292 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

DEPARTMENT OF HEALTH AND

HUMAN SERVICES

Health Care Financing Administration

42 CFR Parts 413, 440, 441, and 489

[HCFA–1152–FC]

RIN 0938–AI31

Medicare and Medicaid Programs;

Surety Bond and Capitalization

Requirements for Home Health

Agencies

AGENCY: Health Care Financing

Administration (HCFA), HHS.

ACTION: Final rule with comment period.

SUMMARY: The Balanced Budget Act of

1997 (BBA ’97) requires each home

health agency (HHA) to secure a surety

bond in order to participate in the

Medicare and Medicaid programs. This

requirement applies to all participating

Medicare and Medicaid HHAs,

regardless of the date their participation

began. This final rule with comment

period requires that each HHA

participating in Medicare must obtain

from an acceptable authorized Surety a

surety bond that is the greater of

$50,000 or 15 percent of the annual

amount paid to the HHA by the

Medicare program, as reflected in the

HHA’s most recently accepted cost

report. The BBA ’97 also requires that

provider agreements be amended to

incorporate the surety bond

requirement; this rule deems such

agreements to be amended accordingly.

The BBA ’97 prohibits payment to a

State for home health services under

Medicaid unless the HHA has furnished

the State with a surety bond that meets

Medicare requirements. This final rule

with comment period requires that, in

order to participate in Medicaid, each

HHA must obtain from an acceptable

authorized Surety, a surety bond that is

the greater of $50,000 or 15 percent of

the annual Medicaid payments made to

the HHA by the Medicaid agency for

home health services for which Federal

Financial Participation (FFP) is

available.

In addition to the surety bond

requirement, an HHA entering the

Medicare or Medicaid program on or

after January 1, 1998 must demonstrate

that it actually has available sufficient

capital to start and operate the HHA for

the first 3 months. Undercapitalized

providers represent a threat to the

quality of patient care.

DATES: Effective Date: January 1, 1998.

Comment Period: Comments will be

considered if we receive them at the

appropriate address, as provided below,

no later than 5 p.m. on March 6, 1998.

ADDRESSES: Mail written comments (one

original and three copies) to the

following address: Health Care

Financing Administration, Department

of Health and Human Services,

Attention: HCFA–1152–FC, P.O. Box

26688, Baltimore, MD 21207–0488.

If you prefer, you may deliver your

written comments (one original and

three copies) to one of the following

addresses:

Room 309–G, Hubert H. Humphrey

Building, 00 Independence Avenue,

SW, Washington, DC 20201, or

Room C5–09–26, 7500 Security

Boulevard, Baltimore, MD 21244–

1850.

In commenting, please refer to file

code HCFA–1152–FC. Comments

received timely will be available for

public inspection as they are received,

generally beginning approximately 3

weeks after publication of a document,

in Room 309–G of the Department’s

offices at 200 Independence Avenue,

SW, Washington, DC, on Monday

through Friday of each week from 8:30

a.m. to 5 p.m. (phone: (202) 690–7890).

FOR FURTHER INFORMATION CONTACT:

Ralph Goldberg (410) 786–4870

(Medicare Surety Bond Provision); John

Eppinger (410) 786–4518 (Medicare

Capitalization Provision); Mary Linda

Morgan (410) 786–2011 (Medicaid

Provisions).

SUPPLEMENTARY INFORMATION: On

September 15, 1997, the Department of

Health and Human Services (HHS)

issued a press release announcing that

HHS was halting Medicare certification

of new home health agencies (HHAs)

and, during the interim, would be

developing new regulations to fight

home health fraud and abuse. In this

final rule with comment period we

implement the statutory requirement in

the Balanced Budget Act of 1997 (BBA

’97), (Public Law 105–33), enacted

August 5, 1997, that requires an HHA to

post a surety bond as a condition of its

approval as a Medicare provider or

Medicaid provider of home health

services. Also, on the basis of authority

found in sections 1861(o)(8), 1866(b)(2),

and 1891(b), of the Social Security Act

(the Act), we institute a requirement

that a new HHA, under the terms of its

provider agreement, must have enough

funds on hand to operate for the first 3

months. The purpose of both

requirements is to establish the financial

stability of home health providers. The

discussion below deals with both

provisions.

I. Background: Surety Bonds

Home health agencies (HHAs) that

meet certain requirements are approved

to be paid for medical and other services

furnished to Medicare and Medicaid

beneficiaries. Section 1861(o) of the

Social Security Act (Act) defines the

term ‘‘home health agency’’ under the

Medicare program and thereby

establishes certain conditions and

requirements that an HHA must meet in

order to participate in Medicare. As a

Medicare participating provider of

services, HHAs also must comply with

applicable requirements for provider

agreements and supplier approval

located in our regulations at 42 CFR part

489.

Sections 1902(a)(10)(D) and 1905(a)(7)

of the Act provide for the coverage of

home health services as medical

assistance under an approved State

Medicaid plan. Implementing

regulations for these statutory

provisions are located at 42 CFR 440.70

and 441.15. Section 440.70(d) specifies

that a home health agency under

Medicaid is an agency that meets the

requirements for participating in

Medicare. Section 441.15 specifies State

plan requirements for home health

services.

Section 4312(b)(1) of BBA ’97

amended section 1861(o) of the Act to

require each HHA, on a continuing

basis, to furnish us with a surety bond

in a form we have specified and in an

amount that is not less than $50,000.

The BBA ’97 provides for a waiver of

this requirement, which we discuss

below. This provision is to be

implemented effective for services

furnished to Medicare beneficiaries on

or after January 1, 1998. However, our

regulations do not currently contain

such a requirement. This change affects

our regulations at 42 CFR part 489.

Section 4312(b)(2) of BBA ’97 amended

the definition of ‘‘reasonable cost’’ in

section 1861(v)(1)(H) of the Act to

provide that the cost of a surety bond is

not included as an allowable Medicare

cost. This change affects our regulations

at 42 CFR part 413, subpart F, which

concern specific categories of Medicare

costs.

Section 4724(b) of BBA ’97 also

amended section 1903(i) of the Act by

adding a new paragraph (18) to prohibit

Federal financial participation (FFP) in

payments under Medicaid for home

health services unless the HHA provides

the State Medicaid agency, on a

continuing basis, a surety bond in a

form that we have specified for

Medicare participation and in an

amount that is not less than $50,000 or

some other comparable surety bond

under State law. This change affects our

regulation at 42 CFR Part 441.
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 293

II. Surety Bond Requirements for HHAs

Under Medicare

A. Scope of Requirement

In general, every HHA that

participates or that seeks to participate

in the Medicare program must obtain a

surety bond. The surety bond must

name the HHA as Principal, HCFA as

Obligee, and the surety company as

Surety. The statute permits us to waive

the requirement of a surety bond in the

case of an agency or organization that

provides a comparable surety bond

under State law. We are not, as a general

matter, implementing the full scope of

this waiver authority at this time,

because we are still considering what

standards and criteria would be

appropriate to implement such a waiver.

If a State has a comparable bond

requirement, we can waive the Medicare

bond requirement with respect to those

HHAs that furnish us with a bond in

compliance with that State’s law. At the

moment, we are only aware that Florida

has a bond requirement which is for

$50,000, whereas our requirement

begins at $50,000 and is higher under

certain circumstances. We believe that

this is consistent with the intent of the

Congress that established $50,000 as the

minimum amount of the bond.

Although we have been apprised that

other States are considering legislation,

we are not aware that any of this

legislation has been enacted into law.

As a result, we are seeking public

comment on what States currently

require in order for HHAs to be in

compliance with State law. We are also

seeking public comment with respect to

comparable experiences in the private

sector on the establishment of surety

bond requirements for HHAs. In

addition, we are seeking public

comment on the impact of our not

choosing to waive the Medicaid bond

required in the case of an agency or

organization that provides a comparable

surety bond under State law. We are,

however, waiving the requirement for

an HHA operated by a Federal, State,

local, or tribal government agency if,

during the preceding 5 years, the HHA

has not incurred long-term unpaid debts

owed to us based on unrecovered

Medicare overpayments or on unpaid

civil money penalties or assessments,

and none of its claims have had to be

referred by us to the Department of

Justice or the General Accounting Office

because of nonpayment. A governmentoperated HHA that does not qualify for

waiver must submit a surety bond.

We are waiving the surety bond

requirement for government-operated

HHAs only to the extent such HHAs

have a good history of paying their

Medicare debts. Our anecdotal

experience suggests that such HHAs

timely pay their Medicare debts. The

basis for this waiver is principally that

because government-operated HHAs are

a component of government, and

because a government has the power to

tax, it is unlikely such HHAs will be

unable to pay their Medicare debts.

Thus, government-operated HHAs, by

their public nature, furnish a

comparable or greater guarantee of

payment as would be afforded us by a

surety bond issued by a private surety

company. Nevertheless, governmentoperated HHAs with a poor history of

paying their Medicare debts, if there are

any such HHAs, are subject to the surety

bond requirement. We solicit comments

on appropriate criteria we may use for

waiving other HHAs from the

requirement to purchase a surety bond.

B. Relationship to Provider Agreements

Section 4312(f)(2) of BBA ’97 specifies

that the surety bond requirement must

be incorporated into existing Medicare

provider agreements by January 1, 1998.

Inasmuch as this mandate would

require the modification of over 10,000

HHA provider agreements by the

January 1, 1998 deadline, we are

implementing these modifications by

this rule. Therefore, this rule deems

such agreements to be modified so as to

incorporate the surety bond requirement

effective January 1, 1998.

We will verify that each HHA has

obtained a bond in the correct amount

and that the bond otherwise conforms to

the specifications we establish. If an

HHA fails to timely file a surety bond

that meets the requirements of our rules,

we may terminate a participating HHA’s

existing provider agreement or refuse to

enter into a provider agreement with an

HHA that seeks to participate in

Medicare. The surety bond requirement

will be incorporated into participating

HHAs’ existing provider agreements and

all new HHA provider agreements

effective January 1, 1998.

C. What Constitutes a Surety Bond

The ‘‘surety bond’’ in this final rule

with comment period is an instrument

obtained by an HHA from a surety

company in which the surety company,

acting as Surety, guarantees that it will

be responsible for unrecovered debts

owed to us by an HHA.

We are requiring that the bond be

obtained from a company that has been

issued a Certificate of Authority by the

U. S. Department of Treasury (which

has issued generally applicable

regulations governing the surety bond

industry with respect to Federal

agencies, thereby creating a wellregulated market). Such companies are

listed in the Department of Treasury’s

Circular Number 570 ‘‘Companies

Holding Certificates of Authority as

Acceptable Sureties on Federal Bonds

and as Acceptable Reinsuring

Companies.’’ We limit the purchase of a

bond from a company listed on the

Department of Treasury’s list of

approved companies that have been

issued a ‘‘Certificate of Authority’’ to

ensure that a Surety we rely on meets

certain minimum standards. Also, the

company must not have been

determined by us to be an unauthorized

surety for the Medicare program.

We will determine a surety company

to be unauthorized if:

• The surety company fails to furnish

us, upon request, timely confirmation of

the issuance of, and the validity and

accuracy of information appearing on, a

surety bond.

• The surety company fails to pay us

timely after we have presented to the

surety a proper claim for payment and

sufficient evidence to establish the

surety company’s liability on the bond.

• The surety company, by other

similar action, furnishes us with good

cause to determine that the company is

not acceptable as a surety for the

Medicare program.

A determination that a surety

company is not an authorized source for

surety bond for Medicare will be

effective immediately upon publishing a

notice of the determination in the

Federal Register and remains in effect

until we publish a notice of

reinstatement in the Federal Register.

However, any such determination does

not affect any surety bond issued by the

surety company to an HHA before the

effective date of the determination.

If a Surety is determined to be an

unauthorized surety company, we will

also determine whether and how such a

determination will affect HHAs that

have obtained a current bond from the

now unauthorized company. We may

require that HHAs obtain replacement

bonds. A determination by us that a

surety company is an unauthorized

surety company for the purposes of this

rule is not a debarment, suspension, or

exclusion for the purposes of Executive

Order 12549.

D. Surety Company Obligations

The surety company must guarantee

to pay us, up to the face amount of the

bond, the full amount of any unpaid

Medicare overpayment, plus accrued

interest, based on payments we made to

the HHA during the term of the bond.

Also, the surety company must

guarantee to pay us, up to the face

amount of the bond, the full amount of
294 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

any unpaid civil money penalty or

assessment we have imposed on the

HHA during the term of the bond based

on an authority under Title XI, Title

XVIII, or Title XXI of the Act, plus any

accrued interest. When the term of the

surety bond expires, the Surety remains

liable for any claims that are not timely

paid that have been or will be identified

based on Medicare payments made

during the term of the bond and for civil

money penalties or assessments that

were determined during the term of the

bond and are not timely paid. We will

demand payment from a Surety when

the Surety becomes liable under a bond

even if we have available to us

alternative legal means to pursue

collection of the monies due us.

Additional requirements for obtaining

a surety bond are addressed in order to

specify the conditions under which the

surety company becomes liable to us.

E. HHA Surety Bond Purchase

Requirements

Except for an HHA operated by a

Federal, State, local, or tribal

government agency determined by us to

meet the waiver criteria for this

requirement, every other participating

HHA must submit to us by February 27,

1998 a surety bond that is effective

beginning January 1, 1998 through the

end of the HHA’s current fiscal year.

Thereafter, a participating HHA must

submit to us, on an annual basis, a new

surety bond to be effective for the

HHA’s fiscal year. The HHA must

submit the bond to us not later than 30

days before the start of the fiscal year.

(For an HHA whose fiscal year begins

February 1, 1998 or March 1, 1998 the

submission of the second bond would

not be due until March 31, 1998.) We

require each HHA to obtain a new

surety bond each year in lieu of a

multiple-year bond or continuous bond.

We believe neither a multi-year bond

nor a continuous bond gives the

Medicare Trust Funds the level of

protection of a one-year bond. In

addition, a one-year bond makes it

easier to administratively tie a particular

bond with a particular year’s Medicare

payments. Also, if the Surety’s liability

is renewed each year up to the limit of

the surety bond, any penalties and

assessments have a greater opportunity

of being repaid by the HHA. If a oneyear bond is required, it is easier to link

the Surety’s liability with a particular

term of the bond and the fiscal year.

An HHA that seeks to participate in

Medicare for the first time must submit

a surety bond to us with its enrollment

application (form HCFA–855, OMB

approval number 0938–0685) but no

later than the completion date of its

certification survey. An HHA that seeks

to become a participating HHA through

the purchase or other transfer of the

ownership interest of a participating

HHA must also ensure that the surety

bond is effective from the date of the

purchase or transfer of the ownership

interest.

For an HHA that undergoes a change

of ownership, the 15 percent is

computed on the basis of Medicare

payments made by us to the HHA for

the most recently accepted cost report.

F. Amount of Surety Bond

We are establishing a flat rate to

determine the amount of the bond that

will be used in combination with a

$50,000 minimum bond. The flat rate is

related to the volume of business a HHA

does with Medicare. The bond amount

is the maximum amount for which a

surety company would be liable to

HCFA. The flat rate is generally 15

percent of the annual amount paid to

the HHA by the Medicare program as

reflected in the HHA’s most recently

accepted cost report. However, if an

HHA’s payments have increased or

decreased by 25 percent for the first 6

months of the HHA’s current fiscal year,

we will determine the amount of the

bond required for the next fiscal year

based on such payments and notify the

HHA of the required bond amount based

on the annualized amount of such

payments. In either case, the amount of

the surety bond and the premium paid

by the HHA for the surety bond are

directly tied to the amount of Medicare

payments received by the HHA.

We believe a bond amount tied to 15

percent of an HHA’s Medicare payments

is needed to ensure that we will recover

on most uncollectible overpayments. In

1993, Medicare overpayments were 4

percent of total Medicare payments

made to all HHAs. In 1996, Medicare

overpayments had grown to 7 percent of

total Medicare payments made to all

HHAs. Thus, the industry-wide ratio of

overpayments to payments has risen

dramatically (nearly doubling). Also,

although the industry percentage was

only 7 percent in 1996, the

overpayments of a particular HHA, as a

percentage of that HHA’s Medicare

payments could greatly exceed the

percentage of overpayments of all

HHAs.

We also believe that generally the 15

percent is a reasonable percentage on

which to base the amount of the bond,

since it would not be too high as to be

a barrier for small companies, yet high

enough to provide the Trust Funds with

a reasonable ability to recover debts

owed to the program. In determining

this percentage amount, we consulted

with an insurance industry trade group.

For HHAs currently participating in

Medicare, the amount of the initial

surety bond (i.e., the bond effective from

January 1, 1998) is to be based on the

HHA’s most recently accepted cost

report. For an HHA that seeks to

participate in the Medicare program on

or after January 1, 1998 and purchases

the assets or ownership interest of a

participating (or formerly participating)

HHA, the amount of the initial surety

bond will be based on the total amount

of Medicare payments to the

participating (or formerly participating)

HHA in the most recently accepted cost

report. For an HHA that seeks to

participate in the Medicare program on

or after January 1, 1998 and has not

purchased the assets or ownership

interest of a participating (or formerly

participating) HHA, the amount of the

initial surety bond will be $50,000. The

amount of each subsequent surety bond

will be based on the annual total

amount of Medicare payments made to

the HHA in the most recently accepted

cost report.

If an HHA’s overpayment for the most

recently accepted cost report exceeds 15

percent of annual payments, Medicare

may require the HHA to secure a bond

up to or equal to the amount of the

overpayment, provided the amount of

the bond is not less than $50,000.

G. Cost of Surety Bonds

We have been advised by surety

industry sources that well-operated and

sufficiently capitalized companies can

expect to incur costs, on average, of

approximately $10 per thousand dollars

of the face amount of the bond. Thus,

on average, a $50,000 bond will cost an

HHA approximately $500. As noted

earlier, under section 4312(b)(2) of

BBA§’97 the cost of surety bonds is not

to be reimbursed by Medicare. The costs

associated with obtaining surety bonds

is further discussed in the regulatory

impact analysis section of this

preamble.

III. Surety Bond Requirements Under

Medicaid

Section 4724(b) of BBA ’97 amended

section 1903(i) of the Act to prohibit

Federal Financial Participation (FFP) to

a State for home health services under

Medicaid unless the home health

agency furnishing the services provides

the State with a surety bond that meets

the requirement established by section

1861(o)(7) of the Act. This provision is

effective for services furnished on or

after January 1, 1998. This change

affects our regulations at 42 CFR part

441.
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 295

In general, every HHA that

participates or that seeks to participate

in the Medicaid program must obtain a

surety bond. The statute requires that

the Medicaid surety bond must be in the

form specified by the Secretary for

surety bonds under the Medicare

program. Therefore, in general, the

requirements for surety bonds for HHAs

in the Medicare program, discussed in

section II of this preamble, also apply to

HHAs participating in the Medicaid

program. However, certain differences

between the Medicare and Medicaid

programs require that the surety bond

requirement be tailored to fit the

Medicaid program. Medicare

reimbursement for services furnished by

participating HHAs is provided through

fiscal intermediaries based on claims

submitted directly to HCFA. Payment

for home health services under

Medicaid is made to the HHA by the

State Medicaid agency. The State

Medicaid agency submits a quarterly

expenditure report to HCFA in order to

claim Federal matching funds, usually

at the 50 percent rate, for home health

services provided under Medicaid by

participating HHAs.

In general, we are adopting for the

Medicaid program the surety bond

requirements set forth in the Medicare

program, as provided for under the BBA

’97. Appropriate changes are made to

establish that the HHA participating in

the Medicaid program must submit the

surety bond to the State Medicaid

agency, rather than HCFA, and that the

State Medicaid agency must take the

applicable actions with regard to

compliance with the statutory and

regulatory requirements in order to

receive FFP for home health services.

For these reasons, we are allowing the

State Medicaid agency to specify any

other requirements for the HHA that it

deems necessary to ensure that it

receives a surety bond from an

authorized surety company. Surety

bonds must be submitted to the

Medicaid agency by February 27, 1998,

and carry an effective date of January 1,

1998. The term of the bond must be 1

year and the amount of the bond must

be $50,000 or 15 percent of the amount

paid to the HHA by the State Medicaid

program for the most recent annual

period for which data are available,

whichever is greater. As in Medicare,

the Medicaid agency may require a bond

greater than 15 percent of annual

payments if the HHA’s overpayments

exceed that percentage of payments.

The Medicaid agency, rather than

HCFA, is the obligee for surety bonds

required under the Medicaid program.

We are specifying that each State will

make the determination that a surety

company has met a condition to cause

it to be unauthorized for Medicaid

purposes in its State. Since each State

will be making this determination, we

are allowing the State to establish its

own requirements for notifying the

HHAs and the public that a surety

company is not authorized for Medicaid

purposes in the State. Each State is

provided the flexibility to set the annual

period for which bonds in their State

will apply.

The surety bond under Medicaid is

for unpaid overpayments only, not for

civil money penalties or assessments, as

is the case under Medicare. Civil money

penalties against HHAs are not

authorized under the Medicaid statute

and neither HCFA nor the States can

impose assessments to HHAs similar to

those assessments imposed by HCFA

under Medicare.

IV. Capitalization Requirements for

HHAs

A. Background

One potential difficulty with many

small businesses is that they are often

undercapitalized. That is, they do not

have adequate capital, or up-front funds,

with which to operate the business

pending development of an adequate

and reliable stream of revenue.

Even under ideal conditions, a

business must incur costs before any

revenues are realized. Costs of planning

and organizing the business are incurred

before any services can be rendered or

goods can be sold. Afterwards, once the

business has begun to operate, there is

a period of time when services are

rendered or goods are sold before any

revenues from these activities actually

will begin to flow into the business.

Until that happens, the business must

have other funds available to operate in

order to pay employee salaries, to pay

rent, to pay costs of heat, light and

power, and so forth.

Under less than ideal conditions, the

need for adequate up-front operating

funds is even more critical. For

example, the demand for the services or

goods may not be as great as anticipated;

a temporary (or longer) downturn in the

market may depress sales; the normal

turn-around in billing and receiving

payment may be longer than

anticipated; or particular customers may

lag in paying for goods and services.

New HHAs generally are small

businesses and have the same need for

adequate capitalization as have other

small businesses which are just starting.

As with other small businesses, a lack

of funds in reserve to operate the

business until a stream of revenues can

be established can seriously threaten the

viability of the business. In addition, for

new HHAs, which are in business to

render patient care services, any

condition threatening the viability of the

new business can adversely affect the

quality of care to their patients and, in

turn, the health and safety of those

patients. That is, if lack of funds forces

an HHA to close its business, to reduce

staff, or to skimp on patient care

services because it lacks sufficient

capital to pay for the services, the

overall well-being of the HHA’s patients

could be compromised. In fact, there

could be the risk of serious ill effects as

a result of patients not receiving

adequate services.

The level of services provided to an

HHA’s patients is of serious concern to

us for the following reason. The process

by which an HHA participates in the

Medicare program is one that involves

a survey by HHS or an accrediting

organization. This survey is essentially

a snapshot of the agency’s activities. For

a new agency that is undercapitalized,

it may be unable to sustain the level of

services it is able to provide at the time

of the survey over the period of time

necessary for it to begin receiving a

steady stream of revenue from Medicare.

The period in question could last as

long as two or even three months. Since

a survey has already been conducted,

the new HHA’s services are not

routinely inspected during this period

and so there is increased danger that

lack of operating funds could result in

inadequate care that is not discovered.

B. Effects of Threatened Financial

Viability

To assure quality of care to patients

who receive care from a new HHA, we

are establishing initial capitalization

requirements for new HHAs in order to

increase the likelihood of their viability

and to minimize situations that could

adversely affect the health and safety of

their patients. These requirements will

be effective January 1, 1998.

We believe that these requirements

are urgently needed, particularly in light

of the findings of the Office of Inspector

General (OIG) regarding

undercapitalized or bankrupt HHAs and

the adverse impact such HHAs have on

the Medicare program and public

monies. In its July 1997 report, ‘‘Home

Health: Problem Providers and Their

Impact on Medicare’’ (OEI–09–96–

00110), the OIG stated, in part:

If it were not for Medicare accounts

receivable, problem agencies would have

almost nothing to report as assets. Agencies

tend to lease their office space, equipment,

and vehicles. They are not required by

Medicare to own anything, and they are

almost always undercapitalized. On average,
296 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

cash on hand and fixed assets amount to only

one-fourth of total assets for HHAs, while

Medicare accounts receivable frequently

equal 100 percent of total assets. These

agencies are almost totally dependent on

Medicare to pay their salaries and other

operating expenses. For a home health

agency, there are virtually no startup or

capitalization requirements. In many

instances, the problem agencies lease

everything without collateral. They * * * do

not even have enough cash on hand to meet

their first payroll.

We agree that it is unacceptable that

an HHA can enter the Medicare program

in many cases with little or no reserves

with which to operate pending receipt

of reimbursement from Medicare (and

other payers). To do business in this

manner sets a new HHA up for potential

problems from the beginning and

exposes Medicare to unnecessary risk.

Accordingly, we believe it is imperative

that Medicare set capitalization

requirements for new HHAs promptly.

Section 1891(b) of the Act states that

it is ‘‘the duty and responsibility of the

Secretary to assure that the conditions

of participation and requirements

specified in or pursuant to section

1861(o) and subsection (a) of this

section and the enforcement of such

conditions and requirements are

adequate to protect the health and safety

of individuals under the care of a home

health agency and to promote the

effective and efficient use of public

moneys.’’ Section 1861(o)(8) itself

authorizes the Secretary to establish

‘‘such additional requirements * * * as

the Secretary finds necessary for the

effective and efficient operation of the

program.’’

Section 1866(b)(2) provides that the

Secretary may refuse to enter into an

agreement under section 1866 after

determining ‘‘that the provider fails to

comply substantially with the

provisions of the agreement’’ or ‘‘with

the provisions of [Title 18] and

regulations thereunder’’ or ‘‘that the

provider fails substantially to meet the

applicable provisions of section 1861.’’

It is on the basis of these authorities

that we are, by regulation, establishing

this new requirement that an HHA must

have a certain minimum amount of

capital necessary to assure the financial

success of the business and, thus, to

minimize the possibility of quality

problems or financial loss to the

Medicare program as a result of

shortfalls in business revenue.

C. Capitalization Requirements

For an HHA that seeks to participate

in the Medicare or Medicaid program

beginning on or after January 1, 1998,

we will determine whether the HHA has

sufficient capitalization, that is, the

initial reserve operating funds that the

HHA will need to operate for the first

three months as a participating

Medicare or Medicaid provider.

Capitalization is required for all HHAs

that are seeking, for the first time, to

participate in Medicare, including new

HHAs as a result of a change of

ownership if the change of ownership

results in a new provider number being

issued.

These capitalization requirements

apply to Medicaid HHAs as well as

Medicare HHAs. As provided in 42 CFR

440.70(d), a home health agency for the

Medicaid program means a public or

private agency or organization, or part of

an agency or organization, that meets

requirements for participating in

Medicare. Most HHAs participate in

both the Medicare and Medicaid

programs. However, even those HHAs

that participate solely in Medicaid but

not in Medicare must meet the Medicare

requirements. Therefore, the following

discussion, which is directed to

Medicare HHAs, must be read to apply

also to HHAs that seek participation in

both programs or only in the Medicaid

program. However, in the case of

Medicaid-only HHAs, the Medicaid

State agency is responsible for

determining whether the capitalization

requirements set forth in 42 CFR 489.28

are met in the same manner that

Medicare intermediaries make the

determination for HHAs requesting to

enter the Medicare program only or both

the Medicare and Medicaid programs.

As discussed further below, through

our Medicare intermediaries we will

determine the amount of capital that

each new HHA is required to have

before becoming certified in the

Medicare program. This amount is to

enable the HHA to operate for three

months after becoming certified to

participate as a Medicare provider of

services. That is, as of the date that the

HHA becomes certified in the Medicare

program, which sometimes could be

retroactive back to the date the HHA

met all condition level requirements, it

must have available the amount of

capital determined by us as sufficient

under criteria established by this rule.

After the date of certification, it is

expected that the HHA will expend

some, or in some cases all, of the funds

in providing care to its patients,

including Medicare beneficiaries,

pending developing a stream of patient

care revenue from Medicare and other

payers.

There may be several ways to

structure a capitalization requirement

for new HHAs, but we believe the

method discussed below is reasonable

and likely to meet the objectives of

enhancing the financial viability of the

Medicare program. We will determine

the sufficiency of the capitalization of

an HHA that seeks to participate in the

program based on the first-year

experience of other HHAs, i.e., on cost

data from submitted cost reports for the

first full year of operation from at least

three other comparable HHAs. Although

a number of factors could be relevant in

determining an adequate capitalization

amount, we believe the following coreapproach serves to tailor the

capitalization needed by an HHA which

is seeking to participate in the Medicare

program.

First, the intermediary determines an

average cost per visit based on first-year

cost report data from the as-filed cost

reports for at least three HHAs that it

serves that are comparable to the HHA

that is seeking to enter the Medicare

program, considering such factors as

geographic location and urban/rural

status, number of visits, provider-based

vs. free-standing, and proprietary vs.

non-proprietary status. The average cost

per visit is determined by dividing the

sum of the total reported costs of care

for all patients of the HHAs by the sum

of their total visits. Then, the

intermediary multiplies the average cost

per visit by the projected number of

visits for all patients (Medicare,

Medicaid, and all other patients) for the

first three months of operation of the

HHA that is seeking to enter the

program. By developing an average cost

per visit using first year cost data from

at least three comparable HHAs in the

same area, then applying this cost per

visit to the new HHA’s own projected

visits, the initial reserve operating funds

so determined should closely

approximate the needs of the new HHA.

Finally, if the number of annual visits

projected by the HHA seeking to enter

the program is less than 90 percent of

the average number of annual visits

reported by the HHAs from which the

average cost per visit was developed

(that is, total reported visits divided by

the total number of HHAs used), the

intermediary will substitute for the

HHA’s projected visits 90 percent of one

calendar quarter of the average reported

visits (that is, the average number of

visits for three months) for the new

HHAs already in the program. This step

serves to set a reserve amount for the

new HHA in line with the experience of

comparable HHAs in the same area and

prevents the new HHA from being

undercapitalized, and putting the HHA

and the Medicare program at risk.

The intermediary also will submit the

average cost per visit that it has

developed to the HCFA regional office

that is involved in certifying the HHA.
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 297

We will collect this information and

analyze it to determine the feasibility of

establishing average per visit costs

regionally or centrally or developing

some other measure of initial

capitalization. Following publication of

these new regulations, we will develop

program instructions that will describe

this process more fully.

The process we have laid out here

will work acceptably, we believe,

because regional home health

intermediaries (RHHIs) serving HHAs

are limited in number and have both the

expertise and recent cost reporting files

to estimate the capital requirements laid

out in this rule. We recognize, however,

that the process relies to some extent on

the recent cost reports available to the

RHHIs and that it could be improved if

the capitalization amounts required

could be derived from a larger data base

and could be computed to a greater

degree by provider type. We have

recently begun to receive HHA cost

reports in an automated system;

however, the available reports are

limited and additional information from

survey and certification files and HHA

claims data would be necessary to help

develop the data we need. We have

begun to look at these data to determine

if it is feasible to compute capitalization

amounts from them. If so, we will use

this data in further developing in the

future, the capitalization requirements

established in this final rule.

The HHA must provide us sufficient

evidence to prove that the initial reserve

operating funds are available to it and

that at least 50 percent of the amount

comprises the HHA’s own, nonborrowed funds which are not in any

way encumbered. If an owner uses his/

her own funds in the business, whether

loaned or contributed to the business,

the funds are considered the owner’s

investment in the business and,

therefore, those funds are part of the

HHA’s own funds. (However, if the

owner lends funds to the business, any

interest the HHA pays the owner would

not be allowable as interest under the

Medicare program (42 CFR

413.153(c)(1)).

If an organization plans to do business

with the Medicare program as a new

HHA, we believe it is reasonable that it

would have 50 percent of the

capitalization requirement as nonborrowed funds. Fifty percent of the

requirement in non-borrowed funds

demonstrates that the organization is

earnest in its attempt to become a

financially sound provider of home

health services under the Medicare

program. And from Medicare’s

perspective, 50 percent of the

capitalization minimizes Medicare’s risk

that the HHA will become financially

insolvent in the beginning stages of

starting its business. At least one State,

(the State of New York), which imposes

operating capital requirements as part of

its certificate-of-need process for HHAs,

requires the applying HHA to document

that it has contributed at least 50

percent of its own (non-borrowed) funds

in meeting the capital requirement.

To support that the HHA has met the

requirement, it must provide the

intermediary with a copy of the

statement(s) of the HHA’s savings,

checking, or other account(s) which

contain(s) the funds, accompanied by an

attestation from an officer of the bank or

other financial institution that the funds

are in the account(s) and are

immediately available.

Although Medicare generally expects

the funds available to be cash funds, in

some cases an HHA may have all or part

of the initial reserve operating funds in

cash equivalents. For the purposes of

this section, cash equivalents are shortterm, highly liquid investments that are

readily convertible to known amounts of

cash and that present insignificant risk

of changes in value. If a cash equivalent

is not readily convertible to a known

amount of cash as needed during the

initial three month period for which the

initial reserve operating funds are

required, the cash equivalent does not

qualify in meeting the initial reserve

operating funds requirement. Examples

of items commonly considered to be

cash equivalents are Treasury bills,

commercial paper, and money market

funds. As with funds in a checking,

savings, or other account, the HHA also

must be able to document the

availability of any cash equivalents.

Depending on the elapsed time

between the time the HHA originally

establishes that it has the funds

available and the time needed for us to

determine that the HHA has met all

other requirements necessary for

certification, we later may require the

HHA to furnish us with another

attestation from the financial institution

that the funds remain available upon the

HHA’s certification into the Medicare

program or, if applicable,

documentation from the HHA that any

cash equivalents remain available.

Also, the officer at the HHA who will

be certifying to the accuracy of the

information on the HHA’s cost report

must certify as to the portion of the

required initial reserve operating funds

that constitutes non-borrowed funds, an

amount which must be at least 50

percent of the total required funds.

The remainder of the initial reserve

operating funds may be secured through

borrowing or line of credit from an

unrelated lender. An unrelated lender is

defined in the regulations providing for

the reimbursement of allowable interest

expense under the Medicare program. In

determining whether interest is proper

under the Medicare program, 42 CFR

413.153(b)(3) provides that ‘‘interest

be—(ii) Paid to a lender not related

through control or ownership, or

personal relationship to the borrowing

organization.’’ Funds borrowed from a

person or entity contrary to the

provisions in § 413.153(b)(3)(ii) do not

qualify as funds to meet the initial

reserve operating funds requirement.

If borrowed funds are not in the same

account(s) as the provider’s own funds,

the HHA also must provide proof that

the borrowed funds are available for use

in operating the HHA, by providing to

the intermediary a copy of the

statement(s) of the HHA’s savings,

checking, or other account(s) containing

the borrowed funds, accompanied by an

attestation from an officer of the bank or

other financial institution that the funds

are in the account(s) and are

immediately available. As with the

provider’s own funds, we later may

require the HHA to furnish another

attestation by the financial institution

that the funds remain available upon the

HHA’s certification into the Medicare

program.

If the HHA chooses to establish the

availability of a portion of the initial

reserve operating funds with a line of

credit, it must provide the intermediary

with a letter of credit from the lender.

As with funds in a bank or other

financial institution, as discussed above,

we later may require the HHA to furnish

us with an attestation from the lender

that the HHA, upon its certification into

the Medicare program, continues to be

approved to borrow the amount

specified in the letter of credit.

We will not enter into a provider

agreement with an HHA until we are

satisfied, through the intermediary, that

the capitalization requirement has been

met, that is, that the HHA has the initial

reserve operating funds available as

discussed above.

V. Provisions of the Final Rule With

Comment Period

A. Surety Bond Requirements Under

Medicare

We are adding a new Subpart F to 42

CFR part 489, consisting of §§ 489.60

through 489.73, to establish the surety

bond requirements that pertain to HHAs

under Medicare.

In § 489.60 (‘‘Definitions’’) we specify

the meaning of the terms ‘‘assessment’’,

‘‘assets’’, ‘‘civil money penalty’’,

‘‘participating home health agency’’,
298 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

‘‘surety bond’’, ‘‘unpaid civil money

penalty or assessment’’, and ‘‘unpaid

claim’’ to clarify the meaning of these

terms in the context of the surety bond

requirements.

We define the terms as follows:

Assessment means a sum certain that

HCFA may assess against an HHA in

lieu of damages under Titles XI, XVIII,

or XXI of the Social Security Act or

under regulations in this chapter.

Assets includes but is not limited to

any listing that identifies Medicare

beneficiaries to whom home health

services were furnished by a

participating or formerly participating

HHA.

Civil money penalty means a sum

certain that HCFA has the authority to

impose on an HHA as a penalty under

Titles XI, XVIII, or XXI of the Social

Security Act or under regulations in this

chapter.

Participating home health agency

means a ‘‘home health agency’’ (HHA),

as that term is defined by section

1861(o) of the Social Security Act, that

also meets the definition of a ‘‘provider’’

as set forth at § 400.202 of this chapter.

Surety bond means one or more bonds

issued by one or more surety companies

under 31 U.S.C. 9304 to 9308 and 31

CFR parts 223, 224, and 225, provided

the bond otherwise meets the

requirements of this section.

Unpaid civil money penalty or

assessment means a civil money penalty

or assessment imposed by HCFA on an

HHA under Titles XI, XVIII, or XXI of

the Social Security Act, plus accrued

interest, that, 90 days after the HHA has

exhausted all administrative appeals,

remains unpaid (because the civil

money penalty or assessment has not

been paid to, or offset or compromised

by, HCFA) and is not the subject of a

written arrangement, acceptable to

HCFA, for payment by the HHA. In the

event a written arrangement for

payment, acceptable to HCFA, is made,

an unpaid civil money penalty or

assessment also means such civil money

penalty or assessment, plus accrued

interest, that remains due 60 days after

the HHA’s default on such arrangement.

Unpaid claim means a Medicare

overpayment for which the HHA is

responsible, plus accrued interest, that,

90 days after the date of the agency’s

notice to the HHA of the overpayment,

remains due (because the overpayment

has not been paid to, or recouped or

compromised by, HCFA) and is not the

subject of a written arrangement,

acceptable to HCFA, for payment by the

HHA. In the event a written

arrangement for payment, acceptable to

HCFA, is made, an unpaid claim also

means a Medicare overpayment for

which the HHA is responsible, plus

accrued interest, that remains due 60

days after the HHA’s default on such

arrangement.

In § 489.61 (‘‘Basic requirement for

surety bonds’’) we stipulate that, in

general, each Medicare participating

HHA or HHA that seeks to become a

Medicare participating HHA must

obtain and furnish us with a copy of a

surety bond. The BBA ’97 requires that

HHAs must obtain a surety bond

effective January 1, 1998. In addition,

we believe that requiring a HHA to

purchase a surety bond will help ensure

that we are able to recover

overpayments we cannot collect using

other methods.

In § 489.62 (‘‘Requirement waived for

Government-operated HHAs’’) we

stipulate that, under certain conditions,

government-operated HHAs are deemed

to have furnished a comparable surety

bond under State law. When the

necessary conditions are met, we waive

the bond requirement. We believe that

government-operated HHAs tend not to

use fraudulent or abusive Medicare

billing practices and when overpaid

almost invariably honor their debts. Our

anecdotal experience suggests that such

HHAs timely pay their Medicare debts.

More importantly, given the taxing

authority of the government of which

the HHA is a part, such government will

generally be able to raise funds to meet

its just debts. As such, we believe such

taxing power affords us a comparable if

not greater level of protection as would

a surety bond issued by a private surety

company and that any Medicare debt a

government-operated HHA might

inadvertently incur would be easily

collectible. Therefore, we believe that

government-operated HHAs represent a

minimum risk to Medicare.

Consequently, we have waived the

surety bond requirement for

government-operated HHAs to the

extent such HHAs have a good history

of paying their Medicare debts.

Government-operated HHAs with a poor

history of paying their Medicare debts,

if there are any such HHAs, will not

meet the standard necessary for waiver

of the surety bond requirement.

In § 489.63 (‘‘Parties to the bond’’) we

specify the format of the names of the

three entities on the bond. This provides

guidance to the HHA as to how to name

the three parties to the bond. By

specifically naming the parties to the

bond in this manner, clarity is provided

as to the rights and obligations of each

party of this three-party instrument.

In § 489.64 (‘‘Authorized Surety and

exclusion of surety companies’’) we

stipulate that the surety bond must be

obtained from an Authorized Surety and

define what conditions must be met for

a surety company to be considered an

Authorized Surety under this section.

We believe that allowing HHAs to

obtain bonds only from surety

companies that have been issued a

Certificate of Authority by the U.S.

Department of the Treasury helps

ensure that the HHA is obtaining a bond

from a company that meets certain

minimum standards. To ensure that the

HHA has properly fulfilled the surety

bond requirement as specified in this

rule, we will ask the Surety to furnish

timely confirmation of the issuance of,

and the validity and accuracy of

information appearing on, a bond the

HHA has furnished to us. If the Surety

fails to comply with our request for such

information, we will determine the

Surety to be unauthorized as a source of

bonds for Medicare purposes, since

without such confirmation from the

Surety we can not determine if the HHA

has properly complied with the surety

bond requirements. Similarly, if we

demand payment according to the terms

of the bond, and the Surety fails without

justification to pay us, we may

determine that such surety company

cannot be relied upon to fulfill its

commitments and may then determine

the surety company to be unauthorized

for future use by any HHA. If a Surety

is determined to be an unauthorized

surety company, we also determine

whether and how such a determination

will affect HHAs that have obtained a

current bond from the now

unauthorized company. We may require

that HHAs obtain replacement bonds. A

determination by us that a surety

company is an unauthorized surety

company for the purposes of this rule is

not a debarment, suspension, or

exclusion for the purposes of Executive

Order 12549.

Section 489.65 (‘‘Amount of the

bond’’) covers the methods of how to

calculate the surety bond amount for

participating HHAs and HHAs that seek

to participate in Medicare. We believe

that 15 percent of the annual Medicare

payments received by the HHA during

its fiscal year is generally a reasonable

percentage on which to base the amount

of the bond, subject to the statutory

minimum of $50,000. By using 15

percent of the amount of annual

Medicare payments, the amount of the

surety bond and the premium for the

surety bond are directly tied to the

amount of Medicare payments received

by the HHA. As stated earlier, in 1993

overpayments were 4 percent of total

Medicare payments made to all HHAs.

In 1996, overpayments were 7 percent of

total Medicare payments made to all
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 299

HHAs. Of course, the percentage of

overpayments to total payments for a

particular HHA could be significantly

higher. However, we believe that the 15

percent standard is a generally

reasonable level and will usually ensure

that we recover most uncollectible

overpayments. Also, we believe that the

15 percent is a reasonable percentage on

which to base the amount of the bond,

since it would not be too high as to be

a barrier for small companies, yet high

enough to provide the Trust Funds with

a reasonable ability to recover debts

owed to the program. In determining

this percentage amount, we consulted

with an insurance industry trade group.

However, we recognize that the 15

percent standard may be insufficient for

HHAs that incur large overpayments.

Therefore, instead of applying the 15

percent standard to such HHAs, we may

require a bond greater than 15 percent

of annual payments if the HHA’s

overpayments exceed that percentage of

payments.

Section 489.66 (‘‘Additional

requirements of the surety bond’’)

specifies the bases under which the

Surety becomes liable to pay HCFA

under the bond, and the conditions

under which the Surety’s guarantee to

HCFA under the bond is not

extinguished. Although a surety bond

requirement has been implemented in

other Federal government agencies, it is

new to us as an element of program

administration. Therefore, we believe

that in order to provide maximum

protection to Medicare, it is our

obligation to provide specific guidance

to the HHAs as to the terms that must

be included in the bond.

In § 489.67 (‘‘Submission date and

term of the bond’’) we specify when

HHAs must submit their initial and

subsequent surety bonds. We believe

neither a multi-year bond nor a

continuous bond gives Medicare the

level of protection of a one-year bond.

The Medicare payments received by

HHAs change yearly, usually increasing.

Thus, a one-year bond makes it easier to

administratively tie the required bond

amount with a particular year’s

Medicare payments, helping to

eliminate confusion for the HHA, the

Surety, and us if we demand payment

from the Surety. We chose for an initial

term of the bond a period from January

1, 1998 to the close of each HHA’s

current fiscal year. (‘‘Current’’ means as

of January 1, 1998, and not as the date

of the publication of the rule.)

In § 489.68 (‘‘Effect of failure to

obtain, maintain, and timely file a

surety bond’’) we state that failure to

obtain a surety bond in accordance with

this rule is a sufficient basis for us to

terminate an HHA’s provider agreement

or for us to refuse to enter into such an

agreement. Such a policy is an

administratively efficient means of

enforcing the surety bond requirement

while affording participating HHAs and

HHAs that wish to participate in

Medicare appropriate rights of due

process as specified in 42 CFR part 498.

In § 489.69 (‘‘Evidence of

compliance’’) we specify that we may, at

any time and in a manner we choose,

require an HHA to demonstrate that the

HHA is in compliance with the surety

bond requirements. We also provide

that the failure of the HHA to

demonstrate such compliance is

sufficient reason to terminate the HHA’s

provider agreement or refuse to enter

into such an agreement. We believe that

in order to ensure that an HHA not only

obtains a surety bond but also that it

does not terminate the bond during the

bond’s one-year term, it is necessary

that we have the ability to make sure the

bond is still in effect. In addition,

conditions may arise, such as the Surety

terminating its business operations,

where the bond may become

unenforceable. Therefore, in order to

safeguard our ability to recover on

unpaid debts from HHAs, a method is

needed to ascertain the continuing

validity of the financial security

represented by the bond we have been

furnished.

Also, if the Surety’s liability is

renewed each year up to the limit of the

surety bond, any penalties and

assessments have a greater opportunity

of being repaid by the HHA. If a oneyear bond is required, it is easier to link

the Surety’s liability with a particular

term of the bond and the fiscal year.

In § 489.70 (‘‘Effect of payment by the

Surety’’) the payment by the Surety to

HCFA on the bond constitutes

collection of the unpaid claim or unpaid

civil money penalty or assessment owed

by the HHA and is a sufficient basis for

termination of the HHA’s provider

agreement. We believe that having to

resort to the Surety for payment of a

Medicare debt owed by the HHA, and

having the Surety acknowledge our

demand for payment as valid, is a

sufficient basis to conclude that the

HHA is not complying with the

provisions of Title XVIII and our

implementing regulations.

In § 489.71 (‘‘Surety’s standing to

appeal Medicare determinations’’) we

specify that a Surety has the same

appeal rights of the HHA, provided the

Surety has paid us under the surety

bond, the HHA has assigned its right of

appeal to the Surety, and the Surety

satisfies all jurisdictional and

procedural requirements that applied to

the HHA. By extending appeal rights to

the Surety in this manner, we are

further protecting it from improper

financial loss in those cases where the

HHA did not exercise the HHA’s appeal

rights and our demand for and receipt

of payment under the bond was

erroneously determined.

In § 489.72 (‘‘Effect of review

reversing HCFA’s determination’’) we

specify that if a Surety has paid HCFA

on the basis of a Medicare debt incurred

by an HHA and the HHA (or the Surety)

successfully appeals HCFA’s

determination that was the basis of the

debt (and the Surety’s payment), then

HCFA will refund to the Surety the

amount that the Surety paid to HCFA to

the extent such amount relates to the

successful appeal, provided all review,

including judicial review, has been

completed on the matter. We believe

this provision protects the Surety from

undue financial loss due to error on our

part.

In § 489.73 (‘‘Incorporation into

existing provider agreements’’) we

specify that the requirements of Subpart

F of Part 489 are deemed incorporated

into existing HHA provider agreements

effective January 1, 1998. Due to the

BBA ’97, we must incorporate the HHA

surety bond requirement into all HHA

provider agreements by January 1, 1998.

Given that the BBA ’97 was enacted in

August 1997, we find that the only

practicable means to accomplish this

task in timely fashion is by our

regulatory authority.

In new § 413.92 we specify that the

costs incurred by a HHA to obtain a

surety bond are not included as

allowable Medicare costs. This

provision implements section 4312(b)(2)

of the BBA ’97 which amended section

1861(v)(1)(H) of the Act to exclude the

cost of these surety bonds as a

reimbursable cost under Medicare.

B. Surety Bonds Requirements Under

Medicaid

We have established a new § 441.16

(the previous § 441.16 is redesignated as

§ 441.17) to specify the prohibition on

FFP in expenditures for home health

services unless the HHA meets the

surety bond requirements. In this

section, we also include the surety bond

requirements specific to Medicaid.

As discussed earlier, generally, we are

adopting the surety bond requirements

under Medicare for the requirements

under Medicaid. However, there are

program differences that require

changes to the Medicare program

requirements and are reflected in the

discussion below of the changes to the

Medicaid regulations.
300 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

In § 441.16(a) we define the terms

‘‘assets’’, ‘‘participating home health

agency’’, ‘‘surety bond’’, and

‘‘uncollected overpayment’’ as these

terms apply to Medicaid. Section

441.16(b) contains the prohibition on

FFP provision. Section 441.16(c)

includes the basic requirement for the

HHA to obtain a surety bond and

furnish a copy of the bond to the

Medicaid agency.

Section 441.16(d) allows governmentoperated HHAs, under certain

conditions, to be exempt from the surety

bond requirements under Medicaid as

we have allowed them under Medicare

except that we have not included

provisions for unpaid civil money

penalties or assessments and having

claims referred to the Department of

Justice or the General Accounting Office

(which are not applicable under

Medicaid). In § 441.16(e), we define the

parties to the bond.

Under paragraph (f)(1) of § 441.16, we

stipulate that an HHA may obtain a

surety bond only from an authorized

surety. We have expanded the Medicare

provision on the definition of an

authorized surety for Medicaid purposes

to allow the Medicaid agency to include

any other conditions that the Medicaid

agency considers necessary for the

proper and efficient administration of

the program. We also have included the

Medicare criteria for determining an

unauthorized surety under paragraph

(f)(2).

Under paragraph (f)(3) of § 441.16, we

have allowed the Medicaid agency to

specify the manner by which public

notification of a determination of an

unauthorized Surety is given and the

effective date of the determination

instead of the determination being

published in the Federal Register.

In § 441.16(g), we stipulate that the

amount of the bond must be $50,000 or

15 percent of the annual Medicaid

payments made to the HHA by the State

Medicaid agency for home health

services furnished for which FFP is

available, whichever is greater. The

computation of the 15 percent for

participating HHAs is to be done by the

State Medicaid agency on the basis of

Medicaid payments made to the HHA

for the most recent annual period for

which information is available as

specified by the State Medicaid agency.

Likewise, the computation of 15 percent

for an HHA that seeks to become a

participating HHA by obtaining assets or

ownership interest is computed using

the most recent annual period as

specified by the State Medicaid agency.

The 15 percent computation does not

apply to an HHA that seeks to become

a participating HHA without obtaining

assets or ownership interest. However,

we recognize that the 15 percent

standard may be insufficient for HHAs

that incur large overpayments.

Therefore, instead of applying the 15

percent standard to these HHAs, we are

providing that the State Medicaid

agency may require a bond greater than

15 percent of annual payments if the

HHA’s overpayments exceed that

percentage of payments.

In paragraph (h) of § 441.16 we

include the same Medicare provisions

on the surety’s liability for full and

timely payment of the HHA’s unpaid

overpayments, up to the stated amount

of the bond, plus accrued interest, as

applicable, for which the HHA is

responsible. However, we do not

include provisions relating to unpaid

civil money penalties or assessments,

which are not imposed by us or the

States with respect to Medicaid. This

section also includes the conditions

under which the Surety’s liability is not

extinguished.

In paragraph (h)(1) we have specified

the submission dates and terms of the

bond. For all participating HHAs, we

have made the initial term of the bond

to be effective from January 1, 1998

through a date specified by the State

Medicaid agency. For subsequent terms,

we have provided that the State may

specify the date by which a bond must

be submitted, and that the term will be

effective for an annual period as

specified by the Medicaid agency. We

require that an HHA that seeks to

become a participating HHA must

submit a surety bond before a provider

agreement under § 431.107 of the

Medicaid regulations can be entered

into. An HHA that experiences a change

of ownership (as ‘‘change of ownership’’

is defined by the State Medicaid agency)

must submit a surety bond effective the

date of the change of ownership for a

term through a date specified by the

State Medicaid agency. We also require

that a government-operated HHA that

does not qualify for waiver submit a

surety bond. In addition, we require that

an HHA that obtains a replacement

surety bond from a different surety to

cover the remaining term of a previously

obtained bond must submit the new

surety bond to the State Medicaid

agency within 60 days (or such earlier

date as the State Medicaid agency may

specify) of obtaining it from the new

Surety for an annual term specified by

the State Medicaid agency.

Section 441.16(j) specifies the effect of

an HHA’s failure to obtain, maintain,

and timely file a surety bond. Section

441.16(k) specifies that the State

Medicaid agency may require an HHA

to furnish further evidence of

compliance with the surety bond

requirement and also specifies actions

the Medicaid agency may take if the

HHA fails to furnish it with such

evidence of compliance. Section

441.16(l) allows the Medicaid agency to

establish procedures for granting or

denying appeal rights to sureties since

the Medicare appeal procedures would

not be applicable for State agencies.

C. Capitalization

We are adding new § 489.28 to

establish an initial reserve operating

fund requirement for HHAs that are

seeking, for the first time, to participate

in the Medicare program on or after

January 1, 1998. Under this

requirement, HCFA, through its

intermediaries, will determine the

amount of reserve funds that each new

HHA is required to have before

becoming certified in the Medicare

program. We are also revising the

Medicaid regulations at § 440.70(d),

which already apply the Medicare HHA

requirements for participation to

Medicaid, to reference the Medicare

capitalization requirement in § 489.28.

This initial reserve operating fund

requirement is to ensure that the HHA

will be able to operate for three months

after becoming certified to participate as

a Medicare provider of services. The

required amount is based on the average

cost per visit of comparable new HHAs,

using data from submitted cost reports

from those HHAs for the first full year

of operation. The HHA must provide

proof that it has the funds to meet the

requirement, with no more than 50

percent of the funds being borrowed

funds, and that the funds are

immediately available.

The purpose of this requirement is to

establish the financial stability of HHAs

newly entering the Medicare program

and thus to assure quality of care to the

HHA’s patients, including Medicare

beneficiaries. The requirement is being

established in order to increase the

likelihood of the viability of an HHA

entering the program and to minimize

situations that could adversely affect the

health and safety of its patients. Lack of

adequate initial reserve operating funds,

that is, undercapitalization, sets up a

new HHA for potential problems from

the beginning, exposes Medicare to

unnecessary risk, and can adversely

affect the quality of care to the HHA’s

patients. We are establishing the

requirement now because we believe it

is urgently needed, particularly in light

of the findings of the Office of Inspector

General that problem HHAs entering the

Medicare program are almost always

undercapitalized—often with not even
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 301

enough cash on hand to meet the first

payroll.

VI. Collection of Information

Requirements

Under the Paperwork Reduction Act

of 1995, agencies are required to provide

a 60-day notice in the Federal Register

and solicit public comment before a

collection of information requirement is

submitted to the Office of Management

and Budget (OMB) for review and

approval. In order to fairly evaluate

whether an information collection

should be approved by OMB, section

3506(c)(2)(A) of the Paperwork

Reduction Act of 1995 requires that we

solicit comment on the following issues:

• Whether the information collection

is necessary and useful to carry out the

proper functions of the agency;

• The accuracy of the agency’s

estimate of the information collection

burden;

• The quality, utility, and clarity of

the information to be collected; and

• Recommendations to minimize the

information collection burden on the

affected public, including automated

collection techniques.

We are, however, requesting an

emergency review of this final rule with

comment period. In compliance with

section 3506(c)(2)(A) of the Paperwork

Reduction Act of 1995, we are

submitting to the Office of Management

and Budget (OMB) the following

requirements for emergency review. We

are requesting an emergency review

because the collection of this

information is needed before the

expiration of the normal time limits

under OMB’s regulations at 5 CFR part

1320, to ensure compliance with section

4312(b) and 4724(b) of BBA ’97 which

requires Medicare and Medicaid

participating HHAs to secure a surety

bond, as of January 1, 1998, in order to

continue participation in the Medicare

and Medicaid programs. We cannot

reasonably comply with normal

clearance procedures because public

harm is likely to result if the agency

cannot enforce the capitalization

requirement to prevent undercapitalized

HHAs from entering the Medicare

program or cannot enforce the surety

bond requirements of the BBA ’97 in

order to protect the Federal government

(especially the Medicare Trust Funds)

from losses due to uncollectible debts

incurred by HHAs.

HCFA is requesting OMB review and

approval of this collection within 3

working days from the date of

publication of this regulation, with a

180-day approval period. Written

comments and recommendations will be

accepted from the public if received by

the individuals designated below within

2 working days from the date of

publication of this regulation.

During this 180-day period, we will

publish a separate Federal Register

notice announcing the initiation of an

extensive 60-day agency review and

public comment period on these

requirements. We will submit the

requirements for OMB review and an

extension of this emergency approval.

We are soliciting public comment on

each of these issues for the provisions

summarized below that contain

information collection requirements:

Section 441.16 Home health agency

requirements for surety bonds. Section

441.16(h)(3)(i) requires that a Surety

must furnish the Medicaid agency with

notice of any action by the HHA or the

Surety to terminate or limit the scope or

term of the bond and that such notice

must be furnished not later than 10 days

after the date of notice of such action by

the HHA, or not later than 60 days

before the effective date of the action by

the Surety.

The burden associated with this

requirement is the time required for a

Surety to provide a State Medicaid

agency with a notice no later than 10

days after any action by the HHA or the

Surety to terminate or limit the scope or

term of the bond. HCFA met with surety

bond industry representatives to discuss

the time and effort associated with

furnishing a notice to terminate or limit

the scope or term of a bond. It is

estimated that less than 1 percent (80

entities) of all 8,062 participating HHAs

will terminate or limit the scope or term

of a bond. It is also estimated that it will

take a surety company 5 minutes to

generate and furnish a notice of such

action (80 entities * 5 minutes = 400

minutes or 7 hours).

Section 441.16(i) requires each

participating HHA that is not exempted

by paragraph (d) of this section to

submit to the Medicaid agency an initial

surety bond by February 27, 1998,

effective for the term January 1, 1998,

through a date specified by the State

Medicaid agency and for subsequent

terms annually thereafter by a date as

the Medicaid agency may specify,

effective for an annual period specified

by the Medicaid agency.

The burden associated with this

requirement is the time required for

each participating HHA to furnish the

Medicaid agency a copy of a surety

bond with original signatures on an

annual basis. It is estimated that it will

take 8,062 providers 5 minutes for an

annual burden of 40,310 minutes = 672

hours.

Section 441.16(i)(2)(i) requires that

HHAs seeking to become a Medicaid

participating HHA must submit a surety

bond before a provider agreement

described under § 431.107 of this

subchapter can be entered into.

The burden associated with this

requirement is the time required for

each HHA seeking Medicaid

participation to furnish the State agency

with a copy of a surety bond with

original signatures. It is estimated that it

will take 900 new providers 5 minutes

for an annual burden of 4,500 minutes

that is 75 hours.

Section 441.16(i)(3) requires an HHA

that undergoes a change of ownership to

furnish the State agency with a copy of

a surety bond with original signatures

effective from the date of the change of

ownership.

The burden associated with this

requirement is the time required for

each participating HHA that undergoes

a change in ownership to furnish the

Medicaid agency a copy of a surety

bond with original signatures. It is

estimated that it will take 287 providers

5 minutes for an annual burden of 1,435

minutes, that is 24 hours.

Section 441.16(i)(4) requires that a

government-operated HHA, that as of

January 1, 1998 meets the criteria for

waiver of the requirements of this

section but thereafter is determined by

the Medicaid agency to not meet such

criteria, must submit a surety bond

within 60 days after it receives notice

from the Medicaid agency that it no

longer meets the criteria for waiver.

The burden associated with this

requirement is the time required for

each government-operated HHA that no

longer meets the criteria for waiver to

furnish the State agency a copy of a

surety bond with original signatures. It

is estimated that on an annual basis less

then 10 entities will be required to

comply with this information collection.

Section 441.16(i)(5) requires that an

HHA that obtains a replacement surety

bond from a different Surety to cover

the remaining term of a previously

obtained bond must submit the new

surety bond to the Medicaid agency

within 60 days (or such earlier date as

the Medicaid agency may specify) of

obtaining it from the new Surety for a

term specified by the Medicaid agency.

The burden associated with this

requirement is the time required for

each HHA that obtains a replacement

surety bond to furnish the State agency

with a copy of a surety bond with

original signatures. It is estimated that it

will take 80 providers 5 minutes for an

annual burden of 400 minutes, that is,

7 hours.

Section 489.28 Required proof of

availability of initial reserve operating

funds. In summary, the information
302 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

collection requirements for

capitalization referenced in § 489.28

requires that an HHA seeking to

participate in the Medicare and/or

Medicaid program on or after January 1,

1998, must demonstrate that it has

sufficient capital, that is, ‘‘initial reserve

operating funds,’’ to operate for the

initial three months of its participation

in the program. In particular, the HHA

must provide HCFA or the State

Medicaid agency a copy of the

statement(s) of the HHAs savings,

checking, or other account(s) which

contain the funds, (e.g. cash, cash

equivalents, borrowed funds or line of

credit) accompanied by an attestation

from an officer of the bank or other

financial institution that the funds are

in the account(s) and are immediately

available.

We estimate that the annual number

of HHAs submitting this information to

be 900, based on the average number of

new HHAs entering the Medicare and/

or Medicaid program from 1994 through

1996. An HHA, whether it requests

participation in both Medicare and

Medicaid, or in one program only, will

have to submit this information only

once. We estimate this activity to take

approximately 900 entities 30 minutes

for an annual burden of 450 hours.

Section 489.66 Additional

requirements of the surety bond. Section

489.66 (c)(1) provides that the Surety’s

liability on the bond is not extinguished

unless, in the event the HHA or the

Surety takes any action to terminate or

limit the scope or term of the bond, the

Surety furnishes us with notice of such

action not later than 10 days after

receiving notice of such action by the

HHA, or not later than 60 days before

the effective date of such action by the

Surety. The burden associated with this

requirement is the time required for a

Surety to provide Medicare with a

notice no later than 10 days after any

action by the HHA or the Surety to

terminate or limit the scope or term of

the bond. It is estimated that less than

1 percent (80 entities) of all 8,062

participating HHAs will terminate or

limit the scope or term of a bond. It is

also estimated that it will take a surety

company 5 minutes to generate and

furnish a notice of such action (80

entities at 5 minutes = 400 minutes or

7 hours).

Section 489.67 Submission date and

term of the bond. Section 489.67(a)

requires each participating HHA that

does not meet the criteria for waiver

under § 489.62 must submit to HCFA, in

such a form as HCFA may specify, a

surety bond by February 27, 1998,

effective for the term beginning January

1, 1998, through the end of the HHA’s

fiscal year and for subsequent terms not

later than 30 days before the HHA’s

fiscal year, effective for a term

concurrent with the HHA’s fiscal year. The burden associated with this

requirement is the time required for

each Medicare participating HHA to

furnish HCFA a copy of a surety bond

with original signatures on an annual

basis. It is estimated that it will take

8,062 providers 5 minutes for an annual

burden of 40,310 minutes = 672 hours.

Section 489.67(b)(1) requires that an

HHA seeking to become a participating

HHA must submit a surety bond with its

enrollment application (Form HCFA–

855, OMB number 0938–0685).

The burden associated with this

requirement is the time required for

each HHA seeking Medicare

participation to furnish us a copy of a

surety bond with original signatures. It

is estimated that it will take 900 new

providers 5 minutes for an annual

burden of 4,500 minutes that is 75

hours.

Section 489.67(c) requires an HHA

that undergoes a change of ownership to

furnish HCFA a copy of a surety bond

with original signatures effective from

the date of the change of ownership. The burden associated with this

requirement is the time required for

each participating HHA that experiences

a change of ownership to furnish HCFA

a copy of a surety bond with original

signatures. It is estimated that it will

take 287 providers 5 minutes for an

annual burden of 1,435 minutes, that is,

24 hours.

Section 489.67(d) requires that a

government-operated HHA, that as of

January 1, 1998 meets the criteria for

waiver under § 489.62 but thereafter is

determined by HCFA to not meet such

criteria, must submit a surety bond

within 60 days after it receives notice

from HCFA that it no longer meets the

criteria for waiver.

The burden associated with this

requirement is the time required for

each government-operated HHA that no

longer meets the criteria for waiver to

furnish HCFA a copy of a surety bond

with original signatures. It is estimated

that on an annual basis less then 10

entities will be required to comply with

this information collection.

Section 489.67(e) requires that an

HHA that obtains a replacement surety

bond from a different Surety to cover

the remaining term of a previously

obtained bond must submit the new

surety bond to HCFA within 30 days of

obtaining it from the new Surety.

The burden associated with this

requirement is the time required for

each HHA that obtains a replacement

surety bond to furnish HCFA a copy of

a surety bond with original signatures.

It is estimated that it will take 80

providers 5 minutes for an annual

burden of 400 minutes, that is, 7 hours.

As a note, the provider/supplier

enrollment forms HCFA–855, HCFA–

855C, HCFA–855R, and related

instructions, which are currently

approved under OMB Approval No.

0938–0685, are in the process of being

revised to incorporate the relevant HHA

surety bond requirements reflected in

this regulation. In particular, an

emergency clearance of these

information collection requirements was

also requested by HCFA. A notice was

published in the Federal Register on

December 18, 1997, requesting that

OMB approve the revised collection by

December 31, 1997. In that notice the

public was given from the date of the

notice’s publication, until December 29,

1997 to comment on the proposed

collection. It should be noted that these

emergency clearances sought by HCFA

would have a maximum approval

period of 6 months from the date of

OMB approval. Also, the addendum to

this regulation displays the revised

HCFA–855, HCFA–855R, HCFA–855C,

and related instructions that will

implement the surety bond

requirements, which were submitted to

OMB for emergency approval. We

continue to solicit comment on these

forms and instructions.

The table below indicates the annual

number of responses for each regulation

section in this proposed rule containing

information collection requirements, the

average burden per response in minutes

or hours, and the total annual burden

hours.

ESTIMATED ANNUAL BURDEN

CFR section Responses

Average

burden per

response

(minutes)

Annual burden hours

441.16(h)(3)(i) ........................................................................................................................................... 80 5 7
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 303

ESTIMATED ANNUAL BURDEN—Continued

CFR section Responses

Average

burden per

response

(minutes)

Annual burden hours

441.16(i) ................................................................................................................................................... 8,062 5 672

441.16(i)(2)(i) ............................................................................................................................................ 900 30 75

441.16(i)(3) ............................................................................................................................................... 287 5 24

441.16(i)(5) ............................................................................................................................................... 80 5 7

489.28 ....................................................................................................................................................... 900 5 450

489.66(c)(1) .............................................................................................................................................. 80 5 7

489.67(a) .................................................................................................................................................. 8,062 5 672

489.67(b)(1) .............................................................................................................................................. 900 5 75

489.67(c) .................................................................................................................................................. 287 5 24

489.67(e) .................................................................................................................................................. 80 5 7

Total .................................................................................................................................................. .................... .................... 2,020

We have submitted a copy of this final

rule with comment to OMB for its

review of the information collection

requirement. These requirements are not

effective until they have been approved

by OMB. A notice will be published in

the Federal Register when approval is

obtained.

If you comment on any of these

information collection and record

keeping requirements, please mail

copies directly to the following:

Health Care Financing

Administration, Office of Information

Services, Information Technology

Investment Management Group,

Division of HCFA Enterprise Standards,

Room C2–26–17, 7500 Security

Boulevard, Baltimore, MD 21244–1850,

Attn: John Burke HCFA–1152–FC Fax

number: (410) 786–1415

and,

Office of Information and Regulatory

Affairs, Office of Management and

Budget Room 10235, New Executive

Office Building Washington, D.C.

20503, Attn.: Allison Herron Eydt,

HCFA Desk Officer Fax numbers:

(202) 395–6974 or (202) 395–5167.

VII. Impact Analyses

A. Regulatory Impact Analyses

We have examined the impacts of this

final rule with comment period under

Executive Order (E. O.) 12866, the

Unfunded Mandate Reform Act of 1995,

and the Regulatory Flexibility Act. E.O.

12866 directs agencies to assess all costs

and benefits of available regulatory

alternatives and, when regulation is

necessary, to select regulatory

approaches that maximize net benefits.

In addition, a Regulatory Impact

Analysis (RIA) must be prepared for

major rules with economically

significant effects ($100 million or more

annually).

The Unfunded Mandate Reform Act of

1995 requires (in section 202) that

agencies prepare an assessment of

anticipated costs and benefits before

proposing any rule that may result in an

annual expenditure by State, local, or

tribal governments, in the aggregate, or

by the private sector, of $100 million.

The rule has no consequential effect on

State, local, or tribal governments. The

impact on the private sector is well

below the $100 million threshold.

Consistent with the Regulatory

Flexibility Act, we prepare a Regulatory

Flexibility Analysis (RFA) unless we

certify that a rule would not have a

significant economic impact on a

substantial number of small entities.

The RFA is to include a justification of

why action is being taken, the kinds and

number of small entities which the

proposed rule will affect, and an

explanation of any considered

meaningful options that achieve the

objectives and would lessen any

significant adverse economic impact on

the small entities. For purposes of the

RFA, HHAs with annual revenues of $5

million or less and non-profit

organizations are considered to be small

entities. Because of the scope of this

rule, all HHAs will be affected, but we

do not expect that effect to be

significant. Nonetheless, we have

prepared the following analysis, which

in conjunction with other material

provided in this preamble, constitutes

an analysis under the Regulatory

Flexibility Act.

The following regulatory impact

analysis is divided into three parts to

discuss separately the Medicare surety

bond requirement, the Medicaid surety

bond requirement, and the

capitalization requirement.

1. Medicare Surety Bond Regulatory

Impact Analysis

Section 4312(b) of BBA§’97 contains

a requirement that HHAs obtain a surety

bond in an amount not less than

$50,000. In addition to using the

statutory minimum amount of the bond

as a floor, we link the required amount

of the surety bond to the amount of

Medicare payments we make to the

HHA each year by establishing that the

bond amount equal 15 percent of such

payments. However, if that amount is

not sufficient, we may link the required

amount of the bond to Medicare

overpayments. We believe that tying the

amount of the bond to the amount of

annual payments or, when necessary,

the amount of Medicare overpayments

will better protect the Trust Funds from

losses due to uncollectible debts

incurred by HHAs. Although we

generally require a bond in an amount

that equals 15 percent of annual

Medicare payments, we recognize the 15

percent standard may be insufficient for

HHAs that incur very large

overpayments. Therefore, instead of

applying the 15 percent standard to

such HHAs, we may require a bond

greater than 15 percent of annual

payments if the HHA’s overpayments

exceed that percentage of payments.

We believe one effect of our rule will

be to encourage inefficient or poorly

managed HHAs to reform their billing

practices. Also, to the extent some

HHAs are intent on providing excessive

or inappropriate services or defrauding

the Medicare program, this rule may

discourage such HHAs from continuing

to participate in the Medicare program.

We expect to have a ‘‘significant

impact’’ on an unknown number of such

entities, effectively preventing some of

them from repeating their past aberrant

billing activities. The majority of HHAs

will not be significantly affected by this

rule. In addition, we believe this rule
304 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

reinforces the behavior of HHAs that are

not currently billing inappropriately, by

encouraging them to continue billing

only for appropriate Medicare services.

We expect reduction in unrecovered

program overpayments as a result of this

rule either by having debts guaranteed

by a surety company, or by high risk

businesses being unable to obtain surety

bonds and, thus, being unable to comply

with their provider agreements.

Because of the large influx of HHAs

(nearly 450 additional HHAs come into

the Medicare program each year) and

because HHAs will be able to furnish

services to additional beneficiaries, we

do not expect an adverse effect on

Medicare beneficiaries. However, we do

not know precisely how many HHAs

will not enter the Medicare program

because of these requirements. As a

result, we are soliciting comments on

these foregoing assertions and

assumptions.

a. Rationale and purposes. We believe

an HHA is an essential link in the chain

of health care providers needed by

Medicare beneficiaries to achieve

optimum health. However, some HHAs

consistently bill Medicare

inappropriately and incur significant

Medicare overpayments. Some of these

overpayments, amounting to hundreds

of millions of dollars, are never

recovered. This rule will provide better

protection of Medicare funds by

establishing a mechanism, the surety

bond, to replenish the Medicare Trust

Funds from the losses incurred by

unpaid debts. In addition, an HHA’s

failure to comply with the surety bond

requirement will provide a basis for us

to refuse to enter into or to terminate a

Medicare provider agreement. We

believe that such HHAs as are unable or

unwilling to obtain a surety bond are

the most likely HHAs to be unable or

unwilling to repay their Medicare debts.

We expect this rule to deter HHAs from

abusive billing practices and from

defrauding the Medicare program and,

to the extent certain HHAs are not

deterred, the surety bond required by

this rule furnishes us with greater

assurance that we may recover on

Medicare debts. Fraudulent practices

include billing the Medicare program

for services that were not furnished, not

furnishing services as billed, or not

furnishing services in accordance with

Medicare policies.

Table 1 illustrates the total claims

paid to HHAs from 1993 through 1996

and associated overpayment

information for those years. This table

illustrates that uncollected

overpayments have been rising

significantly both in absolute dollar

amounts and as a percentage of the

original amount of overpayment.

TABLE 1.—OVERPAYMENTS

Year

Annual HHA

claims paid to

date

Original amount of

overpayments

Overpayment percentage of

claims paid

Current uncollected overpayments

Percent of

overpayments uncollected

1993 ............................................................................ $9,710,473,021 $360,987,031 4 $17,976,042 5

1994 ............................................................................ 12,683,597,818 567,570,313 4 25,827,042 5

1995 ............................................................................ 15,430,623,631 794,637,131 5 98,646,416 12

1996 ............................................................................ 14,357,504,894 1,061,157,961 7 153,628,056 14

b. Costs. According to a home health

industry source, Medicare accounts for

approximately 49 percent of the average

HHA’s revenue. (The approximate

percentage amounts for other revenue

sources are: private insurance—4

percent, Medicaid—24 percent, and

consumer’s out-of-pocket—22 percent.)

Table 2 shows the number of

participating HHAs by Medicare

reimbursement ranges and demonstrates

that approximately 94 percent of all

HHAs were paid $5 million or less by

Medicare in 1996. Because Medicare

accounts for approximately only 49

percent of the average HHA’s total

revenue, we estimate that approximately

84 percent of these HHAs would qualify

as small entities under the Regulatory

Flexibility Act. We estimate that these

HHAs would have a total annual bond

cost of approximately $9.5 million and

an average annual cost per HHA of

approximately $1200.

TABLE 2.—TOTAL NUMBER OF HHAS

ARRANGED BY MEDICARE PAYMENT

[Dates of Service—January to December

1996]

Dollars reimbursed Number

of HHAs

>50,000 ......................................... 744

50,001–100,000 ............................ 452

100,001–200,000 .......................... 735

200,001–334,000 .......................... 767

334,001–1,000,000 ....................... 2854

1,000,001–2,499,000 .................... 2406

2,500,000–5,000,000 .................... 939

5,000,001–10,000,000 .................. 415

10,000,001–20,000,000 ................ 103

20,000,001–30,000,000 ................ 20

30,000,001–40,000,000 ................ 6

40,000,001–50,000,000 ................ 2

50,000,001–150,000,000 .............. 0

>150,000,001 ................................ 1

Totals ....................... 9444

There were approximately 2800 nonprofit HHAs during the time period

specified in Table 2. We estimate that

all but 150 of them were reimbursed less

than $5 million and are already part of

the cost estimate developed for small

businesses. By including these 150 in

the small business category there would

not be any significant change to the cost

estimates already developed.

This rule will require an HHA to have

a surety bond in an amount that is the

greater of $50,000 or 15 percent of

Medicare payments made to the HHA in

the most recent fiscal year for which a

cost report is accepted, or if payments

in the first six months of the current

fiscal year differ from such an amount

by more than 25 percent, then the

amount of the bond is 15 percent of

such payments projected on an

annualized basis. However, if an HHA’s

overpayment in the most recently

accepted annual cost report exceeds 15

percent, Medicare may require the HHA

to secure a bond up to or equal to the

amount of the overpayment, provided

the amount of the bond is not less than

$50,000. We believe that any additional

cost attributable to the percentage of the

Medicare reimbursement calculation

does not represent a significant

economic impact on most HHAs that

will be required to purchase a surety

bond in an amount greater than $50,000.

Moreover, those HHAs that will incur a

substantial cost for obtaining a surety

bond are those few HHAs that generate

Medicare billings in the tens of millions

of dollars or more. In order to have some
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 305

reasonable assurance of being able to

recover a significant portion of

otherwise unrecoverable Medicare

debts, we believe that using a

percentage of total annual Medicare

payments to determine surety bond

amounts above $50,000 is both

reasonable and necessary. Thus, we

have chosen alternatives that we believe

are cost effective and will ensure that

HHAs have bonds in appropriate

amounts. Moreover, we believe that for

most HHAs the cost of obtaining a

surety bond will be outweighed by the

benefits gained by participating in the

Medicare program. Thus, the surety

bond requirement should not result in

substantial changes in the number of

well-managed and appropriately-billing

HHAs. Nonetheless, we are soliciting

comments on surety bond amounts that

would strengthen protection to the

Medicare program and be cost effective.

We believe that 15 percent is a

reasonable percentage on which to base

the amount of the bond since it would

not be too high as to be a barrier to entry

for small entities, yet high enough to

provide the Medicare Trust Fund with

some recourse for compensation for

debts owed to the program. We are

interested in comments about the

reasonableness of the 15 percent

amount. However, if an HHA’s

overpayments in the most recently

accepted annual cost report exceeds 15

percent of payments, Medicare may

require the HHA to secure a bond up to

or equal to the amount of the

overpayment, provided the amount of

the bond is not less than $50,000. We

solicit comments on this approach.

A surety company charges its

underwriting fee based on the amount of

the bond. We have been advised by the

Surety Association of America that for

this type of surety bond the surety

industry usually has an underwriting

charge that ranges between $2 to $30 per

thousand dollars of the face amount of

the bond. However, we have also been

advised by the Surety Association of

America that, for such a bond as is

required by this rule, the average cost is

likely to be approximately $10 per

thousand. Based on this average cost,

Table 3 indicates the average cost of a

surety bond in relation to the HHA’s

annual Medicare revenue.

Table 3 also indicates that the total

costs of bonds would be approximately

$22.5 million if all Medicare

participating HHAs in 1996, including

government-operated HHAs, purchased

surety bonds. However, as stated earlier,

the requirement is waived for an HHA

operated by a Federal, State, local, or

tribal government agency if, during the

preceding 5 years, the HHA has not had

any unrecovered Medicare

overpayments or unpaid civil money

penalties or assessments, and has not

had any HCFA claims referred to the

Department of Justice or the General

Accounting Office because of

nonpayment. Therefore the total cost of

the surety bond requirement based on

the number of HHAs in calendar year

1996 is approximately $18.4 million as

illustrated in Table 4.

TABLE 3.—COST OF SURETY BOND

Dollars reimbursed Number

of HHAs

Reimbursement

by range

Average reimbursement per

HHA

Average amount

of bond

Average

cost of

bond

Total cost of

bonds

<50,000 ......................................................... 744 14,801,083 19,894 50,000 1 500 372,000

50,001–100,001 ............................................ 452 33,825,800 74,836 50,000 1 500 226,000

100,001–200,000 .......................................... 735 107,909,794 146,816 50,000 1 500 367,500

200,001–334,000 .......................................... 767 202,035,624 263,410 50,000 1 500 383,500

334,001–1,000,000 ....................................... 2854 1,827,498,253 640,329 96,049 960 2,741,247

1,000,001–2,499,000 .................................... 2406 3,810,798,797 1,583,873 237,581 2,376 5,716,198

2,500,000–5,000,000 .................................... 939 3,256,036,561 3,467,558 520,134 5,201 4,884,055

5,000,001–10,000,000 .................................. 415 2,827,979,666 6,814,409 1,022,161 10,222 4,241,969

10,000,001–20,000,000 ................................ 103 1,356,573,414 13,170,616 1,975,592 19,756 2,034,860

20,000,001–30,000,000 ................................ 20 462,520,233 23,126,012 3,468,902 34,689 693,780

30,000,001–40,000,000 ................................ 6 207,852,076 34,642,013 5,196,302 51,963 311,778

40,000,001–50,000,000 ................................ 2 95,830,624 95,830,624 14,374,594 143,746 287,492

50,000,001–150,000,000 .............................. 0 0 0 0 0 0

>150,000,001 ................................................ 1 153,842,969 153,842,969 23,076,445 230,764 230,764

Totals .................................................. 9444 14,357,504,894 1,520,278 228,042 2,280 22,491,145

1These costs represent the cost of the minimum bond required by BBA ’97, section 4312(b).

Table 4 illustrates that there are

approximately 1382 governmentoperated HHAs. If a governmentoperated HHA does not qualify for a

waiver, it must obtain a surety bond and

submit it to us. It is estimated

government-operated HHAs would

account for approximately $4 million of

the Medicare surety bond program cost.

If government-operated HHAs are

waived then their surety bond costs are

removed. The net cost to the industry is

then approximately $18.4 million as

illustrated in Table 4. We request

comment on the accuracy of these

estimates.

TABLE 4.—SURETY BOND COST BY WAIVING REQUIREMENT FOR GOVERNMENT-OPERATED HHAS

Total number of HHAs

Number of

Govt.

HHAs

Number of

HHAs

subject

to

bond

Total reimbursement of HHAs

subject to bond

Average reimbursement per

HHA

Average

amount of

bond

Average

cost of

bond

Total cost of

bonds

9444 ............................................................ 1382 8062 $12,256,481,236 $1,520,278 $228,042 $2,280 $18,384,722
306 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

We realize that surety bonds represent

a new cost of approximately $18.4

million to HHAs that furnish services to

Medicare beneficiaries. In addition, we

note that the use of a percentage of the

Medicare reimbursement method adds

approximately $13.7 million more to the

cost of bonds as compared to the cost

that would be incurred by HHAs if they

were subject only to the $50,000

minimum amount required under the

law. However, we believe that the

benefits to the Medicare program and

Medicare beneficiaries outweigh these

additional costs. Our fiscal

intermediaries report that, currently,

uncollected overpayments total over

$150 million (based on 1996 data per

Table 1). These funds are at risk of not

being recovered because the HHAs

responsible for these uncollected

overpayments may be unwilling to

repay these debts or may go (or may

have already gone) out of business. We

believe that if each HHA obtains a

surety bond in an amount proportional

to the amount of Medicare payments it

receives, the Medicare program will

increase its recoveries of uncollected

overpayments, thereby reducing losses

to the Trust Funds.

We project that there will not be any

savings to the Trust Funds in fiscal year

1998 or 1999 because of the lengthy

process of determining overpayments.

In fiscal years 2000, 2001, and 2002, we

estimate direct savings of $10 million,

$20 million, and $20 million,

respectively. Uncollected overpayments

represented about .185 percent of total

HHA payments in fiscal year 1993. We

consider .185 percent the most reliable

estimate because of the time lag

discussed in collecting overpayments.

We are estimating that the savings for

each year is only half of this percentage

because we do not know whether or not

15 percent of an agency’s payments

would cover all of their uncollectable

overpayments. In addition, we believe

that the sentinel effect of the surety

bond, although indeterminable with any

specificity, is likely to result in much

higher savings to the Medicare Trust

Funds beginning in fiscal year 1998.

c. Discussion of alternatives. We

believe it was the Congress’ intent to

strengthen HHA standards to protect

beneficiaries and the Medicare program

from fraudulent and abusive billing

practices, and to protect the Trust Funds

from growing losses due to

unrecoverable Medicare debts incurred

by HHAs. Therefore, we did not choose

the alternative of requiring, across-theboard, a surety bond in the minimum

statutory amount of $50,000. Instead of

relying on this amount for all HHAs, we

have tied the bond amount to a

percentage of each HHA’s annual

Medicare payments. We realize this

policy choice increases the cost of

obtaining a bond for all HHAs that

receive more than $334,000 in Medicare

payments annually. However, this

policy choice also increases the

protection the surety bond requirement

gives to the Medicare Trust Funds. We

solicit comments on this approach.

Although we are authorized to waive

the surety bond requirement if an HHA

provides a comparable surety bond

under State law, with the exception of

government-operated HHAs, we have

not implemented that waiver authority

in this rule. The limited amount of time

available to us between the enactment of

BBA ’97 and the effective date of the

surety bond requirement did not permit

us sufficient time to effectively analyze

the potential specifications of a general

waiver provision. However, we are

mindful that some States may already

have, or may be considering

implementing, surety bond

requirements that could affect HHAs.

Moreover, section 4724 of BBA ’97

establishes a Medicaid surety bond

requirement that the States will be

implementing. We do not want to add

unnecessary costs to HHAs that may be

required to obtain multiple surety

bonds. However, our principal concern

is to safeguard the Medicare Trust

Funds from the losses resulting from

dramatically increasing unrecovered

Medicare debts for which a growing

number of HHAs are responsible. We

solicit comments on useful standards

and criteria for implementing a waiver

of our surety bond requirements that

would, nonetheless, maintain the same

or a greater level of protection of the

Medicare Trust Funds achieved by this

rule.

Because of the short duration between

when BBA ’97 became law and the

effective date of its surety bond

provision, we had little time available to

develop a surety bond rule. As such, we

did not attempt to also develop and

secure approval for a surety bond form

to accompany this rule. Instead, as

described previously, we have specified

certain minimum requirements of an

acceptable surety bond. However, our

present intention is to develop such a

form and to seek approval from the

Office of Management and Budget for its

use. The development of such a form

may eliminate the need to state in

regulation some of the various

requirements of a surety bond for

Medicare purposes and would furnish

to HHAs, the surety industry, and our

own fiscal intermediaries an

unambiguous standard with respect to

the required format of a Medicare surety

bond. We solicit comments on the

advisability of mandating the use of a

HCFA-designed surety bond form. In

addition, we solicit recommendations

regarding the format and other features

of a HCFA-designed surety bond form.

We have established that the Surety

would be liable for unpaid civil money

penalties, assessments imposed by us

and for Medicare overpayments. We

also considered including within the

scope of the Surety’s potential liability

a guarantee of payment for unpaid civil

money penalties and assessments that

were imposed by the Office of the

Inspector General. However, because of

the short time period between when the

BBA ’97 was enacted and the effective

date of the Surety bond provision, we

were unable to fully consider this

option. In addition, because of our

unfamiliarity with surety bonds as a

component of program administration,

we believed that we did not fully

understand how best to implement this

option. We solicit comments on the

advisability of including within the

scope of the Surety’s potential liability

unpaid Office of Inspector Generalimposed civil money penalties and

assessments.

2. Medicaid Surety Bond Regulatory

Impact Analysis

Section 4724(b) of the BBA ’97

contains a requirement that HHAs

obtain a surety bond in a minimum

amount of $50,000. In addition to using

the statutory minimum amount of the

bond as a floor, we link the required

amount of the surety bond to the

amount of estimated Medicaid

payments made to the HHA each year.

We follow the same rationale used for

tying the amount of the bond to

Medicaid payments as Medicare uses for

tying the amount of the bond to

Medicare payments. Likewise, we

believe that the effect of our rule will

mirror the justification used for

imposition of the bond requirement on

participating Medicare HHAs.

This rule requires an HHA

participating in Medicaid to have a

surety bond in an amount that is the

greater of $50,000 or 15 percent of

annual Medicaid payments made to the

HHA. However, we recognize the 15

percent standard may be insufficient for

HHAs that incur large overpayments.

Therefore, instead of applying the 15

percent standard to such HHAs, we may

require a bond in a greater amount if the

HHA’s overpayments exceed that

percentage of payments. In examining

the impact that this final rule with

comment period will have on Medicaid

participating HHAs, we followed the

same rationale and methodology that
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 307

was used for the determination of the

impact of the surety bond requirement

on Medicare participating HHAs.

Likewise, we expect this rule to

encourage some inefficient HHAs to

reform their billing practices and to

deter other HHAs from abusive billing

practices and from defrauding the

Medicaid program. Our analysis is

based on the information that there are

virtually the same number of HHAs

participating in Medicaid as there are in

Medicare and that in 1995 total

Medicaid payments for home health

services amounted to approximately

$1.9 billion.

We have estimated the average

amount of Medicaid payment per HHA

and on this amount have based the total

cost of surety bonds for Medicaid

participating HHAs. After excluding

costs associated with governmentoperated HHAs that meet our waiver

requirements, we estimate the total cost

of surety bonds for Medicaidparticipating HHAs to be approximately

$4.8 million. Unlike the Medicare

program, the Medicaid program savings

are indeterminable because there is no

data comparable to the overpayment

data used to produce the Medicare

estimates. However, combined with the

sentinel effect, we believe the Medicaid

savings will equal or exceed the modest

cost estimated for the bonds.

Using the latest data available, the

following tables show the total number

of HHAs arranged by Medicaid

payment, the total cost of surety bonds

if all HHAs in the Medicaid program

obtain a surety bond, and the cost of

surety bonds if only non-governmentoperated HHAs in the Medicaid

program had obtained a surety bond.

TABLE 1.—TOTAL NUMBER OF HHAS

ARRANGED BY MEDICAID PAYMENT

Dollars paid Number of

HHAs

<50,000 ..................................... 2964

50,001–100,000 ........................ 1750

100,001–150,000 ...................... 1244

150,001–200,000 ...................... 834

200,001–334,000 ...................... 1217

334,001–1,000,000 ................... 1190

1,000,001–2,500,000 ................ 214

2,500,001–5,000,000 ................ 27

5,000,001–10,000,000 .............. 3

10,000,001–20,000,000 ............ 1

Totals ................................. 9444

TABLE 2.—COST OF SURETY BOND

Dollars reimbursed Number

of HHAs

Reimbursement

by range

Average reimbursement Average bond Average

cost

Total cost of

bonds

>50,000 ......................................................... 2964 $58,990,371 $19,902 $50,000 $500 $1,482,000

50,001–100,000 ............................................ 1750 129,314,787 73,894 50,000 500 875,000

100,001–150,000 .......................................... 1244 152,441,149 122,541 50,000 500 622,000

150,001–200,000 .......................................... 834 144,767,688 173,582 50,000 500 417,000

200,001–334,000 .......................................... 1217 310,906,680 255,470 50,000 500 608,500

334,001–1,000,000 ....................................... 1190 647,061,386 543,749 81,562 816 970,592

1,000,001–2,500,000 .................................... 214 298,295,160 1,393,903 209,085 2,091 447,443

2,500,001–5,000,000 .................................... 27 87,119,660 3,226,654 483,998 4,840 130,679

5,000,001–10,000,000 .................................. 3 17,578,870 5,859,623 878,944 8,789 26,368

10,000,001–20,000,000 ................................ 1 20,000,000 20,000,000 3,000,000 30,000 30,000

Totals ..................................................... 9444 1,866,475,751 197,636 59,400 594 5,609,582

TABLE 3.—EFFECT ON TOTAL COST OF BONDS BY WAIVING REQUIREMENT FOR GOVERNMENT–OPERATED HHAS

Total number of HHAs

Number of

Govt

HHAs

HHAs

subject

to

bond

HHAs subject to

bond reimbursement

Average reimbursement per

HHA

Average

amount of

bond

Average

cost of

bond

Total cost of

bonds

9444 ............................................................ 1382 8062 $1,593,341,432 $197,636 $59,400 $594 $4,788,697

In our discussion of the Medicare

surety bond requirement, we identified

and invited comments on several

alternative courses of action. These

alternatives also apply to Medicaid, and

we solicit comments on their

application in that context.

3. Capitalization Regulatory Impact

Analysis

The effect of the capitalization

requirement in this rule will be to

prevent HHAs that are undercapitalized

from participating in the Medicare

program. Also, as provided in 42 CFR

440.70(d), a home health agency for the

Medicaid program means a public or

private agency or organization, or part of

an agency or organization, that meets

requirements for participation in

Medicare. Most HHAs participate in

both the Medicare and Medicaid

programs. However, even those HHAs

that participate in Medicaid but not

Medicare must meet the Medicare

requirements. Therefore, the following

discussion, which is directed to

Medicare HHAs, must be read to apply

to HHAs that seek participation in both

programs or only in the Medicaid

program.

We do not know if the capitalization

requirement will have a significant

economic impact on a substantial

number of small entities. However, we

believe that it will not adversely affect

an HHA that is properly capitalized,

that is, has sufficient operating funds to

see it through the early months of

operation until it develops a stream of

revenue from Medicare, Medicaid, and

other payers. An organization that is

earnest in its attempt to be a financially

sound provider of home health services

under the Medicare program will

already be properly capitalized without

the need for Medicare to require such

capitalization. Furthermore, the

capitalization requirement is structured

to minimize significant economic

impact on new HHAs. Amounts that

will be required for capitalization will

be derived from actual experiences of

new HHAs under Medicare, so we are

confident that HHAs coming into the

program should be incurring the same

level of expenditures independently of

our requirement. Therefore, the

regulation simply captures as an entry

requirement the amount of capital that
308 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

actual HHAs need to operate.

Accordingly, its impact on an HHA that

plans to succeed with due regard for

appropriate quality of patient care and

without resorting to fraudulent or

abusive billing practices is negligible

because the HHA would need to raise

this much capital despite Medicare’s

requirement.

To the extent that any of the funds are

not needed in operating the business

during the first three months, the funds

simply remain with the HHA.

Furthermore, any possible impact that

this requirement may have on HHAs

entering the Medicare program is more

than offset by savings to the Trust Funds

in situations in which HHAs go out of

business due to undercapitalization,

leaving the program unable to recover

overpayments.

Second, the requirement should not

disproportionally affect small HHAs

because the amount of capitalization is

based on the new HHA’s projected

number of visits. Therefore, in

determining the capitalization for three

months, HCFA will expect that an HHA

that projects 25,000 visits in the first

year will need only one quarter of the

capitalization of an HHA projecting

100,000 visits. Of course, if HCFA

determines that a new HHA has underprojected its visits, HCFA will base the

capitalization on the number of visits of

other new HHAs in the program that are

of comparable size to the HHA seeking

to enter the program.

Finally, it is important to be clear that

the need for this requirement is not

solely related to financial concerns.

Paramount to Medicare’s concerns is the

need for an HHA to provide quality care

to its patients, including its Medicare

patients. A lack of funds in reserve to

operate the business until a stream of

revenues can be established can

seriously threaten the viability of the

business. For a new HHA, any condition

threatening the viability of the new

business can adversely affect the quality

of care to its patients and, in turn, the

health and safety of those patients. That

is, if lack of funds forces an HHA to

close its business, to reduce staff, or to

skimp on patient care services because

it lacks sufficient capital to pay for the

services, the overall well-being of the

HHA’s patients could be compromised.

In fact, there could be the risk of serious

ill effects as a result of patients not

receiving adequate services. This

capitalization requirement serves to

greatly minimize that possibility.

If a new HHA for some reason cannot

raise the capital necessary to meet

Medicare’s requirement and, therefore,

is not permitted to enter the Medicare

program, that clearly has an economic

impact on the HHA. However, we

believe that such an economic impact is

necessary. If the HHA cannot raise the

capital, the HHA is not beginning its

business on a sound financial footing. In

such a case, we find the likelihood of

the HHA’s being forced to reduce its

patient care due to reduced patient care

staff or even to go out of business too

great for the Medicare program, and a

risk that Medicare does not want to take.

Quality care is too important to risk on

an HHA that may perform poorly or go

out of business due to

undercapitalization.

We believe that many HHAs have

recently entered the Medicare program

undercapitalized and that, absent this

rule, more would do so. As discussed

above, this requirement will prevent

that situation.

We believe that there is no reasonable

alternative to this requirement. If an

HHA is to provide quality care, it must

be properly capitalized to do so.

B. Rural Hospital Impact Statement

Section 1102(b) of the Act requires us

to prepare a regulatory impact analysis

if a rule may have a significant impact

on the operations of a substantial

number of small rural hospitals. Such

an analysis must conform to the

provisions of section 603 of the RFA.

For purposes of section 1102(b) of the

Act, we define a small rural hospital as

a hospital that is located outside of a

Metropolitan Statistical Area and has

fewer than 50 beds. We are not

preparing a rural impact statement since

we have determined, and certify, that

this rule would not have a significant

impact on the operations of a substantial

number of small rural hospitals.

In accordance with the provisions of

Executive Order 12866, this rule was

reviewed by the Office of Management

and Budget.

VIII. Waiver of Proposed Rulemaking

A. Surety Bond Rules

We ordinarily publish a notice of

proposed rulemaking in the Federal

Register and invite prior public

comment on proposed rules. The notice

of proposed rulemaking can be waived,

however, if an agency finds good cause

that a notice-and-comment procedure is

impracticable, unnecessary, or contrary

to the public interest and it incorporates

a statement of the finding and its

reasons in the rule issued. We find good

cause to waive the notice-and-comment

procedure with respect to this rule

because it is impracticable to employ

such a procedure in this instance with

respect to both the Medicare and

Medicaid regulations, because it is

unnecessary with respect to the

Medicare regulations, and because the

delay in promulgating both the

Medicare and the Medicaid regulations

would be contrary to the public interest.

Issuing a proposed rule with a

comment period before issuing a final

rule would be impracticable because the

Congress has established a statutory

deadline of January 1, 1998 for the

implementation of the surety bond

requirement (BBA ’97, sections

4312(f)(2) and 4724(b)(2)). We cannot

publish a proposed rule, followed by a

final rule, and meet this statutory

deadline. The urgency of the Congress

to have us implement this requirement

was underscored by its further mandate

that HHA Medicare participation

agreements must be amended by

January 1, 1998. Further, because

Federal Financial Participation (FFP)

will not be available to States after

January 1, 1998 for Medicaid home

health services unless the surety bond

requirement is met by Medicaid HHAs,

and because it is necessary to tailor the

requirement to the Medicaid program to

address the differences between

Medicare and Medicaid, it is necessary

to issue a Medicaid rule by the statutory

deadline. However, it would be

impracticable to employ notice-andcomment procedures and accomplish

these results. The only practical means

of amending the Medicare participation

agreements by the statutory deadline is

by issuing this rule now as a final rule

with comment period and deeming such

agreements to be amended as of January

1, 1998 to incorporate the surety bond

requirement. Similarly, the only

practical means of tailoring the surety

bond requirement to the Medicaid

program so as to make FFP available for

home health services by January 1, 1998

is by issuing this rule now as a final rule

with comment period. Therefore, noticeand-comment procedures are

impracticable for this rule with respect

to both the Medicare and Medicaid

surety bond regulations.

Issuing a proposed rule prior to

issuing a final rule is also unnecessary

with respect to the Medicare surety

bond regulation because the Congress

has provided that a Medicare rule need

not be issued as a proposed rule before

issuing a final rule if, as here, a statute

establishes a specific deadline for the

implementation of a provision and the

deadline is less than 150 days after the

enactment of the statute in which the

deadline is contained (42 U.S.C.

1395hh(b)(2)(B), section 1871(b)(2)(B) of

the Social Security Act). BBA ’97 was

enacted on August 5, 1997, less than

150 days from the statute’s effective date

for the surety bond requirement of
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 309

January 1, 1998. Therefore, notice-andcomment procedures are not necessary

for the Medicare rule.

Issuing a notice of proposed rule

before issuing a final rule would also be

contrary to the public interest with

respect to both the Medicare and

Medicaid surety bond regulations

because it would prevent us from

complying with the statutory deadline

imposed by the Congress, would delay

significantly the implementation of an

effective gatekeeping device to deter

undercapitalized and unscrupulous

home health operators from

participating in the Medicare or

Medicaid program, would delay

significantly the implementation of

fiscal guarantees on potentially

hundreds of millions of dollars of

Medicare and Medicaid overpayments,

and would delay significantly the

issuance of essential guidance to the

home health industry, the surety

industry, and the State Medicaid

agencies. Conversely, if notice-andcomment procedures were employed in

issuing this final rule with comment,

the delay would leave the Medicare

Trust Funds and other Federal

Government funds vulnerable to a

variety of fraudulent and abusive

activities at a time when certain

unscrupulous operators appear to have

targeted the home health industry as a

means to improperly obtain Medicare

and Medicaid payment. (See, e.g.,

Department of Health and Human

Services, Office of Inspector General

report—Home Health: Problem

Providers and Their Impact on

Medicare, OEI–09–96–00110.)

Therefore, for the foregoing reasons we

find that, with respect to both the

Medicare and Medicaid surety bond

regulations, employing notice-andcomment procedures would be contrary

to the public interest.

For these reasons, we find good cause

to waive publishing a proposed rule and

to issue this final rule with comment

period. We invite written comments on

this final rule and will consider

comments we receive by the date and

time specified in the DATES section of

this preamble. Although we cannot

respond to comments individually, if

we change this rule as a result of our

consideration of timely comments, we

will respond to such comments in the

preamble of the amended rule.

B. Capitalization

We ordinarily publish a notice of

proposed rulemaking in the Federal

Register and invite prior public

comment on proposed rules. The notice

of proposed rulemaking can be waived,

however, if an agency finds good cause

that a notice-and-comment procedure is

impracticable, unnecessary, or contrary

to the public interest and it incorporates

a statement of the finding and its

reasons in the rule issued. We find good

cause to waive the notice-and-comment

procedure with respect to the

capitalization requirements of this rule

because the delay in promulgating this

rule would be contrary to the public

interest.

Issuing a notice of proposed

rulemaking before issuing a final rule

would be contrary to the public interest

because to do so would permit HHAs

that are undercapitalized, and therefore

not adequately financially prepared to

do business, to continue to enter into

the Medicare and Medicaid programs.

Preventing the participation in Medicare

and Medicaid of undercapitalized HHAs

will have an immediate positive effect

in ensuring that a lack of capital will not

affect care and will have an immediate

sentinel effect on preventing further

losses to the Medicare Trust Funds and

other Federal funds due to the

undercapitalization. The immediacy of

this problem and the urgent need to

correct it has been well documented.

In its July 1997 report, ‘‘Home Health:

Problem Providers and Their Impact on

Medicare’’ (OEI–09–96–00110), the OIG

found that entrepreneurs are able to

open and operate HHAs without fixed

assets or startup costs, relying almost

exclusively on Medicare for income and

assets. It stated, in part:

If it were not for Medicare accounts

receivable, problem agencies would have

almost nothing to report as assets. Agencies

tend to lease their office space, equipment,

and vehicles. They are not required by

Medicare to own anything, and they are

almost always undercapitalized. On average,

cash on hand and fixed assets amount to only

one-fourth of total assets for HHAs, while

Medicare accounts receivable frequently

equal 100 percent of total assets. These

agencies are almost totally dependent on

Medicare to pay their salaries and other

operating expenses. For a home health

agency, there are virtually no startup or

capitalization requirements. In many

instances, the problem agencies lease

everything without collateral. They * * * do

not even have enough cash on hand to meet

their first payroll.

It is unacceptable that an HHA

currently can enter the Medicare or

Medicaid program with little or no

reserves with which to operate. An HHA

inadequately prepared to do business

runs the risk of having to reduce staff or

of going out of business pending receipt

of a regular and continuous stream of

patient care revenues. With this comes

the risk of the HHA’s providing

inadequate care to its patients due to

lack of staff or being forced to stop

rendering patient care altogether.

Equally importantly, a cash poor HHA

limping along to provide patient care or

an HHA that has gone out of business

exposes Medicare and Medicaid to the

risk of being unable to recover payments

to the HHA which are later determined

to be overpayments, resulting in a drain

on the Medicare Trust Funds and other

Federal funds.

Publishing this final rule with

comment period requiring adequate

capitalization for new HHAs prevents

HHAs which are not financially

prepared to do business from entering

the Medicare or Medicaid program,

thereby greatly reducing the attendant

risk of inadequate care to patients and

misuse of the Medicare Trust Funds and

other Federal Government funds.

Employing notice of proposed

rulemaking procedures, on the other

hand, would continue to permit

financially ill-prepared HHAs to enter

these programs. Permitting a situation to

continue that can result in inadequate

health care to an HHA’s patients, thus

potentially threatening the health and

safety of those patients, as well as a

situation that can result in the improper

disbursement of monies from the

Medicare Trust Funds and other Federal

funds, is contrary to the public interest.

Moreover, although there is currently a

moratorium in effect on the entry of new

HHAs into the Medicare program, a

prolonged moratorium could, itself,

eventually create a threat of reduced

access to home health services in some

markets. Therefore, ending the

moratorium timely is also in the public

interest. However, ending the

moratorium before the capitalization

requirement is established would be

counterproductive. Therefore, the

capitalization requirement should be

implemented without significant delay,

an objective not achievable if notice and

comment procedures are employed.

Therefore, HCFA believes that it would

be contrary to the public interest to

employ notice and comment procedures

to implement the capitalization

requirement.

For these reasons, we find good cause

to waive notice and comment

procedures and to issue this final rule

with comment period. We invite written

comments on this final rule and will

consider comments we receive by the

date and time specified in the DATES

section of this preamble.

IX. Waiver of 30-Day Interim Period

Before Rule Is Effective

We ordinarily make the effective date

of a final rule at least 30 days after the

publication of the rule in the Federal

Register. However, the 30-day interim
310 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

period can be waived if an agency finds

good cause for making the effective date

of the rule earlier than 30 days after the

publication of the rule and the agency

publishes a brief statement with the rule

of its findings and the reasons therefore.

We find good cause to make both the

surety bond and the capitalization

provisions of this rule effective January

1, 1998. For the reasons discussed above

in VIII of this preamble ‘‘Waiver of

Proposed Rulemaking,’’ i.e., because we

find that making the rule effective after

January 1, 1998 would be impracticable,

unnecessary, and contrary to the public

interest, we find good cause to waive

the 30-day interim period for this rule.

Therefore, we have made the effective

date of this rule January 1, 1998.

Although we have waived the 30-day

interim period, we invite written

comments on this final rule with

comment period. We will consider

comments we receive by the date and

time specified in the DATES section of

this preamble.

X. Response to Comments

Because of the large number of items

of correspondence we normally receive

on Federal Register documents

published for comment, we are not able

to acknowledge or respond to them

individually. We will consider all

comments received by the date and time

specified in the DATES section of this

preamble, and, if we proceed with a

subsequent document, we will respond

to the comments in the preamble to that

document.

List of Subjects

42 CFR Part 413

Health facilities, Kidney diseases,

Medicare, Puerto Rico, Reporting and

recordkeeping requirements.

42 CFR Part 440

Grant programs-health, Medicaid

42 CFR Part 441

Family planning, Grant programshealth, Infants and children, Medicaid,

Penalties, Reporting and recordkeeping

requirements.

42 CFR Part 489

Health facilities, Medicare, Reporting

and recordkeeping requirements.

42 CFR Chapter IV is amended as set

forth below:

PART 413—PRINCIPLES OF

REASONABLE COST

REIMBURSEMENT; PAYMENT FOR

END-STAGE RENAL DISEASE

SERVICES; OPTIONAL

PROSPECTIVELY DETERMINED

PAYMENT RATES FOR SKILLED

NURSING FACILITIES

A. Part 413 is amended as follows:

1. The authority citation for part 413

is revised to read as follows:

Authority: Secs. 1102, 1861(v), and 1871 of

the Social Security Act (42 U.S.C. 1302,

1395x(v), and 1395hh).

2. Section 413.92 is added to read as

follows:

§ 413.92 Costs of surety bonds.

Costs incurred by a provider to obtain

a surety bond required by part 489,

subpart F of this chapter are not

included as allowable costs.

PART 440—SERVICES: GENERAL

PROVISIONS

B. Part 440 is amended as follows:

1. The authority citation for part 440

continues to read as follows:

Authority: Sec. 1102 of the Social Security

Act (42 U.S.C. 1302).

2. In § 440.70, paragraph (d) is revised

as follows:

§ 440.70 Home health services.

* * * * *

(d) ‘‘Home health agency’’ means a

public or private agency or organization,

or part of an agency or organization, that

meets requirements for participation in

Medicare, including the capitalization

requirements under § 489.28 of this

chapter.

* * * * *

PART 441—SERVICES:

REQUIREMENTS AND LIMITS

APPLICABLE TO SPECIFIC SERVICES

C. Part 441 is amended as follows:

1. The authority citation for part 441

continues to read as follows:

Authority: Sec. 1102 of the Social Security

Act (42 U.S.C. 1302).

2. Section 441.10 is amended by

redesignating paragraphs (h) through (k)

as paragraphs (i) through (l),

respectively and adding a new

paragraph (h) to read as follows:

§ 441.10 Basis.

* * * * *

(h) Section 1903(i)(18) for the

requirement that each home health

agency provide the Medicaid agency

with a surety bond (§ 441.16).

3. In § 441.15 a new paragraph (d) is

added to read as follows:

§ 441.15 Home health services

* * * * *

(d) The agency providing home health

services meets the capitalization

requirements included in § 489.28 of

this chapter.

§ 441.16 [Redesignated as § 441.17]

4. Section 441.16 is redesignated as

§ 441.17.

5. A new § 441.16 is added to read as

follows:

§ 441.16 Home health agency

requirements for surety bonds; Prohibition

on FFP.

(a) Definitions. As used in this

section, unless the context indicates

otherwise—

Assets includes but is not limited to

any listing that identifies Medicaid

recipients to whom home health

services were furnished by a

participating or formerly participating

HHA.

Participating home health agency

means a ‘‘home health agency’’ (HHA)

as that term is defined at § 440.70(d) of

this subchapter.

Surety bond means one or more bonds

issued by one or more surety companies

under 31 U.S.C. 9304 to 9308 and 31

CFR parts 223, 224, and 225, provided

the bond otherwise meets the

requirements of this section.

Uncollected overpayment means an

‘‘overpayment,’’ as that term is defined

under § 433.304 of this subchapter, plus

accrued interest, for which the HHA is

responsible, that has not been recouped

by the Medicaid agency within a time

period determined by the Medicaid

agency.

(b) Prohibition. FFP is not available in

expenditures for home health services

under § 440.70 of this subchapter unless

the home health agency furnishing these

services meets the surety bond

requirements of paragraphs (c) through

(l) of this section.

(c) Basic requirement. Except as

provided in paragraph (d) of this

section, each HHA that is a Medicaid

participating HHA or that seeks to

become a Medicaid participating HHA

must—

(1) Obtain a surety bond that meets

the requirements of this section and

instructions issued by the Medicaid

agency; and

(2) Furnish a copy of the surety bond

to the Medicaid agency.

(d) Requirement waived for

Government-operated HHAs. An HHA

operated by a Federal, State, local, or

tribal government agency is deemed to

have provided the Medicaid agency

with a comparable surety bond under

State law, and is therefore exempt from
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 311

the requirements of this section if,

during the preceding 5 years, the HHA

has not had any uncollected

overpayments.

(e) Parties to the bond. The surety

bond must name the HHA as Principal,

the Medicaid agency as Obligee, and the

surety company (and its heirs,

executors, administrators, successors

and assignees, jointly and severally) as

Surety.

(f) Authorized Surety and exclusion of

surety companies. An HHA may obtain

a surety bond required under this

section only from an authorized Surety.

(1) An authorized Surety is a surety

company that—

(i) Has been issued a Certificate of

Authority by the U.S. Department of the

Treasury in accordance with 31 U.S.C.

9304 to 9308 and 31 CFR parts 223, 224,

and 225 as an acceptable surety on

Federal bonds and the Certificate has

neither expired nor been revoked;

(ii) Has not been determined by the

Medicaid agency to be an unauthorized

Surety for the purpose of an HHA

obtaining a surety bond under this

section; and

(iii) Meets other conditions, as

specified by the Medicaid agency.

(2) The Medicaid agency may

determine that a surety company is an

unauthorized Surety under this

section—

(i) If, upon request by the Medicaid

agency, the surety company fails to

furnish timely confirmation of the

issuance of, and the validity and

accuracy of information appearing on, a

surety bond that an HHA presents to the

Medicaid agency that shows the surety

company as Surety on the bond;

(ii) If, upon presentation by the

Medicaid agency to the surety company

of a request for payment on a surety

bond and of sufficient evidence to

establish the surety company’s liability

on the bond, the surety company fails to

timely pay the Medicaid agency in full

the amount requested up to the face

amount of the bond; or

(iii) For other good cause.

(3) The Medicaid agency must specify

the manner by which public notification

of a determination under paragraph

(f)(2) of this section is given and the

effective date of the determination.

(4) A determination by the Medicaid

agency that a surety company is an

unauthorized Surety under paragraph

(f)(2) of this section—

(i) Has effect only within the State;

and

(ii) Is not a debarment, suspension, or

exclusion for the purposes of Executive

Order No. 12549 (3 CFR 1986 Comp., p.

189).

(g) Amount of the bond.

(1) Basic rule. The amount of the

surety bond must be $50,000 or 15

percent of the annual Medicaid

payments made to the HHA by the

Medicaid agency for home health

services furnished under this

subchapter for which FFP is available,

whichever is greater.

(2) Computation of the 15 percent:

Participating HHA. The 15 percent is

computed by the Medicaid agency on

the basis of Medicaid payments made to

the HHA for the most recent annual

period for which information is

available as specified by the Medicaid

agency.

(3) Computation of 15 percent: An

HHA that seeks to become a

participating HHA by obtaining assets

or ownership interest. For an HHA that

seeks to become a participating HHA by

purchasing the assets or the ownership

interest of a participating or formerly

participating HHA, the 15 percent is

computed on the basis of Medicaid

payments made by the Medicaid agency

to the participating or formerly

participating HHA for the most recent

annual period as specified by the

Medicaid agency.

(4) Computation of 15 percent:

Change of ownership. For an HHA that

undergoes a change of ownership (as

‘‘change of ownership’’ is defined by the

State Medicaid agency) the 15 percent is

computed on the basis of Medicaid

payments made by the Medicaid agency

to the HHA for the most recent annual

period as specified by the Medicaid

agency.

(5) An HHA that seeks to become a

participating HHA without obtaining

assets or ownership interest. For an

HHA that seeks to become a

participating HHA without purchasing

the assets or the ownership interest of

a participating or formerly participating

HHA, the 15 percent computation does

not apply.

(6) Exception to the basic rule. If an

HHA’s overpayment in the most recent

annual period exceeds 15 percent, the

State Medicaid agency may require the

HHA to secure a bond in an amount up

to or equal to the amount of the

overpayment, provided the amount of

the bond is not less than $50,000.

(h) Additional requirements of the

surety bond. The surety bond that an

HHA obtains under this section must

meet the following additional

requirements:

(1) The bond must guarantee that,

upon written demand by the Medicaid

agency to the Surety for payment under

the bond and the Medicaid agency

furnishing to the Surety sufficient

evidence to establish the Surety’s

liability under the bond, the Surety will

timely pay the Medicaid agency the

amount so demanded, up to the stated

amount of the bond.

(2) The bond must provide that the

Surety’s liability for uncollected

overpayments is based on overpayments

that arise from Medicaid payments that

are made by the Medicaid agency to the

HHA during the term of the bond,

regardless of when the overpayments

are determined by the Medicaid agency

or when the overpayments become

uncollected overpayments.

(3) The bond must provide that the

Surety’s liability to the Medicaid agency

is not extinguished by any of the

following:

(i) Any action by the HHA or the

Surety to terminate or limit the scope or

term of the bond unless the Surety

furnishes the Medicaid agency with

notice of such action not later than 10

days after the date of notice of such

action by the HHA to the Surety, or not

later than 60 days before the effective

date of the action by the Surety.

(ii) The Surety’s failure to continue to

meet the requirements of paragraph

(f)(1) of this section or the Medicaid

agency’s determination that the surety

company is an unauthorized surety

under paragraph (f)(2) of this section.

(iii) Termination of the HHA’s

provider agreement described under

§ 431.107 of this subchapter.

(iv) Any action by the Medicaid

agency to suspend, offset, or otherwise

recover payments to the HHA.

(v) Any action by the HHA to—

(A) Cease operation;

(B) Sell or transfer any assets or

ownership interest;

(C) File for bankruptcy; or

(D) Fail to pay the Surety.

(vi) Any fraud, misrepresentation, or

negligence by the HHA in obtaining the

surety bond or by the Surety (or by the

Surety’s agent, if any) in issuing the

surety bond, except that any fraud,

misrepresentation, or negligence by the

HHA in identifying to the Surety (or to

the Surety’s agent) the amount of

Medicaid payments upon which the

amount of the surety bond is

determined shall not cause the Surety’s

liability to the Medicaid agency to

exceed the amount of the bond.

(vii) The HHA’s failure to exercise

available appeal rights under Medicaid

or to assign such rights to the Surety

(provided the Medicaid agency permits

such rights to be assigned).

(4) The bond must provide that

actions under the bond may be brought

by the Medicaid agency or by an agent

that the Medicaid agency designates.

(i) Submission date and term of the

bond.

(1) Each participating HHA that is not

exempted by paragraph (d) of this
312 Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations

section must submit to the Medicaid

agency a surety bond as follows:

(i) Initial term. By February 27, 1998,

effective for the term January 1, 1998,

through a date specified by the State

Medicaid agency.

(ii) Subsequent terms: By a date as the

Medicaid agency may specify, effective

for an annual period specified by the

Medicaid agency.

(2) HHA that seeks to become a

participating HHA.

(i) An HHA that seeks to become a

participating HHA must submit a surety

bond before a provider agreement

described under § 431.107 of this

subchapter can be entered into.

(ii) An HHA that seeks to become a

participating HHA through the purchase

or transfer of assets or ownership

interest of a participating or formerly

participating HHA must also ensure that

the surety bond is effective from the

date of such purchase or transfer.

(3) Change of ownership. An HHA

that undergoes a change of ownership

(as ‘‘change of ownership’’ is defined by

the State Medicaid agency) must submit

the surety bond to the State Medicaid

agency by such time and for such term

as is specified in the instructions of the

State Medicaid agency.

(4) Government-operated HHA that

loses its waiver. A government-operated

HHA that, as of January 1, 1998, meets

the criteria for waiver of the

requirements of this section but

thereafter is determined by the

Medicaid agency to not meet such

criteria, must submit a surety bond to

the Medicaid agency within 60 days

after it receives notice from the

Medicaid agency that it does not meet

the criteria for waiver.

(5) Change of Surety. An HHA that

obtains a replacement surety bond from

a different Surety to cover the remaining

term of a previously obtained bond must

submit the new surety bond to the

Medicaid agency within 60 days (or

such earlier date as the Medicaid agency

may specify) of obtaining the bond from

the new Surety for a term specified by

the Medicaid agency.

(j) Effect of failure to obtain, maintain,

and timely file a surety bond.

(1) The Medicaid agency must

terminate the HHA’s provider agreement

if the HHA fails to obtain, file timely,

and maintain a surety bond in

accordance with this section and the

Medicaid agency’s instructions.

(2) The Medicaid agency must refuse

to enter into a provider agreement with

an HHA if an HHA seeking to become

a participating HHA fails to obtain and

file timely a surety bond in accordance

with this section and instructions issued

by the State Medicaid agency.

(k) Evidence of compliance.

(1) The Medicaid agency may at any

time require an HHA to make a specific

showing of being in compliance with

the requirements of this section and

may require the HHA to submit such

additional evidence as the Medicaid

agency considers sufficient to

demonstrate the HHA’s compliance.

(2) The Medicaid agency may

terminate the HHA’s provider agreement

or refuse to enter into a provider

agreement if an HHA fails to timely

furnish sufficient evidence at the

Medicaid agency’s request to

demonstrate compliance with the

requirements of this section.

(l) Surety’s standing to appeal

Medicaid determinations. The Medicaid

agency may establish procedures for

granting or denying appeal rights to

sureties.

PART 489—PROVIDER AGREEMENTS

AND SUPPLIER APPROVAL

D. Part 489 is amended as follows:

1. The authority citation for part 489

continues to read as follows:

Authority: Secs. 1102 and 1871 of the

Social Security Act (42 U.S.C. 1302 and

1395hh).

2. Section 489.1 is amended by

adding a new paragraph (e) to read as

follows:

§ 489.1 Statutory basis.

* * * * *

(e) Section 1861(o)(7) of the Act

requires each HHA to provide HCFA

with a surety bond.

3. In § 489.10, new paragraphs (e) and

(f) are added to read as follows:

§ 489.10 Basic requirements.

* * * * *

(e) In order for a home health agency

to be accepted, it must also meet the

surety bond requirements specified in

subpart F of this part.

(f) In order for a home health agency

to be accepted as a new provider, it

must also meet the capitalization

requirements specified in subpart B of

this part.

4. A new § 489.28 is added to read as

follows:

§ 489.28 Special capitalization

requirements for HHAs

(a) Basic rule. An HHA entering the

Medicare program on or after January 1,

1998, including a new HHA as a result

of a change of ownership, if the change

of ownership results in a new provider

number being issued, must have

available sufficient funds, which we

term ‘‘initial reserve operating funds,’’

to operate the HHA for the three month

period after its Medicare provider

agreement becomes effective, exclusive

of actual or projected accounts

receivable from Medicare or other

health care insurers.

(b) Standard. Initial reserve operating

funds are sufficient to meet the

requirement of this section if the total

amount of such funds is equal to or

greater than the product of the actual

average cost per visit of three or more

similarly situated HHAs in their first

year of operation (selected by HCFA for

comparative purposes) multiplied by

the number of visits projected by the

HHA for its first three months of

operation—or 22.5 percent (one fourth

of 90 percent) of the average number of

visits reported by the comparison

HHAs—whichever is greater.

(c) Method. HCFA, through the

intermediary, will determine the

amount of the initial reserve operating

funds using reported cost and visit data

from submitted cost reports for the first

full year of operation from at least three

HHAs that the intermediary serves that

are comparable to the HHA that is

seeking to enter the Medicare program,

considering such factors as geographic

location and urban/rural status, number

of visits, provider-based versus freestanding, and proprietary versus nonproprietary status. The determination of

the adequacy of the required initial

reserve operating funds is based on the

average cost per visit of the comparable

HHAs, by dividing the sum of total

reported costs of the HHAs in their first

year of operation by the sum of the

HHAs’ total reported visits. The

resulting average cost per visit is then

multiplied by the projected visits for the

first three months of operation of the

HHA seeking to enter the program, but

not less than 90 percent of average visits

for a three month period for the HHAs

used in determining the average cost per

visit.

(d) Required proof of availability of

initial reserve operating funds. The

HHA must provide HCFA with adequate

proof of the availability of initial reserve

operating funds. Such proof, at a

minimum, will include a copy of the

statement(s) of the HHA’s savings,

checking, or other account(s) that

contains the funds, accompanied by an

attestation from an officer of the bank or

other financial institution that the funds

are in the account(s) and that the funds

are immediately available to the HHA.

In some cases, an HHA may have all or

part of the initial reserve operating

funds in cash equivalents. For the

purpose of this section, cash equivalents

are short-term, highly liquid

investments that are readily convertible

to known amounts of cash and that
Federal Register / Vol. 63, No. 2 / Monday, January 5, 1998 / Rules and Regulations 313

present insignificant risk of changes in

value. A cash equivalent that is not

readily convertible to a known amount

of cash as needed during the initial

three month period for which the initial

reserve operating funds are required

does not qualify in meeting the initial

reserve operating funds requirement.

Examples of cash equivalents for the

purpose of this section are Treasury

bills, commercial paper, and money

market funds. As with funds in a

checking, savings, or other account, the

HHA also must be able to document the

availability of any cash equivalents.

HCFA later may require the HHA to

furnish another attestation from the

financial institution that the funds

remain available, or, if applicable,

documentation from the HHA that any

cash equivalents remain available, until

a date when the HHA will have been

surveyed by the State agency or by an

approved accrediting organization. The

officer of the HHA who will be

certifying the accuracy of the

information on the HHA’s cost report

must certify what portion of the

required initial reserve operating funds

is non-borrowed funds, including funds

invested in the business by the owner.

That amount must be at least 50 percent

of the required initial reserve operating

funds. The remainder of the reserve

operating funds may be secured through

borrowing or line of credit from an

unrelated lender.

(e) Borrowed funds. If borrowed funds

are not in the same account(s) as the

HHA’s own non-borrowed funds, the

HHA also must provide proof that the

borrowed funds are available for use in

operating the HHA, by providing, at a

minimum, a copy of the statement(s) of

the HHA’s savings, checking, or other

account(s) containing the borrowed

funds, accompanied by an attestation

from an officer of the bank or other

financial institution that the funds are

in the account(s) and are immediately

available to the HHA. As with the

HHA’s own (that is, non-borrowed)

funds, HCFA later may require the HHA

to establish the current availability of

such borrowed funds, including

furnishing an attestation from a

financial institution or other source, as

may be appropriate, and to establish

that such funds will remain available

until a date when the HHA will have

been surveyed by the State agency or by

an approved accrediting organization.

(f) Line of credit. If the HHA chooses

to support the availability of a portion

of the initial reserve operating funds

with a line of credit, it must provide

HCFA with a letter of credit from the

lender. HCFA later may require the

HHA to furnish an attestation from the

lender that the HHA, upon its

certification into the Medicare program,

continues to be approved to borrow the

amount specified in the letter of credit.

(g) Provider agreement. HCFA does

not enter into a provider agreement with

an HHA unless the HHA meets the

initial reserve operating funds

requirement of this section.

5. A new subpart F is added to read

as follows:

Subpart F—Surety Bond Requirements for

HHAs

Sec.

489.60 Definitions.

489.61 Basic requirement for surety bonds.

489.62 Requirement waived for

Government-operated HHAs.

489.63 Parties to the bond.

489.64 Authorized Surety and exclusion of

surety companies.

489.65 Amount of the bond.

489.66 Additional requirements of the

surety bond.

489.67 Submission date and term of the

bond.

489.68 Effect of failure to obtain, maintain,

and timely file a surety bond.

489.69 Evidence of compliance.

489.70 Effect of payment by the Surety.

489.71 Surety’s standing to appeal

Medicare determinations.

489.72 Effect of review reversing HCFA’s

determination.

489.73 Incorporation into existing provider

agreements.

Subpart F—Surety Bond Requirements

for HHAs

§ 489.60 Definitions.

As used in this subpart unless the

context indicates otherwise—

Assessment means a sum certain that

HCFA may assess against an HHA in

lieu of damages under Titles XI, XVIII,

or XXI of the Social Security Act or

under regulations in this chapter.

Assets includes but is not limited to

any listing that identifies Medicare

beneficiaries to whom home health

services were furnished by a

participating or formerly participating

HHA.

Civil money penalty means a sum

certain that HCFA has the authority to

impose on an HHA as a penalty under

Titles XI, XVIII, or XXI of the Social

Security Act or under regulations in this

chapter.

Participating home health agency

means a ‘‘home health agency’’ (HHA),

as that term is defined by section

1861(o) of the Social Security Act, that

also meets the definition of a ‘‘provider’’

set forth at § 400.202 of this chapter.

Surety bond means one or more bonds

issued by one or more surety companies

under 31 U.S.C. 9304 to 9308 and 31

CFR parts 223, 224, and 225, provided

the bond otherwise meets the

requirements of this section.

Unpaid civil money penalty or

assessment means a civil money penalty

or assessment imposed by HCFA on an

HHA under Titles XI, XVIII, or XXI of

the Social Security Act, plus accrued

interest, that, 90 days after the HHA has

exhausted all administrative appeals,

remains unpaid (because the civil

money penalty or assessment has not

been paid to, or offset or compromised

by, HCFA) and is not the subject of a

written arrangement, acceptable to

HCFA, for payment by the HHA. In the

event a written arrangement for

payment, acceptable to HCFA, is made,

an unpaid civil money penalty or

assessment also means such civil money

penalty or assessment, plus accrued

interest, that remains due 60 days after

the HHA’s default on such arrangement.

Unpaid claim means a Medicare

overpayment for which the HHA is

responsible, plus accrued interest, that,

90 days after the date of the agency’s

notice to the HHA of the overpayment,

remains due (because the overpayment

has not been paid to, or recouped or

compromised by, HCFA) and is not the

subject of a written arrangement,

acceptable to HCFA, for payment by the

HHA. In the event a written

arrangement for payment, acceptable to

HCFA, is made, an unpaid claim also

means a Medicare overpayment for

which the HHA is responsible, plus

accrued interest, that remains due 60

days after the HHA’s default on such

arrangement.

§ 489.61 Basic requirement for surety

bonds.

Except as provided in § 489.62, each

HHA that is a Medicare participating

HHA, or that seeks to become a

Medicare participating HHA, must

obtain a surety bond (and furnish to

HCFA a copy of such surety bond) that

meets the requirements of this subpart

F and HCFA’s instructions.

§ 489.62 Requirement waived for

Government-operated HHAs.

An HHA operated by a Federal, State,

local, or tribal government agency is

deemed to have provided HCFA with a

comparable surety bond under State

law, and HCFA therefore waives the

requirements of this section with

respect to such an HHA if, during the

preceding 5 years the HHA has—

(a) Not had any unpaid claims or

unpaid civil money penalties or

assessments; and

(b) Not had any of its claims referred

by HCFA to the Department of Justice or

the General Accounting Office in
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accordance with part 401 of this

chapter.

§ 489.63 Parties to the bond.

The surety bond must name the HHA

as Principal, HCFA as Obligee, and the

surety company (and its heirs,

executors, administrators, successors

and assignees, jointly and severally) as

Surety.

§ 489.64 Authorized Surety and exclusion

of surety companies.

(a) An HHA may obtain a surety bond

required under § 489.61 only from an

authorized Surety.

(b) An authorized Surety is a surety

company that—

(1) Has been issued a Certificate of

Authority by the U.S. Department of the

Treasury in accordance with 31 U.S.C.

9304 to 9308 and 31 CFR parts 223, 224,

and 225 as an acceptable surety on

Federal bonds and the Certificate has

neither expired nor been revoked; and

(2) Has not been determined by HCFA

to be an unauthorized Surety for the

purpose of an HHA obtaining a surety

bond under this section.

(c) HCFA determines that a surety

company is an unauthorized Surety

under this section—

(1) If, upon request by HCFA, the

surety company fails to furnish timely

confirmation of the issuance of, and the

validity and accuracy of information

appearing on, a surety bond an HHA

presents to HCFA that shows the surety

company as Surety on the bond;

(2) If, upon presentation by HCFA to

the surety company of a request for

payment on a surety bond and of

sufficient evidence to establish the

surety company’s liability on the bond,

the surety company fails to timely pay

HCFA in full the amount requested, up

to the face amount of the bond; or

(3) For other good cause.

(d) Any determination HCFA makes

under paragraph (c) of this section is

effective immediately when notice of

the determination is published in the

Federal Register and remains in effect

until a notice of reinstatement is

published in the Federal Register.

(e) Any determination HCFA makes

under paragraph (c) of this section does

not affect the Surety’s liability under

any surety bond issued by a surety

company to an HHA before notice of

such determination is published in

accordance with paragraph (d) of this

section.

(f) A determination by HCFA that a

surety company is an unauthorized

Surety under this section is not a

debarment, suspension, or exclusion for

the purposes of Executive Order No.

12549 (3 CFR, 1986 comp., p. 189).

§ 489.65 Amount of the bond.

(a) Basic rule. The amount of the

surety bond must be $50,000 or 15

percent of the Medicare payments made

by HCFA to the HHA in the HHA’s most

recent fiscal year for which a cost report

has been accepted by HCFA, whichever

is greater.

(b) Computation of the 15 percent:

Participating HHA.

The 15 percent is computed as

follows:

(1) For the initial bond—on the basis

of Medicare payments made by HCFA to

the HHA in the HHA’s most recent fiscal

year as shown in the HHA’s most recent

cost report that has been accepted by

HCFA. If the initial bond will cover less

than a full fiscal year, the computation

of the 15 percent will be based on the

number of months of the fiscal year that

the bond will cover.

(2) For subsequent bonds—on the

basis of Medicare payments made by

HCFA in the most recent fiscal year for

which a cost report has been accepted.

However, if payments in the first six

months of the current fiscal year differ

from such an amount by more than 25

percent, then the amount of the bond is

15 percent of such payments projected

on an annualized basis.

(c) Computation of 15 percent: An

HHA that seeks to become a

participating HHA by obtaining assets

or ownership interest. For an HHA that

seeks to become a participating HHA by

purchasing the assets or the ownership

interest of a participating or formerly

participating HHA, the 15 percent is

computed on the basis of Medicare

payments made by HCFA to the

participating or formerly participating

HHA in the most recent fiscal year that

a cost report has been accepted.

(d) Change of ownership. For an HHA

that undergoes a change of ownership

the 15 percent is computed on the basis

of Medicare payments made by HCFA to

the HHA for the most recently accepted

cost report.

(e) An HHA that seeks to become a

participating HHA without obtaining

assets or ownership interest. For an

HHA that seeks to become a

participating HHA without purchasing

the assets or the ownership interest of

a participating or formerly participating

HHA, the 15 percent computation does

not apply.

(f) Exception to the basic rule. If an

HHA’s overpayment in the most

recently accepted cost report exceeds 15

percent of annual payments, HCFA may

require the HHA to secure a bond in an

amount up to or equal to the amount of

overpayment, provided the amount of

the bond is not less than $50,000.

§ 489.66 Additional requirements of the

surety bond.

The surety bond that an HHA obtains

under this subpart must meet the

following additional requirements:

(a) The bond must guarantee that

within 30 days of receiving written

notice from HCFA of an unpaid claim or

unpaid civil money penalty or

assessment, which notice contains

sufficient evidence to establish the

Surety’s liability under the bond, the

Surety will pay HCFA, up to the stated

amount of the bond—

(1) The full amount of any unpaid

claim, plus accrued interest, for which

the HHA is responsible; and

(2) The full amount of any unpaid

civil money penalty or assessment

imposed by HCFA on the HHA, plus

accrued interest.

(b) The bond must provide that the

Surety’s liability for unpaid claims and

unpaid civil money penalties and

assessments is based on—

(1) Medicare overpayments that arise

from Medicare payments that are made

by HCFA to the HHA during the term

of the bond, regardless of when the

overpayments are determined by HCFA

or when the overpayments become

unpaid claims; and

(2) Civil money penalties and

assessments that HCFA imposes on the

HHA during the term of the bond

regardless of when it is determined that

the civil money penalties or assessments

are unpaid.

(c) The bond must provide that the

Surety’s liability to HCFA under the

bond is not extinguished by any action

of the HHA, the Surety, or HCFA,

including but not necessarily limited to

any of the following actions:

(1) Any action by the HHA or the

Surety to terminate or limit the scope or

term of the bond unless the Surety

furnishes HCFA with notice of such

action not later than 10 days after

receiving notice of such action by the

HHA, or not later than 60 days before

the effective date of such action by the

Surety.

(2) The Surety’s failure to continue to

meet the requirements of § 489.64(a) or

HCFA’s determination that the surety

company is an unauthorized Surety

under § 489.64(b).

(3) Termination of the HHA’s provider

agreement.

(4) Any action by HCFA to suspend,

offset, or otherwise recover payments to

the HHA.

(5) Any action by the HHA to—

(i) Cease operation;

(ii) Sell or transfer any asset or

ownership interest;

(iii) File for bankruptcy; or

(iv) Fail to pay the Surety.
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(6) Any fraud, misrepresentation, or

negligence by the HHA in obtaining the

surety bond or by the Surety (or by the

Surety’s agent, if any) in issuing the

surety bond, except that any fraud,

misrepresentation, or negligence by the

HHA in identifying to the Surety (or to

the Surety’s agent) the amount of

Medicare payments upon which the

amount of the surety bond is

determined will not cause the Surety’s

liability to HCFA to exceed the amount

of the bond.

(7) The HHA’s failure to exercise

available appeal rights under Medicare

or to assign such rights to the Surety.

(d) The bond must provide that

actions under the bond may be brought

by HCFA or by HCFA’s fiscal

intermediaries.

§ 489.67 Submission date and term of the

bond.

(a) Each participating HHA that does

not meet the criteria for waiver under

§ 489.62 must submit to HCFA, in such

a form as HCFA may specify, a surety

bond as follows:

(1) Initial term: By February 27, 1998,

effective for the term beginning January

1, 1998 through the end of the HHA’s

fiscal year.

(2) Subsequent terms: Not later than

30 days before the HHA’s fiscal year,

effective for a term concurrent with the

HHA’s fiscal year.

(b) HHA that seeks to become a

participating HHA.

(1) An HHA that seeks to become a

participating HHA must submit a surety

bond with its enrollment application

(Form HCFA–855, OMB number 0938–

0685). The term of the initial surety

bond must be effective from the

effective date of provider agreement as

specified in § 489.13 of this part.

However, if the effective date of the

provider agreement is less than 30 days

before the end of the HHA’s current

fiscal year, the HHA may obtain a bond

effective through the end of the next

fiscal year, provided the amount of the

bond is the greater of $75,000 or 20

percent of the amount determined from

the computation specified in § 489.65(c)

as applicable.

(2) An HHA that seeks to become a

participating HHA through the purchase

or transfer of assets or ownership

interest of a participating or formerly

participating HHA must also ensure that

the surety bond is effective from the

date of such purchase or transfer.

(c) Change of ownership. An HHA

that undergoes a change of ownership

must submit the surety bond to HCFA

not later than the effective date of the

change of ownership and the bond must

be effective from the effective date of the

change of ownership through the

remainder of the HHA’s fiscal year.

(d) Government-operated HHA that

loses its waiver. A government-operated

HHA that, as of January 1, 1998, meets

the criteria for waiver under § 489.62

but thereafter is determined by HCFA to

not meet such criteria, must submit a

surety bond to HCFA within 60 days

after it receives notice from HCFA that

it no longer meets the criteria for

waiver.

(e) Change of Surety. An HHA that

obtains a replacement surety bond from

a different Surety to cover the remaining

term of a previously obtained bond must

submit the new surety bond to HCFA

within 30 days of obtaining the bond

from the new Surety.

§ 489.68 Effect of failure to obtain,

maintain, and timely file a surety bond.

(a) The failure of a participating HHA

to obtain, file timely, and maintain a

surety bond in accordance with this

subpart F and HCFA’s instructions is

sufficient under § 489.53(a)(1) for HCFA

to terminate the HHA’s provider

agreement.

(b) The failure of an HHA seeking to

become a participating HHA to obtain

and file timely a surety bond in

accordance with this Subpart F and

HCFA’s instructions is sufficient under

§ 489.12(a)(3) for HCFA to refuse to

enter into a provider agreement with the

HHA.

§ 489.69 Evidence of compliance.

(a) HCFA may at any time require an

HHA to make a specific showing of

being in compliance with the

requirements of this Subpart F and may

require the HHA to submit such

additional evidence as HCFA considers

sufficient to demonstrate the HHA’s

compliance.

(b) If requested by HCFA to do so, the

failure of an HHA to timely furnish

sufficient evidence to HCFA to

demonstrate compliance with the

requirements of this Subpart F is

sufficient for HCFA to terminate the

HHA’s provider agreement under

§ 489.53(a)(1) or to refuse to enter into

a provider agreement with the HHA

under § 489.12(a)(3), as applicable.

§ 489.70 Effect of payment by the Surety.

A Surety’s payment to HCFA under a

bond for an unpaid claim or an unpaid

civil money penalty or assessment,

constitutes—

(a) Collection of the unpaid claim or

unpaid civil money penalty or

assessment (to the extent the Surety’s

payment on the bond covers such

unpaid claim, civil money penalty, or

assessment); and

(b) A basis for termination of the

HHA’s provider agreement under

§ 489.53(a)(1).

§ 489.71 Surety’s standing to appeal

Medicare determinations.

(a) A Surety shall have standing to

appeal any matter that the HHA could

appeal provided that:

(1) The Surety has made payment of

all amounts owed to HCFA by the HHA,

up to the amount of the bond.

(2) The HHA has assigned its right of

appeal to the Surety.

(3) The Surety satisfies all

jurisdictional and procedural

requirements that would otherwise have

applied to the HHA.

(b) Any assignment of appeal rights by

the HHA to the Surety must be in

writing and must include the right to

appeal all issues contested with respect

to the specified cost reporting period.

§ 489.72 Effect of review reversing

determination.

In the event a Surety has paid HCFA

on the basis of liability incurred under

a bond obtained by an HHA under this

subpart F, and to the extent the HHA

that obtained such bond (or the Surety

under § 489.71) is subsequently

successful in appealing the

determination that was the basis of the

unpaid claim or unpaid civil money

penalty or assessment that caused the

Surety to pay HCFA under the bond,

HCFA will refund to the Surety the

amount the Surety paid to HCFA to the

extent such amount relates to the matter

that was successfully appealed by the

HHA (or by the Surety), provided all

review, including judicial review, has

been completed on such matter. Any

additional amounts owing as a result of

the appeal will be paid to the HHA.

§ 489.73 Incorporation into existing

provider agreements.

The requirements of this subpart F are

deemed to be incorporated into existing

HHA provider agreements effective

January 1, 1998.

(Catalog of Federal Domestic Assistance

Program No. 93.774, Medicare—Hospital

Insurance Program, and Program No. 93.778,

Medical Assistance Program)

Dated: December 1, 1997.

Nancy-Ann Min DeParle,

Administrator, Health Care Financing

Administration.

Dated: December 24, 1997.

Donna E. Shalala,

Secretary.

Note: The attached addendum will not

appear in the Code of Federal Regulations.

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[FR Doc. 97–34220 Filed 12–31–97; 8:45am]

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