Reed Smith Client Alerts


On November 19, 1999, the Office of Inspector General ("OIG") of the Department of Health and Human Services ("HHS") promulgated final regulations entitled "Clarification of the Initial OIG Safe Harbor Provisions and Establishment of Additional Safe Harbor Provisions Under the Anti-Kickback Statute," 64 Fed. Reg. 63518 (1999). These regulations created eight new safe harbor provisions which protect arrangements from criminal prosecution and civil sanctions under the anti-kickback statute, 42 U.S.C. § 1320a-7b(b). This statute prohibits anyone from knowingly and willfully offering, paying, soliciting, or receiving remuneration in order to induce business reimbursable under federal or state health care programs.

The new safe harbors pertain to investments in underserved areas, sales of physician practices, practitioner recruitment, obstetrical malpractice insurance subsidies, investments in group practices, cooperative hospital service organizations, ambulatory surgical centers ("ASCs"), and referral agreements for specialty services. The first four of the new safe harbors address arrangements in underserved areas. In addition, the regulations clarified various provisions in the original safe harbors relating to large and small entity investment interests, space rental, equipment rental, personal services and management contracts, referral services and discounts. On the same day, the OIG also promulgated an interim final rule relating to two additional safe harbors for shared risk arrangements.(fn1) As a result, there are now a total of 23 safe harbors to the anti-kickback statute.

The new safe harbors were originally proposed in 1993. While many provisions were not changed, there have been several major modifications as well as considerable fine-tuning. Half of the new safe harbors protect various types of arrangements in underserved areas, although these areas are now defined more broadly to encompass certain urban, as well as rural, areas. However, the definition of underserved area appears to limit the types of practitioners who may qualify for safe harbor protection in certain cases.

The ASC safe harbor has been substantially enlarged, and now covers four types of ASC arrangements. By contrast, the group practice investment safe harbor has been narrowed to apply only to investments in the group practice itself, and will not protect a group’s investment in separate entities. The clarifications contained in the final rule are generally very similar to the language proposed earlier with one notable exception. The discount safe harbor now provides much greater protection for certain types of rebates and bundled discounts for charge-based or fee schedule providers and suppliers.

The OIG reiterates throughout the regulations that failure to qualify for a safe harbor does not mean that an arrangement is necessarily illegal. However, since many arrangements will not fully qualify for safe harbor protection and will need to be evaluated on an individualized basis, the preamble frequently suggests that parties seek advisory opinions.

This Memorandum provides a brief overview of the legislative and regulatory history of the safe harbors to the anti-kickback statute. It then discusses key aspects of the new safe harbors and clarifications to the existing safe harbors, as set forth in the final rule and accompanying preamble. In light of the complexity of the safe harbor regulations, this Memorandum is not intended to be a comprehensive analysis of all the regulatory provisions, and it cannot provide legal advice regarding the safe harbors’ application to any particular business arrangement. To facilitate review, this Memorandum focuses on selected issues that we believe will be of most interest to our clients, and describes some of the more significant changes that have been made in the safe harbors.


Because the statutory language prohibiting kickbacks is so broad, there has long been concern that innocuous commercial transactions could theoretically fall within its scope, and subject legitimate arrangements to criminal or other sanctions. In 1987, Congress amended the anti-kickback law to require the development of safe harbor regulations, which would specify certain business and payment practices that would not be treated as violations of the anti-kickback statute, even though they technically might not comply with its terms. The goal of the safe harbor provisions is to permit "certain non-abusive arrangements, while encouraging beneficial and innocuous arrangements."(fn2)

In 1991, the OIG published the first final rulemaking that established safe harbors in ten broad areas: investment interests; space rental; equipment rental; personal services and management contracts; sales of practices; referral services; warranties; discounts; employees; and group purchasing organizations ("GPOs"). Id. The OIG received numerous public comments on these regulations, including recommendations for additional safe harbors. In 1993, the OIG published a proposed rule requesting comments on the following seven new areas of safe harbor protection: investment interests in rural areas; ambulatory surgical centers; group practices; practitioner recruitment; obstetrical malpractice insurance subsidies; referral agreements for specialty services; and cooperative hospital service organizations. A modification to the existing safe harbor for sales of physician practices also was proposed at this time.(fn3)

As the original safe harbors were implemented, the OIG became aware of a number of ambiguities that had created uncertainties for health care providers seeking to comply with the regulations. To clarify its intent, in 1994, the OIG published a notice of proposed rulemaking to modify the language of the original safe harbors. These proposed clarifications were not intended to change the safe harbors, but rather to make the regulatory language more precise in order to carry out its intended purposes.(fn4)

The new safe harbor regulations finalize the safe harbors and clarifications proposed in 1993 and 1994. The preamble to the regulations contains comments generally applicable to interpretation of all the safe harbors as well as a summary of the new regulatory provisions and responses to the over 350 public comments received.


A. General Comments

1. Relationship Between The Anti-Kickback Statute And The Stark Statute

The OIG acknowledges that the anti-kickback statute’s safe harbor standards are not necessarily the same as the requirements of the Stark statute prohibiting physician self-referrals, 42 U.S.C. § 1395nn, and claims that this variation results from Congressional intent and the fundamental difference between the two statutory schemes. Although both laws apply to physician self-referrals, the anti-kickback statute is a criminal law which requires improper intent for a violation. The Stark law is a civil statute, and a transaction must fall entirely within an exception to be lawful, regardless of the parties’ intent. Therefore, even if an arrangement does not violate the Stark prohibitions, it may violate the anti-kickback statute if the requisite improper intent to induce referrals is present. 64 Fed. Reg. 63520.

2. Integrated Delivery Systems - Intra System Referrals

With regard to integrated delivery systems, the preamble reiterates the position taken in the 1991 regulations that the anti-kickback statute is not implicated when payments are made within a single corporate entity, e.g. from one division to another. However, despite requests, the OIG declines to provide a safe harbor at this time for integrated delivery systems or for arrangements between wholly-owned entities. These arrangements could create improper financial incentives resulting in over-utilization and increased program costs, which could adversely affect quality of care and patient freedom of choice. According to the preamble, the risk is particularly high where the federal government is paying for services on a fee for service basis. As a potential area of such concern, the preamble gives the example of a hospital making referrals to a wholly-owned home health agency ("HHA") (but does not address the fact that HHAs will be transitioning to a prospective payment system).

3. Transition Period

Several commenters asked the OIG to "grandfather" arrangements that had been structured in good faith reliance on the 1991 safe harbors but which no longer comply with these safe harbors as clarified. The OIG declines to grandfather these arrangements or to provide a formal transition period, noting that a reasonable time for restructuring may vary depending on the nature and complexity of the arrangement. However, the OIG agrees to use its discretion "to be fair to the parties" who reasonably believed they complied with one of the 1991 safe harbors, and are diligently working in good faith to restructure the arrangement, as necessary, in light of the new regulations. Id. at 63520-21.


4. Failure To Comply With A Safe Harbor Does Not Necessarily Make An Arrangement Illegal Or Suspect

At several points throughout the document, the preamble states that an arrangement does not have to comply with a safe harbor in order to be legal under the anti-kickback statute. Moreover, in response to several comments, the OIG emphasizes that an arrangement is not necessarily suspect because it does not comply with a safe harbor although it may be suspect under particular circumstances. Id. at 63521. Parties who have questions about the legality of their specific arrangements are encouraged to obtain guidance through the advisory opinion process, set forth at 42 C.F.R. § 1008.

B. Clarifications To Existing Safe Harbors

1. Large Entity Investment Interests

The new regulations incorporate two of the clarifications for this safe harbor issued in 1994. However, the third clarification has been modified.

a. $50,000,000 Asset Requirement

The original safe harbor required that an entity have more than $50,000,000 in undepreciated net tangible assets to qualify for the safe harbor. The regulations now require that these assets must relate to the furnishing of health care items and services. 42 C.F.R. § 1001.952(a)(1). The OIG provides further guidance by noting that "health care items or services" means:

(i) health care items, devices, supplies, and services and (ii) items or services reasonably related to the furnishing of health care items, devices, supplies or services, including but not limited to, non-emergency transportation, patient education, attendant services, social services (e.g., case management), utilization review, quality assurance, and practice management services. Marketing services are not included.

64 Fed. Reg. 63522.

The preamble also notes that a managed care company would count as a health care related asset for purposes of this test.

b. Loans To Acquire Investment Interests

The regulations have been revised, as suggested in 1994, to specifically state that neither the entity nor any investor (or other individual or entity acting on behalf of the entity or investor) may provide a loan or loan guarantee to another "interested" investor to use in acquiring his or her ownership interest in the entity. This limitation applies only to those acquiring investors in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity ("tainted investor"). 42 C.F.R. § 1001.952(a)(1)(iv).

c. Acquiring Investment Interests

This provision was modified to provide somewhat greater flexibility. The original safe harbor required that investments be acquired on "terms equally available to the public" through trading on a registered national securities exchange. The 1994 clarification narrowed the scope of the safe harbor by indicating that a tainted investor must acquire the same type of interest in the "same way" as members of the public. In addition, there could not be any side agreements requiring purchase or restricting disposition of the stock. Under the new regulations, tainted investors must now obtain their interest in the entity "on terms (including any direct or indirect transferability restrictions) and at a price equally available to the public when trading on a registered securities exchange." 42 C.F.R. § 1001.952(a)(1)(ii).

There is considerable discussion of this requirement in the preamble. The OIG acknowledges that requiring stock to be acquired "in the same way" could be unduly restrictive but expresses continuing concern about (i) restrictions on the sale or disposition of stock that may "lock in" tainted investors, thereby increasing their incentives to refer to the entity, and (ii) allowing tainted investors to acquire their ownership interests at insider prices or more advantageous terms than the general public. The OIG notes that these special terms or prices could be disguised remuneration for referrals and would prevent the safe harbor from protecting the arrangement. 64 Fed. Reg. 63522-23.

2. Small Entity Investment Interests

a. 60-40 Investment Interest Test

This safe harbor originally provided that no more than 40 percent of the value of each class of investment interests could be held in the previous fiscal year or 12 month period by tainted investors. Investors were divided into two classes: "tainted" (or interested) investors who were in a position to make or influence referrals, furnish items or services to or otherwise generate business for the entity, and "untainted" investors who hold an investment interest but do no business with the entity. The new regulations incorporate the 1994 clarification, which allows equivalent classes of equity investments to be combined and equivalent classes of debt instruments to be combined in order to apportion investors into "tainted" and "untainted" pools for purposes of meeting the 60-40 investor test. 42 C.F.R. § 1001.952(a)(2)(i).

The preamble also provides additional guidance on several related issues. First, the OIG rejects the suggestion that only physicians can make referrals or influence the flow of business, and specifically states that hospitals, nursing homes, skilled nursing facilities ("SNFs"), managed care companies, physician practice plans or other institutions are capable of influencing referrals and thus may be tainted investors for purposes of the 60-40 investor test. The potential for manufacturers to be "tainted" for purposes of this test is discussed separately. The OIG acknowledges that manufacturers may invest in health care entities and sell products to those entities but not be in a position to refer patients to, or generate business for, those entities. However, manufacturers may constitute "tainted" investors in certain situations (e.g., when they can influence referrals or furnish items or services to the investment entity). As a result, each arrangement must be evaluated on a case-by-case basis. 64 Fed. Reg. 63523.

There is also a brief discussion of the types of "equivalent" investment interests or debt instruments that may be combined. According to the preamble, these interests do not have to be identical. The focus must be on the potential for remuneration to investors who are existing or potential referral sources. Classes of investment interests may be aggregated when they have similar rights with respect to the entity’s income and assets, where investors receive equivalent returns in proportion to their investments, and where there is no preferential treatment of referral source investors (particularly no special treatment in connection with the disposition of the entity’s assets). Id.

Finally, the OIG rejects the suggestion that further changes be made in the small entity investment interest safe harbor to accommodate general partners for purposes of the 60-40 investor rule. General partners are considered to be tainted investors in this context because they provide services to the entity. As a result, safe harbor protection is available only if the general partners hold a minority interest, even if the partnership has no potential referral source investors.

b. 60-40 Gross Revenue Test

The small entity investment interest safe harbor incorporates the 1994 clarifications and provides that, "no more than 40 percent of the entity’s gross revenue related to the furnishing of health care items and services in the previous fiscal year or previous 12-month period may come from referrals or business otherwise generated from investors." 42 C.F.R. § 1001.952 (a)(2)(vi) (emphasis added). The definition of "health care items and services" in this context is the same as in the large entity investment interest safe harbor (see discussion supra).

The new regulations have also deleted prior language which prohibited more than 40 percent of the revenues coming from "items or services furnished" to the entity by tainted investors. This language had caused considerable confusion and was discussed in the 1994 clarifications, 59 Fed. Reg. 37204-05. However, the clarifications gave an example which generated additional confusion concerning the anti-kickback implications of radiologists’ practice of medicine. The OIG acknowledges the unique circumstances of radiologists, and emphasizes that occasional recommendation of additional testing by a radiologist to an attending physician with whom the radiologist has no financial relationship, pursuant to a bona fide medical consultation, is not prohibited by the anti-kickback statute and would not taint revenues derived from such acts. Id. at 63524.

c. Certain Loans To Interested Investors Prohibited

This new standard prohibits the entity and any investors (or others acting on their behalf) from loaning or guaranteeing loans for a tainted investor who uses any part of the loan to obtain an ownership interest in the entity. 42 C.F.R. § 1001.952(a)(2)(vii). The OIG notes that this criterion is not intended to apply to loans from banks and other unrelated third parties that are not equity investors in the entity, and are not acting on behalf of the entity or any of its investors, even if the loan is used by a prospective investor to purchase an ownership interest. However, the safe harbor will not protect loan guarantees or other arrangements made by an entity or any of its investors (or others acting on their behalf) to secure a loan from a bank or other unrelated third party if the loan is used, even in part, by an investor to obtain an ownership interest in the entity. 64 Fed. Reg. 63524.

3. Space And Equipment Rental/Personal Services And Management Contracts Safe Harbors

a. Contracts To Specify All Items And Services Provided

Two new criteria have been added to each of the safe harbors for space rental, 42 C.F.R. § 1001.952(b), equipment rental, 42 C.F.R. § 1001.952(c) and personal services and management contacts, 42 C.F.R. § 1001.952(d). Both of these criteria were generally suggested in the 1994 clarifications. First, in order to prevent providers from entering multiple, overlapping contracts to circumvent the requirement for contracts with terms of at least one year, all three safe harbors now contain a provision that the contract must cover and specify all the space, equipment, or services leased or provided between the parties during the term of the contract.

b. Commercially Reasonable Business Purpose Test

Second, all three safe harbors now contain a requirement that the aggregate space, equipment or services contracted for must not exceed that which is "reasonably necessary to accomplish the commercially reasonable business purpose" of the rental or services. 42 C.F.R. §§ 1001.952(b)(6), (c)(6), (d)(7).

The OIG originally had proposed that the aggregate space, equipment, or services contracted for not exceed that which is reasonably necessary to accomplish a "legitimate business purpose." 59 Fed. Reg. 37205. In the final regulations, this language is replaced with the phrase "commercially reasonable business purpose" in order to make clear that the test is not whether the arrangement is lawful, but whether the space, equipment, or services have intrinsic commercial value to the lessee or purchaser. 64 Fed. Reg. 63525. The purpose must be reasonably calculated to further the business of the lessee or purchaser, and must be space, equipment, or services that the lessee or purchaser "needs, intends to utilize, and does utilize in furtherance of its commercially reasonable business objectives." Id.

The preamble gives two examples involving durable medical equipment ("DME") suppliers which would not fit the safe harbor. In the first example, a DME supplier leases space in a physician’s office that includes extra space the DME supplier neither occupies nor uses for its DME business. In the second example, the DME supplier leases more space than "would reasonably be rented by a similarly-situated DME supplier negotiating in an arms-length transaction with a non-referral source lessor." Id. Cost sharing or risk sharing arrangements, and joint research initiatives and data collection arrangements are also discussed. Although these may qualify as commercially reasonable arrangements, the OIG warns against abusive arrangements involving contracts with referral sources where the data collected or research performed have no value to the entity paying for them. Such arrangements do not comply with the safe harbor and would be "highly suspect." Id. at 63526.

c. Termination Clauses

There is also discussion of termination clauses in the context of the safe harbors’ requirement that the arrangement involve a contract with a term of at least one year. The preamble notes that "for cause" termination would satisfy the safe harbor if it (i) specifies the conditions under which the contract may be terminated for cause, and (ii) also contains an absolute prohibition on renegotiation of the lease or contract or further financial arrangements between the parties for the duration of the original one year term. The OIG expressed concern, however, that "without cause" termination provisions could be used to create sham leases and contracts. Id. at 63526. The OIG did not state definitively, however, that a "without cause" termination clause disqualifies a transaction from safe harbor protection.

d. Aggregate Compensation Must Still Be Set In Advance

The preamble also contains a brief discussion of the requirements in these three safe harbors that aggregate payments be set in advance, and that part-time arrangements specify the exact schedule of intervals involved. Despite the practical difficulties, the OIG continues to insist that these requirements are necessary for safe harbor protection. Specifically, the aggregate payments requirement is not necessarily satisfied if the method of calculation is set in advance.

4. Referral Services

The OIG adopted the 1994 clarification to the referral services safe harbor without any modification. The safe harbor now specifically requires that any payment from a participant to a referral service not be based on the volume or value of any referrals to or business otherwise generated by either party for the other.

5. Discounts

The anti-kickback statute contains an exception for discounts and other reductions in price obtained by a provider which are properly disclosed and appropriately reflected in costs claimed or charges made to federal health care programs by the provider. 42 U.S.C. § 1320a-7b(b)(3)(A). The 1991 safe harbor regulations implementing the exception defined the types of price concessions that qualified as "discounts," and required buyers and sellers to comply with discount disclosure and reporting mechanisms, which varied depending on the type of buyer involved, in order for an arrangement to be protected. 42 C.F.R. § 1001.952(h). The 1991 safe harbors were subject to important limitations, however, such as the absence of protection for bundled sales arrangements and for rebate arrangements with charge-based buyers such as physicians, pharmacies, and DME suppliers. The discount safe harbor as "clarified" makes important structural changes in the safe harbor and contains a significant liberalization of prior restrictions, particularly relating to rebate arrangements and bundled sales. The OIG also repeats a familiar theme: a critical aspect of the safe harbor is that federal health care programs have the opportunity to realize t