Should Long-Term Care Facilities Outsource Compliance?
If long-term care (LTC) facilities want to save a bundle and ensure compliance with federal regulations, the answer is obvious.
On Dec. 24, 2003, the Securities and Exchange Commission (SEC) promulgated new investment compliance rules. Pursuant to these rules, effective Oct. 24, 2004, investment companies and investment advisers are required to adopt written compliance procedures, review the adequacy of those procedures annually, and designate a chief compliance officer responsible for their administration.
The Summer 2015 edition of Marcum’s Private Investment Forum newsletter included an article focusing on the trend towards outsourcing the implementation of the SEC’s 2003 compliance rules to a compliance services firm (Marcum article). The author wrote that the July 21, 2010, passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) prompted concern among private fund firms about how to implement an effective compliance program as required by the 2003 rules. He concluded that outsourcing the investment compliance function to a reputable compliance services firm enables a private fund firm to avoid the fixed costs and management issues of hiring a full-time equivalent employee (FTE), demonstrates compliance independence, shares liability, and accesses the “breadth of knowledge necessary to implement an effective compliance program.”
The long-term care (LTC) industry is facing a similar dilemma about how to implement an effective compliance program. Here’s my take on the situation.
Compliance Requirements in LTCs
The Patient Protection and Affordable Care Act (ACA) was signed into law on March 23, 2010, exactly 120 days before Dodd-Frank. Section 6102 of the ACA originally required that both Medicare- and Medicaid-certified LTC facilities have in operation a compliance and ethics program by March 23, 2013. The Centers for Medicare & Medicare Services (CMS) subsequently promulgated rules giving LTC facilities — more specifically, Medicare skilled nursing facilities, Medicaid nursing facilities (jointly, facilities), and facilities that are a “distinct part” of a larger institution such as a continuing care retirement community — until Nov. 28, 2019, to establish and implement the mandated compliance and ethics program (the LTC rules).
Like the SEC investment compliance rules, a fundamental component of the LTC rules is that an LTC operating organization that operates five or more facilities must designate a compliance officer for whom the LTC operating organization’s compliance and ethics program is a major responsibility. According to the comments to the LTC rules, CMS expects that the compliance officer will “take the lead in developing the entire program” governing all of the LTC operating organization’s facilities.
Is Outsourcing Compliance an Option?
Although the LTC rules do not specifically endorse the option of outsourcing the compliance officer (CO) role, they do not preclude it. In fact, the LTC rules only require that the CO “report directly to the LTC Operating Organization’s governing body and not be subordinate to the general counsel, chief financial officer or chief operating officer.” Moreover, the Office of Inspector General for the U.S. Department of Health and Human Services has previously endorsed the idea of outsourcing the compliance function to a third-party expert in compliance.
The author of the Marcum article posited several reasons why outsourcing the investment compliance function to a third-party compliance services firm offers many benefits over hiring one or more FTEs. Several of these same reasons support the notion that LTC operating organizations should also outsource the compliance function to establish and implement the mandated compliance and ethics program.
Consider the Cost Differential
According to the Marcum article, utilizing an investment compliance services firm usually costs between 40-60 percent of the fixed cost of at least $200,000 per year in salary and benefits for a competent in-house CO. CMS estimates that LTC operating organizations will commit 30 percent of an FTE (at $85 an hour) to implement and administer the mandated compliance and ethics program, for a total cost of $53,000 per year.
More simply, LTC operating organizations would pay an existing administrative employee, presumably without any compliance experience or expertise, to spend less than a third of their day as a CO. Using the same logic as the Marcum article, rather than commit just 30 percent of an FTE to run the program, an LTC operating organization could theoretically pay at least 10 percent less ($4,000/month x 12 = $48,000) per year to an outsourced CO with the regulatory and business knowledge and expertise to implement an effective LTC compliance and ethics program.
Independence Prevents Conflicts
The author of the Marcum article also stipulated that “… a compliance services firm brings an independent perspective” to the investment compliance function. Conversely, an in-house compliance officer “is inherently conflicted because he/she reports to senior management.”
The LTC rules require the CO report to the board of directors and not be subordinate to the general counsel, chief financial officer, or chief operating officer. Moreover, in the comments to the LTC rules, CMS wrote that the compliance officer should be part of the LTC operating organization’s staff and not located at a facility “to avoid any interference or influence of the compliance officer by an [Facility] administer (sic).”
If the LTC rules require that 30 percent of an existing administrative employee’s responsibilities be devoted to administering the compliance and ethics program, then 70 percent of this employee’s responsibilities will not be related to compliance. Furthermore, since the CO should also be part of the LTC operating organization’s staff, the senior staff would logically seek to appoint an existing administrative employee who is already part of the staff. One can reasonably infer that an existing administrative employee who is part of the operating organization’s staff, and who currently spends 100 percent of their day on activities not related to compliance, is likely subordinate to the general counsel, chief financial officer, or chief operating officer. Appointing this employee to be a CO would not only cause a conflict of interest with senior management, but it would also be a clear violation of the LTC rules.
Like outsourcing the investment compliance function, outsourcing the LTC compliance function brings an independent perspective to the compliance and ethics program and eliminates any potential conflicts of interest.
Outsourcing Compliance Lowers Liability
According to the Marcum article, the role of compliance officer has “direct regulatory liability” better retained by an experienced third-party compliance professional rather than undertaken by a senior executive who may not have adequate regulatory knowledge (i.e., the SEC’s investment compliance rules) nor devote sufficient time to their compliance responsibilities. Moreover, the author claims that outsourcing the investment compliance function also ensures that an external third party has responsibility for the compliance infrastructure. If a private fund firm has a compliance problem, it can look to potential contractual remedies with an outsourced compliance services firm; whereas the only solution for an in-house CO is termination.
Likewise, as mentioned above, an outsourced CO will have ample regulatory knowledge (i.e., the LTC rules and other federal and state laws and regulations governing facilities) and devote sufficient time to administer an effective LTC compliance and ethics program. An outsourced CO agreement will likely also include language that indemnifies an LTC operating organization against significant compliance program failures.
In consideration of the cost, independence, liability, and other issues involved with the decision to outsource the investment compliance function, the author of the Marcum article concluded that an investment compliance firm has the requisite industry knowledge and experience to implement an effective compliance program quickly and efficiently.
The Answer Is Yes
On July 18, 2019, CMS published a proposed rule delaying implementation of the Compliance and Ethics Program provision of the LTC rules. Nonetheless, outsourcing the compliance function to a CO is clearly the most efficient and cost-effective way to implement and administer an LTC compliance program that complies with the LTC rules and is “effective in preventing and detecting criminal, civil, and administrative violations and in promoting quality of care.”
- Should Long-Term Care Facilities Outsource Compliance? - March 2, 2020