In recent posts, I have shared my work with home health cost report data and compared my results to those of CMS and MedPAC. All three of us lean heavily on cost report data to illustrate the financial health of HHAs because there is no other comparable data source that could provide appropriate data for this analysis. However, there is a major limitation of this data. By the time we see it, it is significantly out of date.
The CMS proposed rules and the MedPAC data books are both published in July. In 2023, the most current cost report data for both publications was 2021. This means that when these documents are published, the most current cost report data they provide is at least 18 months old.
When you look at the night sky, you don’t see stars as they look now, but how they looked hundreds or thousands of years ago. When we look at these reports, we see an image of the financial health of HHAs from two years earlier, but we talk about this data as if it was a current reflection of HHA stability.
CMS and MedPAC are both aware of this problem and each uses a different approach to try to fill in some of the gaps between time represented by this data and the present.
In the proposed rule, CMS attempts to calculate estimated HHA expenses for the year following the last year available in the cost reports. For the 2024 proposed rule, this was 2022. In my second blog post, the first containing cost report data, I demonstrated how CMS used cost report data from 2021 and visits from claims in 2022 (available when the proposed rule was developed) to estimate 2022 costs. They do this each year to develop margin estimates for the year ahead of the cost reports. Here is their data in table B4:
They then take this cost and compare it to the average revenue per claim to calculate an estimated “margin”. In this case, they came up with 45%. There are so many flaws with this methodology and logic that I will not repeat my description of all of them here. The primary problem is that they calculate margin by dividing the difference between revenue and expenses by the expenses, and not the revenue. This seems to be an attempt to inflate this percentage for those not looking closely at the numbers and where they come from. The other problem is that a reduction in visits does not relate to a proportionately equal reduction in costs, another issue I dealt with in depth in the post.
MedPAC makes a similar attempt in their 2023 report to look at the financial health of HHAs beyond the end of their 2021 cost report data. They do this by sharing anecdotes they read in the news. Here is some of this content from Chapter 8 on home health, page 248.
They describe these acquisitions as “expansion”, but none of these transactions created any new home health agencies. They only transferred the ownership of existing agencies. In my opinion, the driving force of these transactions was not for the organizations to expand home health resources, but preserve these dwindling resources in markets where they need to deliver home health to their beneficiaries as a requirement to remain a Medicare Advantage plan.
Home Health Care News (HHCN) reported a flat year for M&A growth in 2022 with “volume down 40% and 30% from 2021 and 2020”.
MedPACs own data from their 2023 report shows negative growth for HHAs.
In my previous post, I discussed this disconnect in HHA industry growth (decline) and the large margins shared by CMS and MedPAC in their analysis of HHAs.
I began thinking about how we might be able to look at other data, as CMS and MedPAC has done, to try to get a clearer picture of what is happening beyond the time lag of cost report data and the present, in particular, for 2022.
I have an advantage over these organizations in that I have already seen the 2022 cost report data and I have shared it with you. It shows that 2022 was worse than 2020 and 2021 when it comes to profit margins. However, since my numbers for all three years are very different from those of CMS and MedPAC, I began looking for other data that might describe 2022. Data that might reflect the health of HHAs beyond their dated financials in the cost reports.
To begin, I went through an exercise that Einstein referred to as a “thought experiment”. If a new agency is created, how would this impact the area it serves? If one goes away, what happens then? I have found this process useful in the past to understand workflows and markets that are new to me.
When a new agency is created, it takes on patients in the area it serves. These customers can be patients that were unable to find home health care before the agency existed or they are patients that would have been served by another agency. In either case, the existence of the new agency reduces demand in their service area. Since prices are set by payers in the home health market, prices do not decline as supply increases. If the increased capacity exceeds what the market can support, there is excess capacity to support additional patients and growth.
HHAs compete in a service area for referrals as their primary source of business. Acute care providers must refer discharged patients to HHAs willing and able to take on patients. In a market with excess or increasing capacity, they have more choices of agencies to partner with and the likelihood that a patient referred to an agency will be treated by that agency, or any agency, goes up. In this growth scenario, the time between discharge and home health treatment decreases as agencies compete to take on additional business.
When an agency contracts its service area or goes out of business, the opposite occurs. The patients previously treated by the agency must go elsewhere. There are fewer choices for the acute care providers to refer to and the chances that a referral is rejected increases. Delays increase from the discharge to when patients begin to receive treatment causing complications to their care and reducing the quality of treatment and outcomes, readmissions begin to go up.
If we can combine these generalized assumptions at an industry level, we can assume that a growing and healthy home health industry should attract funds to create more agencies. That this growth would increase the capacity to meet and then exceed referral demand. With stable revenue that is not influenced by supply, you would expect this growth to continue until excess capacity began to eat into HHA margins, the market would then stabilize. The opportunity associated with the CMS and MedPAC image of healthy profit margins should increase the supply of home health services beyond demand making it easier for patients to receive home care after a hospital discharge.
On the other hand, a contracting industry would make referrals more difficult for hospitals. As home health services supply falls below demand and the number of patients seeking treatment exceeds the available capacity for a service area, the hospitals in the area see an increase in the number of referrals rejected by HHAs. Patients and providers would spend more time and energy obtaining healthcare in the home. Delays in treatment would translate into decreasing quality of care, increasing readmissions, and soaring costs as this important piece of the total healthcare process begins to crumble and health plans and CMS begin paying for these short term gains from spending cuts through significant losses overall as these patients with increasing acuity are treated under more costly conditions. Eventually, these organizations will pay much more to correct the problem as they throw money at it in a desperate attempt to repair the damage.
WellSky, a prominent software vendor for HHAs, has a division within their organization called CarePort that makes a living analyzing the transition of care between acute and post acute environments. In June of 2023, they published a report using their proprietary data on referral transactions to describe this aspect of the home health industry and others. You can download this report from this link.
In this report, they include a chart that tracks the growth of home health referrals and the percentage of referrals from acute care to HHAs that are rejected.
We can see these rejection rates climbing over time after stable rates prior to the introduction of PDGM (2020). This data includes 2022, the year following the cost report data most recently reported by CMS and MedPAC.
WellSky attributes these increases in rejections to staffing challenges faced by healthcare providers. I would like to provide an alternative explanation, these rates are increasing because the growing demand for home health services is being met by a declining number of agencies and agencies contracting their service areas as they fall victim to decreasing profit margins. As I have discussed in my blog, the main contributors to this problem are the reduction of Medicare rates through the CMS implementation of “budget neutrality” and the transition to Medicare Advantage health plans that pay these agencies at rates below their costs.
In my posts with 2022 cost report data, we can see this problem accelerating in the cost reports at a rate similar to these HHA rejection rates reported by WellSky.
When we look at our assumptions from our thought experiment, which scenario does this referral rejection data support? Is it the CMS and MedPAC view of a highly profitable industry supported by large investors entering the market and expanding it? Or Is this data in line with my calculations using the cost report data where each year shows increasingly smaller margins and larger percentages of agencies operating at a loss?
CMS states in the proposed rules that they understand the importance of preserving access to home health, yet they are actively contributing to a reduction in these services. New quality measures that CMS will use to influence payments include those that will be diminished by this reduction in supply and its impact on referral rejections. Here is a list of these measures, from my AI assistant, that I believe will be influenced negatively by these CMS cuts and their impact on home health supply.
“There are several home health quality measures in the Home Health Value-Based Purchasing (HHVBP) program that relate to timely referrals to home health agencies:
1. Timely initiation of care: This measure assesses the percentage of patients who receive home health services within two days of a referral.
2. Rehospitalization: This measure evaluates the rate of unplanned rehospitalizations within 30 days of discharge from a home health agency, which can be influenced by timely referrals and appropriate care transitions.
3. Improvement in ambulation: This measure assesses the percentage of patients who show improvement in their ability to ambulate during the course of their home health services, which can be impacted by timely referrals and early interventions.
4. Improvement in bathing: This measure evaluates the percentage of patients who show improvement in their ability to perform bathing activities, which can be influenced by early access to home health services.
5. Improvement in pain interference: This measure assesses the percentage of patients who experience a reduction in pain interference with daily activities, which can be impacted by timely referrals for pain management services.”
Overall, timely referrals to home health agencies can have a significant impact on patient outcomes and satisfaction, as well as on agencies' performance in the HHVBP program.”
Not only are referrals rejections increasing, but the repeat rejections for the same patient are increasing, further aggravating this problem. Any gains by CMS in spending cuts in the short term are more than offset by the expenses and quality of care decreases created by their short sighted approach to funding access to home care. Any attempts to address these issues outside of home health are more expensive and less acceptable to patients.
What is happening now and what will happen in the future for home health is not visible to us through data, but we can assume it is an extension of the trends we can see. It is time that we understood the truth in these numbers and what they mean. Even when we come to an understanding of the grave situation home health is in, it will take additional time to act on it in a way that will correct the problem. The longer we wait, the more drastic this action will need to be and the more costly it will become.
Comments