Policy guidance (the Policy) announced on March 1, 2010, by the North Carolina Department of Health and Human Services (DHHS) may have wide-ranging and possibly unintended effects on successor liability in transactions involving Medicaid providers. The Policy appears to require that all new providers resulting from a change of ownership, merger or acquisition agree in writing to assume “all liability” of the former provider if they wish to be enrolled in the North Carolina Medicaid program.

The ability of DHHS to affect successor liability in healthcare transactions by this Policy raises several legal issues and concerns. Although the Policy may have been intended solely to assist DHHS in protecting its recovery of Medicaid recoupments, the “all liability” breadth of the Policy should be a concern for North Carolina Medicaid providers.

Successor liability in general

Successor liability is frequently a primary issue in determining whether a proposed acquisition transaction involving healthcare providers is structured as an asset purchase, stock purchase or merger, and whether and how subsidiaries are used. Transactions are often structured as asset purchases primarily to allow the acquirer to avoid assuming any of the liabilities of the acquisition target. The liabilities the acquirer wants to avoid include items unrelated to Medicaid recoupments, such as tax, general liability, malpractice, fraud and abuse, benefits plan, employee, business or trade, and other liabilities.

These asset purchases come with a price. The acquirer must file a change of ownership (CHOW) form with Medicare and state Medicaid and may not bill for items or services until the CHOW form has been processed and accepted by the Medicare and applicable state Medicaid programs. In effect, healthcare asset purchases trade off lost revenues to avoid the assumption of liabilities.

What is the new Policy

The Policy’s announcement in DHHS’ March 1, 2010, Implementation Update # 70 occurs at a time when DHHS is addressing its concerns that known Medicaid recoupments or actions that lead to paybacks not be lost when mergers or acquisitions occur.

On January 4, 2010, DHHS proposed regulations requiring that all healthcare providers supply a performance bond or executed letter of credit if any one of several factors exists. One factor is if:

[t]he provider cannot reasonably demonstrate that it has assumed liability and is responsible for paying the amount of any outstanding recoveries to the Medical Assistance Program as the result of any sale, merger, consolidation, dissolution or other disposition of the healthcare provider or person.

The proposed regulations are limited to assuming liability for the payment of outstanding recoveries to the Medical Assistance Program. However, the Policy does not limit the assumption of liability to Medicaid recoupments.

The Policy states that a Medicaid-enrolled provider must notify CSC (North Carolina’s designated Medicaid provider enrollment agent) within 30 days after a “change of ownership/merger/acquisition.” This term is broadly defined to include the following.

  • An exchange of monies or an asset purchase, both of which result in the assignment of a new tax identification number; a stock purchase, which may not result in the assignment of a new tax identification number;
  • A change in a shareholder’s/partner’s percentage of interest in ownership; or
  • A transfer of title and property to another party, or a merger of the provider corporation into another corporation, or the consolidation of two or more corporations resulting in the creation of a new corporation.

Within the 30-day period, the provider must (a) submit a new online Provider Enrollment Application and (b) use company letterhead to provide CSC with certain content and details, including a Liability Statement. The change of ownership/merger/acquisition “shall not be approved” unless the new owner or entity:

agrees in writing to assume all liability, including, but not limited to, cost report settlements, health care assessment settlements, or recoupment actions, that have arisen or that may arise in connection with claims billed by the provider. This will allow the new owner to retain the previous owner’s Medicaid provider number(s) if desired.

North Carolina providers have become accustomed to state laws and regulations requiring the assumption of liability for Medicaid recoupments or paybacks upon a merger or acquisition. However, if the Liability Statement’s assumption of all liability literally means “all liability,” are providers willing to accept as a condition of Medicaid participation that they assume a target provider’s tax, general liability, malpractice, fraud and abuse, benefits plan, employee, business or trade, and other liabilities?

The Policy says that the Liability Statement “will allow the new owner to retain the previous owner’s Medicaid provider number(s) if desired.” The intended meaning of this statement is unclear. Read literally, it may mean that the acquirer in a stock purchase has the option to retain the acquisition target’s Medicaid provider number, thereby permitting the acquirer to bill North Carolina Medicaid immediately and without the customary wait for a new provider number? It may also be a restatement of existing law and regulations to the effect that the acquirer of a provider in an asset purchase may retain the old provider number.

Issues raised by the Policy

The Policy raises a variety of legal questions, such as whether a policy statement can affect how North Carolina administers a CHOW. Legislation or an administrative rule regarding administration of a CHOW would require the state to follow administrative procedures to establish or amend existing rules and regulations.

In addition, the Policy raises the issue of the state’s authority to force a new provider to assume liabilities to the federal government and other third parties, and how may the federal government or third parties enforce an action against a new provider based on a Liability Statement letter given by a new provider to CSC?

The Policy also radically changes the concept of “approving” a CHOW. The federal Medicare program requires an approval in the sense that that Medicare must receive all of the requested information and documentation under the relevant form, and there must have been a successful Medicare survey. However, for DHHS to withhold “approval” of a CHOW unless a provider agrees to a significant new requirement such as the assumption of all liability of a previous provider is at the least an aggressive interpretation of regulatory authority.

In reviewing the magnitude of the effect on successor liability that a literal reading of the Policy’s mandatory Liability Statement would have, one could possibly conclude that DHHS intended that the Policy address only Medicaid recoupments and paybacks. This could be inferred from DHHS’ January 4, 2010, proposed regulation, or the Policy’s recitation that the “all liabilities” assumed in the Liability Statement include “cost report settlements, health care assessment settlements, or recoupments actions.”

Regardless of what limited liabilities DHHS may have meant to address, the Policy specifically requires that the Liability Statement contain the new provider’s writer agreement to assume “all liability.”

What can providers do with respect to the Policy

Clearly, North Carolina providers should be extremely concerned about the Policy’s potential watershed change in successor liability. Not every new provider wants to retain the old provider’s Medicaid provider number(s), and no new provider wants to assume a previous provider’s tax, general liability, malpractice, fraud and abuse, benefits plan, employee, business or trade, and similar liabilities if it can be prevented.

We discussed the Policy with Richard Oliver, team leader of the Local Management Entity Systems Performance Teams for the Division of Mental Health, Developmental Disabilities and Substance Abuse of DHHS. According to Mr. Oliver, DHHS is aware of assumption of liability concerns already expressed by some providers since the March 1 publication of the Policy. He confirmed that DHHS has a key interest in assuring that new providers assuming liability for Medicaid recoupments, paybacks, and similar actions, through the letter required by the Policy and the performance bond or executed letter of credit required in the rules proposed by DHHS in January.

Mr. Oliver encourages providers to offer suggested revisions to the language of the Policy that would protect DHHS’ interest in Medicaid recoupments, paybacks, and similar actions, while addressing the providers’ concerns over an overly broad requirement of assumption of liability.

Summary

DHHS’ new Policy, which requires providers who have been subject to a change of ownership, merger, or acquisition to assume “all liabilities” in writing as a condition to continued enrollment in the North Carolina Medicaid program, unacceptably expands the concept of successor liability in healthcare provider transactions. Providers with an interest in this area should act, individually or through trade groups, to offer revised language to DHHS.