[Code of Federal Regulations]
[Title 42, Volume 2]
[Revised as of October 1, 2002]
From the U.S. Government Printing Office via GPO Access
[CITE: 42CFR411.354]

[Page 346-348]
 
                         TITLE 42--PUBLIC HEALTH
 
                             HUMAN SERVICES
 
PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE PAYMENT--Table of Contents
 
     Subpart J--Physician Ownership of, and Referral of Patients or 
  Laboratory Specimens to, Entities Furnishing Clinical Laboratory or 
                          Other Health Services
 
Sec. 411.354  Financial relationship, compensation, and ownership or investment interest.

    (a) Financial relationships. (1) Financial relationship means--
    (i) A direct or indirect ownership or investment interest (as 
defined in paragraph (b) of this section) in any entity that furnishes 
DHS; or
    (ii) A direct or indirect compensation arrangement (as defined in 
paragraph (c) of this section) with an entity that furnishes DHS.
    (2) A direct financial relationship exists if remuneration passes 
between the referring physician (or a member of his or her immediate 
family) and the entity furnishing DHS without any intervening persons or 
entities (not including an agent of the physician, the immediate family 
member, or the entity furnishing DHS).
    (3) An indirect financial relationship exists under the conditions 
described in paragraphs (b)(5) and (c)(2) of this section.
    (b) Ownership or investment interest. An ownership or investment 
interest may be through equity, debt, or other means, and includes an 
interest in an entity that holds an ownership or investment interest in 
any entity that furnishes DHS.
    (1) An ownership or investment interest includes, but is not limited 
to, stock, partnership shares, limited liability company memberships, as 
well as loans, bonds, or other financial instruments that are secured 
with an entity's property or revenue or a portion of that property or 
revenue.
    (2) An ownership or investment interest in a subsidiary company is 
neither an ownership or investment interest in the parent company, nor 
in any other subsidiary of the parent, unless the subsidiary company 
itself has an ownership or investment interest in the parent or such 
other subsidiaries. It may, however, be part of an indirect financial 
relationship.

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    (3) Ownership and investment interests do not include, among other 
things--
    (i) An interest in a retirement plan;
    (ii) Stock options and convertible securities until the stock 
options are exercised or the convertible securities are converted to 
equity (before this time they are compensation arrangements as defined 
in paragraph (c) of this section);
    (iii) An unsecured loan subordinated to a credit facility (which is 
a compensation arrangement as defined in paragraph (c) of this section); 
or
    (iv) An ``under arrangements'' contract between a hospital and an 
entity owned by one or more physicians (or a group of physicians) 
providing DHS ``under arrangements'' to the hospital.
    (4) An ownership or investment interest that meets an exception set 
forth in Secs. 411.355 or 411.356 need not also meet an exception for 
compensation arrangements set forth in Sec. 411.357 with respect to 
profit distributions, dividends, interest payments on secured 
obligations, or the like.
    (5) Indirect ownership or investment interest. (i) An indirect 
ownership or investment interest exists if--
    (A) Between the referring physician (or immediate family member) and 
the entity furnishing DHS there exists an unbroken chain of any number 
(but no fewer than one) of persons or entities having ownership or 
investment interests between them; and
    (B) The entity furnishing DHS has actual knowledge of, or acts in 
reckless disregard or deliberate ignorance of, the fact that the 
referring physician (or immediate family member) has some ownership or 
investment interest (through any number of intermediary ownership or 
investment interests) in the entity furnishing the DHS.
    (ii) The entity furnishing DHS need not know, or act in reckless 
disregard or deliberate ignorance of, the precise composition of the 
unbroken chain or the specific terms of the ownership or investment 
interests that form the links in the chain.
    (c) Compensation arrangement. A compensation arrangement can be any 
arrangement involving remuneration, direct or indirect, between a 
physician (or a member of a physician's immediate family) and an entity. 
An ``under arrangements'' contract between a hospital and an entity 
providing DHS ``under arrangements'' to the hospital creates a 
compensation arrangement for purposes of these regulations.
    (1) A compensation arrangement does not include any of the 
following:
    (i) The portion of any business arrangement that consists solely of 
the remuneration described in section 1877(h)(1)(C) of the Act and in 
paragraphs (1) through (3) of the definition of the term 
``remuneration'' in Sec. 411.351. (However, any other portion of the 
arrangement may still constitute a compensation arrangement.)
    (ii) Payments made by a consultant to a referring physician under 
Sec. 414.65(e) of this chapter.
    (2) Indirect compensation arrangement. An indirect compensation 
arrangement exists if--
    (i) Between the referring physician (or a member of his or her 
immediate family) and the entity furnishing DHS there exists an unbroken 
chain of any number (but not fewer than one) of persons or entities that 
have financial relationships (as defined in paragraph (a) of this 
section) between them (that is, each link in the chain has either an 
ownership or investment interest or a compensation arrangement with the 
preceding link);
    (ii) The referring physician (or immediate family member) receives 
aggregate compensation from the person or entity in the chain with which 
the physician (or immediate family member) has a direct financial 
relationship that varies with, or otherwise reflects, the volume or 
value of referrals or other business generated by the referring 
physician for the entity furnishing the DHS. If the financial 
relationship between the physician (or immediate family member) and the 
person or entity in the chain with which the referring physician (or 
immediate family member) has a direct financial relationship is an 
ownership or investment interest, the determination whether the 
aggregate compensation varies with, or otherwise reflects, the volume or 
value of referrals or other business generated by the referring 
physician for the entity furnishing the DHS will be measured by the 
nonownership or

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noninvestment interest closest to the referring physician (or immediate 
family member). (For example, if a referring physician has an ownership 
interest in company A, which owns company B, which has a compensation 
arrangement with company C, which has a compensation arrangement with 
entity D that furnishes DHS, we would look to the aggregate compensation 
between company B and company C for purposes of this paragraph 
(c)(2)(ii)); and
    (iii) The entity furnishing DHS has actual knowledge of, or acts in 
reckless disregard or deliberate ignorance of, the fact that the 
referring physician (or immediate family member) receives aggregate 
compensation that varies with, or otherwise reflects, the value or 
volume of referrals or other business generated by the referring 
physician for the entity furnishing the DHS.
    (d) Special rules on compensation. The following special rules apply 
only to compensation under section 1877 of the Act and these regulations 
in subpart J of this part.
    (1) Compensation will be considered ``set in advance'' if the 
aggregate compensation or a time-based or per unit of service-based 
(whether per-use or per-service) amount is set in advance in the initial 
agreement between the parties in sufficient detail so that it can be 
objectively verified. The payment amount must be fair market value 
compensation for services or items actually provided, not taking into 
account the volume or value of referrals or other business generated by 
the referring physician at the time of the initial agreement or during 
the term of the agreement. Percentage compensation arrangements do not 
constitute compensation that is ``set in advance'' in which the 
percentage compensation is based on fluctuating or indeterminate 
measures or in which the arrangement results in the seller receiving 
different payment amounts for the same service from the same purchaser.
    (2) Compensation (including time-based or per unit of service-based 
compensation) will be deemed not to take into account ``the volume or 
value of referrals'' if the compensation is fair market value for 
services or items actually provided and does not vary during the course 
of the compensation agreement in any manner that takes into account 
referrals of DHS.
    (3) Compensation (including time-based or per unit of service-based 
compensation) will be deemed to not take into account ``other business 
generated between the parties'' so long as the compensation is fair 
market value and does not vary during the term of the agreement in any 
manner that takes into account referrals or other business generated by 
the referring physician, including private pay health care business.
    (4) A physician's compensation may be conditioned on the physician's 
referrals to a particular provider, practitioner, or supplier, so long 
as the compensation arrangement--
    (i) Is fixed in advance for the term of the agreement;
    (ii) Is consistent with fair market value for services performed 
(that is, the payment does not take into account the volume or value of 
anticipated or required referrals);
    (iii) Complies with an applicable exception under Secs. 411.355 or 
411.357; and
    (iv) Complies with the following conditions:
    (A) The requirement to make referrals to a particular provider, 
practitioner, or supplier is set forth in a written agreement signed by 
the parties.
    (B) The requirement to make referrals to a particular provider, 
practitioner, or supplier does not apply if the patient expresses a 
preference for a different provider, practitioner, or supplier; the 
patient's insurer determines the provider, practitioner, or supplier; or 
the referral is not in the patient's best medical interests in the 
physician's judgement.

[66 FR 958, Jan. 4, 2001]

    Effective Date Note: At 66 FR 958, Jan. 4, 2001, Sec. 411.354 was 
added, effective Jan. 4, 2002. At 66 FR 60154, Dec. 3, 2001, the 
effective date of the last sentence in Sec. 411.354(d)(1) was delayed 
from Jan. 4, 2002, until Jan. 6, 2003.

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