Letter from Epstein Becker Green to Centers for Medicare and Medicaid Services Re: Proposed Changes to Home Health Prospective Payment Rate for CY 2011

As part of the Home Health Prospective Payment System Rate Update for Calendar Year 2010 Final Rule, CMS finalized a policy stating that "if an owner of a home health agency ['HHA'] 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." (This is referred to as the "36 Month Rule.") Prior to the 36 Month Rule's effective date, the Centers for Medicare and Medicaid Services ("CMS") issued Transmittal CR 6750, which expanded the application of the 36 Month Rule. Several months after the issuance of the Transmittal and after the home health industry expressed its strong concerns with the expanded interpretation of the 36 Month Rule in the Transmittal, CMS rescinded the Transmittal.

On July 23, 2010, CMS proposed changes to the 36 Month Rule as part of Home Health Prospective Payment System for 2011. As part of these proposed rules, the public was provided an opportunity to submit comments. To this end, Epstein Becker Green was asked to submit comments on behalf of a variety of stakeholders (e.g., home health agencies and financial institutions with interests in home health companies, such as private equity, venture capital, and institutional creditors), explaining that the 36 Month Rule (along with the proposed changes in the 2011 Home Health Prospective Payment System rule) is overly broad, prevents a number of legitimate business transactions that support patient care, and in the end will not address the more significant issue that CMS is attempting to address.


September 14, 2010

Dr. Donald Berwick
Administrator
Centers for Medicare and Medicaid Services
Department of Health and Human Services
Hubert H. Humphrey Building, Rm 309-G
200 Independence Avenue, S.W.
Washington, D.C. 20201

        Re:

File Code CMS — 1510-P

Proposed Changes to the Home Health Prospective Payment Rate for CY 2011

Comments Concerning Transfer of Provider Agreement Within 36 Months of Initial Enrollment or Other Change In Ownership

Dear Dr. Berwick:

This letter is submitted in response to the Proposed Rule published by the Centers for Medicare and Medicaid Services (referred to herein as "CMS") in the July 23, 2010 Federal Register regarding changes to the Home Health Prospective Payment System (referred to herein as the "2011 HH Proposed Regulations") and, in particular, proposed changes to 42 C.F.R. § 424.550 concerning the prohibition on the sale or transfer of a home health agency ("HHA") within 36 months of the effective date of the HHA's enrollment in the Medicare program (referred to herein as the "36 Month Rule").

We are submitting these comments on behalf of a variety of stakeholders (e.g., home health agencies and financial institutions with interests in home health companies (i.e., private equity, venture capital and institutional creditors)).

While we, and our clients, appreciate CMS's goal in addressing fraud in the home care industry by eliminating a number of practices, including the creation of "certificate mills," we believe that the 36 Month Rule, along with the proposed changes in the 2011 HH Proposed Regulations, is overly broad, prevents a number of legitimate business transactions which support patient care, and in the end will not address the more significant issue that CMS is attempting to address.

From the outset, we believe that some of CMS's concerns with "certificate mills" may be somewhat misguided. CMS states in the preamble to the 2011 HH Proposed Regulations (along with the preamble to the 2010 regulations) that its justification for adopting the 36 Month Rule is to eliminate businesses establishing home health agencies, obtaining Medicare Provider Agreements without ever having seen a patient or hired an employee, and then selling the Provider Agreements to another party. However, there is an error in CMS's logic as a home health agency cannot obtain a Medicare Provider Agreement without ever having seen a Medicare patient. In order to obtain a Provider Agreement, a home health agency must undergo a survey and become certified by a Medicare certifying organization (such as a State Agency) or through a CMS approved accrediting body. In either case, in order to obtain the Medicare Provider Agreement, these certifying/accrediting bodies require that the home health agency provide services to a minimum number of patients (i.e., 10 patients) prior to obtaining a Medicare Provider Agreement. Home health agencies are then generally subject to state annual licensure surveys and then are required to undergo recertification (or accreditation) every 36 months.

Moreover, as stated above, there are many bona fide transactions that are negatively impacted by the 36 Month Rule. For example, prior to the adoption of the 36 Month Rule in the 2010 Home Health Prospective Payment Regulations, one of our clients had considered purchasing a small operation (referred to as "Target Company") in one of the states where it already maintained operations. The client believed that the transaction would be positive for all parties and that our client would be able to provide higher quality services to Medicare patients in a more cost effective manner. As such, neither the Target Company nor our client is a "sham" organization and neither would be considered "certificate mills." Nevertheless, based upon formal and informal guidance provided to us by representatives of CMS, we understand that if after purchasing the Target Company, our client would either (1) be unable to enter into any transactions to recapitalize the company or sell to (or merge with) another home health company until 36 months following our transaction with the Target Company or (2) be forced to abandon the Target Company's existing Medicare Provider Agreements and wait to begin to bill the Medicare program for services pending the completion of a new survey.

Another effect that we understand that the 36 Month Rule may have for home health agencies is that it may restrict the ability of organizations to obtain financing from institutional creditors because these lenders fear that they may be unable to exercise their right to foreclose on the stock or assets of a home health agency that has defaulted under its credit facility. Specifically, we have been informed that these lenders fear that if the home health agency had experienced a change of control within the last 3 years, the lender would be blocked from exercising its remedies until the Medicare enrollment and survey process had been completed. Moreover, the lenders would be restricted from selling the home health agency to another operator to raise the cash to repay the loan. As a result, we have been led to believe that home health agencies would have limited ability to borrow money for working capital, to pay payroll or to invest in equipment, personnel or expansions which could improve patient care.

Therefore, it is unclear why companies (many of which have been in existence for numerous years) should be limited in its ability to buy other either home health agencies, sell ownership interests in their ultimate parent corporation or undergo a recapitalization. By limiting us in such a way, CMS will significantly hinder our clients' ability to continue to grow, improve our operating systems to most efficiently and effectively provide care, all of which could negatively impact the care our patients receive.

As such, we believe that CMS should eliminate the 36 Month Rule and otherwise address its concerns with Medicare fraud in other ways. For example, one mechanism that CMS could use is its authority under 42 USC 1395bbb(c)(2)(B) to conduct an expedited survey within 2 months of "any change in ownership, administration, or management of the agency to determine whether the change has resulted in any decline in the quality of care furnished by the agency, ?...."

Alternatively, CMS could require that a Provider Agreement will not transfer upon a change of ownership if both the purchasing entity and the selling entity have not been successfully through the State survey process (or deemed accreditation status) and that both parties have never filed a HHA cost report. This should significantly curtail, if not eliminate, certificate mills, while having little to no impact on legitimate providers with long-term operating histories needing to gain access to capital or to go through bona fide changes of ownership. Presumably, CMS would have a much easier time implementing these provisions, which are objective and do not require complicated explanations to determine whether a particular change of ownership transaction would qualify. Similarly, HHAs themselves, as well as financial institutions, would be able to determine whether these requirements were met, ensuring that legitimate business transactions may continue.

However, to the extent CMS is unwilling to repeal the 36 Month Rule, we believe that additional clarification and exceptions are required beyond those set forth in the 2011 HH Proposed Regulations. At a minimum, we request that CMS clarify that the 36 Month Rule only applies to changes of ownership of the legal entity holding the home health agency provider agreement. By way of example, many home health organizations are structured such that there is an ultimate parent holding company that owns various legal entities that, in turn, own and operate home health agencies. While many of the holding companies' home health operations have been in existence for many years (i.e., more than 3 years), some may have recently been acquired from another home health provider or were de novo operations that received their Medicare Provider Agreement only within the last 1-2 years. In this situation, we understand that many of the organizations are owned, at the parent level, by private equity or venture capital firms that may now be looking to sell their interests to another investor. As currently written, the 36 Month Rule provides that a home health agency must obtain a new Medicare Provider Agreement if, within 36 months, there has been a "change in majority ownership of a home health agency by sale (including asset sales, stock transfers, mergers, consolidations)?..." (emphasis added.) We believe that an argument could be made (and that CMS should confirm this interpretation) that the 36 Month Rule applies only when there is a change of ownership of the legal entity that directly owns and operates the home health agency and which possesses the provider agreement. Moreover, we ask that CMS confirm that to the extent the holding company undergoes a recapitalization or its current owners sell their interests to other institutional investors, a change of ownership at this level (i.e. at the parent or grandparent level) would not be a change of ownership of the "home health agency" and, therefore, would not trigger the limitations set forth under the 36 Month Rule.

In addition, we suggest that CMS modify the 36 Month Rule to only apply to "changes of ownership" as defined under 42 CFR 489.18. As currently proposed, 42 CFR 424.550(b)(1) applies to a "change in majority ownership of a home health agency by sale (including asset sales, stock transfers, mergers, consolidations)?..." However, the phrase included in the parenthesis "including asset sales, stock transfers, mergers, consolidations" is broader than CMS's previous definitions of a change of ownership and, therefore, the 36 Month Rule should be modified to eliminate the parenthetical clause and that it be defined in a manner that is consistent with 42 CFR 489.18.

We also believe that an exception to the 36 Month Rule is needed in order to eliminate its application to situations in which a bona fide lender forecloses on the stock and assets of a home health agency and looks to sell such home health agency to a third party to facilitate a repayment of a loan.

We appreciate the opportunity to comment on these proposed regulations, and we look forward to further clarification of these issues. In the meantime, please feel free to contact me if you have any questions or require further information in this regard.

* * *

We appreciate the opportunity to comment on these proposed regulations, and we look forward to further clarification of these issues. In the meantime, please feel free to contact me if you have any questions or require further information in this regard.

Sincerely,

David E. Matyas