M&A Experts: COVID-19 Has ‘Camouflaged the Initial Impact of PDGM’

Home health care is beginning to manage the COVID-19 crisis at a more sustainable pace, and early signs have suggested that the Patient-Driven Groupings Model (PDGM) may not have been the boogeyman that some providers suspected it was.

But the rosy outlook of the first six months of PDGM may be premature. Federal relief funding could have created some artificial safety nets for providers that would have been more adversely affected by the new payment model, which was implemented on Jan. 1.

“PDGM has kind of been pushed to the backburner, and appropriately so. Nonetheless, implementation still took place,” Mark Kulik, managing director of The Braff Group, told Home Health Care News. “And that new system requires home health leadership to embrace a whole new coding system if they’re going to be effective and embrace a whole new expectation for cash flow.”

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But cash flow has been inflated for many health care providers due to COVID-19. The U.S. Department of Health and Human Services (HHS) has distributed over $175 billion to hospitals and health care providers during the public health emergency, which was declared on March 13.

Additionally, many agencies have received money from the Paycheck Protection Program (PPP), which has provided home-based care providers extra cash to pay workers and even implement hazard pay for the ones dealing directly with COVID-19 patients.

“There’s a number of agencies out there that have received checks from the CARES program, or from unique programs like PPP, and those kinds of programs have provided substantial liquidity for them,” Kulik said. “And that’s during a time that PDGM was projected to remove that liquidity and require them to be much more efficient in terms of how they run their businesses. So COVID-19 has kind of camouflaged the initial impact of PDGM.”

Initial data regarding reimbursement under PDGM shows a first-period case mix jump to the 1.30 range during Q1, with second-period case mix jumping to the 0.80 or 0.90 range, according to the Pennsylvania-based health care consulting firm McBee Associates.

Broadly, that suggests fairly positive outcomes from PDGM in the first few months of 2020.

The providers that prepared sufficiently for the model, then, are most likely performing well under PDGM, and also with COVID-19 patients, who tend to be more complex. That’s due to providers spending time in 2019 on adjusting to care for complex patients more successfully.

Those that haven’t, however, may be hard to identify right now.

“Once things return [closer to normal], we will return to where the industry was at the first of this year,” Kulik said. “That will expose who the better leaders are, who’s running their businesses more efficiently, who’s being more creative and how they’re managing new standards of gross margin, expenses and profitability.”

COVID-19 has blurred the home health space. But the realities of PDGM, plus the longer-term financial implications of COVID-19, will catch up eventually.

That could mean that some of the larger home health providers — who were preparing for major M&A opportunities due to PDGM — may get their shot at the back half of the year.

“The impact of the COVID-19 will only accelerate the fragmented portion of the industry, creating more opportunities for some of these larger companies,” Viral Patel, a credit analyst at S&P Global Ratings, recently told HHCN. “If you think about the top five or 10 home health providers, they’re very sizable relative to those at the bottom 90%. I think [COVID-19] will probably just accelerate the consolidation, but the problem here is obviously that there’s gonna be some prudent liquidity management and risk management to make sure that there’s capacity. But I wouldn’t be surprised if in the back half of this year, there’s some more [M&A] activity.”

Even if early returns of PDGM data suggest it’s better than some providers’ worst fears, that doesn’t mean that the bottom 90% is out of hot water yet.

Once COVID-19 federal funding subsides, or at least slows down, that’s when a clearer picture of the post-PDGM landscape will turn up.

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