On November 2, 2010, the Centers for Medicare and Medicaid
Services (CMS) adopted final regulations regarding the 36 Month
Rule, which take effect January 1, 2011. The regulations were
proposed by CMS in July 2010 to clarify the 36 Month Rule, which
prohibits the transfer of a provider agreement and corresponding
provider number to the new owner of a home health agency (HHA) that
acquires an 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. Although CMS expanded some of the
exceptions to the 36 Month Rule as a result of the comments
submitted, CMS has largely retained the clarifications to the 36
Month Rule set forth in the proposed regulations.
It is clear from the commentary that many providers and ancillary
businesses have been concerned that the 36 Month Rule unnecessarily
restricts bona fide transactions, potentially blocks new
investments in the home health industry and deprives HHA owners and
operators of access to capital. Many of the comments proposed
alternatives or additional exceptions to the 36 Month Rule, such as
requiring HHAs to undergo accelerated surveys or re-accreditation
following a change of ownership or clarifying that the 36 Month
Rule is triggered upon initial certification of the HHA, as opposed
to the most recent change of ownership of the HHA. In its responses
to the comments, CMS repeatedly reminded commenters of the two
primary objectives of the 36 Month Rule: (i) to significantly
decrease or eliminate the acquisition of a provider agreement with
the intent to sell the HHA shortly following such acquisition,
commonly known as "flipping"; and (ii) to ensure that
acquirers of HHAs satisfy the Medicare conditions of participation.
CMS further stated its concern that style="font-size: 11pt;
line-height: 115%; font-family: Arial;">a newly-acquired
HHA may not be in compliance with the Medicare conditions of
participation, absent a survey and the other vetting procedures
that come with obtaining a new provider agreement and provider
number. In the commentary, CMS stated that it wants to ensure that
providers are not billing Medicare for services when they are not
in compliance with the Medicare conditions of participation. CMS
determined that these two objectives outweighed the concerns
expressed by providers in the industry, and, accordingly, adopted
the proposed rule in large part as described below, with some
broader exceptions.
Proposed Rule
Most importantly, the proposed rule provided that the 36 Month
Rule applies not only to HHAs within 36 months of their initial
enrollment in Medicare, but also to HHAs within 36 months of
changes in majority control and/or ownership. In the proposed rule,
"Change in Majority Ownership" was defined as an
individual or organization that acquires more than a 50% interest
in an 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).
In the proposed rule, CMS provided exceptions to the 36 Month Rule
for certain bona fide ownership transactions. For more detail on
the proposed rule, please see our previously published bulletin
describing the proposed regulations at this
link.
Final Rule
Consistent with the proposed rule, the final rule clarifies that
the 36 Month Rule applies to any change in majority ownership of a
home health agency by sale (including asset sales, stock transfers,
mergers and consolidations) within 36 months after the effective
date of an HHA's enrollment or the HHA's most recent change
in majority ownership. Now, it is clear that 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 ownership during the first 36 months
of the most recent change in ownership. One important change in the
final rule appears in the definition of "Change in Majority
Ownership." In the final rule, a "Change in Majority
Ownership" occurs when an individual or organization acquires
more than a 50 percent direct ownership interest in an HHA during
the 36 months following the HHA's initial enrollment into the
Medicare program or the 36 months following the HHA's most
recent change in majority ownership (including asset sale, stock
transfer, merger, and consolidation). The important distinction
here is that CMS has determined that "indirect ownership
changes are not impacted by the 36-month rule." For example,
any change in ownership of a holding company that owns and operates
HHAs through subsidiaries is exempt from the 36 Month Rule because
there is only an indirect ownership change.
In the final rule, CMS further provided the following exceptions
for bona fide transactions:
1.The HHA submitted two consecutive years of full cost reports (excluding low utilization or no utilization cost reports) following enrollment in Medicare or within 36 months after the HHA's most recent change in ownership;
2.;An HHA's parent company is undergoing an internal
corporate restructuring, such as a merger or consolidation;
3.The owners of an existing HHA are changing the HHA's existing business structure (e.g. from a corporation to a partnership, from an LLC to a corporation, from a partnership to an LLC) and the owners remain the same; and
4.An individual owner of an HHA dies.
There are some significant changes in the exceptions identified in
the final rule. First, the "publicly-traded
exception" in the proposed rule was expanded to include any
HHA (whether public or private), and the time period for submitting
cost reports was reduced from five consecutive years to two
consecutive years. CMS was persuaded by a commenter that suggested,
among others, that (i) there is no reason that a transaction by a
privately-held HHA is any less legitimate than one involving a
publicly-traded company; and (ii) this requirement gives an unfair
advantage to publicly-traded companies. CMS also agreed that the
time period for the submission of cost reports was excessive and
should be reduced from five years to two years.
Second, with respect to the exception regarding an HHA parent
company undergoing an internal restructuring, CMS eliminated the
requirement for the submission of cost reports for the prior five
years. It agreed that this requirement was unnecessary given the
fact that it is an internal restructuring. Third, with respect to
the change in business structure exception, CMS eliminated the
requirement that there be no change in majority ownership when
there is a change in business structure. Finally, with respect to
the death of an owner exception, CMS agreed with commenters that
the exception should apply, regardless of the ownership percentage
held by the owner. Although commenters proposed additional
exceptions for non-profit entities and HHAs in bankruptcy or
insolvency, CMS determined that there were no legitimate merits for
adding such exceptions.
Many in the home health industry believe that the 36 Month Rule has
had a chilling effect on bona fide transactions within the
industry, and they were hopeful that the final rule would include
positive changes that would provide significant relief. Although
the final rule expanded some of the proposed exceptions, in the
end, the final rule did not go as far as many home health providers
had hoped. CMS has determined that the need to deter
"flipping" and "certificate mills" and have new
HHA owners comply with the conditions of participation outweigh the
negative impact that the 36 Month Rule has on the home health
industry.
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