In my last two posts, I shared differences in the results of my calculations regarding profit margins for HHAs and what is reported by MedPAC in their 2023 report using the same cost report data. I then shared the results of payer margins that included Medicare Advantage calculated with the same methods I used previously for Medicare FFS only.
In my last post, I mentioned that MedPAC did not provide charts and statistics including all payer margins when it came to home health, as they did for acute care, and I expressed my own curiosity and concerns about why this data would be considered relevant for one setting and not the other.
Many times when reading through long and complex documents like the MedPAC report, you can miss important elements provided by the authors. Between my last post and this one, I went back through Chapter 8 on home health looking for anything I might have missed previously. As it turns out, I found some important statistical references by MedPAC in the text of the documents that are relevant to the discussion on how their margin values are calculated. They also present more inconsistencies between what they view when they are looking at this data and what I am seeing.
In this paragraph of the report, the first paragraph on page 248, we find all payer margins for HHAs as reported by MedPAC under their section describing access to capital for HHAs. My apologies to MedPAC and the rest of you for missing it earlier.
The all payer margin in this paragraph appears without any graphical representation in a chart or any reference to where this data comes from, but I am assuming that this is from the cost reports, like most of the rest of the MedPAC financial data.
As it turns out, there is a reason why this number is buried in this section of the report.
For the first time, MedPAC and I agree on a number we both obtained through the cost reports, the only difference is the sign. Using the same cost report data for 2021, I came up with a NEGATIVE 11.89% all payer margin for 2021. Here are my results.
Unlike MedPAC, I am willing to share the values I have used to come up with these margins, I have applied the census as a unit of service to allocate revenue and expenses by each financial class.
This is the data supporting my margins. The revenue and expenses are per census and I have included the three years currently available in the cost reports. Anyone else using the same logic and current cost report data can reproduce these numbers:
I find it unlikely that the fact that my negative margin matches MedPACs positive margin is a coincidence. If it was a mistake, it was a costly one for HHAs.
If this is not enough to question the reliability of data in the MedPAC report and their view of what it means, there is more.
On page 238, this bullet point appears on the MedPAC report:
This point references “Marginal profit”. This is an accounting term used to define the profit margin for a business when one additional unit of a product or service is sold. For example, the marginal cost of selling an extra hamburger is the cost of the ingredients of the hamburger, its packaging, and the labor it took to make it. It does not include the cost of utilities, employee benefits, manager salaries or other fixed expenses that would be the same whether or not you sold 249 or 250 hamburgers. In the case of HHAs, the marginal cost is the visit costs only.
This average “Marginal profit” (26%) is very similar to the Medicare FFS margin presented by MedPAC in chart 8-7 for 2021 at 24.9%. In the paragraph that starts on page 244 and ends on 245, MedPAC discloses that these margins they use to represent HHA performance under Medicare FFS are not actually profit margins, but marginal profits, here is this paragraph:
When MedPAC evaluates the performance of hospitals in chapter 6 of their report, they use operating margins or profit margins as most people understand them. MedPAC decided to use a different approach for HHAs. I have spent a lot of time and energy trying to figure out why our margins were so different, this is the explanation. It took me a while to find it.
In this chart from the report, 8-1, MedPAC counts the number of active HHAs by year and how this number is related to the number of active Medicare beneficiaries.
This data does not come from the cost reports so I am not in the position to question its accuracy, but it is used by MedPAC to support their narrative that access to home health is not in jeopardy for Medicare beneficiaries because the supply of HHAs is stable.
In the title for this chart, they refer to these as HHAs participating in Medicare. I am not aware of many HHAs that do not participate in Medicare, if any, so I would have referred to this chart as all HHAs.
When I look at this chart, I come to a different conclusion than MedPAC promotes in their narrative. There are many factors in healthcare trending favorably toward growth of the home health industry when it comes to the demand for their services, here is a list provided by my ChatGPT assistant:
1. Aging population: As the population continues to age, there is a growing demand for home health services to provide care and support for elderly individuals who wish to remain in their own homes.
2. Advancements in technology: The development of new technologies and tools has made it easier for home health providers to deliver high-quality care in the comfort of a patient's home.
3. Cost-effectiveness: Home health services are often more cost-effective than hospital or institutional care, making them an attractive option for patients and healthcare providers.
4. Preference for in-home care: Many patients prefer to receive care in their own homes, where they can maintain independence and comfort, rather than in a hospital or nursing facility.
5. Increased awareness and acceptance of home health services: As awareness of the benefits of home health services grows, more patients and healthcare providers are turning to this option for care.
6. Support from government and insurance providers: Government programs and insurance providers are increasingly recognizing the value of home health services and may cover or partially cover the costs, making them more accessible to a wider range of patients.
Let’s add to this list the financial metrics provided by MedPAC in their report, 25% margins under Medicare and 11.9% overall in 2021 with these margins growing year to year.
What strikes me about this chart is that given these factors, why would the number of HHAs be in decline?
MedPAC represents this chart and the data it contains as confirmation of their narrative. When I look at it, I wonder what is missing. Why would investors not be jumping over each other to invest in this industry? If these MedPAC reported profits were real, they are better than any other sector of healthcare. Why would investors, bullish on healthcare overall, not try harder to become a part of this effort? The narrative of upward trending financial health for HHAs presented by MedPAC, the factors driving growth in the industry and the actual decline of HHAs reported by MedPAC are not in alignment.
If these growth factors described by my AI assistant are real, and I think most of us would agree they are, then what is holding the industry back? Why is there a decline of HHAs at all?
I agree that reading these reports is a mind numbing experience, even for a person who has made a living on numbers, like me. However, it is important that we review data like this thoroughly and with a degree of skepticism, including the data I have provided. What is missing? Is there a theme or agenda influencing the data provided? Can this data be trusted?
In my opinion, this last issue of growth in the home health industry is the most compelling and critical for the future of home health for patients that will need it. The undeniable pressures toward growth in home health are pushing demand up. Something is holding expansion down. I believe this something is the disparity in the actual profitability of these HHAs compared to the picture created by MedPAC and CMS.
The smartest and best equipped numbers people around work for the organizations that align investment capital with the organizations and industries most likely to experience growth and return on investment. Trends in M&A and organic growth in home health are negative, as MedPAC admits. These investment experts, when they examine these opportunities, are not finding the rosy scenario painted by MedPAC. They are not incentivized to share their findings, but I believe when they research these opportunities they see a picture much closer to the numbers presented by my analysis of the cost reports than the data provided by MedPAC to congress.
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