Changing ownership in any business often causes a myriad of legal challenges. These switch-ups can prove to be even more of a logistical nightmare when it comes to health care, as specific licenses and permits are not so easily transferred from one owner to the next even when the actual facility remains intact. Change of ownership, or “CHOW,” laws govern the transition process. This article will mainly focus on CHOWs in the context of Medicare, but it is important to note that each state has its own CHOW laws and contracts may have their own CHOW requirements.
What is a Change of Ownership?
CHOW laws describe the regulatory process that must be followed when a licensed or certified health care provider undergoes a change of ownership. This process is heavily regulated to ensure that when government-issued licenses, permits, or provider numbers are transferred, the new owner meets the same regulatory requirements that the original owner had to meet to obtain it.
A CHOW takes place when the responsible legal entity has changed, and occurs in the context of Medicare when a Medicare provider has been purchased or leased by another organization. Federal guidelines outline exactly what constitutes a CHOW. The type of “entity” which holds the license will impact when a CHOW event occurs. The following are examples of CHOW events for different entity types:
- The removal, addition, or substitution of a partner, unless the partners expressly agree otherwise, as permitted by applicable state law.
- Sole proprietorships
- The transfer of title and property to another party.
- The merger of the provider corporation into another corporation, or the consolidation of two or more corporations, resulting in the creation of a new corporation. However, the transfer of corporate stock or the merger of another corporation into the provider corporation does not constitute a CHOW event. In addition, if allowed, the lease of all or part of a provider facility constitutes CHOW event.
Are Mergers and Acquisitions the Same as Change of Ownerships?
In short, no. A merger or acquisition occurs when a currently enrolled Medicare provider is purchasing or has been purchased by another enrolled provider. Only the purchaser’s Centers for Medicare and Medicaid Services (“CMS”) Certification Number (“CCN”) and tax identification number remain. Therefore, mergers and acquisitions are different from CHOWs as the seller/former owner’s CCN dissolves. In a CHOW, the seller/former owner’s CCN typically remains intact and is being transferred to the new owner.
Accrediting Organizations and the New Centers for Medicare and Medicaid Services Rule
Recently a final rule from CMS went into effect on June 28, 2022 adding requirements and a specified process to address change of ownership for accrediting organizations (“AOs”). This new rule affects all of the AOs that accredit providers and suppliers, including those that are enrolled in the Medicare Program, and those that enter into a participation agreement with Medicare. A CHOW can occur with an AO that accredits any category of provider or supplier.
The rule now requires Medicare AOs to give the Department of Health and Human Services (“HHS”) advanced notice of a CHOW prior to the effective date of the CHOW. While CMS does not approve the actual business transaction that results in the change, its role is to ensure that the new owner is in compliance with all of Medicare’s guidelines when it approves the CHOW.
What’s an Accrediting Organization?
Medicare-certified providers and suppliers participate in the Medicare program by entering into a provider agreement and must be substantially in compliance with specified statutory requirements of the Social Security Act as well as the regulatory requirements required by the Secretary of the HHS. For most providers and suppliers, becoming accredited through a CMS-approved accreditation program with an accrediting organizations is voluntary. Once a provider or supplier is deemed accredited through the AO, it is presumed that Medicare’s requirements are exceeded and the provider or supplier is in compliance. Now, when an AO desires to change ownership, it must abide by this new regulation to ensure the ongoing effectiveness of the transferred accredited programs and to minimize the risk to patient safety.
What Must the Transferor and Transferee Do When Changing Ownership of an Accrediting Organization?
The persons or organization acquiring an existing CMS-approved accrediting organization or accreditation programs (i.e., the buyer or transferee) must seek approval from CMS for the CHOW transaction and must submit certain information directly to CMS.
Why is Due Diligence Important?
Due diligence is a process of information gathering from an investigation of another party and its business operations in the context of a merger and acquisition (see the M&A Field Guide to learn more about due diligence). Due diligence is especially vital in connection with CHOWs.
Anyone acquiring a licensed or certified health care business, whether a stock or asset transaction, must perform due diligence early in the transaction to determine if the transaction falls under the specific definition of a CHOW. If it does, in the context of Medicare, the purchaser is then subject to all the Medicare specific CHOW regulations, which also means the purchaser is deemed to assume most liabilities under the Medicare program, even if transaction documents say otherwise.
Changing ownership of a healthcare facility poses complicated regulatory and logistical issues. It is essential to comply with state and federal CHOW laws to remain in compliance. More essential is knowing how a transaction might trigger CHOW laws early on in the process.
At ByrdAdatto we are working hard to ensure our clients are well equipped and ready for operating their business. If you have questions regarding this alert, email us at email@example.com or call 214-291-3200.
We are grateful for the significant research and drafting contribution to this article from our Law Clerk, Emily Reese. Emily is a third year student at SMU Dedman School of Law.