CMS modified some key definitions in the recent PPS rule. They also modified a few of the exceptions because remember, the rule worked on a, “Here is what you can't do unless you fit into an exception.” And in doing that, they've made the rule narrower. They've made the exception effectively broader. Avoid your compliance apprehensions with this expert information provided by our expert in a recent home health training event.
Now, the final rule states that if there is a change in the majority ownership by sale, including – that part doesn't change, it still includes stock transfer, et cetera – within 36 months after the effective date of an agency's enrollment in Medicare; the billing privileges will not transfer to the new owner unless an exception applies. Now, the term “sale” does include asset sales, stock transfers, mergers and consolidations. So this continues the 36-month rule and its definition of sale continues to be broader in the traditional change of ownership rule.
“Change of ownership” is defined in the federal regs, it doesn't include stock sales. Many transactions over the years have been structured as stock transfers or ownership industry transfers when we're talking about a limited liability company to avoid the change of ownership rule. But if you're within that 36-month window, that kind of a transaction isn't going to help because they've specifically included it here.
Now, one of the first things they did change, there's a definition for the term “change of majority of ownership”. Our expert mentioned in a home health training event that this is an important definition because if we're not talking about a change in majority ownership, if you go back to the slide discussing the rule, then we aren't within the realm of what's effective about the 36-month rule because the 36-month rule applies to these changes in majority ownership.
Now, the definition was changed as per the CMS rules, “Change of majority ownership occurs when an individual or organization acquires more than a 50% direct ownership interest in a home health agency during the 36 months following the initial enrollment into the Medicare program or change of ownership.”
The released transmittal expanded to include “within 36 months of enrollment or 36 months of a prior change of ownership”. This makes it clear that the broader definition is going to apply. This is something you have to consider whether you're buying a new agency that's only been in business for three years or an established agency.
Now, the other term is “direct” because the use of the phrase “direct ownership”, CMS got a lot of feedback on that wanting to clarify that they intended that. They intended to state only if it's a change of 50% direct ownership interest in the HHA where we'd be talking about a change of majority ownership.
And CMS said, “That's correct. We did not intend this to apply to changes in direct ownership.” And that right there affects the change in the rule and can create at least one potential way to lessen the impact of the rule.
Now, other aspects of the change of majority ownership. A change of majority ownership includes changes that are the result of the cumulative effect of multiple transactions during a 36-month period. This hasn't changed since the last revision of the healthcare rules. And that means, they changed this in the proposed rule and they left it.
Their concern is, if you buy 2% and 2% and 2% and you do that transaction 26 times, each individual transaction is not a change of majority ownership. It's a change of minority ownership because it's only a 2% change. But after 26 purchases of a 2% interest, you now own 52% of the company and so you have incrementally built a majority ownership.
So what they've said here is the change includes changes as a result of multiple transactions so that if you incrementally moved my way past 50%, the moment the transaction pushes me past 50%, we now have a change of majority ownership. And now we have to consider does the 36-month rule apply.
The final rule modified the exceptions. And they modified them rather significantly according to the home health rules. You'll recall under the original rule there were four exceptions. CMS, after a lot of back and forth with the industry, has come back and in my understanding that a lot of feedback that they got that led to some changes in the exceptions came from banks.
1) Exception number 1: The first big change is in exception 1. It now states that the 36-month rule does not apply to an agency where the home health agency submitted two consecutive years of full cost reports. Now, you recall the exception, it used to have to do with larger publicly traded entities and five-year cost reports.
They simplified this down and it applies to any home health agency – publicly traded or not – if you submitted two consecutive years of full cost reports, note that low utilization or no utilization reports do not count. And so this is going to allow a number of agencies.
New agencies that start submitting full cost reports right off the bat should steer clear of the 36-month rule two years after start-up. Established agencies that have undergone, you know, we go back to the previous example. And we've had a sale and now a few months later on another sale.
2) Exception number 2: Parent company undergoing an internal corporate restructuring such as mergers or consolidations. So here you got a larger entity. Maybe you've got some of the indirect or direct ownership stuff going on and effectively the owners are all going to stay the same because we're just doing a corporate restructuring. But we're going to change which covered entities hold what. Maybe there are mergers.
3) Exception number 3: this is pretty much in the prior rule. Owners of the existing home health agency they decide to change the existing business structure. The individual owners remain the same and there's no change in majority ownership.
So the classic medical compliance example here is you formed your company as an LLC. You have three members. Each of you owns a third. And you've decided to change from LLC to a corporation. Now, there are provisions in most state laws to transform an LLC to a corporation or a corporation to an LLC and there may be tax or other reasons you want to do this.
One of the questions that had often come up with the 36-month rule, “Is that a change of ownership? Am I going to lose my billing privileges when I try to restructure my agency for tax purposes?”
Under this exception, as long as the ownership remains the same, so you have the same three shareholders that you had as members and all we've really done is go from home health agency LLC to home health agency incorporated or an exception number 3 and we're not going to have to deal with the 36-month rule.
4) Exception number 4: So then finally, on number 4 we have the death of an individual owner. You may recall that the exception used to be the death of an individual owner who owns less than 49%. That didn't make a lot of sense.
Home Health Training Example: In many cases, you'd be concerned with the death of an owner. You'll be talking about a closely held company where the owner's going to have 100% and then that exception doesn't do any good and then the estate ends up with the family can't pass the agency down to the estate planning process because the ownership changes.
And someone else noted that the death of an owner of 49% or less wouldn't be a change of majority ownership anyways because you're only moving 49% of the interest, perhaps. And so what they did here is they said, “You know what, it's a death of an individual owner. If an owner dies, we're not going to worry about the 36-month rule.”
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