LONG-TERM CARE UPDATE Volume V, No. 4 November 1999 Spotlight: Selling a Nursing Home -- Health Care Issues Governmental Notices Vendor Holdback Licensure Issues Certificate of Need Depreciation Recapture -- General Business Issues Employees Collection of Post-Closing Receivables for Pre-Closing Services Contractual Relationships -- Conclusion Physician Relationships Corporate Compliance Effects of Program Exclusion Who Can Complete the MDS & RAPS? Staffing Bill Introduced Draft Enforcement SOM Lawsuits on the Increase CON Rule Changes PPS Relief RR&G News SPOTLIGHT: SELLING A NURSING HOME The number of nursing homes that have experienced a change of ownership over recent years has increased significantly. Nursing home owners are looking to sell or lease facilities due to falling occupancy rates, increasing governmental regulation, and limitations on reimbursement. Nursing home operators are looking to acquire facilities in Ohio due to restrictions on access to the nursing home market and relatively advantageous reimbursement under the Medicaid program. Transactions involving nursing facilities require great care, however, due to the highly regulated nature of the industry, and the increased scrutiny of transactions involving health care providers from state and federal governments as they seek to control health care costs through heightened scrutiny of the expenditure of their health care dollars. In this first part of a two part series, we will 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 from the perspective of a potential seller (which, for ease of reference, includes a lessor in a lease transaction). In the second part of this series, which will be included in our next Long-Term Care Update, we will examine and discuss similar issues from the perspective of a potential buyer. Health Care Issues  Governmental Notices. Nursing homes 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 notice in a timely manner to ODHS will result in a monetary penalty being imposed upon the seller. Failure to provide timely notices to other agencies may result in the buyer being unable to obtain proper licensure and certification (which could expose both the seller and the buyer to unwanted liability) and undesired reimbursement consequences, particularly with respect to the timing of payments received from third party payers. Finally, special attention should be focused on any ancillary federal and state permits that may be issued in the name of the facility, such as those issued by the Drug Enforcement Agency and the Ohio State Board of Pharmacy, or for clinical laboratories. Vendor Holdback. In addition to providing timely notices to the proper governmental authorities, a seller should be aware that ODHS is required by law to withhold the final two monthly vendor payments to a facility upon notice of a change of ownership. There is a limited exception to this general rule that may result in only one monthly vendor check being withheld, or with a promissory note being issued by the seller in favor of ODHS. In either case, the seller should conduct proper financial planning (especially in a lease transaction) to avoid unwanted cash flow delays. 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. Therefore, it is essential that the issuance of a license in the name of the buyer is not a condition of closing. A nursing home seller should also 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. Due to the potential liability issues involved, a specific indemnification should be obtained from the buyer with respect to the buyer's use of the seller's license. 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 nursing home beds and its business, versus ownership of the nursing home building, equipment and land. It is therefore imperative, particularly in a lease transaction, that counsel for the lessor include sufficient language to indicate that the nursing home beds, business and CON revert to the lessor upon a breach of or at the end of the lease agreement. Otherwise, time-consuming and costly litigation may result. Depreciation Recapture. Upon the sale of a nursing facility that has been owned for less than ten years, the seller will be required to refund to ODHS a percentage of the excess depreciation paid to the seller by ODHS under the Medicaid program. A similar requirement applies to excess depreciation paid to the seller by HCFA under the Medicare program (although there is no time restriction). The seller should address this issue either through a price adjustment in the purchase agreement, or by conducting proper financial planning to avoid an unexpected financial result. General Business Issues Employees. In a typical nursing home change of ownership, the seller will be forced to terminate most, if not all, of the employees at the facility. Potential issues from the seller's perspective include, but are not limited to: notice to the Ohio Bureau of Employment Services and Ohio Bureau of Workers' Compensation; compliance with the federal Worker Adjustment and Retraining Notification ("WARN") Act and COBRA and ERISA requirements; compliance with union collective bargaining agreements, if any; and treatment of unused earned and accrued paid time off. The seller'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). Collection of Post-Closing Receivables for Pre-Closing Services. Many third party and private payers pay nursing homes in arrears, and consequently there may be a significant amount of post-closing receivables attributable to pre-closing services to which the seller is entitled. Typically, these payments are received by the new operator who is in possession of the facility. From the seller's perspective, great care should be taken to address, in detail, the procedure (including timing and the treatment of payments for which no dates of service are specified) for the buyer to remit these payments to the seller. Otherwise, the seller may experience an undesired delay in cash flow, and also may incur unanticipated legal fees in collection actions against former residents and their families. 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 payer, 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 seller must be certain to either terminate these agreements in a timely manner, or to have the buyer agree to assume the contracts (in which case the written consent of the other party may be required). Otherwise, the seller may face a breach of contract action when and if the buyer does not utilize the services of a particular supplier. 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 from the perspective of a potential seller. 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 become increasingly essential. PHYSICIAN RELATIONSHIPS Over the past six months, some of our clients have experienced difficulties with the Medical Directors and/or Attending Physicians in the following areas: Failing to visit residents frequently enough. Charting on residents never seen. Failing to follow established facility protocols for wound or other care. Filing care complaints with the Ohio Department of Health ("ODH") that were never discussed with or brought to the attention of facility administration. Being hostile & uncooperative with facility staff. Failing to keep his/her medical license and attending privileges at the local hospital free of any restrictions. In all of the above instances, facilities with clearly drawn medical credentialing procedures and properly written medical director contracts were in a better position to enforce compliance with their policies and procedures and/or terminate the relationship with that particular doctor. If you have not examined your Medical Director agreement and your Attending Physician's credentialing policies in the recent past, you may wish to do so in light of other facilities' recent experiences. CORPORATE COMPLIANCE On October 29, 1999, the Office of Inspector General ("OIG") published its Draft Compliance Program Guidance for Nursing Facilities. There was a thirty (30) day comment period provided. Not surprisingly, the draft identifies the seven standard elements to an effective compliance program. They are: Implementing written policies. Designating a Compliance Officer and Compliance Committee. Conducting effective training and education. Developing effective lines of communication. Conducting internal monitoring and auditing. Enforcing standards through well-publicized disciplinary guidelines. Responding promptly to detected offenses and developing corrective action. The Office of the Inspector General recommended in the draft guidance that all nursing facilities, even smaller facilities that are not part of a chain or group of facilities, should have a Corporate Compliance program. The OIG went on further to note that the larger the resources of the organization, the more detailed and comprehensive the compliance program is expected to be. Risk areas for nursing home compliance were identified and include quality of care, resident's rights, employee screening, vendor relationships, billing and cost reporting, record keeping and documentation. Our firm is in the process of establishing (or has established) corporate compliance programs for over sixty (60) nursing facilities in Ohio. Please call Carol Rolf if you are interested in obtaining legal assistance in establishing a Corporate Compliance program for your facility. EFFECTS OF PROGRAM EXCLUSION The OIG has clarified the rule regarding the prohibition of employing or doing business with any person who has been excluded from the Medicaid or Medicare program. In a recent OIG Special Advisory Bulletin, the OIG stated that a provider (such as a nursing facility) cannot employ or do business with an individual who has been excluded from the Medicaid or Medicare programs regardless of whether that individual has a direct patient care relationship. In other words, even if that individual's role is purely administrative in nature, payments made to him/her would not be allowable expenses, and the mere employment of the individual could subject the provider to civil monetary penalties. In light of this clarification, nursing facilities should screen all existing and new employees for exclusion. By and large, providers have already been screening all contractors/vendors for exclusion, which is also required. WHO CAN COMPLETE THE MDS & RAPS? There has been much confusion and consternation over the issue of the role of the LPN in the MDS assessment process. In late August of this year, the Ohio Department of Health published a clarification of this issue, stating that an LPN may report and document objective and subjective data on the MDS form. However, an LPN may not complete the RAP because it "requires analysis of assessment data and the establishment of nursing diagnoses." ODH also indicated that the RN, not the LPN, is "responsible for developing, maintaining and modifying the nursing component of the care plan." However, a LPN may participate in the development of the nursing plan of care under the direction of an RN. It is our understanding that ODH has indicated that it will not generally cite facilities on this issue unless non-compliance with the above assessment guidelines results in a specific negative outcome to a particular resident. STAFFING BILL INTRODUCED House Bill 468 has been introduced by Ohio Representative Catherine Barrett. This bill has strong support from SEIU, and includes specific staffing ratios for nursing homes on all three shifts. It would require the facility administrator to post daily and monthly reports regarding the actual ratios maintained in the facility, and would create fines and criminal sanctions for violating the staffing or posting mandates. Additionally, the bill contains language for the express benefit of plaintiff's lawyers. Namely, it provides that there is a legal presumption in any tort (personal injury) action that a facility not meeting the staffing ratios is liable for any injury to a resident. While this bill will likely not become law at this time, the movement towards mandated staffing numbers as well as the promotion of law suits against nursing homes is concerning. DRAFT ENFORCEMENT SOM Clinton's "Nursing Home Initiative" has resulted in two major changes in the survey process. The first change was the alteration in the survey procedures, which was implemented in July of this year. The second change is the enforcement guidance State Operations Manual, ("SOM") draft which is due to be finally implemented at any time. The most important enforcement modifications are as follows: Elimination of "poor performing facility" and "date certain" concepts. The new terminology will be "opportunity to correct" and "no opportunity to correct". Facilities who will not be given the opportunity to correct are those facilities with a G-level deficiency or higher on the current survey and which also had a G-level or higher deficiency on the previous standard survey or on any other survey in the interim. Those facilities which are not given an opportunity to correct will have remedies such as fines imposed against them immediately as of the date of the exit conference. Health Care Financing Administration ("HCFA") will now allow its Regional Offices to delegate authority to the states to deny payment for new admissions. If Region V delegates such authority to Ohio, the two (2) day and fifteen (15) day denial of payment notices will undoubtedly be generated quicker and more actual denials will likely go into effect. Additionally, the draft enforcement SOM specifies that the initial notice or remedies letter should serve as notice of the ninety (90) day mandatory ban. Thus, neither HCFA nor the states will need to generate an additional fifteen (15) day notice in order to effectuate the automatic ninety (90) day ban where deficiencies still exist three months after the exit conference. The effect of this provision will also be to increase the number of bans that actually take effect. Despite the lack of legal basis, HCFA is recommending that chain facilities (two or more facilities under common ownership or management), be subjected to different standards if they have "performance problems." Chains are deemed to have "performance problems" if twenty-five (25%) percent or more of the facilities in the chain had G level or above deficiencies on the three previous standard or complaint surveys, or have substandard quality of care or immediate jeopardy on the most recent survey. If a chain is found to have "performance problems", all of the facilities in the chain are subject to immediate remedies with no opportunity to correct. In light of the fact that Ohio leads the nation in the number of jeopardies declared, and is second only to California in the number of substandard quality of care deficiencies being cited, chains with a significant presence in Ohio should be aware of these draft provisions. Remember, however, all of the above provisions are currently in draft form and not final at this time. LAWSUITS ON THE INCREASE Lawsuits against nursing homes have increased dramatically in the last several years, and damage awards have sky rocketed. Recently at a legal AHCA conference in Chicago, members of our firm learned that claims in Texas and Florida against nursing facilities have become so prevalent and the awards have become so large that many of the major insurance underwriters are refusing to insure any more nursing homes in those states. The extent of plaintiffs' lawyers influence over the legislature is so significant in these states that it was reported that one Florida lawyer contributed as much to the legislators as the entire Florida long term care health care association contributed. No wonder the Florida state legislature has passed strict resident rights laws and is considering even tougher ones. Interestingly, Ohio has similar resident's rights provisions to that of Florida that include awarding plaintiffs with punitive damages. Plaintiffs' attorneys focus on corporate greed and understaffing in these suits. Where they do not have a particularly strong factual case, they will try the facility and the facility's care in general through survey reports, as opposed to the facts of their own particular case. Disgruntled employees figure large in these actions testifying as to understaffing and general poor care. Additionally, repeat deficiency citations on surveys have been argued to be the basis for a punitive damage award. Given this environment, providers should be wary of any requests for medical records and should consult their attorney before releasing any such records. They also should remember to send all their notices of claims to the insurance company by certified mail so that they have proof as to the date when the insurance company was put on notice of the claim. Finally, jury findings of poor care may be used as evidence in subsequent false claims cases brought by the government or in a state licensure action against a particular licensed employee. Therefore, great caution should be exercised in defending as well as settling negligence/malpractice cases, and a knowledge of health law is essential in these matters. CON RULE CHANGES In September 1999, some of the existing Certificate of Need ("CON") rules were modified. All applicants for CONs should be aware of these changes as they will impact future CON applications. Careful planning should be done prior to filing any CON application. The most significant changes are as follows: All CON applications must identify a specific site, by address or permanent parcel number, at the time of filing the application. The site, scope of activity and capital expenditure proposed cannot be changed during the CON review. After the applicant receives the Director of Health's ("Director") notice that the application is declared complete, the applicant has three (3) business days to publish in a local newspaper of general circulation a notice that includes the date the CON review began; the date the decision on the CON is due; the deadline and procedure for requesting a public informational hearing; the deadline and procedure for filing objections to the CON application; a general description of the nature of the project, its costs and facilities involved; and the street address or permanent parcel number for the project. The applicant must provide the Director with a copy of the published notice by certified mail within five (5) business days after the day the notice was first published. Change in definition of "existing health care facility". Changes in certain CON follow-up requirements and appeal procedures. If you have any questions regarding these rules or if you need assistance in preparing or prosecuting your CON application, please call Ira Goffman. PPS RELIEF As we went to press, White House and Congressional negotiators claimed to have agreed to a "final" deal regarding refinement of the Balanced Budget Act that spawned PPS. The deal provides for the following: Payment add-ons for 15 RUGs categories effective 4/1/00 to 9/30/00. Increase in payment for all 44 RUGs groups by 4% effective between 10/1/00 and 9/30/02. SNFs would have the option to convert to the federal rate. Ambulance services to and from dialysis, prosthetic devices and chemotherapy would be carved out of the PPS rate. A two year moratorium on the $1500 therapy payment caps. RR&G NEWS We would like to welcome Christopher Tost to our firm. Chris will concentrate his practice in long-term care regulatory 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 had been on our email list this past quarter, you would have received timely information on numerous topics, including the following: Monthly lists of excluded parties. Year 2000. Corporate Compliance Guidance. Balanced Budget Revisions. "Granny Cams". Nursing Home Abuse Initiatives. Survey & Certification Appeals. If you would like to be added to our distribution list, then please send an email to List@LTClawyers.com. Carol Rolf and Aric Martin recently presented a seminar to the Ohio Society of CPAs regarding long term care corporate compliance programs. Carol recently presented two seminars on the issue of survey and enforcement at AOPHA's Annual Convention and at OHCA's Fall Conference. Dennis Roth recently presented two seminars on the legal ramifications of the Medicare PPS on the long-term care industry at AOPHA's Annual Convention and at OHCA's Fall Conference. Aric recently presented a seminar on structuring assisted living admission agreements at OALA's Annual Conference.   | 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