‘This Has Been Haunting Us’: How Sloppy Cost Reporting Leads To Home Health Payment Cuts

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It’s easy for home health agencies to point the finger at the U.S. Centers for Medicare & Medicaid Services (CMS) for slashing reimbursement rates.

However, some argue that agencies also should take a close look in the mirror, with a point of reflection being around cost reporting.

“These cuts that we’re getting — and the cuts that we have gotten in the past — are the direct result of sloppy cost reporting that we as an industry have allowed to happen,” Arlene Maxim, SVP of clinical services with Axxess, told Home Health Care News. “It’s a huge problem. CMS truly believes that we are making these huge profits and that we don’t deserve it. It’s really unfortunate because many of these organizations are struggling every single week even to make payroll.”


Cost reporting

Cost reporting in home health care, generally, is an analysis of the costs that agencies incur over an entire year. Agencies calculate everything that they’ve spent during the year and fill out a form provided by CMS.

Maxim compared it to tax season, but with a little more rigor involved.

“I actually managed and owned, for a very short time, a home care agency,” Maxim said. “When the cost report would be due in April, we would spend from January to April — to the last minute — making sure we had every single dime that was spent accounted for and allocated in the right place.”


It’s then the responsibility of the agency to present that information to an accountant who, in a best-case scenario, understands cost reporting in the home health space.

Prior to the implementation of the Prospective Payment System (PPS) in 2000, home health providers would spend months on cost reports. At the time, they would have to submit accurate data and were paid based on those cost reports.

“If cost reporting data is inaccurate or unrepresentative of the actual costs of providing care, government estimates of home health agency financial performance – and the policy choices based on those estimates – risk inaccuracy,” Andrew Baird, vice president of government affairs and policy counsel at Enhabit Inc. (NYSE: EHAB), told Home Health Care News email. “If cost reports reflect inaccurate or incomplete information, it can skew the resulting cost category weights away from the actual level of resources necessary to provide high-quality care to every patient wherever they call home.”

The Dallas-based Enhabit is one of the largest independent providers of home health and hospice care in the country. Its footprint includes 255 home health locations and 108 hospice locations across 34 states.

Baird explained that a home health agency’s Medicare reimbursement is — in part — calibrated through updates to the market basket index, which contains seven major cost categories. The relative weights of these cost categories are derived from cost reporting data and ultimately determine which categories drive Medicare payment.

Prior to 2000, CMS would hover the threat of an audit for these cost reports, Maxim said. Then CMS backed off and sent a letter that said they would no longer audit cost reports.

“What happened then is, the smaller agencies who are always trying to ‘save money’ would hire someone who does accounting to look over these cost reports,” Maxim said. “Not necessarily a CPA, but someone who knew how to plug in numbers into certain lines.”

Without the threat of an audit from CMS, cost reporting in home health care started to become unsophisticated and somewhat irresponsible.

Although CMS stopped auditing these cost reports, the government agency did submit data to MedPAC, an independent agency that advises Congress on issues affecting the Medicare program.

“The smaller organizations who think they’re saving money have presented cost reports to the federal government that are very inaccurate,” Maxim said. “They’re very sloppy. There’s no other term to use.”

According to research done by BerryDunn, MedPAC has received cost reports that have shown a home health visit costs as much as $78,432 and as little as 29 cents.

“This has been haunting us for years,” Robert Markette, an attorney with the law firm Hall, Render, Killian, Heath & Lyman, told HHCN. “The numbers are all over the place. The baseline problem is that we don’t report it accurately because we don’t take cost reporting seriously. We give CMS the ammunition they need to make their argument that we’re being paid too much. When in fact, I think we’re severely underpaid.”

MedPAC can only go off of the numbers they receive from home health agencies and their cost reports. Because of that, the federal government has seen some figures where agencies have a 45% profit margin.

“That’s not true,” Maxim said. “I don’t know any agency that has 45% profit. I’ve worked with probably thousands of agencies by now, and we’re lucky if we get or see a 5% profit margin.”

What needs to change

The larger home health agencies in the space generally do a good job of cost reporting, Markette said. Where there needs to be improvement is with the smaller and medium-sized providers who might cut corners and costs by doing these reports themselves.

“Some will have their standard accountant to do it, and that’s not to say these folks are not good at being small business accountants,” Markette said. “But they’re just not appropriately competent to do this kind of reporting.”

Agencies too often look at cost reporting as checking a box during an annual fiscal cycle. Because the ramification of insufficient cost reporting does not directly impact their business, the industry has turned a blind eye to it.

The very first thing any agency should do is to partner with an accounting firm or a private agency that has experience in home health care. It’s not enough to work with someone who has experience in just health care, Maxim said.

“We need to have people that understand our business,” Maxim said. “Otherwise, they’re going to do what they think is OK, but is not OK. We need to find somebody who has experience in home health. Not hospitals, not doctors offices, but home health specifically.”

Providers should also be discussing the impact a new role could have on a cost report and how that could potentially skew the math one way or another.

“For example, roles that are hybrid in nature and contain a marketing or business development aspect will need to be granular enough to allow for separate allocations for cost report purposes,” Baird said.

Another actionable item for agencies is to make their EMR system built in a way that can handle and track reliable financial data, as well as operational data.

As the industry has evolved, so has the way agencies are compensated. Investing in those overlooked areas of the business could go a long way.

“In the old days, you would have a nurse open up a home health agency and it was their labor of love,” Markette said. “They ran the company like nurses and it would be very much about the patients — which is a good thing. But as we’re moving into these more advanced payment systems with value-based purchasing – PDGM and the like – it’s becoming a much more data-dependent space.”

As for CMS, Baird believes it should expand cost reporting to include all payers beyond traditional Medicare.

“Thereby gaining a more accurate and comprehensive view of the overall reimbursement landscape for home health,” he said. “CMS is a critical partner in these large-scale policies and should be at the table from the beginning to partner with the home health community on ways to make improvements to the cost reporting framework.”

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