The 36 Month Rule again has taken center stage as the Centers
for Medicare and Medicaid Services (CMS) recently proposed new
regulations governing ownership changes in the home health
industry. Many home health executives had expected the proposed
rule to ease significantly the regulatory burdens related to
changes in majority control and/or ownership. CMS, however, has
once again failed to recognize the negative impact that the
unnecessary restrictions of the 36 Month Rule have on the vast
majority of home health agencies.
36 Month Rule Background
On January 1, 2010, CMS adopted a rule that prohibits the transfer
of a provider agreement and corresponding provider number to the
new owner of a home health agency (HHA) that acquires a HHA
(whether by asset purchase or stock transfer) if the change of
ownership takes place within 36 months of the HHA's enrollment
in Medicare. This rule was in response to CMS concerns regarding
"certificate mills" where HHA brokers enrolled in
Medicare for the sole purpose of selling a HHA rather than to
provide services to Medicare beneficiaries. In such instances, the
broker applied for Medicare certification and then quickly sold the
HHA without seeing Medicare patients. Under the rule, the new owner
is required to enroll as a new provider, undergo a state survey or
accreditation, and execute a new provider agreement prior to
billing Medicare for services rendered. This rule is commonly
referred to as the 36 Month Rule, which was summarized in our
bulletin circulated on November 24, 2009 available at this
link.
To clarify the rule, CMS issued Transmittal 318, Change Request
6750 to the Medicare Program Integrity Manual. Transmittal 318
provided that a HHA may not undergo a change of ownership if the
effective date of the change occurs within 36 months after the
ownership effective date of the provider's enrollment in
Medicare or the effective date of the last change of ownership.
This clarification amounted to a broad expansion of the 36 Month
Rule and was met with much resistance by the home health industry
because the definition of "ownership change" was overly
broad. It expanded the definition of CHOW beyond any previous
interpretation and included ownership transactions such as a five
percent (5%) or greater ownership change or a change in partners,
regardless of the percentage of ownership involved. After industry
leaders and others persuasively explained the devastating impact
that this expansive interpretation would have on successful HHAs
operating within the law, CMS rescinded Transmittal 318 on May 5,
2010. Many anticipated that, with the rescission of Transmittal
318, CMS would issue formal guidance clarifying to the industry
that the 36 Month Rule applies only to HHAs within 36 months of
their initial enrollment with Medicare. Most importantly, many
thought that the guidance would permit the sale of a HHA that has
been enrolled with Medicare for more than 36 months even if the
selling HHA has undergone a change of ownership within the past 36
months.
Recent Developments
On July 23, 2010, CMS issued proposed rules to once again clarify
the 36 Month Rule. The proposed rules provide for certain
transaction exemptions from the 36 Month Rule for the following
bona fide ownership transactions:
- A publicly traded company acquires another HHA and both entities have submitted cost reports to Medicare for each of the prior five years;
- A HHA parent company undergoes an internal corporate restructuring, such as a merger or consolidation, and the HHA has submitted cost reports to Medicare for the prior five years;
- Owners of an existing HHA change the existing business structure (e.g. a partnership to a limited liability company), the individual owners remain the same, and there is no change in majority ownership (50% or more ownership in the HHA); and
- The death of an owner who owns a 49% or less interest (where several individuals and/or organizations are co-owners of an HHA and one of the owners dies).
Contrary to the expectations of many within the home health
industry, CMS has indicated in the Preamble to the proposed rule
that the 36 Month Rule applies not only to agencies within 36
months of their initial enrollment in Medicare, but also to
agencies within 36 months of changes in majority control and/or
ownership. Pursuant to the Preamble, an HHA owner must enroll as a
new provider, undergo a state survey or accreditation, and execute
a new provider agreement prior to billing Medicare when there is a
change in majority control and/or ownership during the first 36
months of when the HHA is initially conveyed Medicare billing
privileges or the most recent change in ownership (including asset
sale, stock transfer, merger or consolidation). One point worth
noting is that this broader application of the rule to changes in
majority control and/or ownership appears only in the Preamble and
not the regulation itself. This leaves the issue of application to
changes in the majority control and/or ownership up for debate. In
commentary, CMS also stated that it recognized that there are many
cases where a small change in ownership does not result in
fundamental change of ownership by the majority owner or owners.
These situations should not necessarily require a new enrollment
and state survey or meet the deemed-accreditation status, which may
explain the focus on majority control and/or ownership as the
bright-line test. In this regard, CMS is proposing a definition of
"Change in Majority Ownership" to mean an individual or
organization that acquires more than a 50% interest in a HHA during
the 36 months following the initial enrollment into the Medicare
program or a change of ownership (including asset sale, stock
transfer, merger or consolidation). To ward off attempts by HHAs to
circumvent the rule by acquiring ownership interests incrementally
over time to ultimately own a majority interest, CMS is proposing
that the definition of "Change in Majority Ownership"
include an individual or organization that acquires majority
ownership in an HHA through the cumulative effect of asset sales,
stock transfers, mergers or consolidations within a 36-month
period.
Our View
We think that the proposed rules are positive for HHAs that are
publicly traded companies and offer some relief to closely held
HHAs that suffer the death of an owner. Unfortunately, however, the
proposed rules still will have a negative impact on the vast
majority of HHAs by restricting them from consummating legitimate
transactions or capital raising activities without first obtaining
a new provider number and undergoing a state survey or
accreditation. It is clear that CMS rightfully intends to restrict
illegal and unethical activities that are present in the home
health industry. However, instead of carefully defining rules and
regulations to protect against the illegal activity it is
targeting, CMS has proposed overly expansive rules that affect
legitimate home health providers engaging in bona fide business
transactions, as well as those engaging in illegal activity. CMS is
soliciting comments to the proposed rules until September 14, 2010,
and we expect that many within the home health industry will voice
their concerns. For example, many think that the publicly traded
company acquisition exemption should be expanded to include
privately held companies that meet certain criteria indicative of
providing quality of care (which may not necessarily include the
submission of cost reports). In addition, others have suggested
that conducting a survey of the HHA within a set period of time
following the acquisition of such HHA, coupled with a user fee to
be paid by the purchaser of such HHA, is an alternative to the 36
Month Rule. The comment period provides an opportunity for HHAs to
point out the unintended consequences and harmful effect that this
latest clarification has on legitimate HHAs and their businesses
and propose workable solutions that will provide continuity of care
for Medicare beneficiaries. We currently are engaged to represent
clients in the home health industry with the preparation of their
comment letters and are available to assist others as well.
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