Health Care Alert
February 2010
Authors:
Richard P. Church
richard.church@klgates.com
919.466.1187
Darlene S. Davis
darlene.davis@klgates.com
919.466.1119
Virginia E. Worthy
jenny.worthy@klgates.com
704.331.7508
K&L Gates includes lawyers practicing out
of 36 offices located in North America,
Europe, Asia and the Middle East, and
represents numerous GLOBAL 500,
FORTUNE 100, and FTSE 100
corporations, in addition to growth and
middle market companies, entrepreneurs,
capital market participants and public
sector entities. For more information,
visit www.klgates.com.
CMS Update: New Rules for Home Health
Agencies Undergoing Ownership Changes
Further Update (December 17, 2010)
On November 17, 2010, the Centers for Medicare and Medicaid Services (“CMS”)
published the final rule governing policies and payments made under the home
health prospective payment system for calendar year 2011 and adopted the proposed
rule changes to the 36 month rule (the “Final Rule”) described in the July 23, 2010
update below. The Final Rule makes a number of revisions to the proposed rule,
most notably:

Confirms that the Final Rule only applies to a “direct” ownership change of a
home health agency (“HHA”) via change to the “[c]hange in majority
ownership” definition.1

Confirms that cumulative transfers of a majority interest in an HHA are subject
to the Final Rule via changes to the “[c]hange in majority ownership”
definition.2

Adds a broad new exception for existing HHAs that have submitted full-year
Medicare cost reports for two consecutive years. The Final Rule specifies that
cost reports indicating low utilization or no utilization will not qualify as full
cost reports.3

Removes the five year cost reporting requirement from the exception for parent
companies undergoing an internal restructuring.4

Adds an exception for an HHA changing its existing business structure (e.g.,
from a corporation to a partnership) provided that all owners will remain the
same.5

Expands the exception for death of an owner to include any death whether of a
minority or majority owner.6
In addition, CMS reiterated that HHAs undergoing a new enrollment generally or as
a result of the Final Rule must meet the initial reserve operating funds requirements
found at 42 C.F.R. § 489.28. The Final Rule also revised those requirements by
clarifying that HHAs must meet the initial reserve operating funds requirement from
the period beginning upon submission of the enrollment application until three
months after billing privileges are conveyed.
1
See 42 C.F.R. § 424.502.
See id.
3
Id. § 424.550(b)(2)(i). In light of this new broad exception, CMS removed from the Final Rule the
proposed exception for publicly traded companies with five years of cost reports.
4
Id. § 424.550(b)(2)(ii).
5
Id. § 424.550(b)(2)(iii).
6
Id. § 424.550(b)(2)(iv).
2
Health Care Alert

The provisions of the Final Rule only apply to
transactions whose effective date is after
January 1, 2011; however, via comment and
examples, CMS reiterated that the Final Rule
will be implicated by transactions occurring
after January 1, 2011, but within 36 months of a
prior change in majority ownership regardless of
whether the prior change of majority
ownership occurred before January 1, 2011.
20117 and promulgated changes to the 36 month
rule (the “Rule”) described below. CMS now
proposes that 42 C.F.R. § 424.550(b)(1) will apply
to any change in majority ownership during the 36month time period after the effective date of the
home health agency’s (“HHA”) enrollment in
Medicare.8 The proposed rule would amend 42
C.F.R. § 424.502 by defining “Change in majority
ownership” to mean an individual or organization
acquiring more than a 50 percent interest in an HHA
via asset sales, stock transfers, mergers, or
consolidations during the 36 month window.9 In
commentary, CMS clarifies that such change may
include a cumulative acquisition of more than 50%
interest during that time period via multiple
acquisitions of small amounts of stock.

A change of majority ownership within 36
months of an excepted transaction under the
Final Rule will be subject to the Final Rule.
In addition, the proposed rule also includes
proposed exemptions to the Rule in the following
limited circumstances:

For purposes of meeting the cost report
exception, the two years of cost reports must
be consecutive and must have been accepted
by the contractor.

Where a publicly-traded company is acquiring
another HHA and both entities have submitted
cost reports to Medicare for the previous five
(5) years.

For HHAs undergoing changes in business
structures other than those specifically
mentioned in the Final Rule (e.g. corporation
to LLC), the CMS contractor should contact
the Division of Provider and Supplier
Enrollment liaison for guidance as to the
applicability of the exception.

Where an HHA parent company is undergoing
an internal corporate restructuring, such as a
merger or consolidation, and the HHA has
submitted a cost report to Medicare for the
previous five (5) years.

CMS contractors should not notify a HHA
that a transaction will be subject to the Final
Rule (i.e. require mandatory re-enrollment)
without first obtaining approval of the
contractor’s CMS liaison.
On December 17, 2010, CMS issued Transmittal
362 (Change Request 7256) instructing CMS
contractors on how to implement the Final Rule and
a MLN Matters MM7256 instructing providers on
the Final Rule. CMS clarified the following items in
the Transmittal and MLN Matters article:
The Transmittal also provides substantial guidance
on how CMS contractors are to implement the
enhanced initial reserve operating funds
requirements found in the Final Rule.
Further Update (July 23, 2010)
On July 23, 2010, the Centers for Medicare and
Medicaid Services (“CMS”) published the home
health prospective payment system proposed rule for
7
See Medicare Program; Home Health Prospective Payment
System Rate Update for Calendar Year 2011; Changes in
Certification Requirements for Home Health Agencies and
Hospices, Proposed Rule, 75 Fed. Reg. 43236 (July 23,
2010).
8
In commentary to the proposed rule, CMS interprets this
period to include “the first 36 months of when the HHA is
initially conveyed Medicare billing privileges or the last change
of ownership (including asset sale, stock transfer, merger or
consolidation).” See 75 Fed. Reg. at 43266.
9
Interestingly, in commentary to the proposed rule, CMS
suggests such incremental changes of ownership would each
be reported as a change of information to the HHA provider’s
enrollment file. See 75 Fed. Reg. at 43266. This suggestion
appears to run contrary to existing Medicare 855A
requirements that require a provider to identify all owners of
greater than 5% interest in a provider, but do not require
reporting of ownership percentages. As such, a shift within
existing ownership percentages of a previously reported 5%
owner does not appear to be required to be reported as a
change of information.
February 2010
2
Health Care Alert

Where the owners of an existing HHA decide to
change the existing business structure (e.g.,
partnership of a limited liability corporation or
sole proprietorship to subchapter S corporation),
the individual owners remain the same, and
there is no change in majority ownership (i.e.,
50 percent or more ownership in the HHA.)

Where the death of an owner who owns 49
percent or less (where several individuals and/or
organizations are co-owners of an HHA and one
of the owners dies) interest in an HHA.
CMS is currently accepting comments on the
proposed rule through September 14, 2010.
However, in light of the various interpretations taken
by CMS as to the original rule, it is not clear at this
time if CMS would take the position that the existing
rule should be interpreted by contractors in a manner
consistent with the proposed rule changes.
Further Update (May 10, 2010)
Amid concerns over the application of 42 C.F.R. §
424.550(b)(1) (the “Rule”), the Centers for Medicare
and Medicaid Services (“CMS”) rescinded
Transmittal 318 (Change Request 6750), dated
December 18, 2009, amending the Medicare
Program Integrity Manual to implement the Rule
(the “Transmittal”) as well as the associated
Medicare Learning Network MLN Matters regarding
the same. In an email to representatives of industry
stakeholders, CMS stated it will not be replacing the
Transmittal at this time, but it is in the process of
considering future rulemaking regarding the Rule.
Additionally, CMS indicated it is in the process of
instructing contractors to apply the Rule only to
those ownership changes that fall under the
definition of “change of ownership” as defined in 42
C.F.R. § 489.18. Notably, however, as of May 7,
2010 the Medicare Learning Network Provider
Inquiry Assistance article (instructing CMS
contractors regarding implementation of the Rule)
was still available on the CMS website and does not
reflect the Transmittal rescission.
Update (February 26, 2010)
Via revisions to an MLN Matters article dated
February 18, 2010, the Centers for Medicare and
Medicaid Services ("CMS") clarified that 42 C.F.R.
§ 424.550(b)(1) (the “Rule”) would not apply to
home health agency applications reporting an
ownership change received before January 1,
2010.10 As noted below, previously CMS had
indicated an intent to apply the Rule to any Form
CMS-855A application reporting an ownership
change that was still in process with a CMS
contractor even if the application had been filed
prior to the Rule’s stated January 1, 2010 effective
date. Due to quite frequent delays in processing
applications, in this regard, the Rule would have
potentially been applied to transactions reporting
ownership changes that were filed even before the
Rule was promulgated in final form.
CMS Update: New Rules for
Home Health Agencies
Undergoing Ownership
Changes
On November 10, 2009, the Centers for Medicare &
Medicaid Services (“CMS”) published the home
health prospective payment system final rule for
calendar year 2010.11 The final rule includes
several provisions intended to address program
integrity concerns in the home health industry.
Most significant in that regard is the provision
concerning sales or transfers of ownership of home
health agencies (“HHAs”), which prohibits the
assumption of the Medicare provider agreement by
a new owner when an HHA has initially enrolled
within the previous thirty-six (36) months (the
“Rule”). In mid-December, CMS issued a program
transmittal instructing its contractors on the
interpretation and implementation of the Rule that
appears to substantially broaden the scope of the
Rule, with potentially serious consequences for the
unwary.
The Rule
Prior to January 1, 2010, CMS regulations provided
for the automatic assumption of the Medicare
provider agreement when an HHA underwent a
change of ownership as defined in 42 C.F.R. §
10
Home Health Prospective Payment System Rate Update
for Calendar Year 2010, 74 Fed. Reg. 58,078 (Nov. 10, 2009)
(hereinafter HHA Final Rule).
11
Id. at 58,118.
February 2010
3
Health Care Alert
489.18 (a “CHOW”). In commentary to the Rule,
CMS argued it is necessary in light of various
examples of fraud—notably in Florida and Texas—
where HHAs have undergone frequent CHOWs with
the new owners acting merely as nominal figures in
the HHA.12 Accordingly, the Rule, which is
effective January 1, 2010, provides:
If an owner of a home health agency 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. The prospective provider/owner of
the HHA must instead:
(i) Enroll in the Medicare program as a new
HHA under the provisions of § 424.510,
and
(ii) Obtain a State survey or an accreditation
from an approved accreditation
organization.13
The implications of the Rule on providers are
significant. Because Medicare certification for initial
enrollment is not retroactive to the application date
(as in the case of CHOW, where it may be
retroactive to the date of the sale or transfer),
providers subject to the Rule must forgo Medicare
reimbursement from the effective date of the sale or
transfer until at the earliest the date of the required
survey.14 Given the timeline for processing
applications and performing surveys, this
reimbursement gap could be substantial—six to nine
12
42 C.F.R. § 424.550(b)(1).
New enrollments are effective as of the survey date if all
requirements are met as of that date, or, if all requirements are
not met, the subsequent date (a) all requirements are met or
(b) all conditions of participation are met and an acceptable
plan of correction is received for any lower-level deficiencies.
See id. § 489.13(b).
14
Under a memorandum to state survey agency directors,
CMS has instructed state survey and certification agencies to
make initial enrollment surveys a low priority when deemed
accreditation status is otherwise available. See Memorandum
from Thomas Hamilton, Director, Survey and Certification
Group, to State Survey Agency Directors (S&C 08-03) (Nov. 5,
2007), available at
www.cms.hhs.gov/SurveyCertificationGenInfo/downloads/SCL
etter08-03.pdf.
13
months or more.15 Further, in states that require
HHAs to be enrolled in Medicare in order to
participate in Medicaid, the Rule might also affect
Medicaid reimbursement.
Notably, in commentary to the Rule, CMS
repeatedly used the term “change of ownership” in
elaborating on the application of the Rule and stated
that applications that are pending or in process as of
January 1, 2010, are subject to the provisions of the
Rule.16 The former item is noteworthy because a
“change of ownership” or CHOW is narrowly
defined by regulation at 42 C.F.R. § 489.18. The
latter is noteworthy insofar as providers with sale or
ownership transfer applications on file with their
regional home health and hospice intermediary
would now be subject to the Rule and a potential
reimbursement gap notwithstanding that they had
timely filed an application well before the Rule was
promulgated in final form.
The CMS Transmittal
On December 18, 2009, CMS attempted to further
clarify the types of transactions subject to the Rule
via a Transmittal amending the Medicare Program
Integrity Manual (the “Transmittal”).17 However,
the Transmittal is noteworthy insofar as it may
suggest that the Rule is applicable to situations
beyond those immediately evident by the text of the
Rule and its associated commentary. The
Transmittal provisions begin, “Effective January 1,
2010—and per 42 CFR § 424.550(b)—an HHA
may not undergo a CHOW pursuant to 42 CFR §
489.18 if the ownership change occurs within 36
months” after the effective date of enrollment or
most recent ownership change. However, CMS
then goes on to equate a change of ownership with
an “ownership change” throughout the remainder of
the Transmittal. An “ownership change” is then
defined by CMS to include any of the following:
1. CHOW;
2. Acquisition/merger;
15
HHA Final Rule, 74 Fed. Reg. at 58,118.
Centers for Medicare and Medicaid Services, Transmittal 318,
CMS Manual System Pub 100-08 Program Integrity Manual,
Implementation of Home Health Agency Program Safeguard
Provisions (Dec. 18, 2009).
17
Id.
16
February 2010
4
Health Care Alert
3. Consolidation;
4. Change request reporting a 5 percent or greater
ownership change (e.g., stock, transfer, asset
sale); and
5. Change request reporting a change in partners,
regardless of the percentage of ownership
involved.18
Thus, the Transmittal might be read to suggest that
the Rule is applicable to any “ownership change”
within thirty-six (36) months of any other
“ownership change,” where both such changes might
have been nothing more than the reporting of the
sale of a 5 percent minority ownership interest.
Significantly, in this regard, an “ownership change”
is defined to be much more than just a CHOW under
42 C.F.R. § 489.18 as such transfers of minority
stock interests are explicitly excluded from the
definition of a CHOW under 42 C.F.R. § 489.18.
The Transmittal also instructs CMS contractors on
how to handle Medicare filings in light of the Rule.
Under the Transmittal, the contractor is instructed to
verify the effective date of the change by requesting
a copy of the transfer agreement, sales agreement, or
bill of sale (whichever is applicable). Thus, the
contractor will not simply rely on the projected date
of the sale as listed on the Medicare filing. If the
sale has not yet occurred, the contractor is instructed
to inform the HHA that it must also submit a CMS855A voluntary termination application to terminate
the current provider agreement and go through the
new enrollment process. If the sale has already
occurred, the contractor is instructed to deactivate
the existing HHA’s billing privileges so that
Medicare payments will be withheld until the new
enrollment is approved.19
In this regard, many sellers and potentially even
buyers of HHAs may be captured by the Rule, which
would result in their disenrollment from the
Medicare program. For example, an HHA that
underwent a reorganization in the past thirty-six (36)
months captured by the Transmittal (whether or not
a CHOW, but for example resulting in a change of
information filing within the scope of the
Transmittal), which then permitted the entry of a
new equity investor of 5 percent or greater (again in
conjunction with an asset sale in exchange for
equity or entirely unrelated to a CHOW), may be
captured by the Rule as interpreted by CMS, subject
to being disenrolled from Medicare, and subject to
the reimbursement gap associated with a new
enrollment.
Potential Update to the CMS
Guidelines
In light of concerns that the Rule, particularly as
interpreted by the Transmittal, is overly broad, CMS
has been contacted by industry trade groups and
HHAs to seek clarification or retraction of some or
all of the Rule and/or the Transmittal. Accordingly,
providers should remain vigilant for additional
guidance on this matter from CMS. In the
meantime, providers contemplating a transaction or
transfer of any type reportable to CMS should
carefully consider whether the provider has
undergone an “ownership change” as broadly
defined by the Transmittal within thirty-six (36)
months of its potential “ownership change” (again
as broadly defined) to determine the potential
application of the Rule on any provider involved in
the transaction.
For questions and concerns related to the Rule,
please contact:
Jonathan K. Henderson
817.347.5278
jon.henderson@klgates.com
William J. Spratt, Jr.
305.539.3320
william.spratt@klgates.com
Richard P. Church
919.466.1187
richard.church@klgates.com
18
Id.
Available
at: http://www.cms.hhs.gov/MLNMattersArticles/downloads/M
M6750.pdf.
19
February 2010
5
Health Care Alert
Anchorage Austin Beijing Berlin Boston Charlotte Chicago Dallas Dubai Fort Worth Frankfurt Harrisburg Hong Kong London
Los Angeles Miami Moscow Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park
San Diego San Francisco Seattle Shanghai Singapore Spokane/Coeur d’Alene Taipei Tokyo Warsaw
Washington, D.C.
K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous
GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market
participants and public sector entities. For more information, visit www.klgates.com.
K&L Gates is comprised of multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and
maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in
Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named
K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an
office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L
Gates Jamka sp. k.) maintaining an office in Warsaw; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in
Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each
entity is available for inspection at any K&L Gates office.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon
in regard to any particular facts or circumstances without first consulting a lawyer.
©2010 K&L Gates LLP. All Rights Reserved.
February 2010
6