February 2010 Authors: Richard P. Church richard.church@klgates.com 919.466.1187 Darlene S. Davis darlene.davis@klgates.com 919.466.1119 Virginia E. Worthy jenny.worthy@klgates.com 704.331.7508 K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com. CMS Update: New Rules for Home Health Agencies Undergoing Ownership Changes Further Update (July 23, 2010) On July 23, 2010, the Centers for Medicare and Medicaid Services ( CMS ) published the home health prospective payment system proposed rule for 2011 1 and promulgated changes to the 36 month rule (the Rule ) described below. CMS now proposes that 42 C.F.R. 424.550(b)(1) will apply to any change in majority ownership during the 36-month time period after the effective date of the home health agency s ( HHA ) enrollment in Medicare. 2 The proposed rule would amend 42 C.F.R. 424.502 by defining Change in majority ownership to mean an individual or organization acquiring more than a 50 percent interest in an HHA via asset sales, stock transfers, mergers, or consolidations during the 36 month window. 3 In commentary, CMS clarifies that such change may include a cumulative acquisition of more than 50% interest during that time period via multiple acquisitions of small amounts of stock. In addition, the proposed rule also includes proposed exemptions to the Rule in the following limited circumstances: Where a publicly-traded company is acquiring another HHA and both entities have submitted cost reports to Medicare for the previous five (5) years. Where an HHA parent company is undergoing an internal corporate restructuring, such as a merger or consolidation, and the HHA has submitted a cost report to Medicare for the previous five (5) years. Where the owners of an existing HHA decide to change the existing business structure (e.g., partnership of a limited liability corporation or sole proprietorship to subchapter S corporation), the individual owners remain the same, and there is no change in majority ownership (i.e., 50 percent or more ownership in the HHA.) 1 See Medicare Program; Home Health Prospective Payment System Rate Update for Calendar Year 2011; Changes in Certification Requirements for Home Health Agencies and Hospices, Proposed Rule, 75 Fed. Reg. 43236 (July 23, 2010 ). 2 In commentary to the proposed rule, CMS interprets this period to include the first 36 months of when the HHA is initially conveyed Medicare billing privileges or the last change of ownership (including asset sale, stock transfer, merger or consolidation). See 75 Fed. Reg. at 43266. 3 Interestingly, in commentary to the proposed rule, CMS suggests such incremental changes of ownership would each be reported as a change of information to the HHA provider s enrollment file. See 75 Fed. Reg. at 43266. This suggestion appears to run contrary to existing Medicare 855A requirements that require a provider to identify all owners of greater than 5% interest in a provider, but do not require reporting of ownership percentages. As such, a shift within existing ownership percentages of a previously reported 5% owner does not appear to be required to be reported as a change of information.
Where the death of an owner who owns 49 percent or less (where several individuals and/or organizations are co-owners of an HHA and one of the owners dies) interest in an HHA. CMS is currently accepting comments on the proposed rule through September 14, 2010. However, in light of the various interpretations taken by CMS as to the original rule, it is not clear at this time if CMS would take the position that the existing rule should be interpreted by contractors in a manner consistent with the proposed rule changes. Further Update (May 10, 2010) Amid concerns over the application of 42 C.F.R. 424.550(b)(1) (the Rule ), the Centers for Medicare and Medicaid Services ( CMS ) rescinded Transmittal 318 (Change Request 6750), dated December 18, 2009, amending the Medicare Program Integrity Manual to implement the Rule (the Transmittal ) as well as the associated Medicare Learning Network MLN Matters regarding the same. In an email to representatives of industry stakeholders, CMS stated it will not be replacing the Transmittal at this time, but it is in the process of considering future rulemaking regarding the Rule. Additionally, CMS indicated it is in the process of instructing contractors to apply the Rule only to those ownership changes that fall under the definition of change of ownership as defined in 42 C.F.R. 489.18. Notably, however, as of May 7, 2010 the Medicare Learning Network Provider Inquiry Assistance article (instructing CMS contractors regarding implementation of the Rule) was still available on the CMS website and does not reflect the Transmittal rescission. Update (February 26, 2010) Via revisions to an MLN Matters article dated February 18, 2010, the Centers for Medicare and Medicaid Services ("CMS") clarified that 42 C.F.R. 424.550(b)(1) (the Rule ) would not apply to home health agency applications reporting an ownership change received before January 1, 2010. 4 As noted below, previously CMS had indicated an 4 Home Health Prospective Payment System Rate Update for Calendar Year 2010, 74 Fed. Reg. 58,078 (Nov. 10, 2009) (hereinafter HHA Final Rule). intent to apply the Rule to any Form CMS-855A application reporting an ownership change that was still in process with a CMS contractor even if the application had been filed prior to the Rule s stated January 1, 2010 effective date. Due to quite frequent delays in processing applications, in this regard, the Rule would have potentially been applied to transactions reporting ownership changes that were filed even before the Rule was promulgated in final form. CMS Update: New Rules for Home Health Agencies Undergoing Ownership Changes On November 10, 2009, the Centers for Medicare & Medicaid Services ( CMS ) published the home health prospective payment system final rule for calendar year 2010. 5 The final rule includes several provisions intended to address program integrity concerns in the home health industry. Most significant in that regard is the provision concerning sales or transfers of ownership of home health agencies ( HHAs ), which prohibits the assumption of the Medicare provider agreement by a new owner when an HHA has initially enrolled within the previous thirty-six (36) months (the Rule ). In mid-december, CMS issued a program transmittal instructing its contractors on the interpretation and implementation of the Rule that appears to substantially broaden the scope of the Rule, with potentially serious consequences for the unwary. The Rule Prior to January 1, 2010, CMS regulations provided for the automatic assumption of the Medicare provider agreement when an HHA underwent a change of ownership as defined in 42 C.F.R. 489.18 (a CHOW ). In commentary to the Rule, CMS argued it is necessary in light of various examples of fraud notably in Florida and Texas where HHAs have undergone frequent CHOWs with the new owners acting merely as nominal 5 Id. at 58,118. February 2010 2
figures in the HHA. 6 Accordingly, the Rule, which is effective January 1, 2010, provides: If an owner of a home health agency sells (including asset sales or stock transfers), transfers, or relinquishes ownership of the HHA within 36 months after the effective date of the HHA s enrollment in Medicare, the provider agreement and Medicare billing privileges do not convey to the new owner. The prospective provider/owner of the HHA must instead: (i) Enroll in the Medicare program as a new HHA under the provisions of 424.510, and (ii) Obtain a State survey or an accreditation from an approved accreditation organization. 7 The implications of the Rule on providers are significant. Because Medicare certification for initial enrollment is not retroactive to the application date (as in the case of CHOW, where it may be retroactive to the date of the sale or transfer), providers subject to the Rule must forgo Medicare reimbursement from the effective date of the sale or transfer until at the earliest the date of the required survey. 8 Given the timeline for processing applications and performing surveys, this reimbursement gap could be substantial six to nine months or more. 9 Further, in states that require HHAs to be enrolled in Medicare in order to participate in Medicaid, the Rule might also affect Medicaid reimbursement. 6 42 C.F.R. 424.550(b)(1). 7 New enrollments are effective as of the survey date if all requirements are met as of that date, or, if all requirements are not met, the subsequent date (a) all requirements are met or (b) all conditions of participation are met and an acceptable plan of correction is received for any lower-level deficiencies. See id. 489.13(b). 8 Under a memorandum to state survey agency directors, CMS has instructed state survey and certification agencies to make initial enrollment surveys a low priority when deemed accreditation status is otherwise available. See Memorandum from Thomas Hamilton, Director, Survey and Certification Group, to State Survey Agency Directors (S&C 08-03) (Nov. 5, 2007), available at www.cms.hhs.gov/surveycertificationgeninfo/downloads/scl etter08-03.pdf. 9 HHA Final Rule, 74 Fed. Reg. at 58,118. Notably, in commentary to the Rule, CMS repeatedly used the term change of ownership in elaborating on the application of the Rule and stated that applications that are pending or in process as of January 1, 2010, are subject to the provisions of the Rule. 10 The former item is noteworthy because a change of ownership or CHOW is narrowly defined by regulation at 42 C.F.R. 489.18. The latter is noteworthy insofar as providers with sale or ownership transfer applications on file with their regional home health and hospice intermediary would now be subject to the Rule and a potential reimbursement gap notwithstanding that they had timely filed an application well before the Rule was promulgated in final form. The CMS Transmittal On December 18, 2009, CMS attempted to further clarify the types of transactions subject to the Rule via a Transmittal amending the Medicare Program Integrity Manual (the Transmittal ). 11 However, the Transmittal is noteworthy insofar as it may suggest that the Rule is applicable to situations beyond those immediately evident by the text of the Rule and its associated commentary. The Transmittal provisions begin, Effective January 1, 2010 and per 42 CFR 424.550(b) an HHA may not undergo a CHOW pursuant to 42 CFR 489.18 if the ownership change occurs within 36 months after the effective date of enrollment or most recent ownership change. However, CMS then goes on to equate a change of ownership with an ownership change throughout the remainder of the Transmittal. An ownership change is then defined by CMS to include any of the following: 1. CHOW; 2. Acquisition/merger; 3. Consolidation; 4. Change request reporting a 5 percent or greater ownership change (e.g., stock, transfer, asset sale); and 10 Centers for Medicare and Medicaid Services, Transmittal 318, CMS Manual System Pub 100-08 Program Integrity Manual, Implementation of Home Health Agency Program Safeguard Provisions (Dec. 18, 2009). 11 Id. February 2010 3
5. Change request reporting a change in partners, regardless of the percentage of ownership involved. 12 Thus, the Transmittal might be read to suggest that the Rule is applicable to any ownership change within thirty-six (36) months of any other ownership change, where both such changes might have been nothing more than the reporting of the sale of a 5 percent minority ownership interest. Significantly, in this regard, an ownership change is defined to be much more than just a CHOW under 42 C.F.R. 489.18 as such transfers of minority stock interests are explicitly excluded from the definition of a CHOW under 42 C.F.R. 489.18. The Transmittal also instructs CMS contractors on how to handle Medicare filings in light of the Rule. Under the Transmittal, the contractor is instructed to verify the effective date of the change by requesting a copy of the transfer agreement, sales agreement, or bill of sale (whichever is applicable). Thus, the contractor will not simply rely on the projected date of the sale as listed on the Medicare filing. If the sale has not yet occurred, the contractor is instructed to inform the HHA that it must also submit a CMS- 855A voluntary termination application to terminate the current provider agreement and go through the new enrollment process. If the sale has already occurred, the contractor is instructed to deactivate the existing HHA s billing privileges so that Medicare payments will be withheld until the new enrollment is approved. 13 In this regard, many sellers and potentially even buyers of HHAs may be captured by the Rule, which would result in their disenrollment from the Medicare program. For example, an HHA that underwent a reorganization in the past thirty-six (36) months captured by the Transmittal (whether or not a CHOW, but for example resulting in a change of information filing within the scope of the Transmittal), which then permitted the entry of a new equity investor of 5 percent or greater (again in conjunction with an asset sale in exchange for equity or entirely unrelated to a CHOW), may be captured by the Rule as interpreted by CMS, subject to being disenrolled from Medicare, and subject to the reimbursement gap associated with a new enrollment. Potential Update to the CMS Guidelines In light of concerns that the Rule, particularly as interpreted by the Transmittal, is overly broad, CMS has been contacted by industry trade groups and HHAs to seek clarification or retraction of some or all of the Rule and/or the Transmittal. Accordingly, providers should remain vigilant for additional guidance on this matter from CMS. In the meantime, providers contemplating a transaction or transfer of any type reportable to CMS should carefully consider whether the provider has undergone an ownership change as broadly defined by the Transmittal within thirty-six (36) months of its potential ownership change (again as broadly defined) to determine the potential application of the Rule on any provider involved in the transaction. For questions and concerns related to the Rule, please contact: Jonathan K. Henderson 817.347.5278 jon.henderson@klgates.com William J. Spratt, Jr. 305.539.3320 william.spratt@klgates.com Richard P. Church 919.466.1187 richard.church@klgates.com 12 Id. 13 Available at: http://www.cms.hhs.gov/mlnmattersarticles/downloads/m M6750.pdf. February 2010 4
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