Court Upholds CMS' Prohibition On 'Under-Arrangements' Transactions, Strikes Down CMS' Prohibition On 'Per-Click' Equipment Rental Arrangements

A 2008 rule change from the Centers for Medicare and Medicaid (CMS)—which effectively prohibited referring physician-owned companies from furnishing hospital services "under arrangements"—has withstood a challenge by a urology trade association. On June 12, 2015, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) held that the 2008 rule change, which redefined an "entity furnishing designated health services" to include entities that perform the services, not just bill for them, constituted a reasonable construction of the Stark Law and was entitled to deference. The appellate court, however, held that CMS' prohibition on "per-click" equipment rental arrangements lacked a rational basis in light of the agency's "tortured reading" of a relevant conference report, which, the court noted, was "the stuff of caprice." Accordingly, the court struck down CMS' 2008 prohibition on per-click equipment rental arrangements involving referring physician-owned equipment leasing companies.

Important Background and Context

The urology profession's litigious relationship with the secretary of the U.S. Department of Health and Human Services (Secretary), of which CMS is a part, goes back to at least the early 2000s. At that time, it took the Secretary to court over CMS' decision to treat lithotripsy—the process of breaking up kidney stones using high-energy sounds waves—as an inpatient or outpatient hospital service when billed by a hospital, and, thus, as one of the Stark Law's "designated health services" (DHS). Am. Lithotripsy Soc'y v. Thompson, 215 F. Supp. 2d 23 (D.D.C. 2002). Arguing that the legislative history of the Stark Law clearly evidenced congressional intent to exclude lithotripsy from the ambit of the Stark Law, two urologist trade associations prevailed in that litigation. This court decision would later become critical to the continued viability of lithotripsy under-arrangements transactions between urologist-owned lithotripsy companies and hospitals. (Under arrangements is a Medicare term of art referring to hospital subcontracting for facility/technical services to hospital patients, and the under-arrangements supplier is prohibited from billing any person or entity but the hospital for the services.) The urologist-owned lithotripsy companies had, for many years, furnished hospitals with the lithotripter (equipment that shoots high-energy sound waves) and technologist necessary for the performance of lithotripsy typically ordered and performed by the company's urologist-owners. Although there is some limited coverage and payment for...