The U.S. District Court for the Eastern District of Texas found February 18, 2011 that a challenge to the healthcare reform law provisions that amended the Medicare Act could go forward even though the plaintiffs did not exhaust their administrative remedies. The court denied the Department of Health and Human Services (HHS) Secretary’s motion to dismiss, finding it had jurisdiction under a judicially crafted exception to the exhaustion requirements.
Section 6001 of the Patient Protection and Affordable Care Act (PPACA) made
amendments to the section of the Medicare Act known as the Stark Law. The Stark Law prohibits physician-owned facilities from billing Medicare for services to patients referred by a physician owner.
Since its inception, the Stark Law has included a number of exceptions, including when a physician has an ownership interest in an entire hospital, and not just a subdivision of the hospital. 42 U.S.C. § 1395nn(d)(3) (whole hospital exception).
Section 6001 of the PPACA eliminated the whole-hospital exception, but it grandfathered in existing facilities and new facilities that met certain requirements before September 23, 2010.
Section 6001 also prohibits existing physician-owned hospitals from billing Medicare for self-referrals if the hospital expands.
Plaintiff Texas Spine & Joint is a physician-owned hospital that is grandfathered under Section 6001. But at the time the law passed, TS&J had already invested considerable time and money in a planned expansion. The hospital argues that Section 6001 unconstitutionally restricts it from continuing with the expansion.
Plaintiff Physician Hospitals of America is a 501(c)(6) organization representing the interests of its physician-owned hospital members. Plaintiffs claim that Section 6001 violates a number of their constitutional rights.
Plaintiffs requested a declaration that Section 6001 is unconstitutional and an injunction that would prevent HHS Secretary Kathleen Sebelius from enforcing Section 6001. The Secretary moved to dismiss, arguing that the court lacks jurisdiction because plaintiffs failed to first channel their claim through Medicare’s administrative review process.
Plaintiffs argued that an exception applies because of the hardship they face if forced to comply with the exhaustion requirement.
According to the court, an exception described by the Supreme Court in Shalala v. Illinois Council on Long Term Care, Inc. 529 U.S. 1 (2000), allows for direct resort to the courts when requiring presentment and channeling through the agency “would mean no review at all.”
In other words, the court explained, if enforcing the administrative presentment
requirement would cause the challenging party to endure a hardship so severe that they would never pursue it, then it would qualify as essentially no review at all.
Here, plaintiffs would have to construct or expand a hospital at a significant expense, file a Medicare reimbursement claim with the Secretary, and wait for it to be denied before they could bring their claims before the court as a challenge to the Secretary’s finding, the court noted.
“It is inconceivable that a hospital would gamble millions of dollars in construction and expansion costs with the hope that it would ultimately prevail in having Section 6001 deemed unconstitutional by the Court,” the court observed.
Finding the Illinois Council exception “was intended to embrace this very situation,” the court held it had jurisdiction in the case and denied the Secretary’s motion to dismiss. Physician Hosps. of Am. v. Sebelius, No. 6:10-cv-277 (E.D. Tex. Feb. 18, 2011).
U.S. Court In Texas Upholds Constitutionality Of PPACA
Provision Affecting Specialty Hospitals
The U.S. District Court for the Eastern District of Texas upheld March 31, 2011 the constitutionality of a provision of the healthcare reform law that dramatically limits the availability of the “whole hospital” exception to the Stark Law for physician-owned hospitals.
In granting summary judgment in favor of the Department of Health and Human Services (HHS) Secretary, the court found the provision did not violate due process, equal
protection, or constitute an unlawful taking.
The Stark Law generally prohibits hospitals from billing Medicare for services to patients referred by a physician owner, but includes an exception for when a physician has an ownership interest in an entire hospital, and not just a subdivision of the hospital. 42 U.S.C. § 1395nn(d)(3) (whole hospital exception).
Section 6001 of the Patient Protection and Affordable Care Act (PPACA) eliminated the whole-hospital exception, but it grandfathered in existing facilities and new facilities that met certain requirements before September 23, 2010. All new projects also had to be completed by December 31, 2010 in order to bill Medicare for services.
Section 6001 also prohibits existing physician-owned hospitals from billing Medicare for self-referrals if the hospital expands.
Plaintiff Texas Spine & Joint is a physician-owned hospital that is grandfathered under Section 6001. But at the time the law passed, TS&J already had invested considerable resources in a planned expansion. The hospital argued that Section 6001
unconstitutionally restricts it from continuing with the expansion.
Plaintiff Physician Hospitals of America is a 501(c)(6) organization representing the interests of its physician-owned hospital members.
Plaintiffs requested a declaration that Section 6001 is unconstitutional and an injunction that would prevent HHS Secretary Kathleen Sebelius from enforcing Section 6001.
under the Fifth Amendment; effects an unconstitutional and retroactive taking of their real and personal property; and is void for vagueness.
The court rejected plaintiffs’ arguments and uphold the constitutionality of Section 6001. As an initial matter, the court reiterated a previous holding that it had subject matter jurisdiction even though plaintiffs did not exhaust their administrative remedies under the exception to the exhaustion requirements set forth by the Supreme Court in Shalala v. Illinois Council on Long Term Care, Inc. 529 U.S. 1 (2000), which allows direct resort to the courts when requiring presentment and channeling through the agency “would mean no review at all.” See Physician Hosps. of Am. v. Sebelius, No. 6:10-cv-277 (E.D. Tex. Feb. 18, 2011).
Next, applying rational basis review, the court rejected plaintiffs’ substantive due process and equal protection claims.
According to the court, the justifications for Section 6001—that physician-owned hospitals lead to overutilization of services, higher costs, undermine community hospitals that provide uncompensated care, and provide inadequate emergency care—were not so unfounded as to be arbitrary.
Plaintiffs attempted to offer evidence that some “facts” on which Congress and the Secretary relied lacked support and appeared to be “made up.”
But the court found that “[a]lthough Plaintiffs present considerable evidence that questions the wisdom and judgment of the legislature, all of the evidence, even when viewed in favor of Plaintiffs, cannot support a finding that Congress acted arbitrarily when passing Section 6001.”
Plaintiffs also argued the proposed justifications were pretextual and that Section 6001 was the product of a “backroom deal” brokered to gain the support of hospital groups for the healthcare reform legislation.
While acknowledging case law striking down laws as arbitrary that were based on
allegedly illegitimate protectionist purposes, the court concluded that plaintiffs had failed to refute all the asserted justifications for the provisions.
The court also rejected plaintiffs’ claim that Section 6001 amounts to a regulatory taking of their real property and of their capital investment, including their anticipated revenue source of Medicare claims from patients treated in new or expanded physician-owned hospitals.
After finding the takings claim ripe for review, the court found no regulatory takings of real property, noting Section 6001 “merely limits the availability of the whole hospital exception” and “does not impose any restrictions on Plaintiffs’ use of their real property.” “The only value Plaintiffs have lost under the law, is the ability to bill Medicare for self- referred patients,” the court observed.
The court also found no regulator taking of plaintiffs’ capital investment.
The court acknowledged plaintiffs demonstrated a substantial financial hardship as a result of Section 6001 (i.e. forfeiting resources already expended for expansion plans and losing Medicare as a revenue stream).
But given that Medicare is a voluntary program that the government can alter at any time, and that Congress in the past considered and almost enacted previous versions of Section 6001, “plaintiffs cannot claim to have had a reasonable expectation that the statute would remain unchanged,” the court said.
Moreover, Section 6001 “is more analogous to a ‘public program adjusting the benefits and burdens of economic life to promote the common good’ than a physical invasion of Plaintiffs’ property rights,” the court added.
Finally, the court rejected plaintiffs’ contention that Section 6001 should be void for vagueness. Specifically, the court held Section 6001’s various deadlines were not conflicting and that the provision establishing exceptions for some physician-owned hospitals to expand was not overly vague even though it gives the Secretary nearly two years to develop an application process.
Physician Hosps. of Am. v. Sebelius, No. 6:10-cv-277 (E.D. Tex. Mar. 31, 2011).
U.S. Court In Oklahoma Says Uninsured Plaintiffs Have Standing
To Challenge Healthcare Reform Law
A federal court in Oklahoma ruled April 26, 2011 that three uninsured patients had standing to raise certain constitutional challenges to the healthcare reform law.
As with several other federal courts to consider the issue, the U.S. District Court for the Western District of Oklahoma found the need to investigate and plan financially for health insurance coverage was a sufficient injury-in-fact for standing purposes
The court did hold, however, that the insured plaintiffs participating in the challenge did not have standing because their argument that future insurance costs could result as a result of the Affordable Care Act (ACA) was too speculative and depended on the actions of third parties, i.e., insurers.
Plaintiffs’ Claims
Plaintiffs alleged the following claims:
1. Congress lacked authority under the Commerce Clause to enact the provision requiring individuals to buy insurance or face a penalty;
2. Congress lacked constitutional authority to impose a capitation tax to enforce the individual mandate;
3. The power to enact such legislation is specifically reserved to the states pursuant to the Tenth Amendment;
4. The ACA forces plaintiffs to contribute to the funding of abortions, thereby violating their First Amendment rights of conscience and the free exercise of religion;
5. The ACA violates equal protection under the Fifth and Fourteenth Amendment by, among other things, “funding and benefiting certain special interest organizations, including unions, through tax exemptions and other mechanisms,” based on their political viewpoints, and “[b]y providing for ‘earmarks,’ or ‘special interest
expenditures,’ while denying similar funding and benefits to other individuals who don’t share similar viewpoints";
6. The ACA’s individual mandate violates due process under the Fifth Amendment; and
7. The ACA requires individuals to provide private medical information to the federal government in violation of the Fourth Amendment.
Not Too Speculative
The court found the three uninsured plaintiffs in the action had established standing for their first, second, third, and sixth causes of action.
Specifically, the court held these plaintiffs had alleged two injuries that were fairly traceable to the ACA: the future injury of being compelled to purchase healthcare
coverage they did not want and the present injury of having to investigate and plan their finances for the future requirement to buy health insurance.
According to the court, plaintiffs’ alleged future and present injuries were sufficiently “concrete and particularized” to constitute an injury-in-fact for standing purposes. Based on similar reasoning, the court also held these claims were ripe for review.
Injury Not Fairly Traceable to ACA
The court refused, however, to find standing for those plaintiffs who currently have insurance. “These Plaintiffs have failed to allege an injury that is fairly traceable to the challenged action of the Defendants and not the result of some independent action of some third party not before the Court or of Plaintiffs’ own actions.”
Plaintiffs argued the ACA will cause the cost of healthcare insurance to rise because the law bans insurers from denying coverage based on pre-existing conditions.
But the court characterized this assertion as too speculative to constitute and injury-in- fact.
Moreover, the ACA does not require insurance companies to raise their premiums; and if insurers did so, “any injury to Plaintiffs would be the result of the insurance companies’ independent actions and not the challenged actions of the Defendants,” the court
observed.
“In other words,” the court concluded, “Plaintiffs’ injury would not be fairly traceable to the ACA or the Defendants.”
No Standing for Remaining Claims
The court held none of the plaintiffs had standing as to the remaining claims, largely for failing to identify any specific ACA provisions that require or put into effect the
complained of actions; for example, providing “earmarks” or “special interest
expenditures” for some groups but not others, requiring the disclosure of private medical information to the government, and requiring plaintiffs to contribute to the funding of abortions.