Why the Proposed Medicare Rate Increase for 2021 Is ‘No Cause for Celebration’

Home health providers have experienced varying degrees of disruption to their business models over the past dozen or so years, from the Patient Driven Groupings Model (PDGM) to smaller regulatory changes.

But at the end of the day, the cost of doing business has gone up. And reimbursement levels don’t reflect that, according to Mark Sharp, a partner at the accounting, auditing and advisory firm BKD.

“For almost 10 years now, [there’s been an] effort to really change the way we deliver health care, taking us from a fee-for-service model to a model that focuses on value and quality,” Sharp said Tuesday at the National Association for Home Care & Hospice (NAHC) 2020 virtual Financial Management Conference. “So we’ve got the pressures of doing business more efficiently, but also doing it differently. That’s what we all have to deal with in today’s environment.”

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The Centers for Medicare & Medicaid Services (CMS) has never properly adjusted rates to match higher costs for at least 12 years.

“Since 2008, we have never once seen a full inflationary rate increase,” Sharp said.

The disruption of PDGM could further slice home health margins. Heading into 2020, the new payment model was the industry’s primary and biggest fear.

Since, it has taken somewhat of a backseat to COVID-19. But while certain regulatory relief has been granted to home health agencies, PDGM’s rollout has not been paused.

CMS’s new proposed payment rule for 2021 would give home health agencies an estimated 2.6% rate increase, which would collectively mean about $540 million more for providers next year. But Sharp doesn’t find that particularly helpful.

“I find it a little bit ironic that we’re celebrating a [2.6%] base rate increase that still doesn’t cover the 3.1% inflation,” Sharp said. “We are in difficult times of maintaining profit margins in a landscape like this. When I look at this payment environment, I would envision we’d be having decreasing margins.”

From 2009 to 2011, profit margins across home health went from 5.3% to 2.8%, according to information shared during the Financial Management Conference. Since then, margins have held relatively steady around that 2.8% number.

“Since [2011], overall profit margins have remained stable. They’re not overly generous, but they’re stable from 2011, all the way through 2018,” Sharp said. “The question that I might ask is that: At what point is it going to become too difficult to maintain those margins?”

Part of the reason CMS hasn’t jumped to increase home health base reimbursement rates is likely due to the Medicare Payment Advisory Commission (MedPAC). For years, MedPAC commissioners have argued that home health providers are overpaid.

And MedPAC’s views of home health margins are far different than the industry’s.

According to MedPAC’s most recent calculations, freestanding home health agencies — about 85% of all agencies — had an aggregate margin of 15.3% in 2018..

“The 2018 margin is consistent with the historically high margins the home health industry has experienced since the Prospective Payment System (PPS) was implemented in 2000,” MedPAC officials in a July report. “The margins from 2001 to 2017 averaged [16.5%], indicating that most agencies have been paid well in excess of their costs under the PPS.”

The antidote to thinning margins

With COVID-19-related costs rising as well as PDGM coming into the picture — though data on PDGM has been encouraging thus far — agencies may need to adapt to keep margins closer to 3%.

Margins were 2.9%, 2.3%, 2.5% and 2.8% in 2015, 2016, 2017 and 2018, respectively.

“We do need to find new ways to streamline our processes and emphasize quality,” Sharp said. “[And] bring about a culture that we’re going to bring in patients, as well as recruit and retain the best staff.”

What Sharp and Stacy Olinger — the vice president of BJC Home Care — suggest is abiding by “lean principles.” St. Louis, Missouri-based BJC Home Care is a provider of home health, hospice, home infusion and palliative care, among other services.

“Lean” is a philosophy of improving workflow by minimizing waste in order to maximize value to the customer, according to Olinger, who presented with Sharp at the Financial Management Conference.

“[Becoming] lean — it is a journey and it’s also more than just a set of tools,” Olinger said. “It is an overall management philosophy and operating system, a production system that really does help you achieve the quadruple aim of health care.”

The philosophy is popular with many big-name businesses, including the car company Toyota. But it has not been applied in home health all that often.

It’s about eliminating non-value-added tasks and activities, implementing low- to no-cost solutions and simplifying processes, among other improvements.

With the not-so-generous rate adjustments, providers taking matters into their own hands when it comes to increasing margins might be their best bet.

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