CHOW Time Just Got Longer: New CMS Policy Memo Increases Gap Period for Buyers Seeking New Provider Agreements

November 15, 2013 By Jack Seal
Vol. XI Issue 45
American Health Lawyers Association Weekly

“When EF Hutton talks, people listen,” or so said the advertising slogan in the 1980s. In health care, when the Centers for Medicare & Medicaid Services (CMS) speaks, everybody listens—and those who don’t often find themselves in less than desirable situations.

For would-be buyers of health care companies and practices, CMS recently spoke (via a policy memo) and buyers would do well to pay close attention. On September 6, 2013, CMS issued a policy memo (Policy Memo)[1] setting out that the time it will take for buyers to obtain new provider numbers is likely to be longer in the future than it has been in recent years. Essentially, the Policy Memo encourages buyers of health care providers to accept Automatic Assignment of their sellers’ Medicare provider agreements. The Policy Memo reflects CMS’ concern that state survey agencies (SA) (e.g. State Department of Health, Division of Healthcare, Health Facilities Licensing and Certification etc.) and accreditation organizations (AO) (e.g. the Joint Commission) may be deviating from CMS policy. 

The Backdrop: Understanding Provider Agreement Assignments in Transactions

One of the major sources of funding for health care providers is Medicare, the government health care program for the elderly. CMS administers the program and pays providers via “Medicare provider agreements” executed with each provider. When a health care provider such as a hospital or skilled nursing facility changes ownership, the change is known in health care parlance as a “CHOW.” A CHOW has numerous regulatory implications, the most important of which often relates to the payment stream received by the facility under its provider agreement and the possible interruption of that payment stream.

Generally, when a CHOW occurs, CMS automatically assigns the existing provider agreement to the buyer (Automatic Assignment). However, a buyer has the option to reject Automatic Assignment, provided it is made in writing by the buyer and sent to the CMS Regional Office at least 45 days prior to the CHOW date, and instead request the issuance of a new provider agreement.  

There are pluses and minuses to accepting Automatic Assignment. On the plus side, Automatic Assignment results in uninterrupted participation of the acquired provider in the Medicare program (and thus uninterrupted payment) and no new Medicare survey of the facility is required. On the minus side, however, the buyer assumes all potential liabilities that may exist under the assigned provider agreement, including plans of correction, Medicare sanctions and penalties, and payment adjustments to the buyer to collect civil monetary penalties (that can be huge). The buyer also assumes the obligation to repay to CMS any past overpayments that may have been received under the provider agreement, regardless of the fact that the buyer did not receive the original funds. 

Automatic Assignment has a material impact on the structure and closing date of most acquisition transactions as buyers often choose to structure the transaction as a purchase of assets in which the provider number is rejected. When a buyer rejects Automatic Assignment, the existing provider agreement is terminated as of the closing of the transaction, and the buyer will be required to apply to CMS for a new provider agreement and CMS certification number. This process is known as the “initial enrollment process” and it creates a gap in the provider’s ability to bill and receive payments from Medicare. This gap extends for the period of time from closing of the transaction until the effective date when the acquired facility again becomes a Medicare participant (Gap Period). Payment is not retroactive upon enrollment, so a provider loses all Medicare income that otherwise would have been earned during the Gap Period. Since the buyer is incurring the cost of operating the facility but not receiving payment from Medicare, the buyer’s economic interest is to have as short of a Gap Period as possible. 

CMS Speaks: The Policy Memo

CMS’ new Policy Memo arises in response to concerns that SAs and AOs are collaborating with buyers who reject Automatic Assignment to minimize the Gap Period. CMS has previously stated that Automatic Assignment of existing provider agreements is an important tool in protecting Medicare trust funds because Automatic Assignment preserves CMS’ ability to recover overpayments. When the Gap Period can be shortened, there is less incentive for buyers to accept Automatic Assignment of an existing provider agreement. Conversely, if the Gap Period is lengthened, some buyers who would have rejected Automatic Assignment may decide to automatically assume the Provider Agreement (usually via a stock purchase). The Policy Memo aims to restrict the ability of the buyers, SAs, and AOs to shorten the Gap Period in an effort to incentivize buyers to accept Automatic Assignment. 

The Policy Memo reiterates two specific points. First, a buyer who rejects Automatic Assignment must be treated like an initial applicant, and thus experience a period of uncertain duration with no Medicare payments. Second, it makes clear that initial surveys conducted by SAs, a pre-requisite to being enrolled in Medicare, are the “lowest workload priority.” 

As part of the initial enrollment, the buyer must satisfy all applicable legal and Medicare participation requirements, including a full and unannounced survey of a “fully operational” facility. To be considered fully operational, the facility must be providing services to a sufficient number of patients or residents so that compliance with all requirements can be determined. Since the survey must be unannounced and unexpected, a provider must be providing services to patients during the entire Gap Period and cannot begin serving patients shortly before the survey. 

The Policy Memo specifies that any survey that occurs within 14 days of the closing of a transaction indicates collaboration with the buyer and “warrants closer review” of whether the survey was unannounced. Further, the Policy Memo goes on to outline CMS’ position on numerous additional parameters related to initial surveys, all of which have the likely effect of lengthening the Gap Period. These include the following:

 Lastly, the effective date of the new Provider Agreement is the date when the last applicable federal requirement has been met, including a finding of substantial compliance on the survey. Importantly, federal requirements include more than just passing the survey; for example, a rehabilitation hospital must also satisfy requirements for Office for Civil Rights compliance documentation and required attestation to the SA. 

Practice Pointers: The Buyer’s Dilemma[2]

Buyers in health care transactions have always had to weigh the risk of assuming their sellers’ liabilities by accepting Automatic Assignment of a provider agreement against the potential loss of income during the Gap Period caused by rejecting the provider agreement. Now, however, CMS has upped the ante for buyers considering rejection.

Over the last several years, many purchasers have been able to obtain new provider agreements very quickly, sometimes in as little as seven days. CMS’ new bright line rule of no less than 14 days for post-transaction surveys is likely to extend this time substantially, especially since the survey must be considered lowest priority for SAs and cannot even be undertaken until the Medicare administrative contractor has issued a recommendation for approval of the buyer to participate in Medicare. 

Violations of the 14-day bright line test will not result in an automatic rejection of the survey. However, buyers who short circuit this minimum timeline do so at their own risk, as their survey then becomes subject to close scrutiny. Even if the survey ultimately survives scrutiny, the additional review is likely to lengthen the survey time. Buyers are cautioned to closely observe CMS’ rule.

Taking into consideration that CMS’ purpose in publishing the Policy Memo is to encourage buyers to take Automatic Assignment, buyers considering Automatic Assignment should undertake careful and thorough diligence to ensure they adequately handicap the risk of assuming liabilities of their seller under the provider agreement. Further, as always, any buyer considering Automatic Assignment should also consider negotiating strong indemnity language and escrow protections with the seller.

Finally, if the buyer chooses to reject the provider agreement, the buyer will need to have enough capital on hand (or readily available) to fund operations at the new facility for an unknown period of time, which now is likely longer than it has been historically. The buyer should also understand that it will have to keep the facility “fully operational” and serving a sufficient number of patients during the Gap Period, despite going unpaid for service to Medicare patients. 

[1] The Policy Memo is issued as S&C: 13-60-ALL and can be found online at: http://www.cms.gov/Medicare/Provider-Enrollment-and-Certification/SurveyCertificationGenInfo/Downloads/Survey-and-Cert-Letter-13-60.pdf

[2] The concepts in this article are not intended as legal advice, and the reader is encouraged to consult counsel regarding the specific facts of any proposed legal undertaking.

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