Physician Self-Referral

Physician Self-Referral

Section 1877 of the Social Security Act (the Act) (42 U.S.C. 1395nn), also known as the physician self-referral law:

  1. Prohibits a physician from making referrals for certain designated health services payable by Medicare to an entity with which he or she (or an immediate family member) has a financial relationship, unless the requirements of an applicable exception are satisfied; and
  2. Prohibits the entity from filing claims with Medicare (or billing another individual, entity, or third-party payor) for any improperly referred designated health services.

A financial relationship may be an ownership or investment interest in the entity or a compensation arrangement with the entity. 

The statute establishes a number of specific exceptions and grants the Secretary of the Department of Health and Human Services (HHS) the authority to create regulatory exceptions for financial relationships that do not pose a risk of program or patient abuse. 

The following items and services are designated health services:

  1. Clinical laboratory services.
  2. Physical therapy services.
  3. Occupational therapy services.
  4. Outpatient speech-language pathology services.
  5. Radiology and certain other imaging services.
  6. Radiation therapy services and supplies.
  7. Durable medical equipment and supplies.
  8. Parenteral and enteral nutrients, equipment, and supplies.
  9. Prosthetics, orthotics, and prosthetic devices and supplies.
  10. Home health services.
  11. Outpatient prescription drugs.
  12. Inpatient and outpatient hospital services.

When enacted in 1989, Section 1877 of the Social Security Act (the Act) applied only to physician referrals for clinical laboratory services. In 1993 and 1994, Congress expanded the prohibition to additional DHS and applied certain aspects of the physician self-referral law to the Medicaid program. In 1997, Congress added a provision permitting the Secretary to issue written advisory opinions concerning whether a referral relating to DHS (other than clinical laboratory services) is prohibited under section 1877 of the Act. In addition, in 2003 Congress authorized the Secretary to promulgate an exception to the physician self-referral prohibition for certain arrangements in which the physician receives non-monetary remuneration that is necessary and used solely to receive and transmit electronic prescription information and established a temporary moratorium on physician referrals to certain specialty hospitals in which the referring physician has an ownership or investment interest.

The following discussion provides a chronology of our more significant and comprehensive rulemakings; it is not an exhaustive list of all rulemakings related to the physician self-referral law.  After the passage of section 1877 of the Act, we proposed rulemakings in 1992 (related only to referrals for clinical laboratory services) (57 FR 8588) (the 1992 proposed rule) and 1998 (addressing referrals for all designated health services) (63 FR 1659) (the 1998 proposed rule).  We finalized the proposals from the 1992 proposed rule in 1995 (60 FR 41914) (the 1995 final rule) and issued final rules following the 1998 proposed rule in three stages.  The first final rulemaking (Phase I) was a final rule with comment period that appeared in the January 4, 2001 Federal Register (66 FR 856).  The second final rulemaking (Phase II) was an interim final rule with comment period that appeared in the March 26, 2004 Federal Register (69 FR 16054).  Due to a printing error, a portion of the Phase II preamble was omitted from the March 26, 2004 Federal Register publication.  That portion of the preamble, which addressed reporting requirements and sanctions, appeared in the April 6, 2004 Federal Register (69 FR 17933).  The third final rulemaking (Phase III) was a final rule that appeared in the September 5, 2007 Federal Register (72 FR 51012).

In addition to Phase I, Phase II, and Phase III, we issued final regulations on August 19, 2008 in the Fiscal Year (FY) 2009 Inpatient Prospective Payment System final rule with comment period (73 FR 48434) (the FY 2009 IPPS final rule).  That rulemaking made various revisions to the physician self-referral regulations, including: (1) Revisions to the ‘‘stand in the shoes’’ provisions; (2) prohibitions on per unit of service (‘‘per-click’’) and percentage-based compensation formulas for determining the rental charges for office space and equipment lease arrangements; and (3) expansion of the definition of ‘‘entity.’’

On November 16, 2015, in the Calendar Year (CY) 2016 Physician Fee Schedule (PFS) final rule, we issued regulations to reduce burden and facilitate compliance (80 FR 71300 through 71341).  In that rulemaking, we established two new exceptions, clarified certain provisions of the physician self-referral regulations, and updated regulations to reflect changes in terminology.  On November 15, 2016, in the CY 2017 PFS final rule, we included at § 411.357(a)(5)(ii)(B), (b)(4)(ii)(B), (l)(3)(ii), and (p)(1)(ii)(B), requirements identical to regulations that have been in effect since October 1, 2009 that the rental charges for the lease of office space or equipment are not determined using a formula based on per-unit of service rental charges, to the extent that such charges reflect services provided to patients referred by the lessor to the lessee (81 FR 80533 through 80534).  On November 23, 2018, in the CY 2019 PFS final rule (83 FR 59715 through 59717), we incorporated into our regulations provisions at sections 1877(h)(1)(D) and (E) of the Act that were added by section 50404 of the Bipartisan Budget Act of 2018 (Pub. L. 115–123).  Specifically, we codified in regulations our longstanding policy that the writing requirement in various compensation arrangement exceptions in § 411.357 may be satisfied by a collection of documents, including contemporaneous documents evidencing the course of conduct between the parties.  We also amended the special rule for temporary noncompliance with signature requirements at § 411.353(g), removing the limitation on the use of the rule to once every 3 years with respect to the same physician and making other changes to conform the regulatory provision to section 1877(h)(1)(E) of the Act.

A final rule entitled “Modernizing and Clarifying the Physician Self-Referral Regulations” (the MCR final rule) appeared in the December 2, 2020 Federal Register (85 FR 77492) and established three new exceptions to the physician self-referral law applicable to compensation arrangements that qualify as “value-based arrangements,” established exceptions for limited remuneration to a physician and the donation of cybersecurity technology and services, and revised or clarified several existing exceptions.  The MCR final rule also provided guidance and updated or established regulations related to the fundamental terminology used in many provisions of the physician self-referral law.  Most notably, we defined the term “commercially reasonable” in regulation, established an objective test for evaluating whether compensation is considered to take into account the volume or value of referrals or other business generated between the parties, and revised the definitions of “fair market value” and “general market value.”  The MCR final rule also revised the definition of “indirect compensation arrangement,” which was further revised in the CY 2022 PFS final rule (86 FR 65343).  On November 23, 2022, in the CY 2023 Outpatient Prospective Payment System (OPPS) final rule (87 FR 71748), we revised certain exceptions to make them applicable to Rural Emergency Hospitals, a new provider type established in the Consolidated Appropriations Act of 2021 (Pub. L. 116-260).  [For more information on regulatory history, refer to "Significant Regulatory History" in the navigation tool on the left side of this page.]  

With respect to the application of the physician self-referral law to hospitals with physician ownership, after passage of the Patient Protection and Affordable Care Act of 2010 (Pub. L. 111–148) (Affordable Care Act), we issued final regulations on November 24, 2010 in the CY 2011 OPPS final rule with comment period (75 FR 71800), on November 30, 2011 in the CY 2012 OPPS final rule with comment period (76 FR 74122), and on November 10, 2014 in the CY 2015 OPPS final rule with comment period (79 FR 66987) that established or revised certain regulatory provisions to codify and interpret the Affordable Care Act’s revisions to section 1877 of the Act.  In the FY 2024 IPPS final rule, which appeared in the August 28, 2023 Federal Register (88 FR 58640), we revised and clarified certain requirements for hospitals requesting an exception to the prohibition on facility expansion, including revisions to regulations finalized in the CY 2021 OPPS final rule regarding the expansion exception process.  [For more information on hospitals with physician ownership, including the regulatory history, refer to “Physician-Owned Hospitals” in the navigation tool on the left side of this page.]

Because our regulations define certain designated health services by Current Procedural Terminology (CPT) and Healthcare Common Procedure Coding System (HCPCS) codes, we publish annually an updated list of codes for the relevant designated health services.  Beginning with the January 1, 2023 List of CPT/ HCPCS Codes (the Code List), we publish the Code List solely on the CMS website.  (See the CY 2022 PFS final rule for further information (86 FR 65356 through 65357).)  [For more information, refer to the "List of CPT/HCPCS Codes" in the navigation tool on the left side of this page.]

On September 23, 2010, we published the CMS Voluntary Self-Referral Disclosure Protocol (“SRDP”) pursuant to section 6409(a) of the Affordable Care Act.  The SRDP sets forth a process to enable providers of services and suppliers to self-disclose actual or potential violations of the physician self-referral law.  Additionally, section 6409(b) of the Affordable Care Act, gives the Secretary of HHS the authority to reduce the amount due and owing for violations of section 1877.  [For more information, refer to "Self-Referral Disclosure Protocol" in the navigation tool on the left side of this page.]

Page Last Modified:
11/29/2023 02:22 PM