United States: CMS Policy Memorandum Clarifies Disincentives To Buyer's Rejection Of Seller's Medicare Agreement

In a September 6, 2013, policy memorandum, effective immediately, the Centers for Medicare & Medicaid Services (CMS) detailed its policy ensuring that providers that choose to reject assignment of the seller's Medicare agreement in a change of ownership will face greater uncertainty and cumbersome delay in their Medicare participation and ability to bill the program.

The Centers for Medicare & Medicaid Services (CMS) memorialized in a September 6, 2013, policy memorandum to state survey agencies, effective immediately, its de facto policy of placing buyers that reject the automatic assignment of a seller's Medicare agreement in a change of ownership at the lowest level of priority for Medicare certification under the new ownership.

When an acquisition of a Medicare-certified provider occurs, CMS automatically assigns the existing Medicare provider agreement approval to the new owner.  Automatic assignment means uninterrupted participation of the acquired provider in the Medicare program.  There is no required survey as a result of acquisition.  The downside to a buyer accepting automatic assignment is that the buyer is subject to the terms and conditions under which the assignment agreement originally was issued.  These include the Medicare requirements to adjust payments to the new owner for prior overpayments (successor liability) even if they relate to pre-acquisition periods, and to adjust Medicare payments to the new owner in order to collect civil monetary penalties.

The policy memorandum incentivizes buyers to accept automatic assignment of the seller's Medicare agreement by creating uncertain and potentially lengthy delays in initial Medicare certification of what was a participating Medicare provider and, correspondingly, in the ability of the new owner to bill Medicare.  As CMS states in the policy memorandum, the policy "provides continuity in the ability of CMS to recover outstanding overpayments to the provider/supplier." 

Click here to view the policy memorandum (Memo 13-60-ALL), posted September 6, 2013. 

CMS Policy Discourages Rejection of Automatic Assignment of Provider Agreement

New owners have the option of rejecting assignment of the Medicare agreement, which precludes the buyer from having successor liability for Medicare overpayments.  However, rejecting the automatic assignment of the seller's Medicare agreement is a voluntary termination of the Medicare agreement by the new owner.  The termination is effective as of the date the acquisition is completed.  With very limited exceptions, there will be no Medicare payment for services to beneficiaries under the rejected provider agreement furnished on or after that acquisition date. 

Having rejected assignment, if the new owner wishes to participate in the Medicare program, the new owner is considered an "initial" applicant subject to a concomitant and cumbersome initial enrollment process.  As part of the provider's "initial" enrollment, the new owner must satisfy applicable legal and Medicare participation requirements, including an unannounced survey of the new owner's compliance with Medicare requirements for the facility and its operation.  The policy memorandum announces additional policies; for example, a survey that takes place within 14 days after the effective date of an acquisition that involves rejection of assignment of the provider agreement will warrant closer review by CMS, including when the new provider agreement will be effective.   

In the past, as a de facto matter, surveys where the buyer had rejected assignment often went to CMS's low priority for survey and a tie-in notice.  The policy memorandum, directed to state survey agency directors, explicates CMS's policy regarding the specific timing of that initial survey in the instance of a buyer's rejection of the existing Medicare agreement.  That is, the survey agency and the accrediting organization cannot conduct a survey for initial certification until after the date of the sale.  The survey must be a full standard survey and under the new ownership in order to assess the facility's compliance with law under the new owner.  The survey cannot take place until the Medicare Administrative Contractor has issued a recommendation for approval of the new owner's enrollment application; the facility must be fully operational and providing services to patients before it may be surveyed; and the survey, when conducted, must be truly unannounced in order to permit an assessment of compliance when the facility is operating in a typical manner.  Subjecting accrediting agencies to CMS scrutiny as to their timing of a survey, a survey that takes place within 14 days after the effective date of an acquisition that involves rejection of assignment of the provider agreement will warrant closer review by CMS of the circumstances of the case and the timing of the survey.  Moreover, the effective date of the Medicare agreement is not the date of the acquisition of the provider.  Rather, the effective date of the Medicare agreement is the date when the last applicable federal requirement for Medicare participation has been met, and not an earlier date.  These federal requirements are not simply survey requirements; they include, for example, Office of Civil Rights compliance documentation prior to an accreditation survey.

For a new owner that has rejected assignment of an existing Medicare agreement, the policy memorandum becomes additionally troublesome in the low level of priority assigned to the survey.  Initial surveys conducted by survey agencies are generally the lowest workload priority, particularly in the case of provider types for which accreditation is available.  CMS policy makes complaint investigations, re-certifications and other work for existing Medicare providers a higher priority than certification of new Medicare providers.  If a survey agency conducts an initial certification survey of an applicant that rejected assignment of the Medicare agreement, CMS will review the facts to determine whether the survey agency deviated from CMS workload priorities, with such deviation possibly raising doubt that the survey was unannounced.  In addition, in the case of post-survey actions, there are scenarios detailed in the effective date section of the policy memorandum whereby a hospital unable to submit an acceptable plan of correction, for example, must request a new initial certification survey and be re-surveyed in an unannounced re-survey.

The policy memorandum also clarifies that if the owner of an existing Medicare-participating hospital (Hospital A) acquires another Medicare-participating hospital (Hospital B), and Hospital A rejects assignment of the Medicare agreement of Hospital B, Hospital A is not eligible for Medicare payment for services at the new Hospital B campus of Hospital A until it has completed a process analogous to that applied to an initial applicant for Medicare enrollment.  In other words, Hospital A cannot bill Hospital B as a satellite location of Hospital A.  The enrollment process for Hospital B thus will include the full, unannounced survey, following the change of ownership, after the Hospital B site has been fully operating under the new ownership of Hospital A.  That is the case even though Hospital A's new campus at the site of Hospital B will not be separately enrolled in Medicare, apart from Hospital A.

Considerations for Buyers

Highlighting the benefits of automatic assignment of the Medicare agreement with its corresponding uninterrupted participation of the acquired provider in the Medicare program, the policy memorandum underscores the significant potential downside of rejecting the automatic assignment of a Medicare agreement in a change of ownership.  Of course, buyers accepting the automatic assignment of the Medicare agreement with concerns about potential successor liability must continue to ensure that their diligence is thorough and adequate, including strong escrow arrangements where there may have been (or may yet be discovered) overpayments to the seller. 

For change of ownership transactions where the buyer rejects automatic assignment, the buyer certainly will need to plan capital and revenue resources sufficient to carry the facility over a period of uncertain duration, pending the provider's initial enrollment and certification for participation in the Medicare program.  In addition, subject to a full, unannounced survey of the fully operating provider, the new owner should ensure that it has all systems in place so that when the unannounced survey does occur, the facility is fully operational under the ownership and control of the new owner, and is providing services to patients necessary to meet, and be in full compliance with, applicable law and all requirements for participation in the Medicare program.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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