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A significant issue confronting all healthcare providers is the potential application of the Fraud and Abuse law to various transactions and arrangements. The law broadly prohibits the payment of remuneration in return for referrals. Unlike the Stark law which can result in administrative fines, the Fraud and Abuse law can result in the imposition of criminal penalties. As reported in this newspaper earlier this year, several physicians and a hospital administrator were convicted under this law and now face lengthy prison terms.

On November 19, Medicare issued new "safe harbor" regulations exempting certain transactions from the scope of the Fraud and Abuse law. Eight new safe harbors were established. These safe harbors supplement existing safe harbors promulgated in 1991. Medicare also clarified certain aspects of a number of existing safe harbors. These new regulations offer hospitals some additional clarity regarding the potential impact of the Fraud and Abuse law on their business dealings with physicians and other referral sources.

Ambulatory Surgical Centers

he safe harbors include protection for both physician owned and hospital/physician ASCs. In general, for physician investors the ASC must be an extension of their office practice. In order for a hospital to be an investor in an ASC jointly owned with physicians, the hospital must not be in a position to directly or indirectly make or influence referrals to the ASC or any investor.

Joint Ventures

A safe harbor has been created for joint ventures in medically underserved areas. An earlier proposed form of this exception was limited to rural areas. The new regulations extend the protections to include medically underserved urban areas and allows for physicians to comprise up to fifty percent of the investor pool. The safe harbor contains no restriction on the amount of revenue that can be received from referral source investors, which is a significant expansion of the limitations contained in the existing safe harbor for small investment interests.


Recruitment of physicians in health professional shortage areas ("HPSA") is protected by the new safe harbors. Recruitment payments are limited to three years. However, payments to existing medical groups to recruit physicians are not covered and will continue to be reviewed on a case-by-case basis.

Physician Practice Acquisitions

The new regulations provide protection for hospital purchases of medical practices in HPSAs when the practice is purchased and held for a period of time while a new physician is recruited.

OB Subsidies

Hospital payments of malpractice premiums for physicians engaged in obstetrical practices in HPSAs are protected. However, 75 percent of the physician's patients must be medically underserved patients thereby limiting the practical applicability of this safe harbor.

Group Practice Investments

A safe harbor now exists for investments by physicians in their own group practices if the group practice qualifies as such under the Stark law.

Specialty Referral Arrangements

This safe harbor protects situations where an individual or entity agrees to refer a patient to another for specialty services in return for the other party agreeing to refer the patient back under certain circumstances.

Cooperative Hospital Services Organizations ("CHSO")

Cooperative hospital service organizations ("CHSO") that qualify under section 501(e) of the Internal Revenue Code will be protected under this safe harbor. Payments from a hospital to a CHSO to support the CHSO's operational costs and payments from the CHSO to the hospital as required by IRS rules are protected.

Clarifications of Existing Safe Harbors

Medicare also clarified six existing safe harbors. The clarifications apply to safe harbors covering investment interests, space rentals, equipment rentals, personal services and management contracts, referral services, and discounts.

SHAM Transactions

The preamble to the new safe harbors indicates that the safe harbors, both new and old, only protect arrangements if the form and substance of the arrangement conforms to the safe harbor in which the protection is sought.

Shared Risk Arrangements

Medicare also published an interim final rule establishing two new safe harbors protecting certain managed care arrangements. One protects financial arrangements between managed care plans and providers where the plan is paid by Medicare on a capitated basis. The second safe harbor protects fee-for-service arrangements if the provider is placed at substantial financial risk for the cost or utilization of items or services.

The new safe harbors, although not as expansive as the healthcare industry would have hoped, do provide substantial additional protection. Although complex, they offer potential protection for a number of common practices and arrangements.