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HHS/CMS RIN: 0938-AI31 Publication ID: Fall 1997 
Title: ●Surety Bond and Capitalization Requirements for Home Health Agencies (BPO-152-FC) 
Abstract: This final rule with comment establishes that each home health agency (HHA) must obtain a surety bond in the amount of $50,000 or 15 percent of its prior year's Medicare payments, whichever is greater. The rule implements section 4312(b) of the Balanced Budget Act of 1997 (Pub. L. 105-33). The rule also sets forth capitalization requirements for HHAs, consistent with a commitment that the Department would publish a rule requiring new HHAs to have enough funds on hand to operate for the first three to six months. 
Agency: Department of Health and Human Services(HHS)  Priority: Other Significant 
RIN Status: First time published in the Unified Agenda Agenda Stage of Rulemaking: Final Rule Stage 
Major: No  Unfunded Mandates: No 
EO 13771 Designation: uncollected 
CFR Citation: 42 CFR 413    42 CFR 484    42 CFR 489   
Legal Authority: 42 USC 1302    42 USC 1395(hh)    42 USC 1395x(v)(1)(A)   

Statement of Need: Section 4312(b) of the Balanced Budget Act of 1997 requires each Medicare participating HHA to obtain a surety bond by January 1, 1998 regardless of the date its Medicare participation began. Requiring HHAs to obtain surety bonds will improve HCFA's ability to collect overpayments received by an HHA as a result of fraudulent or abusive HHA billings. ^PFrequently, HHAs are not sufficiently capitalized in relation to the operating expenses as reflected in their annual operating budget to sustain their operations. This rule requires HHAs entering the Medicare program on or after January 1, 1998 to demonstrate to their Medicare intermediary that they have adequate initial reserve operating funds with which to start the business and operate it for the first six months. The HHA cannot receive a provider agreement until it has met this requirement by providing the information to the intermediary and showing evidence that the appropriate resources exist and are committed to the business.

Summary of the Legal Basis: Sections 1861(o) and 1891 of the Social Security Act (the Act) provide the basis for conditions that an HHA must meet in order to participate in Medicare. Specific participation requirements for HHAs are located in our regulations at 42 CFR part 484. As a participating supplier of services, HHAs also must comply with applicable requirements for supplier approval located in our regulations at 42 CFR part 489. ^PSection 4312(b)(1) of the Balanced Budget Act of 1997 (Pub. L. 105-33), enacted August 5, 1997, 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 specified by the Secretary and in an amount that is not less than $50,000. ^PSection 4312(b)(2) of the Balanced Budget Act of 1997 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. ^PSection 1891(b) of the Act provides that it is the responsibility of the Secretary to assure, among other things, that the conditions of participation and the requirements in section 1861(o) of the Act and the enforcement of such conditions and requirements are adequate to protect the health and safety of individuals under the care of the HHA and to promote the effective and efficient use of public moneys. Section 1861(o)(5), in conjunction with 1861(z)(1), and further implemented in 42 CFR 484.14(i), requires that an HHA have an annual operating budget. Section 1861(o)(7) authorizes the Secretary to establish requirements that the Secretary finds necessary for the effective and efficient operation of the program, and section 1861(o) provides that an HHA is to meet such requirements.

Alternatives: We did not choose the alternative of requiring a surety bond in the minimum statutory amount of $50,000. Instead, to provide the maximum protection to Medicare we have required that the bond amount be the greater of $50,000 or 15 percent of the HHA's prior year Medicare payments. Although we are authorized to waive the surety bond requirement if an HHA provides a comparable surety bond under State law, we have not implemented that waiver authority in this rule. The limited amount of time available to us, between the enactment of the Balanced Budget Act of 1997 and the effective date of the surety bond requirement, did not permit us sufficient time to effectively analyze the potential specifications of a waiver provision. ^PThe capitalization requirement is to establish the financial stability of HHAs. Without this provision, an under-funded HHA may be forced to close pending development of an adequate and reliable stream of revenue. When an HHA is forced to close, the Medicare program is harmed financially if it is unable to recover payments owed to the program. More importantly, the closing of an HHA adversely affects the quality of care to its patients and, in turn, the health and safety of those patients. Therefore, the Department finds no alternative to this requirement.

Anticipated Costs and Benefits: Using 1996 data, if all Medicare participating HHAs, including all government-operated HHAs, purchased surety bonds, we estimate the cost of the surety bond requirement to be approximately $22.5 million. Exempting government-operated HHAs from purchasing surety bonds lowers the estimated cost of the surety bond requirement to approximately $18.4 million. This rule will assist to reduce losses to the Medicare program due to fraudulent and abusive HHA billings. We expect this rule to have a "significant impact" on an unknown number of HHAs, effectively preventing some of them from repeating their past aberrant billing activities. In addition, we believe this rule reinforces the behavior of HHAs that are not currently billing inappropriately, by encouraging them to continue billing only for appropriate Medicare services. ^PSections 1861(o)(5) and (z)(1) of the Act already require that an HHA must submit an operating budget, the budget to be used for determining an HHA's capitalization requirement. Therefore, this requirement calls for no additional HHA costs in developing an operating budget. The capitalization requirement will help ensure that only financially stable HHAs enter the Medicare program, resulting in fewer HHAs unexpectedly closing. Therefore, the Department will minimize its financial liability in the case of agencies that are forced to close while indebted to the Medicare program. In addition, since unexpected HHA closings jeopardize the quality of care of HHA patients, the capitalization requirement is being implemented to minimize those events.

Risks: The Congress has mandated that we establish a surety bond requirement for HHAs. There is a risk that the HHAs whose required surety bond amount is above the minimum mandated by the statute may protest their additional cost. HCFA believes the public interest is best served by establishing the requirement in such a way that it largely addresses the risk of unrecoverable losses to the Medicare Trust Funds, and will likely have the greatest impact on those HHAs that receive the largest Medicare payments. We believe that most HHAs will not be adversely affected to a significant degree as a result of this requirement. Moreover, we discern no adverse effects on the health and safety of Medicare beneficiaries. We do not believe the capitalization requirement will be a significant barrier because, although an HHA must demonstrate that it has funds to meet the requirement, up to 50 percent of the amount does not have to be equity of the HHA. That is, up to half the required amount could be in the form of loans or in a line of credit.

Action Date FR Cite
Interim Final Rule  11/00/1997    
Regulatory Flexibility Analysis Required: Yes  Government Levels Affected: None 
Small Entities Affected: Businesses, Organizations 
Included in the Regulatory Plan: Yes 
Agency Contact:
Ralph Goldberg
Division of Provider and Supplier Enrollment
Department of Health and Human Services
Centers for Medicare & Medicaid Services
7500 Security Boulevard,
Baltimore, MD 21244
Phone:410 786-4870