D.C. Federal District Court Upholds Stark "Under Arrangements" and "Per-Click" Restrictions

Executive Summary

In a case of first impression, Council for Urological Interests v. Sebelius, D.D.C., No. 1:09-cv-0546, 5/24/13, the federal district court for the District of Columbia (the “Court”) interpreted certain 2008 changes to the Stark regulations having far-reaching effects on “under arrangements” contracts between hospitals and physician-owned service providers. The Court held that the Centers for Medicare and Medicaid Services’ (“CMS”) expansion of the definition of the term “entity” and prohibition on “per-click” equipment lease arrangements were reasonable interpretations of the Stark Law and did not violate either the Administrative Procedure Act (“APA”) or the Regulatory Flexibility Act. The Court denied the Council for Urological Interests’ (“CUI”) motion for summary judgment and granted Sebelius’s motion. Accordingly, “under arrangements” contracts involving the lease of specialized equipment and technical personnel by physician-owned services providers to hospitals for treatment of hospital outpatients referred by owner physicians remain severely restricted in the District of Columbia and elsewhere. It is uncertain whether CUI will appeal the decision.

Background

The Stark law prohibits a physician from making referrals for designated health services (“DHS”) to an “entity” with which the physician (or an immediate family member) has a financial relationship and prohibits the entity from billing Medicare for the DHS, unless an applicable exception applies. Under the 2001 (“Phase I”) Stark regulation’s definition of “entity,” an “entity” included only the person or entity that billed Medicare for the DHS and not the person or entity that performed the DHS where the person or entity performing the DHS was not the person or entity billing for it. This old definition made it possible for physician owners of companies furnishing services to hospitals “under arrangements” to refer patients to their companies and be paid a fee per patient without violating the Stark law or regulations. In other words, the definition of “entity” placed these arrangements outside the purview of Stark because the physician-owned services providers did not bill for the DHS. The Phase I regulations also permitted time-based or unit-of-service-based payments (“Per-Click Payments”) in space and equipment leases, even when the physician receiving the Per-Click Payment was the source of the referral for DHS using the space or equipment that had generated the Per-Click Payment.

Stark IV Revisions

Concerned about the potential for tainted clinical decision making and overutilization of Medicare resources, CMS revised the Stark regulations in a “Phase IV” rulemaking in 2008 to close what it perceived to be certain loopholes in the regulatory framework. First, CMS amended the definition of “entity” to state that a person or entity is considered to be “furnishing” DHS if it is the person or entity that has “performed” (provided the medical work of) the DHS notwithstanding that such entity did not actually bill the services. Thus, where an “under arrangements” service provider (e.g., a joint venture, physician group practice or other physician organization) “performs” the services and, pursuant to a contractual arrangement, a hospital bills for those services, the services are DHS and the “under arrangements” service provider would be a “DHS Entity” with respect to those services. After the effective date of the Phase IV regulations, referrals to the “under arrangements” service provider made by a physician owner/investor in such provider would need to meet an ownership exception to be protected.

Second, CMS revised the lease exceptions for office space and equipment (among other exceptions) to provide that per-click rental charges are not permitted to the extent that such charges reflect services provided to patients referred by the lessor to the lessee. The prohibition on Per-Click Payments for space or equipment used in the treatment of a patient referred to the lessee by a physician applies regardless of whether the physician is the lessor or whether the lessor is an entity in which the referring physician has an ownership or investment interest.

These two 2008 Stark regulations revisions had the effect of effectively eliminating (i.e., making illegal) many active non-rural “under arrangements” deals between physician-owned services providers, such as CUI’s constituents, and hospitals. Because the effects were so broad-reaching, CMS delayed the effective date until October 1, 2009 so that these arrangements could be unwound or restructured.

The Lawsuit

CUI is a not-for-profit corporation consisting chiefly of urologist-owned joint ventures. Before 2008, these joint ventures would enter into agreements with hospitals under which the joint venture companies would lease to hospitals laser equipment and technical personnel then used by the urologist-owners of the joint ventures to perform outpatient laser surgery for conditions such as prostate cancer and related urological problems. These types of arrangements were justified on the basis that the laser equipment was very expensive and became obsolete quickly due to frequent advances in technology; hospitals were reluctant to invest in such expensive equipment, so the joint venture companies stepped in to fill the gap. The physician-owners would refer their patients to their own companies performing the hospital outpatient services and be paid Per-Click Payments.

In response to the Stark IV regulations of 2008 effectively eradicating many of these arrangements, CUI filed suit against HHS on March 23, 2009. First, CUI contended that CMS acted “arbitrarily and capriciously by changing what it [meant] to ‘furnish’ DHS,” and that “‘an examination of the entire Stark Act'” would show that CMS’s current interpretation of furnishing services defies Congressional intent. In response, CMS argued that, in amending the regulation, it merely applied the “common meaning” of “furnish,” which means to provide or supply. Further, CMS insisted that its new interpretation was entirely consistent with the plain language of the Stark Law and that the plain language is the “best evidence of Congressional intent.” The Court agreed with CMS’s arguments, finding that the Stark Law “does not unambiguously foreclose” CMS’s expanded interpretation of what it means to be an entity furnishing services and that such an interpretation “advances the Stark Law’s objective to take a physician’s financial interest out of the equation when he or she is referring patients for DHS.” It further noted that certain of CUI’s “tangential” arguments challenging long-standing definitions relevant to the case were untimely and barred under the APA’s six-year statute of limitations, which would have started running in 2001.

Second, CUI contended that the 2008 regulation amendment prohibiting a hospital from paying a joint venture a Per-Click Payment for the leasing of equipment and use of technical personnel violated Congressional intent to permit Per-Click Payments and that CMS acted arbitrarily and capriciously in making these revisions. Again, the Court rejected CUI’s arguments. CMS argued that, in prohibiting Per-Click Payments in the context of physician self-referral, it was acting under “the Secretary’s statutory authority” to impose additional requirements “beyond those established by Congress for a lease to qualify for a compensation exception.” The Court agreed, finding that the Stark Law is silent on whether Per-Click Payments must be permitted. Further, CMS provided a well-reasoned analysis justifying why it chose to alter its statutory interpretation and prohibit Per-Click Payments in the context of physician self-referral. Because CMS provided a well-reasoned analysis that furthered the goals of the Stark Law, the Court believed itself bound to defer to CMS’s interpretation of the Secretary’s statutory authority.

Conclusion/Practical Takeaways

The Court denied CUI’s motion for summary judgment and granted Sebelius’s cross-motion for summary judgment, leaving the Stark IV regulatory regime in the District of Columbia intact at this time.

This case is a loss for physician-owned companies and associations representing physician-owned companies, which no doubt hoped the Court would rule against CMS. Pending an appeal by CUI or the filing of other cases in other federal district courts, the restrictions on “under arrangements” deals and Per-Click Payments remain in place. As the Affordable Care Act and its implementing regulations continue to be rolled out, physicians and hospitals must continue to find new and creative ways to integrate and provide excellent and innovative services under the many new payment regimes.

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