On November 10, 2009, the Secretary of Health and Human Services issued a final rule that significantly restricts the ability of Home Health Agencies to change ownership or to even modify their structure. See 74 Fed. Reg. 58,078 (Nov. 10, 2009). This new rule, effective January 1, 2010, amends 42 C.F.R. § 424.550, by prohibiting the owner of an HHA from selling “(including asset sales or stock transfers), transfer[ring] or relinquish[ing] ownership of the HHA within 36 months after the effective date of the HHA’s enrollment in Medicare,” unless the new owner undergoes a survey and obtains a provider number of its own. The new rule essentially prevents a new owner from selling its HHA and provider number within a 36-month window. The Secretary refused industry requests to include in the rule a waiver or hardship exemption.

The purpose of the rule is prevent owners from “flipping” HHAs--purchasing with the goal of selling rather than operating. The Centers for Medicare & Medicaid (“CMS”) was concerned that these type of “short haul” operators were less likely to know how to properly operate an HHA than others and that without a survey they proceed with little oversight. CMS believes that this “change will help to ensure that individuals establishing a HHA are doing so with a long-term view of furnishing services, rather than establishing a business for the purpose selling it a short time later.” 74 Fed. Reg. 58,118.

The new regulation, though, is less than a model of clarity and raises more questions than it answers. First, it is unclear from the language of the rule or its preamble whether the 36-month clock begins to run from the date that the HHA was originally enrolled in Medicare or from the date of the last transfer or change of ownership. The language of the rule—“within 36 months after the effective date of the HHA’s enrollment”—would support the former interpretation. However, a recent manual issuance suggests otherwise. See CMS Transmittal 318 (Dec. 18, 2009). The Transmittal states that the 36-month clock begins to run from the later of the effective date of enrollment or the effective date of the most recent ownership change.

Second, it is unclear what type of transaction would actually trigger the rule. As set forth in the Transmittal, the rule would appear to encompass virtually any form of transfer even internal transfers designed as part of a corporate reorganization. The Transmittal clarifies the scope somewhat by indicating that the stock transfers must be ones involving at least a 5% change in ownership; any partnership change though would be sufficient to trigger the rule. In addition, the rule applies to any CHOW, acquisition or merger, consolidation, stock transfer or assignment involving at least 5% change and any change in the composition of a partnership--identities or shares.

Various parties are seeking clarification from CMS , and hopefully confirmation, of the interpretation that the 36-month window should only apply from the date of first enrollment, without a new 36-month window commencing with the effective date of the most recent ownership change. CMS has verbally indicated that it will not apply the rule retroactively to cover ownership changes that occurred prior to January 1, 2010 (though the 36 -month window would still apply with respect to a first enrollment date prior to that date).

Owners of HHAs will want to carefully consider any changes in equity ownership or composition of a partnership in light of this new rule, and may want to impose restrictions on the ability of their equity owners to transfer ownership if it will trigger a new 36-month window. In addition, merger and acquisition planning and the potential structuring of transactions will need to account for the impact of this rule and complying with the prohibition on transfers of, at the very least, HHAs that are still within 36 months of their first enrollment. Even well established HHA “families” of affiliated entities with long histories may have one or more new HHAs that have been established as part of their organic growth strategy. Structuring a sale transaction, to account for the limitation on a multi-agency seller’s ability to transfer certain HHAs within its family of agencies, will require advance planning and may lead to a bi-furcated transaction structure where HHAs subject to the rule are treated differently than those not subject to the 36-month limitation.