Navigating the 36-Month Rule in Home Health and Hospice Ownership Changes

How does the 36-month rule impact your home health or hospice agency's ability to sell or transfer ownership? If you've ever wondered why certain restrictions exist on ownership changes, you’re not the only one.

The 36-month rule was created to prevent rapid turnover among agencies. But what does it really mean for you as an owner or potential owner?

*This article was written in consultation with Kelly McCarthy & Mariam Treystman.

The Home Health Consultant has handled hundreds of ownership change applications. This makes us incredibly familiar with navigating the 36-month rule. 

In this article, we’ll answer these questions:

• What is the 36-Month Rule?
• What's the Purpose of the 36-Month Rule?
• Are There Exceptions to the 36-Month Rule?
• What are the Different Types of Ownership Changes?
• What Do You Need to Know Before Selling/Buying an Agency?

By the end of this article, you'll know exactly how this rule affects you, your agency, and your next steps.

What is the 36-Month Rule?

The 36-month rule is a CMS regulation. It restricts changes in the majority ownership of home health (HH) and hospice (HSP) agencies during the first 36 months after their accreditation. This period, counted from the “enrollment date,” limits the ability to transfer over 49% ownership, except in specific cases, to discourage the quick sale of new agencies. Let’s break down the key components of the rule and how it supports sustainable agency practices.

Key Components of the 36-Month Rule

Before we get into the nitty gritty of the 36-month rule, there are a few concepts you need to understand first.

1. Enrollment Date

The rule applies based on the agency’s enrollment date, not the date of licensing. This date refers to when CMS completes the agency's accreditation. This effective date can be found on the agency’s accreditation letter or certificate.

2. Change in Majority Ownership

A change in majority ownership occurs when more than 49% of an agency's direct ownership transfers.

3. Consecutive Full Cost Reports

The agency can change majority ownership prior to 36 months if they have filed two consecutive full cost reports. Each report must reflect an annual revenue threshold of at least $200,000, which indicates that the agency has been consistently active for at least two years.

Why Did CMS Create the 36-Month Rule?

CMS introduced the 36-month rule to prevent the establishment of home health & hospice agencies solely for resale purposes-which can disrupt patient care and agency stability.

By enforcing a minimum operating period and financial requirements, CMS aims to foster a sustainable industry. This rule primarily protects patients and the Medicare system by ensuring compliance and continuity among processes.

For example, if a home health agency changes hands multiple times within its first three years, patient care quality may be jeopardized by shifts in management or policy. With the 36-month rule, CMS minimizes these risks, promoting stable and dedicated care.

Example of the 36-Month Rule in Practice

Imagine a newly accredited home health agency that becomes operational and receives its accreditation on January 1, 2023. Under the 36-month rule, this agency cannot transfer more than 49% of its ownership until after January 1, 2026, or until it has filed two consecutive full cost reports. The agency cannot change majority ownership within this period. If they did, it would result in a provider termination, unless it falls under an exception.

Exceptions to the 36-Month Rule

The 36-month rule has limited exceptions. These exceptions are limited to scenarios outside the agency's control, including:

1. Death of a Majority Shareholder

If a majority shareholder passes away, CMS permits the transfer of their ownership to an heir or designated individual. The new owner must provide a death certificate, and, if applicable, documentation like a will or trust.

2. Internal Corporate Restructure

Structural changes within the parent corporation or between indirect owners can proceed without affecting the 36-month timeline, as these changes do not alter the agency's direct ownership.

Types of Ownership Changes for Home Health Agencies

CMS recognizes various types of ownership changes, each with different implications for the 36-month rule:

1. CHOW (Change of Ownership)

This refers to direct ownership changes of 50% or more. CHOWs can be completed after the 36-month period, or after two full cost reports have been submitted

2. Changes of Indirect Ownership

Changes in the agency’s parent company (i.e., indirect ownership) do not trigger the 36-month rule, provided that direct ownership remains unchanged.

3. Stock Transfers (CHST)

CMS allows stock transfers of 49% or less which do not meet the threshold for a majority ownership change.

4. Change of Governing Board

Changes within the governing board—such as a shift in board members, CEOs, or other executives—are also allowed with a caveat. Governing board changes will not trigger the 36-month rule, as long as there is no majority share change.

What You Need to Know About the 36-Month Rule Before Selling Agency

For those considering selling or transferring ownership of their home health or hospice agency, the following takeaways are essential:

• Understand Your Enrollment Date: The 36-month rule starts from the agency’s accreditation date, not licensure or provider number tie-in date.
• Consider Cost Reports: Ensure two consecutive full cost reports are filed if planning a sale within three years of accreditation.
• Exceptions Are Limited: Only major events like the death of a shareholder or corporate restructuring allow early ownership transfer without penalty.
• Use a Consultant for Compliance: Due to the complexity of CMS regulations, consulting with a professional ensures compliance and can prevent provider termination due to unintentional rule violations.

The 36-month rule may seem complex, but understanding its requirements empowers agency owners to navigate ownership changes with confidence. Whether you’re preparing for a sale or ensuring compliance, staying informed protects your agency from penalties and contributes to a more stable healthcare industry.

For more insights on maintaining compliance and safeguarding your agency’s future, check out our article on Value-Based Purchasing below. Gaining clarity on these regulations is the first step toward confidently managing your agency’s operations.