Home Health Bankruptcies Likely to Rise After PDGM

Although a fairly common practice in the senior housing and skilled nursing worlds, home health providers as a group have largely avoided bankruptcy proceedings, partly thanks to a steady reimbursement landscape and increasing demand for services by older Americans hoping to age in place.

If history serves as any guide, that’s likely to change under the Patient-Driven Groupings Model (PDGM) and the inevitable market disruption expected come Jan. 1, 2020, McBee Associates Inc. President Mike Dordick told Home Health Care News.

Wayne, Pennsylvania-based McBee is an independent health care services and consulting firm that works with providers across the continuum of care.

“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,” Dordick said. “If you make the comparison to where we are now, there are some similarities.”

Mike Gustafson, a Chicago-based attorney with international law firm Faegre Baker Daniels LLP, seconds that notion.

As a general rule, bankruptcies in any industry tend to climb whenever there’s a significant change, especially one that affects revenue and cash flow simultaneously, Gustafson told HHCN.

“[PDGM] definitely seems to have the potential to be this external force that causes disruption to the industry, both decreasing revenues but also in that it affects cash flow,” he said. “That can really be a recipe for danger to any business that is either caught unaware or doesn’t properly prepare.”

The great unknown

Calculating the exact number of home health provider bankruptcies that have been filed over the years is extremely difficult, experts say, because a dedicated database does not exist.

There are, however, a handful of ways to help gauge or estimate frequency.

For example, going back to 1980, there have been nearly 300 bankruptcy cases involving providers with the phrase “home health” in their business name, an HHCN review of electronically filed court records found.

Of those cases, only 50 or so were filed in the past decade.

“There are bankruptcies taking place in home health right now, but they’re very infrequent,” Dordick said. “Most organizations that are in home-based care are fine and can weather the storm. They don’t have the issue of potentially not having enough cash. It’s nowhere near what you see with skilled nursing facilities (SNFs) and the senior housing world.”

From 1999 to 2002 — a much shorter period — there were at least 117 total bankruptcy cases involving home health providers, the HHCN review found.

Timing wise, that spike matches up perfectly with the shift from IPS to PPS.

PPS, the current payment model for Medicare home health services, went into effect on Oct. 1, 2000. Broadly, the implementation of PPS was mandated by the 1997 Balanced Budget Act in response to soaring Medicare home health spending, with IPS serving as a stepping stone to the model.

While in place, IPS established lower per-visit payment limits, in addition to a per-beneficiary average cost limit on home health agencies.

“People appreciated that [PPS] was a necessary process, but it was still an unknown,” Dordick said. “And back then, it wasn’t necessarily the poorly clinically run agencies filing for bankruptcy. It was just ones that couldn’t make the necessary changes quickly enough.”

Another way to more loosely evaluate home health bankruptcies is by looking at provider closures, assuming the two are somewhat related.

Only a few hundred of the roughly 12,000 home health agencies in operation have closed over the past five years, with most closures happening in highly competitive, saturated markets, National Association for Home Care & Hospice President William A. Dombi told HHCN. Those markets include Florida, Illinois, Michigan, Ohio and Texas, according to Dombi, who said NAHC tracks closures using termination notices posted by the Centers for Medicare & Medicaid Services (CMS).

In comparison, back in the 1990s and early 2000s, the home health industry lost about 25% to 30% of existing agencies, Dordick said.

PDGM’s cash flow impact

As the biggest payment overhaul for home health agencies in nearly two decades, PDGM will shake up operations in several key ways, particularly when it comes to the delivery of therapy services, the timing of visits, the frequency of billing and the specificity of clinical coding.

The model will likewise have an impact on cash flow, most notably in the first few months after implementation.

In fact, some providers may see their cash-flow levels drop by double digits in January and February under PDGM, before picking back up in March, according to industry analyses.

“Cash flow can be a real serious issue, especially when you think about it from a bankruptcy standpoint,” Gustafson, who typically handles bankruptcy cases for senior housing clients, said. “Most bankruptcies are filed not because somebody has a bad business idea or bad management … a lot of times it is just you can no longer fund. There’s no capital available for use.”

With that in mind, home health providers should think long and hard about the use of capital leading up to PDGM, perhaps scaling back on M&A activity or the launch of expensive new programs.

Additionally, providers should start talking to their referral sources about PDGM, Dordick said.

“We’ve been advising people that you need to do everything you can to make sure receivables are as clean as they can be, that orders are being signed timely, that you’re educating your referrals sources,” he said. “It’s worth the time so they understand what’s coming with PDGM, the types of documentation you’ll need that’s different from what you need today.”

Chapter 7 — also known as liquidation bankruptcy — is the expected bankruptcy filing route for home health providers, Gustafson said.

No ‘panic in the streets’

To help prepare providers for PDGM, NAHC spent the early part of 2019 holding educational sessions across the country. From his perch atop the organization, Dombi believes that the industry is much more prepared for PDGM than when PPS came down the pike.

More than 3,000 individuals participated in NAHC’s PDGM educational sessions, he said.

“It’s still nine months away and there’s a long way to go — none of this happens overnight in terms of change,” he said. “But the fact that they are getting seriously prepared for PDGM — if that is an indication of how the industry at large is doing — I think the transition is one we’ll be able to make. The wildcard, of course, is the behavioral adjustment.”

It’s also important to note that some providers stand to gain under PDGM because of their patient case-mix, Dombi said.

In other words, the broad level of preparation and PDGM’s mixed reimbursement projections may lower the odds of widespread bankruptcies taking place.

“I don’t see panic in the streets. I don’t see high anxiety,” he said. “Typically if you’re going to see bankruptcies, you’re going to see some of that already.”