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Department of Behavioral Health and Developmental Services
 
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State Board of Behavioral Health and Developmental Services
 
chapter
Rules and Regulations For Licensing Providers by the Department of Behavioral Health and Developmental Services [12 VAC 35 ‑ 105]
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11/28/21  1:32 pm
Commenter: john humphreys

Small business demise
 

Small business extinction - the department has been increasingly hostile to small businesses, this is not an opinion, it's not the way I "feel" it's a demonstrable fact for which there is ample evidence; consider: 1) the Burns rate setting analysist stated during the question and answer session that the rate setting formula only permitted a profit for the business if they exercised "economies of scale" which is impossible for very small businesses; 2) the current criteria for reimbursement used by the department to implement these rates also significantly disadvantage small businesses, in 2 independent ways: a) the incrementally increased penalties for group home size via the reimbursement rates disproportionately fell on single location small businesses and required expansion into multiple locations and a larger bureaucratic organization to avoid the penalties. b) The use of a "day" as the only billing unit allowed large bureaucratic organizations that offer day support services to double dip each day into the reimbursement pool for each individual in their care, an opportunity denied to small providers focused solely on providing  residential services, unless they were to become larger and more bureaucratic to include day support services – Interestingly, when Covid closed day support programs large providers (who were double dippers) were quoted in the Richmond Times Dispatch lamenting that the day rate for residential supports alone was insufficient to cover the cost of the services; something very small providers said at the outset and have been battling since; 3) when making regulatory changes the department has repeatedly attempted to use pretext to dis-incentivize or prohibit successful business models for small providers (i.e. several efforts to eliminate the shared residence group home model, which so far have been unsuccessful and 4) regulations that have been adopted and proposed uniquely, disproportionately and unfairly have a significant negative impact on very small businesses. While several examples are included in other comments, multiple examples in response to every proposed regulation can be found in those comments and the most damning fact of all in this regard is that the department, to my knowledge, has never in their history adopted are proposed regulations including any exemption or accommodation for small businesses as is required by Virginia state law; Section 2.2 – 4007.1 provides clear requirements “to minimize the economic impact on small businesses”, “consider utilizing alternative regulatory methods” for small businesses (listing 5), avoid regulations that “overlaps, duplicates… federal or state law or regulation” and “minimizing the adverse impact on small businesses”.

This continues:

 

12 VAC 35 – 106 – 20 – definitions – sows the seeds of small business extinction, specifically: the definition for a change of ownership is unclear in 2 respects;

  • number 3 the division of one entity into 2 or more would require the issuance of a conditional license (12 VAC 35 – 106 – 80 – D3) with a limitation of only one four-person or less group home (12 VAC 35 – 106 – 50 – G); it appears that all of the new entities including the parent organization that is being divided up would have start with a conditional license and a limit on the number of homes/persons; which prevents a small business from divesting of a portion of the business but retaining the remaining portion (if it exceeds one group home or 4 persons) – It is also important to note that this provision would apply to almost any change of ownership initiated by small business owner as the requirement of a conditional license with location/person restrictions would require all but the most tiny of operators to divide the locations up into separate offerings for different persons and preclude the transfer of the small business intact, which greatly diminishes its value .
  • The definition for a change of ownership does not include the death of the business owner/license holder and it appears that this would be considered a succession under the definition of succession plan; however, it is extremely unclear as outlined below if the exclusion from the definition of a change of ownership also includes exclusion from the conditional license/other requirements that apply to a change of ownership.

RECOMMENDATIONS: 1) the regulation should clarify that if an organization is split into 2 or more entities, then the parent organization which holds a full license in good standing can retain that license and need not move to a conditional license; 2) the regulation should include an exemption that allows a small business to change ownership as an intact entity to retain its value and avoid extinction

 

12 VAC 35 – 106 – 50 – definitions – "succession plan" – requires a written signed statement "by the license holder which identifies a new license holder in the event of the current license holder's death". What is not made clear by this definition is the meaning of the "new" in the identification of a different license holder; depending upon the interpretation, it could be restricted to organizations that currently hold a full organizational license or it could allow identification of someone who would be a 1st time (i.e. new) license holder who would then have to make an application and be subject to those rules. Regardless of which interpretation eventually emerges, the extinction of the small business would be guaranteed when the current owner dies. Simply there would be one of 2 choices, either identify an existing holder of a full organizational license who could then subsume the small business intact (see below) into their larger organization and small businesses is dead or you could identify a new person who had to apply for a new license but they could only receive a conditional license and operate one location of 4 or fewer persons, meaning that only the tiniest businesses could be transferred intact, that any economies of scale they had developed for survival would be lost and a thriving/successful small business would die. Probably doesn't matter to most people, but in either case to get the new license the name of the business would have to disappear and all the years of dedication, sweat and tears that went into building a respected business name would simply die with the original owner/license holder, which I find heartbreaking and sad. Perhaps, there's an outside chance that there's a 3rd choice and the owner could identify a new person to take over the existing license, who could then inherit the business intact and continue its operations under the same name/reputation but this would appear to run afoul of the prohibition on the transfers of licenses found elsewhere in the regulations (12 VAC – 106 – 50 – C). Finally, I would note that other than this definition and a requirement to have one (12 VAC 35 – 106 – 470), the regulations do not address directly nor indirectly any requirements/ restrictions/rules or other clarifying inclusions that are specific to a succession plan; since they are not included in the change of ownership definition which is further defined, there appear to be no other applicable provisions making this requirement extremely vague and subject to the arbitrary/capricious interpretation. RECOMMENDATIONS: 1) Definition should be clarified and the body of the regulations should directly clarify the process/requirements of succession; 2) the regulation should include an exemption that allows a small business to change ownership as an intact entity to retain its value and avoid extinction.

 

12 VAC 35- 105-50; 12 VAC 35 – 106 – 40; 12 VAC 35 – 106 – 50; 12 VAC 35 – 106 – 80 – taken collectively, these provisions cemented into stone the following conditions:

1) A conditional license is the only one that will be issued whenever a person who does not hold a current license, a change of ownership and/or a desire to transfer and a current license holder who subsumes the operations from another license holder.

2) conditional license holders are limited to one group home with 4 or fewer persons during the conditional license period; while there is no mention of sponsored placement homes but it appears, the same logic would be operational there as well.

3) The one exception to the conditional license limits, are also limited as 106 – 50 A1f – states "once a provider holds a full organizational license, the provider may have more than one additional service on a conditional license". However, this does not appear to include more than one group home location and this would limit the choices for intact moves in succession/change of ownership to those entities which already held a full organizational license.

The inevitable result of these 3 conditions would ensure the extinction of small businesses as it precludes any choices that would allow the small business to continue intact, economically viable and under the same name. Consider the choices available:

  1. the small business goes to an entity that currently holds a organizational license – if the small business had more than one group home location or one that served more than 4 individuals that it does not appear even that entity could subsume the small business intact and even if it could that's exactly what would happen – it would be subsumed, the name disappear and the small business would die, while the parent organization would grow into an even larger more bureaucratic entity.  

Or

2) the small business goes to new license holders – again if the business had more than one group home location, one that served more than 4 persons or offered more than one service, the small business would have to be broken up into several component parts so that each of the new license holders could hold a small enough piece to qualify with their conditional license, which would require several business names, lose the economy of scale necessary for profitability and again the small business would die.

 

Either of these choices and/or a combination of the 2 would have the exact same outcome the small business would cease to exist as a separate entity and large bureaucratic businesses would continue to feast on their remains and grow even larger, more bureaucratic and further removed from the Individuals served.

Consider the circumstance of our very small business, regulatory burdens and reimbursement penalties forced us to reduce from 2 group homes (with plans for a 3rd where the property was purchased, the blueprints drawn up and initial contractors secured) down to only one 4 person group home and 1 sponsored residential home; but even for a business that small these rules would make it impossible to transfer the business intact and keep its name. While not perfect, over the past 19 and a half years, it has consistently demonstrated substantial compliance with the regulations (1 founded human rights violation – confidentiality breach in 2009 without harm; only 4 licensing citations with CAPs – 3 for med error without harm/ER or physician visit and one for the designated smoking area when licensing agents/ interpretation changed) and when these concerns did appear the corrective action that was eventually accepted had already been completed prior to the citation and in the others, the propose corrective action was completed before it was accepted/approved. In addition to substantial compliance with the state regulations, the organization has never received a violation nor recommendation of change from a DMAS review, 2 rounds of HSAG/PDQR reviews and has been the deemed as in compliance with the final rule HCBS rights requirements. This clearly establishes that the policies and procedures, practices, administration supervision and services/protections of the organization are sufficient to justify continued full licensing of the organization. We had a succession plan in the event of the owner/license holder death, that provided for the House Manager, who has been with the organization since inception and one of 2 administrators/supervisors, thus qualified and an integral part of the organization compliance, to take over and all of the corporations stocks, assets and accounts were set to transfer to her in the will. Under this regulatory set that will not be able to be possible, she will be cheated out of all that she has work for to build the organization, the individuals served (2 of them for over 18 years) will lose their home and a successful small business with a good reputation will simply die. This should not be an acceptable result, the problem is further magnified for businesses that are slightly larger than ours, but as this example indicates even very small businesses will be on the chopping block and their extinction assured.

RECOMMENDATION: change these provisions to prevent this injustice and the extinction of small businesses, through either an expanded clarification of succession that allows for the transfer of the business intact to an involved individual who qualifies or create a small business exemption which accomplishes the same function

12 VAC 35 – 106 – 40 – B1 applications and 12 VAC 35 – 106 – 470 – 1 - policies – both have a required inclusion of 3 words "a succession plan", again leaving its parameters unclear and undefined. This truly represents the final slap in the face for the small business owner/license holder, as it would require them to make the cruel choice of how their small business they have poured years of their life, blood, sweat and tears into is going to die and become extinct. Also, it is extremely unclear how this provision would operate in the real world, several concerns readily appear and there is no guidance in the rest of the regulations about how they could be resolved; for example:

1) identifying the new license holder – if the new license holder identified has to be an existing organizational license holder, then it would appear to create an obligation on the provider to obtain agreement from an existing organizational license holder to be the new license holder identified in the providers succession plan (or does the state just suggest we name without informing). Obtaining agreement to become the new license holder may well be problematic, the low reimbursement rates, onerous regulatory burdens and staffing shortages have led to the closure of many homes; why would individuals closing homes within their own organization be willing to take on the burden of someone else's organization? This problem becomes even more significant when the small business has more than one group home or one that is larger than 4 persons, as identification of multiple organizations/individuals would be required in order to assign responsibility for the individual pieces. If no one agrees to be identified as the new license holder what is the responsibility of the provider at that point?

2) workability – I'm not exactly sure on the intent of this provision, if it is to have operations subsumed into that organization to provide continuity of services, several problems have the potential to prevent that intent from working out in the real world. For example, what if the property/home where the deceased license holder conducted operations, was not the property of the business, would the new license holder identified be required to purchase a property, if the owner of the property no longer wanted operations there but had other uses for the home. Also, when identified in the succession plan as the new license holder what exactly goes along with that upon the death of the license holder; surely, the department can't be suggesting an automatic trade-off of the individuals served, as they are not the providers to assign, it would require informed consent protections. Does this provision assume in succession planning that other company assets, staffing or funds/line of credit moved to the identified new holder and if not why would they take on the additional burden with no benefit? What if the entity identified as the new license holder changes their mind once the current license holder is deceased and declines to accept the responsibility?  What if the identified lack the financial resources to meet the 90 day emergency requirement or to continue the operation? There are simply a lot of unanswered questions here that would need to be addressed in the regulations to make a succession plan practical.

3) Misplaces the burden for continuity of services – the individual provider has no effective mechanism for vetting other license holders or most others who may be willing to accept being identified as the new license holder in the succession plan; however, the state/department has an entire apparatus that is designed for vetting license holders and others, making them the most qualified to secure new placements on the event of a license holders death. The current license holder may not want the organization/license to continue on or they may not be able to find anyone to identify who meets their standards – does this create an obligation to choose blindly just to meet the regulation. More importantly, this requirement is a simple passing of the buck for all the negative consequences/concerns that the conditional license requirements/restrictions introduce into the smooth transition of a small business upon the death of the owner/license holder. If the business owner is precluded from transferring the property, business and operations to the individual of their choosing due to the regulations, why should they then become responsible for finding a variety of entities willing to be identified as the new license holder in their succession plan? To force the individual provider to clean up the mess created by these restrictions is completely unreasonable, unworkable and indefensible.

RECOMMENDATION: withdraw this provision and give this concern a more thorough analysis that identifies pitfalls and unintended consequences and propose at a later date a greatly expanded clarification/requirements/exceptions regulatory set for succession plans

CommentID: 116744