The U.S. Department of Health and Human Services (“HHS”) will be heading back to District Court—and likely the drawing board altogether—to grapple with a recent federal court holding that the Medicare equipment lease rule is probably illegal.

The final rule, issued in 2008, effectively prohibits physicians who lease medical equipment to hospitals from referring their Medicare patients to these same hospitals for outpatient care involving that equipment. It is designed to prevent doctors from profiting from self-referrals.

Under the rule, a physician may lease medical equipment to a hospital and may refer patients to that hospital for tests using that equipment, but the physician must then accept payment for the equipment lease on a monthly or yearly basis, instead of on a “per click” or “per use” basis.

The Council of Urological Interests—a not-for-profit association of physicians who participate in leasing agreements with hospitals—challenged the rule in 2009, alleging that it exceeds HHS’s statutory authority. They believe that “per click” leases are permitted under the law.

In an opinion handed down late last week, the D.C. Circuit indicated that HHS misconstrued the legislative history of the federal Stark Law, and the rule as a result exceeds HHS’s statutory authority.

HHS maintained that its rule was consistent with the purpose of the Stark Law. And in 2013, the U.S. District Court for the District of Columbia agreed—holding that the rule was within the bounds of the Stark Law.

However, Friday’s D.C. Circuit ruling partially overturns that earlier decision. While the appellate court acknowledged that the text of the Stark Law alone supports the rule, it is nonetheless inconsistent with a House Conference Report from 1993 interpreting the Stark Law, which the preamble to the final rule recognized as an important source of statutory interpretation. The majority opinion suggested that the Secretary of HHS “should consider—with more care than she exercised here—whether a per-click ban on equipment leases is consistent with the 1993 Conference Report.”

Judge Thomas B. Griffith filed a dissenting opinion, agreeing in principle with the majority but concluding that the Council for Urological Interests failed to timely raise the argument.

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