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 jbaird@bf-law.com.
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