United States: DC Circuit Calls Into Question Legality Of Stark Law Ban On Per-Click Equipment Leases

On June 12, 2015, the US Court of Appeals for the District of Columbia Circuit issued a lengthy decision calling into question the regulatory prohibition on per-click equipment leases under the federal physician self-referral law (or "Stark Law"), 42 U.S.C. §§ 1395nn and 1396(b)(s).  Council for Urological Interests v. Burwell, No. 13-5235.  In a 2-1 decision, the Court of Appeals held that the explanation offered by the US Department of Health & Human Services ("HHS") for prohibiting per-click equipment leases — from "the cross-your-fingers-and-hope-it-goes-away school of statutory interpretation" according to the Court — is based on an unreasonable interpretation of the Stark Law.  In the same decision, the Court unanimously upheld HHS's broad definition of a "furnishing" entity to include both the entity that performs the "designated health services" ("DHS") at issue and the entity that bills for them.


The Stark Law has a referral prohibition and a billing prohibition.  Pursuant to the referral prohibition, in the absence of an applicable exception, a physician who has a "financial relationship" with an "entity" may not make a "referral" to that entity for the "furnishing" of DHS for which payment may be made by the Medicare program.  Pursuant to the billing prohibition, in the absence of an applicable exception, the furnishing entity may not bill for improperly referred DHS.  A physician may have a "financial relationship" with an entity if he or she has a direct or indirect "ownership or investment interest" in, or a "compensation arrangement" with, the DHS entity.

An arrangement that implicates the Stark Law will not violate the statute or its implementing regulations, 42 C.F.R. § 411.350 et seq., if a statutory or regulatory exception is met.  One such exception covers the rental of equipment.  Under the statutory exception, a "compensation arrangement" does not include "[p]ayments made by a lessee of equipment to the lessor for the use of the equipment," provided certain conditions are met.  One of the conditions is that the rental charges must not be "determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties."

In a 1998 proposed rulemaking, the Health Care Financing Administration, the predecessor to the Centers for Medicare & Medicaid Services ("CMS"), considered prohibiting certain "per-click" equipment lease arrangements that would permit a physician-lessor to be paid each time he or she referred a patient to a hospital-lessee.  In 2001, however, CMS decided against this prohibition because the agency had "reviewed the legislative history with respect to the exception for space and equipment leases" —  specifically, H.R. Rep. No. 103-213, at 814 (1993) ("Conference Report") — and "concluded that the Congress intended that time-based or unit-of-service-based payments be protected, so long as the payment per unit 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."  (The precise language in the Conference Report is as follows:  "[t]he conferees intend that charges for space and equipment leases may be based on...time-based rates or rates based on units of service furnished, so long as the amount of time-based or units of service rates does not fluctuate during the contract period.")

In 2008, however, CMS had a change of heart, and revised its regulations concerning the equipment lease exception to prohibit arrangements where the formula for rental charges is based on "[p]er-unit of service rental charges, to the extent that such charges reflect services provided to patients referred by the lessor to the lessee."  In the same rulemaking, CMS expanded the regulatory definition of "entity" to include not only the entity that bills Medicare for the DHS at issue, but also the entity that "performs" such DHS.  As a result of these amendments, arrangements pursuant to which physicians lease equipment to hospitals on a per-use basis and "perform" the procedures using the equipment have been precluded, in large part, from relying on the equipment lease exception.

In March 2009, the Council for Urological Interests (the "Council") filed suit in the US District Court for the District of Columbia, alleging that HHS's 2008 rulemaking exceeded the agency's authority under the Administrative Procedure Act ("APA").  The district court granted summary judgment in favor of HHS, holding that the rulemaking was entitled to Chevron deference and that the agency's construction of the Stark Law was reasonable. 

Per-Click Equipment Leases

The D.C. Circuit reviewed the regulatory ban on per-click equipment leases using the two-step Chevron test.  Under the first step, the Court reviewed whether Congress unambiguously forbade HHS from banning per-click equipment leases.  The Court focused on two clauses in the statutory exception:

  • the requirement that the "rental charges over the term of the lease are set in advance, are consistent with fair market value, and are not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties" (the "rental charge clause"); and
  • the requirement that the lease "meet[] such other requirements as [HHS] may impose by regulation as needed to protect against program or patient abuse" (the "other requirements clause").

Given the ambiguity of the first clause and the clarity of the second, a majority of the Court concluded that the "text of the statute does not unambiguously preclude [HHS] from using [its] authority to add a requirement that bans per-click leases" (emphasis added).  Quite to the contrary, the other requirements clause "clearly provides [HHS] with the discretion to impose any additional requirements that [it] deems necessary 'to protect against program or patient abuse.'"

In reaching this conclusion, the majority rejected an argument made by the Council that per-click leases were intended to be permitted because a per-click charge could meet the requirements of the rental-charge clause (as long as the charge remained the same for the duration of the lease).  The Court concluded that this argument ignores the other requirements clause, which "explicitly permits" HHS to impose additional conditions on equipment rental agreements.  Because of this clause, as well as the fact that the Stark Law "nowhere expressly states" that per-click rates are permitted, the ban on per-click leases could be properly classified as an "other" requirement.

The majority also rejected an argument made by the Council that the Stark Law's legislative history plainly shows that Congress intended to permit per-click leases.  The Council pointed to the portion of the 1993 Conference Report stating that under the rental-charge clause charges "may be based on . . . time-based rates or rates based on units of service furnished, so long as the amount of time-based or units of service rates does not fluctuate during the contract period."  Focusing on the use of the term "may," the majority concluded that the Conference Report merely showed that the rental-charge clause did not necessarily preclude per-click leases.

While a majority concluded that the statute does not unambiguously forbid HHS from banning per-click leases (Chevron step one), a (different) majority also concluded the per-click ban "falters...at Chevron step two," which requires an assessment of "the agency's statutory interpretation to determine whether it is a 'permissible' and 'reasonable' view of Congress's intent."  "In making this assessment," the Court "look[s] to what the agency said at the time of the rulemaking" and "not to its lawyers' post-hoc rationalizations."  The Court then continued as follows:

In the preamble to the [2008] per-click ban, the [HHS] Secretary identified the 1993 Conference Report as an important locus of statutory interpretation...This is unsurprising as the Secretary felt completely bound by the Conference Report in 2001...The Secretary now believes the Conference Report is ambiguous but her explanation in the 2008 rulemaking borders on the incomprehensible.  According to the Secretary:

Where the total amount of rent (that is, the rental charges) over the term of the lease is directly affected by the number of patients referred by one party to the other, those rental charges can arguably be said to . . . "fluctuate during the contract period based on" the volume or value of referrals between the parties. Thus...the Conference Report can reasonably be interpreted to exclude from the space and lease exceptions leases that include per-click payments for services provided to patients referred from one party to the other...

This jargon is plainly not a reasonable attempt to grapple with the Conference Report; it belongs instead to the cross-your-fingers-and-hope-it-goes-away school of statutory interpretation. The Conference Report makes clear that the "units of service rates" are what cannot "fluctuate during the contract period," not the lessor's total rental income...The Secretary's interpretation reads the word "rates" out of the Conference Report entirely.  If a "reasonable" explanation is "the stuff of which a 'permissible' construction is made"...the Secretary's tortured reading of the Conference Report is the stuff of caprice.

Because the per-click ban failed step two of the Chevron test, the majority remanded the regulation to the district court with instructions to remand to HHS.  The majority instructed that, on remand, HHS should consider "with more care" whether a per-click ban on equipment leases is consistent with the 1993 Conference Report.

Furnishing Entity Definition

The Court also reviewed the regulatory definition of "entity furnishing designated health services," found at 42 C.F.R. § 411.351.  Because the Council conceded that the relevant provision in the Stark Law was ambiguous, the D.C. Circuit analyzed whether, under step two of the Chevron test, CMS's definition of DHS entity as including the provider of services, and not just the entity that bills Medicare, was based on a reasonable interpretation of the Stark Law.  Reviewing the text and purpose of the Stark Law, the Court unanimously concluded that defining the "entity furnishing designated health services" to include the entity providing the services was a permissible construction of the statute.  The Court noted that the terms "provide" and "furnish" are used interchangeably in the Stark Law, and emphasized that the regulatory definition furthered the purposes of the statute by "closing a loophole" otherwise available to physician-owners (who could circumvent the purposes of the Stark Law merely by having the hospital bill Medicare for the services at issue).


It is unclear whether Council for Urological Interests means the end of the regulatory prohibition on per-click equipment leases.  As noted above, the D.C. Circuit remanded the case to the district court so that it, in turn, could instruct HHS to consider whether a ban on per-click equipment leases is consistent with the Stark Law.  It remains to be seen whether HHS will attempt to re-promulgate the per-click ban using a new rationale and, if so, whether it will be able to do so successfully.  (In this regard, note that all three judges concluded that the per-click ban ran afoul of Chevron; their disagreement was only with respect to why it did so.)

Although the D.C. Circuit's ruling did not address the legality of CMS's prohibition on per-click leases in the context of the Stark Law exceptions for space leases, 42 C.F.R. § 411.357(a), and indirect compensation arrangements, 42 C.F.R. § 411.357(p), the underlying rationale of the decision suggests that those prohibitions also may be ultra vires, at least as presently promulgated.

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