Physician Hospitals of Am. v. Sebelius

• Citation: 781 F.Supp.2d 431
• Decision Date: 31 March 2011
• Docket Number: No. 6:10–cv–277.,6:10–cv–277.
• Parties: PHYSICIAN HOSPITALS OF AMERICA and Texas Spine & Joint Hospital, Ltd.v.Kathleen SEBELIUS, in her official capacity as Secretary of the United States Department of Health and Human Services.
• Court: United States District Courts. 5th Circuit. United States District Court of Eastern District Texas

781 F.Supp.2d 431

PHYSICIAN HOSPITALS OF AMERICA and Texas Spine & Joint Hospital, Ltd.

v.Kathleen SEBELIUS, in her official capacity as Secretary of the United States Department of Health and Human Services.

No. 6:10–cv–277.

United States District Court, E.D. Texas, Tyler Division.

March 31, 2011.

Lindsey Scott Birdsong, Birdsong & Armstrong PC, Tyler, TX, Blake E. Armstrong, Scott Charles Oostdyk, Virginia Leigh Hudson, McGuire Woods, Richmond, VA, Victor L. Moldovan, McGuirewoods LLP, Atlanta, GA, for Physician Hospitals of America and Texas Spine & Joint Hospital, Ltd.Kimberly L. Herb, Scott Risner, Sheila M. Lieber, Jim J. Marquez, Marquez & Associates, Washington, DC, Robert Austin Wells, U.S. Attorney's Office, Tyler, TX, Andrea I. Schwab, Donald P. Wilcox, Texas Medical Association, Anthony Lee Icenogle, Icenogle & Sullivan, LLP, Austin, TX, Rebecca M. Fowler, Doerner Saunders Daniel & Anderson, Tulsa, OK, James J. Belanger, Scott M. Bennett, Coppersmith Schermer & Brockelman, Phoenix, AZ, for Kathleen Sebelius, in her official capacity as Secretary of the United States Department of Health and Human Services.

MEMORANDUM OPINION & ORDER

MICHAEL H. SCHNEIDER, District Judge.

In this suit, physician-owned hospitals (POHs) challenge a recent amendment to the Medicare Act ¹ that limits their ability to bill for services to Medicare patients who were referred by a physician owner. According to the hospitals, the law—Section 6001 of the Patient Protection and Affordable Care Act (PPACA), Pub. L. No. 111–148, 124 Stat. 119, 684–89 (2010) as amended by the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111–152, § 1106, 124 Stat. 1029, 1049–50 (2010) codified at 42 U.S.C. § 1395nn— violates a number of their constitutional rights.

Plaintiffs request a declaration that Section 6001 is unconstitutional and ask the Court to enjoin the Secretary of the United States Department of Health and Human Services (the Secretary) from enforcing the amended law. The Secretary challenges the Court's subject matter jurisdiction and alternatively moves for summary judgment on all grounds.

The Court concludes that Congress did not act unconstitutionally and that it is not the function of the Court to determine the wisdom of this congressional action. Having considered the parties' briefs, oral arguments, and the applicable law, the Court finds the Secretary is entitled to judgment as a matter of law.

I. BACKGROUND

A. PHA and TSJH Growth, Expansion, and Halting of Development Plans

Plaintiff Physician Hospitals of America (PHA) is a trade association representing the interests of more than one hundred POHs in over thirty states. PHA's members, including Plaintiff Texas Spine and Joint Hospital (TSJH), a twenty-bed hospital in Tyler, Texas, are POHs. PHA's members and TSJH serve Medicare and Medicaid patients along with other private insurance and indigent patients.

Plaintiff TSJH and many of PHA's members are specialty hospitals. Specialty hospitals, as opposed to general or full-service hospitals, are health care facilities that focus on performing certain procedures or on treating patients with particular diseases or conditions. They tailor their care and facilities to fit the chosen type of condition, patient, or procedure on which they focus. ² See, e.g., U.S. Gov't Accounting Office, GAO–03–683R, Specialty Hospitals: Information on National Market Share, Physician Ownership, and Patients Served 1 (2003) [hereinafter GAO–03–683R]. Specialty hospitals are not new to the hospital industry. They have existed for decades. Specialty hospitals, particularly physician-owned specialty hospitals (specialty POHs), experienced phenomenal growth in recent years. Id. at 6.

In March 2008, TSJH's physician owners commissioned plans for an expansion to meet its current and expected patient demand. The estimated cost of the TSJH expansion exceeded $30 million. By March 2010, TSJH had spent more than $3 million on its project by purchasing land, obtaining zoning approvals, and other transaction costs. Like TSJH, many other PHA member hospitals around the country also were expanding or developing new facilities or were planning those projects as of March 2010. The financing model used by TSJH and PHA's members to support expansion projects typically was anchored in expected Medicare reimbursements from patient care in those expanded or new facilities.

In March 2010, Congress passed legislation that unquestionably impacts POHs located throughout the country, including Tyler, Texas. On March 23, 2010, President Barack Obama signed the PPACA, which included Section 6001, subtitled “Limitation on Medicare Exception to the Prohibition on Certain Physician Referrals for Hospitals.” Pub. L. 111–148, § 6001, 124 Stat. at 684–89 (hereinafter referred to as “Section 6001”). Section 6001, an amendment to the Medicare Act, prohibits new or expanded POHs from filing claims for health services covered by Medicare if there is a financial relationship between the referring physician and the hospital receiving payment.

B. Physician Self–Referral: History of Congressional Action

An understanding of the historical context that gave rise to limiting Medicare payments for physician self-referrals ³ requires a review of congressional activity leading up to the adoption of Section 6001. It is also helpful to trace the growth of specialty POHs in conjunction with Congress's attempt to regulate Medicare payments involving self-referrals.

1. The Enactment of the Stark Law and Whole Hospital Exception

As early as 1989, some members of Congress began taking notice of the increasing numbers of physicians who were referring patients to medical facilities in which the physician maintained a financial interest. Congress directed the Office of the Inspector General (OIG) to study

referring-physician ownership of, or compensation by, entities providing items or services for which Medicare may make payment; the range of such arrangements and the means by which they are marketed to physicians; the potential of such ownership or compensation to influence a physician's decision about referrals and to lead to inappropriate use; and the practical difficulties involved in enforcing actions against such arrangements that violate current anti-kickback provisions.

Office of Inspector Gen., U.S. Dep't of Health and Human Servs., OAI–12–88–01410, Financial Arrangements Between Physicians and Health Care Businesses: Report to Congress ii (1989). The OIG's report, published in May 1989, was followed by the eventual passage of legislation previously proposed by United States Congressman Pete Stark. Ethics in Patient Referrals Act of 1989, H.R. 939, 101st Cong. (1989).

The “Stark Law,” as it came to be called, generally prohibited hospitals from billing Medicare for patients referred to facilities in which the referring physician (or immediate family members) had an ownership or other investment interest. See Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101–239, § 6204, 103 Stat. 2106, 2236–43 (1989) codified at 42 U.S.C. § 1395nn. This first version of the Stark Law, enacted in December 1989, did not affect hospitals. Rather, it affected only self-referrals to facilities furnishing clinical laboratory services. 103 Stat. at 2236. But, in 1993, the law was expanded to encompass self-referrals for additional health services, including hospital treatment. Omnibus Reconciliation Act of 1993, Pub. L. No. 103–66, § 13562, 107 Stat. 312, 596–605 (1993).

Of particular relevance in this dispute is the fact that the Stark Law included a provision that would become known as the “whole hospital exception.” It permitted Medicare payment for services when the referring physician had an ownership or investment interest in the entire hospital, rather than merely a subdivision or department of the hospital. 42 U.S.C. § 1395nn(d)(3). According to the legislative history accompanying Section 6001's enactment, the exception was included because, at the time of the Stark Law's enactment, there were a number of rural hospitals where such ownership arrangements were in place. H.R.Rep. No. 111–443, pt. 1, at 355 (2010), U.S. Code Cong. & Admin. News 2010, pp. 123, 202–04. Ownership in a “whole hospital” was also acceptable to Congress under the assumption that a physician's potential for economic gain through patient referrals was more likely diluted in a general hospital providing diverse services. Id. Given that scenario, the risk that economic self-interest might compromise the physician's judgment was of less concern. GAO–03–683R at 2.

But the Stark Law clearly prohibited physicians with an ownership interest in a distinct hospital subdivision from being able to refer Medicare patients to that subdivision. 42 U.S.C. § 1395nn(d)(3)(C). This provision of the Stark Law reflected congressional concern that ownership in a specific subdivision would create an incentive for self-referrals. H.R.Rep. No. 111–443, pt. 1, at 355, U.S. Code Cong. & Admin.News 2010, pp. 202–04.

2. Congress Enacts Specialty POH Moratorium

By 2003, Congress apparently noticed the increase in the number of POHs, in general, and the growth of specialty POHs, in particular. According to a study requested by Congress, the number of specialty POHs tripled between 1990 and 2003. GAO–03–683R at 6. The same report observed that specialty POHs were often similar in size and scope to hospital departments. Id. at 2.

In response to this rapid growth, Congress authorized in-depth studies of specialty POHs. Congress directed the Medicare Payment Advisory Commission (MedPAC) ⁴ and the Department of Health and Human Services (HHS) to study and report on the cost and quality of care at specialty POHs as compared with local, full-service community hospitals. See Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108–173, § 507, 117 Stat. 2066, 2295–97 (2003). Congress also...