How The Sausage Gets Made: Inside CMS’ Home Health Payment Rulemaking Process

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Every year, industry stakeholders anticipate the U.S. Centers for Medicare & Medicaid Services’ (CMS) release of the home health proposed payment rule and the final rule.

The final rule’s provisions and updates determine what the Medicare home health landscape will look like for the foreseeable future, but sometimes providers aren’t well-versed on the ins and outs of the rule-making process.

On an annual basis, there are several steps that CMS routinely goes through to put together the home health proposed payment rule.


It begins with the annual inflation update, otherwise known as the market basket index.

“That process to get to the proposed rule has two main elements to it,” National Association for Home Care & Hospice (NAHC) President William A. Dombi told Home Health Care News. “One of them is to look at what the formula is for determining the annual inflation update, and that examines a variety of cost elements and the weight given to those cost elements.”

Periodically, there’s a rebasing of the market basket index, and a revision to the weights given to each element, according to Dombi.


“That would entail examining what the inputs are, and then what the sources of those inputs might be,” he said. “CMS uses a combination of numbers from the cost report and Bureau of Labor Statistics data.”

This first step is for CMS to determine whether it will stick with its most recent formula or make adjustments.

Data is then sent to an outside firm that CMS uses to forecast what the inflation rate was estimated to be for the particular year. This year, CMS likely used data from the third or fourth quarter of 2022, Dombi noted. 

“The forecasting methodology is employed to say, ‘Okay, if this is what the trends look like, this is what the inflation in cost will be during 2024,’” he said. “It really is a prediction of inflation costs.” 

Budget-neutrality adjustment — which has received industry pushback after the switch to the Patient-Driven Groupings Model — is also a big factor when it comes to the proposed rule and the proceeding final rule.

Achieving budget neutrality is a fairly complex process, health care policy expert Lisa Grabert told HHCN.

“CMS has rules that they have to follow [regarding] budget neutrality, and they’re given some flexibility in how they can achieve that,” she said.

Grabert is a research professor at Georgetown and Marquette universities. Post-hospitalization issues within the Medicare program is the focus of her work. She also previously worked as a Capitol Hill aide in the U.S. House of Representatives Committee on Ways and Means.

In general, when CMS makes big changes – for example, going from 60-day episodes to 30-day episodes – those changes have to be budget neutral.

“They have to go back to the old payment system, and make sure that any of the changes made to the new system, in comparison, are totally neutral from a budgetary standpoint,” Grabert said. “When you change a payment system, you embed different incentives in place, and so people will behave differently. When they behave differently based on those incentives, those are not intended behaviors from payment reform.”

Grabert noted that home health providers and advocates find this controversial because CMS is still monitoring those behavior changes, and then recouping money based on a comparison to the old payment system for unintended behavior changes.

Another component of the proposed rule is the wage index.

The wage index is a collection of: information from the Census Bureau; information from the Bureau of Labor Statistics; and information from CMS’ own claims data, relative to what’s changing from year to year and relative to the cost of labor throughout the country.

“The wage index is an often overlooked – but very important – element in how much the provider is ultimately paid, and it changes from year to year,” Dombi said.

CMS also takes another step, having to do with the outlier. Outlier payments are meant to reduce the risk of caring for extremely high-cost cases.

By statute, the outlier is intended to spend no more than 2.5% of the total spend in home health. CMS has to figure out the formula for applying the outlier based upon the previous year’s experience.

“In particular, looking at the fixed dollar-loss ratio,” Dombi said. “That is something that, on a year-to-year basis, goes up or goes down – sometimes very little, never usually very much, in order to fit it within that 2.5% budget.”

The final component of rule-making is focused on case mix weights. CMS looks at claims data to see what resources, on average, have been applied to each case mix category. This process helps CMS determine if they need to recalibrate.

Ultimately, Congress also has the power to step in and make modifications.

“For example, Congress can say, ‘Regardless of what the forecast would work out to be for the market basket index, we’re going to set it for X,’” Dombi said. “They’ve done that multiple times over the years. Sometimes, Congress steps in with an even bigger change like they did with PDGM, and says, ‘We’re changing the whole model.’” 

In the weeks between the proposed rule and the final rule, there is a 60-day comment period that takes place. This time gives the general public the ability to submit formal comments to CMS.

“Within that 60-day comment period, there is a pretty big attempt to try to get CMS to change something from what they proposed,” Grabert said. “After the 60-day comment period closes, CMS looks through all of those comments. They try to identify themes where they have consensus, and they use those comments to inform what they will put in the final rule.”

The comment period and general advocacy from trade associations can factor significantly into what becomes the home health final payment rule, a CMS spokesperson told HHCN in an email.

In order to determine the final rule, CMS also looks at the market basket index again, using more recent data than they had for the proposed rule. The agency also has a more complete set of claims data to determine the recalibration. This can also lead to a potential revision of the outlier analysis that’s done on the fixed dollar loss ratio.

On the flip side, the budget neutrality adjustment likely won’t change from year to year with PDGM.

“It’s not like they’re going to move to a new calendar year of data,” Dombi said. “They kind of stick with what they’ve done for the proposed rule.”

The comment period for the 2024 proposed payment rule closed on Aug. 8, 2023. CMS is expected to finalize the payment rule in late October or early November.

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