New rules for changes in hospice ownership are likely to slow down or kill some mergers and acquisitions, according to Ari Markenson, partner at the law firm Venable LLP.
Among the U.S. Centers for Medicare & Medicaid Services’ (CMS) new policies is a rule prohibiting changes of ownership within 36 months of Medicare enrollment, designed to curb quick license sales in an effort to avoid regulatory attention.
Another recently proposed rule would require anyone who holds 5% ownership or more in a hospice must submit to a criminal background check, including fingerprints.
Markenson represents health care provider clients in a range of regulatory and business matters, including M&A, certificate of need approvals and licensing, among others. Hospice News sat down with him to discuss the legal implications of these new and proposed requirements and their potential impact on acquisitions and investments.
There’s a lot of conversation about the payment update with a lot of providers saying that it’s inadequate. But what are some of the aspects of the rule that people aren’t talking about as much that should be getting more attention?
The focus that they’ve put now on their concerns about hospice program integrity, and adding the hospice providers to what’s called the 36-month rule, changing how their survey and certification process is going to work — those issues are pretty significant.
The 36-month rule, when it was implemented for home health really had a significant impact on a very specific type of potential program integrity issue in home health. Home health has been and still is a very easy health care provider type for entrepreneurs to sort of enter the marketplace. And as a result, it also became a place for less than scrupulous folks to join the marketplace.
What CMS found out, and [the U.S. Department of Health & Human Services Office of the Inspector General (OIG)] found out, is that they really had a lot of fraudulent providers at that time in home health, and so they implemented this 36-month provision.
CMS has now said that they’re seeing very similar inappropriate behavior in the hospice program, and so they’re going to apply that same rule to hospice now, though they have some pretty good exceptions.
I actually had a client not too long ago who had set up a new hospice company and did it properly. They knew what they were doing, were running it and getting it started. But then really just had some personal issues where they just couldn’t continue to operate it. So they looked to sell it. Thankfully, they did it before the rule came into effect, but the fact is that there was nothing nefarious about what they were doing.
But had the 36-month rule been in effect, this particular client with the way they were structured, and the fact that no exception would have applied to this, essentially would have either had to completely close down their business and lose whatever value they had in it, or continue to operate it until they could actually transfer.
Can you say more about the exceptions you mentioned?
There are some very important exceptions. One very important exception actually is a kind of internal restructuring exception. If you own a group of providers and you are merging one of them into the other — or essentially, if you own like sort of a conglomerate — you can kind of move things around internally without triggering the rule.
Our firm is in the midst of a massive home health transaction. Had we not been able to take advantage of the implementation of that exception, a very large home health provider would have sort of been tripped up by not being able to go through this sale of the whole company. They would have had to wait 18 months to get past some of these more recent acquisitions they had done.
If you can’t fit into an exception, to transfer ownership you end up having to go through a process of getting an entirely new Medicare number.
How rigorous is that process?
It’s extremely rigorous. The other thing is that about 10 years ago CMS essentially said in this memo to state survey agencies that if a buyer rejects taking the seller’s provider number, they would take their new application and add it to the bottom of the pile.
Essentially, they would slow-walk it, because it’s not their job to protect new buyers from old liabilities. CMS has literally said to the state survey agencies, slow-walk it, take your time.
You’ve said that sellers and buyers should do a thorough review of the application before they get too far down the path toward a transaction. Can you add some color around what that involves and what they should be looking for?
There are some bad apples that have been in the hospice program. And they may say to you, “I’ve got my state license. I’ve got my Medicare provider number. I’ve been in business for so many years, and I’ve got to get out. So I’m gonna give you a good deal if you can close within a certain number of days.”
There are lots of buyers who are just not as careful about that kind of scenario. They essentially say that they will fix it later.
Let’s say you are buying your dream car. On the outside, it is absolutely pristine, and they’re giving it to you for nothing. And you’re saying to yourself that anything that is wrong with this thing mechanically doesn’t matter. I’m just going to give the guy a check and drive it away. But, when you drive off, the wheels fall off and the engine sputters. There are folks who would take that deal.
This is the same kind of thing. If you haven’t done your diligence and your homework to truly understand when that hospice was enrolled or if it went through any other kind of change of ownership, then you all of a sudden find out that CMS doesn’t process it.
You can’t let the seller say to you, “Oh, why do you need to see my transaction documents from this, that or the other thing? Or why do you need to see my old filings?” The answer is: I need to absolutely confirm the history of this provider number.
Regarding the fingerprint test and that scrutiny when it comes to Medicare enrollment, can you add some clarification around to whom that applies? For example, would a private equity investment firm that owns a hospice have to undergo this screening, or would it be limited to the executives at the provider entity itself?
This is just something that all types of investors have had to navigate that they really haven’t had to in the past. I can’t tell you how many times I’ve had to tell an investment fund that I needed one of their principals to fly to Georgia to get fingerprinted. Georgia is one of those states that will not accept fingerprinting outside the state.
With fingerprinting and the heightened scrutiny of ownership, you can’t assume that you can hide behind any sort of passive ownership and not have to disclose who you are.
And I, to be honest, think that’s really unfortunate because there’s a lot of investment funds that could put a lot of money into health care, but they shy away. They simply don’t want to give the information or, due to the structure of their firm, they actually are prohibited from giving the information.
There are structures of certain funds, where there are just straight-out confidentiality provisions that essentially say that the fund itself cannot disclose who its limited partners are, which is perfectly normal in the marketplace. And if you look at the Medicare program integrity disclosure rules, 5% or more equity ownership in an entity all the way up the chain must be disclosed.
I’ve actually had to explain to different individuals that a pension fund, for example, while benefiting individuals does not actually have any kind of ownership. You can’t go further in terms of finding a 5% owner.
If an investment fund is owned by three different pension funds, you basically tell CMS or its contractors that you can give them the name of the pension fund or potentially the name of an executive of the pension fund, but I can’t disclose any more than that. You may get email after email saying that you must tell them who owns that company.
The heightened disclosure rules are an added element of complexity and add an element of difficulty in doing transactions. It slows down transactions, particularly in the investment world.
I’m not begrudging. CMS has an interest in knowing who the puppeteers are. But they’ve done it in a way that is just, “Give me the information, and I’ll decide who the puppeteers are.” And it makes things difficult. You’re going to see a real sort of stomping down on interest in investing.