The Health Care Investor : Healthcare Lawyers & Attorneys for Life Science Companies & Investors

On November 2, 2010, CMS issued a final rule and commentary clarifying the “36 Month Rule” applicable to home health agencies (“HHAs”) that participate in the Medicare Program. The final rule contains several significant changes that narrow the scope of the rule’s application and increase the flexibility for investors in HHAs. The final rule impacts a change in majority ownership of an HHA by sale (including an asset, stock, merger or other consolidation) which occurs 36 months after: (1) the effective date of an HHA’s initial enrollment in Medicare, or (2) within 36 months after the HHA’s most recent change in majority ownership. In such situations the HHA’s Medicare Provider Agreement and Medicare billing privileges do not convey to the new owner and the new owner must instead enroll in the Medicare program as a new HHA and obtain a state survey or accreditation.

There are several key exceptions and clarifications in the final rule as follows:

1.                  If the HHA that is changing ownership has submitted 2 consecutive years of full cost reports (and not low utilization or no utilization reports), the 36 Month Rule does not apply.

2.                  If the owner of an existing HHA is simply changing existing business structure (i.e., a corporation is converting to an LLC) then the 36 Month Rule does not apply.

3.                  The final rule clarifies that if any owner (regardless of such owner’s level percentage ownership in the HHA) dies, then the 36 Month Rule does not apply.

4.                  The commentary to the final rule indicates that changes of ownership at a parent company level or other indirect ownership changes do not trigger the 36 Month Rule’s application.

Investors in home health agencies should consider the implications of the 36 Month Rule in acquisitions of HHAs and also in investing and starting up new HHAs. In large part the future application of the 36 Month Rule can be avoided by simply utilizing a parent holding company for any HHA investments. The text of the final rule can be accessed here.

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With the mid-term elections now behind us and the Republicans faring as successfully as generally predicted, all segments of the healthcare industry are looking closely at what the new Congressional power balance will mean for them. With several seats still in question as states finalize vote counts, the House membership will include at least 241 Republicans (largest since 1946) and at least 184 Democrats, while the Democrats will retain the majority with a slimmer margin.   This shift is the largest seat gain by either party since 1948.   Since then, the biggest change had been the 1994 Clinton-term Republican gain.   

High on the Republican agenda will be tackling the Obama-backed sweeping healthcare reform law passed this spring. Although a full scale repeal of the Patient Protection and Accountable Care Act (PPACA) is highly unlikely, Republicans will likely be looking at every available opportunity to slow down or roll back the healthcare legislation.  Many in the new Congress will be sure to stage strong opposition to new rulemakings and appropriations that are necessary to implement the key components of PPACA in an effort to minimize or delay the practical impact of the law. 

The healthcare sectors most immediately effected by PPACA are already reaching out to their seated and newly elected legislators to gain their ear on key issues. It has been well publicized, and we’ve discussed in prior blog posts, that the physician-owned hospital industry was a particular target in PPACA through Section 6001, which contained massive changes to the Stark law exception under which physician-owned hospitals have historically operated and been permitted to bill Medicare/Medicaid for referrals by their physician owners. Physician Hospitals of America (PHA) and its member hospitals will be working hard to educate newly elected legislators on the issues surrounding Section 6001 in an effort to obtain legislative relief through an amendment of Section 6001 or through the rulemaking process. These efforts of PHA are in addition to the ongoing litigation it has waged in conjunction with Texas Spine & Joint Hospital challenging the constitutionality of Section 6001. Even with the new shift in Congressional power, the industry will very likely continue to face powerful opposition, including from the American Hospital Association (AHA), which has the 5^th largest PAC in the country. The AHA and Federation of American Hospitals (FAH) together have spent $6,344,522 since 2007 on their advocacy efforts, a large component of which is tighter restrictions on physician ownership in hospitals.

Other sectors have also already started making moves to ensure their voice is heard. As the new Congressmen and Senators take office and Congressional leadership and committee leadership take shape, we will very likely see the divergent party healthcare agendas again at the forefront of Congressional activity and should soon see which sectors are most heavily impacted.

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