Navigating the CHOW (Change of Ownership): Medicare & Licensure Pitfalls
In standard business sales, the deal ends when the money is wired. You hand over the keys, and you walk away.
In Healthcare M&A, the wire transfer is just the beginning of a bureaucratic marathon known as the CHOW (Change of Ownership).
This is the phase where deals go to die. If you mishandle the regulatory transfer, Medicare (CMS) has the power to deactivate your billing privileges after the close, effectively rendering the business worthless overnight.
At Home Care Business Broker, we have seen million-dollar deals fall apart not because of financials, but because of a filing error on a CMS-855A form. Here are the major regulatory pitfalls you must navigate to ensure your exit is secure.
1. The "36-Month Rule": The Deal Killer
This is the most critical regulation for young agencies. If you started your agency recently, this rule determines whether you even have a sellable asset.
The Rule (42 CFR 424.550): If a Home Health Agency (HHA) or Hospice undergoes a change in majority ownership (selling more than 50% of the company) within 36 months of its initial Medicare enrollment or its last CHOW, the provider agreement does not transfer.
The Intent: CMS created this rule to stop "flipping"—where investors would set up empty "shell" agencies just to sell the Medicare billing number.
The Consequence: If you violate this rule, the buyer cannot "take over" your billing number. They must apply as a brand-new agency, go through a new state survey, and wait months for approval—during which they often cannot bill Medicare. Most buyers will walk away rather than accept this risk.
The "Cost Report" Exception
There is one major "out." If your agency has submitted two consecutive years of full cost reports, you may be exempt from the 36-month prohibition.
Note: This means full years of operation with accepted reports, not just two calendar years. Always verify your eligibility with a specialized healthcare attorney before listing.
2. The CMS-855A: Stock vs. Asset Sale
How you structure the sale (Stock vs. Asset) dramatically changes your paperwork burden with your Medicare Administrative Contractor (MAC).
Scenario A: Stock Sale (Change of Information)
If the buyer purchases your legal entity (the Inc. or LLC), the provider number usually stays intact because the "owner" (the corporation) hasn't technically changed—only the shareholders have.
The Filing: You file a "Change of Information" on the 855A.
The Benefit: This is generally faster and less disruptive. The billing number remains active, and the "Tie-In Notice" (official approval) comes faster.
Scenario B: Asset Sale (Assignment of Provider Agreement)
In an asset sale, the buyer is technically a new entity. For them to bill Medicare using your number, they must formally accept "Assignment" of your provider agreement.
The Unique Risk: In most industries, Asset Sales allow buyers to leave liabilities behind. Not in Medicare. By accepting assignment, the buyer accepts Successor Liability for all your past billing errors.
The Audit Risk: If CMS audits a claim from three years ago (long before the buyer arrived), the buyer is now on the hook for the repayment. This is why many buyers in Asset Sales push for deep indemnification clauses or "Holdbacks" (keeping 10-20% of the purchase price in escrow).
3. The "Cash Flow Gap": The Hidden Cash Crunch
Even if your CHOW is approved, there is often a "Billing Blackout" period.
When the CHOW is processed, the Medicare Administrative Contractor (MAC) may temporarily freeze payments to verify the new banking information (CMS-588). This freeze can last 30 to 60 days.
The Impact:
You (the seller) stop receiving payments on the closing date.
The buyer starts billing, but the cash gets held by Medicare in a "suspense account."
The Danger: If the buyer doesn't have enough working capital to fund payroll for 2 months without revenue, the business can collapse post-close. We model this cash crunch during the deal negotiation to ensure the buyer is capitalized enough to survive it.
4. State Licensure Nightmares (CA, NY, FL)
Medicare is federal, but your license is state-specific. While CMS might process a CHOW in 60-90 days, some states are notoriously slow.
California (CDPH): The California Department of Public Health is facing massive backlogs. A license transfer can take 6 to 12 months.
The Strategy: Deals in CA often require a "Management Services Agreement" (MSA). This legal structure allows the buyer to run the business (and bill) under your license/name while waiting for the state to officially approve the transfer.
New York (DOH): New York has a rigorous "Certificate of Need" (CON) and "Character and Competence" review. If the buyer is not already a licensed operator in NY, the approval process can drag on for nearly a year.
Florida (AHCA): Generally faster, but requires strict "Proof of Financial Ability to Operate" (PFAO). If the buyer cannot prove they have liquid cash equal to 3 months of operating expenses, the transfer will be denied.
Summary: Regulatory Diligence Comes First
You can negotiate the perfect price, but you cannot negotiate with the government.
Do not sign a Letter of Intent (LOI) until you have audited your regulatory standing:
36-Month Check: Are you legally allowed to transfer your provider number?
Cost Reports: Are all your reports filed and accepted?
State Notification: Does your state require a 90-day pre-notification before a sale?
We work with top healthcare regulatory attorneys to ensure your CHOW is structured correctly from Day 1.
Don't let red tape kill your exit. Let’s review your compliance status before you go to market.