LONG-TERM CARE UPDATE Volume VI, No. 1 February 2000 Spotlight: Buying a Nursing Home -- Health Care Issues Governmental Notices Licensure Issues Successor Liability Certificate of Need Certification and Licensure Survey and Reports Personal Needs Allowance Funds Reimbursement Considerations -- General Business Issues Employees Contractual Relationships -- Conclusion Confidentiality of Medical Records Final Enforcement SOM RR&G News SPOTLIGHT: BUYING A NURSING HOME In this second part of a two part series, we provide a brief description of some of the most pertinent (but far from all) issues that our firm has identified as warranting increased scrutiny in nursing home transactions in Ohio from the perspective of a potential buyer (which, for ease of reference, includes a lessee in a lease transaction). In the first part of this series, which was included in the November, 1999, Long-Term Care Update, we examined and discussed similar issues from the perspective of a potential nursing home seller. Health Care Issues  Governmental Notices. Nursing home operators are required to formally notify, among other agencies, the Ohio Department of Human Services ("ODHS"), the Ohio Department of Health ("ODH"), and the Health Care Financing Administration ("HCFA") of a potential change in ownership 45 to 90 days (depending on the agency) prior to the closing of the transaction. Failure to provide timely notices to these agencies may result in the buyer being unable to obtain proper licensure and certification, and also may result in undesired reimbursement consequences, particularly with respect to the timing of payments received from third party payers. It is therefore imperative that the definitive transaction agreement affirmatively require the current operator to provide the required notices in a timely manner. One frequent question we are asked is when the various licensure and certification applications should be submitted to the appropriate governmental agencies. As a general rule of thumb, it is advisable to submit such applications as soon as possible, to avoid potential processing problems and unwanted cash flow delays. Buyers should be aware, however, that the licensure and Medicaid certification applications will not be formally processed until after ODH and ODHS receive formal notification that the change of ownership has occurred. It is therefore advisable for the buyer or the buyer's counsel to submit a written confirmation to ODH and ODHS shortly after the transaction formally closes. Licensure Issues. A nursing home license is not transferable from a seller to a buyer. Furthermore, the ODH will not issue a nursing home license in the name of a buyer until after it has received notice that the transaction has closed. A nursing home buyer should therefore be aware that the buyer will need to use the seller's licensure post-closing, under a "letter of consent" issued by ODH, until a new license is issued in the name of the buyer by ODH. The letter of consent must be signed by a representative of the seller and attested to by a notary public, and should be obtained prior to the closing. Successor Liability. Typically, a purchaser that acquires a business through an asset purchase transaction is not liable for the debts and obligations of the seller that arose prior to the closing. In a nursing home transaction, however, the purchaser will have "successor liability" for Medicare overpayments made to the prior owner, even under an asset purchase agreement, if the purchaser assumes the seller's Medicare provider agreement (which, as a matter of law, transfers upon a "change of ownership"). Although most transaction agreements will require the seller to indemnify the purchaser for this liability, this may not be a feasible alternative unless a portion of the purchase price has been withheld from the seller in escrow. In the alternative, the purchaser could not assume the seller's Medicare provider agreement, although this option must be evaluated from a business perspective, since the purchaser will not be able to bill for Medicare services until new a provider agreement is issued. The issuance of a new provider agreement could take many months, creating significant cash flow and other financial problems. This is a viable alternative, however, particularly for facilities with low Medicare volume. Certificate of Need. Certificate of Need ("CON") approval is still required in Ohio to relocate nursing home beds or to build a new nursing home. In addition, there is a moratorium prohibiting the ODH from granting a CON to add nursing home beds in any particular county. Therefore, a commonly-litigated issue today concerns disputes over the ownership of the rights to operate the nursing home beds, versus ownership of the nursing home building, equipment and land. It is therefore imperative that counsel for a nursing home purchaser or lessee include sufficient language in the definitive transaction documents to indicate that the right to operate the nursing home beds are being sold or leased as part of the transaction. Otherwise, time-consuming and costly litigation may result. Certification and Licensure Survey and Reports. It is essential for any nursing home buyer or lessee to review complete copies of survey reports, waivers of deficiencies, plans of correction, and any other governmental investigation reports issued with respect to the facility during the past thirty-six (36) months prior to the change of ownership. The past survey history of a facility may affect how it will be treated by the government in future surveys. Additionally, if a facility is purchased or leased in the middle of a survey cycle, where outstanding deficiencies exist and penalties for those deficiencies have been imposed, the new operator will be expected by the government to correct those issues and pay those penalties (such as fines). Of course, the definitive transaction documents may provide otherwise, but the government is not a party to those agreements. Personal Needs Allowance Funds. In any nursing home transaction, it is essential for the purchaser to obtain an accounting of all personal needs allowance funds held for the benefit of residents, certified as true and complete as of the closing by an officer of the seller, with a specific indemnification for any inaccuracies or errors. Reimbursement Considerations. Although the reimbursement implications of any Ohio nursing home transaction should also be reviewed by an accountant experienced in Medicare and Medicaid reimbursement, some potential issues for consideration by counsel (and perhaps resolution in the definitive transaction document) include the following: Lease Transactions: Obtaining a representa-tion and warranty from the lessor as to the lessor's "historical capital asset cost basis"; determining whether the lease will be treated as a "capital" or an "operating" lease; and determining whether the lessor's historical capital asset cost basis will qualify for a "step- up" under Ohio's Long-Term Care Medicaid Reimbursement System. Purchase Transactions: Determining the proper "step-up" under Ohio's Long-Term Care Medicaid Reimbursement System; determining the impact of any "imputed occupancy" penalty under Ohio's Long-Term Care Medicaid Reimbursement System; and determining whether to elect to receive the "full federal" Medicare reimbursement payment for the facility. General Business Issues Employees. In a typical nursing home change of ownership, the purchaser usually hires most, if not all, of the former employees at the facility. Potential issues from the buyer's perspective include, but are not limited to: In most, if not all, transactions, the new employer will be deemed a "successor employer" under the Ohio Bureau of Employment Services and Ohio Bureau of Workers' Compensation Laws, which means that the new employer will assume the old employer's unemployment and workers' compensation experience ratings. The financial impact of "successor employer" status should be determined during due diligence. The new employer will want to ascertain that no employees have been excluded from or sanctioned under the Medicare and Medicare programs; and that all employees who are required to have current criminal background checks have them, as well as evidence of required physical examinations and Mantoux tests. Other issues for consideration include compliance with union collective bargaining agreements, if any, establishing new health and welfare benefits plans, and treatment of unused earned and accrued paid time off. The buyer's exposure and duties with respect to these issues will vary through the negotiation and inclusion of appropriate provisions in the definitive transaction document (purchase agreement or lease). Contractual Relationships. The typical nursing home is party to a wide variety of written contracts or commitments, such as maintenance, landscaping, refuse collection, fire protection, security, alarm, computer (hardware and software), copier, facsimile, postage meter, overnight delivery, telephone, food services, third party payor, medical director, ambulance, laboratory, optometry, ophthalmology, hospice, respite care, nutrition, dental, pharmacy, x-ray, psychology, psychiatrist, physical, speech, occupational and respiratory therapy, nursing facility transfer, dialysis, oxygen, podiatrist, audiology, durable medical equipment, etc. A nursing home buyer will frequently be asked to assume these contracts, in which case the written consent of the other party may be required. The buyer should carefully review all contracts before agreeing to assume them. In many cases, the buyer may be able to favorably renegotiate the terms and conditions of the agreements, particularly with ancillary suppliers anxious to retain the facility's business. Additionally, the existing contractual relationships may pose corporate compliance concerns that may need to be addressed by the buyer. Conclusion This article has attempted to highlight only some of the many issues that our firm has identified as warranting increased scrutiny in nursing home transactions in Ohio from the perspective of a potential buyer. Other potential health care issues include restrictions on the reassignment of benefits, exclusion from Medicare and Medicaid, governmental investigations, corporate compliance, valuations, reimbursement, corporate practice of medicine, tax issues (especially for tax-exempt providers), and anti-trust considerations. It is important to understand that nursing home transactions that initially appear to be straight-forward are nevertheless affected by many complex rules and regulations, and may therefore become a trap for the unwary. As the industry continues to evolve and consolidate, the need to identify potential issues and problems will remain and become increasingly essential. CONFIDENTIALITY OF MEDICAL RECORDS As we reported to those of you on our email distribution list, one of the most far reaching rules to effect health care providers in a long time is in the works. Many of you have probably read about it or you may have caught President Clinton's references to it in his State of the Union Address. Although the rule is just proposed right now, long- term care facilities need to start getting familiar with the rule and what it will require. It is mandatory, requires certain policies, staffing, contracts, etc. to be in place by a certain time. Following the dictates of these rules will be time consuming and expensive, and there will be large penalties for noncompliance. We have enclosed the U.S. Department of Health and Human Services' summary of the proposed rule as in insert with this LTC Update. Note that currently the final rule is scheduled to be published in May, 2000. FINAL ENFORCEMENT SOM The Enforcement State Operations Manual has been finalized effective December 15, 1999. Notably absent from the final version are provisions relating to chains with "performance problems". Otherwise, most of the provisions from the draft remained the same. Key points are as follows: New policies regarding opportunities to correct Elimination of poor performer and date certain terminology Double G on current surveys (survey on or after December 15, 1999), and on previous standard or intervening survey, harm on first survey after re-entry, jeopardy, single instance CMP imposed = no opportunity to correct Revisit policies No right to a revisit After two revisits, need RO approval for a third revisit Compliance won't always be found as of date of allegation Bans HCFA authorizes states to impose ban No separate 15 day notice on 90 day ban Fines Per instance CMP (jeopardy and non-jeopardy) = $1,000 - $10,000 Can impose per instance CMP on more than one tag, but total capped at $10,000 Cannot have per instance CMP and per day CMP simultaneously Can have per instance CMP on original visit and per day CMP in revisit in same survey cycle Reasonable Assurance Medicare only 1-6 month period Minimum two surveys required RA determination not appealable Plan of Correction Quality Assurance systems must be described to prove compliance can be maintained Must share these systems on revisit to prove that compliance achieved as of allegation of compliance date Details of this enforcement SOM and new strategies for avoiding and/or limiting fines or other survey penalties will be discussed at Cleveland and Columbus seminars in which our firm is a participant on February 22nd and 23rd. RR&G NEWS We would like to welcome Katherine Estafanous to our firm. Kathy will concentrate her practice in health care transactional issues. We routinely send out legal updates and other news that we find of interest for the long-term care industry via email. If you would like to be added to our distribution list, then please send an email to List@LTClawyers.com. Carol Rolf will be presenting a seminar for the Ohio Health Care Association ("OHCA") on the Final Enforcement SOM on February 22 in Cleveland and on February 23 in Columbus. Carol Rolf and Aric Martin will be presenting the legal portion of the Core of Knowledge at Ohio State University ("OSU") on February 24. Carol and Aric will also be presenting a 2-day seminar at OSU entitled, "Important Legal Issues Facing Nursing Homes in the New Millenium" on March 13-14, 2000.   | Practice Areas | Attorney Profiles | Publications | | Seminars | Screen for Exclusion | Contact Info | | Directions | Home | Rolf & Goffman Co., L.P.A. Phone 216-514-1100 E-mail info@rolfgoffman.com