Federal District Court Upholds Stark Regulation Ban On Physician-Owned Under Arrangement Service Providers

On May 24 the District Court for the District of Columbia rejected an appeal brought by a group of urologists ("CUI") seeking to overturn regulations promulgated in 2008 by the Centers for Medicare & Medicaid Services ("CMS") that prohibited physician-owned "under arrangement" service providers under the Stark Law (the "2008 Rule"). The decision in Council for Urological Interests v. Sebelius1 also upholds CMS's regulations prohibiting per-service (or "per-click") leases.

Under the Stark Law, physicians may not refer Medicare patients to entities "furnishing" "designated health services" ("DHS") with which they have a financial relationship unless an exception applies. A financial relationship may be either an ownership or investment interest or a compensation arrangement. Inpatient and outpatient hospital services are classified as DHS. The appeal was brought by a group of urologists challenging a 2008 regulatory change that characterized their arrangements with hospitals as impermissible ownership arrangements whereas under prior interpretations by CMS such arrangements only needed to qualify under the compensation exceptions.

BRIEF HISTORY OF PHYSICIAN-OWNED SERVICE PROVIDERS

Well before the enactment of the Stark Law, physicians held many types of ownership interests in service providers. In some cases, the services were clearly DHS, for example imaging services, and in other cases they were not, for example lithotripsy, cardiac catheterization, ambulatory surgery and dialysis centers. In some of these cases, the non-DHS service was provided by the physician-owned service provider in the hospital for reimbursement and other reasons. These historic arrangements followed various models, but in most cases the outside service provider leased space from the hospital, provided equipment and supplies, and employed or contracted for the staff and physicians needed to provide the service.

These services provided by outside physician-owned service providers needed to comply with Medicare's "under arrangement" rules.2 Under these rules the hospital must exercise professional responsibility over the service. In addition, "The provider must accept the patient for treatment in accordance with its admission policies, and maintain a complete and timely clinical record on the patient, ..."3 Medicare has historically always treated a service provided by an outside vendor under these rules in the same manner as if it were directly furnished by the hospital itself, as seen for example in the coverage rules for outpatient hospital services.4

Many of these physician-owned arrangements were viewed as non-abusive because they involved personal clinical care by the physician owners similar to physician-owned ambulatory surgical centers or dialysis centers. Because of compliance requirements that these services be provided at fair market value, most of the arrangements with hospitals were structured to assure that the hospitals saved money by buying the service from the physician-owned entity as opposed to providing the service in-house. Ironically, many of these arrangements contained similar quality and cost-control incentives to the physician-owners as are now advocated by CMS in health care reform demonstration projects.

LEGAL BACKGROUND

1. Stark Law Phase 1 Rulemaking

   In the development of the Stark regulations that were first promulgated as Phase I in 2001, CMS addressed the question of whether to permit physician-owned under arrangement service providers. One of the questions CMS addressed was to treat the provider that was "furnishing" the DHS as the hospital, and not the physician-owned entity. Under this analysis the physicians did not own the hospital, and so the arrangement between the hospital and service provider needed only to comply with a compensation exception. Part of the consideration for CMS was that with many of these physician-owned services, the physicians provided personal services as an extension of practice without any evidence of abuse...