On January 1, 2010, The Centers for Medicare and Medicaid Services (CMS) closed a loophole in its home health PPS regulations with a rule that is likely to harm more legitimate providers than shady characters, the group the rule supposedly targets. Responding to a known abusive practice, the federal agency applied a sledge hammer where a scalpel was needed, potentially damaging or closing more than 2,000 home care agencies. If buying or selling a Medicare certified home health agency is in your plans, learn — better yet, memorize — 42 CFR 424.550(b).

After several interviews with home health attorneys, consultants and merger/acquisition brokers, we have pieced together a description of a practice that has become known as the “certificate mill.” Quasi-legal entrepreneurs operating on the edges of our service industry apply for Medicare certification, stamp their name on the cover page of a standard policy and procedure manual, undergo a survey and, after a waiting period, receive clearance to submit claims to a Regional Home Health Intermediary (RHHI). Before hiring one nurse or admitting a Medicare beneficiary patient, however, they immediately sell the new “agency.”

According to Chicago attorney Ericka Adler, of the law firm Kamensky Rubinstein Hochman & Delott, LLP, which specializes in health care law, a constant flow of sales contracts arrive on her desk. “They come from people who identify themselves as ‘business brokers’,” she explained, “but it is always the same few individuals reappearing over and over again with new buyers and sellers in tow.”

These people were making as much as $400,000 per transaction.

—Attorney Ericka Adler

The process has been cook-booked. A formula that always wins CMS’s blessing is well known and used over and over again. The only thing not clear is whether there are hundreds of different individuals in the game or a handful of people playing hundreds of times in succession. Everyone we spoke to agreed it had reached epidemic levels, at least in some regions — Chicago, Houston and Los Angeles are often mentioned but it is more widespread than that — and that a rule was needed to stop it.

The motivation? Reports indicate the going rate can be as high as $400,000, willingly paid by someone wishing to open a home care agency but not interested in undergoing the lengthy application process. Without having seen a single patient, owners of these newly formed “agencies” have no trouble locating interested buyers, who either begin to hire staff and see patients after the acquisition or wait a short while and flip it again, often realizing their own $50,000 to $100,000 gain in a year or less. In both cases, the original seller immediately starts the process over again.

First fix attempt failed

CMS itself exacerbated the problem three years ago, making the certificate mill industry more lucrative by adding difficulty to the application process. In a previous failed attempt to curb the rate at which new agencies have been opening since 2001, CMS forced states to allocate state surveyor resources by instituting a 4-tier priority system. Tier one services receive immediate surveyor attention while tiers three and four are dealt with only if no higher priority duties remain, meaning, in practice, never. Sending state surveyors to evaluate a new provider seeking Medicare home health certification was assigned by CMS to tier three.

CMS did offer new applicants an alternative to waiting for infinity for state surveyors to arrive. A survey performed by an independent accreditation organization, at its standard fee, is accepted in lieu of a state survey. Certificate mill prices immediately inflated in response to the resulting supply and demand ratio change.

42 CFR 424.550(b) intended consequences

The new rule that took effect on January 1, 2010 requires anyone purchasing a certified home health agency to reapply for certification as a new provider if the agency being purchased came into existence or underwent another ownership transfer during the previous 36 months. Certainly, this rule should eliminate the certificate mill industry. There is no longer any value, certainly not $400,000, to a certificate that becomes invalid as soon as it is sold.

On the surface, it would appear this is the end of the story. CMS has ended a source of abuse and a group of shady characters must find a new scam. There is much, however, lying just below the surface. CMS itself estimates the rule will “affect” approximately 2,000 home health care agencies.

42 CFR 424.550(b) unintended consequences

CMS has a standard response to those unfairly harmed by the rule. “It’s a shame this happened to you. We wish you well.”

Many honest businesses formed to offer quality skilled nursing and therapy services over the long term, though not the stated target of 42 CFR 424.550(b), will be harmed. CMS has published interpretations of the rule that extend its reach well beyond certificate mills, appearing to surreptitiously address a different, unrelated issue: CMS’s belief that there are simply too many Medicare certified home health agencies.

Unintended consequence #1: clumsy transition period

Until February 18, (see sidebar) ownership transfers signed by the parties in 2009 but pending RHHI approval on January 1, 2010 were to have fallen under the new rule. This provision was to have held whether an RHHI processes ownership transfer notification form 855A in a timely manner or not. On February 18, CMS forced RHHIs to make the date they received an 855A the effective date that determines whether a transaction will be treated under the new or old rule.

Previously, a CMS spokesperson had told us that no special consideration or exception would be made for agency purchasers who closed a deal in 2009, submitted an 855A before December 31 but did not receive RHHI approval until 2010. Their reasoning is that these buyers and sellers had the benefit of the proposed rule as soon as it was published in the Federal Register on August 19 and should have been aware of the need to submit their applications quickly.

“Nonsense,” say more than one consultant interviewed for this story. According to home health attorney Elizabeth Zink-Pearson, of the Edgewood, Kentucky firm Pearson & Bernard, PSC, some of her clients signed sales contracts and submitted 855A forms to Palmetto GBA as long ago as July, more than a month before the proposed rule appeared in the Federal Register, and had heard nothing regarding approval as of mid-February. “The normal procedure, specified in CMS instruction manuals, calls for RHHIs to turn 855As around in 30-60 days.” Zink-Pearson explained, “There can be a delay after they send it to a regional CMS office for final approval, but the total time frame is typically about six months. For an RHHI to sit on it for seven months instead of two before submitting it to CMS is unheard of and beyond understanding but it has been happening frequently since last spring.” There has been no word from CMS about the status of agencies that have already been illegitimately de-activated by their RHHI.

Home health consultant Michael McGowan reports the same types of delays for his West Coast clients at the hands of Cahaba and NGS. “Some of these 855A applications go back to July and August,” he reported. “When they complain to CMS, they are told, in so many words, “That’s a real shame. It is too bad that happened to you.” He added that complaints directly to any RHHI are met with, “You must speak with CMS about this matter.”

Unintended consequence #2: like catching dolphins in tuna nets

Though not included in the language of the proposed (8/19/09) or final (11/10/09) rule, CMS issued an interpretation that includes all ownership transfers in the following categories:

  • Change of ownership (CHOW)
  • Acquisition/merger
  • Consolidation
  • Change request reporting a 5 percent or greater ownership change (including stock transfer or asset sale)
  • Change request reporting a change in partners, regardless of the percentage of ownership involved
  • Corporate reorganization, where the true owner does not change but corporate ownership is altered

According to merger and acquisition consultant Dexter Braff, president of The Braff Group, this broad net captures far more ownership transfers than CMS’s stated target, including large numbers of legitimate providers who have never been near the certificate mill problem. He offered a few examples:

  • A long-time agency owner/operator retires, selling the agency to a married couple, who intend to be active owners themselves. In less than three years, the couple experiences a death or a divorce. The day they notify CMS of how they have reorganized ownership in response to the event, the agency is ineligible to submit claims. The “new owner” must apply as a new agency.
  • A legitimate, highly-regarded agency experiences success and decides to seek investment dollars in order to finance expansion to an additional location and invest in new technologies. The investor requests a small amount of stock in the agency in exchange. If the amount of the stock transfer is 5%or more, the agency must reapply as a new agency and cannot submit claims until approval is finalized.
  • A couple nearing retirement is advised by their tax consultant to gradually transfer ownership of the agency they have operated for ten years totheir son and daughter. He recommends 10% per year for five years, followed by a transfer of the remaining 50% in year six. This couple would have to reapply for Medicare certification every year in years two through six.

The list of circumstances that can shut down the operations of honest providers by a rule supposedly intended to capture only dishonest ones goes on and on, including the death of a minority partner, inheritance situations, merger of two equals even if they have both been operating for many years, et cetera. None of these circumstances have anything to do with controlling the certificate mill industry. All of them will harm good providers faced with unexpected, unavoidable events.

Unintended (?) consequence #3: limbo status worse than de-certification

It is even more diabolical than that, Zink-Pearson insists, thanks to a nuance many readers of the final rule may have overlooked. “If the CHOW is not processed, the rule does not actually de-certified the new owner but only de-activates billing privileges. This is an important distinction. A de-certified agency has access to an appeal process. Under de-activation, there is no such recourse. The new owner has absolutely no legal remedy.” McGowan added that some agencies surprised by their de-activation notices asked to have their CHOW voided but those requests are always denied.

Zink-Pearson noted that CMS admitted in its comments published with the final rule that they expect about 2000 home health agencies to be affected. This approximates the number of agencies that closed their doors in the late 90’s when the Interim Payment System (IPS) was in effect. Was this collateral damage unavoidable? Or might minor changes in the rule, or in CMS’s interpretation of it, have protected legitimate providers while still hampering the certificate mill industry? Perhaps the operative question, keeping the IPS episode in mind, is, “What is CMS’s true intention?” It is either to control the certificate mill problem, the stated intention; to reduce the total number of certified home health agencies CMS has to deal with, the suspected reason, or both. Consultants we interviewed say the answer is not at all clear.

RAC Assistance for Home Care requested a comment from CMS on three questions related to the collateral damage issue. The agency’s official response is that the industry had ample opportunity to submit comments on the proposed rule from August 19 through October 19 and that none of these issues were raised as objections in the 20 comments received.

LATE BREAKING NEWS

Under pressure from NAHC and other industry representatives, CMS already appears to be backing down.

Last Thursday, February 18, CR 6750 was revised. RHHI’s have officially been instructed to treat 855A applications that they received before 1/1/10 under the old rules, regardless of when they get around to approving the application.

Calling this reversal of its December 18 interpretation a “clarification,” CMS has effectively ordered RHHIs to stop being so aggressive in their determinations of which agencies they are permitted to de-activate.

—MedLearn Matters Number MM6750, Revised

“Not only nonsense, but absolutely false,” our attorneys and consultants universally responded. The examples of ignored public comments and interpretations slipped in after the final rule was published form a litany of offenses:

  • There was at least one comment that a 12-month waiting period would have been more than enough to control the certificate mill but that the additional 24 months will only harm legitimate providers. CMS noted the comment but rebuffed it, keeping the proposed rule’s language.
  • Applying the rule retroactively, rather than only to sales of assets or stock that occurred on or after 1/1/10, is not part of the final rule as published. “Pending on 1/1/10″ was added as a CMS interpretation of its own rule, published only in the official instruction to RHHIs, known as Pub 100-08, Transmittal 318, which detailed RHHI responsibilities under Change Request (CR) 6750. Both documents were dated 12/18/09, the Friday before Christmas and five weeks after the final rule appeared in the Federal Register. (CMS has backed down on this provision. See inset text box for late breaking news.)
  • The same is true for the list of transactions that CMS instructed RHHIs to count as ownership transfers, including the low, 5% threshold for stock transfers that produce no change of operational personnel. It appeared for the first time in CR 6750 on December 18.
  • Though CMS stated that it developed this rule because it otherwise does not know whether a new owner will be willing and capable of complying with home health conditions of participation, the broad definition of what constitutes a new owner will cause multiple, wasteful inspections of applicants that have undergone no material management change since their previous application. Stock transfers that leave all management and staff in place and result in no policy or procedure changes are being de-activated at the same rate as those who purchase certificates from the mills.

There is a legal reason expanding a rule’s scope in an obscure document released only to contractors, Zink-Pearson explained. “In court, judges typically defer to CMS’s interpretation of a rule rather than reading the original language and forming their own conclusions. The only legal challenge that can be made is to sue for an injunction in which it is argued that CMS’s interpretation is arbitrary and capricious or otherwise not in accordance with the Constitution. This would be a large, costly approach, inappropriate for any individual agency to pursue.”

Real stories, real people already caught in the net

Beginning the first week of January, new home care agency owners began to receive notices from their RHHIs that their billing privileges were de-activated. Regardless of whether their purchase of an existing agency had been finalized in July or December, regardless of whether the RHHI had delayed processing an 855A CHOW notification, if records showed that a previous ownership transfer of any kind had occurred since January 1, 2007, all payments were stopped within 30 days. Stories are mounting of agency owners that had never heard of the certificate mill problem but who are suddenly without revenue and without recourse. Here is one of those stories.

Agency owner Michele C. — who allowed us to relate her story on condition we did not identify her — is recovering from a stroke. While no one can speak definitively about cause and effect, the event followed three weeks of sleepless nights after her RHHI notified the person to whom she had sold her agency in December that they would be required to apply as a new Medicare agency. Had NGS opened its mail on Friday, December 31, the sale would have been a 2009 sale. But the RHHI says it received the 855A application on Monday, January 4, making it a pending 2010 transaction.

During the transition, however long it takes for the new owner to be certified, neither party may submit Medicare claims. Michele’s former agency does 96% of its billing to insurance companies and 4% to Medicare. Insurance company contracts often require Medicare certification as a condition of treating the company’s covered patients. Prior to the stroke, Michele and her staff, aided by a consultant, spent every business hour explaining to low-level insurance company staff persons the difference between Medicare certification and de-activated billing privileges, hoping to avoid losing her main revenue sources through a misunderstanding.

These are the mistakes Michele and her buyer made. Neither reads the Federal Register every day, leaving them in the dark about the impending rule change. Neither engaged an attorney or consultant with home health industry experience to shepherd them through the sale. They did not pay $10 to ensure delivery of the 855A by December 30. The IRS accepts postmarks as the active date of delivery; RHHIs do not.

It gets worse

Had Michele and her buyer been active Federal Register readers, had they sent their 855A by overnight delivery, certified with receiver signature required, the outcome would have been exactly the same. According to NAHC attorney Bill Dombi, the interpretations included in CR 6750 were complete surprises, not at all expected by those who were studying the final rule in preparing to alert their clients and association members.

Prior to the stroke, Michele filed to rescind her 855A notice of ownership change so she might continue to operate the business. Every RHHI is denying all such requests. In addition, Dombi notes, 855A forms submitted prior to January 1 are not supposed to be subject to the new rule. CMS actually agrees with that interpretation but cannot, or will not, explain why RHHIs continue to violate it with impunity. He said that NAHC may soon resort to asking Congress or the courts to intervene if CMS cannot get its contractors to follow the law.

Recourse: none so far

Though NAHC’s Dombi assures us he continues to negotiate, CMS is so far insisting that the only way to change their current interpretation of the rule is to make a new rule, a year-long process. Buyers and sellers who believe they have been inappropriately subjected to 424.550(b) receive the same answer CMS gives to reporters’ inquiries. “424.550(b) was developed through the HHA PPS rulemaking process. It included a public comment period. No comments were made during the solicitation period about the problems [outlined above]. At the end of the comment period, CMS finalized a policy similar to what was proposed.”

“It is not necessary to make a new rule to change an interpretation,” Zink-Pearson continued her recitation of what she calls CMS’s nonsense statements, “it is not true that they did not receive comments on these specific issues, and it is a stretch to call the final policy, which includes CMS’s interpretations, “similar” to what was proposed.”

One workaround, but it is dangerous

At this early date — the new rule has been in effect for less than two months at this point — paths for legitimate providers to follow are not completely clear. According to Braff, new ownership transfers of agencies subject to the rule, in other words, of agencies that have experienced full or minor ownership changes within three years, may be wise to consider temporary management contracts instead of outright purchases. “These operating agreements would only have to last until the 36-month window closes, which could be six or eight months or less, Braff” he explained, adding, “But this may raise liability concerns. If the seller retires to a beach somewhere and the buyer gets into trouble with CMS, a patient’s family or the IRS, that seller may find out he is not as retired as he thought he was.”

Braff added that the due diligence process for agency buyers has suddenly become more complex. Not only will prospective buyers inspect the seller’s books, interview staff, study Home Health Compare reports and the like. They will also have to perform a thorough search of ownership history, looking for the most minor shifts in corporate structure.

CMS stated in the preamble to both the proposed and final versions of this rule that it was doing this because it finds itself unable to know whether new participants in Medicare home health are willing and able to comply with home health conditions of participation. The way this new rule is working so far, they know no more than they did before. A buyer intent on running a shady or sloppy operation merely has to shop until finding one to acquire that has not had a recent ownership change.

On the other hand, if their intention was to shut down the certificate mill industry, they could have easily accomplished that with a 12-month exclusion instead of 36 months.

All of this exposes a possible gap between the government’s stated and actual motivation. The last time the number of Medicare certified agencies approached the 10,000 mark, CMS created the Interim Payment System, which forced approximately 2,000 closures, though CMS swore at the time that was an unfortunate side-effect and not its intention. We are at 10,000 again. Perhaps 424.550(b) is intended to have unintended consequences of its own.

Next issue

There is much to be learned about the long-term effects of 42 CFR 424.550(b) as we are less than two months into the enforcement period. We welcome comments from affected agency owners. We will continue to seek guidance from consultants and attorneys about how an affected agency should proceed.

your 1st, 2nd and 3rd time preferences

20 Responses to “CMS Admits New CHOW Rule May Force 2,000 Home Health Agency Closures”

  1. Brett Carroll Says:

    We are currently involved in a managment contract with an owner that is in her 70s and ready to retire. The owner has had the agency since 2006 but recently in 2008 had decided to give her granddaughter part of the ownership before she sold the business as a thank you for helping work in the business along the way. Now she cant sell till 2011 and must remain active. Just another unintended consequence.

  2. Tim Rowan Says:

    Brett,
    There are hundreds of these kinds of stories. Is it not clear that CMS could have controlled the illicit selling and reselling of agencies with a 12-month waiting period and that the additional 24 months are intended to serve some other purpose?

  3. John McDonald Says:

    I would be interested in knowing if the changes also include changes in ownership prior to actual enrollment in medicare. All the documentation refers to 36 months after enrollment but not to the year prior during the application process. Could this still allow for changes made prior to recieving your provider number?

  4. CAU | Misery Has Company Says:

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  5. Tim Rowan Says:

    John,
    By my reading, prior ownership changes would not matter. The 36-month clock starts over on the day first Medicare certification is awarded. If there were ownership transfers before or not, what triggers the rule is that it is a new Medicare agency, not a new organization.

  6. Will Says:

    Tim, thanks for the informative read. What is your take on changes of ownership that were completed (not pending) within the period of January 1, 2007 until January 1, 2010? For example, if an HHA transferred ownership and completed the process in late 2009, would the rule retroactively apply to this HHA, and thus, would have to wait until late 2012 to do another change of ownership without being deactivated by Medicare? Thanks.

  7. Tim Rowan Says:

    Will,
    The rule says that CMS will look back three years when presented with any new ownership transfer on or after 1/1/10. If a transfer was completed and the paperwork submitted to your RHHI so that they received it in December, 2009, that ownership transfer would not initiate a 3-year lookback for other transfers. However, if the ownership transfer occurs now, it will initiate a 3-year lookback, which would find the December 2009 transfer. So, the answer to your question is, yes, if you had a transfer just prior to the new rule’s start date, you will be forced to reapply if you have any type of ownership transfer amounting to 5% or more until December of 2012.

  8. Cynthia Says:

    Tim,
    Our new HHA received State (DHS) license 3 weeks ago. Presently we are awaiting Medicare certification survey for deemed status from JACHO. Our company is owned by 50/50 share by me and a friend’s husband. I want to transfer my 50% ownership to my spouse. Does this constitute change of ownership under the new rule?

  9. hilda Says:

    As of July 2010 the CHOW rule has changed, can you explain how it will affect a Medicare Certified Agency that wants to do a CHOW. Will their provider be deactivated by Medicare pending the CHOW?

  10. hilda Says:

    Please explain how the CHOW process changed after July 2010. Can a Certified HHA do a CHOW and their provider not be deactivated pending the CHOW

  11. Tim Rowan Says:

    Hilda,
    Responding to industry pressure, in July CMS rescinded portions of its rule that went beyond what Congress and its own previous rules had authorized it to do. While I strongly urge you to seek legal advice before taking any action, I can state what it seems to say now. If a certified HHA changes ownership twice within three years, the new owner must re-apply for permission to submit Medicare claims. That did not change in July. What changed is that the definition of what constitutes a CHOW reverted to CMS’s own previous definition that was in effect before its November 2009 rule. That rule arbitrarily redefined a CHOW as any transfer of 5% or more of company stock, which Congress did not ask CMS to do. You need to get legal advice on exactly what constituted a CHOW prior to November.

  12. Tim Rowan Says:

    Cynthia,
    I have hesitated to reply because this takes me clearly into the arena of giving legal advice, which I am not qualified to do. See my response to Hilda. The definition of what constitutes a CHOW for purposes of determining whether a new owner must re-apply for permission to send claims to Medicare has reverted to what it was before CMS’s November directive. The illicit ruling that a 5% transfer constitutes a CHOW has been rescinded but you must get legal counsel to sort out your 50/50 situation.

  13. Cristy Says:

    We are a new agency. We are not certified yet but had been waiting to have 7 patients to be able to have the JCAHO survey. Three of the partners wanted to quit and the two partners wanted to buy them out. Are we affected by this? We are not Medicare orJCAHO certified yet.

  14. Tim Rowan Says:

    Cristy,
    I do not offer legal advice but to the best of my knowledge the rule only affects Medicare-certified agencies. If your ownership change occurs prior to your agency receiving permission to send claims to Medicare it does not start the 36-month clock. The clock starts the day you become certified. If the ownership transfer occurs after certification, that might be considered two ownership changes within 36 months.
    Tim

  15. monty Says:

    I have been looking for a home health agency in Florida region 3 to buy and grow but this new 36 month rule has limited the opportunities available. What is the best way to start a new company and complete the medicare certification process. How long does the application process take. Do you have any recommendations for consulting companies to help me with the process?

  16. Tim Rowan Says:

    Monty,
    Frankly, there are far too many home health agencies in Florida already. Starting a new one will take the same amount of time as re-applying for Medicare billing status after acquiring an existing one less than 3 years old. It will also meet with unprecedented resistance from state regulators. The best advice is to find one to buy so that you do not add to the total number and make an already bad situation worse. If you talk to the Home Care Association of Florida and a reputable mergers and acquisitions broker such as The Braff Group, you will eventually find someone ready to retire who has held their certificate for longer than 36 months. A good M&A advisor can also guide you should you identify an agency to buy that does not quite meet the 36-month limit.

  17. ron Says:

    I would like to buy an HHA that was medicare certified in the last 60 days. I would be buying an there existing corporation through a stock purchase. My understanding is the Medicare reverted to there 2009 rules in July 2010 as it relates to stock transfers and that this transaction would not be a change of ownership but a change of information and that it would be allowed. I would be able to bill Medicare right away. Is that correct? Additionally, do you know if I put the change of information in before the end of the year will it fall under the 2010 rules even if they do not finish processing the from until January 2011?

  18. Tim Rowan Says:

    You have moved into a legal technicality area that is beyond the expertise of this blog’s staff. I strongly encourage you to seek advice from an attorney who is familiar with Medicare regulations. Perhaps a phone call to the National Association, if you are a member, would be helpful.
    Tim

  19. Kate Says:

    I have a question about Unintended Consequence #2. When you stated “CMS issued an interpretation that includes all ownership transfers..” were you referring to the (now rescinded) Transmittal 318 or to another piece of CMS interpretive guidance?

  20. Tim Rowan Says:

    This article, published in February of last year, was referring to Transmittal 318, which was withdrawn after pressure from home care associations who found its provisions overkill to accomplish CMS’s intended results.