District Court decision on Stark could have broad impact

Federal court opens the door to challenging Medicare regulations, some experts say

A U.S. federal court ruled last month that the Centers for Medicare & Medicaid Services (CMS) exceeded its authority by including lithotripsy services among the designated health services covered by the self-referral prohibition otherwise known as Stark. While the court’s decision means that Stark no longer applies to lithotripsy, its broader impact is that parties mounting a pre-emptory challenge to Medicare regulations may be more likely to obtain judicial review without first exhausting their administrative remedies, says Charles Oppenheim of the Los Angeles office of Foley & Lardner.

The U.S. District Court for the District of Columbia sided with plaintiffs from two trade associations representing urologists July 16 when it rejected CMS’ interpretation that lithotripsy, a noninvasive procedure performed by urologists to remove kidney stones, is covered by Stark. In addition, the court held that the plaintiffs were not required to exhaust their administrative remedies before obtaining judicial review.

In reaching its decision, the court allowed the plaintiffs to appear in federal court without first exhausting their administrative remedies because requiring plaintiffs to go through administrative channels would effectively deny them the opportunity for judicial review, says Oppenheim.

To determine whether plaintiffs were required to first seek an administrative hearing, the court relied on Shalala v. Illinois Council on Long-Term Care, notes Oppenheim. In that case, the Supreme Court refused to hear a case involving a challenge to CMS’ nursing home regulations because the plaintiff trade association and its member nursing homes had not exhausted administrative remedies.

According to Krista Callaghan, also of Foley & Lardner in Los Angeles, the Illinois Council court focused on the severity of the penalty incurred by a violation and the ability of plaintiffs’ members to access administrative review. It concluded that the administrative penalties were minor and that the plaintiff or its nursing home members could incur a small penalty and receive an administrative hearing before proceeding to federal court.

In this case, Callaghan says the court held that judicial review was warranted because the penalties for violating Stark II were so severe that the plaintiffs or their members could not risk incurring statutory penalties in order to challenge the regulations. Requiring the plaintiffs to exhaust their administrative remedies would have been tantamount to denying plaintiffs the ability to obtain judicial review, he explains.

Health care attorney Jeffrey Peters of Arent Fox in Washington, DC, says it is important to note that while this decision means that physicians may refer personally performed services to lithotripsy centers with which they have a financial interest without violating the Stark law, the referral of other inpatient or outpatient hospital services to hospitals by those physicians still may be prohibited by Stark.

For example, CMS would assert that lithotripsy provided "under arrangements" still will establish a "financial relationship" with the hospital. Peters says that in such instances, a urologist with an ownership interest in the lithotriptor still must meet a Stark exception in order to refer designated health services, (such as inpatient or outpatient l hospital services) to the hospital.

Peters cautions, however, that the Court’s decision has no bearing on the applicability of the federal anti-kickback statute to lithotriptor-related ventures. Moreover, the decision also does not alter the status of lithotripsy under many state self-referral laws, says Peters.

"Some state self-referral statutes apply to lithotripsy explicitly, and others may apply more broadly," he explains. "Significantly, many state self-referral prohibitions that could still cover lithotripsy may generally apply regardless of the identity of the payer for the service."

"This holding potentially expands the ability of providers and their trade associations to engage in anticipatory challenges to Medicare regulations that they believe to be invalid, especially if they seek to challenge Stark," says Oppenheim. Assuming the decision is not overturned on appeal, he says it is very helpful to providers who appeared to have little hope after the Illinois Council decision of challenging Medicare regulations in court until they first had exhausted their administrative appeals and incurred administrative penalties.