FTC Staff Comment Before the Department of Health and Human Services Concerning the Deployment of Regulations Pursuant to the Medicare and Medicaid Anti-Kickback Statute

'.
·	~.'
COY~ENTS 	OF 	THE 	FEDERAL TRADE 	COY~ISSION'S
BUREAUS 	OF 	COMPETITION, 	CONSUMER 	PROTECTION 	AND 	ECONOMICS
CONCERNING THE 	DEVELOPMENT OF 	REGULATIONS 	PVRSUANT 	TO 	THE
MEDICARE 	AND MEDICAID ANTI-KICKBACK 	STATUTE
PRESENTED TO 	THE 	DEPARTMENT OF 	HEALTH AND 	HUYJili 	SERVICES
(LRR-17-NI)
DECEMBER 	18, 	1987

,..
.. I
I. 	IntrQduction
Congress 	has 	directed 	the 	Secretary of 	Health 	and 	Human
Services 	("the 	Secretary") 	to 	"promulgate. 	. 	regulations,
specifying 	pa)~ent practices 	that 	shall 	nQt 	be 	treated 	as 	a
criminal 	Qffense"l 	under 	the 	Medicare 	and 	Medicaid 	anti-kickback
law, 	S~tion 1128B(b) 	of 	the 	Social 	Security Act,2 	and 	that 	shall	_". 	~ 	~. 	-- 	..• __ .. 	._._0... 	_...0 	.. __ ... 	.J
nQt 	provide 	a 	basis 	for 	excluding 	providers 	frQm 	the 	Medicare 	or
Medicaid 	prQgrams 	under 	Section 	1128(b)(7).3 	The 	staff 	of 	the
Federal 	Trade 	CommissiQn 4 	is 	pleased 	to 	provide 	these 	comments 	in
response 	to 	the 	Department 	of 	Health 	and 	Human 	Services' 	request
for 	pUblic 	comments 	before 	propQsed 	regulations 	are 	pUblished 	by
the 	Secretary.S 	We 	urge 	the 	Secretary 	to 	adQpt 	regulations 	that
make 	clear 	that 	those 	involved 	in 	certain 	types 	of 	legitimate,
.pro-competitive 	arrangements 	-- 	which 	can produce 	cost 	savings
for 	the 	Medicare 	and 	Medicaid 	prQgrams 	or 	for 	the 	proqrams'
patients 	-- 	are 	not 	considered 	to 	be 	in 	violation 	of 	Sectio~
1128B(b) 's 	broadly 	worded 	prohibition 	of 	referral 	fees.
1 	Medicare 	and 	Medicaid 	Patient 	and 	Program 	Protection Act
of 	1987, 	Pub. 	L. 	No. 	100-93, 	§ 	14, 	101 	Stat. 	680, 	6S7 	(1987).
~ 2 	42 	U. S. c......_§...--l3.2-O.a"'.-1l:L(.Ql....... _..$ection 	1128B 	Qf 	the 	Social
Security 	Act 	consolidates 	what 	were 	Sections 	1877 	(Medicare 	anti-
kic}~~ck provision) 	and 	1909 	(Medicaid 	anti-kickback 	provision)"
of 	the 	Social 	Security Act, 	42 	U.S.C. 	§§ 	1395nn 	and 	1396h. 	Pub.
L ~Q..:.._._LQ.9 - 9 3, 	§ 	4. 	---.
._------
3 	42 	U.S.C. 	S 	132C~-7(b)(7).
4 	These 	CQmments 	re?resent 	the 	views 	Qf 	the 	Federal 	Trade
Commission's 	Bureaus 	of 	Competition, 	Consumer 	Protection, 	and
Economics, 	and 	not 	necessari~y tho=e 	of 	the 	Commission 	itself 	or
of 	any 	individual 	Commissioner. 	The 	CQmmission 	has, 	however,
VQtej 	to 	authorize 	their 	submission.
S 	52 	Fed. 	Reg. 	38,794 	(Oct. 	19, 	1987).

III. 	Interest 	and 	Experience 	of 	the 	Federal 	Trade 	Commission
Our 	interest 	in 	this 	matter 	stems 	from 	our 	involvement 	in
competition 	and 	consumer 	protection 	policy. 	The 	Federal 	Trade
Commission 	is 	empowered 	under 	15 	U.S.C. 	S 	41 	~ ~. 	to 	prevent
unfair 	methods 	of 	competition 	and 	unfair 	or 	deceptive 	acts 	or
practices 	in 	or 	affecting 	commerce. 	Pursuant 	to 	this 	statutory
mandate, 	the 	Commission 	encourages 	competition 	among 	members 	of
,
the 	licensed 	professions 	to 	the 	maximum 	extent 	compatible 	with
other 	state 	and 	federal 	goals. 	For more 	than 	a 	decade, 	the
Commission 	has 	investigated 	the 	competitive 	effects 	of
restrictions 	on 	the 	business 	arrangements 	of 	hospitals 	and 	state-
licensed 	health 	professionals, 	including 	physicians, 	pharmacists,
physical 	therapists, 	and 	others. 	Among 	the 	restrictions 	that 	we
have 	examined 	are 	ones 	that, 	like 	Section 	1128B(b), 	prohibit 	the
payment 	of 	rebates 	and 	referral 	fees. 6 	Our 	goal 	has 	been 	to
identify 	and 	seek 	the 	removal 	of 	those 	restrictions 	that 	impede
competition, 	increase 	costs, 	and 	harm 	consumers 	without 	providing
substantial 	countervailing 	benefits.
6 	Letter 	from 	Janet 	M. 	Grady, 	Regional 	Director, 	San
Francisco 	Regional 	Office, 	Federal 	Trade 	Commission 	to 	Hon. 	Chuck
Hardwick, 	Speaker 	of 	the 	Assembly 	of 	the 	State 	of 	Ne~ Jersey 	(May
21, 	1987); 	Letter 	from 	~alter T. 	Winslow, 	Acting 	Directo~, Bureau
of 	Compe~ition, Federal 	Trade 	Commission 	to 	H. 	Fred 	Varn,
Executive 	Director, 	Florida 	Board 	of 	Dentistry 	(Nov. 	6, 	1985);
Letter 	from 	Walter 	T. 	Winslow, 	Acting 	Director, 	Bureau 	of
Competition, 	Federal 	Trade 	Commission 	to 	George 	M. 	Sanctez, 	O.D.,
President, 	Arizona 	State 	Board 	of 	Optometry 	(Oct. 	17, 	1985).
Copies 	of 	these 	letters 	are 	available 	from 	the 	Federal 	Trade
Commission's 	Office 	of 	Public 	Affairs.
3

IV. 	The 	Medicare/Medicaid 	Anti-KicY~ack Statute 	and 	its 	Purpose
The 	Medicare 	and 	Medicaid 	anti-kickback 	statute 	provides
that 	a 	person 	is 	guilty 	of 	a 	felony 	(l) 	whenever 	he 	knowingly
solicits 	or 	receives 	"any 	remuneration 	(including 	any 	kickback,
bribe, 	or 	rebate) 	directly 	or 	indirectly, 	overtly 	or 	covertly, 	in
cash 	or 	in 	kind" 	in 	return 	for 	referring 	an 	individual 	for 	goods
or 	services 	covered 	by 	Medicare 	or Medicaid 	or 	in 	return 	for
purchasing 	or 	arranging 	the 	purchase 	of 	such 	goods 	or 	services,
or 	(2) 	whenever 	he 	knowingly 	offers 	or 	pays 	any 	remuneration 	to
induce 	such 	referral 	or 	purchase. 7
Congress 	adopted 	the 	original 	version 	of 	this 	provision 	in
1972, 	and 	made 	violation 	of 	it 	a 	felony 	in 	1977, 	in 	large 	part
because 	it 	determined 	that 	the 	condemned 	practices 	"contribute
signific~ntly to 	th~ cost 	of 	the 	[Medicare 	and 	Medicaid]
programs."S 	A concern 	is 	that 	kickbacks 	can 	encourage 	fraudulent
referrals 	for 	unnecessary 	care. 	According 	to 	Congress, 	this 	type
of 	fraudulent 	practice
cheats 	taxpayers 	who 	must 	ultimately 	bear 	the 	financial
burden 	of 	misuse 	of 	funds 	in 	any 	government-sponsored
program. 	It 	diverts 	from 	those 	most 	in 	need, 	the
nation's 	elderly 	and 	poor, 	scarce 	program 	dollars 	that
1128B(b) 	of 	the 	Social 	Security Act, 	42 	U.S.C	7 	Section
§ 	1320a-7b(b).
8 	H.R. 	Rep. 	No. 	95-393 	(II), 	9Ist 	Cong., 	1st 	Sess.,
repri~ted in 	1977 	U.S. 	Code 	Congo 	& ~d. 	News 	3039, 	3055.
4

were 	intended 	to 	provide 	vitally 	needed 	quality 	health
services. 9
V. 	Arrangemer.ts 	That 	Should 	Not 	Be 	Considered 	in 	Violation
In 	connection 	with 	our 	efforts 	to 	promote 	competition 	in 	the
health 	care 	sector 	of 	the 	economy, 	we 	have 	observed 	several 	types
of 	business 	arrangements 	and 	practices 	that 	could 	be 	construed 	to
violate 	Section 	1128B(b), 	but 	which 	we 	believe 	are 	pro-
competitive, 	and 	in 	many 	cases 	are 	likely 	to 	help 	control
Medicare 	and 	Medicaid 	costs. 	These 	include 	business 	arrangeme:lts
involving 	a~os, 	PPOs, 	and 	referral 	services, 	and 	business
practices 	such 	as 	the 	referral 	of 	patients 	by 	providers 	to 	health
care 	facilities 	owned 	by 	the 	providers 	and 	hospital 	waiver 	of
Medicare 	copa}~ents and 	deductibles. 	We 	explain 	below 	how 	each
of 	these 	types 	of 	arrangements 	and 	practices 	could 	be 	construed
to 	violate 	Section 	1128B(b), 	and 	why, 	nonetheless, 	they 	are 	pro-
competitive, 	and 	may 	benefit 	thi~d-party payors 	such 	as 	Medicare
and 	Medicaid. 	Although 	we 	are 	not 	aware 	of 	any 	prosecutions
under 	Section 	1128B(b) 	of 	providers 	involved 	in 	these 	types 	of
arrangements 	and 	p~actices, we 	are 	concerned 	that 	some 	people 	may
be 	discouraged 	from 	using 	pro-competitive 	arrangemen~s because 	of
9 	Id. 	at 	3047.
5

the 	severe 	penalties 	to 	which 	violators 	of 	Section 	1128B(b) 	are
subject. 10
A. 	Alternative 	Health 	Care 	Delivery 	Systems
Health 	maintenance 	organizations 	and 	preferred 	provider
organizations 	are 	health 	care 	delivery 	systems 	that 	are 'marketed
to 	employers, 	unions, 	and 	other 	groups 	as 	alternatives 	to
traditional 	fee-for-service 	programs 	offered 	by 	third-party
payors 	such 	as 	commercial 	health 	insurers. 	We 	believe 	that
alternative 	delivery 	systems 	can 	be 	pro-competitive 	forces 	in 	the
health 	care'market. 11 	For 	example, 	both 	HMOs 	and 	PPO 	programs
typically 	have 	built-in 	incentives 	to 	control 	health 	care 	ccsts
and 	thus 	provide 	cost-effective 	alternatives 	to 	traditional
systems 	for 	the 	financing 	and 	delivery 	of 	health 	care. 12 	In
10 	Violators 	are 	subject 	to 	a 	maximum 	of 	five 	years 	in
prison 	and 	a 	$25,000 	fine, 	42 	U.S.C. 	§ 	1320a-7b(b), 	and 	exclusion
from 	participation 	as 	providers 	in 	the 	Medicare 	and 	Medicaid
programs, 	42 	U.S.C. 	§ 	1320a-7(b)(7).
11 	~, 	~, 	Health 	Care 	Management 	Associates, 	101 	F.T.C.
1014 	(1983) 	(advisory 	opinion 	concerning 	PPO 	program); 	Letter
from 	James 	C. 	Miller 	III, 	Chairman, 	Federal 	Trade 	Co~~ission, to
Representative 	Ron 	Wyden 	(July 	29, 	1983) 	(commenting 	favorably 	on
proposed 	federal 	legislation which 	would 	have 	exempted 	PPOs 	from
the 	coverage 	of 	certain 	state 	laws 	and 	regulations).
12 	~~, 	Epstein, 	Begg 	and 	McI;:il, 	The 	Use 	Qf
bmbulatQ=Y 	Testino 	in 	Prepaid 	and 	Fee-fer-Service 	G=QUP
Practices, 	314 	N. 	Engl. 	J. 	Y;ed. 	1089 	(1986); 	Johnson 	and
Aquilina, 	The 	I~pact Qf 	Heal~h Maintenance 	Qroanizati~ns and
CQmpetitiQn 	on 	HQspitals 	in 	MinneapQlis/St. 	Paul, 	10 	J. 	of 	Health
PQlitics, 	PQlicy 	and 	Law 	659 	(1986); 	Bureau 	of 	EconQmics, 	Federa2
6

addition, 	as 	"bulk" 	purchasers 	of 	hospital 	and 	medical 	services,
HMOs 	and 	PPOs 	can 	increase 	competition 	among 	providers 	of 	such
services, 	who 	vie 	for 	contracts 	with 	them.
Although 	they 	exist 	in 	many 	different 	forms, 	all 	PPO
programs 	involve 	a 	series 	of 	contractual 	arrangements 	between
"preferred" 	health 	care 	providers 	and 	an 	intermediary, 	such 	as 	an
insurer 	or 	self-insured 	employer, 	that~ acts 	as 	a 	third-party
payor 	of 	health 	care 	benefits. 	PPO 	programs 	often 	attempt 	to
select 	preferred 	providers 	for 	their 	ability 	to 	deliver 	quality
health 	care 	at 	a 	low 	cost. 	Enrollees 	in 	PPO 	programs 	usually 	are
given 	financial 	incentives, 	typically 	waivers 	of 	copayments 	and
deductibles, 	to 	encourage 	them 	to 	use 	these 	lower 	cost 	preferred
providers.
HMOs 	are 	simildr, 	in 	many 	respects, 	to 	PPO 	programs. 	Both
typ~s ~f 	arrangements 	use 	a 	limited 	panel 	of 	health 	car~
providers 	and 	provide 	coverage 	for 	a 	wide 	~angA of 	health 	care
services. 	HMOs 	differ 	from 	PPO 	programs 	in 	that 	HMOs 	deliver
these 	services 	directly 	to 	enrollees 	by 	employing 	or 	contracting
with 	health 	care 	providers, 	as 	well 	as 	by 	undertaking 	the
insurance 	function 	that 	third-party 	payors 	provide 	in 	PPO
arrangements. 	In 	addition, 	a~os generally 	provide 	coverage 	only
if 	enrollees 	obtain 	their 	health 	care 	services 	from 	these
Trade 	Commission, 	Staff 	Report 	on 	the 	Health 	Maintenance
O=aanization 	and 	Its 	Effects 	OD 	Competition 	(1977).
7

participating 	providers. 	Most 	PPO 	programs, 	by 	contrast, 	provide
coverage 	for 	use 	of 	non-participating 	providers, 	albeit 	at 	a
higher 	out-of-pocket 	cost 	to 	enrollees.
Some 	of 	the 	contractual 	arrangements 	used 	by 	HMO 	and 	PPO
programs, 	however, 	may 	involve 	legitimate 	payments 	that
nevertheless 	could 	be 	construed 	to 	violate 	Section 	1128B(b). 	For
example, 	some 	PPO 	programs 	require 	participating 	providers 	to
remit 	to 	the 	PPO 	a 	percentage 	of 	the 	fees 	earned 	from 	treating
PPO 	patients. 	This 	is 	one 	method 	used 	for 	funding 	a 	PPO's
administrative 	expenses. 	Although 	not 	all 	PPOs 	are 	financed 	in
this 	manner, 	this 	type 	of 	PPO 	program may 	be 	attractive 	to 	many
providers 	because 	the 	fees 	they 	pay 	to 	the 	PPO 	are 	directly
proportional 	~o the 	benefits 	(i.e., 	the 	number 	of 	referred
patients) 	that 	they 	receive 	from 	participating-in 	the 	program.
Because 	the 	financial 	success 	of 	a 	new 	program 	often 	is
uncertain, 	providers 	may 	prefer 	to 	participate 	in 	such 	PPO
programs 	that 	"meter" 	the 	benefits 	to 	them 	rather 	than 	in
programs 	that 	require 	substantial 	up-front 	capital 	contributions
or 	annual 	charges. 	On 	its 	face, 	this 	type 	of 	financial
arrangement 	might 	be 	characterized 	as 	a 	payment 	by 	the 	provider
of 	a 	"kickback" 	to 	the 	PPO 	program 	in 	order 	to 	induce 	the 	PPO 	to
refer 	pa~ients to 	the 	provider, 	in 	violation 	of 	Sections
1128B(b)(1)(h) 	and 	(2)(A)13 	if 	Medicare 	or Medicaid 	funds 	are
involved.
13 	4 2 	u. S . c. 	§ § 	1 3 2 0 a - 7 b ( b )( 1 )( A) 	a f. d 	(:) (A) •
8

Certain 	financial 	arrangements 	used 	by 	HMOs 	could 	also 	be
construed 	to 	violate 	Section 	1128B(b). 	For 	example, 	some 	HMOs,
particularly 	those 	known 	as 	the 	IIA 	(individual 	practice
association) 	type, 	hold 	back 	a 	certain 	percentage 	of 	each
individual 	provider's 	fees 	for 	services 	rendered, 	in 	order 	to
create 	a 	reserve 	to 	pay 	for 	an 	unexpectedly 	high 	use 	of 	services
by 	the 	entire 	subscriber 	population~ 	This 	"holdback" 	fund 	is
later 	distributed 	pro 	rata 	to 	the 	providers 	if 	the 	program's
aggregate 	utilization 	levels, 	and 	hence 	its 	costs, 	do 	not 	exceed
the 	anticipated 	levels 	upon 	which 	the 	HMO's 	premiums 	were 	based.
This 	arrangement 	is 	used 	to 	spread 	some 	of 	the 	HMO's 	financial
risk 	over 	its 	participating 	providers, 	and 	gives 	providers 	an
additional 	incentive 	to 	help 	control 	unnecessary 	use 	of 	expensive
health 	ca~e service:.. 	The 	distribution 	of 	the 	holdback 	fund
could 	be 	considered 	the 	payment 	of 	a 	rebate 	in 	violatiwn 	of
Section 	1128B(b).
We 	believe, 	however, 	that 	these 	types 	of 	a~o and 	PPO
arrangements 	are 	unlikely 	to 	increase 	payments 	by 	the 	Medicare
and 	Medicaid 	programs 14 	because 	such 	arrangrnents 	do 	not 	provide
incent~ves for 	making 	referrals 	for 	unnecessary 	or 	inappropriate
medical 	care. 	For 	example, 	the 	PPO 	program 	described 	above,
14 	We 	understand 	that 	Medicare 	currently 	contracts 	with 	HMOs
to 	provide 	hsalth 	ca~e to 	some 	of 	the 	program's 	patients, 	42
U.S.C. 	§ 	139Smrn, 	aroci 	that 	it 	also 	is 	considering 	using 	PPO
arra~gements 	to 	provide 	care 	to 	patients.
9

while 	perhaps 	technically making 	a 	referral 	and 	receiving 	a 	fee
in 	return, 	does 	not 	itself 	suggest 	or 	recommend 	medical 	care.
The 	PPO 	program 	provides 	only 	a 	list 	of 	preferred 	health 	care
providers, 	from 	which 	patients 	can 	choose. 	Thus, 	the 	PPO 	program
is 	not 	in 	a 	position 	to 	refer 	patients 	for 	unnecessary 	care 	in
order 	to 	increase 	the 	amount 	of 	fees 	paid 	to 	the 	PPO 	by
providers. 	Furthermore, 	the 	physician 	or 	other 	health 	care
provider 	who 	actually 	recommends 	medical 	care 	to 	a 	PPO 	patient
does 	not 	receive 	any 	referral 	fee 	under 	the 	arrangement 	we 	have
described. 	For 	the 	same 	reasons, 	the 	HMO 	"holdback" 	arrangement
described 	above 	is 	unlikely 	to 	result 	in 	unnecessary 	referrals
and 	higher 	costs 	to 	the 	Medicare 	and Medicaid 	programs. 	Indeed,
rath€= 	than 	encouraging 	referrals 	for 	unnecessary 	care, 	the
holdback, 	which 	providers 	do 	not 	receive 	if 	program 	costs 	exceed
anticipated 	levels, 	encourages 	providers 	to 	hold 	down 	costs 	and
thus 	conserve 	program 	resources.
Use 	of 	alternative 	delivery 	systems 	such 	as 	HMOs 	and 	PPOs
can 	actually 	reduce 	the 	costs 	of 	third-party 	payors, 	such 	as
Medicare 	and 	~edicaid. 	Most 	p~O and 	PPO 	programs 	are 	designed 	to
control 	health 	care 	costs 	so 	that 	the 	programs 	can 	be
successfully 	marketed 	to 	cost-conscious 	groups. 	The 	programs
that 	are 	likely 	to 	succeed 	in 	the 	increasingly 	price-competitive
health 	care 	industry 	are 	those 	that 	best 	help 	employers,
10

insurers, 	and 	other 	third-party 	payors 	cut 	health 	care 	costs. 1S
HMOs 	and 	PPOs 	typically 	attempt 	to 	control 	costs 	in 	several 	ways.
First, 	many 	HMO 	and 	PPO 	programs 	are 	"bulk" 	purchasers 	of 	medical
services 	and 	are 	often 	able 	to 	negotiate 	fees 	that 	are 	lower 	than
providers' 	usual 	charges. 	Second, 	PPO 	programs 	often 	seek 	to
contract 	with 	providers 	who 	have 	demonstrated 	a 	propensity 	to
control 	expenditures. 	Third, 	many 	PPOs 	and 	HMOs 	use 	innovative
methods 	to 	control 	costs, 	such 	as 	risk-sharing 	among 	providers
and 	incentives 	for 	enrollees 	to 	use 	preferred 	providers.
Finally, 	many 	a~o and 	PPO 	programs 	provide 	strict 	controls 	on
utilization.
We 	believe 	that 	the 	contractual 	payments 	made 	to 	HMOs 	and
PPOs 	that 	we 	have 	described 	above 	should 	be 	analyzed 	in 	the
context 	of 	the 	overall 	cost-saving 	potential 	of 	the 	programs 	of
which 	they 	are 	a 	part. 	This 	is 	very 	similar 	to 	the-approach
taken 	by 	Congress 	in 	1986, 	when 	it 	decided 	to 	exempt 	from 	Section
1128B(b) 	what 	otherwise 	might 	be 	construed 	as 	"kickbacks" 	made 	by
vendors 	to 	group 	purchasing 	agents, 	as 	long 	as 	certain 	disclosure
and 	other 	requirements 	are 	met. 16 	Congress 	found 	that 	"to 	cover
cos~s," group 	purchasing 	organizations 	(GPOs) 	acting 	on 	behalf 	of
15 	Contracts 	between 	HMO 	and 	PPO 	programs 	and 	employers, 	for
example, 	are 	of~en subject 	to 	renewal 	or 	cancellation 	on 	an
annual 	basis. 	Those 	programs 	that 	fail 	to 	keep 	costs 	down 	are 	at
risk 	of 	losing 	these 	contracts 	to 	other, 	more 	efficient, 	health
care 	plans.
16 	Section 	1128B(b)(3) (C) 	of 	the 	Social 	Security Act, 	42
U.S.C. 	§ 	1320a-"7b(bj (3) (C).
11

partic~pating hospitals 	and 	other organizations 	sometimes
"require 	vendors 	from 	whom 	they 	purchase 	services 	or 	supplies 	to
pay 	them 	a 	fixed 	percentage 	of 	the 	value 	of 	the 	business 	that
they 	refer 	to 	the 	vendors ... 17 	In 	recommending 	that 	such 	payments
be 	exempt 	from 	Section 	1128B(b), 	the 	House 	Budget 	Committee
stated:
The 	Committee 	believes 	that 	GPO's 	can 	help 	reduce
health 	care 	costs 	for 	the 	government 	and 	the 	private
sector 	alike 	by 	enabling 	a 	group 	of 	purchasers 	to
obtain 	substantial 	volume 	discounts 	on 	the 	prices 	they
are 	charged. 	The 	Committee 	understands 	that 	the 	amount
of 	the 	price 	reductions 	exceeds 	the 	fees 	the 	vendors
must 	pay 	the 	GPO's. 	The 	Committee 	can 	see 	no
justification 	for 	prohibiting 	such 	cost-saving
arrangements 	. 	18
Thus, 	Congress 	determined 	that 	the 	GPOs, 	when 	examined 	in 	the
context 	of 	their 	overall 	effect 	on 	the 	market, 	are 	likely 	to
reduce 	health 	care 	costs. 	As 	we 	have 	stated, 	the 	overall
structure 	of 	PPOs 	and 	HMOs 	can 	also 	help 	reduce 	health 	care 	costs
for 	the 	government 	and 	the 	private 	sector. 	Payment 	mechanisms
used 	to 	cover 	the 	costs 	of 	PPO 	programs 	and 	~~Os, 	like 	the
percentage 	payment 	system 	used 	by GPOs, 	should 	be 	permitted 	in
order 	to 	encourage 	cost-saving 	arrangements.
In 	order 	~o encourage 	the 	development 	of 	programs 	like 	~~Os
and 	PPOs 	tLct 	are 	likely 	to 	reduce 	costs, 	increase 	consumer
welfare, 	and 	benefit 	the 	Medicare 	and 	Medicaid 	programs, 	we 	urge
17 	H.R. 	Rep. 	No. 	99-727, 	99th 	Cong., 	2nd 	Sess., 	reDrinted 	in
1986 	U.S. 	Code 	Congo 	& Admin. 	News 	3607, 	3662.
13 	Id. 	at 	3663.
12

that 	the 	Secretary 	specifically state, 	in 	the 	proposed
regulations, 	that 	participation 	in 	HMO 	and 	PPO 	programs 	will 	not
be 	considered 	to 	violate 	Section 	1128B(b).
B. 	Referral 	Services
Referral 	sen"ices, 	which 	can 	be 	either 	for-profit 	or 	not-
for-profit, 	refer 	prospective 	patients 	to 	one 	or 	more 	providers, 	_
based 	on 	the 	stated 	needs 	of 	the 	?atients 	and 	the 	qualifications
or 	prices 	of 	the 	providers. 	These 	services 	could 	also 	be.
construed 	to 	violate 	Section 	1128B(b) 	if 	providers 	are 	required
to 	pay 	a 	fee 	to 	the 	service 	for 	referrals. 	However, 	we 	believe
that 	referral 	Fervices 	are 	also 	unlik8ly 	to 	raise 	the 	costs 	of
the 	Medicare 	and 	Medicaid 	programs.
Referral 	services 	t17ically 	make 	available 	a 	wide 	variety 	of
information 	on 	the 	provide=s 	to 	whom 	they 	refer 	patients. 	Such
information 	can 	promote 	competition 	by 	enabling 	patients 	to
compare 	fees 	and 	services 	offered 	by 	providers. 	Fo= 	example, 	a
referral 	service 	can 	inform 	patients 	as 	to 	which 	providers 	will
accept 	Medicare 	assignment. 	The 	fees 	paid 	to 	referral 	ser\rices
are 	unlikely 	to 	p=ovide 	an 	incentive 	for 	anyone 	to 	refer 	patients
for 	unnecess~ry care. 	This 	is 	because, 	like 	the 	PPO 	arrangement
described 	earlie=, 	the 	entity 	receiving 	the 	fee, 	the 	referral
service 	in 	this 	case, 	does 	not 	recommend 	or 	suggest 	th~t the
13

patient 	obtain 	medical 	care. 	Indeed, 	referral 	services 	are 	most
often 	used 	by 	patients 	who 	"self-refer;" 	that 	is, 	patients 	who
have 	decided 	on 	their 	own 	to 	seek 	medical 	care.
For 	these 	reasons, 	we 	urge 	the 	Secretary 	specifically 	to
state, 	in 	the 	proposed 	regulations, 	that 	participation 	in
referral 	services 	will 	not 	be 	considered 	to 	violate 	Section
1128B(b).
c. 	Ownership 	Interests
Referral 	of 	patients 	by 	a 	provider 	to 	an 	entity 	in 	which 	th8
provider 	has 	a 	financial 	interest 	could 	also 	be 	viewed 	as 	a
violation 	of 	Section 	1128B(b). 	For example, 	a 	physician 	may
refer 	a 	patie~t 	to 	a 	laboratory 	in which 	he 	has' a 	partial
ownership 	interest. 	Presumably, 	the 	physician 	will 	be 	entitled
to 	some 	of 	the 	profits 	generated 	by 	the 	laboratory, 	some 	of 	which
may 	be 	attributable 	to 	that 	particular 	referral. 	Such 	profits
could 	be 	construed 	as 	"any 	remuneration 	. 	[received] 	directly
or 	indirectly. 	. 	in 	cash 	or 	in 	kind" 	in 	return 	for 	referring
that 	patient 	to 	that 	laboratory.19
~hile the 	benefits 	of 	allowing 	health 	care 	practitioners 	to
refer 	patients 	to 	entities 	in 	which 	they 	nave 	financial 	interests
19 	42 	U.S.C. 	§ 	1320a-7b(b).
14

may 	not 	be 	as 	obvious 	as 	those 	of 	alternative 	delivery 	systems,
such 	practices 	may 	have 	several 	pro-competitive 	effects. 	First,
established 	practitioners 	in 	a 	community 	might 	identify
particular 	health 	care 	needs 	in 	their 	area, 	such 	as, 	for 	example,
a 	certain 	type 	of 	medical 	laboratory. 	Prohibiting 	physicians
from 	referring 	Medicare 	and 	Medicaid 	patients 	to 	this 	laboratory
may 	make 	them 	reluctant 	to 	invest 	time, 	money 	and 	experience 	in
such 	a 	project.
Second 1 	a 	practitioner 	who 	refers 	patients 	for 	further 	care
to 	an 	entity 	in 	which 	he 	has 	invested, 	for 	example, 	a 	physical
therapy 	practice, 	may 	be 	better 	able 	to 	assure 	continued 	high
quality 	care 	for 	those 	patients. 	This 	is 	because 	an 	investment
interest 	may 	lead 	to 	a 	stronger, 	more 	permanent 	working
relationship 	between 	the 	referring 	practitioner 	and 	the 	entity 	in
which 	he 	has 	a 	financial 	interest.
It 	can 	be 	argued 	that 	allowing 	practitioners 	to 	refer
patients 	to 	entities 	in 	which 	they 	have 	financial 	interests 	does
increase 	the 	risk 	of 	referrals 	for 	unnecessary, 	inappropriate, 	or
more 	expensive 	care. 	But 	there 	are 	many 	other 	common 	practices'·
in 	the 	health 	care 	field 	that 	also 	create 	such 	a 	risk 	that 	have
never 	been 	considered 	to 	be 	unlawful. 	For 	example, 	when 	one
practitioner 	refers 	a 	patient 	to 	another 	p~actitioner in 	the 	same
professional 	service 	corporation 	or 	partnershi~, the 	referring
practitioner 	will 	usually 	share 	in 	any 	profits 	generated 	by 	the
15

fees 	paid 	to 	the 	second 	practitioner. 20 	Multispecialty 	clinics
can 	be 	a 	highly 	efficient 	way 	of 	providing 	health 	care 	services,
as 	can 	ownership 	of 	entities 	that 	provide 	ancillary 	services. 	We
do 	not 	believe 	that 	Congress 	intended 	to 	outlaw 	these 	practices
in 	the 	context 	of 	the 	Medicare 	and 	Medicaid 	prograrns. 21
The 	types 	of 	practices 	that 	could 	be 	construed 	to 	violate
Section 	1128B(b) 	lie 	on 	a 	continuum 	in 	terms 	of 	their 	potential
to 	increase 	the 	costs 	of 	the 	Medicare 	and 	Medicaid 	programs. 	At-
one 	end 	of 	this 	continuum 	there 	are 	fraudulent 	"kickbacks" 	for
referrals 	of 	Medicare 	and 	Medicaid 	patients, 	which 	are 	illegal.
At 	the 	other 	end 	are 	situations 	such 	as 	a 	physician 	who 	owns 	a
few 	shares 	of 	stock 	in 	a 	pharmaceutical 	company. 	That 	physician
is 	not 	likely 	to 	be 	considered 	in 	violation 	of 	Section 	1128B(b)
when 	he 	prescribes 	medications 	manufactured 	by 	that 	company
20 	This 	problem 	may 	be 	most 	evident 	when 	a 	practitioner
recommends 	that 	he 	himself 	provide 	additional 	services.
21 	We 	note 	that 	Medicare 	and 	Medicaid 	officials 	have 	taken
the 	position 	that 	referrals 	to 	entities 	in 	which 	the 	provider 	has
an 	ownership 	interest 	may 	not 	violate 	the 	law. 	See 	Letter 	from
Irv 	Cohen, 	Deputy 	Director, 	Office 	of 	Program Validation, 	Health
Care 	Financi:Jg 	Administration 	(NOV. 	25, 	1980) 	("We 	do 	not 	beli..::ve
that 	physician 	referrals 	to 	en 	entity 	in 	which 	the 	referring
physician 	maintains 	an 	cwnership 	(or 	other 	investmer.t) 	interest
would, 	per 	se, 	violate 	the 	illegal 	remuneration 	provisions 	of
section 	1877 	(predecessor 	to 	Section 	1128B 	of 	the 	Social 	Security
Act, 	dealing 	with 	Medicare]."); 	Letter 	from 	Martin 	L. 	Kappert,
Director, 	Bureau 	of 	Quality 	Control, 	Health 	Care 	Financing
Administration 	(Dec. 	10, 	1980) 	(physician's 	ownership 	interest 	in
a 	medical 	supply 	company 	to 	which 	the 	physiciaa 	may 	refer 	his
p~~ients does 	not 	violate 	Section 	1909 	(predecessor 	to 	Section
1128B(b) 	of 	the 	Social 	Security 	Act, 	dealing 	with 	Medicaid))
(addressees 	of 	letters 	not 	made 	public). 	we 	beleive, 	however,
that 	regulations 	under 	Section 	1128B(b) 	should make 	this 	explicit.
16

.- :
\
I
I
i
because 	this 	practice 	is 	unlikely 	to 	result 	in 	unnecessary
prescriptions 	and 	thereby 	increase 	costs. 	The 	problem with 	which
the 	Secretary 	is 	now 	faced 	is 	where 	to 	draw 	the 	line 	along 	this
continuum, 	between 	those 	arrangements 	that 	should 	be 	considered
in 	violation 	of 	Section 	1128B(b) 	and 	those 	that 	should 	not. 	We
believe 	that 	the 	benefits 	of 	allowing 	practitioners 	to 	refer
patients 	to 	health 	care 	facilities 	they 	own 	suggest 	that, 	in
drawing 	this 	line, 	the 	Secretary 	should 	permit 	such 	practices.
To 	reduce 	the 	risk 	of 	encouraging 	unnecessary 	referrals, 	and
to 	remedy 	any 	deception 	of 	patients, 	the 	Secretary 	may 	want 	to
consider 	adopting 	regulations 	under 	Section 	1128B(b) 	to 	require
that 	practitioners 	disclose 	to 	patients 	any 	ownership 	interest
they 	have 	in 	an 	entity 	to 	which 	they 	are 	referring 	the 	patient.
Although 	it 	is 	uncertain 	how 	much 	disclosure 	will 	reduce 	Medicare
and 	Medicaid 	costs, 	it 	could 	provide 	the 	patient 	with 	information
that 	may 	aid 	in 	the 	decision 	whether 	to 	use 	the 	recommended
provider. 22 	If 	a 	disclosure 	requirement 	is 	adopted, 	care 	shJuld
be 	taken 	to 	avoid 	disclosure 	requirements 	that 	impose 	unnecessary
costs 	on 	providers. 23
22 	Similar 	disclosure 	requirements 	exist 	in 	the 	laws 	of 	some
states. 	~,~, 	California 	Bus. 	& Prof. 	Code 	§ 	654.2, 	which
requires 	that 	physicians 	disclose 	in 	writing 	to 	patients 	any
financial 	interest 	they 	have 	in 	facilities 	to 	which 	patients 	are
referred, 	and 	inform 	patients 	t~at they 	do 	not 	have 	to 	use 	the
provider 	the 	physician 	has 	selected.
23 	The 	Secretary 	might 	also 	consider 	regulations 	that 	state
that 	Section 	11283(b) 	will 	be 	applied 	where 	the 	percentage 	of 	the
profits 	the 	practitioner 	receives 	from 	the 	entity 	in 	which 	the
17

We 	urge 	the 	Secretary 	specifically 	to 	state, 	in 	the 	proposed
regulations, 	that 	an 	ordinary 	return 	on 	invested 	capital 	will 	not
be 	considered 	remuneration 	within 	the 	meaning 	of 	Section
l128B(b).
D. 	Waivers 	of 	Deductibles 	for 	Medicare 	Part 	A
Under 	Medicare 	Part 	A, 	wbich 	provides 	for 	payment 	for
inpatient 	hospital 	services, 	Medicare 	deducts 	from 	its 	payments
to 	hospitals 	amounts 	that 	Medicare 	permits 	hospitals 	to
collect 	from 	the 	Medicare 	patient 	as 	coinsurance 	and
deductibles. 24 	Some 	hospitals 	waive 	coinsurance 	and 	deductible
amounts 	as 	a 	marketing 	technique 	to 	attra~t patients 	to 	use 	their
hospitals. 	Such 	a 	waiver 	could 	be 	construed 	as 	a 	payment 	by 	the
hospital 	to 	induce 	the 	Medicare 	patient 	to 	use 	the 	hospital's
24 	Apparently, 	there 	is 	no 	dire~t statutory 	requirement 	that
hospitals 	collect 	these 	coinsurance 	and 	deductible 	amoun~s from
patien~s. 	Letter 	from 	Richard 	P. 	Kusserow, 	Inspector 	General,
U.S. 	Department 	0: 	Health 	and 	Human 	Services 	to 	Stephen 	S. 	Trott,
Assistant 	Attorney 	General, 	Criminal 	Division, 	U.S. 	Department 	of
Justice 	(April 	17, 	1925).
18

;
services, 	in 	violation 	of 	Section 	112BB(b).25 	We 	believe 	that
waivers 	of 	deductible 	and 	coinsurance 	amounts 	should 	not 	be
treated 	as 	unlawful 	because 	they 	can 	provide 	price 	competition
among 	hospitals. 	This 	competition can 	result 	in 	lower 	prices 	to
Medicare 	patients 	and 	therefore 	benefit 	consumers.
Although 	allowing 	hospitals 	to 	waive 	these 	payments 	may 	not
raise 	the 	cost 	to 	Medicare 	for 	a 	given 	hospitalization,26
overall 	costs 	could 	increase 	because 	some 	patients 	whose
decuctible 	and 	coinsurance 	payments 	are 	waived 	by 	hospitals, 	will
opt 	for 	hospitalizations 	that 	might 	not 	be 	medically 	necessary.
Congress 	may 	have 	provided 	for 	deduc~ib~e and 	coinsurance 	amounts
in 	part 	to 	provide 	incentives 	for 	patients 	to 	question 	the
advisability 	of 	inpatient 	hospital 	care. 27
25 	See 	West 	Allis 	Memorial 	Hosp., 	Inc. 	v. 	Bowen, 	660 	F.
Supp. 	936 	(E.D. 	Wis. 	1987) 	(preliminary 	injunction 	sought 	by
hospital 	to 	enjoin 	competitor 	hospital's 	waiver 	of 	Medicare
deductibles 	and 	coinsurance 	amounts, 	on 	grounds 	that 	such 	waiver
violated 	Medicare 	anti-kickback 	statute, 	denied 	by 	court) .
26 	Hospitals 	are 	currently 	=eimbursed 	by 	Medicare 	under 	a
prospective 	payment 	system. 	Pursuant 	to 	a 	specific 	"diagnosis
related 	group" 	(DRG) 	for 	each 	patient, 	hospitals 	are 	paid 	a 	fixed
amo~nt by. Medicare 	regardless 	of 	the 	actual 	costs 	incurred 	by 	the
hos?ital 	for 	treating 	that 	particular 	patient. 	The 	hospital 	is
not 	permitted 	to 	bill 	Medicare 	for 	a 	higher 	amount 	to 	cover 	the
cost 	of 	waiving 	deductibles 	or 	coinsurance 	amounts.
27 	Kusserow, 	sUDra, 	note 	24 	at 	4. 	However, 	we 	understand
that 	the 	Department 	of 	Health 	and 	Human 	Services' 	Inspector
General 	believes 	that 	other mechanisms 	exist, 	such 	as 	MeQicare
contrac~s with 	quality 	control 	peer 	re\-ieworganizations, 	to
effectively 	control 	overutilization 	of 	hospitals. 	Id. 	at 	5-6.
19

' ..
We 	suggest 	that 	the 	Secretary consider whether 	the 	potential
increase 	in 	competition 	and 	savings 	to 	Medicare 	patients 	that 	can
occur 	from 	waiver 	of 	Medicare 	coinsurance 	and 	deductible 	amounts
outweighs 	the 	possible 	overutilization 	of 	hospital 	care 	that 	may
be 	caused 	by 	such 	a 	waiver. 	If 	the 	Secretary 	determines 	that 	the
benefits 	outweigh 	the 	costs, 	then 	we 	suggest 	that 	the 	Secretary
adopt 	regulations 	that 	make 	clear 	that 	such 	waivers 	of 	Medicare
deductibles 	and 	coinsurance 	amounts 	do 	not 	violate 	Section
1128B(b).28
E. 	Other 	Arrangements
The 	specific 	types 	of 	arrangements 	that 	we 	have 	described
are 	by 	no 	means 	an 	exhaustive 	list 	of 	the 	types 	of 	arrangements
that, 	although 	they 	could 	be 	viewed 	as 	violating 	Section
1128B(b), 	are 	likely 	to 	provide 	pro-competitive 	benefits 	to 	the
28 	We 	note 	that 	the 	Inspector 	General 	does 	not 	support 	an
exemption 	for 	waivers 	of 	coinsurance 	amounts 	by Medicare 	Part 	B
providers 	(providers 	of 	medical 	services 	other 	than 	inpatient
hospital 	services). 	In 	part, 	this 	is 	because 	Part 	B providers
are 	reimbursed 	on 	a 	fee-for-service 	bcsis, 	with 	the 	resulting
possibility 	that 	the 	cost 	of 	waiving 	coinsurance 	amounts 	may 	be
passed 	on 	to 	the 	Medicare 	program. 	Id. 	at 	4-5. 	If, 	in 	the
future, 	reimbursements 	to 	Par~ B providers 	are 	dete=rnined 	on 	a
DRG 	basis, 	we 	suggest 	that 	the 	Secretary 	follow 	the 	same 	approach
regarding 	waivers 	by 	Part 	B providers 	that 	we 	have 	outlined
regarding 	Part 	A providers. 	In 	the 	meantime, 	the 	Secreta=r
should 	consider 	whether 	the 	pro-competitive 	advantages 	of
allowing 	Part 	B providers 	to 	waive 	Medicare 	deductibles 	ane
copayments 	outweigh 	the 	nsed 	for 	criminal 	sanctions 	to 	prevent
such 	providers 	fr8ffi 	passing 	through 	the 	cost 	of 	such 	waivers 	to
~he ~edicare prog~am.
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Medicare 	and 	Medicaid 	programs 	and 	their 	patients. 	The 	health
care 	sector 	of 	the 	economy 	is 	constantly 	generating 	innovative
programs 	that 	facilitate 	competition 	among 	providers 	or 	that 	are
designed 	to 	be 	competitive 	by 	controlling 	costs 	and 	providing
quality 	care. 	There 	are 	likely 	to 	be 	additional 	types 	of 	pro-
competitive 	programs, 	which, 	like 	the 	ones 	we 	have 	described, 	may
contain 	ancillary 	financial 	arrangements 	that 	could 	be 	construed
to 	violate 	Section 	1128B(b). 	As 	long 	as 	these 	ancillary
arrangements, 	when 	viewed 	in 	the 	ccntext 	of 	the 	pro-competitive
programs 	of 	which 	they 	are 	a 	part, 	are 	not 	likely 	to 	impose 	costs
on 	the 	Medicare 	and 	Medicaid 	programs, 	including 	costs 	for
unnecessary 	care, 	~hey should 	not 	be 	prohibited.
We 	suggest 	that 	the 	Secretary closely examine 	such
arrangements 	in 	light 	of 	the 	goals 	of 	Section 	1128B(b). 	We 	urge
the 	Secretary 	to 	ma 1<e 	clear 	that 	if, 	when 	balanced 	against 	the
pro-competitive 	and 	cost-saving 	effects 	of 	the 	entire 	progr~m,
these 	arrangements 	are 	no~ 	likely 	to 	raise 	the 	costs 	of 	the
Medicare 	ar.d 	Medicaid 	programs, 	they 	will 	not 	be 	considered 	to
violate 	Section 	1128B(b).
VI. 	Conclusion
We 	have 	attempted 	to 	provide 	examples 	of 	several 	types 	of
finan~~al arrangements 	and 	practices 	in 	the 	health 	care 	sector 	of
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the 	economy 	that 	could 	be 	construed 	to 	violate 	the 	Medicare 	and
Medicaid 	anti-kickback 	statute, 	but 	that 	are 	part 	of 	pro-
competitive 	health 	plans 	or 	other 	arrangements 	that 	may
ultimately 	provide 	cost 	savings 	to 	the 	Medicare 	and 	Medicaid
programs 	or 	to 	the 	programs' 	patients. 	The 	specific 	arrangements
we 	have 	identified 	involve 	HMOs, 	PPOs, 	and 	referral 	services.
The 	specific 	practices 	we 	have 	idp.ntified 	include 	the 	referral 	of
patients 	by 	providers 	to 	health 	care 	facilities 	owned 	by 	the
providers 	and 	hospital 	waiver 	of 	Medicare 	deductibles 	and
coinsurance 	payments. 	Many 	of 	these 	arrangements 	and 	practices
are 	not 	likely 	to 	raise 	Medicare 	and 	Medicaid 	costs, 	and 	thus 	are
not 	the 	type 	of 	arrangements 	and 	practices 	that 	Congress 	has
sought 	to 	prohibit. 	Consequently, 	we 	urge 	the 	Secretary 	to
develop 	regulations 	pursuant 	to 	Section 	1128B(b) 	that 	make 	clear
that 	providers 	involved 	in 	these 	and 	similar 	financial
arrangements 	and 	practices 	that 	are 	not 	likely 	to 	raise 	costs 	to
the 	Medicr.re 	~nd Medicaid 	programs, 	will 	not 	be 	subject 	to
criminal 	prosecution 	under 	Section 	1128B(b) 	a~dto exclusion 	from
the 	Medicare 	and 	Medicaid 	programs 	under 	Section 	1128(b)(7).
We 	appreciate 	tLis 	opportunity 	to 	provide 	these 	comments.
Please 	let 	us 	know 	if 	we 	can 	be 	0: 	any 	further 	assistance.
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