U.S. Court of Appeals for the D.C. Circuit Rules on Stark Law Regulations

In June, the U.S. Court of Appeals for the District of Columbia Circuit ruled on two regulations implemented by the Centers for Medicare and Medicaid Services (CMS) under the federal Stark law (Stark) in 2008. Following a challenge by the Council for Urological Interests (the Council), a urology trade association, the court rejected CMS’ prohibition on per-click equipment rental leases but upheld CMS’ new interpretation of “entity furnishing designated health services” and thus the prohibition against “under-arrangement” transactions.

Stark prohibits physicians from referring Medicare or Medicaid patients for designated health services to an entity with which the physician has a financial relationship unless an exception applies. An exception to Stark exists for equipment leases. Under CMS’ 2008 regulation challenged by the Council, CMS barred per-click rental arrangements based on CMS’ analysis that Congress did not intend to protect arrangements where the lessor’s amount of income fluctuated based on the amount of patients referred by the lessor to the lessee. CMS claimed to base its determination to bar per-click equipment leases on a 1993 U.S. House of Representatives conference report (Conference Report).

The court reviewed CMS’ per-click equipment lease prohibition under the two-step Chevron legal test used to determine whether a court must grant deference to a government agency’s interpretation of a statute. First, the court determined that Stark did not forbid CMS from banning per-click leases, as the statute does not expressly permit per-click leases and also allows the Secretary of the U.S. Department of Health and Human Services (the Secretary) to impose, by regulation, other requirements as needed to protect against program or patient abuse. However, the court determined that the per-click ban failed under step-two of the Chevron analysis, as the agency’s statutory interpretation was not permissible or reasonable in light of Congress’s intent. The court’s decision focused on the Conference Report cited by CMS. The Conference Report explained, “in reference to the rental-charge clause for the equipment rental exception, ‘[t]he conferees intended that charges for space and equipment leases may be based on…time-based rates or rates based on units of service furnished, so long as the amount of time-based or units of service rates does not fluctuate during the contract period.'” The court’s decision highlighted how the Secretary’s interpretation of the Conference Report had changed over time, pointing out that in 2001, the Secretary explained, “given the clearly expressed congressional intent in the legislative history, we are permitting ‘per use’ payments.” The court found that the Conference Report makes clear that unit of service rates are what cannot fluctuate during the contract period, and noted that the Secretary’s new interpretation of the Conference Report ignored the word “rates” completely. In rejecting the ban on per-click leases, the court stated that the agency’s “jargon is plainly not a reasonable attempt to grapple with the Conference Report; it belongs instead to the cross-your-fingers-and-hope-it-goes-away school of statutory interpretation.”

Separately, the court ruled in favor of CMS’ new definition of an “entity furnishing designated health services.” CMS had previously interpreted entity to only include the entity that billed Medicare for the service, whereas CMS’ new interpretation expanded the definition to also include an entity that performs the designated health service whether or not that entity bills Medicare for the service. The new definition expands Stark’s prohibition to certain joint ventures, or similar arrangements, where a physician or an entity in which a physician is an owner or investor, leases equipment to a hospital and refers patients to the hospital for procedures performed by the physician using the leased equipment. Whereas the physicians previously only needed to meet the Stark exception related to compensation arrangements, the new rule means that physicians with an ownership or investment interest in a group practice will not be permitted to refer patients to the hospital for these procedures unless an ownership or investment interest exception applies.

The court determined that the terms “provide” and “furnish” are used interchangeably in the statute, and that the Secretary’s regulation was a reasonable construction of the statute and thus entitled to deference. The court found that CMS’ change to the definition “furthers the purpose of the statute by closing a loophole otherwise available to physician-owned entities that would allow circumvention of the purpose of the Stark Law merely by having the hospital bill Medicare for the services.” The court also found that the term “performs” as used in the definition was not impermissibly vague.

Overall, the court’s decision impacts healthcare providers and compliance professionals who structure arrangements to be compliant with Stark exceptions. The court upheld CMS’ prohibition of under-arrangement transactions that include designated health services. While the court struck down CMS’ ban on per-click equipment rental leases, given CMS’ clear intention, such leases will continue to be scrutinized by the Office of Inspector General (OIG). Providers should be aware that the per-click rate must always be fair market value for the equipment leased, and may not fluctuate over the term of the contract. In general, equipment rental leases should be consistent with all OIG guidance, including the OIG’s guidance under the federal Anti-Kickback Statute (AKS).

Wachler & Associates represents healthcare providers in negotiating and drafting all types of agreements, including equipment rental leases and under-arrangements transactions with hospitals. Our attorneys regularly structure agreements to comply with Stark exceptions, AKS safe harbors, and other OIG guidance regarding Stark and the AKS. If you or your health care entity have any questions regarding equipment rentals or under-arrangement transactions, or other arrangements under Stark and the AKS, please contact an experienced health care attorney at (248) 544-0888 or via email at wapc@wachler.com.