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Donating Health Information

Technology to Physicians:

CMS/OIG Regulations Highlight a Key

Challenge to Realizing an Electronic

Health Record for all Americans


Donating Health Information Technology to Physicians: CMS/OIG

Regulations Highlight a Key Challenge to Realizing an Electronic Health

Record for all Americans

This White Paper provides analysis and commentary on the recently proposed anti-kickback safe harbors and Stark Law exceptions for the provision of health information technology and related services (HIT) to referral sources. For a description of the specific provisions of the proposed rules, please see our October 11, 2005 On the Subject, "CMS and OIG Propose New Stark Law Exceptions and Anti-Kickback Safe Harbors for E-Prescribing and EHRs" at

The Health Information Technology Conundrum

In his January 20, 2004, State of the Union Address, President George W. Bush announced his plan to ensure that most Americans have electronic health records within 10 years: “By computerizing health records, we can avoid dangerous medical mistakes, reduce costs, and improve care.” The White House’s website states that the President’s Health Information Technology Plan will address long-standing problems of preventable errors, uneven quality and rising costs in the nation’s health care system. The President’s plan includes adopting health information standards, increasing funding for health information technology demonstration projects, using the federal government’s clout as one of the largest purchasers of health care in the world to create incentives for health care providers to adopt health information technology, and creating a subcabinet level position to provide the national leadership and coordination to achieve the President’s goals. HIT includes electronic medical records, computerized prescribing and ordering of diagnostic tests, clinical decision support tools, and the technology necessary to assure the secure exchange of electronic health information.


Prior to the President’s initiative, the U.S. Congress and federal agencies had helped create a platform for expanding adoption of HIT through the so-called HIPAA legislation and regulations that mandate common transaction and code sets and standards for health information security and privacy. In addition, as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), Congress directed the Secretary of the Department of Health and Human Services (the Secretary) to adopt standards for electronic prescribing of drugs covered by the new Voluntary Prescription Drug Benefit Plan, also known as Medicare Part D, to improve patient safety, quality of care and efficiency in the delivery of care (e-prescribing). Sponsors of prescription drug plans (Part D sponsors) are required to support and comply with e-prescribing standards established by the Secretary. Health care professionals are not required to write prescriptions electronically; however, those who engage in e-prescribing are required to comply with the Secretary’s recently published initial e-prescribing standards (the so-called Foundation Standards). The Secretary’s foundation standards are in addition to existing HIPAA rules governing the creation, storage and exchange of personal health information.


Notwithstanding the fact that the federal government has yet to promulgate standards for electronic health records (EHR) technology, per se, HIT vendors are continually developing, upgrading and marketing HIT to public and private health plans, health systems, hospitals and large physician practices. However, the cost of adopting HIT is substantial, and public and private grants will only reach a relatively small number of providers. Although a number of voluntary regional health information organizations have been formed and a few public/private initiatives started, a number of hospitals, health systems and health plans have undertaken HIT initiatives aimed at solo and small- to medium-sized physician group practices. These practices compose the largest segment of the medical profession and are the least likely candidates to make the necessary capital outlay to adopt HIT given that most are already struggling to slow the decline in their professional incomes.

Because physicians are the lynchpin of any meaningful development of e-prescribing and EHR systems in this country, and, generally, they will not pay for the technology, there will not be an EHR for most Americans by 2014, and the improvements in patient safety, quality of care and efficiencies the President and Secretary hail as important public policy objectives will simply not be achieved, unless Part D sponsors and hospitals can fund the adoption of HIT by physicians and other referral sources without violating the federal physician self-referral law (the Stark Law) and the federal health care program anti-kickback statute (the AKS).



Attempts by hospitals, in particular, to create an electronic health record within their service areas have for years been thwarted by potential liability under the AKS and, especially, the Stark Law. The Centers for Medicare and Medicaid Services (CMS), in its Stark II Phase II rulemaking, created an exception to the Stark Law for community-wide health information systems, effective July 26, 2004. However, the exception does not allow an entity to provide HIT to physicians in a manner that takes into account the volume or value of referrals or other business generated between the parties, and the community-wide health information systems must be made available to every provider, practitioner and resident of the community who desires to participate. For example, the exception does not appear to allow a hospital to fund development of a system initially limited to its active medical staff members or members of a clinical department of the hospital that account for the highest volume of admissions, orders and medical records at the hospital, where presumably the use of such technology would have the most positive impact on patient safety and reduce medical errors.

In the e-prescribing context, Congress recognized that proliferation of e-prescribing technology important to the Medicare Part D program would not occur without an anti-kickback safe harbor and Stark Law exception for donations of technology necessary for e-prescribing. As a result, the MMA requires the Secretary to adopt such a safe harbor and Stark Law exception (collectively referred to here as exceptions). However, even Congress directed the Secretary to limit the exceptions to technology necessary to and used solely for e-prescribing. Thus, for example, a physician practice could not use the technology for other health information purposes, such as with an EHR system used to deliver day-to-day patient care.

Recognizing the need for an exception to address EHR as well as e-prescribing, the Office of the Inspector General (OIG) also proposed the concepts (but not the language) for an anti-kickback safe harbor for EHR arrangements, and the CMS, recognizing that the Stark Law community-wide health information exception was not broad enough to encourage development of health information systems, also proposed exceptions for EHR arrangements. Unfortunately, the e-prescribing and EHR exceptions proposed by the OIG and the CMS (sometimes referred to here as the agencies) are probably too narrow to effectively encourage widespread adoption of EHR systems.

In defense of the agencies, they do not have authority from Congress to create just any exceptions for HIT, and the MMA specifically instructed them to create an exception for HIT necessary to and used solely for e-prescribing. The CMS is only authorized to create exceptions to the Stark Law for arrangements that do “not pose a risk of program or patient abuse.” Congress directed the OIG to create safe harbors because it was generally believed that the broad language of the AKS could create criminal liability for innocuous, harmless, beneficial and efficient arrangements between referral sources and recipients. Consequently, the OIG has always considered safe harbors to be limited to those facts and circumstances where there is a very low risk of program or patient abuse. Therefore, it’s not surprising that the proposed e-prescribing and EHR exceptions are narrow.


Herein lies the conundrum for the President, his Health Information Technology Coordinator, David Brailer, and the Secretary. The Bush Administration cannot achieve its HIT initiative without getting the technology into physicians’ hands and offices, but the technology is valuable, gives wealthier hospital and health systems or Medicare Part D Sponsors a competitive advantage, and, if not interoperable, can inappropriately influence medical decision making and steer patients to the donor’s facilities. The agencies cannot, consistent with their delegated authority, create broad exceptions that do not address the potential risk of program or patient abuse. Consequently, the public and private stakeholders in the President’s HIT initiative may have no choice but to lobby Congress for broad legislative exceptions for donations of HIT by referral recipients to referral sources. However, now that the OIG and CMS have proposed exceptions for donations of e-prescribing and EHR technology, it is less likely that Congress would intervene in the notice-and-comment process initiated by the agencies. Further, there is no guarantee that legislative exceptions, such as the ones included in the recently introduced bill, H.R. 4157 (Health Information Technology Promotion Act of 2005), as interpreted and implemented by the OIG and CMS, would be any broader than those proposed by the OIG and the CMS.

Consequently, the notice-and-comment process for the OIG and CMS rules on HIT donations is critically important to the stakeholders in the HIT initiative, including the OIG and the CMS. The OIG is clearly committed to crafting “safe harbor conditions that would promote open, interconnected, interoperable electronic health records systems that help improve the quality of patient care and efficiency in the delivery of health care to patients, . . .” Similarly, after noting the many benefits of EHRs, the CMS states: “We seek to encourage the adoption of this technology through this proposed rulemaking.” Clearly, the agencies


are under instructions from the Secretary to take steps to assure the AKS and the Stark Law do not unnecessarily chill the adoption of HIT. Thus, it is possible that a combination of lobbying efforts and public comments on the proposed rules will lead the agencies to broaden the proposed exceptions to achieve the Bush Administration’s initiatives and avert the need for greater congressional intervention.

The balance of this White Paper discusses key elements of the proposed exceptions that are problematic and, absent modification, will significantly hamper HIT’s adoption.


The proposed e-prescribing safe harbor and Stark Law exception restrict HIT donations to hardware, software or information and technology and training services necessary to and used solely to receive and transmit electronic prescription information. The proposed EHR safe harbors and Stark Law exceptions extend the scope of protection to software, but not to hardware, essential to and used solely for the transmission, receipt and maintenance of patients’ electronic health records, electronic prescription drug information and directly related training services. For example, the proposed rules do not allow donations of computer hardware, operating systems and connectivity to physicians, such as hand-held personal information managers and desktop computers with internet service, that could be used to access and transmit any health information other than a patient’s prescription drug information. The rules also suggest a Part D sponsor cannot provide pre- and post-installation services and maintenance of donated HIT, nor could the donated technology be used for computerized provider order entry (CPOE). Also, the proposed limitations conflict with the market, which is focused on software suites that bundle e-prescribing software with EHR software, as well as personal information, CPOE, scheduling, medical decision-making support, billing and other software.

Restricting HIT donations for EHR to software “essential to and used solely for” EHR and restricting the use of donated hardware to that which “is necessary to and used solely for” e-prescribing will chill the adoption of HIT. Such restrictions impose artificial constraints on the functionality of software products that support EHR and e-prescribing; constraints will be resisted by vendors who have sunk costs in software suites and by medical practices required to invest in additional HIT necessary to support an EHR and CPOE system. Ironically, the exclusion of medical decision-making support functions from the exceptions undercuts one of the key anticipated benefits of an EHR: better quality of care and fewer preventable clinical errors.

Fortunately, the CMS has requested comments on an additional Stark Law exception for HIT donations, the “substantial use” of which would be to receive and transmit prescriptions, and is considering requiring EHR technology to include a CPOE component. In addition, the agencies have requested recommendations for defining “electronic health records,” including information on what software is currently bundled together, in order to appreciate the scope of HIT that needs to be protected to incentivize its adoption. Thus, it is certainly possible the agencies will broaden the permitted scope and use of HIT in the final rules to better reflect the reality of current product designs and end-user expectations for multifunctionality and integration of information system technology. As noted below, the potential for abuse that arises from broadening the scope and use of donated HIT can be managed in part by requiring physicians to reimburse the donor for any incremental costs attributable to their use of the HIT for personal, business and financial purposes (e.g., additional computers, business software, servers, networks and connectivity).


Closely related to the problem of proposed limits on the scope and use of the donated technology is the problem of a cap on its value. The agencies are explicitly concerned about the threat to competition posed by the ability of larger and wealthier institutions to donate expensive HIT that smaller institutions cannot afford. This is a legitimate concern, especially because interoperability is not yet the industry standard. However, the cold hard fact of the matter is that many (if not most) medical practices will not adopt HIT if it costs the practice a dime, and certain inner-city and rural practices cannot afford HIT even if they are willing to invest in the technology. Public and private grants will not reach all of these sole access providers. Imposing a cap will also increase transaction costs for donors, and engender disputes between medical practices and donors, because the cost-sharing formula will require negotiation on the front end and, in all likelihood, collections by the donor on the back end. It would also cause medical practices to limit their HIT to those technologies and high-volume referral arrangements that would patently increase physician efficiency and revenues, not those that may be necessary or desirable to fully realize a community-wide EHR system, interoperability (discussed below), improvements in patient safety, quality and utilization, connectivity with underserved areas, and the extension of HIT’s benefits to under- or uninsured patients.


For these reasons, a cap on the value of the donated technology, whether structured as a sum certain, a percentage of total costs or a hybrid formula, will inhibit the adoption of HIT by physician practices, unless, perhaps, Congress authorizes CMS to tie adoption to a Medicare payment rate differential (not unlike the current differential in payment for Medicare participating physicians) or creates other economic incentives. Alternatively, as noted above, the agencies could limit the value of donated HIT (and concurrently address certain of their technology scope and use concerns) by requiring the practice to reimburse the donor for the incremental costs of HIT attributable to personal business and financial information systems within the practice. The advantage of this approach is that it would not involve implementation of a particular dollar amount or percentage of total HIT costs that will most certainly chill adoption. Physician practices would only have to decide whether to assume the incremental costs associated with expanding use of the technology to personal, business and financial information management.


Currently, the government has not adopted any product standards that define or mandate interoperability in the e-prescribing or EHR context. This is a problem because, on the one hand, creation of exceptions for pre-interoperable HIT will promote its development and adoption. On the other hand, it may support proliferation of a patchwork of closed, proprietary systems that ultimately delay the development and adoption of an interoperable EHR and the public health benefits of interoperability. The agencies are quick to stress that interoperable HIT poses a lower risk of abuse than proprietary HIT because there is less risk that its closed nature will be used to direct or steer business to the donor. However, apparently neither agency believes the risk of abuse posed by pre-interoperable HIT donations is so great that it could not propose protections for such donations. Further, the creation of a pre-interoperability exception may reflect the government’s recognition that achieving interoperability will necessarily be an incremental process; it may take years for the industry and the government to reach a consensus on a definition of interoperability that reflects technological and market realities. In the words of some HIT policy analysts, interoperability is not a switch that gets turned on at some definite time in the future, but rather it will emerge over time in stages or iterations of technology adoption with varying degrees of interoperability.

While the agencies’ protection of donations of pre-interoperable HIT raises important policy and implementation issues, for purposes of this white paper the issue raised by interoperability is not whether the government should extend protection to pre-interoperable HIT, but whether the government’s safeguard against the patient steering risks posed by the donation of pre-interoperable HIT is too broad, effectively negating the utility of the e-prescribing and pre-interoperability EHR exceptions. This safeguard is discussed below.


Both agencies propose imposing a broad restriction on discriminating among recipients of pre-interoperable HIT in a manner that takes into account the volume or value of business generated between the donor and the recipients. In addition, both agencies propose loosening this volume/value standard for donations of post-interoperable HIT to permit discrimination among recipients in a manner that only indirectly takes into account the volume or value of the business generated between the donor and the recipients. However, there is a significant problem with having disparate volume/value standards for pre- and post-interoperable HIT exceptions.

The exceptions could be interpreted to mean that certain eligibility criteria that donors of pre-interoperable HIT would likely want to use may not fit within the pre-interoperability exceptions (including e-prescribing). Although not without doubt, it appears a hospital can make medical staff membership a condition of receipt of pre- and post-interoperable HIT. However, conditioning eligibility on a specified historical volume of admissions to the hospital or rolling out HIT to medical staff in the department that accounts for the largest volume of current admissions may not qualify for the pre-interoperability exceptions. Similarly, while it is clear that a Part D sponsor could, by relying on the post-interoperability EHR exceptions, condition eligibility for post-interoperable EHR technology that includes e-prescribing technology to physicians who write a specified volume of prescriptions, it is not clear whether a Part D sponsor could impose this same condition on receipt of pre-interoperability HIT. This ambiguity has to be resolved by the agencies; if resolved in a manner that prevents donors from drawing these kinds of seemingly innocuous distinctions among physicians, the pre-interoperability EHR and e-prescribing exceptions will not afford broad protection for donations of HIT and will hamper its adoption in physicians’ offices.

Accordingly, the agencies should reconsider applying disparate volume/value standards to the pre- and post-interoperable HIT exceptions and permit donors of either technology to discriminate among physicians in a manner that only indirectly takes into account the volume or value of the physician’s generation of business for the donor. Alternatively, the agencies should create


clear safe harbors within the pre-interoperability HIT exceptions (including the e-prescribing exceptions) for commercially reasonable distinctions among physicians that only indirectly take into account the volume or value of the physician’s referrals to the donor.


Although the Secretary and the agencies have clearly recognized the chilling effect the AKS and the Stark Law is likely to have on adoption of HIT by physicians, who are the heart of the health care delivery system in the United States, the proposed exceptions are unlikely to foster the kind of wide-spread adoption necessary to make significant strides in the early development of an EHR for every American. Consequently, the question is whether the agencies, under the limitations of their delegated rulemaking power, are capable of creating exceptions to the AKS and the Stark Law broad enough to fulfill the administration’s policy objectives. Specifically:

ƒ Can the agencies get comfortable with physicians using donated HIT, in part, for personal, business and financial purposes not directly related to the clinical treatment of patients?

ƒ Can the agencies get comfortable with exceptions that do not have any cap on the dollar value of the donated technology as long as the physicians must pay any incremental cost attributable to personal, business or financial uses?

ƒ Can the agencies, prior to developing and adopting EHR technology certification criteria, get comfortable with donors drawing commercially reasonable distinctions among physicians that arguably indirectly take into account the volume or value of the business generated between the donor and the recipient, e.g., a hospital conditioning receipt of HIT on historical utilization of the hospital, or a Part D sponsor conditioning HIT donations on the volume of the practice’s prescriptions?

If the answer to any of these questions is no, and Congress does not intervene to do what the agencies cannot or will not do, then the wide-spread adoption of HIT by physician practices in the near future, which is already a daunting task with an uncertain outcome, will be driven far more by market forces than any health information policy initiatives of this or any other administration.

As for congressional intervention, it would appear the agencies’ concerns regarding fraud and abuse, concerns the agencies will no doubt convey to Congress, could be substantially addressed through interoperability. Donations of interoperable technology to physicians could be encouraged without protecting donations that are, explicitly or implicitly, conditioned upon referrals to the donor or that directly take into account the volume or value of the recipient’s referrals to the donor. However, even if Congress was convinced of the merit of this strategy for addressing fraud and abuse concerns, the strategy involves delaying relief from the AKS and the Stark Law until a consensus is reached on interoperability, which could take years. If the goal is an interoperable EHR for every American, perhaps such a delay would ultimately improve the chances of achieving the goal by preventing the proliferation of entrenched, proprietary EHR systems. If the goal is to house patient information within an EHR as soon as possible and to achieve interoperability over time, then delay of any kind is unacceptable, and the government should favor early and wide-spread adoption of proprietary HIT by physicians over fraud and abuse prevention. This is a critical near-term public policy choice that Congress and the administration have to make in consultation with the public and private stakeholders. If the proposed rules are any indication, it is a choice the agencies are not capable of making.

For more information, please contact your regular McDermott lawyer, or:

Daniel H. Melvin: 312.984.6935

Stephen W. Bernstein: 617.535.4062

Eric Gordon, M.D.: 310.551.9315

For more information about McDermott Will & Emery visit

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