Ownership Transparency: The New Normal in Healthcare?

On November 17, 2023, the U.S. Department of Health and Human Services ("HHS") Centers for Medicare and Medicaid Services ("CMS") published a final rule (the "Final Rule") requiring Medicare skilled nursing facilities ("SNFs") and Medicaid nursing facilities to provide more detailed information than they were previously required to provide on the Medicare Enrollment Application Form CMS-855A regarding ownership and managerial information. Moreover, the Final Rule establishes new definitions of a "private equity company" ("PEC") and "real estate investment trust" ("REIT") for Medicare provider enrollment purposes.

CMS issued the Final Rule in response to certain studies connecting private equity ownership to a decline in quality of care. CMS believes that requiring disclosure of more detailed ownership data will provide insight into the prevalence of private equity involvement in Medicare-enrolled nursing home facilities and SNFs.

The Final Rule will be effective January 16, 2024. SNFs and nursing facilities must use the Form CMS 855-A to disclose ownership and managerial information upon initial enrollment, revalidation, and reactivation, as well as upon any change of ownership ("CHOW"). CMS plans to commence off-cycle revalidations of SNFs to obtain the required information.

Private Equity in the Healthcare Sector

The SNF Final Rule was published amid of a wave of criticism about the role of private equity in the healthcare system. The Final Rule was foreshadowed in April 2022 when CMS made public data on mergers, acquisitions, consolidations, and changes of ownership from 2016-2022 for hospitals and nursing homes enrolled in Medicare. In addition, in June of 2023, the Federal Trade Commission ("FTC") issued a proposed rule to amend the premerger notification requirements under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR"), significantly expanding the number and scope of required disclosures companies seeking to merge must provide for premerger review, including identifying minority shareholders of the acquiring entity and upstream controlling entities, as well as directors, officers, and board observers of all entities within the organizational structure of the filer.

In keeping with the trend toward greater transparency in healthcare transactions, many states are exercising greater oversight of healthcare provider changes in ownership and have recently enacted laws requiring notice of material transactions. For example, healthcare entities must submit notice of material transactions to the appropriate state department at least thirty (30) days prior to closing in New York, sixty (60) days prior to the effective date of the transaction in Washington, and ninety (90) days prior to closing in California. For more examples of state law notice requirements, see below.

Critics of transparency question whether increased oversight will be unduly burdensome and potentially inhibit the flow of capital into the healthcare sector. Under the Final Rule, for example, SNFs must disclose the "the organizational structure" of each "additional disclosable party" to the facility, including up-the-chain indirect ownership. Such a disclosure imposes an administrative burden on the SNF and nursing home facilities as well as the facility's respective Medicare Administrative Contractor, which likely means there will be longer processing timelines for enrollments, changes of information, and revalidations. Time will tell whether the increased transparency and attendant scrutiny will help or hurt the evolution of the healthcare delivery system.

SNF Disclosure Parameters

Focusing on the Final Rule, nursing homes must now disclose the following information to CMS or, for Medicaid nursing facilities, the applicable state Medicaid agency ("state agency"):

• Each member of the facility's governing body, including the name, title, and period of service of each member.
• Each person or entity who is an officer, director, member, partner, trustee, or managing employee of the facility, including the name, title, and period of service of each such person or entity.
• Each person or entity who is an additional disclosable party of the facility.
• The organizational structure of each additional disclosable party of the facility and a description of the relationship of each such additional disclosable party to the facility and to one another.

Timing

Medicare-enrolled SNFs must begin reporting the newly required information when the newly revised Form CMS-855A becomes available. The nursing facility must report the above information upon initially enrolling in Medicare or Medicaid (including changes of ownership) and upon revalidating their Medicare or Medicaid enrollment every five years. CMS also plans to conduct off-cycle revalidations of SNFs to collect the required data. Further, the CMS Form-855A's application has been revised such that all entities listed on any provider or supplier's Form CMS-855A submission must disclose whether they are a PEC or a REIT. To the extent that a Medicare SNF must already report some of the above data via the Form CMS-855A, the SNF need not report the same data more than once on the same application submission. In terms of the required Medicaid nursing facility data, states will have the option of adopting a similar policy.

Definitions

Definition of "Private Equity Company"
A private equity company (PEC) means a publicly traded or non-publicly traded company that collects capital investments from individuals or entities and purchases a direct or indirect ownership share of a provider.

Definition of "Real Estate Investment Trust"
A real estate investment trust (REIT) means a corporation, trust, or association (1) which is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) which would be taxable as a domestic corporation; (4) which is neither a financial institution referenced to in section 582(c)(2), nor (B) an insurance company to which subchapter L applies; (5) the beneficial ownership of which is held by 100 or more persons; (6) which is not closely held; and (7) which meets the limitations of 26 U.S.C. § 856(c).

If you have any questions about the new CMS Final Rule requiring additional disclosures for SNFs and nursing home facilities, please contact your trusted legal counsel.

Definition of "Additional Disclosable Party"
An additional disclosable party means a person or entity that (1) provides operational, financial, or managerial control over the facility or a part thereof, or provides policies or procedures for any of the facility's operations, or provides financial or cash management services to the facility; (2) leases or subleases real property to the facility, or owns a whole or part interest equal to or exceeding five percent (5%) of the total value of such real property; (3) provides management or administrative services, management or clinical consulting services, or accounting or financial services to the facility.

Notice Requirements by State