Understanding the Medicare Ramifications of the Change of Ownership (“CHOW”) Rules

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Many people do not understand the rules governing change of ownership for health care providers. This article will clarify a number of misconceptions.

What is  a CHOW?
There are generally two ways to sell a business: an asset sale or the sale of all of the company’s stock/membership interests. When an entity sells its stock/membership interest, the entity continues to exist but has new stockholders/ members. The terms of an asset sale defines exactly what is being sold, such as selling a house.
It is easier to begin by defining what is not a CHOW. A CHOW is not a stock/ membership transfer, even when the Provider’s stockholder/members completely change. Transfer of corporate stock/membership interests or the merger of another corporation into the provider corporation does not constitute a CHOW.[1] The purchase of 100% of a corporation’s stock/membership interest does not implicate the regulation governing CHOWs, as it is not considered a change of ownership for Medicare purposes.[2] 
The short answer to pinpointing a CHOW is that a CHOW typically occurs when a Medicare Provider has been purchased or leased by another healthcare provider. However, determining when a CHOW has occurred is complicated because the regulation, 42 C.F.R. § 489.18, delineates CHOWs by the type of entity at issue.[3] A CHOW occurs when 1) in a partnership when a partner is removed, added, or substituted, “…unless the partners expressly agree otherwise;”[4] 2) in an unincorporated sole proprietorship when there is a “transfer of title and property to another party;”[5] 3) in a corporation when there is a “merger of the provider corporation into another corporation,  or the consolidation of two or more corporations, resulting in the creation of a new corporation;”[6] or 4) “the lease of all or part of a provider facility constitutes a CHOW of the leased portion.”[7] The Provider agreement is automatically “assigned to the lessee only to the extent of the leased portion of the facility.”[8]
The Effect of a CHOW on a Healthcare Transaction and Implications of Rejecting or Accepting Provider Agreement.

A provider which is contemplating or negotiating a CHOW must notify Centers for Medicare and Medicaid Services (“CMS”). [9] A CHOW must be reported to CMS within 30 days of the change by both the buyer and the seller.[10] This is accomplished by submitting Form CMS 855A or Form CMS 855B. The default rule under 42 C.F.R. § 489.18 is that CMS automatically assigns the existing Medicare provider agreement to the new owner.[11] Automatic assignment allows for the uninterrupted participation of the acquired provider, which translates into uninterrupted Medicare payments.[12] Because of the automatic assignment, the provider is generally not required to undergo a survey by the accrediting organization which normally follows CHOW acquisitions.[13]  

However, the CMS Regional Office has the discretion to direct the State Survey Agency to conduct a survey in individual cases where there is a cause for concern.[14] The new owner must notify the Accreditation Organization of the acquisition.[15] The risks associated with automatic assignment is that the buyer will be subject to all applicable statutes, regulations, and terms and conditions under which the assigned agreement originally issued. This includes, but is not limited to, overpayments that the selling entity incurred pre-acquisition. The liabilities for automatic assignment under 42 C.F.R. § 489.18 include:

 (d) Conditions that apply to assigned agreements. . .

“(1) Any existing Plan of Correction.

  (2) Compliance with applicable health and safety standards.

  (3) Compliance with the ownership and financial interest disclosure requirements of part   420, subpart C, of this chapter.

  (4) Compliance with civil rights requirements set forth in 45 CFR Parts 80, 84, and 90.”

Implications of Rejecting an Existing Provider Agreement.
On the other hand, a Provider Agreement can be rejected by indicating on the 855 application that the new owner is rejecting the automatic assignment.[16] This generally precludes successor liability, as discussed above.[17] The voluntary termination is effective as of the date the acquisition is completed.[18] However, voluntary termination of the existing Provider Agreement means that there will be no Medicare payments for services to beneficiaries on or after the acquisition date, until a new Provider number is obtained.[19] There is one exception to this rule, that provides for continuation, up to thirty days, of payments for hospitals or critical access hospital inpatients, home health agency or hospice patients, or skilled nursing facility residents who were admitted prior to the acquisition date.[20] When a new owner rejects the Provider Agreement, the facility is considered an initial applicant under the Medicare Program and must apply for a new Provider number.[21] The new owner must complete the 855 enrollment process, satisfy any other applicable Federal Medicare participation requirements, and undergo an unannounced full survey of their compliance with applicable Medicare requirements.[22] Further, the Accrediting Organization must conduct a full initial accreditation survey after the acquisition date, even if the sold facility had prior Medicare accreditation.[23] The survey will not be conducted until the new facility is fully operational.[24] The effective date for Medicare participation for an entity that rejects the previous Provider Agreement is the date when the last applicable Federal requirement has been met.[25]
When a buyer rejects assignment of the Provider Agreement, the buyer cannot bill Medicare until it obtains a new Medicare provider number from CMS. The process of applying for a new Medicare provider number generally takes eighteen months or more, which is detailed more fully above. In addition, there is a moratorium to obtain a new Medicare number for home health agencies in six geographical areas which have had high incidents of fraudulent activities. New providers wishing to obtain a new Provider Number will not be able to operate Medicare home health agencies in these areas until the moratorium is lifted.
Clarifying Rules for Hospital Acquisition.
Due to hospitals incorrectly applying the rules in the past, CMS issued clarifying rules for hospital-acquisition combination scenarios.[26] If  an existing hospital acquires another facility to use as another hospital campus, then that existing hospital can begin to bill for services provided on the newly acquired campus without interruption.[27] The Provider Agreement related to the new facility is not terminated, rather it is subsumed into the prior existing hospital’s provider agreement.[28] However, if the existing hospital rejects assignment of the acquired hospital’s provider agreement, then the new campus is not eligible for Medicare payments until it has completed a process analogous to an initial applicant for Medicare enrollment.[29] 

There are benefits and risks to automatic acceptance of a Provider Agreement. CMS has provided a huge incentive to healthcare providers to encourage automatic acceptance, but it comes with consequences and potential traps for the unwary. The decision whether to accept or reject the Provider Agreement must be carefully weighed in each individual case.
For more information on these CHOWs, please contact Charles MacKelvie at cmackelvie@kdlegal.com.

[1] 42 C.F.R. § 489.18 (1994).
[2] See Id.
[3] See Id.
[4] Id.
[5] Id.
[6] Id.
[7] Id.
[8] Id.
[9] CMS is the entity that runs Medicare in the United States.
[10] 42 C.F.R. § 424.516 (2012).
[11] See 42 C.F.R. § 489.18 (1994).
[12] Centers for Medicare & Medicaid Services, Acquisitions of Providers/Suppliers with Rejection of Automatic Assignment of the Medicare Provider Agreement: Implications for Timing of Surveys and Participation Effective Date (hereinafter CMS Memo).
[13] Id.
[14] Id.
[15] Id.
[16] CMS Memo.
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] United States v. Vernon Home Health, Inc., 21 F.3d 693 (5th Cir. 1994). 
[22] CMS Memo.
[23] Id.
[24] Id.
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29] Id.