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Atlantic Urological Associates, P.A. v. Leavitt

May 5, 2008


The opinion of the court was delivered by: Rosemary M. Collyer United States District Judge


Plaintiffs sue Michael O. Leavitt, in his official capacity as Secretary of the Department of Health and Human Services ("the Secretary" or "HHS"), to challenge HHS's final rule, 73 Fed. Reg. 404 (Jan. 3, 2008) (the "Final Order") and its final rule, 72 Fed. Reg. 66222 (Nov. 27, 2007) (the "Anti-Markup Rule"), both of which relate to Medicare payment for laboratory testing services.*fn1 Plaintiffs include: (1) three urology physician group practices (the "Physician Groups")*fn2 that own pathology laboratories; (2) Dr. Sam Michaels, a self-employed pathologist who performs testing services for other physician groups; (3) Uropath, LLC, a limited liability company that manages various pathology laboratories; and (4) Uropath's Director of Clinical Operations, Rebecca Page. Plaintiffs seek to invalidate the Final Order and the Anti-Markup Rule; HHS moves to dismiss for lack of jurisdiction.


This litigation was only recently filed in court but has a long administrative history. The Centers for Medicare and Medicaid Services*fn3 ("CMS") have been publically concerned since at least 2004 about a growing tendency of physician groups to utilize so-called "pod" laboratories for lab work, miles from the physicians' offices, and then to claim that doctors in both locations are "sharing a practice" for purposes of billing Medicare. See 69 Fed. Reg. 66236, 66316 (Nov. 15, 2004). From the perspective of CMS, these arrangements violate the spirit, if not the exact language, of the anti self-referral provisions of the law and regulations. The administrative record ("A.R.") indicates that many physicians also believe that "pod" laboratories are inappropriate ways for doctors to refer lab work to a business they own and from which they profit. See, e.g., A.R. at 204-21, Cmts. of the Am. Clinical Lab. Ass'n (notice of filing hard copy [Dkt. #14] Feb. 22, 2008).

The principal reason for the pod laboratories is financial: pods provide the referring urologists a financial stake in pathology services the urology groups order for their patients. Referring physicians seek such a financial arrangement so they can earn additional income from the work that results from their medical referrals. The CMS final rule that is the subject of this action [i.e. the Anti-Markup Rule] is a reasonable attempt to remove from anatomic pathology the referring physician's profit motive that can corrupt medical decisions.

Amicus Brief filed by College of Am. Pathologists [Dkt. #19] at 3.

By way of background, Congress passed the Stark Act, 42 U.S.C. § 1395nn, to prohibit physicians from making referrals to, and prohibit laboratories from billing Medicare for, services ordered by physicians who have a financial interest in the laboratory. See 42 U.S.C. § 1395nn(a). The Stark Act contains an exception for a physician practice that directly performs its own clinical laboratory services as part of its group practice. See 42 U.S.C. § 1395nn(b)(2). The exception allows Medicare to be billed for services that are furnished personally by the referring physician or a member of the same group practice:

(I) in a building in which the referring physician (or another physician who is a member of the same group practice) furnishes physicians' services unrelated to the furnishing of designated health services [lab work], or

(II) in the case of a referring physician who is a member of a group practice, in another building which is used by the group practice --

(aa) for the provision of some or all of the group's clinical laboratory services, or

(bb) for the centralized provision of the group's designated health services (other than clinical laboratory services), unless the Secretary determines other terms and conditions under which the provision of such services does not present a risk of program or patient abuse . . . .

42 U.S.C. § 1395nn (b)(2)(A)(ii) (I) & (II).

Never say the American entrepreneurial spirit is dead. Faced with this exception to the anti-referral provisions of the Stark Act, certain physician groups that order a significant number of patient biopsies - typically dermatology, gastroenterology, and urology groups - began to develop what are called "pod" laboratories.*fn4 Plaintiff Physician Groups are urology practice groups that regularly order prostate biopsies. They formed Plaintiff Uropath to manage pod laboratories for them and other practice groups. Uropath operates pod laboratories in Arlington, Texas; Leesburg, Florida; San Antonio, Texas; Sarasota, Florida; and Philadelphia, Pennsylvania. See Pls.' Motion for a Preliminary Injunction ("Pls.' Motion"), Ex. 7. Uropath has "fifteen labs, three pathologists, and a full and part time staff totaling thirty employees. [Its] customers represent nine states and one hundred sixty-two urologists." Id. The Sarasota facility was started by physician groups in Florida but now services physician groups from North Carolina, Colorado, Kansas, Texas, Connecticut, Indiana, and Ohio. The laboratories operated by Uropath are an extension of, and are owned and controlled by, the Physician Groups. Pl.'s Mot. at 6. This is clearly a successful business model: Urology Care, Inc., a four-physician urology practice in Jefferson City, Missouri, earned $314,000 in 2007 by sending its specimens to the Uropath-managed lab in San Antonio, Texas, in which Urology Care has a partial ownership interest. See Pls.' Mot., Ex. 6, Declaration of Michael S. Severance, M.D. ("Severance Decl.") ¶¶ 3 & 10.

On July 12, 2007, CMS published the Physician Fee Schedule Proposed Rule for 2008. See 72 Fed. Reg. 38122 (July 12, 2007). "In the Proposed Rule, CMS propose[d] to complete the multi-year process that began in 2004 when CMS expressed concern about possible exploitation by some providers of loopholes in Medicare billing and self-referral provisions." A.R. at 204, Cmts. of the Am. Clinical Lab. Ass'n. After receiving over a thousand comments, CMS issued the AntiMarkup Rule on November 27, 2007. The Anti-Markup Rule, intended to be effective for services rendered after January 1, 2008, limited Medicare payment for diagnostic testing services provided in a "centralized building" that does not qualify as the "same building" under the physician self-referral exception in the Stark Law. See 72 Fed. Reg. 66222, 66308-9; see also 42 C.F.R. § 411.355(b).

Shortly thereafter, CMS received "informal comments" and published the Final Order. The Final Order delayed until January 1, 2009, the applicability of the Anti-Markup Rule except as to (1) the technical component of a diagnostic test,*fn5 and (2) the professional component of anatomic pathology diagnostic testing services furnished in a centralized building. Under the Final Order, payment for anatomic pathology diagnostic testing services performed at a "site other than the office of the billing physician or other supplier" is to be limited to the lesser of: (1) the performing supplier's net charge to the billing physician or other supplier; (2) the billing physician or other supplier's actual charge; or (3) the fee schedule amount for the test that would be allowed if the performing supplier billed directly. 73 Fed. Reg. at 405; 42 C.F.R. § 414.50(a)(1). In English, this approach basically omits Medicare payment of any overhead associated with the use of a lab owned by a physician group when the lab is not located in the group's practice offices. CMS indicated that "[b]ecause anatomic pathology diagnostic testing arrangements precipitated our proposal for revision of the anti-markup provisions and remain our core concern, we are not delaying the date of applicability [of the Anti-Markup Rule] with respect to anatomic pathology diagnostic testing services." 73 Fed. Reg. at 405.

Because it fails to suspend application of the Anti-Markup Rule to anatomic pathology diagnostic testing services, Dr. Severance of Missouri predicts that the Final Order will have dire consequences.

If the January 3, 2008, final rule is not enjoined, we will be forced to shut down our laboratory. We cannot afford to lose money on every Medicare pathology test, as the January 3, 2008, rule requires us to do. Without being able to refer tissue samples for Medicare patients, which represent about 64% of our case mix, operation of our lab would not be financially feasible.

Accordingly, if the final rule is not enjoined, we will have to immediately start sending all pathology specimens to outside labs rather than to our own lab. This means that those laboratories will bill Medicare for the physician fee schedule amount, rather than having our urology group be able to bill for those amounts. Thus, enforcement of the final rule will result in a permanent and ongoing loss of income that we will have no way to recover.

Severance Decl. ¶¶ 6 & 7.

Plaintiffs filed this suit on January 25, 2008. The Complaint alleges a number of counts as follows:

(1) In Count I, Plaintiffs assert that the Final Order must be set aside as arbitrary and capricious in violation of the Administrative ...

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