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CMS Provides Guidance on Enrollment and Certification During Mergers and Acquisitions

on Monday, 30 September 2013 in Health Law Advisory: Zachary J. Buxton, Editor

On September 6, 2013, CMS issued a survey and certification letter to state survey agency directors that provides guidance on the automatic assignment of Medicare provider agreements in health care transactions including mergers and acquisitions. Providers and suppliers who engage in these transactions should be familiar with the guidance, as the decision of whether to assume another party’s Medicare provider agreement could have real impact on post-closing cash flows.

 

One of the many decisions providers and suppliers must make early on in a health care transaction is whether they, as the acquiring party, should take assignment of the other party’s Medicare provider agreement. Under current regulations, Medicare provider agreements are automatically assigned unless they are rejected by the acquiring party. In cases where the acquiring party takes assignment, the new owner enjoys uninterrupted participation in the Medicare program (no survey is required), albeit with a potential cash flow delay.

 

When an acquiring party chooses to structure a transaction as an asset acquisition with the express purpose of being able to avoid the assumption of the other party’s outstanding liabilities, many times the acquiring party rejects the assumption of the target’s Medicare provider agreement. This usually happens because of potential overpayment and other compliance-related liabilities (e.g. Stark, anti-kickback, fraud and abuse) that are unknown to the parties at the time of the deal, difficult to discover, and, if they exist, are of a size that would otherwise undermine the deal.

 

The CMS guidance letter is an important positional statement that should be taken into account when acquiring an enrolled Medicare provider or supplier. In the guidance, CMS reminds state survey agencies that if a new owner rejects assignment of a Medicare provider agreement, the acquired provider or supplier must be treated as an initial applicant if it seeks to participate in Medicare post-closing. Initial applicants must undergo a full site certification prior to enrollment in the Medicare program. CMS reminds state survey agencies that these initial survey visits must be unannounced. CMS will be suspect of situations where assignment of the Medicare provider agreement is rejected and the state agency performs a site visit and initial survey at the time of or shortly after the transaction closes. In CMS’ opinion, such timing raises doubt as to whether the initial survey was truly unannounced.

 

Accordingly, CMS issued the following reminders to state survey agencies as to the appropriate timing of surveys when assignment of the Medicare provider agreement has been rejected:

  • The survey must not occur until after the deal closes.

  • The survey may not occur until the Medicare Administrative Contractor (MAC) has recommended approval of the 855.

  • The new provider must be fully operational.

  • The provider or supplier should not know the date or approximate date of the survey. “[A]ny survey that takes place, for example, within fourteen days after the effective date of an acquisition that involves rejection of assignment of the provider agreement warrants closer review by the RO of the circumstances of the case and the timing of the survey.”

  • Initial surveys are of the lowest priority to state agencies. State agencies should be able to demonstrate that they are able to address all higher priority workload prior to performing initial surveys. If a state agency performs an initial survey on a provider that rejected assignment of the provider agreement while having outstanding higher priority workload, it raises doubt as to whether the survey was truly unannounced.

 

One of the keys to any transaction is minimizing the potential Medicare cash flow delay or loss post-closing. When a Medicare provider agreement is not assumed, CMS reminds us that “[t]he effective date [of the new provider agreement] is not the date of the acquisition of the provider or supplier. Rather, the effective date of the Medicare agreement is the date when the last applicable Federal requirement has been met, and not earlier.” Thus, when a provider agreement is rejected, there will certainly be Medicare cash flow loss due to the gap in time between closing and the new survey, presuming that no deficiencies are identified in that survey. The effective date of the new provider agreement will not relate back to the date of closing.

 

To mitigate this risk, parties to a transaction where the provider agreement will be rejected should try to work with the state survey agency to arrange for a survey as soon after closing as possible. However, CMS’ letter likely means that state survey agencies will be more difficult to work with in planning a transaction, as the guidance says that survey agencies are not allowed to schedule initial survey visits on an announced basis and that surveys that closely coincide with transaction closing dates will be treated as suspect.

 

As providers explore transactions and determine whether to assume or reject another party’s Medicare provider agreement, the timing of potential surveys and the likelihood of lost Medicare cash flows should be taken into account. If the provider assumes the target’s Medicare provider agreement in order to avoid lost Medicare cash flows, greater time and resources must be committed to the due diligence process to root out and discover potential liabilities or other pertinent issues and should be taken seriously. Furthermore, if assuming a provider agreement, transactional documents should contain protections, indemnifications and/or claw-back provisions to provide the acquiring party further protections against unknown liabilities that may arise in the future under the Medicare provider agreement due to pre-closing transgressions.

 

Andrew D. Kloeckner

1700 Farnam Street | Suite 1500 | Omaha, NE 68102 | 402.344.0500