Increasing Regulatory Pressures Could Spur Home Care Consolidation

Although home health care represents one of the nation’s fastest-growing industries, a recent study suggests consolidation might lie ahead as agencies wrestle with maintaining profitability under increasing regulatory pressures.

In the past five years, an aging U.S. population, the prevalence of chronic disease and a movement toward cost-efficient treatment options from private and public payers have all contributed to an annualized revenue growth rate of 4.8% to $74.2 billion, according to a Home Care Providers study from IBIS World.

Despite the strong growth, industry profitability in recent years has been under pressure as government programs, including Medicare and Medicaid, have seen their budgets shrink and federal sequestration has reduced payments to home health care agencies. 

Most recently in November, the Centers for Medicare & Medicaid Services (CMS) finalized a rule under the Home Health Prospective Payment System that will cut Medicare payments to home health agencies by 1.05% for calendar year 2014, resulting in an estimated $200 million less paid to these agencies under the new rule.

While home care saves billions of dollars every year by allowing patients to avoid high-cost settings such as hospitals, according to IBIS World Industry Analyst Jocelyn Phillips, regulatory pressures have impacted profitability for home care agencies. 

“Decreasing federal funding has resulted in reimbursement cuts for the industry and has suppressed operating profit,” said Phillips.

To increase their margins, IBIS World found that industry operators have increased consolidation activity, as larger companies are better able to negotiate with suppliers and can acquire the medications and materials used in home care at lower prices.

Since 2008, the number of home health care companies in the industry has grown at a slower annualized rate of 3.8% compared to the previous five-year period. In 2013, the number of home care companies is expected to reach 303,440 in the U.S., according to IBIS World.

As a result, IBIS World expects industry consolidation to continue in the five years leading to 2018 in light of reimbursement cuts that are expected to continue and a shortage of skilled personnel. 

“To spur new demand and maintain pricing, industry operators are expected to develop healthcare solutions aimed at new markets, such as chronic disease management, a system of coordinated healthcare interventions and communications with an emphasis on patient self-care,” says IBIS World. “This area of healthcare is anticipated to grow in upcoming years, which will provide the industry with the opportunity to compete effectively with institutional care providers like hospitals.”

The Home Care Providers study can be purchased at IBIS World.

Written by Jason Oliva

Jason Oliva