[Federal Register Volume 63, Number 2 (Monday, January 5, 1998)]
[Rules and Regulations]
[Pages 292-355]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-34220]



[[Page 291]]

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Part II





Department of Health and Human Services





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Health Care Financing Administration



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42 CFR Parts 413, 440, 441, and 489



Medicare and Medicaid Programs, Surety Bond and Capitalization 
Reqirements for Home Health Agencies; Final Rule

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

[[Page 292]]



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.

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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 government-operated 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, government-operated 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 well-regulated 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:
    <bullet> 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.
    <bullet> 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.
    <bullet> 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

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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 
one-year 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 
BBASec. '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.

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    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,

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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 core-approach 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.

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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, non-borrowed 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 non-borrowed 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 short-term, 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 Sec. 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 
Secs. 489.60 through 489.73, to establish the surety bond requirements 
that pertain to HHAs under Medicare.
    In Sec. 489.60 (``Definitions'') we specify the meaning of the 
terms ``assessment'', ``assets'', ``civil money penalty'', 
``participating home health agency'',

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``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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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

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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 Sec. 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 Sec. 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 Sec. 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 one-year bond is required, 
it is easier to link the Surety's liability with a particular term of 
the bond and the fiscal year.
    In Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 441.16 (the previous Sec. 441.16 is 
redesignated as Sec. 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.

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    In Sec. 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 government-operated 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 
Sec. 441.16(e), we define the parties to the bond.
    Under paragraph (f)(1) of Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 440.70(d), which already 
apply the Medicare HHA requirements for participation to Medicaid, to 
reference the Medicare capitalization requirement in Sec. 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

[[Page 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:
    <bullet> Whether the information collection is necessary and useful 
to carry out the proper functions of the agency;
    <bullet> The accuracy of the agency's estimate of the information 
collection burden;
    <bullet> The quality, utility, and clarity of the information to be 
collected; and
    <bullet> 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 Sec. 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

[[Page 302]]

collection requirements for capitalization referenced in Sec. 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 Sec. 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 Sec. 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                        
------------------------------------------------------------------------
                                                  Average               
                                                 burden per     Annual  
           CFR section              Responses     response      burden  
                                                 (minutes)      hours   
------------------------------------------------------------------------
441.16(h)(3)(i)..................           80            5            7

[[Page 303]]

                                                                        
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 BBASec. '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

[[Page 304]]

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                                             
----------------------------------------------------------------------------------------------------------------
                                                                    Overpayment                                 
                              Annual HHA claims   Original amount    percentage       Current        Percent of 
            Year                 paid to date     of overpayments    of claims      uncollected     overpayments
                                                                        paid        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]              
------------------------------------------------------------------------
                                                               Number of
                      Dollars reimbursed                          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 non-profit 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

[[Page 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                                                             
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                               Average                         Average                  
                     Dollars reimbursed                        Number   Reimbursement by    reimbursement    Average amount    cost of    Total cost of 
                                                               of HHAs        range            per HHA           of bond        bond          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 
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ These costs represent the cost of the minimum bond required by BBA '97, section 4312(b).                                                            

    Table 4 illustrates that there are approximately 1382 government-
operated HHAs. If a government-operated 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                                    
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Number   Number        Total                                                               
                                                               of    of HHAs   reimbursement of      Average     Average amount  Average   Total cost of
                   Total number of HHAs                      Govt.   subject   HHAs subject to    reimbursement      of bond     cost of       bonds    
                                                              HHAs   to bond         bond            per HHA                       bond                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
9444......................................................     1382     8062    $12,256,481,236      $1,520,278        $228,042   $2,280     $18,384,722
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 306]]

    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-the-board, 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 General-imposed 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

[[Page 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 
government-operated HHAs that meet our waiver requirements, we estimate 
the total cost of surety bonds for Medicaid-participating 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-government-operated HHAs in 
the Medicaid program had obtained a surety bond.

       Table 1.--Total Number of HHAs Arranged by Medicaid Payment      
------------------------------------------------------------------------
                                                              Number of 
                        Dollars paid                             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                                                             
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               Number   Reimbursement by       Average                         Average    Total cost of 
                     Dollars reimbursed                        of HHAs        range         reimbursement     Average bond      cost          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                              
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Number    HHAs    HHAs subject to       Average                     Average                
                   Total number of HHAs                     of Govt  subject         bond         reimbursement  Average amount  cost of   Total cost of
                                                              HHAs   to bond    reimbursement        per HHA         of bond       bond        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

[[Page 308]]

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 under-projected 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-and-comment 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, 
notice-and-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

[[Page 309]]

January 1, 1998. Therefore, notice-and-comment 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-and-comment 
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-and-comment 
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

[[Page 310]]

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 programs-health, 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:


Sec. 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 Sec. 440.70, paragraph (d) is revised as follows:


Sec. 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 Sec. 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:


Sec. 441.10  Basis.

* * * * *
    (h) Section 1903(i)(18) for the requirement that each home health 
agency provide the Medicaid agency with a surety bond (Sec. 441.16).
    3. In Sec. 441.15 a new paragraph (d) is added to read as follows:


Sec. 441.15  Home health services

* * * * *
    (d) The agency providing home health services meets the 
capitalization requirements included in Sec. 489.28 of this chapter.


Sec. 441.16  [Redesignated as Sec. 441.17]

    4. Section 441.16 is redesignated as Sec. 441.17.
    5. A new Sec. 441.16 is added to read as follows:


Sec. 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 Sec. 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 Sec. 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 Sec. 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

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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 
Sec. 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

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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 Sec. 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:


Sec. 489.1  Statutory basis.

* * * * *
    (e) Section 1861(o)(7) of the Act requires each HHA to provide HCFA 
with a surety bond.
    3. In Sec. 489.10, new paragraphs (e) and (f) are added to read as 
follows:


Sec. 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 Sec. 489.28 is added to read as follows:


Sec. 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 free-standing, 
and proprietary versus non-proprietary 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

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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


Sec. 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 Sec. 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.


Sec. 489.61  Basic requirement for surety bonds.

    Except as provided in Sec. 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.


Sec. 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

[[Page 314]]

accordance with part 401 of this chapter.


Sec. 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.


Sec. 489.64  Authorized Surety and exclusion of surety companies.

    (a) An HHA may obtain a surety bond required under Sec. 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).


Sec. 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.


Sec. 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 
Sec. 489.64(a) or HCFA's determination that the surety company is an 
unauthorized Surety under Sec. 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.

[[Page 315]]

    (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.


Sec. 489.67  Submission date and term of the bond.

    (a) Each participating HHA that does not meet the criteria for 
waiver under Sec. 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 Sec. 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 
Sec. 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 Sec. 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.


Sec. 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 Sec. 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 Sec. 489.12(a)(3) for HCFA 
to refuse to enter into a provider agreement with the HHA.


Sec. 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 Sec. 489.53(a)(1) or to refuse to enter 
into a provider agreement with the HHA under Sec. 489.12(a)(3), as 
applicable.


Sec. 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 
Sec. 489.53(a)(1).


Sec. 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.


Sec. 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 
Sec. 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.


Sec. 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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