Key Takeaways: Why Home Health Agencies are Heated at CMS for the 2023 Proposed Rule.

CMS is cutting home health reimbursement in its 2023 proposed rule, even going as far as saying that it overpaid home health agencies by $2 billion over the past 2 years based on a retrospective calculation.

Home health agencies are heated and arguing that the CMS calculation is faulty and cuts in the current operating environment are draconian.

MedPAC thinks cutting home health reimbursement is fine and agrees with the CMS methodology.

Home health operators and trade groups are working with a few members of Congress to pass the Preserving Access to Home Health Act to circumvent CMS shenanigans and statutory requirements.

Continued cuts to home health, a sector with a ton of potential and growth as seniors desire aging in place, will cut innovation and dis-incentivize investment in the space as margins get squeezed.

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Backstory – CMS cuts home health in proposed rule.

Here’s some initial context on what’s going on. Every year, the Centers for Medicare and Medicaid (CMS) makes (make?) payment updates for the 9 fee-for-service verticals (home health, hospice, outpatient care, etc.). A lot of these changes are based on predefined rules that CMS must follow.

To begin the process each year, CMS sends out a ‘proposed’ rule and gives constituents a chance to comment on the proposals or give feedback on certain provisions.

In mid-June, CMS issued the 2023 proposed payment rule for home health providers. Bottom line – based on a few nuanced adjustments, most notably the -7.69% ‘behavioral assumption’ adjustment to payments, CMS proposed cutting reimbursement to home health by 4.2% overall, or $810 million compared to 2022 rates.

Behavioral Adjustment? The behavioral adjustment stems from a CMS analysis conducted in hindsight after it implemented the new home health payment model, PDGM (the “Patient-Driven Groupings Model).

After CMS implemented PDGM, it calculated the difference in Medicare expenses between the following:

  • Total calculated payments for a set of claims in 2020 and 2021 under the OLD payment system (case-mix system), versus
  • Total actual payments for those claims under PDGM

Based on this analysis (that home health operators take issue with, but we’ll get into that), CMS estimated that it inadvertently overpaid claims under the first 2 years of PDGM by $2 billion. Because CMS has to be budget neutral as mandated by statutory requirement, CMS was forced to add the 7.69% ‘behavioral’ adjustment to the proposed rule for 2023 in order to bring payments in-line with budget neutrality. I should note that this cut is on top of a 4.36% cut that CMS implemented in the same year as PDGM for the same reason as noted above.

Why home health operators aren’t happy with CMS.

As you can imagine, the huge cut to home health reimbursement is controversial.

Home health players are beside themselves and are making their voices heard in the comments. Besides vocalizing vehement disagreement, here are some of the more interesting arguments laid out by the operators:

Faulty Methodology: Home health operators and the AHA argue that the methodology CMS used to calculate the behavioral adjustment is faulty given that incentives between the two payment models are different, especially when considering therapy visits under PDGM. Under PDGM, payments are based on the clinical characteristics of the patient rather than the total number of therapy visits (old case-mix system).

  • Home health operators are confused as to why CMS wouldn’t acknowledge that budget neutrality calculations for a new payment system can fundamentally change the scope of services in that service vertical, when it literally did just that in its budget neutrality calculation for the SNF model. Notably, CMS didn’t publish the data it used in calculating the 7.69% behavioral adjustment. That seems like it would be…important?

Sustained Inflation: While the Fed initially described inflationary pressures as transitory, it has persisted throughout 2022, hitting a high of 9.1% in June. Provider organizations are experiencing the effects of inflation most in labor – in some cases, 10+% growth year over year – drugs and medical supplies, and finally G&A expenses. In home health, a substantial portion of spend sits in gas fees reimbursed for its home health aides. Although energy prices are volatile, gas prices are stupid high in 2022. Costs per visit from using contract labor and the impact of inflation mentioned above are creating huge pressures on margin for home health operators in 2022, factors that CMS and MedPAC fail to consider.

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Rising Acuity: In one of the more interesting comments, WellSky lays out recent patient acuity (complexity) trends, including the fact that patients are staying longer at hospitals. WellSky argues that home health cuts would actually lead to higher costs for CMS since these higher acuity patients would have to seek care in facility-based settings, which cost more than home health. WellSky goes on to say that continued home health cuts would destroy patient access considering the secular growth trend in Medicare – the program will increase by 36 million individuals over the next 10 years.

Medicare Margin Dynamics: In most other fee for service verticals outside of post-acute care, commercial insurance reimbursement typically subsidizes other payors and allows provider organizations to generate margins to reinvest into the biz. Post-acute is different in the sense that Medicare can comprise 60+% of its payor mix. As a result, home health operators are arguing that Medicare actually takes on the role of the commercial payor in the post-acute industry and subsidizes lower reimbursement rates from MA, Medicaid, and the VA. Although MedPAC calculates an average Medicare margin of 20+%, that doesn’t equate to the full picture. In fact, the National Association for Home Care & Hospice analysis shows that over 50% of home health providers are operating on negative overall margins.

I could go on with some of the finer points, but the arguments above are a pretty good snapshot into how most home health agencies oppose the ruling.

Here are some comments from publicly traded operators as well on their Q2 2022 transcripts:

The topic on everyone’s mind has been the proposed home health rule for 2023. As most of you know, on June 17, CMS released the 2023 home health proposed rate update, which detailed a reduction to overall home health payments by the aggregate amount of 4.2%. As you’re all aware, the driver behind this reduction is CMS’ proposed permanent cut of 6.9% to the 30-day base payment rate that was derived from a 7.69% permanent behavioral assumption adjustment…

It is also confusing to us in the industry as well as members of Congress and congressional staff why CMS is making such a drastic cut to reimbursement during times of extraordinary inflation. With that being said, we have been preparing for this scenario and have been in discussions with our congressional champions for months to formulate a thoughtful legislative approach that prohibit CMS from instituting these drastic proposed cuts…

This would allow time for the industry and CMS to work on a much more reasonable and predictable methodology that adequately measures the impact in transition from old HHRG 60-day payment system with the new PDGM 30-day payment system as well as fully accounting for the impact that COVID-19 has had on utilization, patient mix and the level of care provided by home health agencies. Based on limited data and information released by CMS to date, the proposed cut to reimbursement in 2023 appears to be the result of a flawed methodology and lack of full recognition of current labor inflation. Now that the bill has been introduced, we, along with the industry, will continue explaining to staff and members of Congress the impact of the proposed cuts on home health agencies, patient access and the need to pass this legislation by the end of the year.” Christopher Gerard, Amedisys

And the Pennant Group:

We were disappointed with the framework of the Medicare home health proposed rule, which applies a permanent cut of 6.9% to the 30-day base payment rate offset by a market basket update of 2.9%. CMS’ methodology in making permanent cuts related to behavioral adjustment uses incomplete data from a truncated period during a global pandemic and would dramatically reduce reimbursement for home health services during a period of intense inflationary pressure. Together with peers throughout the industry, we look forward to working with CMS and partners in the legislative branch to pursue solutions that work better for beneficiaries and providers.” John Gochnour, the Pennant Group

MedPAC defends the CMS methodology.

Usually, MedPAC’s main arguments revolve around its calculated Medicare margin and whether that margin is sufficient enough to maintain adequate access to care for Medicare beneficiaries.

In its March 2022 report to Congress, MedPAC recommended that Congress reduce home health payments by 5% and calculated home health agency Medicare margin of 20.2% (AKA, Medicare payment less total Medicare cost of care divided by total Medicare payment). In 2020, that margin was 22.9% and MedPAC projects Medicare margin to be 17% in 2022.

Based on MedPAC’s methodology (protecting access), the adviser stood by CMS’ proposed rule and even went so far as saying that CMS could even cut reimbursement further (in addition to recoup the $2 billion in overpayments made in 2020 and 2021). MedPAC lays out the case that home health payments are more than adequate across its usual lines of reasoning and criteria:

  • Access to care – is the supply of providers sufficient and trending in an appropriate direction, how is the volume of services trending, and is Medicare margin sufficient to sustain access?
  • Quality of care – are outcome measures for home health adequate?
  • Access to capital – can home health agencies tap capital markets for credit needs?

Bottom line: MedPAC thinks that Medicare payments to home health agencies are excessive.

The Commission strongly supports the 7.69 percent reduction to lower home health spending as required by law. As noted in our March 2022 report to the Congress, Medicare has long overpaid for home health care, and lower payments would better align payments with costs.”

Madden’s Musing.

While CMS hasn’t yet issued a final rule and won’t til November, I have to think that CMS scales back the cuts based on the responses outlined above. The wildest part about MedPAC’s defense is the fact that inflation isn’t mentioned once in the document. Although MedPAC mentions the impact of cost inflation in its March report, the adviser downplays its impact on home health agencies.

Like I mentioned and as several home health operators outlined thoroughly in their comments, the methodology CMS is using to calculate the difference in overpayments seems to be based on some faulty logic during a period of time of great unrest during the public health emergency. Although MedPAC claims that the PHE didn’t have an impact on the calc, I have to think there’s a fair degree of noise in the data.

I’ve discussed on this newsletter ad nauseum the labor shortages and inflation struggles that provider organizations are facing in 2022 and likely 2023.

Although labor inflation should make its way into Medicare reimbursement through the wage adjustment and capped reductions, the bump still won’t be enough. What policymakers seem to fail to realize is that the home health tech making $10 an hour can simply go down the street and flip burgers at McDonald’s, drive Uber, or grab a shift in an Amazon factory for $15+ starting wage. That’s the real competition in the labor segment and why payment cuts to home health are straight up dumb.

As seniors age into Medicare and demand of services continues to march in a secular, upward direction, CMS is cutting payments to home health agencies, a key area of massive growth & innovation that allows seniors to age gracefully in their homes, by a projected $18 billion.

Don’t we want seniors to age in place? Shouldn’t we continue to incentivize home health as a low-cost alternative to other post-acute settings and drive investment plus subsequent innovation to this area? Why would we dis-incentivize investment to the lowest cost setting across the post-acute spectrum?

Continued cuts will only accelerate and spur consolidation as smaller mom and pop as well as regional home health agencies go under. What dynamic does that create again? Oh yeah – higher costs, folks. Chew on that, MedPAC.

Bottom Line: I would hate to work for CMS given all of the handcuffs you have from statutory requirements and the stakeholders across a $830B + worth of spending in Medicare and $670B+ in Medicaid.

All eyes will be watching the drop of the final rule in November!


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Blake Madden
Blake Madden
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