Q&A with Jeff Baird: Change of Ownership Under Competitive Bidding

AMARILLO, Texas — “If someone asked me to come up with the
most ridiculous program known to man, I would not have been able to
dream up competitive
bidding,” says health care attorney Jeffrey S. Baird of Brown
& Fortunato. “This is a classic case of fact being stranger
than fiction. Unfortunately, for the foreseeable future,
competitive bidding is here to stay, and we have to deal with
it.

“One of the many issues arising out of competitive bidding has
to do with change of ownership of a contract supplier,” Baird
continues. “Simply put, contract suppliers will want to sell to
non-contract suppliers, and non-contract suppliers will want to buy
their way into competitive bidding by purchasing contract
suppliers.”

However, as Baird sets out in the following Q&A, a
non-contract supplier cannot automatically buy its way into
competitive bidding by purchasing a contract supplier. “Upon
purchasing a contract supplier, the buyer must submit documentation
to CMS and CMS will, in turn, decide if a new (or ‘replacement’)
competitive bid contract will be issued to the buyer,” he explains.
So what guidance has CMS given the industry about such transfers of
ownership?

Question: May a contract supplier (i.e., a DME company
that executed a competitive bid contract) sell or transfer the
competitive bidding contract?

Answer: No, a competitive bidding contract may
not be sold or transferred. If CMS determines that a contract has
been sold or transferred, the contract will be terminated.

Question: May a non-contract supplier purchase a
contract supplier and, in effect, assume the competitive bidding
contract?

Answer: The general answer is “yes.” However,
be careful. As set out below, the devil is in the details.

Question: Is any type of notice required to be given
before a change of ownership (CHOW) of a contract supplier
occurs?

Answer: Sixty days before the anticipated
effective date of the CHOW, the contract supplier (i.e., seller)
must notify CMS that it is negotiating a CHOW. Thirty days before
the effective date of the CHOW, the non-contract supplier (i.e.,
buyer) must submit certain documentation to CMS, unless such
documentation was previously submitted and is still current. If a
new entity will emerge from the CHOW, then the new entity must
submit the documentation.

Question: OK, so what documentation must be
submitted?

Answer: The documentation must include the
following:

(1)The buyer must disclose any current or prior legal actions,
sanctions, revocations from the Medicare program, program-related
convictions, or exclusions or debarments against the buyer, or its
directors, officers, high-level employees, affiliated companies or
subcontractors by any federal, state or local agency. For the Round
1 rebid, bidders were required to disclose such sanctions occurring
within the past five years, and I would expect CMS to find the same
timeframe acceptable in the case of a CHOW.

(2)The buyer must submit documentation that the supplier has all
required state and local licenses to perform the services under the
competitive bidding contract.

(3)The buyer must submit documentation that the supplier meets
all quality standards (i.e., is accredited) for the products and
services that will be performed under the competitive bidding
contract.

(4)The buyer must submit financial documents. In the Round 1
rebid, bidders were required to submit an income statement, balance
sheet, statement of cash flow, a credit report, and tax return
extracts. The income statement, balance sheet, and statement of
cash flow needed to be for the year immediately prior to
bidding.

The credit report needed to have a numerical score, be completed
within 90 days of bidding, and be issued by Dun & Bradstreet,
Experian, Equifax, TransUnion, or Standard & Poor’s. The tax
return extract needed to be the revenue and expense portion (and
supporting schedules) of the bidder’s tax return for the year
immediately preceding bidding. The exact tax return extract
depended on the organization structure and tax form filed. I expect
that CMS will have similar requirements for such documents from a
buyer.

Question: Must the buyer sign anything with CMS
indicating that the buyer assumes the seller’s obligations under
the competitive bidding contract?

Answer: Yes. If the buyer purchases the assets
of the seller, then the buyer must submit a signed novation
agreement to CMS. The novation agreement must be acceptable to CMS
and must state that the buyer will assume all obligations under the
seller’s competitive bidding contract. The novation must be
submitted at least 30 days before the anticipated effective date of
the CHOW. I anticipate that CMS will issue further guidance on what
elements need to be included in the novation agreement or publish a
form for supplier use.

Question: What if a new entity is formed?

Answer: If a new entity is formed, then:

(1)At least 30 days before the anticipated effective
date of the CHOW, the seller (who is the existing contract
supplier) must submit to CMS a final draft of a novation agreement;
and

(2)Within 30 days after the effective date of the CHOW,
the new entity must submit to CMS the executed novation
agreement.

Question: What factors will CMS look at in determining
whether or not to award a competitive bidding contract to the buyer
or the new entity?

Answer: CMS may award a competitive bidding
contract to the buyer (or new entity) if the buyer or new entity
meets the quality standards, accreditation requirements, enrollment
requirements, financial standards, and all other requirements of
the competitive bidding program for that particular round. Unless
CMS issues further guidance on CHOW or creates a “pre-approval”
process, suppliers that enter into such transactions may need to be
prepared to unwind them if CMS decides not to award the buyer or
new entity a contract.

Question: What if a buyer purchases less than 100
percent of the stock of a contract supplier?

Answer: The CBIC needs to issue guidance on
this. The competitive bidding regulations do not define what
constitutes a “change of ownership.” It would be unreasonable for
CMS to require a contract supplier to provide it with notice for
each and every instance that its stock, even one share, is up for
sale. However, in the absence of further guidance, any transfer of
stock could be considered a change of ownership.

As a guidepost, the NSC requires reporting a change of ownership
information only when the person holds 5 percent or more ownership
interest. The transfer of less than 5 percent ownership interest
does not require reporting to the NSC. Those reporting guidelines
would be reasonable in competitive bidding as well.

Question: What if a buyer purchases less than 100
percent of the assets of a contract supplier?

Answer: The CBIC needs to issue guidance on
this. See the discussion regarding a less-than-100 percent stock
purchase. In the absence of further guidance, any transfer of
assets could be considered a change of ownership.

It will be the intent of the parties for the competitive bidding
contract to “follow the assets.” What this means is that the
parties will intend that CMS will issue a new competitive bidding
contract to the buyer. The regulations make such an award possible,
since they do not explicitly require a 100 percent asset transfer.
In this case, the contract supplier will need to notify CMS of its
negotiations at least 60 days prior to the effective date of the
CHOW. The buyer will need to send in its documentation and the
signed novation agreement 30 days before the effective date of the
CHOW.

Question: What if a buyer purchases a contract supplier
after it is awarded a contract but before the contract goes into
effect?

Answer: The same CHOW requirements apply. CMS
stated in the Request for Bids for the Round 1 rebid that “A
supplier that has an NSC approved CHOW after the bid window closed
and has been offered a contract will need to abide by the CHOW
requirements in 42 CFR § 414.422(d).” Those are the CHOW
requirements under competitive bidding.

Jeffrey S. Baird, Esq., is chairman of the Health Care Group
at Brown &
Fortunato, P.C., a law firm based in Amarillo, Texas. He
represents pharmacies, infusion companies, home medical equipment
companies and other health care providers throughout the United
States. Baird is Board Certified in Health Law by the Texas Board
of Legal Specialization. He can be reached at 806/345-6320 or
[email protected].

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