Council for Urological Interests v. Burwell

790 F.3d 212

COUNCIL FOR UROLOGICAL INTERESTS, Appellant

v.Sylvia Mathews BURWELL, in her Official Capacity as Secretary of the Department of Health and Human Services and United States of America, Appellees.

No. 13–5235.

United States Court of Appeals, District of Columbia Circuit.

Argued Sept. 24, 2014.

Decided June 12, 2015.

Gordon A. Coffee argued the cause for appellant. With him on the briefs were Thomas L. Mills, Steffen N. Johnson, and Erica E. Stauffer.

Jeffrey E. Sandberg, Attorney, U.S. Department of Justice, argued the cause for appellees. With him on the brief were Stuart F. Delery, Assistant Attorney General, Ronald C. Machen Jr., U.S. Attorney, and Michael S. Raab, Attorney. Christine N. Kohl, Attorney, entered an appearance.

Before: HENDERSON, ROGERS, and GRIFFITH, Circuit Judges.

Opinion for the Court on Parts I, II.A, III, IV, and V filed by Circuit Judge GRIFFITH.

Opinion for the Court on Part II.B filed by Circuit Judge HENDERSON.

Opinion dissenting from Part II.A filed by Circuit Judge HENDERSON.

Opinion dissenting from Part II.B filed by Circuit Judge GRIFFITH.

I

The Secretary of Health and Human Services issued regulations that effectively prohibit physicians who lease medical equipment to hospitals from referring their Medicare patients to these same hospitals for outpatient care involving that equipment. The regulations accomplish this through two separate provisions. The first prohibits physicians from charging hospitals for leased equipment on a per-use basis when the physicians also refer patients to the hospital for procedures using that equipment. The second interprets the relevant statute to apply to physician-groups that perform procedures rather than only the entities that bill Medicare. Challenging the regulations here is an association of physicians who participate in leasing agreements with hospitals, under which they charge hospitals for equipment on a per-use basis and perform the procedures using the equipment. The association argues that the regulations exceed the Secretary's statutory authority and violate both the Administrative Procedure Act and the Regulatory Flexibility Act. The district court granted the Secretary's motion for summary judgment. Although one majority agrees with the district court that the statute is ambiguous as to the regulation of leases that charge on a per-use basis (Part II.A), a different majority concludes that the Secretary's explanation for prohibiting these leases is unreasonable (Part II.B). The court unanimously concludes that the Secretary's interpretation of the statute to apply to the physician-groups performing the procedures is reasonable (Part III), and that the Secretary complied with the Regulatory Flexibility Act (Part IV). We therefore affirm in part, reverse in part, and remand to the district court with instructions to remand the regulation relating to leases charging by use to the Secretary for further proceedings.

A

This case involves the interplay between complicated statutory provisions and regulations.

Resolving the questions before us requires that we undertake a sometimes arduous journey through the tangled regime. We begin our slog with a look at the Medicare program.

Medicare provides federally funded health insurance to disabled persons and those aged 65 or older for various services, including the outpatient hospital procedures at issue here. 42 U.S.C. §§ 1395 et seq. In addition to paying the performing physician a fee that covers her services for the outpatient care, see generally 42 U.S.C. §§ 1395w–4, 1395x(s)(1) ; 42 C.F.R. §§ 410.20, 414.32, Medicare also pays the hospital a fee that covers charges for space, equipment, supplies, diagnostic testing, and the services of any non-physician personnel, 42 U.S.C. § 1395l (t) ; 42 C.F.R. pt. 419. Typically a hospital will have an employee perform the outpatient procedures using its own equipment, but Medicare also permits hospitals to contract with third parties to provide such outpatient services. See 42 U.S.C. § 1395x(w)(1) ; 42 C.F.R. § 410.42(a). Under these agreements, the third party provides equipment and technicians for a procedure while the hospital provides space and support services, pays for the lease of the equipment, and bills Medicare.

The members of the association challenging the regulations here have just this kind of relationship with hospitals. These arrangements are attractive to them because Medicare reimburses outpatient procedures that take place in hospitals at higher rates than if they were performed elsewhere.¹ Compare 42 C.F.R. § 419.2(b) (listing eighteen categories of costs Medicare covers for outpatient hospital procedures), with 42 C.F.R. § 416.61(a) (listing eight categories of costs Medicare covers in ambulatory surgical centers).

This disparity creates a financial incentive for physicians to make referrals based more on maximizing their income than on maximizing the Medicare patient's well-being. For example, suppose a physician has an ownership interest in a hospital laboratory that diagnoses various illnesses. The physician profits by sending his Medicare patient to that hospital to undergo the diagnostic tests. The patient, by contrast, has little financial incentive to limit the cost of the tests, as Medicare covers most of the costs. This imbalance in interests can lead to a physician ordering a battery of unnecessary tests. In fact, a 1991 study showed this very outcome where Florida physicians had ownership interests in diagnostic clinics. See Joint Ventures Among Health Care Providers in Florida: Hearing Before the H. Subcomm. on Health of the H. Comm. on Ways and Means, 102d Cong. (1991). To address this problem, Congress enacted the Stark Law (named for former Representative Pete Stark of California). See generally42 U.S.C. § 1395nn ; see also Medicare and Medicaid Programs; Physician's Referrals to Health Care Entities With Which They Have Financial Relationships, 63 Fed.Reg. 1659, 1718 (proposed Jan. 9, 1998). The Stark Law places restrictions on both the referring physicians and the hospitals. It prohibits a physician who has a “financial relationship” with a hospital from referring Medicare patients to that hospital.² It also bars hospitals from receiving Medicare payments based on these prohibited referrals. See 42 U.S.C. § 1395nn(a)(1)(A), (a)(1)(B), (h)(6)(K). For the Stark Law's purposes, a physician has a “financial relationship” with a hospital if she owns or invests in it, or if she has a compensation agreement with the hospital covering services, equipment, and the like. Id. § 1395nn(a)(2)(A)-(B), (h)(1).

Despite the general prohibition on potentially self-interested referrals, the Stark Law permits referrals by physicians to entities in which they have a financial interest in certain limited circumstances. It does so by excluding some forms of compensation agreements and ownership interests from the definition of “financial relationship,” thus allowing both the relationships and the referrals. See 42 U.S.C. § 1395nn(b) -(e). The provision at issue here is the equipment rental exception, under which physicians may 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. The lease must (1) be in writing; (2) assign use of the equipment exclusively to the hospital; (3) last for a term of at least one year; (4) set rental charges in advance that are consistent with fair market value and “not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties”; (5) satisfy the standard of commercial reasonableness even absent any referrals; and (6) meet “such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse.” 42 U.S.C. § 1395(e)(1)(B)(i)-(vi).

In 1998, the Secretary proposed a rule that would prevent a physician with an ownership interest in a group that leased equipment and performed procedures under contract with a hospital from referring Medicare patients to the hospital for those procedures. The proposed rule accomplished this by adopting a broader interpretation of the statutory language that prevents physicians from referring Medicare patients to an entity “for the furnishing of designated health services” when the physician and the entity have a financial relationship. 42 U.S.C. § 1395nn(a)(1)(A). Specifically, the proposed rule expanded the definition of an entity “furnishing” such services. The previous definition included only the party billing Medicare, usually the hospital where the procedures were performed. The new rule would extend to the party performing the procedures, including the third parties that contracted to perform outpatient procedures in hospital facilities. 63 Fed.Reg. at 1706. The proposed rule also altered the equipment rental exception by banning leases that charged the hospital for each use of the equipment—also referred to as leases with “per-click” payments—for patients referred by the physician-lessor. Id. at 1714.

To give an example of the regulatory scheme at work, prior to the proposed regulations, a single doctor could own laser equipment that she leased to a hospital, refer patients to that hospital for laser procedures, and profit each time the laser equipment was used. Because Medicare gives greater reimbursements for procedures performed at hospitals than for those same procedures performed in physicians' offices, it would be more profitable for a doctor to enter into such arrangements with a hospital than it would be for the doctor to purchase the laser for use in her own office. The Secretary's proposal forbade this practice. While a doctor could still own laser equipment and lease it to the hospital to which she referred her patients, she would only be permitted to receive time-based payments from the hospital, such as yearly or monthly...