A federal trial court turned down a challenge brought by a group of physicians and physician-owned entities to a recent change in the federal self-referral rules that doctors worry could harm patient care.

The Stark law generally prohibits physicians from referring patients to entities in which they have a financial stake. Centers for Medicare & Medicaid Services rules now interpret an entity to include only the party that directly bills Medicare for designated health services. But as of Oct. 1, CMS will use the term entity more broadly to include those providing the services billed to Medicare. This policy change was detailed in a final rule released in August 2008.

The plaintiffs in the case were a group of cardiologists and surgeons providing cardiac catheterization services to local hospitals via the labs the physicians own. The hospital, which does not have any ownership interest in the labs, would bill Medicare for the services and then pay the labs a flat fee. The new rule change, however, effectively will bar such physician-hospital joint ventures because both the hospital and the physician groups will be considered entities providing designated health services, rendering any referrals illegal.

The physician groups sued the Dept. of Health and Human Services, claiming that the rule change violated the intent of the Stark law, which provides exceptions for such arrangements as long as they meet certain criteria. The compensation must be fair market value and not based on referral volumes, among other requirements.

"There has been a long-accepted practice of these kinds of service agreements with hospitals. Now CMS ... took a class of health care providers and essentially wrote them out of business," said Thomas S. Crane, lead counsel for the plaintiffs.

But without addressing the merits of the case, the U.S. District Court for the District of Columbia said it did not have the authority to rule on the action because Medicare rules require parties first to pursue an administrative appeal.

That puts the physicians in a tough spot, Crane said. Since the doctors cannot directly bill or receive payments from Medicare under such arrangements, they do not have standing to bring an administrative claim.

"Under this decision, no physician [in these types of arrangements] can ever challenge a Stark law regulation," Crane said. The physicians decided not to appeal the decision and instead plan to seek a regulatory change.

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