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 that its concern that, absent a survey and the other vetting procedures that come with obtaining a new provider agreement and provider number, a newly-acquired HHA may not be in compliance with the Medicare conditions of participation. 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.
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.
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 the following 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.
For more information, please contact Ken Marlow, Stephen Page, Brent Hill, Kim Looney 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.