United States Court of Appeals, District of Columbia Circuit
Argued: September 24, 2014.
Appeal from the United States District Court for the District of Columbia. (No. 1:09-cv-00546).
Gordon A. Coffee argued the cause for appellant. With him on the briefs were Thomas L. Mills, Steffen N. Johnson, and Erica E. Stauffer.
Jeffrey E. Sandberg, Attorney, U.S. Department of Justice, argued the cause for appellees. With him on the brief were Stuart F. Delery, Assistant Attorney General, Ronald C. Machen Jr., U.S. Attorney, and Michael S. Raab, Attorney. Christine N. Kohl, Attorney, entered an appearance.
Before: HENDERSON, ROGERS, and GRIFFITH, Circuit Judges. OPINION on Parts I, II.A, III, IV, and V filed by Circuit Judge GRIFFITH. OPINION on Part II.B filed by Circuit Judge HENDERSON. Opinion dissenting from Part II.A filed by Circuit Judge HENDERSON. Opinion dissenting from Part II.B filed by Circuit Judge GRIFFITH.
GRIFFITH; KAREN LECRAFT HENDERSON
The Secretary of Health and Human Services issued regulations that effectively prohibit physicians who lease medical equipment to hospitals from referring their Medicare patients to these same hospitals for outpatient care involving that equipment. The regulations accomplish this through two separate provisions. The first prohibits physicians from charging hospitals for leased equipment on a per-use basis when the physicians also refer patients to the hospital for procedures using that equipment. The second interprets the relevant statute to apply to physician-groups that perform procedures rather than only the entities that bill Medicare. Challenging the regulations here is an association of physicians who participate in leasing agreements with hospitals, under which they charge hospitals for equipment on a per-use basis and perform the procedures using the equipment. The association argues that the regulations exceed the Secretary's statutory authority and violate both the Administrative Procedure Act and the Regulatory Flexibility Act. The district court granted the Secretary's motion for summary judgment. Although one majority agrees with the district court that the statute is ambiguous as to the regulation of leases that charge on a per-use basis (Part II.A), a different majority concludes that the Secretary's explanation for prohibiting these leases is unreasonable (Part II.B). The court unanimously concludes that the Secretary's interpretation of the statute to apply to the physician-groups performing the procedures is reasonable (Part III), and that the Secretary complied with the Regulatory Flexibility Act (Part IV). We therefore affirm in part, reverse in part, and remand to the district court with instructions to remand the regulation relating to leases charging by use to the Secretary for further proceedings.
This case involves the interplay between complicated statutory provisions and regulations.
Resolving the questions before us requires that we undertake a sometimes arduous journey through the tangled regime. We begin our slog with a look at the Medicare program.
Medicare provides federally funded health insurance to disabled persons and those aged 65 or older for various services, including the outpatient hospital procedures at issue here. 42 U.S.C. § § 1395 et seq. In addition to paying the performing physician a fee that covers her services for the outpatient care, see generally 42 U.S.C. § § 1395w-4, 1395x(s)(1); 42 C.F.R. § § 410.20, 414.32, Medicare also pays the hospital a fee that covers charges for space, equipment, supplies, diagnostic testing, and the services of any non-physician personnel, 42 U.S.C. § 1395 l (t); 42 C.F.R. pt. 419. Typically a hospital will have an employee perform the outpatient procedures using its own equipment, but Medicare also permits hospitals to contract with third parties to provide such outpatient services. See 42 U.S.C. § 1395x(w)(1); 42 C.F.R. § 410.42(a). Under these agreements, the third party provides equipment and technicians for a procedure while the hospital provides space and support services, pays for the lease of the equipment, and bills Medicare.
The members of the association challenging the regulations here have just this kind of relationship with hospitals. These arrangements are attractive to them because Medicare reimburses outpatient procedures that take place in hospitals at higher rates than if they were performed elsewhere. Compare 42 C.F.R. § 419.2(b) (listing eighteen categories of costs Medicare covers for outpatient hospital procedures), with 42 C.F.R. § 416.61(a) (listing eight categories of costs Medicare covers in ambulatory surgical centers).
This disparity creates a financial incentive for physicians to make referrals based more on maximizing their income than on maximizing the Medicare patient's well-being. For example, suppose a physician has an ownership interest in a hospital laboratory that diagnoses various illnesses. The physician profits by sending his Medicare patient to that hospital to undergo the diagnostic tests. The patient, by contrast, has little financial incentive to limit the cost of the tests, as Medicare covers most of the costs. This imbalance in interests can lead to a physician ordering a battery of unnecessary tests. In fact, a 1991 study showed this very outcome where Florida physicians had ownership interests in diagnostic clinics. See Joint Ventures Among Health Care Providers in Florida: Hearing Before the H. Subcomm. on Health of the H. Comm. on Ways and Means, 102d Cong. (1991). To address this problem, Congress enacted the Stark Law (named for former Representative Pete Stark of California). See generally 42 U.S.C. § 1395nn;
see also Medicare and Medicaid Programs; Physician's Referrals to Health Care Entities With Which They Have Financial Relationships, 63 Fed.Reg. 1659, 1718 (proposed Jan. 9, 1998). The Stark Law places restrictions on both the referring physicians and the hospitals. It prohibits a physician who has a " financial relationship" with a hospital from referring Medicare patients to that hospital. It also bars hospitals from receiving Medicare payments based on these prohibited referrals. See 42 U.S.C. § 1395nn(a)(1)(A), (a)(1)(B), (h)(6)(K). For the Stark Law's purposes, a physician has a " financial relationship" with a hospital if she owns or invests in it, or if she has a compensation agreement with the hospital covering services, equipment, and the like. Id. § 1395nn(a)(2)(A)-(B), (h)(1).
Despite the general prohibition on potentially self-interested referrals, the Stark Law permits referrals by physicians to entities in which they have a financial interest in certain limited circumstances. It does so by excluding some forms of compensation agreements and ownership interests from the definition of " financial relationship," thus allowing both the relationships and the referrals. See 42 U.S.C. § 1395nn(b)-(e). The provision at issue here is the equipment rental exception, under which physicians may both lease equipment to a hospital and refer their Medicare patients to that hospital for procedures using the equipment so long as the leasing agreement meets certain conditions. The lease must (1) be in writing; (2) assign use of the equipment exclusively to the hospital; (3) last for a term of at least one year; (4) set rental charges in advance that are consistent with fair market value and " not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties" ; (5) satisfy the standard of commercial reasonableness even absent any referrals; and (6) meet " such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse." 42 U.S.C. § 1395nn(e)(1)(B)(i)-(vi).
In 1998, the Secretary proposed a rule that would prevent a physician with an ownership interest in a group that leased equipment and performed procedures under contract with a hospital from referring Medicare patients to the hospital for those procedures. The proposed rule accomplished this by adopting a broader interpretation of the statutory language that prevents physicians from referring Medicare patients to an entity " for the furnishing of designated health services" when the physician and the entity have a financial relationship. 42 U.S.C. § 1395nn(a)(1)(A). Specifically, the proposed rule expanded the definition of an entity " furnishing" such services. The previous definition included only the party billing Medicare, usually the hospital where the procedures were performed. The new rule would extend to the party performing the procedures, including the third parties that contracted to perform outpatient procedures in hospital facilities. 63 Fed.Reg. at 1706. The proposed rule also altered the equipment rental exception by banning leases that charged the hospital for each use of the equipment--also referred to as leases with " per-click" payments--for patients referred by the physician-lessor. Id. at 1714.
To give an example of the regulatory scheme at work, prior to the proposed regulations, a single doctor could own laser equipment that she leased to a hospital, refer patients to that hospital for laser procedures, and profit each time the laser equipment was used. Because Medicare gives greater reimbursements for procedures performed at hospitals than for those same procedures performed in physicians' offices, it would be more profitable for a doctor to enter into such arrangements with a hospital than it would be for the doctor to purchase the laser for use in her own office. The Secretary's proposal forbade this practice. While a doctor could still own laser equipment and lease it to the hospital to which she referred her patients, she would only be permitted to receive time-based payments from the hospital, such as yearly or monthly charges. The frequency of laser usage would have no bearing on the doctor's profit, so she would no longer have a financial incentive to refer patients to the hospital for laser procedures. By the same token, a physician with an ownership interest in a group that leased laser equipment and performed laser procedures under contract with a hospital could no longer refer patients to the hospital for such procedures.
After considering comments, the Secretary decided against including either of these proposed alterations in the rule promulgated in 2001. Instead, the final rule provided that an entity is " furnishing designated health services" only if it is the entity that actually bills Medicare for the services. See Medicare and Medicaid Programs; Physicians' Referrals to Health Care Entities With Which They Have Relationships, 66 Fed.Reg. 856, 943 (Jan. 4, 2001). Physicians with an ownership interest in a group that contracted with a hospital could continue to refer patients to the hospital because any such groups performing the procedures and supplying the equipment were not billing Medicare. The 2001 rule also continued to allow leases with per-click payment terms. Id. at 876. Even so, the preamble to the regulation explained that the Secretary continued to be concerned that contractual arrangements between physician-owned groups and hospitals " could be used to circumvent" the Stark Law, id. at 942, and also recognized the " obvious potential for abuse" in per-click payments, id. at 878. In both cases, the Secretary advised that she would monitor the arrangements and reconsider the decision if necessary. Id. at 942, 860.
That reconsideration came in 2007 with another notice of proposed rulemaking. The Secretary again proposed banning per-click leases and forbidding physicians from making referrals to hospitals for procedures to be performed by a group practice in which the physician has an ownership interest. See Medicare Program; Proposed Revisions to Payment Policies, 72 Fed.Reg. 38,122 (proposed July 12, 2007). This time, the Secretary adopted both proposed regulations with minimal changes in 2008. See Medicare Program; Changes to Disclosure of Physician Ownership in Hospitals and Physician Self-Referral Rules, 73 Fed.Reg. 48,434 (Aug. 19, 2008). According to the new rule, an entity that either performs or bills for designated health services is considered to be " furnishing" such services, meaning that physicians with ownership interests in groups that perform outpatient services in hospitals cannot refer patients for the procedures. See 42 C.F.R. § 411.351. With respect to the equipment rental exception, the rule states that the lease may not use per-click rates. 42 C.F.R. § 411.357(b)(4)(ii)(B). Thus, under the regulations challenged here, a physician-
owned group that contracts to lease equipment to a hospital cannot do so on a per-click basis while referring patients to that hospital for procedures using the equipment. Nor can a physician with an ownership interest in the group refer patients for outpatient procedures in a hospital where the group performs the procedures, unless she qualifies for one of the narrow ownership exceptions. See, e.g., 42 U.S.C. § 1395nn(d)(2) (exempting rural providers).
The Council for Urological Interests is made up of a group of joint ventures principally owned by urologists. These joint ventures lease laser technology to hospitals. Urologists generally prefer to furnish their services in a hospital because of the higher reimbursement rate available there. The Council contends that the lower rate paid for its members' services outside a hospital is insufficient to cover the cost of the equipment. Thus, to make the purchase of laser equipment economically viable, the urologists enter into agreements with a hospital, where the hospital pays the joint venture for the equipment on a per-click basis. The new regulation the Council challenges prohibits these arrangements.
The Council filed this action in March 2009, alleging that the 2008 rule exceeded the Secretary's authority under the Administrative Procedure Act (APA) and violated the procedural requirements of the Regulatory Flexibility Act (RFA). The Secretary moved to dismiss the complaint for lack of subject-matter jurisdiction, arguing that challenges to the regulation must be raised through the agency's administrative procedures before they can be raised in court. The district court granted the motion, but this court reversed. Because the statute only permits Medicare " providers" who bill Medicare to seek administrative review, the Council and other affected parties who provided services but did not bill Medicare lacked access to administrative review. Under these circumstances, we held that requiring the use of administrative procedures would result in the " complete preclusion of judicial review." See Council for Urological Interests v. Sebelius, 668 F.3d 704, 713-14, 399 U.S.App.D.C. 159 (D.C. Cir. 2011) (quoting Shalala v. Ill. Council on Long Term Care, Inc., 529 U.S. 1, 22-23, 120 S.Ct. 1084, 146 L.Ed.2d 1 (2000)). On remand, the parties filed cross-motions for summary judgment. The district court granted the government's motion, concluding that the agency regulations were entitled to Chevron deference and that the agency's construction of the statute was a reasonable one. See Council for Urological Interests v. Sebelius, 946 F.Supp.2d 91, 112 (D.D.C. 2013). The district court also rejected the Council's claims under the RFA, finding that the Council had conceded a crucial portion of the Secretary's argument by failing to provide a response. See id. The Council timely appealed both the APA and RFA claims. On appeal, the Council argues that the text and legislative history of the Stark Law preclude the Secretary from banning physicians who refer patients to a hospital from leasing equipment to that hospital on a per-click basis. The Council also argues that the Secretary unreasonably interpreted the statute to forbid physicians from referring patients to a hospital for procedures performed by a group in which the physician has an ownership interest. Finally, the Council argues that the Secretary failed to complete the requisite regulatory flexibility analysis called for by the RFA. We have jurisdiction under 28 U.S.C. § 1291.
" We review a grant of summary judgment de novo applying the same standards as those that govern the district court's
determination." Troy Corp. v. Browner, 120 F.3d 277, 281, 326 U.S.App.D.C. 249 (D.C. Cir. 1997).
When Congress gives an agency authority to interpret a statute, we review the agency's interpretation under the deferential two-step test set forth in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). See Troy Corp., 120 F.3d at 283. At step one, to determine whether Congress has directly spoken to the precise question at issue, we use " the traditional tools of statutory interpretation." Consumer Elecs. Ass'n v. FCC, 347 F.3d 291, 297, 358 U.S.App.D.C. 180 (D.C. Cir. 2003) (internal quotation marks omitted). If it is clear that Congress has addressed the issue, we give effect to congressional intent. If the statute is silent or ambiguous on the matter, we move to a second step that asks whether the agency's interpretation is " based on a permissible construction of the statute." Chevron, 467 U.S. at 843. An interpretation is permissible if it is a " reasonable explanation of how an agency's interpretation serves the statute's objectives." Northpoint Tech., Ltd. v. FCC, 412 F.3d 145, 151, 366 U.S.App.D.C. 363 (D.C. Cir. 2005). If the agency's construction is reasonable, we defer. See Chevron, 467 U.S. at 842-43.
" We begin, as always, with the plain language of the statute in question." Citizens Coal Council v. Norton, 330 F.3d 478, 482, 356 U.S.App.D.C. 214 (D.C. Cir. 2003). The Council argues that the Stark Law expressly permits per-click rates for equipment rentals and that the Secretary thus lacked authority to ban per-click leases. The Council points to language in a clause of the equipment rental exception that permits equipment lease arrangements when " rental charges over the term of the lease are set in advance, are consistent with fair market value, and are not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties." 42 U.S.C. § 1395nn(e)(1)(B)(iv). This rental-charge clause, the Council argues, means that per-click rates are necessarily permissible so long as they meet these requirements. Per-click charges pass muster, according to the Council, because a charge based on use can be set in advance and be consistent with fair market value, and the charge would not take into account volume or value of referrals when the per-use charge is stable across the leasing period, rather than increasing after a certain number of uses. The Council is wrong. Its argument ignores the remaining requirements of the equipment rental exception. Importantly, the final clause states that the lease must also " meet such other requirements as the Secretary may impose by regulation as needed to protect against program or patient abuse." 42 U.S.C. § 1395nn(e)(1)(B)(vi). The Secretary explicitly relied on this authority in promulgating the regulation forbidding per-click payments. See 42 C.F.R. § 411.357(b)(4)(ii)(B). Because any lease must comply with the listed rental charge requirements and any further requirements the Secretary adds, the fact that per-click leases comply with the rental charge requirements alone is ...