Where It Pays for Home Health Agencies to Spend More

Home health agencies are feeling a serious squeeze on their margins due to a host of factors, including Medicare cuts, managed care cost containment, rising wages, and a forthcoming pre-claim review from the Centers for Medicare & Medicaid Services (CMS). This environment is making an always important question even weightier than usual—namely, where agencies should cut costs and where they should invest to drive productivity.

Neighborhood Health—based in West Chester, Pennsylvania, and part of the Penn Medicine system—is among the home health providers facing new challenges to keeping a healthy margin.

Since he took over as interim CFO 13 years ago, Neighborhood Health has grown annual revenue from $8 million to $22 million, but that increased revenue hasn’t spared it from the industry headwinds that are challenging gross margin, said David Berman, speaking Monday at the National Association for Home Care & Hospice (NAHC) Financial Management Conference in Las Vegas.


Neighborhood is navigating the financial headwinds through a variety of strategies, Berman said, and one major guiding principle is to resist the impulse to cut costs simply to see an immediate impact on financials. Berman also is a principal with Simione Healthcare Consultants, specializing in mergers and acquisitions, and in this role he has seen companies fail because they have an imbalanced approach.

In an effort to right the financial ship, leadership at one large but struggling home health provider continually cut costs by reducing staff, Berman shared. However, the margin kept eroding until the company was dismantled and sold.

“They weren’t smart about what they were doing,” he said. “They just saw the pure dollars-and-cents without understanding the process … They weren’t as focused on growing the revenue as cutting costs.”


While each agency needs to evaluate its own situation and make decisions accordingly, the following are three areas in which they may be wise to consider allocating more resources even in a challenging financial environment, according to Berman:

1. Clinical Informatics Staff

A pervasive and persistent challenge for home health is caregivers who do their documentation outside of patients’ homes. As an example, Berman cited a nurse who said home health was a great fit because she could see clients, be home in the afternoon when her children got off the school bus, and then do her documentation at night when they were asleep. This is a common scenario, and it seriously compromises an agency’s productivity and patient outcomes, Berman cautioned.

This is because documenting in the home is more efficient, as the caregiver does not have to jog his or her memory about what care was provided, what condition the patient was in, and other essentials. And the higher quality documentation done on-site naturally also contributes to better care and outcomes.

To increase documentation in the home, Neighborhood employs two clinical informatics nurses. These are former field nurses who are experts in how to use the Neighborhood IT system, who go in the field with clinical staff and show them how to be more efficient in their on-site documentation.

“They can get about 90% of the documentation done in the home,” Berman said. “The clinician who is with them, when the [informatics] nurse is not there, they get about 50% done in the home. So, that education … can give them something I can’t give them, our CEO can’t give them.”

The little money that is spent on the informatics staff has gone a long way to improving productivity by getting buy-in from staff that in-home documentation can be done, he said.

2. Quality Improvement/Clinical Supervision

Nationwide, agencies allocate about 9.54% of revenue to Quality Improvement/Clinical Supervision, according to Simione benchmarks. This is likely to increase, perhaps substantially, driven by changes such as the pre-claim demonstration occurring in several states nationwide, Berman believes.

Under the pre-claim initiative, agencies in select states will have their Medicare claims pre-reviewed, and those deemed inaccurate will have to be resubmitted.

“If I’m an agency in one of those states, I’m investing some dollars there, even though CMS says you don’t need to,” Berman said. “I’m investing dollars because the cash-flow impact of not is going to be catastrophic to my organization. I need to make sure that … all the boxes are checked, all the documentation is in line, so that when I submit that pre-claim review, I get the authorization, I get the affirmation, the first time.”

For a claim that is submitted a second time, the processing time can be up to 20 days in the pre-claim process, he noted—and this could create a “huge” issue for cash flow.

3. Technology 

Tech may seem like low-hanging fruit to go after when an agency is looking to cut costs. For example, staff members may not be utilizing a particular piece of tech, causing agency leaders to identify it as something that can be jettisoned. But smart agencies are likely to focus more on increasing usage rather than abandoning tech initiatives, Berman said, citing Simione numbers.

“[Agencies] that spend less than 1% [of overall revenue] on IT have the lowest gross margin of anybody in our database,” he said. “Those that spend between 1% and 5% have the highest.”

One reason why increasing IT spend can help with gross margin is that tech can automate certain processes, such as in billing, reducing the need for staff while keeping productivity high. Still, there is a need to make the right judgment call about the level of investment in this area; when the spending on IT exceeds 5%, that correlates with lower revenue, Berman pointed out.

However, the relationship between higher IT spend and healthier margins underscores his larger point, he stressed: “Cutting for the sake of cutting isn’t always the right answer.”

Written by Tim Mullaney

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