With RAP Phaseout Finalized, Writing Is on the Wall for Small Home Health Agencies

When the Centers for Medicare & Medicaid Services (CMS) released its final payment rule last week, the agency all but guaranteed a wave of home health industry consolidation in 2020.

That guarantee comes despite CMS’s move to nearly halve the 8.01% behavioral adjustment included in the Patient-Driven Groupings Model (PDGM).

But in addition to reducing the widely opposed, assumption-based cut, CMS finalized its proposal to phase out home health pre-payments, or Requests for Anticipated Payment (RAPs). As a result, smaller providers are sure to take a financial hit next year, M&A experts told Home Health Care News.

“The industry has had the benefit of having multiple smaller providers that served different niches of the business throughout the country,” Rich Tinsley, CEO and president of M&A advisory firm Stoneridge Partners, told HHCN. “The payment change is going to cause some financial hardships for smaller providers that may not be prepared. You are going to see some of them forced out of business.”

Last week’s final rule lowers the PDGM behavioral adjustment from 8.01% to 4.36%. The assumption-based behavioral adjustment has been a major, ongoing point of contention for home health leaders, though,and the topic likely still isn’t settled entirely. 

Indeed, home health stakeholders could still pursue a remedy through Congressional action.

Industry lobbyists and large providers have pushed for bipartisan legislation aimed at refining PDGM’s behavioral adjustment in both the U.S. House of Representative and Senate.

“We do anticipate that we’re going to see some movement on some meaningful legislation over the next couple of months,” National Association for Home Care & Hospice (NAHC) President William A. Dombi said last month at the organization’s annual conference.

Overall, last week’s final rule increases Medicare payments by an estimated 1.3%, or almost $250 million, according to CMS. That factors in a 1.5% update required by the Bipartisan Budget Act of 2018, as well as a mandated 0.2% decrease to rural add-on payments.

PDGM’s behavioral adjustment is priority No. 1, but a RAP phaseout is nothing to scoff at.

Right now, RAPs provide upfront financing of up to 60% of the anticipated payment for a home health episode. Over the next year, CMS will start to phase out pre-payments, getting rid of them fully in 2021 — a plan that’s part of the agency’s ongoing efforts to curb fraud, waste and abuse.

Historically, RAPs have opened the door for local agencies trying to set up shop and serve their markets without having a large amount of working capital.

Fast forward to 2021: The elimination of RAPs will prevent new home health businesses that are smaller in scale from forming in the first place, according to Tinsley.

“CMS was bridging the gap with these RAP payments,” he said. “When that goes away, you are going to see fewer new agencies come up and fulfill those gaps in different markets. These smaller agencies aren’t going to have the capital to get started and grow. You’ll see fewer companies go from $2 million, to $5 million, to $10 million because pure growth requires working capital.”

With all that in mind, it’s likely the large home health agencies will come out on top in 2020 and onward while leading the charge on home health consolidation at the same time.

And there are several reasons why.

For starters, big agencies have had ample resources to fully prepare for PDGM and a phasing out of RAPs. Amedisys, for example, has already begun operating under PDGM’s framework at 60 of its care centers.

So far, the company is seeing success in its PDGM test runs, Amedisys President and CEO Paul Kusserow said during a third-quarter earnings call.

“The larger [home health agencies] are more sophisticated and have been going through enormous planning exercises,” Mark Kulik, managing director at The Braff Group, told HHCN. “They have access to liquidity, either through established lines of credit or the ability to manage their money more effectively. Those businesses with extra resources will manage through this.”

The Braff Group is also an M&A advisory firm.

Prior to the final rule coming out, Encompass Health, Amedisys and LHC Group had all expected largely minimal to neutral — or even better — bottom-line impacts from PDGM.

In its Q3 call, Encompass Health specifically projected a roughly 1% decrease to its 2020 Medicare reimbursement rate. 

Now that the behavioral adjustment has been drastically lowered — to 4.36% — some of those projections automatically become rosier. 

A day after CMS released its final rule, Amedisys, Encompass Health and LHC Group stock rallied across the board. LHC Group’s stock went up 13.2%; Amedisys’ stock went up 14.5%; and Encompass Health’s stock went up 7.1%.

Nonetheless, providers would do well to remember that this time of change means that everyone will be in “learning mode” in an effort to acclimate to the new requirements, according to Kulik.

“Even though we are talking about agencies, CMS is in learning mode, the fiscal intermediaries are going to be in learning mode. Agencies have been preparing, as well as the software firms that support the agencies,” he said. “Still, its only theory. It’s not until it comes into practice do we really see how all the parts move or don’t move together.”