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Good Intentions Gone Wrong: CMS Proposes New Rule to Clarify Home Health Agency 36 Month Rule

08.23.10

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:

1. A publicly traded company acquires another HHA and both entities have submitted cost reports to Medicare for each of the prior five years;

2. 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;

3. 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

4. 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.

For more information, please contact Ken Marlow, Brent Hill, Stephen Page or any member of the Waller Lansden Healthcare Practice at 800-487-6380.

The opinions expressed in this bulletin are intended for general guidance only.  They are not intended as recommendations for specific situations.  As always, readers should consult a qualified attorney for specific legal guidance.