ownership
interest is in the entire facility, and not merely a subdivision. This means that a
physician can refer patients to specialty hospitals even if the physician has an
ownership interest in the facility. Some observers have characterized this as a serious
loophole in the self-referral ban. They state that while referrals to a general hospital
would have little economic impact for an individual physician, the same is not true
in the case of smaller specialty hospitals.
An April 2003 GAO report focused on these concerns. It noted that specialty
hospitals, while only 2% of the market had tripled in number since 1990. In 2000,
they accounted for about 1% of Medicare spending for inpatient services.
Approximately 70% of specialty hospitals in existence or under development had
some physician owners, with total physician ownership averaging slightly more than
50%. In about 10% of hospitals with physician owners, physicians in a single group
practice owned 80% or more of the hospital. The report also noted that these
hospitals tended to treat less sick patients.12
MMA. Section 507 of MMA placed a temporary, 18-month moratorium
(beginning December 8, 2003) on physician referrals to specialty hospitals in which
the physician has an ownership or investment interest. The ban does not apply to
hospitals already in operation before November 18, 2003 or under development as
of such date, provided certain conditions are met. During this time, both the
Medicare Payment Advisory Commission (MedPAC) and HHS are to conduct
studies on these entities and submit reports to Congress by March 8, 2005, containing
recommendations for any legislative or administrative changes.
11 U.S. General Accounting Office, Specialty Hospitals: Geographic Location, Services
Provided, and Financial Performance, Report to Congress, GAO-04-167, Oct. 2003.
12 U.S. General Accounting Office, Specialty Hospitals: Information on National Market
Share, Physician Ownership and Patients Served, GAO letter report GA-03-683R, Apr. 12,
2003

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The specialty hospital (sometimes labeled “boutique hospital”) issue is
controversial. It is likely that it will continue to be the subject of debate during the
moratorium period.

Regulations
It took a number of years for most of the implementing regulations to be issued
for the self-referral ban. In part, this reflected the fact that Congress on several
occasions considered, and in a few cases enacted, significant modifications to the
original law. More important, however, the delay reflected the very complicated and
continually evolving nature of business relationships in the health care industry.
HHS tried to develop regulations which, on the one hand, were consistent with the
intention of the law while, at the same time, not interfering unduly with legitimate
business practices.
Stark I. The Stark I provision was effective January 1, 1992. Proposed
implementing regulations were published March 11, 1992.13 Both independent
laboratories and physicians raised concerns with respect to several items in the
proposed rules. Final regulations were not issued until August 14, 199514 and were
effective September 13, 1995. As noted earlier, the application of these regulations
was limited to physician referrals to clinical laboratories. However, the preamble
noted that the policy interpretations were generally expected to apply with respect to
other “designated health services” until Stark II regulations were issued.
Stark II. Proposed Stark II regulations were issued January 9, 1998.15 On
January 4, 2001, final regulations (with comment period) were issued.16 These
covered major portions of Stark II, including many of the Medicare-related issues
raised in comments to the proposed rules. These regulations are referred to as Phase
13 HHS, HCFA, “Medicare Program; Physician Ownership of and Referrals to Health Care
Entities That Furnish Clinical Laboratory Services; Proposed Rule,” 57 Federal Register
8588, Mar. 11, 1992.
14 HHS, HCFA, “Medicare Program; Physician Financial Relationships With, and Referrals
to Health Care Entities That Furnish Clinical Laboratory Services; Financial Relationship
Reporting Requirements; Final Rule,” 60 Federal Register 41915, Aug. 14, 1995.
15 HHS, HCFA, “Medicare and Medicaid Programs; Physicians’ Referrals to Health Care
Entities With Which They Have Financial Relationships; Proposed Rule,” 63 Federal
Register 1659, Jan. 9, 1998.
16 HHS, HCFA, “Medicare and Medicaid Programs; Physicians’ Referrals to Health Care
Entities With Which They Have Financial Relationships; Final Rule,” 66 Federal Register
855, Jan. 4, 2001.

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I. Most of the remaining provisions were addressed in Phase II interim final
regulations (with comment period) issued March 26, 2004.17 18
As noted by CMS, most of the public comments made in response to the 1998
proposed rules asserted that the agency’s interpretation of the statute was too
conservative. CMS responded by noting that the final rule in Phase I was
substantially revised in order to provide more flexibility. It reported that, in general,
it interpreted the prohibition narrowly and the exceptions more broadly. For
example, major changes were made in the definitions of group practice, in-office
ancillary services, and academic medical centers. As a result of the numerous
changes made by the final regulations, CMS stated that physicians should find it
easier to comply with the laws and regulations. In general, the effective date for
Phase I was delayed for one year, to January 4, 2002, to allow any affected
individuals and entities enough time to restructure their business relationships.
The Phase II final regulations cover items not addressed in Phase I, including
the exceptions relating to ownership and investment interests and exceptions related
to compensation arrangements. In certain instances, changes are made in the Phase
I rules in response to public comments. Phase II regulations are effective July 26,
2004. As noted in the preamble, CMS followed the same approach as with Phase I.
CMS stated that it attempted to clarify and simplify the rules; further it added
additional exceptions for financial relationships that posed no risk of fraud and abuse
when all of the conditions of the exception are met.
CMS noted that the Phase I and Phase II regulations are intended to be read
together. It therefore printed the entire regulation for the self-referral provisions as
part of the Phase II issuance. The only part of the self-referral ban not addressed by
Phase II is the ban on Medicaid referrals; this is expected to be addressed in
subsequent rule-making.
The Appendix provides an overview of the self-referral law and regulations as
they exist today.
17 HHS, CMS, “Medicare Program; Physicians’ Referrals to Health Care Entities With
Which They Have Financial Relationships (Phase II); Interim Final Rule,” 69 Federal
Register 16052, Mar. 26, 2004.
18 A technical glitch resulted in a couple of sections being omitted from the preamble to the
regulations. The omitted language was subsequently published on Apr. 6, 2004. HHS,
CMS, “Medicare Program; Physicians’ Referrals to Health Care Entities With Which They
Have Financial Relationships (Phase II) Correction; Correction of Interim Final Rule,” 69
Federal Register 17933, Apr. 6, 2004.

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Other Anti-Fraud Provisions
It should be noted that the law contains a variety of provisions, in addition to the
self-referral ban, which are designed to address potentially fraudulent or abusive
activities against federal health care programs. These include: (1) Section 1128 of
the Social Security Act (SSA) which establishes, for individuals and entities
convicted of health care crimes, mandatory and permissive exclusions from
participation in federal health care programs; (2) Section 1128A of SSA which
establishes civil monetary penalties for false claims and similar activities; and (3) the
“anti-kickback” statute (Section 1128B of the SSA) which establishes criminal
penalties for individuals and entities submitting false statements or soliciting or
receiving a kickback. Federal criminal prosecutions may also be brought under other
anti-fraud statutes.
Civil money penalties, assessments, and exclusions for health care violations are
administered by the HHS Office of Inspector General (OIG), while criminal
provisions are administered by the Department of Justice. The law also requires the
Secretary of HHS to issue and modify “safe harbors” which identify legitimate
business practices which would not be considered in violation of the anti-kickback
law.
Prospects
In the first few years following enactment of the self-referral ban, a number of
efforts were made to significantly modify or lessen the impact of the legislation. This
effort has waned in recent years. It is, however, likely that the health care community
will continue to recommend additional modifications to the regulations to
accommodate additional business relationships.
The major focus of legislative attention in the near future is likely to be the 18-
month moratorium on referrals to specialty hospitals and whether the ban will be
extended, perhaps in modified form, after the June 8, 2005, ending date.

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CRS-11
Appendix: Summary of Law and Regulations
This Appendix provides an overview of the self-referral law and regulations as
they exist today. This summary should not serve as a basis for determining
whether an individual financial relationship is in violation of the ban or fits one
of the exceptions. Only an attorney familiar both with the Stark provisions as
well as the circumstances of an individual case is in a position to make such a
determination.
In General
The law establishes a ban on certain financial arrangements between a referring
physician and an entity. Specifically, if a physician (or immediate family member)
has a financial relationship with an entity, the physician is prohibited from making
a referral to the entity for designated health services (DHS) for which Medicare
would otherwise pay. Further, the entity may not bill Medicare for such services.
A financial relationship is defined as an ownership or investment interest in or
a compensation arrangement with the entity. For purposes of the ban, an ownership
or investment interest may be through equity, debt, or other means. An interest in an
entity that holds such ownership or investment interest is included in the definition.
A compensation arrangement is generally defined as any arrangement involving any
remuneration between a physician (or immediate family member) and an entity.
Sanctions
The law prohibits payments for a DHS provided through a prohibited referral
and requires refunds for any amounts improperly billed and collected. It provides for
a civil monetary penalty (up to $15,000 per service) and exclusion from Medicare in
any case where a person submits an improper claim that such person knew or should
have known was provided through a prohibited referral or who has not refunded the
payment. Civil monetary penalties of up to $100,000 for each arrangement or
scheme and exclusion from Medicare are also provided for circumvention schemes.
These occur in cases where a physician or other entity enters an arrangement or
scheme (such as a cross-referral arrangement) which the entity or person knew or
should have known had the principal purpose of assuring referrals, which if they had
been directly made would have been prohibited.
Civil money penalties, assessments, and exclusions for health care violations are
administered by the HHS Office of Inspector General (OIG). The OIG sanctions
regulations for such violations include sanctions relating to the self-referral ban (42
C.F.R. 1003).
Exceptions
The law includes a series of exceptions to the ban. Some are general exceptions
to both the ownership and compensation arrangement prohibitions, while others
relate only to ownership or only to compensation arrangements.

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Implementing regulations add an exception for a claim by an entity for a DHS
when the entity is unaware of the referring physician’s identity and did not act in
reckless disregard or deliberate ignorance of such identity.
The regulations further add an exception for certain temporary arrangements
involving noncompliance. If the entity has a financial relationship with an entity that
complied with one of the general, ownership, or compensation exceptions for the
previous 180 days, it is allowed 90 days to come into compliance provided certain
conditions are met. The relationship must have fallen out of compliance for reasons
beyond the control of the entity and the entity must take prompt steps to rectify the
noncompliance. This exception can be used by an entity only once every three years.
The following is a summary of the self-referral law (Section 1877 of the Social
Security Act) and related regulations (42 C.F.R. 411.350 - 411.361)
Definitions
The law and regulations contain a series of terms which are key to application
of the self-referral provision. The definition of terms is particularly important to
determine whether a particular referral falls within the prohibition, and if so, is
eligible for an exception. The following highlights the definitions for key terms used
throughout the law and/or regulations. Additional concepts, primarily applicable to
a single exception are defined in subsequent sections.
Designated Health Services.
Law. The self-referral ban applies to designated health services (DHS). These
are defined as: (1) clinical laboratory services; (2) physical therapy services; (3)
occupational therapy services; (4) radiology services, including magnetic resonance
imaging (MRI), computerized axial tomography (CAT scans) and ultrasound
services; (5) radiation therapy services and supplies; (6) durable medical equipment
(DME) and supplies; (7) parenteral and enteral nutrients, equipment, and supplies;
(8) prosthetics, orthotics, and prosthetic devices and supplies; (9) home health
services; (10) outpatient prescription drugs; and (11) inpatient and outpatient hospital
services.
Regulations. DHS do not include services that are reimbursed by Medicare as
part of a composite rate for a service that is not a DHS. For example, radiology
services paid as part of the facility fee for ambulatory surgical center services are not
considered DHS.
Certain services are defined by reference to a list of specific CPT (Current
Procedural Terminology) and HCPCS (Health Care Financing Administration
Procedure Coding System) codes. The specified services are clinical laboratory
services, physical therapy, occupational therapy and speech language pathology
services, radiology and certain other imaging services, and radiation services and
supplies. The associated codes are in an Appendix to the March 24, 2004 regulations
and will be updated annually in an appendix to the physician fee schedule update.

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CRS-13
Referral; Referring Physician.
Law. Referrals include a request by a physician for an item or service,
including the request for a consultation with another physician (and any test or
procedure ordered by or to be performed by, or under the supervision of, that other
physician). Also included is a request by a physician, or establishment of a plan of
care, that involves the furnishing of DHS. Physician requests are defined as
physician referrals.
The law specifies that requests by pathologists for clinical diagnostic lab
services and pathological examination services are not “referrals” if they are
furnished by (or under the supervision of) such pathologist pursuant to a consultation
request by another physician. Requests by radiologists for diagnostic radiology
services and by radiation oncologists for radiation therapy would not constitute
referrals.
Regulations. The regulations state that a “referral “ does not include services
performed or provided personally by the referring physician. A service is not
considered to be personally performed or provided if it is performed or provided by
another person, including the referring physician’s employees, independent
contractors, or group practice members. The definition of referring physician
specifies that such physician and the professional corporation of which he or she is
the sole owner are the same for purposes of the self-referral provisions.
The preamble to the regulations notes that while some services may not be
considered to be personally performed, they may fall into the in-office ancillary
services or other exceptions (discussed below).
Further, the preamble also notes that a referral is not considered to have taken
place if a physician personally provides durable medical equipment to a patient.
Similarly there is no referral if a physician personally fills an implantable pump or
when a physician prepares an antigen and furnishes it to a patient.
Financial Relationship.
Law. As noted above, a financial relationship is defined as an ownership or
investment interest in or a compensation arrangement with the entity.
Regulations. The interest may be direct, in which case the remuneration passes
between the referring physician and the entity furnishing the DHS without any
intervening persons or entities. It may also be indirect.
Ownership or Investment Interest.
Law. An ownership or investment interest may be through equity, debt, or other
means. An interest in an entity that holds such ownership or investment interest is
included in the definition
Regulations. An indirect ownership or investment interest exists if there is an
unbroken chain of persons or entities with ownership and investment interests

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between the referring physician (or immediate family member) and the entity.
Common ownership in an entity does not in and of itself establish an indirect
ownership. There must be an unbroken chain of interests between the referring
physician and the entity furnishing the DHS, such that the physician has an interest
in the entity furnishing the DHS.
Compensation Arrangement.
Law. A compensation arrangement is generally defined as any arrangement
involving any remuneration between a physician (or immediate family member) and
an entity. The following types of remuneration are excluded from the definition: (1)
the forgiveness of amounts owed for inaccurate or mistakenly performed tests and
procedures or correction of minor billing errors; and (2) the provision of items used
solely to collect, transport, process, or store specimens or order or communicate the
results of tests.
In addition, there is an exclusion for payments made by an insurer or self-
insured plan to a physician to satisfy a claim, submitted on a fee-for-service basis, for
the furnishing of health services by that physician to an individual covered by a
policy with that insurer or self-insured plan. The following requirements must be
met for this exclusion: (1) the services may not be furnished and the payment may
not be made pursuant to a contract or other arrangement between the insurer or the
plan and the physician; (2) the payment is made to the physician on behalf of the
covered individual and would otherwise be made to the individual; (3) the amount
of the payment is set in advance, does not exceed fair market value, and is unrelated
directly or indirectly to the volume or value of referrals; and (4) the payment meets
any other requirements imposed by the Secretary to prevent abuse.
Regulations. An “under arrangements” contract between a hospital and an
entity providing DHS “under arrangements” to the hospital is considered a
compensation arrangement. An arrangement consisting solely of items excluded
from the definition of remuneration is not considered a compensation arrangement.
An indirect compensation arrangement exists if: (1) there exists between the
referring physician and the entity an unbroken chain of persons or entities that have
financial relationships between them; (2) the aggregate compensation, of the referring
physician (or immediate family) from the person or entity with which the physician
has a direct financial relationship, must vary with or otherwise reflect the volume or
value of referrals or other business generated for the DHS entity; and (3) the DHS
entity must have actual knowledge of, or act in reckless disregard or deliberate
ignorance of, the fact that the referring physician receives aggregate compensation
that varies with the volume or value of referrals or other business generated for the
DHS entity.
If an indirect compensation arrangement exists, an exception may apply if,
among other things, the physician’s compensation from a bona fide employer is set
in advance; is consistent with fair market value (which may include unit-based or
time-based compensation); otherwise complies with a general or compensation
exception (as discussed below); and complies with certain conditions ensuring
patient choice, insurer’s choice, and a physician’s independent medical judgment.

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Fair Market Value.
Law. The law defines fair market value as the value in an arms length
transaction, consistent with general market value. In the case of rentals or leases, it
includes the value of the rental property for general purposes. In the case of leased
space, the value is not adjusted to reflect the additional value the prospective lessee
or lessor would attribute to the proximity to the lessor where the lessor is a potential
source of patient referrals.
Regulations. General market value is generally defined as the price that an
asset would bring, or the compensation that would be included in a service
agreement, as a result of bona fide bargaining between the parties. The regulations
specify that hourly payment for a physician’s professional service is to be considered
fair market value if it is determined using one of two methodologies. Under the first
method, the hourly rate is 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 such services in the area. Under the second method, the
hourly rate is determined by averaging the fiftieth percentile national compensation
level for physicians in the same speciality in at least four of six specified surveys and
dividing by 2,000 hours. If a specialty is not identified in a survey, the general
practice amount can be used.
Volume or Value of Referrals.
Law. A number of exceptions in the compensation sections specify that the
compensation not take into account the volume or value of referrals. Certain
exceptions impose the further requirement that the compensation not take into
account other business generated between the parties.
Regulations. The regulations permit time-based or unit-based payments, even
when the physician receiving the payment has generated the payment through a DHS
referral, provided the payment is set at fair market value at the inception of the
arrangement and does not subsequently change during the term of the arrangement
in any manner that takes into account DHS referrals. For those exceptions that
prohibit taking into account other business generated between the parties, the
arrangement may not take into account any other business, including non-federal
health care business generated between the parties. Not included are personally
performed services.
Group Practice.
Law. The law contains a definition of group practice for purposes of the self-
referral provision. A group practice is defined as a group of two or more physicians
legally organized as a partnership, professional corporation, foundation, not-for-profit
corporation, faculty practice plan, or similar association in which: (1) each physician
group member furnishes substantially the full range of services the physician
routinely provides through the joint use of office space, facilities, equipment, and
personnel; (2) substantially all of the services of the physician group members are
provided through the group and billed under a billing number assigned to the group
with billing receipts treated as receipts of the group; (3) the overhead expense and

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CRS-16
practice income are distributed in accordance with methods previously determined;
(4) members of the group practice must personally perform no less than 75% of the
physician-patient encounters of the group practice; and (5) the group meets other
standards imposed by the Secretary.
In addition, no physician who is a member of a group may directly or indirectly
receive compensation based on the volume or value of referrals. However, a
physician may be paid a share of the overall profits of the group, or a productivity
bonus, based on personally-performed services or services incident to such services,
so long as the share or bonus is not determined in any manner which is directly
related to the volume or value of the physician’s referrals.
The law also specifies that faculty practice plans operated by a hospital, an
institution of higher education, or a medical school with an approved medical
residence training program fall within the definition of a group practice only for
services provided within the faculty practice plan.
Regulations. The regulations specify that the practice must consist of a single
legal entity operating primarily for the purpose of being a physician group practice
in any organizational form recognized by the state including (but not limited to) a
partnership, professional corporation, limited liability company, foundation, not-for-
profit corporation, faculty practice plan, or similar association. The entity may be
owned, in whole or in part, by another medical practice, provided it is not an
operating physician practice. A single entity does not include informal affiliations
of physicians formed substantially to share profits from referral or separate group
practices under common ownership or control. A group practice that is a single legal
entity may own subsidiary entities. A group practice operating in more than one state
is considered a single legal entity if: (1) the states in which the group are operating
are contiguous; (2) the legal entities are absolutely identical as to ownership,
governance, and operation, and (3) the organization into multiple entities is necessary
to comply with state licensing laws.
The practice must have two or more physicians who are members of the group
(either as employees or direct or indirect owners). Each physician group member
must furnish substantially the full range of patient care services that the physician
routinely furnishes through the joint use of space, facilities, equipment, and
personnel. The total time each member spends on patient care services must be
documented to determine whether the group meets the test that substantially all (i.e.,
75%) of total patient care services must be furnished through the group. A group
practice adding a relocating physician will have 12 months to come back into
compliance with the “substantially all” test, if the addition of such new member
would otherwise mean the entity failed the test.
The group practice must be a unified business with centralized decision making
and consolidated billing and financial reporting.
The group practice is required to meet the prohibition on compensating a
physician based on the volume or value or referrals. However, the definition of a
group practice permits a group to pay physicians a share of the overall profits. They
can allocate the overall profits on an equal per capita basis or on a basis related to

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CRS-17
revenues for non-DHS services. The practice may also pay a productivity bonus
provided it is calculated in a reasonable and verifiable manner not directly related to
the volume or value of referrals. The bonus can be based on total patient encounters
or relative value units (used for the purpose of paying for services under the
physician fee schedule) or compensation not related to DHS services. In both cases
the requirements are met if revenues from DHS are less than 5% of total revenues.
General Exceptions
The law specifies the following general exceptions to both the ownership or
investment and the compensation bans.
Physicians’ Services Exception.
Law. Physicians’ services are defined as those services provided personally by
(or under the personal supervision of) another physician in the same group practice
as the referring physician.
Regulations. The regulations extend the exception to services provided as
“incident to” physicians services (such as those provided by nurses), provided they
meet the definition of physicians services. This exception does not extend to other
“incident to” services, such as diagnostic tests, or physical therapy.
In-office Ancillary Services Exception.
Law. This exception applies to all designated health services except for durable
medical equipment (other than infusion pumps) and parenteral and enteral nutrients,
equipment, and supplies. In-office ancillary services are defined as services
furnished by the referring physician, another physician in the same group practice,
or personally by individuals directly supervised by the physician or another physician
in the group practice.
The services must be furnished in: (a) a building in which the referring
physician or other member of the group practice provides services unrelated to the
furnishing of designated health services; or (b) in another building used for the
centralized provision of the group’s designated health services. For clinical lab
services only, the exception applies if such services are furnished by a group practice
with multiple locations. For other designated health services, the group practice
exception only applies if they are provided in a centralized location. The Secretary
is permitted to establish other terms and conditions where the provision of services
at more than one location do not present a risk of program or patient abuse.
The services must be billed by the physician performing or supervising the
service, by that physician’s group practice, or by an entity entirely owned by such
physician or group practice. Billings by a physician’s group must use the billing
number assigned to the group.
The Secretary may establish additional requirements to protect against program
or patient abuse.

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Regulations. The in-office ancillary services exception, is the key exception
relied upon by physicians in their own practices. The regulations provide detailed
guidance on many of the concepts noted in the law, including the following.
! Designated health services. The exception is expanded. Included
are specified DME items (canes, crutches, walkers and folding
manual wheel chairs, infusion pumps (including external ambulatory
infusion pumps) and blood glucose monitors) under certain specified
conditions. These items (except for infusion pumps and blood
glucose monitors) must be needed for ambulation and used by the
patient to depart from the office. The item must be personally
furnished by the physician who ordered the DME or another
physician or employee in the group practice. The physician or group
practice supplying the DME must meet all the DME supplier
standards.
! Drugs. Outpatient drugs, furnished in the office, may be covered
under the exception even if they are used by the patient at home.
Chemotherapy infusion drugs are also covered.
! Direct Supervision. The exception applies to services provided by
persons directly supervised by the physician or another physician in
the group practice. Supervision must meet the applicable physician
supervision requirements under the applicable Medicare coverage or
payment rules for the service in question. Physicians in the group
include owners, employees, independent contractors, leased
employees, and locum tenens physicians.
! Same Building. Services are considered provided in the same
building (but not necessarily in the same space or part of the
building) provided one of the following three major conditions are
met:
! The building is one in which the referring physician or his or her
group practice (if applicable) has an office that is normally open
to patients at least 35 hours a week, and the referring physician
(and one or more members of the group) regularly practices
medicine and furnishes physician services to patients in that
office at least 30 hours a week. Some of the services must be
physician services unrelated to DHS, although the unrelated
physician services may lead to the ordering of DHS. This test
generally describes buildings which are the central place of
practice for physicians or their groups.
! The building is one in which the referring physician, or his or her group
practice, has an office that is normally open to their patients at least eight
hours a week, and the referring physician regularly practices medicine and
furnishes physician services to patients in that office at least six hours a
week (including some unrelated to DHS). Services provided by members
of the referring physician’s group do not count toward the six-hour
threshold. The patient must usually see the referring physician or other
members of the group practice in the building. This test generally
describes buildings where a referring physician practices medicine at least
one day per week and is the principal place in which the physician’s
patients receive services.

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! The building is one in which the referring physician, or his or her group
practice, has an office that is normally open to their patients at least eight
hours a week, and the referring physician or a member of the group
practice, regularly practices medicine and furnishes physician services to
patients in that office at least 6 hours a week in that office (including
some unrelated to DHS). The referring physician must be present and
order the DHS in connection with a patient visit during the time the office
is open in the building or the referring physician, or a member of the
group practice, must be present while the DHS is furnished during the
time the office is open in the building. This test generally describes
buildings where a referring physician, or member of the group, provide
physician services at least one day per week and the DHSs are ordered
during a patient visit or the physicians are present during the furnishing
of the designated health services.
! Special Rule for Home Care Physicians. An exception to the same
building requirement is established for physicians who do not have an
office because they treat patients in their private homes. The referring
physician, or qualified person accompanying the physician, such as a
nurse or technician must provide the DHS contemporaneously with a
physician service that is not a DHS to the patient in the patient’s private
home (which may include an assisted living facility or independent living
facility).
! Centralized Building. This means part or all of a building (including
for this purpose only, a mobile vehicle, van, or trailer that is owned
or leased on a full time basis, i.e., 24 hours per day, seven days per
week, for a term of not less than six months) by a group practice and
that is used exclusively by the group practice. The term does not
include space shared by more than one group practice, a group
practice and one or more solo practitioners, or by a group practice
and another provider or supplier. A group practice may have more
than one centralized building.
Prepaid Plans Exception.
Law. Services provided by a prepaid health plan to its enrollees are exempt.
The definition of prepaid plans includes those meeting Medicare requirements or
operating as prepaid plans under a Medicare demonstration project. The law includes
coordinated care plans under the Medicare+Choice program, now known as the
Medicare Advantage program.
Regulations. The exception includes Medicaid managed care organizations.
Electronic Prescribing Exception.
Law. MMA provides for the establishment of an electronic prescription
program for the new Medicare drug program. It authorizes the Secretary to establish
a safe harbor from sanctions under the self-referral and other anti-fraud provisions
in connection with the provision of nonmonetary remuneration necessary and used
exclusively for electronic prescribing. Such remuneration could consist of hardware,
software, or other information technology and training services.

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CRS-20
Regulations. Implementing regulations have not yet been issued.
Other exceptions.
Law. Exceptions are provided for other financial relationships, specified by the
Secretary in regulations, that do not pose a risk of program or patient abuse.
Regulations. The regulations include a series of additional exceptions as
follows.
Academic Medical Centers (AMCs) Exception. AMC services qualifying
for the exception must meet conditions for the referring physician. The AMC must
also meet structural requirements and conditions.
! Referring Physician. The referring physician must:
!
Be a bona fide employee of a component of the academic
medical center on a full-time or substantial part-time basis. A
component includes an affiliated medical school, faculty
practice plan, hospital, teaching facility, institution of higher
education, departmental professional corporation, or non profit
support organization whose primary purpose is supporting the
teaching mission of the academic medical center. The
components need not be separate legal entities.
!
Be licensed to practice medicine in the state(s) in which he or
she practices medicine.
!
Have a bona fide faculty appointment at the affiliated medical
school or at one or more of the educational programs at the
accredited academic hospital; and
! Provide either substantial academic services or substantial clinical
services (or a combination) for which the faculty member receives
compensation as part of his or her employment relationship with
the academic medical center. A physician is deemed to meet the
test if the physician spends at least 20% of his or her professional
time or eight hours per week providing such services. Failure to
meet this test does not necessarily preclude the physician from
meeting the requirement.
! Referring Physician Compensation. The total compensation paid by
all academic medical center components to the referring physician
must be set in advance, not exceed fair market value, and not be
determined in a manner that takes into account the volume or value
of referrals or other business generated by the physician.
! Definition of AMC. For purposes of the exception, an AMC is
defined as:
!
An accredited medical school (including a university where
appropriate) or an accredited academic hospital. An accredited
academic hospital is a hospital or health system that sponsors
four or more approved medical education programs.
!
One or more faculty practice plans affiliated with the medical
school, the affiliated hospital(s), or the accredited academic
hospital; and

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CRS-21
!
One or more affiliated hospital(s) in which a majority of the
physicians on the medical staff consists of physicians who are
faculty members and a majority of all hospital admissions are
made by physicians who are faculty members. Courtesy and
volunteer faculty may be counted as faculty. Faculty from any
affiliated medical school or accredited academic hospital
education program may be aggregated. Residents and
nonphysician professionals need not be counted as part of the
medical staff of the affiliated hospital.
! AMC Standards. AMCs are required to meet the following
standards:
!
Transfers of money between components of the academic
medical center must directly or indirectly support the missions
of teaching, indigent care, research or community service.
!
The relationship of the components of the AMC must be set
forth in written agreements or other written form adopted by the
governing board of each component. If the AMC is one legal
entity, documentation requirements are satisfied if transfers of
funds between components are reflected in the routine financial
reports.
!
All money paid to a referring physician for research must be
used solely to support bona fide research or teaching and must
be consistent with the terms and conditions of the grant.
! Anti-Fraud. The referring physician’s compensation arrangement
cannot violate the anti-kickback statute or any Federal or State law
or regulation governing billing or claims submission.
Implants Furnished by an Ambulatory Surgical Center (ASC) Exception.
Certain implants furnished by an ASC are covered by this exception. Covered
implants include, but are not limited to: cochlear implants, intraocular lenses, and
other implanted prosthetic devices, and DME. The implant must be implanted by the
referring physician or a member of the referring physician’s group in a Medicare-
certified ASC with which the physician has a financial relationship. Payment is
made to the ASC as an ASC procedure.
Erythropoietin (EPO) and Other Dialysis-related Drugs Furnished in or by
an End-stage Renal Disease (ESRD) Facility Exception. This exception
includes certain outpatient prescription drugs that are required for the efficacy of
dialysis and identified on the list of drugs appended to the regulations. Drugs are
those which are administered in an ESRD facility or in the case of EPO or Aranesep
(or identified equivalent drug) are dispensed by the ESRD facility for home use.
Preventive Screening Tests, Immunizations, and Vaccines Exception.
The items must meet Medicare frequency requirements and be on the list appended
to the regulations.
Eyeglasses and Contact Lenses Following Cataract Surgery Exception.
The exception applies to items provided in accordance with Medicare coverage and
payment provisions.

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CRS-22
Intra-family Rural Referrals Exception. The exception applies to referrals to
an immediate family member or to an entity furnishing DHS with which the
immediate family member has a financial relationship, providing certain conditions
are met. The patient must reside in a rural area and no other person or entity is
available within 25 miles to furnish the services in a timely manner. The mileage
limitation does not apply in the case of home-based services. In all cases, the
referring physician or immediate family member must make reasonable inquiries as
to the availability of other persons or entities to furnish the DHS. These persons do
not have an obligation to make such inquires with respect to persons or entities
located more than 25 miles away.
Exceptions Relating Only to Ownership or Investment
Prohibition
The law specifies certain exceptions relating only to the ownership or investment
prohibition.
Ownership of Publically Traded Investment Securities Exception.
Law Ownership of certain investment securities are exempt. These securities
are defined as those purchased in a corporation listed on a major stock exchange
(New York, American, regional or foreign) or traded under an automated interdealer
quotation system operated by the National Association of Securities Dealers. The
corporation must have stockholder equity in excess of $75 million, either at the end
of its most recent fiscal year or on an average during the previous three fiscal years.
The exception also applies to ownership of shares in a regulated investment
company, provided the company has total assets of over $75 million either at the end
of its most recent fiscal year or on an average during the previous three fiscal years.
Regulations. The publically traded securities exception applies to securities that
can be purchased on the open market at the time the DHS referral is made.
Hospitals in Puerto Rico Exception. The law and regulations provide an
exception for designated health services provided by a hospital in Puerto Rico.
Hospital Ownership Exception.
Law. The law provides an exception for designated health services provided by
a hospital where the referring physician is authorized to perform services at the
hospital and the ownership or investment interest is in the hospital itself and not
merely in a subdivision.
MMA places a temporary, 18-month moratorium (beginning December 8, 2003)
on physician referrals to specialty hospitals in which the physician has an ownership
or investment interest. A specialty hospital is one that is primarily or exclusively
engaged in the care and treatment of one of the following: (1) patients with a cardiac
condition; (2) patients with an orthopedic condition; (3) patients receiving a surgical
procedure; or (4) any other service category that the Secretary designates as
inconsistent with the purpose of permitting physician ownership and investment

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CRS-23
interests in a hospital under the hospital ownership exception. The ban does not
apply to hospitals already in operation before November 18, 2003 or under
development as of such date provided the following conditions are met: (1) the
number of physician investors after such date is no greater than on such date; (2) the
specialized care categories do not change after such date; and (3) any increase in the
number of beds only occurs on the hospital’s main campus and does not exceed 50%
of the beds as of such date or five beds whichever is greater.
Regulations. The regulations do not add any service categories to the statutory
list of specialty hospitals.
Rural Providers Exception.
Law. An exception is provided for designated health services provided by an
entity in a rural area (using the same criteria to define rural areas as used under
Medicare’s hospital prospective payment system). The exception only applies if
substantially all of the designated health services furnished by the entity are furnished
to individuals residing in the rural area. In addition, the section includes the MMA
18-month moratorium (beginning December 8, 2003) on referrals to specialty
hospitals.
Regulations. “Substantially all” is defined as not less than 75%.
Exceptions Relating Only to Other Compensation
Arrangements
The law establishes a number of exceptions relating to compensation
arrangements.
Rental of Office Space and Equipment Exception.
Law. Payments made by a lessee to a lessor are not considered a compensation
arrangement if: (1) the lease is in writing, signed by the parties, and specifies the
premises or equipment covered by the lease; (2) the space or equipment rented or
leased does not exceed that which is reasonable and necessary for the legitimate
business purposes of the lease or rental and is used exclusively by the lessee; (3) the
term of the rental or lease is at least one year; (4) the rental charges over the term of
the lease are set in advance, consistent with fair market value, and are not determined
by taking into account the volume or value of any referrals or other business
generated between the parties; (5) the lease would be commercially reasonable even
if no referrals were made between the parties; and (6) the lease meets any other
requirements imposed by the Secretary to protect against abuse. In the case of office
rental or lease, a lessee may make payments for the use of space consisting of
common areas if the payments do not exceed the lessee’s pro rata share of expenses
based on the ratio of space used exclusively by the lessee to the total amount of space
(excluding common areas) occupied by persons using the common area.
Regulations. Leases may be terminated during the first year, with or without
cause, provided the parties do not enter into another lease until after the expiration

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CRS-24
of the lease term. Holdover month-to-month rentals for up to six months
immediately following an agreement of at least one year are permitted.
Bona Fide Employment Relationships Exception. The law and
regulations provide an exception for payments made by an employer to a physician
(or immediate family member) who has a bona fide employment relationship with
the employer if: (1) the employment is for identifiable services; (2) the amount of
the remuneration is consistent with fair market value and is not determined in a
manner that takes into account (directly or indirectly) the volume or value of
referrals; (3) the remuneration is provided pursuant to an agreement that would be
commercially reasonable without such referral; and (4) the employment meets other
requirements the Secretary may impose as needed to protect against program abuse.
The law and regulations permit productivity bonuses when based on services
personally performed by the physician or immediate family member.
Personal Service Arrangements Exception.
Law. The law establishes an exception for payments from an entity under an
arrangement if: (1) the arrangement is written, signed by the parties, and specifies
the services covered; (2) the arrangement covers all of the services to be provided by
the physician (or immediate family member) to the entity; (3) the aggregate services
contracted for do not exceed those that are reasonable and necessary for legitimate
business purpose; (4) the term of the agreement is at least one year; (5) the
compensation is set in advance, does not exceed fair market value, and (except for
physician incentive plans) is unrelated to the volume or value of referrals or other
business generated between the parties; (6) the services do not involve the counseling
or promotion of activities counter to state or federal law; and (7) the arrangement
meets other requirements imposed by the Secretary to protect against abuse.
Additionally, an exception is established for physician incentive plans. These are
defined as compensation arrangements between an entity and a physician or
physician group that may directly or indirectly have the effect of reducing or limiting
services provided to the entity’s enrollees. Compensation for such incentive plans
may be determined in a manner (through a withhold, capitation, bonus, or otherwise)
that takes into account the volume or value of referrals or other business generated
between the parties, provided certain conditions are met. No specific payment may
be made directly or indirectly to the physician or physician group as an inducement
to reduce or limit medically necessary services provided to enrollees. If the plan
places the physician or physician group at substantial financial risk (as determined
by the Secretary using rules developed for Medicare risk sharing contracts) it must
comply with any requirements the Secretary may impose pursuant to that program.
Further, the entity must provide the Secretary, on request, with descriptive
information on the program.
Regulations. The requirement that an arrangement must cover all services to be
furnished by the physician may be met by multiple contracts provided they all
incorporate each other by reference or if they cross-refer to a master contract which
is maintained centrally. Further, DHS entities may terminate contracts during the
first year of the term, provided the parties do not enter into the same, or substantially
the same, arrangement during that year.

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CRS-25
Remuneration Unrelated to the Provision of Designated Health
Services Exception.
Law. An exception is provided in the case of remuneration, provided by a
hospital to a physician, which is unrelated to the provision of designated health
services.
Regulations. The regulations clarify that this is a narrow exception which only
applies if the remuneration is wholly unrelated to the provision of DHS.
Physician Recruitment Exception.
Law. An exception is provided for physician recruitment arrangements under
which a hospital pays a physician to relocate in order to become a member of the
hospital’s medical staff so long as there are no requirements for the physician to refer
patients to the hospital and the amount of remuneration is unrelated, directly or
indirectly, to the volume or value of referrals. The Secretary may impose other
requirements as needed to protect against program or patient abuse.
Regulations. The regulations require that: (1) the arrangement is written and
signed by both parties; (2) the arrangement is not conditioned on the physician’s
referral of patients to the hospital; (3) the hospital does not determine directly or
indirectly the volume or value of actual or anticipated DHS referrals by the physician
or other business generated between the parties; and (4) the physician is allowed to
establish staff privileges at another hospital or hospitals and refer business to other
entities, except as otherwise restricted under a separate employment or services
contract that complies with the requirements for a bona fide employment relationship
(as noted above).
The remuneration is for the purpose of inducing a physician to relocate to the
geographic area served by the hospital. The physician will be presumed to have
relocated to the geographic area if: (1) the physician has relocated his or her medical
practice at least 25 miles; or (2) the physician’s new medical practice derives at least
75% of its revenues from professional services furnished to patients whom the
physician did not see in the three years preceding relocation. In the first year, the
75% test is deemed to be met, if there is reasonable expectation that the requirement
will be met. Residents and physicians in practice less than one year are not required
to satisfy the relocation requirement.
Payments made to physicians through existing medical groups or directly to
physicians recruited to existing medical groups meet the exception provided: (1) if
payments are made to the group, the group is a party to the recruiting agreement; (2)
all remuneration paid by the hospital to the group is passed through to the recruited
physician except for actual recruitment costs incurred; (3) under any income
guarantee, the hospital takes into account only the incremental costs attributable to
the recruited physician; (4) records of actual costs and passed through amounts are
kept for five years; (5) remuneration paid by the group does not reflect the volume
or value of actual or anticipated referrals by the recruited physician or the practice
receiving the direct payments form the hospital; (6) no other additional restrictions

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CRS-26
are imposed on the physician other than those relating to quality of care; and (7) the
agreement does not violate anti-kickback laws or regulations.
The physician recruitment exception is extended to federally qualified health
centers (FQHCs).
Isolated Transactions Exception.
Law. An exception is provided in the case of isolated financial transactions, such
as a one-time sale of a property or practice, if: (1) the amount is consistent with fair
market value and is unrelated (directly or indirectly) to the volume or value of
referrals, and (2) the transaction would be commercially viable without such
referrals. Again, the Secretary may impose other requirements as needed to protect
against program or patient abuse.
Regulations. The regulations specify that there can be no additional transactions
between the parties for the following six months, except for those specifically
exempted under other allowed exceptions. Post-closing adjustments that do not take
into account the volume or value of referrals or other business generated by the
referring physician are permitted.
Group Practice Arrangements with a Hospital Exception.
Law. An exception is established for certain arrangements under which
designated health services are provided by a group practice but billed by the hospital.
An exception is provided if: (1) in the case of services provided to inpatients, the
arrangement is pursuant to the provision of inpatient services; (2) the arrangement
began before December 19, 1989 and has continued in effect without interruption
since that date; (3) in the case of DHS covered under the arrangement, substantially
all of such services furnished to patients of the hospital are furnished by the group
under the arrangement; (4) the arrangement is pursuant to a written agreement that
specifies the services to be provided and the compensation for the services; (5) the
compensation is consistent with fair market value, the amount per unit of service is
fixed in advance and is unrelated to the volume or value of referrals or other business
generated between the parties; (6) the agreement would be commercially reasonable
even if there were no referrals; and (7) the arrangement meets other requirements the
Secretary may impose as needed to protect against program or patient abuse.
Regulations. The regulation specifies that the DHS must be furnished by the
group. In order for the “substantially all” test to be met, at least 75% of the DHS
services furnished to hospital patients are furnished by the group under the
arrangement.
Payments by a Physician for Items and Services Exception.
Law. An exception is made for payments by a physician to a lab for clinical
laboratory services. An exception is also made for payments to another entity for
items and services if they are furnished at a price consistent with fair market value.

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CRS-27
Regulations. The regulations specify that payments include those made by an
immediate family member of the physician. Services means services of any kind, not
just health care services. This exception can only be used if no other exception
applies.
Other Exceptions.
Law. Exceptions are authorized for other financial relationships, specified by the
Secretary in regulations, that do not pose a risk of program or patient abuse.
Regulations. The regulations include a series of additional exceptions as
follows.
Charitable Donations By a Physician Exception. This exception covers bona
fide charitable donations made by a physician (or immediate family member) to an
entity if: (1) the donation is made to a tax-exempt organization or to a supporting
organization; (2) it is not solicited or made in any manner that reflects the volume or
value of referrals or other business generated between the physician and the entity;
and (3) the arrangement does not violate the anti-kickback statute or any law
governing billing or claims submission.
Non-Monetary Compensation Up to $300 Exception. (1) The non-monetary
compensation can not be determined in any manner that takes into account the
volume or value of referrals or other business generated by the physician; (2) the
compensation may not be solicited by the physician or physician’s practice; and (3)
the arrangement does not violate the anti-kickback statute or any law governing
billing or claims submission. The $300 limit is to be increased each calendar year
by the increase in the consumer price index-urban all items (CPI-U).
Fair Market Value Compensation Exception. This exception applies to
compensation stemming from an arrangement between an entity and a physician (or
immediate family member) or any group of physicians (whether or not they meet the
definition of group practice) for the provision of items or services by the physician
(or family member) or group of physicians to the entity. The following conditions
must be met: (1) the arrangement is in writing, covers identifiable items or services
all of which are specified; (2) the time frame is specified; (3) the compensation is
specified, set in advance, consistent with fair market value and does not take into
account the volume or value of referrals or other business generated by the referring
physician; (4) the arrangement would be commercially reasonable; (5) the
arrangement does not violate the anti-kickback statute or any law governing billing
or claims submission; and (6) the services do not involve counseling or promotion
of a business arrangement or other activity that violates state or federal law.
Medical Staff Incidental Benefits Exception. This exception applies to non-
monetary compensation from a hospital to a member of its medical staff when the
item or service is used on the hospital’s campus. The following conditions must be
met: (1) the compensation is offered to (but not necessarily accepted by) all members
of the medical staff practicing in the same specialty without regard to the volume or
value of referrals or other business generated between the parties; (2) the
compensation is provided during periods when the medical staff members are

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CRS-28
engaged in services or activities that benefit the hospital or its patients; (3) the
compensation is provided by the hospital and used on the campus; (4) the
compensation is reasonably related to or designed to facilitate directly or indirectly
the delivery of medical services; (5) the compensation for each occurrence (for
example a meal) is less than $25, increased each calendar year by the increase in the
CPI-U; (6) compensation is not determined in any manner that takes into account the
volume or value of referrals or other business generated between the parties; (7) the
arrangement does not violate the anti-kickback statute or any law governing billing
or claims submission. The exception may apply to other facilities meeting the
requirements, including federally qualified health centers.
Risk-Sharing Arrangements Exception. This exception applies to
compensation provided pursuant to a risk-sharing arrangement between a managed
care organization or independent physician’s association and a physician (either
directly or through a subcontractor) for services provided to health plan enrollees
provided that the arrangement does not violate the anti-kickback statute or any law
governing billing or claims submission.
Compliance Training Exception. This exception applies to compliance
training provided by an entity to a physician (or immediate family member or office
staff) who practices in the entity’s local community or service area provided the
training is held in such area.
Indirect Compensation Exception. Indirect compensation (as defined above,
under “Compensation” in Definitions section) meets the qualifications for an
exception provided that: (1) the compensation is fair market value for services and
items actually provided and does not take into account the volume or value of
referrals or other business generated by the referring physician; (2) the arrangement
is in writing and specifies the covered services (except that in the case of a bona fide
employment relationship the arrangement need not be set out in a written contract,
but must be for identifiable services and be commercially reasonable even if no
referrals are made to the employer); and (3) the arrangement does not violate the anti-
kickback statute or any law governing billing or claims submission.
Referral Services Exception. This is defined as remuneration which meets the
requirements in 42CFR1001.952(f) defining permissible exceptions to activities
defined as criminal for purposes of federal health care programs.
Obstetrical Malpractice Insurance Subsidies Exception. This is defined as
remuneration which meets the requirements in 42CFR1001.952(o) defining
permissible exceptions to activities defined as criminal for purposes of federal health
care programs.
Professional Courtesy Exception. Professional courtesy (i.e., the provision
of free or discounted health care items or services) offered to a physician, immediate
family member, or office staff can qualify for an exception provided that: (1) the
professional courtesy is offered to all physicians on the entity’s bona fide medical
staff or entity’s local community or service area without regard to the volume or
value of referrals or other business generated between the parties; (2) the health care
items and services are of a type routinely provided by the entity; (3) the entity’

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CRS-29
professional courtesy policy is written and approved in advance by the governing
board; (4) the courtesy is not offered to a physician or immediate family member who
is a federal health care program beneficiary, unless there is a good faith showing of
financial need; (5) the insurer is informed of any coinsurance reduction; and (6) the
arrangement does not violate the anti-kickback statute or any law governing billing
or claims submission.
Retention Payments in Underserved Areas Exception. This exception
applies to retention payments made by a hospital or federally qualified health center
directly to a physician on its staff in order to retain the physician’s medical practice
in the geographic area served by the entity. To qualify: (1) the remuneration must
meet the general standards specified for physician recruitment specified above; (2)
the area served by the entity is a health professions shortage area (HPSA) or is an
area with a demonstrated need for the physician, as determined by the Secretary in
an advisory opinion; (3) the physician has a bona fide firm recruitment offer from a
hospital or FQHC, unrelated to the entity making the payment, which would require
the physician to move his or her practice at least 25 miles and outside of the
geographic area served by the entity making the retention payment; (4) any retention
payment is subject to the same obligations and restrictions on repayment or
forgiveness as the bona fide recruitment offer; and (5) the arrangement does not
violate the anti-kickback statute or any law governing billing or claims submission.
The Secretary is permitted to waive the relocation requirement through an advisory
opinion.
The retention payment is the lower of: (1) the difference between the physician’s
current income from physician and related services and the income the physician
would receive from such services under the recruitment offer (over no more than a
24-month period); or (2) the reasonable costs the hospital or FQHC would otherwise
have to expend to recruit new physicians to the geographic area. Parties are required
to use reasonable and consistent methodologies for making these determinations. A
hospital can not enter into a retention arrangement more frequently than once every
five years and the amount may not be altered during the term of the arrangement
based on the volume or value of referrals or other business generated by the
physician.
Community-Wide Health Information Systems Exception. This exception
applies to items or services of information technology provided by an entity to a
physician that allow access to and sharing of electronic healthcare records and any
complimentary drug information systems, general health information medical alerts,
and related information for patients served by community providers and practitioners
in order to enhance overall health. In order to qualify: (1) the items and services are
available as necessary to enable the physician to participate in the community-wide
information system; are principally used by the physician as part of that system, and
are not provided in any manner that takes into account the volume or value of
referrals or other business generated by the physician; (2) the community-wide
systems are available to all providers and practitioners and residents of the
community who desire to participate; and (3) the arrangement does not violate the
anti-kickback statute or any law governing billing or claims submission.

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CRS-30
Other Provisions
Advisory Opinions. The Secretary is required to issue advisory opinions
concerning whether a referral (other than to a clinical laboratory) is prohibited. Each
advisory opinion is binding to the Secretary and the party or parties requesting the
opinion. To the extent practicable, the Secretary is to apply the rules and take into
account the regulations relating to advisory opinions for fraud and abuse sanctions.
Reporting Requirements. The law establishes a reporting requirement for
entities providing services under Medicare. Entities are required to provide
information on covered services provided by the entity and the names and provider
numbers of physicians (or immediate family members) with ownership or investment
interests or compensation arrangements. Sanctions may be imposed on any person
who is required, but fails, to meet reporting requirements.
The regulations specify that a reportable financial relationship is any ownership
or investment interest or compensation arrangement, including those meeting the
criteria for an exception, except for those related to publically traded securities or
mutual funds. The required information is only that information that the entity
knows or should know in the course of prudently conducting business. Reportable
information is to be retained by the entity and furnished upon request; routine
reporting is not required.

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