The U.S. Court of Appeals for the District of Columbia Circuit issued an opinion June 12, 2015, lambasting the Centers for Medicare & Medicaid Services’ (“CMS”) rationale in implementing the ban on “per-click” space and equipment leases under the Stark Law. This ban, which went into effect Oct. 1, 2009, was effectively challenged by the Council for Urological Interests (“Council”), which was also behind the successful challenge against the application of the Stark Law to hospital lithotripsy services in 2002.

Among the more colorful descriptions used by the Court in describing CMS’s position were that it was “incomprehensible,” “tortured”, and “the stuff of caprice.” And on an even more scathing note, the Court described CMS’s reading of the legislative history of the Stark Law as belonging to the “cross-your-fingers-and-hope-it-goes-away school of statutory interpretation.”

Prefacing these less-than-kind statements, the Court provided a fairly detailed overview of the Stark Law and the specific type of arrangement at issue under the case – namely, a per-click equipment lease arrangement between a physician-owned group and a hospital, pursuant to which the physician group could potentially drive up lease payments based on the number of patients they refer to the hospital. The Court acknowledged CMS’s efforts to curb potential overutilization of Medicare resources through the implementation of the per-click ban in 2009, and indicated it would review the ban under the two-step process set forth by the Supreme Court in Chevron (Chevron USA Inc. v. Natural Resources Defense Council, Inc., 467 US 837 (1984)).

Under the first step, the Court reviewed whether Congress had directly spoken to the precise question at issue, or whether there was some ambiguity at play. After determining that some ambiguity did exist with respect to whether a per-click ban was intended by Congress, the Court turned to the second step in the analysis, which focused on whether CMS’s interpretation of the statutory construction was reasonable. And as evidenced by the above statements, the Court clearly felt that it was not.

The issue that seemed to offend the Court the most with respect to CMS’s interpretation was its reading of the legislative history related to the Stark Law, in which Congress indicated that “charges for space and equipment leases may be based on…time-based rates or rates based on units of services furnished, so long as the amount of time-based or units of service rates does not fluctuate during the contract period” (H.R. Rep. No. 103-213, 814 (1993)). In implementing the ban on per-click leases, CMS specifically referenced this legislative history, but essentially argued that such language did not apply to per-click leases where the total amount of rent is directly affected by the number of patients referred by one party to the other (73 FR 48434, 48716 (Aug. 19, 2008)). The Court pointedly noted the legislative history clearly referenced that per-click rates, not the total amount of rent as referenced by CMS, may not vary during the contract period.

After the Court’s criticism of CMS was complete, the opinion took an interesting turn. The Court remanded the case to the district court with instructions to remand to the Secretary/ CMS for “further proceedings consistent with this opinion.” The Court also stated that on remand, “the Secretary should consider – with more care than she exercised here – whether a per-click ban on equipment leases is consistent with the [legislative history].” Therefore, while the ban on per-click equipment leases arguably no longer applies, there is room for CMS to revisit the issue.

Interestingly enough, the opinion also dealt with a separate, but related, ban against “under arrangements” transactions that was implemented by CMS at the same time as the per-click ban. The under arrangements ban effectively prohibited many arrangements between physician-owned groups and hospitals where the group provided, but did not bill for, designated health services to the hospital. Although these types of arrangements were not necessarily outright banned, CMS brought many of these types of arrangements under the purview of the Stark Law by redefining the term “entity” to include both entities that bill and perform designated health services. As a result, physician groups that merely provide designated health services to hospitals now need to meet an exception to the Stark Law, which many cannot. Although the Council attempted to challenge this ban along with the per-click ban, it did not succeed on this front. The Court indicated, unlike the per-click regulations, the “under arrangements” regulations promulgated by CMS were in fact reasonable.

How CMS will choose to proceed next is unclear. While there is an opportunity for CMS to reinvent the per-click regulations to bring them in line with the Court’s opinion, it may decide it is not necessary to do so, particularly given that the ban against under arrangements transactions still stands. That is to say, a physician-owned group may now be permitted to lease equipment on a per-click basis to a hospital to which it refers, but it still would not be permitted to perform the services being referred. Although CMS does not appear to have commented directly on this case, it did issue proposed regulations regarding a number of other Stark exceptions about a month after the date the case was published. In commentary to these regulations, CMS specifically requested comments regarding whether additional guidance was needed within the industry due to litigation and judicial rulings related to the Stark Law (80 FR 41686, 41930 (July 15, 2015)). However, at the same time, it also proposed a new “time-share lease” exception that includes the same per-click ban the Court held was unenforceable (although CMS did solicit comments on whether or not this ban was necessary to protect program or patient abuse) (Id. at 41922). Hopefully, the newly proposed regulations will be finalized sooner than later, and ideally, CMS will take that opportunity to provide clarification on how it intends to treat per-click leases going forward.