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Given all of the provisions and changes included in the U.S. Centers for Medicare & Medicaid Services’ (CMS) 2024 proposed rules, the 36-month rule being applied in hospice went a bit overlooked.
Home health and hospice M&A experts see it as a significant development that could affect both subsectors.
Essentially, CMS is proposing a ban on hospice owners from selling their businesses within 36 months of Medicare enrollment. The proposal mirrors a regulation that has existed for several years in home health care.
The rule forbids any change in majority ownership during the 36 months after initial enrollment, including acquisitions, stock transactions or mergers.
“The 36-month rule, which has long been part of home health, is a significant development for hospice,” VitalCaring President Luke James told Home Health Care News.
The Dallas-based VitalCaring is a newer home health company helmed by industry veteran April Anthony. Its network includes over 70 locations across six states.
What is the 36-month rule?
In 2010, CMS proposed a rule that prohibited home health providers from selling their Medicare provider number to crack down on bad actors in the industry.
The idea behind such measures is to prevent owners from obtaining a Medicare number to sell it.
When CMS proposed the rule for home health, providers and advocates pushed back against some of the stipulations. In that case, industry leaders were able to persuade CMS to include exceptions to allow legitimate transactions and consolidation.
For instance, if a home health agency submitted two consecutive years of full cost reports – excluding low-utilization or no-utilization cost reports – following enrollment in Medicare or within the first 36-month window, a deal could be made.
Transactions are allowed within the first 36 months if an agency’s parent company is undergoing a corporate restructuring or if an individual owner of an agency dies, for example.
Home health and hospice leaders like James are not surprised the rule is making its way to hospice, but it does present some challenges for deals in the future.
“There’s a pretty big market right now for entrepreneurs [and] organizations going out, contacting hospice agencies, obtaining the Medicare provider number and then putting that up for sale,”James said. “One of the reasons is that larger organizations may not want to go through the whole process of developing a team to build a hospice segment, but they do have the capital.”
A number of companies advertise their licenses on websites designed to connect buyers and sellers across a range of industries, including hospices.
On two of these sites combined, close to 200 hospice companies had posted about licenses for sale, with most asking for prices in the vicinity of $300,000 to $350,000.
“These large companies will go out and pay $200,000 to $400,000 for these licenses depending on geography and the market,” James said. “It’s supply and demand. So this rule is going to prevent that from happening.”
The same stipulations applied in home health care after the 2010 comment period will likely apply to hospice deals, he added.
M&A, fraud considerations
For hospice deals currently in the works, the new proposed rule will cause a roadblock, although likely temporary.
Cory Mertz, managing partner at the M&A firm Mertz Taggart, said that deals in home health care came to a halt when the proposed rule was introduced in 2010. However, those deals and would-be buyers were able to get most of those deals once exceptions were added to the final rule.
“In fairness, it was fairly easy to predict [this was coming for hospice] if you were working in the industry in 2010,” Mertz told HHCN. “Because it did interrupt things until the final rule was established — with the exceptions — which allowed would-be buyers to continue to execute on their M&A strategies.”
Looking ahead, Mertz doesn’t see the 36-month rule affecting the M&A space for home health and hospice in a major way.
“I don’t think it will,” Mertz said. “Especially if the exceptions — or something similar — are adopted. I think as an owner, even if your intent is not to sell, you want to have the flexibility to sell the company if you had to in the first three years or so. We always suggest setting up a holding company that will own the company that has the provider number. That way, under one of the exceptions, they will then be able to transact if necessary.”
The new rule will have an effect on fraudulent behavior from hospice providers, James believes.
Specifically, the rule should prevent “license flipping.”
“One of the trends that CMS is seeing is that organizations will go out and open three or four hospice provider numbers and use one of them,” James said. “They’ll act fraudulently on that one, get caught, shut it all down and then move those patients to another provider number they have lying in wait. Then if that one gets caught, they’ll have another one.”
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