Home Health & Hospice Week

Lots of innocent providers are being constrained by the feds' new rule on change of ownership, and newly proposed modifications to the rule won't help much.

Background: Last year, the Centers for Medicare & Medicaid Services implemented a rule under which home health agencies undergoing a change of ownership (CHOW) within 36 months of initial enrollment or a sale have to undergo another initial certification survey. The so-called 36-month rule aims to stop "certificate mill" operations, CMS explains the 2011 prospective payment system proposed rule published in the July 23 Federal Register. "Under this scenario ... entrepreneurs apply for Medicare certification, undergo a survey, and become enrolled in Medicare, but then immediately sell the agency without having seen a single Medicare beneficiary or hired a single employee," CMS explains in the rule. "These brokers ... enroll in Medicare exclusively to sell the HHA, rather thanto provide services to beneficiaries."

"This practice allows a purchaser of an HHA from the broker to enter the Medicare program without having to undergo a State survey, which, in turn, often leads to that owner selling the business very soon thereafter to someone else," CMS continues. "The 'flipping' mechanism is used to circumvent the State survey process."

The 36-month rule which took effect last  January has stopped this flipping, believes consultant Pat Laff with Laff Associates in Hilton Head Island, S.C. "But it also stops a lot of other  transactions that are quite legitimate," Laff tells Eli. The CHOW rule has had a significant impact on the market, says Jack Eskenazi Jr. with mergers and acquisitions firm Healthcare Advisory Partners in Los Angeles. "There are fewer smaller and weaker -- and thus, cheaper -- candidates on the market because many of the smallest and weakest providers are younger than 36 months," Eskenazi tells Eli.

Pros and cons: The CHOW restriction "is frustrating to newer providers who aren't doing well who want to exit and recover their investment," Eskenazi observes. On the other hand, "it's a boon to smaller and weaker providers who are older than 36  months, because there are fewer sellers of that stature to compete with." Thus, valuations have remained the same or even increased in certain desirable geographies.

Another result of the new rule is "that some private equity sponsored providers are suspending acquisition activities," Eskenazi says. That's "because the 36-month rule would prevent them from executing an exit strategy within 36 months of consummating an add-on acquisition."

In addition to the four new exceptions (see box, p. 292), the proposed rule also makes clear that ownership changes that take place gradually over time won't help an agency avoid the 36-month rule, notes the National Association for Home Care & Hospice. "The amount of ownership is cumulative throughout the 36 months, so that individual transfers of less than 51 percent of ownership to the same  individual or organization are totaled during the period," NAHC explains. Cumulative transfers "will trigger the rule if more than 50 percent ownership transfers to that individual or organization during the time period."

Even with the newly proposed exceptions, the CHOW 36-month rule still will affect many potential transactions that would have no fraud or abuse qualities at all, industry sources protest. CMS needs to implement more exceptions  to the rule for legitimate transactions, Laff says. For example, there should be an exception for when an owner dies and the HHA stock doesn't leave the family, he believes.

Eskenazi would like to see an exception for multi-location agencies that have simply added another location within the last 36 months, he says. Another exception should be for CHOWs when the purchaser is a "highly qualified operator," particularly one that is already participating in the program, Eskenazi says.

Bottom line: "To eliminate fraud, CMS should be focused on the characteristics of the buyer, not the seller," Eskenazi believes. "I would be in favor of allowing any qualified provider who is in good standing with CMS to acquire any other Medicare certified home health agency, regardless of when it last filed an 855."

Stay tuned: CMS is expected to issue its PPS final rule with the finalized CHOW exceptions by the end of the month.