CMS Pub. 100-08, ch. 10, § 10.2.1.6.2

A. Background

Effective January 1, 2011, and pursuant to 42 CFR §§ 489.28(a) and 424.510(d)(9), an HHA

entering the Medicare program - including a new HHA resulting from a change of ownership if

the change of ownership results in a new provider number being issued - must have available

sufficient funds (known as initial reserve operating funds) at (1) the time of application

submission and (2) all times during the enrollment process, to operate the HHA for the three-month period after the Medicare contractor conveys billing privileges (exclusive of actual or

projected accounts receivable from Medicare). This means that the HHA must also have

available sufficient initial reserve operating funds during the 3-month period following the

conveyance of Medicare billing privileges.

B. Points of Review

At a minimum, the contractor shall verify that the HHA meets the required amount of

capitalization at the following times:

• 1st Review - Prior to making its recommendation for approval to the state

• 2nd Review – Between 30 and 35 calendar days after making its recommendation to the

state. (Only the request for proof of capitalization need be initiated between 30 and 35

calendar days. The verification need not be completed within or by this timeframe.)

• 3rd Review - After the contractor receives the state recommendation but before it sends to

PEOG the e-mail described in section 10.2.1.6(B)(3)(B)

• 4th Review - During the 3-month period after the contractor conveys Medicare billing

privileges to the HHA

For initial applications, the contractor shall verify that the HHA meets all of the capitalization

requirements addressed in 42 CFR §489.28. (Note that capitalization need not be reviewed for

revalidation, reactivation applications, and changes of ownership that do not require a new/initial

enrollment under §424.550(b).) The contractor may request from the HHA any and all

documentation deemed necessary to perform this task.

The HHA must submit proof of capitalization within 30 calendar days of the contractor’s request

to do so. Should the HHA fail to furnish said proof and billing privileges have not yet been

conveyed, the contractor shall deny the HHA’s application pursuant to §424.530(a)(8)(i) or (ii),

as applicable. If billing privileges have been conveyed, the contractor shall revoke the HHA’s

billing privileges per §424.535(a)(11).

Should the contractor deem it necessary to verify the HHA’s level of capitalization more than

once within a given period (e.g., more than once between the time a recommendation is made

and the completion of the state review process), the contractor shall seek approval from its

PEOG BFL.

C. Determining Initial Reserve Operating Funds

Initial reserve operating funds are sufficient to meet the requirement of 42 CFR §489.28(a) 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 CMS

for comparative purposes) multiplied by the number of visits projected by the HHA for its first 3

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.

The contractor shall determine the amount of the initial reserve operating funds by using reported

cost and visit data from submitted cost reports for the first full year of operation from at least

three HHAs that the contractor serves that are comparable to the HHA seeking to enter the

Medicare program. Factors to be used in making this determination shall include:

• Geographic location and urban/rural status;

• Number of visits;

• Provider-based versus free-standing status; and

• Proprietary versus non-proprietary status.

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 3 months of operation of the HHA

seeking to enter the program, but not less than 90 percent of average visits for a 3-month period

for the HHAs used in determining the average cost per visit.

D. Proof of Operating Funds

As described further in section 10.2.1.6.2(E) and (G) below, the HHA must provide CMS with

adequate proof of the availability of initial reserve operating funds. In some cases, an HHA may

have all or part of the initial reserve operating funds in cash equivalents. For purposes of the

capitalization requirement, 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. A cash equivalent that is not readily convertible to a known amount of cash as needed

during the initial 3-month period for which the initial reserve operating funds are required does

not qualify as meeting the initial reserve operating funds requirement. Examples of cash

equivalents for purposes of the capitalization requirement 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. CMS may later require the HHA to furnish: (1) another

attestation from the financial institution that the funds remain available; and/or (2)

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 constitutes 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

1. General Information

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. As part of this, and except as stated in section 10.2.1.6.2(E)(2) and (H) below, the HHA

must (at a minimum) furnish: (1) a copy of the statement(s) of the HHA's savings, checking, or

other account(s) containing the borrowed funds; and (2) 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, CMS later may require the

HHA to establish the current availability of such borrowed funds; this could include furnishing

an attestation from a financial institution or other source (as may be appropriate) 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.

2. Inability to Obtain Attestation Statements

Several national bank chains are no longer providing the attestation statements referenced in 42

CFR § 489.28(d) and § 489.28(e) (e.g., to verify the existence of capitalization funds for HHAs).

Accordingly, the contractor may accept a current bank statement unaccompanied by an

attestation from an officer of the bank or other financial institution if the HHA cannot secure the

attestation. (See the phrase “(if the financial institution offers such attestations)” in revised §

489.28(d) and (e).) All efforts must be exhausted, however, to obtain the attestation of funds

statement before the contractor can forgo this requirement. In no circumstances shall the

contractor instruct the HHA to obtain a different bank that will provide an attestation statement.

All other documents listed in section 10.2.1.6(G) must be obtained if required.

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 CMS with a letter of credit from the lender. CMS 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. Documents

As part of ensuring the prospective HHA’s compliance with the capitalization requirements, the

contractor shall obtain the following from the HHA:

• A document outlining the HHA’s projected budget – preferably, a full year’s budget broken

out by month

• A document outlining the number of anticipated visits - preferably a full year broken out by

month

• An attestation statement from an officer of the HHA defining the source of funds

• Copies of bank statements, certificates of deposits, etc., supporting that cash is available

(must be current)

• Except as stated in section 10.2.1.6.2(E)(2) above, a letter from an officer of the bank

attesting that funds are available

• If available, audited financial statements

The contractor shall also ensure that the capitalization information in Section 12 of the Form

CMS-855A is provided.