CMS Proposal Takes Home Health Agency Closure Estimates and ‘Lights Them on Fire’

After federal health care policymakers fine-tuned the Patient-Driven Groupings Model (PDGM) last October with a 6.42% cut based on certain behavioral assumptions, some industry experts predicted there would be a modest uptick in home health bankruptcies in 2020.

“The last time the industry went through this kind of major change was in the late 1990s and early 2000s — moving from the Interim Payment System (IPS) to the Prospective Payment System (PPS) — and you saw a lot of bankruptcies take place,” McBee Associates Inc. President Mike Dordick previously told Home Health Care News. “If you make the comparison to where we are now, there are some similarities.”

Despite steadfast advocacy efforts from the National Association for Home Care & Hospice (NAHC), the Partnership for Quality Home Healthcare (PQHH), LeadingAge and other groups, the outlook today may be even grimmer than it was nine months ago.

In fact, if developing payment and policy proposals are enacted, more than 30% of existing home health agencies could go out of business in 2020, multiple sources recently told HHCN.

There are two big factors that play into that.

For one, the Centers for Medicare & Medicaid Services (CMS) is doubling down on the assumption-based behavioral adjustment baked into PDGM, which is scheduled to go live on Jan. 1. Instead of the original 6.42% cut, the agency is now pushing a behavioral adjustment to the tune of 8%.

Broadly, that 8% figure is based on CMS’s belief that home health agencies will always do whatever it takes to ensure the highest level of reimbursement, whether that means adding extra visits to avoid Low Utilization Payment Adjustment (LUPA) claims or picking more lucrative codes when given the chance.

In theory, PDGM is supposed to be budget neutral, a detail mandated by the Bipartisan Budget Act of 2018.

“Not everybody could afford an 8% cut,” NAHC President William A. Dombi said July 14 during an opening address at the organization’s Financial Management Conference in Chicago. “You might be at a 6% margin [level]. That means an 8% cut puts you underwater.”

Nationally, freestanding home health agencies had an aggregate margin of 15.2% in 2017, according to new data from the Medicare Payment Advisory Commission (MedPAC).

But MedPAC’s calculations have historically been inflated, critics argue, with the actual home health profit margin much closer to 2%. A big reason for the mismatch: MedPAC discounts many clinical and business expenses that are part of the home health care landscape, including marketing fees and the use of pricey technology tools that have long been excluded from Medicare cost reports.

Although CMS is comfortable making assumption-based cuts in the home health world, the agency has taken steps to avoid doing that in other settings.

For example, CMS officials have noted that they “do not make any attempt to anticipate or predict” skilled nursing provider reactions to the Patient-Driven Payment Model (PDPM).

“I think behavioral adjustments are something that this industry really shouldn’t tolerate,” Amedisys Inc. (Nasdaq: AMED) CEO and President Paul Kusserow said in September 2018 at the HHCN Summit. “The idea that [CMS] knows what we’re going to do — particularly if it’s bad, even before we do it — is just wrong.”

There is currently legislation in both the U.S. House of Representatives and Senate to prohibit assumption-based cuts from CMS — with wide bipartisan support.

While the industry awaits a resolution from lawmakers, there’s another emerging potential issue that spells financial disaster for home health agencies next year: the phasing out of pre-payments.

In its proposed payment rule released July 11, CMS highlighted its intent to reduce home health Requests for Anticipated Payment (RAPs) to 20% in 2020 for existing agencies and eliminate them completely by 2021. New home health agencies will be shut out of RAPs entirely starting in 2020.

In general, RAPs give home health agencies upfront financing to pay their workers and cover key costs. They’re commonly used by smaller, mom-and-pop providers with a money-in-money-out operating model.

“That will take these small agencies out,” Dordick told HHCN last week. “I thought the 30% [home health closures] number was going to happen at one point or another regardless. The RAP thing just takes previous estimates and lights them on fire.” 

For context, about 25% to 30% of existing home health agencies went out of business in the 1990s and early 2000s with the transition of IPS to PPS.

“It’s going to be a terrible situation,” Dordick added.

A variety of variables impacts agency cash flow, namely days to RAP, days to final claim, case-mix and periods per patient. Depending on how all those variables shake out and if RAPs are reduced, some agencies may experience cash flow losses as high as 26% moving from December to January, and upward of 43% from January to February, according to estimates compiled by BlackTree Healthcare Consulting.

“In basically all scenarios, you’re going to see a negative impact in January and February,” Nick Seabrook, managing principal and founder of BlackTree, told HHCN. “Depending on what your ‘new’ PDGM looks like in terms of case-mix or periods per patient, you then really start to see [cash] flow stabilize in that April-and-beyond time period.”

With that in mind, days cash on hand is going to be crucial moving into PDGM, Seabrook noted. Getting cash in the door from non-Medicare payer sources in a timely manner will likewise be critical, as will making accounts receivable as streamlined as possible.

“If you have a bunch of unbilled claims at the same point and you’re not billing as much, you’re going to have really, really significant cash flow issues,” Seabrook said.