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From Health Law Daily, June 15, 2015

Appellate panel gives a ‘Stark’ contrast of opinions on equipment rental exception

By Bryant Storm, J.D.

The D.C. Circuit affirmed in part and reversed in part a district court’s grant of summary judgment for HHS in litigation over the ability of HHS to prohibit physicians who lease medical equipment to hospitals from also referring patients to the same hospital. A majority of the three-judge appellate panel determined that the Stark Law (42 U.S.C. §1395) was ambiguous and a different majority found the HHS prohibition on the leases unreasonable. However, the court unanimously agreed that the applicability of the statute to physician-groups was reasonable. The court remanded the regulation back to the district court and HHS so that the agency could reconsider the permissibility of its ban (Council for Urological Interests v. Burwell, June 12, 2015, Griffith, T.).

Stark Law. In order to reduce self-interested physician referrals, the Stark Law prohibits certain physician referrals by physicians who have financial interests in an entity to which they are making the referral. The Stark Law contains several exceptions, including the equipment rental exception, which allows physicians to “both lease equipment to a hospital and refer their Medicare patients to that hospital for procedures using the equipment so long as the leasing agreement meets certain conditions.” However, under 42 C.F.R. Sec. 411.351, HHS limited the exception so that physicians with ownership interests in groups that perform outpatient services in hospitals cannot refer patients for procedures at those hospitals. Additionally, under 42 C.F.R. Sec. 411.357(b)(4)(ii)(B), for an equipment rental lease agreement to qualify for the equipment rental exception, the lease cannot be based upon a the frequency of services performed or a “per-click rate.”

Lawsuit. The Council for Urological Interests (the Council), a joint venture made up of urologists, leases laser technology to hospitals where the urologists prefer to perform services because of the higher Medicare reimbursement rates obtained in hospitals. Due to the high costs of the laser equipment, the Council asserted that the per-click or volume-based referral arrangement with hospitals is necessary for Council members to make the purchase of the laser technology economically viable. The Council filed a lawsuit under the Administrative Procedure Act (APA) (P.L. 79–404) and the Regulatory Flexibility Act (RFA) (5 U.S.C. §604) challenging the HHS regulations because the regulations prohibit such arrangements. At the district court level, summary judgment was granted for the government on the grounds that the regulations were a reasonable interpretation of the statute.

Ambiguity. The Council asserted on appeal that the Stark Law expressly precluded HHS from banning physicians who refer patients to a hospital from leasing equipment to that hospital on a per-click basis. Additionally, the Council argued that HHS unreasonably interpreted the statute when it decided to “forbid physicians from referring patients to a hospital for procedures performed by a group in which the physician has an ownership interest.” On the first issue, the court held that the Council was mistaken in its reading of the statute to expressly allow the per-click arrangement because the statute contained a clause allowing HHS to create additional regulatory requirements for equipment rental agreements. Accordingly, the court held that the Stark Law did not unambiguously preclude HHS from prohibiting per-click equipment lease agreements.

Caprice. However, at the second step in its analysis, the court held that the HHS regulation could not be viewed as a reasonable or permissible interpretation of Congress’s intent. To reach its decision, the court considered the changing HHS position regarding the permissibility of the per-click ban, in the context of legislative history found in a 1993 Conference Report. Because the Conference Report was favorable to the use of per-click equipment lease arrangements, the court described the HHS position explaining away the Conference Report as one that belonged “to the cross-your-fingers-and-hope-it-goes-away school of statutory interpretation.” Accordingly, the court found 42 C.F.R. Sec. 411.357(b)(4)(ii)(B) to be an unreasonable interpretation of the statute and called it “the stuff of caprice.” The appellate court remanded the issue back to the district court with instructions to send it back to HHS to consider more carefully whether the per-click ban was consistent with the legislative intent found in the Conference Report.

Furnishing. The court next analyzed the new HHS definition of “entity furnishing designated health services.” The Council conceded that the statute was ambiguous regarding the definition. However, the physician group asserted that the definition rendered other aspects of the law superfluous and was impermissibly vague. Although the Council argued that the definition eliminated the effect of the exception for all group practices, the court held that the definition was nevertheless reasonable because although it would limit the effect of the exception for some group practices, it would not do so for all of them and was within the authority of HHS. The court also held that HHS did not violate the RFA because HHS properly certified that the regulations would not have a significant impact on small businesses.

Dissents. Judge Henderson dissented, in part, on the position that “Congress unambiguously intended to authorize per-click equipment leases.” Although the dissent agreed that the statute itself was somewhat ambiguous, Judge Henderson dissented because the legislative history spoke clearly to the intent of Congress to allow per-click leases. In support of this argument, Judge Henderson looked to the 1993 Conference Report, which expressly indicated the conferees’ intention that equipment leases could be premised on “rates based on units of service furnished.”

Judge Griffith dissented with respect to the majority opinion that HHS should not have been able to rely on a legislative argument on appeal that was not considered during the rulemaking process. Judge Griffith reasoned that because the Council raised the challenge at the district court but not again at the appellate level, the Council should have been prohibited from pursuing the point on appeal. In dissent, Judge Griffith asserted, “by sua sponte considering an argument the Council has elected to omit from either its opening or reply brief, the majority remands a federal regulation based on an argument not before this court.”

The case is No. 13-5235.

Attorneys: Gordon A. Coffee (Winston & Strawn LLP) for Council for Urological Interests. Jeffrey E. Sandberg, U.S. Department of Justice, for Sylvia Mathews Burwell, Secretary, U.S. Department of Health and Human Services, and United States of America.

Companies: Council for Urological Interests, U.S. Department of Health and Human Services; United States of America

MainStory: TopStory StarkNews QualityNews PaymentNews EmploymentNews CMSNews MDeviceNews DistrictofColumbiaNews

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