Banks and other financial institutions need to understand how federal and state laws may impact closing a lending transaction in connection with a change of ownership ("CHOW") of a health care facility ("HCF"). Various laws implicated in a CHOW frequently include federal Medicare laws and state licensing, certificate of need, and Medicaid laws.

Under Medicare regulations, a CHOW is defined as any of the following: (a) in a partnership, the removal, addition or substitution of a partner, unless the partners expressly agree otherwise as permitted by state law; (b) in a sole proprietorship, the transfer of title to property to another party; (c) in a corporation, the merger of the corporation into another corporation, or the consolidation of two or more corporations, either of which results in the creation of a new corporation; or (d) a lease of all or part of the HCF. Commonly encountered CHOW transactions include asset sale and purchase transactions and lease transactions where the purchaser/lessee agrees to accept assignment of the current operator’s Medicare provider agreement and number. (Note: It is possible for Medicare and Medicaid purposes for a purchaser/lessee to enroll as a new provider and not accept assignment of the Medicare and Medicaid provider agreements. However, that process will require substantially more time and will disrupt operations (and cash flow) of the HCF and is not, as a general rule, pursued by purchasers/lessees.) For Medicare purposes, a CHOW must be reported within 30 days of the effective date of the change. The Medicare administrative contractor will review the HCF’s submission and make a recommendation for enrollment of the provider to the Centers for Medicare & Medicaid Services ("CMS"). If CMS approves the recommendation, it will issue a "tie-in" notice indicating the provider has been enrolled and may begin billing.

Certain issues may increase the time period for receiving the tie-in notice from CMS. First, to the extent the current operator of the HCF has any outstanding notice of non-compliance or deficiencies, the operator must submit a plan of correction acceptable to CMS before the CHOW will be processed (and the new operator must pursue that plan of correction to completion). Second, it is possible for CMS to require a compliance survey in connection with a CHOW. Either of these issues may considerably increase the timing of closing the CHOW and the lending transaction. In addition, CMS recently implemented new requirements for providers to validate their enrollment in the Medicare program. The screening requirements in connection with this validation requirement varies by provider type according to which class of providers have historically engaged in fraudulent and abusive practices. Satisfying these additional requirements may also involve additional effort and time.

If a CHOW exists under applicable Medicare regulations, it likely also implicates a change of ownership or operator for purposes of state licensing, certificate of need, and Medicaid laws. Generally, most state HCF licenses are not assignable. Consequently, a purchaser/lessee is typically required to submit an application for a license to operate the HCF to the state health department and that license must be approved prior to effecting the CHOW. Typically, the license approval requires 30-60 days. In addition, if the HCF is subject to state certificate of need laws, the underlying transaction might require a notice of intent, or it might be advisable to seek a determination of reviewability or, in rare cases, it might require a new certificate of need. A notice of intent or a request for reviewability determination will typically be 30-60 days, but a new certificate of need will significantly extend the timetable for closing the transaction. Finally, a CHOW for Medicare purposes is also a CHOW under applicable state Medicaid regulations. Similar to the Medicare process for a CHOW, the purchaser/lessee must apply for participation in the Medicaid program and generally accept assignment of the current operator’s Medicaid provider agreement and number. Generally, an application and notice is required to be filed at least 45 days prior to the effective date of the CHOW. Similar to the Medicare process, any outstanding licensing deficiencies or Medicaid certification deficiencies will delay the closing of the transaction until plans of correction are accepted by applicable state agencies.

In most CHOW transactions involving a HCF, the purchaser/lessee and seller/lessor carefully coordinate all of the notices and filings required under applicable federal and state laws so that all necessary approvals and licenses will be issued and/or effective on the scheduled closing date. Generally, lenders do not have a direct role to play in obtaining such approvals or licenses. If all proceeds smoothly, lenders should expect that process to take 60-90 days. However, additional delays will be encountered if the existing operator or HCF has any outstanding deficiencies cited by federal or state regulatory agencies.