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July 12, 2002


The opinion of the court was delivered by: Kennedy, District Judge.


Plaintiffs American Lithotripsy Society ("ALS") and Urology Society of America ("USA") bring this action against defendant Centers for Medicare and Medicaid Services ("CMMS") contending that two regulations promulgated by defendant are unlawful as they apply to a medical procedure known as lithotripsy. Plaintiffs contend that the regulations violate the Administrative Procedure Act, 5 U.S.C. § 706(2)(A) ("APA"), and the Regulatory Flexibility Act, 5 U.S.C. § 601 et seq. ("RFA"). The first regulation classifies lithotripsy as an "inpatient [or] outpatient hospital service," one of ten "designated health services" as to which physician referrals to entities with which the physicians have a financial relationship are statutorily prohibited. See 66 Fed. Reg. 856 (Jan. 4, 2001). The second regulation concerns the valuation methods defendant uses to determine "fair market value" for lithotripsy services.

Before the court are the parties' cross motions for summary judgment. Upon consideration of the motions and the opposition thereto, the court concludes that plaintiffs' motion must be granted with respect to their challenge under the APA to the classification of lithotripsy as an "inpatient [or] outpatient hospital service." This ruling renders plaintiffs' other claims moot.


A. Lithotripsy

Lithotripsy is a medical procedure performed by urologists that removes kidney stones through the use of a machine called a lithotriptor. A lithotriptor generates shock waves that break urinary tract stones into small pieces so that they may pass through the urinary tract and out of the body.

Prior to the advent of lithotripsy in the 1980's, treatment of urinary tract stones required invasive surgery followed by a week long hospitalization and up to two months of home recovery. In contrast, lithotripsy may be performed without hospitalization and requires only one or two days of home recovery. Thus, although a large initial investment is required to purchase a lithotriptor, lithotripsy is a less costly procedure overall than traditional surgery. Plaintiffs allege, however, that this cost savings made hospitals reluctant to invest in lithotripsy, because lithotripsy would generate less revenue than traditional surgery. As a result of this recalcitrance by hospitals, plaintiffs assert, lithotripsy remained unavailable to many patients.

Urologists desiring to provide lithotripsy to their patients acted to fill this void by purchasing lithotriptors. Because such an investment would not be cost-effective for a single urologist, urologists formed groups that collectively purchased or leased lithotriptors, or established lithotripsy centers to do so. The urologists who own the centers provide lithotripsy services to their own patients at the centers, and the centers also provide services to other urologists who need access to lithotriptors to treat their patients. More than half of lithotriptors are now owned by urologists.

B. Regulation of Lithotripsy

1. "Under Arrangement"

CMMS requires that lithotripsy services provided to patients insured by Medicare be billed "under arrangement" with a hospital in order for providers to receive reimbursement from Medicare for the technical fees associated with the procedure. This means that urologists and lithotripsy centers cannot bill Medicare directly for lithotripsy technical fees but instead must enter into an arrangement with a hospital in order to be reimbursed. Under this arrangement the lithotripsy center typically provides all of the equipment and personnel to perform the procedure, including the lithotriptor itself, while the role of the hospital is limited to billing Medicare. By virtue of this billing role mandated by the "under arrangement" requirement, the hospital receives a large portion — up to 70% — of the Medicare technical fees for the lithotripsy services provided by the center, even though the lithotripsy center performs almost all of the work in delivering the services to patients.

Plaintiffs contend that because the hospital does not do more than bill Medicare for lithotripsy services provided by lithotripsy centers, the "under arrangement" requirement is not medically necessary.*fn1 Plaintiffs argue that both Congress and defendant recognized this in 1990 when, in an effort to reduce Medicare expenditures, they designated lithotripsy as one of the procedures that could be performed in an ambulatory surgery center ("ASC") without hospital involvement. Under such a regime, lithotripsy centers could bill Medicare directly and thereby avoid the "under arrangement" requirement and the concomitant fee-splitting with hospitals. However, because defendant has yet to finalize new rates for lithotripsy performed at ASCs after this court ruled its original rate-setting to be improper in 1992,*fn2 lithotripsy centers remain unable to receive compensation under Medicare for lithotripsy performed at an ASC. Thus, in order to receive any Medicare compensation for lithotripsy, the centers must still be "under arrangement" with a hospital.

2. Stark Statutes

In 1989, Congress enacted legislation designed to address the strain placed on the Medicare Trust fund by the overutilization of certain medical services by physicians who, for their own financial gain rather than their patients' medical need, referred patients to entities in which the physicians held a financial interest. The legislation, Section 6204 of the Omnibus Budget Reconciliation Act (Pub.L.101-239), known as "Stark I" after its sponsor Congressman Fortney "Pete" Stark, reflected Congress' concern that such a financial interest "can affect a physician's decision about what medical care to furnish a patient and who should furnish the care." 63 Fed.Reg, 1659, 1660 (Jan. 9, 1998).

Stark I was modeled upon a Florida statute that prohibited all physician selfreferrals, but created an exception for lithotripsy. See FLA. STAT. § 455.236. Lithotripsy was excepted from the Florida statute because a comprehensive study of physician self-referral commissioned by the Florida legislature concluded that physician ownership of lithotripsy centers did not pose a risk of overutilization. Like the Florida statute, Stark I was originally crafted as a blanket prohibition on physician self-referral, with specific exceptions for medical procedures not prone to overutilization. Among the exceptions was lithotripsy. See H.Rep. No. 101-247, 101st Cong. 1041 (1989) (including an exception for "a facility providing lithotripsy services for services performed personally by the referring physician"). In committee, however, the bill's scope was narrowed until in its final form it prohibited physician selfreferrals only with respect to clinical laboratory services.*fn3 See 42. U.S.C. § 1395nn. Since lithotripsy is not a clinical laboratory service, the exception for lithotripsy previously in the bill became unnecessary and was removed.

Four years later, Congress enacted Section 13562 of the Omnibus Budget Reconciliation Act of 1993 (Pub.L.103-66), known as Stark II, which expanded the reach of Stark I to prohibit physician self-referrals in eleven "designated health services" in addition to clinical laboratory services.

The eleven designated health services are: physical therapy services; occupational therapy services; radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthoties, and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient health services.

See 42 U.S.C. § 1395nn(h)(6) ("Section 1395nn(h)(6)"). Lithotripsy was not explicitly included among the eleven services enumerated in Section 1395nn(h)(6), and none of the enumerated services were further defined in Stark II. In a colloquy during the floor debate in the House of Representatives regarding Section 1395nn(h)(6), Congressman Rose posed the following question to Congressmen Stark, the bill's sponsor and chairman of the committee responsible for the bill:

I ask the chairman . . . this question . . . the physician self-referral ban enumerates `inpatient and outpatient hospital services.' It is my understanding that this provision is not intended to apply to physician owned lithotripsy facilities that furnish services under contract with a hospital. Is this correct?

139 Cong.Rec. H6239 (Aug. 5, 1993). Congressman Stark responded, "[T]he gentleman is correct." Id.

On January 4, 2001, seven years after the passage of Stark II, CMMS issued final regulations implementing Stark II. See 66 Fed. Reg. 856 (Jan. 4, 2001). In these regulations CMMS announced that "inpatient and outpatient hospital services," the eleventh designated health service enumerated in Stark II, encompassed lithotripsy. See id. at 953-55. Thus, physicians are prohibited under the regulations from referring patients for lithotripsy services to entities with which they have a "financial arrangement" unless they meet one of the statutory exceptions. 42 U.S.C. § 1395nn(a) ("Section 1395nn(a)"). CMMS considers the "under arrangement" relationship it requires urologists to enter into with hospitals in order to receive Medicare compensation to be a "financial arrangement" for purposes of the regulations. Thus, urologists cannot refer their Medicare patients for lithotripsy services, even if those services are to be personally provided by the referring urologist, unless they meet one of the exceptions to Section 1395nn(a).

The second provision of the regulations plaintiffs challenge deals with the threshold requirement that must be met before a party can qualify for any of the statutory exceptions to Section 1395nn(a). In order for a physician to be eligible for an exception that would permit referrals of patients to entities in which the physician has a financial interest, Stark II mandates that the physician cannot receive remuneration that exceeds "fair market value" for the services performed. 42 U.S.C. ยง 1395nn(a). Thus, if a hospital with an "under arrangement" relationship with a urologist pays the urologist "fair market value" for the urologist's lithotripsy services, the urologist may refer patients to the ...

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