Federal Register, Volume 63 Issue 2 (Monday, January 5, 1998)

[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

_______________________________________________________________________

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:
The surety company fails to furnish us, upon request,
timely confirmation of the issuance of, and the validity and accuracy
of information appearing on, a surety bond.
The surety company fails to pay us timely after we have
presented to the surety a proper claim for payment and sufficient
evidence to establish the surety company's liability on the bond.
The surety company, by other similar action, furnishes us
with good cause to determine that the company is not acceptable as a
surety for the Medicare program.
A determination that a surety company is not an authorized source
for surety bond for Medicare will be effective immediately upon
publishing a notice of the determination in the Federal Register and
remains in effect until we publish a notice of reinstatement in the
Federal Register. However, any such determination does not affect any
surety bond issued by the surety company to an HHA before the effective
date of the determination.
If a Surety is determined to be an unauthorized surety company, we
will also determine whether and how such a determination will affect
HHAs that have obtained a current bond from the now unauthorized
company. We may require that HHAs obtain replacement bonds. A
determination by us that a surety company is an unauthorized surety
company for the purposes of this rule is not a debarment, suspension,
or exclusion for the purposes of Executive Order 12549.

D. Surety Company Obligations

The surety company must guarantee to pay us, up to the face amount
of the bond, the full amount of any unpaid Medicare overpayment, plus
accrued interest, based on payments we made to the HHA during the term
of the bond. Also, the surety company must guarantee to pay us, up to
the face amount of the bond, the full amount of

[[Page 294]]

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:

[[Page 296]]

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

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enough cash on hand to meet the first payroll.

VI. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995, agencies are required to
provide a 60-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted to
the Office of Management and Budget (OMB) for review and approval. In
order to fairly evaluate whether an information collection should be
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act
of 1995 requires that we solicit comment on the following issues:
Whether the information collection is necessary and useful
to carry out the proper functions of the agency;
The accuracy of the agency's estimate of the information
collection burden;
The quality, utility, and clarity of the information to be
collected; and
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
We are, however, requesting an emergency review of this final rule
with comment period. In compliance with section 3506(c)(2)(A) of the
Paperwork Reduction Act of 1995, we are submitting to the Office of
Management and Budget (OMB) the following requirements for emergency
review. We are requesting an emergency review because the collection of
this information is needed before the expiration of the normal time
limits under OMB's regulations at 5 CFR part 1320, to ensure compliance
with section 4312(b) and 4724(b) of BBA '97 which requires Medicare and
Medicaid participating HHAs to secure a surety bond, as of January 1,
1998, in order to continue participation in the Medicare and Medicaid
programs. We cannot reasonably comply with normal clearance procedures
because public harm is likely to result if the agency cannot enforce
the capitalization requirement to prevent undercapitalized HHAs from
entering the Medicare program or cannot enforce the surety bond
requirements of the BBA '97 in order to protect the Federal government
(especially the Medicare Trust Funds) from losses due to uncollectible
debts incurred by HHAs.
HCFA is requesting OMB review and approval of this collection
within 3 working days from the date of publication of this regulation,
with a 180-day approval period. Written comments and recommendations
will be accepted from the public if received by the individuals
designated below within 2 working days from the date of publication of
this regulation.
During this 180-day period, we will publish a separate Federal
Register notice announcing the initiation of an extensive 60-day agency
review and public comment period on these requirements. We will submit
the requirements for OMB review and an extension of this emergency
approval.
We are soliciting public comment on each of these issues for the
provisions summarized below that contain information collection
requirements:
Section 441.16 Home health agency requirements for surety bonds.
Section 441.16(h)(3)(i) requires that a Surety must furnish the
Medicaid agency with notice of any action by the HHA or the Surety to
terminate or limit the scope or term of the bond and that such notice
must be furnished not later than 10 days after the date of notice of
such action by the HHA, or not later than 60 days before the effective
date of the action by the Surety.
The burden associated with this requirement is the time required
for a Surety to provide a State Medicaid agency with a notice no later
than 10 days after any action by the HHA or the Surety to terminate or
limit the scope or term of the bond. HCFA met with surety bond industry
representatives to discuss the time and effort associated with
furnishing a notice to terminate or limit the scope or term of a bond.
It is estimated that less than 1 percent (80 entities) of all 8,062
participating HHAs will terminate or limit the scope or term of a bond.
It is also estimated that it will take a surety company 5 minutes to
generate and furnish a notice of such action (80 entities * 5 minutes =
400 minutes or 7 hours).
Section 441.16(i) requires each participating HHA that is not
exempted by paragraph (d) of this section to submit to the Medicaid
agency an initial surety bond by February 27, 1998, effective for the
term January 1, 1998, through a date specified by the State Medicaid
agency and for subsequent terms annually thereafter by a date as the
Medicaid agency may specify, effective for an annual period specified
by the Medicaid agency.
The burden associated with this requirement is the time required
for each participating HHA to furnish the Medicaid agency a copy of a
surety bond with original signatures on an annual basis. It is
estimated that it will take 8,062 providers 5 minutes for an annual
burden of 40,310 minutes = 672 hours.
Section 441.16(i)(2)(i) requires that HHAs seeking to become a
Medicaid participating HHA must submit a surety bond before a provider
agreement described under 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

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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

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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

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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

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

[[Page 311]]

the requirements of this section if, during the preceding 5 years, the
HHA has not had any uncollected overpayments.
(e) Parties to the bond. The surety bond must name the HHA as
Principal, the Medicaid agency as Obligee, and the surety company (and
its heirs, executors, administrators, successors and assignees, jointly
and severally) as Surety.
(f) Authorized Surety and exclusion of surety companies. An HHA may
obtain a surety bond required under this section only from an
authorized Surety.
(1) An authorized Surety is a surety company that--
(i) Has been issued a Certificate of Authority by the U.S.
Department of the Treasury in accordance with 31 U.S.C. 9304 to 9308
and 31 CFR parts 223, 224, and 225 as an acceptable surety on Federal
bonds and the Certificate has neither expired nor been revoked;
(ii) Has not been determined by the Medicaid agency to be an
unauthorized Surety for the purpose of an HHA obtaining a surety bond
under this section; and
(iii) Meets other conditions, as specified by the Medicaid agency.
(2) The Medicaid agency may determine that a surety company is an
unauthorized Surety under this section--
(i) If, upon request by the Medicaid agency, the surety company
fails to furnish timely confirmation of the issuance of, and the
validity and accuracy of information appearing on, a surety bond that
an HHA presents to the Medicaid agency that shows the surety company as
Surety on the bond;
(ii) If, upon presentation by the Medicaid agency to the surety
company of a request for payment on a surety bond and of sufficient
evidence to establish the surety company's liability on the bond, the
surety company fails to timely pay the Medicaid agency in full the
amount requested up to the face amount of the bond; or
(iii) For other good cause.
(3) The Medicaid agency must specify the manner by which public
notification of a determination under paragraph (f)(2) of this section
is given and the effective date of the determination.
(4) A determination by the Medicaid agency that a surety company is
an unauthorized Surety under paragraph (f)(2) of this section--
(i) Has effect only within the State; and
(ii) Is not a debarment, suspension, or exclusion for the purposes
of Executive Order No. 12549 (3 CFR 1986 Comp., p. 189).
(g) Amount of the bond.
(1) Basic rule. The amount of the surety bond must be $50,000 or 15
percent of the annual Medicaid payments made to the HHA by the Medicaid
agency for home health services furnished under this subchapter for
which FFP is available, whichever is greater.
(2) Computation of the 15 percent: Participating HHA. The 15
percent is computed by the Medicaid agency on the basis of Medicaid
payments made to the HHA for the most recent annual period for which
information is available as specified by the Medicaid agency.
(3) Computation of 15 percent: An HHA that seeks to become a
participating HHA by obtaining assets or ownership interest. For an HHA
that seeks to become a participating HHA by purchasing the assets or
the ownership interest of a participating or formerly participating
HHA, the 15 percent is computed on the basis of Medicaid payments made
by the Medicaid agency to the participating or formerly participating
HHA for the most recent annual period as specified by the Medicaid
agency.
(4) Computation of 15 percent: Change of ownership. For an HHA that
undergoes a change of ownership (as ``change of ownership'' is defined
by the State Medicaid agency) the 15 percent is computed on the basis
of Medicaid payments made by the Medicaid agency to the HHA for the
most recent annual period as specified by the Medicaid agency.
(5) An HHA that seeks to become a participating HHA without
obtaining assets or ownership interest. For an HHA that seeks to become
a participating HHA without purchasing the assets or the ownership
interest of a participating or formerly participating HHA, the 15
percent computation does not apply.
(6) Exception to the basic rule. If an HHA's overpayment in the
most recent annual period exceeds 15 percent, the State Medicaid agency
may require the HHA to secure a bond in an amount up to or equal to the
amount of the overpayment, provided the amount of the bond is not less
than $50,000.
(h) Additional requirements of the surety bond. The surety bond
that an HHA obtains under this section must meet the following
additional requirements:
(1) The bond must guarantee that, upon written demand by the
Medicaid agency to the Surety for payment under the bond and the
Medicaid agency furnishing to the Surety sufficient evidence to
establish the Surety's liability under the bond, the Surety will timely
pay the Medicaid agency the amount so demanded, up to the stated amount
of the bond.
(2) The bond must provide that the Surety's liability for
uncollected overpayments is based on overpayments that arise from
Medicaid payments that are made by the Medicaid agency to the HHA
during the term of the bond, regardless of when the overpayments are
determined by the Medicaid agency or when the overpayments become
uncollected overpayments.
(3) The bond must provide that the Surety's liability to the
Medicaid agency is not extinguished by any of the following:
(i) Any action by the HHA or the Surety to terminate or limit the
scope or term of the bond unless the Surety furnishes the Medicaid
agency with notice of such action not later than 10 days after the date
of notice of such action by the HHA to the Surety, or not later than 60
days before the effective date of the action by the Surety.
(ii) The Surety's failure to continue to meet the requirements of
paragraph (f)(1) of this section or the Medicaid agency's determination
that the surety company is an unauthorized surety under paragraph
(f)(2) of this section.
(iii) Termination of the HHA's provider agreement described under
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

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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.

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(6) Any fraud, misrepresentation, or negligence by the HHA in
obtaining the surety bond or by the Surety (or by the Surety's agent,
if any) in issuing the surety bond, except that any fraud,
misrepresentation, or negligence by the HHA in identifying to the
Surety (or to the Surety's agent) the amount of Medicare payments upon
which the amount of the surety bond is determined will not cause the
Surety's liability to HCFA to exceed the amount of the bond.
(7) The HHA's failure to exercise available appeal rights under
Medicare or to assign such rights to the Surety.
(d) The bond must provide that actions under the bond may be
brought by HCFA or by HCFA's fiscal intermediaries.

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]
BILLING CODE 4120-01-P