This week we will look at whether the purchase of substantially all of the assets of a healthcare company is a CHOW and why CMS cares about CHOWs. 

When all, or substantially, of the assets of an organization are sold by the seller to the buyer it is an “Asset Purchase” and the buyer begins operating the business.  In general, only assets and liabilities which are specifically identified in the purchase agreement are transferred to the buyer (although some liabilities become the liability of the buyer by law).  The advantage of an Asset Purchase is that the buyer usually assumes few, if any, liabilities.   All of the other assets and liabilities remain with the seller.  Usually, the seller takes the purchase price it receives, pays off all remaining liabilities and distributes whatever is left to the shareholders in accordance with their percentage ownership.

Does an Asset Purchase result in a CHOW?  In an Asset Purchase, the assets and operations move from one entity (seller) to another (buyer).  A CHOW occurs whenever a new entity becomes the responsible party for a provider; therefore an Asset Purchase results in a CHOW. 

A CHOW is important to the Center for Medicare and Medicaid Services (“CMS”) because it needs to know who is responsible for the operation of the business.  When Medicare was enacted in 1965, there was a concern that placing meaningful conditions on enrollment would jeopardize the viability of the Medicare Program.  As a result, there were few barriers to enrolling in Medicare until about 1996.  In 1996, CMS discovered that 32 of 36 new durable medical equipment, prosthetics, orthotics and supply applicants in Miami, Florida were not bona fide businesses.  This led to a larger investigation across the nation where it was determined that numerous inexperienced, unqualified or non-existent applicants were defrauding CMS.

To curb the fraud and abuse of Medicare, CMS developed its enrollment application - CMS Form 855 (“855”).  Now, in order to receive payment(s) from Medicare, a provider must submit an 855 and be enrolled in the Medicare Program.  The 855 is the tool CMS uses to obtain detailed and specific information about providers.  The applicant must submit their tax ID number and often must prove the ability to provide services (e.g. medical licenses, qualified technicians).   The 855 must be signed by an authorized official who has authority to bind the applicant and who has ownership or control of the applicant.

In order to continuously monitor and verify that a provider is compliant with the enrollment requirements, and that continued enrollment is warranted, CMS requires that it be notified within 90 days of most changes to the information furnished on the enrollment application.   However, since a CHOW could result in an unqualified or fraudulent provider becoming the party responsible for the provision of healthcare services, and billing Medicare for such services, a CHOW must be reported within 30 days and failure to do so may result in deactivation or revocation of billing privileges.

At the closing of the Asset Purchase, the Medicare provider agreement is automatically assigned to the buyer unless the buyer rejects the automatic assignment, in writing, 45 days before closing.  Automatic assignment allows for uninterrupted participation in the Medicare program with no required survey.  The downside to automatic assignment is that 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.  This creates an interesting paradox because one of the main reasons for choosing an Asset Purchase structure is to avoid assuming liabilities of the seller.  However, automatic assignment results in the buyer assuming potential liabilities (via the provider agreement) that can have substantial financial and operational ramifications.

A CHOW also requires a final cost report to be filed by the seller within 45 days of closing and the buyer and seller must complete an 855 and submit it to CMS.  Medicare will continue to pay the prior owner until the CMS Regional Office approves the CHOW.  This will typically be several weeks (or more) after closing.