Determining Ownership

3210.1 - Determining Ownership (Rev. 1, 05-21-04) 3210.1A - General (Rev. 1, 05-21-04) For certification and provider agreement purposes, the authorized official is an individual (such as independent practitioner or sole proprietor) or an appointed official (including, but not limited to, an officer, director, manager, general partner, limited partner, etc.) of a legal entity such as a corporation or general partnership who is directly responsible for the business enterprise and has been granted the legal authority to enroll it in Medicare, to make changes and/or updates to its status in the Medicare program, and to commit it to fully abide by the laws, regulations and applicable program memoranda and manual issuances of the Medicare program. This party is legally responsible for decisions and liabilities in a business management sense. The same party also bears the final responsibility for operational decisions made in the capacity of a “governing body” and for the consequences of those decisions. Whether the owning party owns the provider enterprise premises or rents or leases them from a landlord or lessor is immaterial. Of course, if the owner enters into an agreement that allows the “landlord” to make or participate in decisions about the ongoing operation of the enterprise, this indicates that the owner has entered into either a partnership agreement or a management agency agreement instead of a property lease. A new partnership agreement constitutes a CHOW. To determine ownership of any provider enterprise or organization, the SA determines which party (whether an individual or legal entity such as a partnership or corporation) has immediate authority for making final decisions regarding the operation of the enterprise and bears the legal responsibility for the consequences of the enterprise’s operations. CHOW processing is necessary for program participants that have Health Benefit Agreements or Provider Agreements in the Medicare program (hospital, SNF, HHA, hospice, CORF, OPT/SP providers and CMHC) because it must be determined who the responsible party is under the agreement. For the same reason, CHOW processing is necessary for supplier participants that have category-specific agreements with the Secretary (RHC, ASC, and FQHCs) or that must file cost reports (e.g., ESRD facilities). Somewhat less extensive CHOW processing is necessary for the remaining supplier types without agreements or cost report requirements (e.g., PXR) to ensure compliance with the statutory requirement for ownership disclosure and to ensure that the program has current, accurate records regarding participants. 3210.1B - SA Actions to be Taken Following CHOW (Rev. 1, 05-21-04) 3210.1B1 - All Cases (Rev. 1, 05-21-04) The SA mails a set of initial certification forms to the new owner as soon as possible. (See Exhibit 63.) The SA sends Form CMS-1561 to the new owner for signature with a footnote that lists the original provider number, the name of the previous owner (the owner of record before the change of ownership), and his or her address, and it is placed in the empty space provided after the blocks furnished for the successor’s signature, title, and date. This serves to convey to each new owner at the outset that he or she is being assigned the previous owner’s provider agreement “subject to all the conditions specified in [the] agreement and 42 CFR Part 489, to include existing plans of correction....” This is important, because some providers have professed ignorance that they have been assigned the previous owners’ provider agreements, subject to the same terms and conditions that applied to the previous owners. This was a central point in the “U.S. v. Vernon Home Health, Inc.” case. Under 42 CFR 489.18(d) and early on any purchase of assets that involve the assignment of the provider agreement is subject to the relevant statutory and regulatory conditions. The new owners or prospective new owners must be clearly informed of their rights and responsibilities under the applicable Federal statutes and regulations, and it must be done as early in the process as possible to enable these individuals to make informed decisions. Whenever an owner is contemplating or negotiating the sale of a provider, he or she notifies the SA, FI or the RO, as required in 42 CFR 489.18(b). The SA or the RO asks the prospective new owner if he or she intends to participate in the Medicare program, and if so, whether he or she intends to do so by accepting assignment of the previous owner’s provider agreement or by applying for a new provider agreement. This will prevent the confusion we have seen in the past and reduce the litigation. The new owner should be made aware that if the agreement is assigned to the new owner, the new owner is responsible for the former owner’s liabilities, including any Medicare payments. Also, assignment of the agreement, in some cases, would result n the new owner receiving a Medicare underpayment. If the new owner states that assignment of the former owner’s provider agreement is not going to be accepted, but the new owner intends to continue the entity’s Medicare participation, inform the provider that there will be a break in the continuity of Medicare payment because CMS requires all new applicants to undergo a survey. If the new owner still does not wish to accept assignment, following a CHOW, the entity must enroll in the Medicare program as a new provider in accordance with the instructions found in §2005, and undergo the survey and certification process. Sometimes the RO is unaware that a change of ownership has taken place until after the fact; sometimes months after the sales agreement has been consummated. In these cases, there is nothing that can be done except to ensure that the new owner understands the consequences of becoming a Medicare provider and accepting assignment of the previous owner’s provider agreement. Regardless of when the new owner is advised of the automatic assignment of the previous owner’s provider agreement (if the provider/supplier explicitly refuses to accept assignment, notify the RO immediately because payments may have already been made under the old provider agreement) the SA uses the footnote and has the new owner sign under the set of blocks on Form CMS- 1561 labeled “Accepted for the Successor Provider of Services by.” This is an important step because it documents the fact that the new owner realizes that there is an assignment of the agreement. The SA informs the new owner of the requirement to submit the documents to its office no later than 2 working days after the consummation of the CHOW transaction, or, if the transaction occurred more than 2 calendar days ago, as soon as possible. The SA may accept the documents prior to the consummation of the CHOW transaction. However, because some CHOW transactions never are consummated, these documents should not be forwarded until the transaction has been completed. Similarly, the SA can only complete its processing after the CHOW date. If the new owner indicates a desire not to participate in the program, the SA alerts the RO immediately by telephone and, if Medicaid is involved, the SMA. The SA obtains a written notice regarding the owner’s desire not to participate, and forwards it to the RO or to the SMA as appropriate. A CHOW, per se, does not require a special survey. However, if new locations are added or different types of services will provided, we recommend that the SA may conduct a survey. If there is any reason to believe that the quality of services has deteriorated following the CHOW then the state must conduct a survey. For portable x-ray suppliers, the SA obtains a copy of Form CMS-855B, and a statement from the new owner informing it of the CHOW effective date. Because there is no agreement to transfer in these cases and no cost report to be filed by the outgoing owner, it is not critical that the SA establish the CHOW date with the certainty required for providers and suppliers with Medicare agreements and/or cost reporting requirements. For all providers, and suppliers with category-specific agreements (for example, RHC and ASC), and ESRD facilities, the SA obtains applicable Request to Establish Eligibility form, an Expression of Fiscal Intermediary Preference, and documentation that proves a CHOW took place as well as exactly when it took place. The SA has all facilities complete an Expression of Fiscal Intermediary Preference form in every case to alert it to the instances in which the new owner is part of a CMS-recognized chain organization that uses a FI not commonly used in its State. Multi-regional chain operations due to their complexity are to be referred to the RO for adjudication in accordance with §3210.3. The SA includes on the Fiscal Intermediary Preference form a blank to be completed by the new owner indicating the ending date of the fiscal year that the new owner intends to use for purposes of Medicare and/or Medicaid reimbursement. The cost reporting year initially selected by the new owner must be used for cost reporting purposes and cannot be changed by the RO or SA. If the new owner decides that it wants to change its cost reporting year, it must do so in accordance with the requirements found in 42 CFR 413.24(f)(3). These requirements specify that the provider must submit a written request to their FI 120 calendar days before the close of the new reporting period requested by the provider and that a finding of good cause is made by the intermediary. Good cause would not be found if the FI determines the change would affect the initial date a hospital would be subject to the rate of increase ceiling or be paid under the prospective payment system. For providers and suppliers with category-specific agreements, the SA obtains two signed originals of the applicable Medicare agreement form. For providers, the SA obtains the applicable form required by OCR (HHS-441) and the appropriate attachments. See Exhibit 63 for a full listing of documents for the SA to submit to the RO. 3210.1B 2 - CHOW during Termination Development (Rev. 1, 05-21-04) The SA apprises the provider/supplier that termination actions already in process will not be postponed and the termination will only be avoided if compliance is attained. The SA notifies the RO by telephone of the CHOW and proceed to obtain and process the usual CHOW documents. 3210.1B 3 - CHOW during “Reasonable Assurance Period” (Rev. 1, 05-21-04) Following termination, a new owner may request approval for reentry, subject to operation of the facility for a certain period of time without recurrence of the deficiencies that were the basis for termination. The reentry may be through the SA survey process or through an accrediting organization recognized by CMS where appropriate under the regulations. The RO makes the determination as to whether the institution is eligible for readmission based on demonstrated compliance over a specified period of time. This “reasonable assurance period” will not be altered because a new owner takes over the provider organization or because the provider organization becomes accredited. If the new owner wishes to proceed with reentry, the SA notifies the RO by telephone and obtains and processes the usual CHOW documents (see §2016). 3210.1B 4 - Transfer Agreement Required of New Owner (Rev. 1, 05-21-04) For SNFs and NFs, a new owner will have to negotiate and submit a hospital transfer agreement relating to the new owning entity. 3210.1B 5 – Relocation of Provider/Supplier Concurrent with CHOW (Rev. 1, 05-21-04) A new owner may propose to relocate the provider/supplier concurrent with the CHOW. If the relocation is to a site in a different geographic area serving different clients than previously served and employing different personnel to serve those clients, do not assign the agreement to the new owner. The provider/supplier must be treated as a new applicant to the Medicare program, rather than as an address change of an existing provider. 3210.1C - Certification of Accredited Providers/Suppliers Which Change Ownership (Rev. 1, 05-21-04) While accreditation by a national accreditation body is not transferable to a new entity, accreditation does not automatically lapse when ownership changes. In the case of a provider or supplier that has been accredited by a national accreditation body, the provider/supplier must notify the accreditation body within 30 calendar days of the CHOW. Accreditation is continued until the accreditation body has determined whether a resurvey is necessary. If an accredited provider/supplier is involved in a CHOW, the SA does not resurvey the provider/supplier. The SA secures the usual CHOW documents and forwards them to the RO. If a participating provider/supplier that has been accredited by a national accreditation organization merges with a nonaccredited participating or nonparticipating provider/supplier, the accreditation organization may extend its accreditation to the nonaccredited provider/supplier as if it were deemed to meet the Medicare conditions. A CMS approved accreditation organization may extend its accreditation in a hospital it currently accredits. This could be a hospital that has undergone a change of ownership or a hospital that has expanded by acquiring another hospital or by establishing additional facilities. The JCAHO hospital accreditation program and all other CMS approved accreditation organizations have agreed to conduct surveys within 6 months the date of the extension agreement with the provider. The extension of the accreditation by the accreditation organization will serve in lieu of conducting a survey at this time. 3210.1D - CHOW Situations (Rev. 1, 05-21-04) Although 42 CFR 489.18 addresses only sole proprietorships, partnerships, corporations, and lease arrangements as CHOWs (as defined below) this does not preclude other transactions that constitute a CHOW (e.g. the creation of a Limited Liability Company). You should consult with your regional attorney when these other transactions are involved to determine if a CHOW has taken place. However, it is important for providers to understand that transactions that are considered a CHOW for purposes of certification may be treated differently for purposes of reimbursement under the program. 1 - Sole Proprietorship If a provider of services is an entity owned by a single individual, a transfer of title to the enterprise to another person or firm, whether or not including transfer of title to the real estate, constitutes a CHOW. It is also a CHOW if the former owner becomes one of the members of a partnership or corporation succeeding him as the new owner. 2 - Partnership In a partnership, the removal, addition, or substitution of an individual as a partner in the entity, in the absence of an express statement to the contrary (as permitted by State law) dissolves the old partnership and creates a new partnership and is a CHOW. State laws may vary regarding exceptions to this rule. If the surviving partners raise a question, the SA submits the facts without delay to the RO for a decision (or to the appropriate State authorities in a Medicaid-only case). 3 - Corporation In an incorporated provider entity, the corporation is the owner. The governing body of the corporation is the group having direct legal responsibility under State law for operation of the corporation’s entity, whether that body is a board of trustees, a board of directors, the entire membership of the corporation, or is known by some other name. Even though one or more members of this governing body changes, and regardless of whether ownership of the corporation stock is transferred, there would not be a CHOW as long as the same corporation continues to be the legal entity responsible for operation of the provider organization. A merger of one or more corporations with the Medicare-participating provider corporation surviving (i.e., a merger “into” the participating corporation) is not recognized as a CHOW of the surviving corporation. Also: • If the corporation that survives is not the former owner of the provider entity, there is a CHOW; and • Consolidation or merger of two or more corporations that results in the creation of a new corporate entity having ownership control over a provider organization constitutes a CHOW. The SA may need to refer to a corporation’s bylaws (on record with the State government) or board meeting minutes as it researches difficult cases. 4 - Leasing When all or part of a participating provider facility is leased, it constitutes a CHOW. If only part of the provider is leased, the original provider agreement remains in effect only with respect to the unleased portion. The lease of part of the facility constitutes a change of ownership. The SA does a survey and prepares a certification covering the leased portion as a new provider. When a new lease arrangement goes into effect at a participating facility, the SA obtains documents that indicate which individual or entity has first level authority over, and responsibility for, the provider located within the leased premises. 5 - Management Firm Operating Institution for Owners A firm that contracts with the owners to manage an enterprise, subject to the owners’ general approval of operating decisions, is an agent of the owners rather than a partner or successor. If management in that sense is turned over to a management firm, this would not constitute a CHOW even though the management firm may appear to have wide latitude in making decisions, and even though its fee may be based on the net revenue or profit the facility receives from furnishing services. The only case in which operation under a management agreement would constitute a CHOW is when the owner has relinquished all authority and responsibility for the provider organization. In questionable cases, the SA obtains and submits the management agreement to the RO along with its analysis and recommendation. If a provider enterprise has been placed in the hands of a management firm and there is cause to suspect a problem in regard to patient care, the SA schedules and performs a survey. 6 – Franchise If an entity states it is a franchisee of another entity which is the owner of the provider, do not enter into an agreement with either party or process a CHOW until you establish which entity is the provider which CMS will hold legally responsible for complying with the provisions of §1866 of the Act and applicable regulations. Please note that under 42 CFR 389.11 (see also §2781) if a provider wishes to participate in the Medicare program it must have an authorized official sign the provider agreement and submit a written statement indicating whether the provider has ever been adjudged insolvent or bankrupt or has such action pending. 3210.1E - CHOW Analysis General Rules (Rev. 1, 05-21-04) • A State licensing decision based upon a CHOW analysis conducted under the State’s criteria is not necessarily relevant to a Medicare CHOW determination. The Medicare determination must be made based exclusively on Medicare regulations and policies; • There can be no CHOW, i.e., transfer of Medicare participation, assignment of the provider agreement, and provider number, if there is no functioning provider enterprise in existence. If a provider ceases operations, it no longer meets the definition of any provider type and no longer has a right to a provider agreement or identification number; • As a rule, when a provider organization is sold, the Medicare provider number stays with it. A buyer is assigned the provider number and the provider agreement if the buyer purchases a participating provider organization. A provider number cannot be sold. A provider identification number is not the “property” of any individual or legal entity. The number is issued by the Medicare program and is under the control of the Secretary of DHHS, subject to law, regulation, and program policy; • To understand whether a CHOW took place in complex situations such as corporate reorganizations, it is often helpful to construct a simple “before and after” ownership diagram of the legal relationships among the owning entities and providers involved. The two-part diagram visually displays the ownership relationships as they appeared before and after the date of a possible CHOW; • In general, a CHOW recognized by the Medicare program is considered to have taken place at 12:01 a.m. on the date specified (i.e., in the first minute of the 24- hour day). Legal responsibility and the right to payment changes over when the clock moves past midnight into the CHOW effective date; • In general, the key date regarding a newly formed corporation is not the incorporation date (the date the corporation came into legal existence), but the date a provider was conveyed to the new corporation. Sometimes a new corporation becomes legally responsible for a provider the moment the corporation comes into existence, but there must be documented evidence that this is the case. It cannot be assumed; • It is not possible to know beforehand whether a CHOW will take place on a planned CHOW date. In every case, one must wait until after a proposed CHOW date to determine whether the planned CHOW event actually occurred. This means it is impossible to process a CHOW prior to the effective date; and • The mere sale of any number of shares of an owning corporation does not constitute a Medicare CHOW because the responsible legal entity, the corporation, remains in place. For corporations that do not issue stock but are controlled by a “member” or “members” (which can be individuals, partnerships, or other corporations), the same principle holds true: a change in the individuals or entities controlling or owning the corporation is not relevant for CHOW purposes.