Medicare and Medicaid Programs; Surety Bond and Capitalization Requirements for Home Health Agencies

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

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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:

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,

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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

[[Page 304]]

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

--------------------------------------------------------------------------------------------------------------------------------------------------------

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

[[Page 307]]

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 $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

[[Page 308]]

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

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

the capitalization requirements of this rule because the delay in

promulgating this rule would be contrary to the public interest.

Issuing a notice of proposed rulemaking before issuing a final rule

would be contrary to the public interest because to do so would permit

HHAs that are undercapitalized, and therefore not adequately

financially prepared to do business, to continue to enter into the

Medicare and Medicaid programs. Preventing the participation in

Medicare and Medicaid of undercapitalized HHAs will have an immediate

positive effect in ensuring that a lack of capital will not affect care

and will have an immediate sentinel effect on preventing further losses

to the Medicare Trust Funds and other Federal funds due to the

undercapitalization. The immediacy of this problem and the urgent need

to correct it has been well documented.

In its July 1997 report, ``Home Health: Problem Providers and Their

Impact on Medicare'' (OEI-09-96-00110), the OIG found that

entrepreneurs are able to open and operate HHAs without fixed assets or

startup costs, relying almost exclusively on Medicare for income and

assets. It stated, in part:

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

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