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.