United States: Federal District Court Upholds Stark Regulation Ban On Physician-Owned Under Arrangement Service Providers

On May 24 the District Court for the District of Columbia rejected an appeal brought by a group of urologists ("CUI") seeking to overturn regulations promulgated in 2008 by the Centers for Medicare & Medicaid Services ("CMS") that prohibited physician-owned "under arrangement" service providers under the Stark Law (the "2008 Rule"). The decision in Council for Urological Interests v. Sebelius1 also upholds CMS's regulations prohibiting per-service (or "per-click") leases.

Under the Stark Law, physicians may not refer Medicare patients to entities "furnishing" "designated health services" ("DHS") with which they have a financial relationship unless an exception applies. A financial relationship may be either an ownership or investment interest or a compensation arrangement. Inpatient and outpatient hospital services are classified as DHS. The appeal was brought by a group of urologists challenging a 2008 regulatory change that characterized their arrangements with hospitals as impermissible ownership arrangements whereas under prior interpretations by CMS such arrangements only needed to qualify under the compensation exceptions.

BRIEF HISTORY OF PHYSICIAN-OWNED SERVICE PROVIDERS

Well before the enactment of the Stark Law, physicians held many types of ownership interests in service providers. In some cases, the services were clearly DHS, for example imaging services, and in other cases they were not, for example lithotripsy, cardiac catheterization, ambulatory surgery and dialysis centers. In some of these cases, the non-DHS service was provided by the physician-owned service provider in the hospital for reimbursement and other reasons. These historic arrangements followed various models, but in most cases the outside service provider leased space from the hospital, provided equipment and supplies, and employed or contracted for the staff and physicians needed to provide the service.

These services provided by outside physician-owned service providers needed to comply with Medicare's "under arrangement" rules.2 Under these rules the hospital must exercise professional responsibility over the service. In addition, "The provider must accept the patient for treatment in accordance with its admission policies, and maintain a complete and timely clinical record on the patient, ..."3 Medicare has historically always treated a service provided by an outside vendor under these rules in the same manner as if it were directly furnished by the hospital itself, as seen for example in the coverage rules for outpatient hospital services.4

Many of these physician-owned arrangements were viewed as non-abusive because they involved personal clinical care by the physician owners similar to physician-owned ambulatory surgical centers or dialysis centers. Because of compliance requirements that these services be provided at fair market value, most of the arrangements with hospitals were structured to assure that the hospitals saved money by buying the service from the physician-owned entity as opposed to providing the service in-house. Ironically, many of these arrangements contained similar quality and cost-control incentives to the physician-owners as are now advocated by CMS in health care reform demonstration projects.

LEGAL BACKGROUND

1. Stark Law Phase 1 Rulemaking

In the development of the Stark regulations that were first promulgated as Phase I in 2001, CMS addressed the question of whether to permit physician-owned under arrangement service providers. One of the questions CMS addressed was to treat the provider that was "furnishing" the DHS as the hospital, and not the physician-owned entity. Under this analysis the physicians did not own the hospital, and so the arrangement between the hospital and service provider needed only to comply with a compensation exception. Part of the consideration for CMS was that with many of these physician-owned services, the physicians provided personal services as an extension of practice without any evidence of abuse. Examples included physician-owned dialysis, ambulatory surgery, and cardiac catheterization. As a result, in Phase I, CMS defined the term "entity" that was furnishing DHS as "the entity to which CMS makes payment for the DHS,"5 meaning the hospital. CMS also made clear that ownership or investment interests do not include a contract between a hospital and a physician-owned under arrangement service provider.6

In Phase I CMS also permitted physicians to be paid for leased space and equipment and services under a unit-of-service (also known as a "per-service" or "per-click) methodology.7 CMS allowed such arrangements based on legislative history suggesting such arrangements were permissible.8

2. Subsequent Developments

The Phase I rule allowed the historic relationships, for example by physician-owned lithotripsy and cardiac catheterization providers, to continue. Overwhelmingly, these arrangements were not inherently DHS, but only became classified as DHS because they were provided as hospital services and billed by the hospitals. As hospital services, they became DHS, and subject to the Stark Law. But under the Phase I rule, these arrangements needed only to comply with the applicable compensation exceptions.

As happens so often with regulatory developments, an unintended consequence took place. The Phase I rule did not differentiate between services that are not generally DHS, but become classified in that manner when provided under arrangement, and those services that had always been DHS, such as imaging services. The Phase I rule also did not differentiate between services personally performed by physicians as an extension of practice and services where the physician's only connection with the referred service was the referral itself. This approach meant that referring physicians were permitted to own, and refer to, imaging joint ventures that provided services under arrangement to hospitals and escape Stark Law scrutiny as long as the arrangement complied with a compensation exception. To many observers this seemed like an end-run around the fundamental purposes of the Stark Law, especially in situations where the referring physicians played no clinical role in the service.

3. Change In Definition of "Entity" Furnishing DHS and New Per-Service Restrictions

In August 2008 as part of the fiscal year 2009 inpatient prospective payment rule, CMS responded to anecdotal complaints and largely ended the ability of physician-owned under arrangement service providers to survive under the Stark Law.9 CMS accomplished this change by reversing its Phase I interpretation and historic interpretation of what it means to "furnish" a service payable under Medicare. Specifically, CMS amended the definition of "entity" to include an entity that has "performed services that are billed as DHS."10

Importantly, the revised rule only restricted these service providers' ability to furnish the full array of services — space, equipment and supplies, and personnel — needed to perform the service in question. Because the Stark Law exceptions on their face permit physicians to have physician-owned equipment leasing companies without such companies being characterized as furnishing DHS, CMS made clear the limits on its rulemaking authority: "We do not consider an entity that leases or sells space or equipment used for the performance of the service, or furnishes supplies that are not separately billable but used in the performance of the medical service, or that provides management, billing services, or personnel to the entity performing the service, to perform DHS."11 Notwithstanding the obvious confusion over the question of what bundle of services would trigger the new ban, CMS declined to provide a specific definition of "perform" in the final rule, but stated that the term should have its "common meaning."12

To further restrict these arrangements, CMS invoked its statutory authority regarding lease of space and equipment arrangements to create "such other requirements as the Secretary may impose by regulation to protect against program or patient abuse."13 Specifically, CMS changed course from the Phase I rule, and banned per-service space and equipment rental arrangements involving referring physicians.14

DISTRICT COURT DECISION

The case was before the district court on remand from the Court of Appeals for the District of Columbia, which found UCI need not first exhaust its administrative remedies in order to have the case heard on its merits.15 The court was ruling on cross motions for summary judgment and analyzed the two regulatory changes — definition of the term entity and elimination of per-service leases — under the so-called Chevron two-partstandard.16

1. Standard of Review

As explained by the court, "The court first must examine the statute to determine whether Congress has spoken directly to the precise question at issue."17 "If the statute is silent or ambiguous with respect to the specific issue, then the court ... must determine whether the agency's response to the question at issue is reasonable and based on a permissible construction of the statute."18 Critical to administrative law jurisprudence, at this stage courts are required to uphold an agency's "reasonable interpretation" of the statute in question, giving "deference" — known also as Chevron deference" — to the agency's interpretation.19 "The agency's interpretation need not be the only possible interpretation, nor even the interpretation deemed most reasonable by the courts."20

Of note, only in its analysis of CMS 2008 change to interpretation of per-service leases did the court identify that the standard of review is somewhat different when courts are reviewing changes in agency interpretation. Here, "[T]he question raised by the change is whether [CMS] has supported its new reading of [the Stark Law] with a reasoned analysis sufficient to command the court's deference under Chevron."21

2. The Court's Analysis of Under Arrangement Services

In the court's Chevron step one analysis it focused its attention on the statutory compensation exception permitting group practices to provide services under arrangement.22 Plaintiffs understandably had pointed to this exception as the basis for CMS's Phase I statutory interpretation that physician-owned under arrangement service providers did not create an ownership interest, but instead need only be analyzed under the compensation exceptions. According to CMS in Phase I, "Congress would not have excepted these relationships from the compensation arrangement restriction, if they were prohibited as an ownership or investment interest."23 In contrast, in the 2008 rule, CMS stated, "[Th]ere is no indication in either the text of [the Stark Law] or its legislative history that the Congress intended to except ownership interests in the entity performing the service on behalf of the hospital."24 In response to CUI's argument that this statutory exception would be rendered meaningless by CMS's new definition of furnishing, the court cited approvingly to CMS's response in its brief that "the exception would still be valuable where the physicians are mere employees (and not owners) of a group practice."25 In other words, these employed, non-equity physicians of group practices would not have an impermissible ownership interest, and could avail themselves of protection under this statutory compensation exception. The court held that the term "entity furnishing DHS" was ambiguous and turned to the second step in the Chevron analysis.

The court found CMS's new interpretation of "furnishing" to be a reasonable interpretation. CUI argued this term was impermissibly vague and that CMS failed to provide meaningful guidance.26 In contrast, CMS argued that the new definition of furnishing was based on a "plain language" definition. In siding with CMS, the court reiterated that its job was only to determine whether CMS's interpretation was reasonable under Chevron.

3. The Court's Analysis of Per-Service Arrangements

The court's analysis here followed the same path as with under arrangement services. It found the Stark Law did not expressly permit per-service leases, and that CMS's rulemaking was reasonable.

In the Chevron step one analysis, the court was unpersuaded by the clear legislative history that Congress intended to permit such leases. Instead, it concluded, "Indeed, the Stark Law contains no language — not even ambiguous language — permitting lease payments calculated according to units of service."27 In its Chevron step two analysis the court summarized CMS actions. In Phase I —

"CMS believed that the Conference Report showed Congress had intended to protect per-click payments, so long as the payment is at fair market value at inception and does not subsequently change during the lease term in any manner that takes into account DHS referrals. However, in the 2008 Regulations, CMS changed course and prohibited per-click payments in the context of physician self-referrals."28

The court cited approvingly CMS's argument that it was entitled to take prophylactic regulatory action without waiting for "extensive evidence of program or patient abuse."29 The court was sufficiently satisfied with the small number of comments to the 2008 regulations that pointed to abuse with per-service leases to uphold CMS's rulemaking, finding that CMS was not required to "clear a specific evidentiary hurdle prior to imposing additional restrictions for lease exceptions."30

COMMENT

Both the 2008 Rule and this court decision clearly could have had different outcomes.

Without question, prior to the enactment of the Stark Law, there were abusive joint ventures, primarily with laboratories, that Congress chose to stop. At the same time, there was a long history of physician-owned services, primarily where the physician-owners provided personal clinical services, which were free of abuse, that Congress chose to permit under the Stark Law. In Phase I, CMS made statutory interpretations that allowed physician-owned under arrangement service providers to continue, along with per-service leases.

Few would argue that CMS had some evidence that some providers were taking advantage of these Phase I decisions to allow these physician-owned services to flourish in ways not intended – particularly with imaging services. In deciding how to address these problems, CMS had options to take a more surgical approach, for example to continue to permit physician-owned under arrangement services where physician owners performed personal clinical services thereby relying on what has come to be known as the "extension of practice" exception.

In addition, it is important to note that in the 2008 Rule CMS only restricted physician-owned entities from providing all the components of a service – space, equipment/supplies and personnel. But CMS always has recognized that the Stark Law itself clearly permits physicians to provide one of these three components, and it has never been clear why physicians would not be able to avail themselves of two of these components in one arrangement. So CMS simply shifted the compliance analysis to the question of what combination of services would constitute "furnishing" the DHS. CMS has never answered this question.

In turning to the court's analysis, it appears CUI has several arguments to appeal in the hopes of finding a circuit court panel that would be unconvinced by the 2008 Rule and more persuaded by CMS's Phase I analysis. Most importantly, we can easily imagine another court finding CMS's 2008 definition of "furnishing" to be a radical departure from past interpretations, including without limitation its under arrangement rules, and that this new definition is not a common ordinary meaning as CMS purports it to be. In any case, given the ongoing uncertainty in the definition of "furnishing" and the likelihood of an appeal, we doubt the issues in this CUI case will go away soon.

Footnotes

1 Slip Op., 09-cv-0546 (BJR).
http://scholar.google.com/scholar_case?case=14709048420204671808&q=Council+for+Urological+Interests+
V.+Sebelius&hl=en&as_sdt=2,22&as_vis=1

2 Medicare General Information, Eligibility, and Entitlement Manual, Chapter 5 – Definitions; §10.3 - Under Arrangements; CMS Pub. 100-01. http://www.cms.gov/Regulations-and-Guidance/Guidance/Manuals/downloads/ge101c05.pdf

3 Id.

4 42 C.F.R. § 410.27(a)(1)(i).

5 42 C.F.R. § 411.351.

6 42 C.F.R. § 411.354(b)(3)(iv).

7 See, eg., 42 C.F.R. § 411.357(b)-(c).

8 66 Fed. Reg. at 876-78; H.Rep. 103-213 at 814 (1993)

9 73 Fed. Reg. 48434 (August 19, 2008). A very small number of such arrangements could qualify under one of the ownership exceptions, for example for rural providers. Social Security Act § 1877(d)(2).

10 42 CFR §411.351 (October 1, 2009).

11 73 Fed. Reg. 48726.

12 Id.

13 Social Security Act § 1877(e)(1)(A)(vi) and (B)(vi); 73 Fed. Reg. 48713.

14 42 CFR §411.357(a)(5)(ii)(B) and (b)(5)(ii)(B) (October 1, 2009).

15 Council for Urological Interests v. Sebelius, 668 F.3d 704, 712-14 (D.C. Cir. 2011). An earlier case that challenged this same regulation, in which we served as lead counsel, involving several groups of cardiologists who provided under arrangement cardiac catheterization services, was dismissed on procedural grounds in this same district court, but the case was not appealed. Colorado Heart Institute v. Leavitt (D.D.C. No. 1:08-cv-01626-RMC).

16 Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).

17 CUI, slip op. at 10.

18 Id. (internal citations and quotations omitted)

19 Id.

20 Id. at 10-11 (emphasis in original, internal citations and quotations omitted)

21 Id. at 28-29.

22 SSA § 1877(e)(7).

23 66 Fed. Reg. at 942.

24 Slip Op. at 16, citing 73 Fed. Reg. 48725.

25 Id. at 17.

26 Id. at 19.

27 Id. at 25.

28 Id. at 27.

29 Id. at 28.

30 Id. at 31, n. 15.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Thomas S. Crane
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.