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June is upon us. The year is nearly halfway gone, and since the turn of the calendar, there have been a lot of learnings on where the home health industry currently sits — and where it may be headed.
But everything will be reset in the next month when the Centers for Medicare & Medicaid Services (CMS) drops its CY2024 proposed payment rule.
“I think, in general, the broad consensus view is that CMS will pursue completing out the second phase of the behavioral adjustments,” Scott Fidel, managing director at Stephens Inc., told me last week. “There is also still substantial uncertainty around the clawback piece of this, and whether CMS will pursue that, and to what degree. That clearly could create more volatility.”
Anything having to do with the home health business – M&A, payer relationships, staffing, operations – will be affected by that proposal.
No source I’ve talked to has expressed optimism about CMS’ plans.
Now that it’s a month out, I’m breaking down what another backbreaker from CMS could mean for the industry’s future. That is the topic of this week’s exclusive, members-only HHCN+ Update.
Mergers, acquisitions and premonitions
The first quarter of the 2023 saw a historically low amount of M&A activity.
Without clarity on even a proposed payment rule, PE firms are staying away. Strategics may be more inclined to buy up smaller providers, but many of them have griped about asking prices and the amount of high-quality providers left to acquire.
The CY2023 final rule amounted to a 0.7% increase, or $125 million increase, compared to 2022 aggregate payments. But that was due to a phasing in of the negative, permanent adjustment CMS is seeking, totaling -7.85%. Half of that – a -3.925% adjustment – was implemented in 2023.
Providers are expecting the second half of that to come in 2024.
Strategic buyers – such as the larger home health players – may be more inclined to make deals with more certainty. They have to deal with the same landscape as the smaller providers do. For providers with a desire to dive more into value-based care, layering on home health, hospice and home- and community-based care capabilities still makes sense, despite worse Medicare fee-for-service (FFS) payment rates.
But Medicare FFS payment rates have traditionally been the sturdy leg that providers have relied upon to do business. While the Medicare Payment Advisory Commission (MedPAC) has historically viewed those rates as too high in a vacuum, providers argue that sufficient FFS rates are imperative for them to operate.
Without that leg to stand on, taking on Medicare Advantage (MA) patients – which providers are reimbursed far less for – becomes even more burdensome.
This is a problem that all providers – large and small – are grappling with right now.
So, while strategics may be more likely to acquire after the proposed rule than PE firms – which need a clear return on investment – there’s not certainty there.
The best evidence of that is Amedisys Inc. (Nasdaq: AMED) combining with Option Care Health (Nasdaq: OPCH), a deal that valued the former at $3.6 billion. Industry experts have speculated that Amedisys was willing to combine at this time given the future uncertainty of both MA and FFS rates.
“I don’t think there was was much surprise at all to see Amedisys announce that they are merging with another company,” Fidel said. “I think there has been a lot of focus and speculation around whether Amedisys and other large standalone home health and hospice operators would be looking to merge, just given the recent trends that we’ve already seen.”
In other words, if the biggest and baddest home health providers are potentially looking for exits, that leaves even less buyers on the market – at least for now.
PE firms may not stay away completely in 2023 and 2024, but it’s likely they will take a wait-and-see approach until there’s further certainty on what they’re getting into. And, even then, they’re likely to be picky. With that said, it is important to note many PE groups still see massive long-term opportunity in the home health market.
Gone are the days of a ripe market for consolidation where buyers can’t get enough of mom-and-pop exits. For the time being, everyone is on their own in this fight against poor payment rates.
“Home health, hospice and home care dealmaking really took a nosedive in Q3 of 2022,” Rebecca Springer, senior analyst at PitchBook, told HHCN last month. “I expected things to pick back up a little bit more than they have, and I’m a little bit surprised that we haven’t seen more activity in the home health space.”
Innovation, service lines and staffing
Inadequate payment from CMS and MA plans are the cause in this situation. The effects are likely to be wide ranging.
Firstly, a downward trend in the amount of home health agencies in the U.S. will likely continue, but perhaps for a different reason than industry experts previously thought.
Many providers built for FFS payment will simply have to go out of business without the chance to be acquired. The payment may be too low across the board, with the cost of transitioning into a slimmer business able to take on MA patients too high.
“To get Medicare Advantage right, you have to be prepared for a sea change in your cost structure and the way that you operate your business,” Frontpoint Health CEO Brent Korte told HHCN last month. “There’s only so much change any provider can make from a clinician expense perspective. It’s impossible to get the cost structure right unless they’re completely prepared to restructure their organization.”
There have already been documented cases of home health providers going out of business due to this sea change, including Hospice and Home Care of Juneau, the Illinois-based Trinity Health At Home, and Oahu Home Healthcare.
That’s part of the effect, which could lead to reduced home health care access. Another part, though, is fewer quality and innovative existing providers.
Plenty of providers will be in this for the long haul. But with the current payment landscape, don’t expect them to be liberal with new investments – in service lines, in sign-on bonuses, in new care models.
“Our margin is what we use to fund innovation,” Michael Johnson, the head of home health and hospice at Bayada Home Health Care, told me in March. “We have to fund our own innovation. There’s no way to do that when you’re paid [subpar] rates.”
The excitement of venturing into palliative care, hospital at home or SNF at home wanes when there’s more cash-strapped providers in the space.
Further payment cuts certainly won’t help with the No. 1 threat in home health care, either, which is still staffing. Offering competitive wages – or innovative training and retention programs – will also be at least incrementally tougher.
“Labor costs for nurses home health aides are up – in some places, you can’t even find folks,” former VNA Health Group President and CEO Dr. Steve Landers told CMS reps on a stakeholder call that frustrated providers in March. “And one of the reasons you can’t find them is because we’re competing with the hospitals. And the hospitals have differential treatment by CMS under wage index policy.”
Landers’ argument fell on deaf ears that day. Not long after, he announced he was headed out of home health care to take the helm at a senior living organization.
If cuts continue, it may be only a matter of time before other home health leaders follow him.