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D.C. Circuit Finds Physicians Can Pursue Challenge to Stark Law Regulation

Written by Tom Crane

The D.C. Court of Appeals gave Medicare providers and suppliers a holiday gift last week with the issuance of a rare jurisdictional ruling involving a challenge to the Stark Law regulations.

For years, CMS had interpreted the Stark Law as permitting physicians to act as service providers to hospitals furnishing an array of services “under arrangement.” A physician or a group of physicians would form a legal entity to provide services, equipment, and supplies to hospital patients and then would contract with the hospital to provide such services.  Common examples were lithotripsy services furnished by urologists and cardiac catheterization services provided by interventional cardiologists.  Because Medicare requires the hospital to bill for such services, CMS deemed the hospital as the entity furnishing these designated health services (DHS), which meant that the physicians’ ownership in the entity was not impermissible under the Stark Law.  But these ownership interests became illegal as of October 1, 2009 under a new Stark Law regulation declaring that entities providing under arrangement services were furnishing DHS.

Before the regulation went into effect, a group of urologists filed suit challenging the new regulation in U.S. district court.  But district court avoided a ruling on the merits in D.C. Council for Urological Interests v. Sebelius (the “CUI case”) by finding that it did not have jurisdiction.  Following what it believed was a proper reading of Supreme Court precedent established in Shalala v. Illinois Council on Long Term Care (“Illinois Council”), the district court held that the plaintiff must first exhaust Medicare’s statutory administrative remedies before filing suit.  (The district court reached the same decision in Colorado Heart Institute v. Johnson, an earlier identical challenge brought by cardiologists.).  The district court found that because the hospitals with which the plaintiffs’ members contract could have filed an administrative challenge, administrative remedies were reasonably available and thus must be exhausted before the plaintiffs could bring this suit in federal court.

Last week the D.C. Circuit had little trouble overturning the district court’s decision in the CUI case, unanimously finding that the case fits within an exception to the exhaustion requirements established in Illinois Council.  The court relied on the reasoning in Illinois Council regarding the fact that Medicare’s administrative exhaustion provisions are “a channeling requirement, not a foreclosure provision” (quoting from Illinois Council) and found that Congress had not “deliberately intended to completely bar non-providers from seeking review of regulations that target them directly.”  It then looked at the relationship of plaintiff’s members to the hospitals with which they contracted and held that invoking Medicare’s channeling requirement would amount to a complete preclusion of judicial review.

The decision is significant because it acknowledges the reality that the interests of many hospitals and physician entities are not necessarily aligned on this issue and that no hospital has in fact challenged CMS’s decision to change the regulation well over two years ago.  In addition, the district court failed to recognize that providers are invariably unwilling to mount Stark Law challenges through the administrative process, in part because virtually all agreements between hospitals and physicians contain provisions that require contracts to be reformed or unwound if found to be in violation of the Stark Law, which means that the parties would not agree to keep illegal contracts in place for purposes of a court challenge. As important, the district court’s jurisdictional ruling effectively prevented physicians from ever bringing a Stark Law challenge unless they qualified as the DHS provider.  Finally, last week’s decision will pave the way for a district court ruling on the merits of the Stark Law regulation at issue.



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Karen S. Lovitch

Chair, Health Law and Co-Chair, Health Care Enforcement Defense Practices

Karen advises industry clients on regulatory, transactional, operational, and enforcement matters. She has deep experience handling FCA investigations and qui tam litigation for laboratories and diagnostics companies.