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
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
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
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
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.
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
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
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. § 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 ...