Court Opinion

ID: 2668183
Source: CourtListenerOpinion
Date Created: 2014-04-04 14:53:04.954675+00
Date Added: 2024-06-11T12:22:12.918549
License: Public Domain

UNITED STATES DISTRICT COURT
                            FOR THE DISTRICT OF COLUMBIA

                                         )
COLORADO HEART INSTITUTE,                )
LLC, et al.,                             )
                                         )
              Plaintiffs,                )
                                         )
       v.                                )             Civil Action No. 08-1626 (RMC)
                                         )
                          1
CHARLES E. JOHNSON, Acting               )
Secretary, U.S. Department of Health and )
Human Services,                          )
                                         )
              Defendant.                 )
                                         )

                                  MEMORANDUM OPINION

               The Stark Law, 42 U.S.C. § 1395nn, generally prohibits a physician from referring

Medicare patients to an “entity for the furnishing of designated health services” (“DHS”) where a

financial relationship exists between the physician and the entity. The Centers for Medicare &

Medicaid Services (“CMS”) currently interprets this statutory language to refer only to the entity that

directly bills Medicare for DHS. However, effective October 1, 2009, CMS will interpret this

language to also include a second entity that provides DHS to the first entity that directly bills

Medicare. Plaintiffs are physicians and physician-owned entities that provide DHS under contract

with hospitals in Colorado. Under CMS’s current interpretation, only the hospital – the billing entity

– is considered to be furnishing DHS and, therefore, the individual physician Plaintiffs can lawfully

       1
         Pursuant to Federal Rule of Civil Procedure 25(d), Charles E. Johnson is substituted as
Acting Secretary for his predecessor, Michael O. Leavitt, Secretary of the U.S. Department of Health
and Human Services.
refer their Medicare patients to the entities they own. But under CMS’s new interpretation, the

physician-owned entities that provide DHS under contract with the hospitals also will be considered

to be furnishing DHS. Consequently, absent an applicable exception, the Stark Law will prohibit

the individual physician Plaintiffs from referring their Medicare patients to their own entities.

Plaintiffs seek a declaration that CMS’s new interpretation of entities furnishing DHS is unlawful,

and move for summary judgment. Defendant moves to dismiss or, in the alternative, for summary

judgment. This Court lacks subject matter jurisdiction. Accordingly, it will grant Defendant’s

motion to dismiss and deny Plaintiffs’ motion for summary judgment.

                                         I. BACKGROUND

                Medicare is a federally funded program that subsidizes health insurance for the elderly

and disabled. See 42 U.S.C. § 1395 et seq. The Stark Law was enacted “to address the strain placed

on the Medicare Trust fund by the overutilization of certain medical services by physicians who, for

their own financial gain rather than their patients’ medical need, referred patients to entities in which

the physicians held a financial interest.” Am. Lithotripsy Soc’y v. Thompson, 215 F. Supp. 2d 23,

26 (D.D.C. 2002). To prevent such financial conflicts of interest from influencing medical decision-

making, the Stark Law sets out explicit prohibitions intended to restrict the ability of physicians to

profit from their own referrals. Specifically, the statute generally prohibits physicians from making

a referral to an “entity for the furnishing of designated health services”2 that will be paid by Medicare

        2
          In addition to inpatient and outpatient hospital services at issue here, the other categories
of DHS are clinical laboratory services; physical therapy services; occupational therapy services;
radiology services, including magnetic resonance imaging, computerized axial tomography scans,
and ultrasound services; radiation therapy services and supplies; durable medical equipment and
supplies; parenteral and enteral nutrients, equipment, and supplies; prosthetics, orthotics, and
prosthetic devices and supplies; home health services; outpatient prescription drugs; and outpatient
speech-language pathology services. See 42 U.S.C. § 1395nn(h)(6).

                                                  -2-
if the physician, or an immediate family member of the physician, has a “financial relationship”3 with

the entity.4 42 U.S.C. § 1395nn(a)(1)(A). In addition to the general prohibition on referrals, the

Stark Law provides that an “entity may not present or cause to be presented a claim” for Medicare

reimbursement of DHS referred in violation of the statute. Id. § 1395nn(a)(1)(B). The statute further

provides that no Medicare payments may be made for such services, and any amounts collected for

such services must be refunded. Id. § 1395nn(g)(1) & (2). An entity that knowingly presents or

causes to be presented a prohibited claim, or knowingly enters into a prohibited arrangement or

scheme, is subject to civil monetary penalties and liability under the False Claims Act, 31 U.S.C. §

3729 et seq. Id. § 1395nn(g)(3) & (4).5

               Plaintiffs in this case include: (i) three entities that provide diagnostic and therapeutic

cardiac catheterization and related services (“Cath Labs”); (ii) cardiologists and vascular surgeons

who perform and refer catheterization services in the Cath Labs and who have an ownership or

investment interest in one or more of the Cath Labs; (iii) a cardiology practice that is part owner of

the Cath Labs; and (iv) a company and its owner that provide management services to two of the

Cath Labs. See Am. Compl. ¶¶ 1-36. Under Medicare’s billing rules, only a hospital may bill for

       3
          A “financial relationship” is defined broadly to encompass either a “compensation
arrangement” or an “ownership or investment interest.” Id. § 1395nn(a)(2). A “compensation
arrangement” generally means “any arrangement involving any remuneration between a physician
(or an immediate family member of such physician) and an entity . . . .” Id. § 1395nn(h)(1)(A). An
“ownership or investment interest” includes an interest “through equity, debt, or other means and
includes an interest in an entity that holds an ownership or investment interest in any entity providing
the designated health service.” Id. § 1395nn(a)(2).
       4
        Specific statutory exceptions permit referrals even where an ownership or compensation
arrangement exists. See id. § 1395nn(b)-(e).
       5
        Criminal penalties may also apply under the “anti-kickback statute.” See 42 U.S.C.
§ 1320a-7b(b).

                                                  -3-
the cardiac catheterization services performed by the Cath Labs.             See Medicare Provider

Reimbursement Manual, Part I, Ch. 21, § 2118.1. As a result, the Cath Labs provide their services

to hospitals “under arrangements” in which the hospitals contract with the Cath Labs to provide

“nursing and technical personnel, equipment, drugs, and medical supplies” for the cardiac

catheterization services. Am. Compl. ¶¶ 42, 60. Each of the hospitals that has contracted with a

Cath Lab “establishes its own prices, negotiates reimbursement amounts with third-party payors, and

bills such payors including Medicare and Medicaid for all hospital services including those provided

under arrangement.” Id. ¶ 53. The hospitals then pay the Cath Labs a “flat fee for each service

provided.” Id. ¶ 52. The Cath Labs, in turn, distribute the earnings from the fees paid by the

hospitals “to the physician investors according to their ownership interests.” Id. ¶ 64. Due to

efficiencies, the Cath Labs can provide the cardiac catheterization services “at a lower cost than

could be provided by the hospitals.” Id. ¶ 54. “Accordingly, the hospitals profit by having these

services under arrangement.” Id. And because Medicare only reimburses hospitals for such services,

“only a very small percentage” of the Cath Labs’ revenues “are generated from services that could

be performed and billed from an independent outpatient facility.” Id. ¶ 43.

               The Secretary of Health and Human Services (“HHS”) has authority to promulgate

regulations implementing the Medicare program, including the Stark Law, see 42 U.S.C.

§§ 1395hh(a)(1) & 1395nn(b)(4), and has delegated his authority to CMS. Because the Stark Law

does not define when an entity furnishes DHS, it has been left to CMS to do so by regulation. Under

CMS’s current regulations, “[a] person or entity is considered to be furnishing DHS if it is the person

or entity to which CMS makes payment for the DHS, directly or upon assignment on the patient’s

behalf.” 42 C.F.R. § 411.351 (definition of “entity”). Accordingly, presently in an “under

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arrangements” transaction, only the hospital is considered to be an entity furnishing DHS; the entities

supplying DHS to the hospital, such as the Cath Labs, are not considered to be entities furnishing

DHS. Therefore, the Stark Law does not currently prohibit the individual physician Plaintiffs from

making referrals to the Cath Labs in which they have a financial interest.

               This will all change on October 1, 2009, when CMS’s final rule that Plaintiffs

challenge here takes effect. That rule provides that “[a] person or entity is considered to be

furnishing DHS if it is the person or entity that has performed services that are billed as DHS” or it

“is the person or entity that has presented a claim to Medicare for the DHS . . . .” Changes to

Physician Self-Referral Rules, 73 Fed. Reg. 48,434, at 48,751 (Aug. 19, 2008) (to be codified at 42

C.F.R. § 411.351 (definition of “entity”)). Thus, effective October 1, 2009, both the hospital and

the entities supplying DHS to the hospital, such as the Cath Labs, will be considered to be entities

furnishing DHS in an “under arrangements” transaction. Consequently, absent an applicable

exception, the Stark Law will prohibit the individual physician Plaintiffs from making referrals to

their own Cath Labs.

               Plaintiffs sue the Secretary of HHS in his official capacity seeking a declaration that

CMS’s broadened definition of an entity furnishing DHS “is contrary to clear congressional intent,

based on an impermissible construction of the Stark Law, arbitrary and capricious, and exceeds the

agency’s authority,” in contravention of the Administrative Procedure Act (“APA”), 5 U.S.C. § 551

et seq. Am. Compl. at 4-5 (Introduction). Plaintiffs assert that the Court has jurisdiction under

Section 702 of the APA, 5 U.S.C. § 702, and the general federal question statute, 28 U.S.C. § 1331.

Id. ¶ 38. They move for summary judgment. Defendant moves to dismiss for lack of subject matter

jurisdiction, or in the alternative, for summary judgment.

                                                 -5-
                                      II. LEGAL STANDARD

                Federal courts are courts of limited jurisdiction and the law presumes that “a cause

lies outside this limited jurisdiction.” Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377

(1994); St. Paul Mercury Indem. Co. v. Red Cab Co., 303 U.S. 283, 288-89 (1938). Because

“subject-matter jurisdiction is an ‘Art. III as well as a statutory requirement[,] no action of the parties

can confer subject-matter jurisdiction upon a federal court.’” Akinseye v. District of Columbia, 339

F.3d 970, 971 (D.C. Cir. 2003) (quoting Ins. Corp. of Ir., Ltd. v. Compagnie des Bauxite de Guinea,

456 U.S. 694, 702 (1982)). On a motion to dismiss for lack of subject-matter jurisdiction pursuant

to Rule 12(b)(1), the plaintiff bears the burden of establishing that the court has subject-matter

jurisdiction. Kokkonen, 511 U.S. at 377.

                Because subject-matter jurisdiction focuses on the court’s power to hear the claim,

however, the court must give the plaintiff’s factual allegations closer scrutiny when resolving a Rule

12(b)(1) motion than would be required for a Rule 12(b)(6) motion for failure to state a claim.

Macharia v. United States, 334 F.3d 61, 64, 69 (D.C. Cir. 2003); Grand Lodge of Fraternal Order

of Police v. Ashcroft, 185 F. Supp. 2d 9, 13 (D.D.C. 2001). Moreover, the court is not limited to the

allegations contained in the complaint. Hohri v. United States, 782 F.2d 227, 241 (D.C. Cir. 1986),

vacated on other grounds, 482 U.S. 64 (1987). Instead, to determine whether it has jurisdiction over

the claim, the court may consider materials outside the pleadings. Herbert v. Nat’l Acad. of Scis.,

974 F.2d 192, 197 (D.C. Cir. 1992).

                                                   -6-
                                         III. ANALYSIS

               Plaintiffs assert that the Court has jurisdiction under Section 702 of the APA, 5

U.S.C. § 702, and the general federal question statute, 28 U.S.C. § 1331. Am. Compl. ¶ 38.

However, Section 702 of the APA does not provide an independent basis for jurisdiction. See

Califano v. Sanders, 430 U.S. 99, 107-07 (1977) (concluding that the “APA does not afford an

implied grant of subject-matter jurisdiction permitting federal judicial review of agency action”).

Thus, jurisdiction lies, if at all, under 28 U.S.C. § 1331. See Robbins v. Reagan, 780 F.2d 37, 42-43

(D.C. Cir. 1985).

               Section 405(h) of the Social Security Act, made applicable to the Medicare Act by

42 U.S.C. § 1395ii, provides:

               No action against the United States, the [Secretary of Health and
               Human Services], or any officer or employee thereof shall be brought
               under section 1331, or 1346 of title 28 to recover on any claim arising
               under [the Medicare Act].

42 U.S.C. § 405(h). “This bar against § 1331 actions applies to all claims that have their ‘standing

and substantive basis’ in the Medicare Act.” Am. Chiropractic Ass’n, Inc. v. Leavitt, 431 F.3d 812,

816 (D.C. Cir. 2005) (quoting Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1, 11

(2000)). As this Court recently explained, in Illinois Council the Supreme Court held that “Section

405(h) of the Medicare Act precluded review under the general federal question jurisdiction of

Section 1331 and required that the claim be exhausted through HHS’s administrative claims process

before it could be heard in federal court.” Atl. Urological Assocs., P.A. v. Leavitt, 549 F. Supp. 2d

20, 29 (D.D.C. 2008). “In other words, Section 405(h) mandates the ‘‘channeling’ of virtually all

legal attacks through the agency.’” Id. (quoting Ill. Council, 529 U.S. at 13).

                                                -7-
               “Although § 1395ii, which incorporates § 405(h), would appear to preclude all

Medicare suits founded on general federal question jurisdiction, the Supreme Court has recognized

an exception: if the claimant can obtain judicial review only in a federal question suit, § 1395ii will

not bar the suit.” Am. Chiropractic, 431 F.3d at 816 (citing Ill. Council, 529 U.S. at 10-13). “The

question therefore is whether [Plaintiffs] could get [their] claim[] heard administratively and whether

[they] could receive judicial review after administrative channeling.” Id.

               It is undisputed that Plaintiffs could not themselves bring an administrative challenge

before HHS because they cannot directly bill or receive payments from Medicare for DHS. See Am.

Compl. ¶ 100; Def.’s Mot. to Dismiss & Cross Mot. for Summ. J. at 14. It also is undisputed that

the hospitals with which the Cath Labs contract – the entities that directly bill and receive payments

from Medicare for DHS – could, if they so chose, bring an administrative challenge before HHS and

get judicial review of HHS’s determination. See 42 C.F.R. Part 405, Subpart I; 42 U.S.C.

§ 1395ff(b).6 The issue, then, is whether the hospitals’ ability to get administrative and judicial

review of CMS’s expanded interpretation of entities furnishing DHS ousts the Court of jurisdiction

over Plaintiffs’ claim.

               In American Chiropractic, an association of chiropractors sought to challenge a

Medicare regulation that permitted HMOs to require patients to obtain a referral from a doctor or

osteopath in order to receive covered chiropractic services. In finding that the district court lacked

       6
          In cases involving a facial challenge to the validity of a regulation or statutory provision,
the hospitals may request expedited judicial review so that the legal challenge may be decided more
quickly. See 42 U.S.C. § 1395ff(b)(2); 42 C.F.R. § 405.990. Moreover, Defendant has assured the
Court that the hospitals will be able to bring an administrative challenge without risk of incurring
sanctions. See Defs.’Mot. to Dismiss & Cross Mot. for Summ. J. at 16-17. Plaintiffs have given the
Court “no convincing reason to doubt the Secretary’s description of the agency’s general practice.”
 Ill. Council, 529 U.S. at 22.

                                                 -8-
Section 1331 jurisdiction over that claim, the D.C. Circuit noted that one way the chiropractors could

get their claim heard administratively was indirectly through a patient filing a grievance with the

HMO claiming that the referral requirement was illegal. 431 F.3d at 816. If a patient were to do so,

then the patient’s filing “would trigger the administrative process” and the chiropractors’ claim could

get heard indirectly through the patient’s filing. Id. at 817. The association of chiropractors also

sought to challenge a Medicare regulation that permitted medical doctors and osteopaths, in addition

to chiropractors, to perform a specific covered service. The court held that the district court lacked

Section 1331 jurisdiction over that claim as well because the chiropractors could get their claim

heard administratively if (1) an HMO provided that only medical doctors and osteopaths could

perform the service; (2) a patient in such an HMO enlisted the services of a chiropractor; (3) the

patient (or the chiropractor as the patient’s assignee) filed an administrative claim arguing that the

HMO must cover the service (or reimburse the chiropractor); and (4) the HMO defended on the

ground that another Medicare regulation entitles it to restrict the type of practitioners who may

provide a service. See id. The court held that under that chain of events:

                [t]he HMO’s invocation of this provision would squarely present the
               question whether medical doctors and osteopaths, as well as
               chiropractors, are “qualified to furnish” the service . . . . It follows
               that chiropractors could receive an administrative decision on the
               issue presented . . . and that under Illinois Council the district court
               had no jurisdiction to decide that claim.

Id. at 817-18. The court reached that conclusion despite acknowledging that just 22 percent of

HMOs required the service to be performed by medical doctors or osteopaths only, and that

chiropractors with patients in the remaining 78 percent of HMOs would have no means of getting

their claim heard administratively or judicially. See id. at 817.

                                                 -9-
               Against this backdrop, the Court finds that it lacks jurisdiction over Plaintiffs’ claim.

Any one of the hospitals “under arrangement” with a Cath Lab could get administrative and judicial

review of CMS’s expanded interpretation of entities furnishing DHS, the issue presented by

Plaintiffs’ claim here. Like the chiropractors in American Chiropractic whose claims could be heard

indirectly through their patients, the physicians and physician-owned Cath Labs here could have their

claim heard indirectly through a hospital with which they contract. Because Plaintiffs could get their

claim heard administratively and could get judicial review after administrative channeling, the Court

has no Section 1331 jurisdiction over Plaintiffs’ claim.

               Plaintiffs argue that American Chiropractic is distinguishable because “the court

found that the plaintiff association of chiropractors could ‘get its claim heard’ because its members

had direct access to administrative review as the assignee of their patients.” Pls.’ Opp’n to Def.’s

Mot. to Dismiss at 10. While it is true that the court noted that the chiropractors could also get their

claim heard directly by waiving any right to payment from the patient and becoming the patient’s

assignee, see 431 F.3d at 817, there would have been no reason for the court to discuss how the

chiropractors could get their claim heard indirectly through the patient if the only relevant inquiry

was whether the chiropractors themselves could challenge the referral requirement directly. See

Nat’l Athletic Trainers’ Ass’n, Inc. v. HHS, 455 F.3d 500, 504 (5th Cir. 2006) (“Unlike the

chiropractors in American Chiropractic, the athletic trainers here are not service providers, therefore

they cannot become assignees of the patients. Nevertheless, the American Chiropractic court

considered both the patient’s and the chiropractor’s rights to pursue administrative review.”).

Plaintiffs’ lack of a direct avenue to administrative review through an assignment does not mean that

they could not get their claim heard. As the Fifth Circuit has explained:

                                                 -10-
               We are not persuaded that the inability to acquire the physician or
               beneficiary’s right to administrative review ends our inquiry; “the
               question is whether, as applied generally to those covered by a
               particular statutory provision, hardship likely found in many cases
               turns what appears to be simply a channeling requirement into
               complete preclusion of judicial review.” Accordingly, in deciding
               whether the Illinois Council exception applies, we must consider
               whether the claim may ultimately be subject to review after
               proceeding through administrative channels.

Id. at 504-05 (citations omitted) (emphasis in original).

               Plaintiffs argue that the hospitals are not adequate proxies because they have no

incentive to channel the claim administratively and because they face their own roadblocks to the

administrative review process. In support of their argument that the Court has jurisdiction absent

an adequate proxy for their claim, Plaintiffs cite American Lithotripsy Society v. Thompson, 215 F.

Supp. 2d 23 (D.D.C. 2002). But that decision issued before the D.C. Circuit’s decision in American

Chiropractic. The American Lithotripsy court specifically relied on the reasoning of the district

court in American Chiropractic in finding jurisdiction because there was an inadequate proxy, see

215 F. Supp. 2d at 29-30, reasoning that the D.C. Circuit omitted when it reversed the district court

in American Chiropractic. See 431 F.3d at 817-18. Tellingly, in finding that the district court lacked

Section 1331 jurisdiction over the chiropractors’ claims in American Chiropractic, the D.C. Circuit

did not analyze whether the patients were adequate proxies for the chiropractors’ claims. There was

no discussion of the patients’ incentive to bring an administrative claim or the chiropractors’

roadblocks to obtaining administrative review. It was enough “that chiropractors could receive an

administrative decision on the issue presented ” if an HMO disallowed chiropractors to perform the

service (only 22 percent did), a patient in such an HMO enlisted the services of a chiropractor, and

the patient (or the chiropractor as assignee) filed a claim Id. at 817 (emphasis added).

                                                -11-
               The Court recognizes that the Fifth Circuit has looked to see not only whether a

plaintiff’s claim could be heard administratively but also whether the third party with the means to

bring the claim before the agency has the necessary incentive to do so. See Nat’l Athletic, 455 F.3d

at 505-08. However, the Fifth Circuit relied on American Lithotripsy. See id. at 505. As discussed

above, American Lithotripsy relied on the reasoning of the district court in American Chiropractic

that the D.C. Circuit omitted when it reversed the district court. Accordingly, while Fifth Circuit law

might require a third party to have both the means and the incentive to file an administrative claim,

that does not appear to be the law in this Circuit. But even if it were, the Court finds that the

hospitals have the necessary incentive to file an administrative claim here because the Cath Labs

provide the cardiac catheterization services “at a lower cost than could be provided by the hospitals”

and “the hospitals profit by having these services under arrangement.” Am. Compl. ¶ 54. Assuming

Plaintiffs’ allegations to be true, then the hospitals have sufficient incentive to challenge CMS’s

expanded interpretation of entities furnishing DHS.

                                      IV. CONCLUSION

               For the foregoing reasons, this Court lacks jurisdiction. Accordingly, the Court will

grant Defendant’s motion to dismiss [Dkt. # 17], deny Plaintiffs’ motion for summary judgment

[Dkt. # 13], and deny as moot Defendant’s motion for summary judgment [Dkt. # 16]. A

memorializing Order accompanies this Memorandum Opinion.

Date: April 20, 2009                                        /s/
                                                   ROSEMARY M. COLLYER
                                                   United States District Judge

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