Not What the Doctor (or Congress) Ordered: DC Circuit Rules that HHS Must Reconsider Its Stark Law Interpretation

“Per-click” leases typically involve arrangements where equipment is leased by a physician(s) to a hospital that pays the physician a set amount every time the equipment is used. In Council for Urological Interests v. Burwell, D. DC, No. 13-5235 (June 12, 2015), the DC Circuit was asked to rule on whether HHS could interpret the Stark Law to prohibit the use of such per-click compensation despite legislative history to the contrary. In a majority opinion, containing often harsh language, the DC Circuit held that HHS failed to properly consider whether a ban on per-click compensation in equipment leases is consistent with the Stark Law’s legislative history, and instructed the district court to remand the matter to HHS for further proceedings on this issue.

Background

The Stark Law prohibits a physician from making referrals for designated health services to an entity with which the physician (or an immediate family member) has a financial relationship, unless there is an applicable exception. The Stark Law contains a statutory exception for equipment leases, which requires in part that rental charges over the term of the agreement are set in advance, consistent with fair market value, and not determined in a manner that takes into account the volume or value of referrals or other business generated between the parties. The exception also allows the HHS Secretary to impose additional regulatory requirements to protect against program or patient abuse.[1] As initially finalized in 2001, the implementing regulations did not limit the use of per-click compensation for equipment leases. However, in 2008, HHS promulgated new regulations that contained such a prohibition.[2]

The DC Circuit’s Decision

The DC Circuit concluded in Council for Urological Interests that while the Stark Law permits HHS to use regulations to supplement the statutory requirements for certain Stark Law exceptions, HHS did not appropriately consider the applicable legislative history when finalizing the 2008 prohibition on per-click compensation for equipment leases. In particular, the DC Circuit examined the 1993 Conference Report, which includes an explanation of the legislative language that the Houses of Congress agreed upon when negotiating the final version of that year’s amendment to the Stark Law. The DC Circuit noted that although HHS cited the Conference Report as an important source of statutory interpretation when promulgating Stark regulations in both 2001 and 2008, the substantive position HHS took in 2001 was at odds with its 2008 interpretation.

The DC Circuit described HHS’ 2008 interpretation of the Conference Report, where HHS asserted that it was allowed to prohibit per click compensation in equipment leases, as bordering on the “incomprehensible.” In rejecting HHS’s reasoning, the court stated that HHS’s “jargon is plainly not a reasonable attempt to grapple with the Conference Report; it belongs instead to the cross-your-fingers-and-hope-it-goes-away school of statutory interpretation.” The DC Circuit also called HHS’s review of the Conference Report a “tortured reading … [that] is the stuff of caprice.” Accordingly, the appellate court held that “the per-click ban fails at Chevron step two” and instructed the district court to remand the matter to HHS for further proceedings, stating that HHS should more carefully consider whether a per-click ban is consistent with the legislative history.[3]

Impact of the DC Circuit’s Decision

While the DC Circuit did not rule that the Stark Law definitely permits per-click arrangements, the ruling did strongly suggest that such arrangements could be a viable option. If HHS wishes to prohibit these arrangements, HHS will need to find a convincing way to reconcile this position with the seemingly contradictory legislative history.  Nevertheless, since a somewhat divided Court of Appeals (2 of the 3 judges separately dissented in part from the majority opinion) has sent the case back to the District Court for remand back to HHS for further review,  practitioners should be cautious about entering into per-click arrangements until HHS issues additional guidance on the matter.

The ruling is further notable because it indicates that challenging HHS’ implementation of the Stark Law can be a viable strategy under certain circumstances. Due to the complex nature of the Stark Law and its implementing regulations, courts often have deferred to HHS as the administrative agency charged with interpreting the law. Having the influential DC Circuit challenge HHS’s interpretation may be a very useful precedent.

[1] 42 U.S.C. §1395nn(e)(1)(B).  [2] 42 C.F.R. §411.357(b). [3] The DC Circuit upheld another section of the lower court’s opinion, finding that HHS’ position in the 2008 regulations expanding the definition of what constitutes an “entity furnishing designated health services” was a reasonable construction of the statute that is entitled to deference.