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Council for Urological Interests v. Sebelius

United States District Court, District Circuit

May 24, 2013

COUNCIL FOR UROLOGICAL INTERESTS, Plaintiff,
v.
KATHLEEN G. SEBELIUS, in her official capacity as Secretary of the Department of Health and Human Services, et al., Defendants. Re Document: 28, 30

DENYING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT; GRANTING DEFENDANT’S CROSS-MOTION FOR SUMMARY JUDGMENT

BARBARA J. ROTHSTEIN UNITED STATES DISTRICT JUDGE

This case is before the Court on cross-motions for summary judgment filed by Plaintiff, the Council for Urological Interests (“CUI”), and Defendants, the Secretary of the Department of Health and Human Services and the United States.[1] CUI alleges that recent regulations implemented by the agency violate the Administrative Procedure Act (“APA”) and the Regulatory Flexibility Act (“RFA”). Having reviewed the briefs, the Administrative Record, and the relevant statutory provisions and regulations, the Court denies Plaintiff CUI’s motion and grants Defendants’ motion.

I.BACKGROUND

A. Urologist-Owned Joint Ventures and Their Provision of “Under Arrangements” Services

CUI is a not-for-profit corporation comprised of businesses that provide equipment and technical personnel for performing various urological medical services. Compl. ¶ 2. The equipment and technical personnel provided by CUI’s members are used to treat conditions such as non-cancerous prostate enlargement, prostate cancer, and related urological conditions. Pl.’s Statement of Facts (“SOF”) ¶ 1.[2] One of the urological services used to treat such conditions is laser surgery. Id. ¶¶ 3-6.

According to CUI, laser surgery is more effective than open surgery in treating prostate and urological disease, but the technology is costly and requires frequent updating.[3] Compl. ¶¶ 3-6; 9-11. CUI claims that due to the cost, hospitals have been reluctant to invest in laser surgery equipment. Id. ¶ 11. Instead, urologists have formed joint ventures to purchase the laser surgery equipment. CUI’s members consist largely of these urologist-owned joint ventures. Id.

The joint ventures frequently enter agreements with hospitals by which a joint venture leases to the hospital the equipment and technical personnel that are then used by the urologist-owners of the joint venture to perform outpatient laser surgery. Id. ¶ 18; AR 863. The services provided under such an agreement are commonly referred to as services made “under arrangements.” In an “under arrangement” transaction, the hospital contracts with the urologist- owned joint venture (or any other third party), for the performance of a hospital service, but it is the hospital that is responsible for billing and collecting payments. See 42 U.S.C. § 1395x(w).

As prostate conditions primarily affect older men, approximately 75% of patients who receive laser surgery from these joint ventures have insurance coverage through the Medicare program. Pl.’s SOF ¶¶ 1, 16. Thus, it is common that the hospital bills Medicare for the urological services. Medicare reimburses the hospital for the use of its equipment, space and non-physician personnel by paying a “technical fee.”[4] The hospital, in turn, will pay the urologist-owned joint venture a previously contracted amount to account for the hospital’s use of the joint venture’s equipment and technical personnel in rendering the urological service. See Compl. ¶¶ 19-20; Def.’s Mot. at 6. This amount, commonly referred to as a “per-click” payment, is paid by the hospital to the joint venture each time that a service is performed “under arrangements.”

As will be elaborated below, recent changes in the law have interrupted the ability of the urologists who own these joint ventures to refer their patients to receive services made “under arrangements.” CUI has thus brought suit against CMS, asserting that these recent changes in the law violate the APA and the RFA. To further appreciate CUI’s claims, however, a more thorough understanding of the relevant legal framework is required.

B. Legal Framework

1.The Stark Law

This litigation plays out against the backdrop of the Medicare Act-the vast federal statute that provides federal financial support for disabled persons and persons over the age of 65. 42 U.S.C. § 1395 et seq. Medicare provides a system for paying physicians, hospitals, and prescription drug providers for patient care. Id. Early in the law’s history, it became evident that abuse of the system could occur. One of the key areas of concern was that of “physician self-referrals”-patient referrals by a physician to a facility with which that physician had a financial relationship. Medicare and Medicaid Programs; Physician’s Referrals to Health Care Entities With Which They Have Financial Relationships, 63 Fed. Reg. 1659, 1661 (proposed Jan. 9, 1998). Congress was concerned that a physician’s financial interest could “affect [his or her] decision about what medical care to furnish a patient and who should furnish the care.” Id. Simply put, Congress was worried that a physician who had a financial interest in a facility would refer patients to that facility in order to make money, rather than to provide the best course of treatment. Id.

In 1989, Congress responded to the issue of physician self-referrals by enacting the Stark Law, named after its sponsor, Congressman Fortney “Pete” Stark and codified at 42 U.S.C. § 1395nn. Am. Lithotripsy Soc’y v. Thompson, 215 F.Supp.2d 23, 26 (D.D.C. 2002). In its original form, the Stark Law responded to abuses in the use of clinical laboratories. The law prohibited a physician who had a financial relationship with a clinical laboratory from making a referral to that same laboratory for the furnishing of services that Medicare would pay for. 63 Fed. Reg. at 1661. Four years later, in 1993, Congress expanded the Stark Law from the clinical laboratory context, naming eleven other types of services where physician self-referrals would be prohibited. Am. Lithotripsy, 215 F.Supp.2d at 26. Together, these twelve categories are referred to in the Stark Law as “designated health services” (“DHS”). Of specific relevance here, one of these DHS categories is “[i]npatient and outpatient hospital services.” 42 U.S.C. § 1395nn(h)(6)(K).

In its current form, the Stark Law states that “if a physician . . . has a financial relationship with an entity . . . then the physician may not make a referral to the entity for the furnishing of a [DHS] for which payment otherwise may be made under [the Medicare Act].” 42 U.S.C. § 1395nn(a)(1)(A). Moreover, if a referral is prohibited under § 1395nn(a)(1)(A), “the entity may not present or cause to be presented” a Medicare claim for the DHS that was received. 42 U.S.C. § 1395nn(a)(1)(B).

A “financial relationship” is defined as either (1) a physician’s “ownership or investment interest in the entity” or (2) a “compensation arrangement . . . between the physician and the entity.” 42 U.S.C. § 1395nn(a)(2)(A)-(B). An “ownership or investment interest . . . may be through equity, debt or other means and includes an interest in an entity that holds an ownership or investment interest in any entity providing the designated health service.” Id. § 1395nn(a)(2)(B). “The term ‘compensation arrangement’ means any arrangement involving any remuneration between a physician . . . and an entity.” Id. § 1395nn(h)(1). Thus, the Stark law prohibits a physician who owns an entity or has entered into a payment arrangement with an entity from referring his or her patients to that entity for DHS.

2.Relevant Regulatory Background

a.2001 Regulations

Congress delegated authority to the Secretary to promulgate regulations implementing the Stark Law. See, e.g., 42 U.S.C. §§ 1395nn(b)(4). In 2001, CMS promulgated regulations that defined “outpatient hospital services” as “includ[ing] services that a hospital provides for its patients that are furnished either by the hospital or by others under arrangements with the hospital.” 42 C.F.R. § 411.351 (2001). In other words, as of the 2001 Regulations, services performed “under arrangements” with a hospital would qualify as “outpatient hospital services” for purposes of the Stark Law. See Id . Because “under arrangement” services are “outpatient hospital services, ” and because, as discussed earlier, the Stark Law expressly provides that “outpatient hospital services” are DHS, it follows that services performed “under arrangements” are DHS. Accordingly, under the 2001 Regulations, services provided “under arrangements” (including urological services performed by urologist-owned joint ventures) are subject to the Stark Law’s prohibition on physician self-referrals. See 66 Fed. Reg. at 923.

In addition to defining “outpatient hospital services, ” the 2001 Regulations also clarify what the term “entity” means under the Stark Law, which is not defined in the statute. “Entity” refers to a physician’s sole practice, group of physicians, or other organization (like a corporation, partnership, etc.) that “furnishes DHS.” 42 C.F.R. § 411.351 (2001). Moreover, under the 2001 Regulations, “[a] person or entity is considered to be furnishing DHS if it is the person or entity to which CMS makes payment for the DHS, directly or upon assignment on the patient’s behalf.” Id. In other words, an entity furnishing DHS was limited to only the person or entity that was billing Medicare. This narrow definition was significant to urologists who owned joint ventures because, as the joint venture was not billing Medicare, the urologist-owners remained free to refer Medicare patients to the joint venture for DHS. See 42 U.S.C. § 1395nn(a)(1)(A).

Lastly, in the 2001 Regulations, CMS interpreted the Stark Law’s compensation arrangement exceptions to allow for “per-click” payment arrangements. 66 Fed. Reg. at 876. As noted above, every time that a urologist-owned joint venture conducted a urological service “under arrangements” for a Medicare patient, the hospital – after obtaining reimbursement from Medicare – would pay the joint venture a previously contracted “per-click” payment for the use of the joint venture’s equipment and technical personnel. See supra Part.I.A. These “per-click” payments were allowed even when the Medicare claim stemmed from DHS performed on a patient that the urologist-owner had referred to the joint venture, and notwithstanding the Stark Law’s general prohibition on physician self-referrals. 66 Fed. Reg. at 876-78; 42 C.F.R. § 411.354(d)(1)-(4). Thus, under the 2001 regulatory regime, urologist-owners were allowed to make referrals to their own joint-ventures- referrals that would result in per-click lease payments to the joint venture and, by extension, the urologist-owners.

b. 2008 Regulations

In 2008, CMS revised the regulations in two ways that created challenges for the urologist-owned joint ventures. First, CMS expanded what it meant to be an entity furnishing DHS. Under this change, the Stark Law would treat as an entity that furnishes DHS, not only the organization that presented a Medicare claim for the DHS (i.e., the billing organization), but also the organization that performed the DHS for which Medicare was billed. 42 C.F.R. § 411.351. By expanding the definition of an “entity furnishing DHS, ” the 2008 regulations brought physician-owned joint ventures within the ambit of the Stark Law’s prohibitions, because a joint ventures performed DHS. Further, because the joint venture was an “entity” in which the urologist-owner had a financial interest, the 2008 Regulations effectively prohibited a urologist-owner from referring his or her Medicare patients for DHS to the joint venture working “under arrangements” with the hospital.

To understand the next revision that CMS made in the 2008 Regulations, it is important to note that the Stark Law provides exceptions to the general ban on physician self-referrals. 42 U.S.C. § 1395nn(b)-(e). Certain exceptions apply only where the physicians have an ownership or investment interest in the entity, id. § 1395nn(c)-(d), while other exceptions apply only when a physician and an entity have a compensation arrangement, id. § 1395nn(e). Of particular relevance here, the Stark Act allows a physician to make referrals to an entity with which he has a compensation arrangement if the physician and the entity have entered into a lease agreement for the rental of office space or equipment, and if that lease agreement meets certain conditions. Id. § 1395nn(e)(1). Among these conditions, the “rental charges over the term of the lease . . . [must] not [be] determined in a manner that takes “into account the volume or value of any referrals, ” and “the lease must meet other requirements imposed by the Secretary’s regulation as needed to protect against program or patient abuse.” 42 U.S.C. § 1395nn(e)(1)(A)-(B). The Stark Law does not elaborate as to what it means for a rental charge to not take into account the volume or value of referrals.

The 2008 Regulations amended the regulations governing the lease agreement exceptions, prohibiting “per-click” rental charges “to the extent that such charges reflect services provided to patients referred between the parties.”[5] 42 C.F.R. § 411.357(b)(4)(ii)(B). Accordingly, a joint venture providing DHS services “under arrangements” with a hospital would not be allowed to collect a “per-click” payment for each service to a Medicare patient if that patient had been referred to the joint venture by a urologist-owner.

CMS delayed the effective date of the 2008 Regulations by approximately one year to allow physicians and hospital time to restructure existing contracts. 73 Fed. Reg. 48, 713; id. at 48, 733.

C. Procedural History

In response to the 2008 Regulations, CUI filed this suit on March 23, 2009. See generally Compl. Judge Henry Kennedy dismissed the case on jurisdictional grounds, Council for Urological Interests v. Sebelius, 754 F.Supp.2d 78 (D.D.C. 2010), but the D.C. Circuit reversed and remanded for further proceedings, Council for Urological Interests v. Sebelius, 668 F.3d 704, 712-14 (D.C. Cir. 2011). In December 2011, the matter was reassigned to the undersigned judge.

Both parties have filed cross-motions for summary judgment. With those motions ripe for consideration, the Court turns to consider the parties’ ...


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