Court rejects physician challenge to change in self-referral rule

A new definition of an entity under the Stark law, set to take effect Oct. 1, likely will invalidate many physician-hospital arrangements.

By — Posted July 6, 2009

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A federal trial court turned down a challenge brought by a group of physicians and physician-owned entities to a recent change in the federal self-referral rules that doctors worry could harm patient care.

The Stark law generally prohibits physicians from referring patients to entities in which they have a financial stake. Centers for Medicare & Medicaid Services rules now interpret an entity to include only the party that directly bills Medicare for designated health services. But as of Oct. 1, CMS will use the term entity more broadly to include those providing the services billed to Medicare. This policy change was detailed in a final rule released in August 2008.

The plaintiffs in the case were a group of cardiologists and surgeons providing cardiac catheterization services to local hospitals via the labs the physicians own. The hospital, which does not have any ownership interest in the labs, would bill Medicare for the services and then pay the labs a flat fee. The new rule change, however, effectively will bar such physician-hospital joint ventures because both the hospital and the physician groups will be considered entities providing designated health services, rendering any referrals illegal.

The physician groups sued the Dept. of Health and Human Services, claiming that the rule change violated the intent of the Stark law, which provides exceptions for such arrangements as long as they meet certain criteria. The compensation must be fair market value and not based on referral volumes, among other requirements.

"There has been a long-accepted practice of these kinds of service agreements with hospitals. Now CMS ... took a class of health care providers and essentially wrote them out of business," said Thomas S. Crane, lead counsel for the plaintiffs.

But without addressing the merits of the case, the U.S. District Court for the District of Columbia said it did not have the authority to rule on the action because Medicare rules require parties first to pursue an administrative appeal.

That puts the physicians in a tough spot, Crane said. Since the doctors cannot directly bill or receive payments from Medicare under such arrangements, they do not have standing to bring an administrative claim.

"Under this decision, no physician [in these types of arrangements] can ever challenge a Stark law regulation," Crane said. The physicians decided not to appeal the decision and instead plan to seek a regulatory change.

If it stands, the court decision leaves intact a rule likely to have a wide-ranging impact on patient care, said cardiologist Dennis J. Battock, MD, medical director and co-founder of Colorado Heart Institute, one of the plaintiffs in the case.

"Our goal in working with the hospital was to provide not only cost-effective care, but improve quality, and physicians were incentivized to do this" under collaborative arrangements, he said. "The trend in all the health care reform proposals is for physicians and hospitals to work together. With this ruling, it's going to change the way we deal with hospitals, and in some instances, might force us to open an outpatient lab. But that duplicates services" if patients require additional treatment at a hospital.

The court conceded the physicians could not bring an administrative challenge on their own. But that did not mean that their hospital partners could not pursue a claim on the doctors' behalf, Judge Rosemary M. Collyer said. The hospitals would have an incentive to do so if in fact the arrangements are helping to save costs, she said.

Still, that's an unlikely scenario, because physicians and hospitals may have competing interests, said Thomas H. Hawk, a health care regulatory expert with King & Spalding LLP in Atlanta.

The bigger picture

Hawk said the court sidestepped the larger issue of whether the rule change was justified.

"CMS has for a couple of years made public its concerns about these arrangements" and the potential that they could lead to overutilization, he said. Nevertheless, "the court ruling shows that when Congress originally passed the [self-referral] prohibition, it may not have contemplated just how unwieldy the Stark law structure has become," he said, noting the numerous exceptions that have been crafted over the years.

For now, the ruling means that physician groups likely will have to dismantle or restructure their existing arrangements with hospitals, said Donald H. Romano, former director of the CMS Division of Technical Payment Policy. Once physicians are considered owners of designated health services, exceptions under the Stark rule "are going to be hard to come by," said Romano, now a partner with the law firm Arent Fox LLP in Washington, D.C.

Still, Romano said the rule change is consistent with the Stark law's original intent.

"In 1998, the proposed rule-making said we don't care whether physicians are referring a patient to an entity that directly bills for the service or sells it to someone else. Either way there is a risk of overutilization, and that's something [CMS] is going to regulate."

The 2001 final regulation included a narrower definition of entity, but at the time, it was mostly hospitals contracting with other hospitals to help cover certain service lines, he said. "The plain language of the statute supports the idea that the Stark law applies as long as you are furnishing the service. And furnishing does not simply mean you are billing for the service."

According to Hawk, doctors' restructuring options likely will depend on their level of involvement in providing a particular service. For example, do they just own the equipment or do they run a whole lab operation?

Until CMS issues further guidance, however, "there's going to be a gray area for a while about whether physicians are going to be providing more limited services, but that may be where we are headed," Hawk said.

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Case at a glance

Is a new self-referral regulation on physician-hospital arrangements valid?

A federal trial court said it did not have jurisdiction over the issue, and the physician plaintiffs did not have standing to challenge the regulation judicially or administratively.

Impact: Some legal experts say the ruling leaves in place a new rule likely to invalidate many physician-hospital arrangements and diminish patient care. The decision also could make it more difficult for doctors to challenge related Stark law regulations in the future, they say.

Source: Colorado Heart Institute LLC v. Johnson, U.S. District Court for the District of Columbia

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