Home Health & Hospice Week

Profit margin fluctuation may give you whiplash.

With all the political changes sweeping Washington, D.C., will this be the year Congress listens to the Medicare Payment Advisory Commission and cuts home health agency rates even further?

In its annual report to Congress issued this month, MedPAC recommends that Congress “reduce home health payment rates by 5 percent in 2018 and implement a two-year rebasing of the payment system beginning in 2019.”

That would strip up to $2 billion from Medicare home health spending in 2018 — 11 percent of the $18.1 billion Medicare spent on home health services in 2015. The changes would cut up to $10 billion over the five years starting in 2018, the report estimates.

“The chronic overpayments Medicare has made need to be addressed,” MedPAC maintains in the report. “These two actions should help to better align payments with actual costs, ensuring better value for beneficiaries and taxpayers without impeding access to home health care services.”

This Year’s Profit Margins May Actually Be Closer To 20%, MedPAC Charges

MedPAC bases much of its justification for the cuts on the explosive growth of the industry after the Interim Payment System concluded and the prospective payment system began, and on its premise that “payments for home health care have substantially exceeded costs since Medicare established the PPS.”

MedPAC points to profit margin figures to prove the latter point, noting that margins averaged 23 percent in 2001 (PPS’s first year) and 16.5 percent from 2001 to 2014.

But the industry has long contested Med-PAC’s margin figures. One of their major flaws is that MedPAC calculates them using only freestanding agencies’ cost report data.

“Margins for hospital-based agencies in 2015 were -14.8 percent,” MedPAC admits in the report. But “the lower margins of hospital-based agencies are chiefly due to their higher costs, some of which may be due to overhead costs allocated to the HHA from its parent hospital,” the Commission justifies.

HHAs are particularly skeptical of Med-PAC’s margin calculations in this year’s report. After reporting a 10.8 percent Medicare margin for 2014 and projecting an 8.8 percent margin for 2016, MedPAC abruptly changed course, declaring a 15.6 percent margin for 2015.

“Margins in 2015 increased approximately 5 percentage points because of a 3.4 percent decrease in costs and 2.3 percent increase in payment per episode,” the report explains.

Furthermore: “The reported margins may be low” for 2015, MedPAC argues. “An audit of 2011 cost reports by [the Centers for Medicare & Medicaid Services] found that a sample of 98 agencies overstated their costs by 8 percent; adjusting for the overstatement of costs, margins for this year would have been in excess of 20 percent.”

HHAs and industry experts dispute this assertion. First of all, agencies complain the Medicare cost report doesn’t capture their costs for many essential items. And because the cost reports no longer lead to any direct reimbursement impact, agencies often don’t take the time and resources to separate out reimbursable costs for the report.

Agencies often will allocate more costs to non-reimbursable product lines in their reports, offers cost report expert Pat Laff with Laff Associates in Hilton Head Island, S.C. Providers have to set up a very specific allocation system to avoid that problem.

Laff questions the surprising 44 percent jump in the profit margin figure from 2014 to 2015, noting that MedPAC’s data and calculations are not transparent or independently verified. Laff notes that he did not see a corresponding jump in margins in the reports he prepared for clients in that time frame.

The margin spike is particularly questionable due to agencies’ increases in costs such as benefit premiums and compensation in a newly reemerging clinician shortage, Laff believes.

MedPAC also fails to factor in the increased costs agencies will be incurring for complying with the new and heavily revised Conditions of Participation, Value-Based Purchasing, and PCR, among other mandates, points out Tom Boyd with Simione Healthcare Consultants in Rohnert Park, Calif.

Plus: The 8 percent overstatement estimate is “a really big amount,” Laff tells Eli. Again, there’s no information about the 98 agencies CMS audited and their report data — particularly whether that sample is representative, he notes.

With the cost reports in question coming 10 years after the advent of PPS, neither the contractor nor the providers had much experience with the documents or their auditing, Boyd says. And HHAs had no incentive to fight determinations that items weren’t allowable.

For example: Quickbooks has an account called “travel & entertainment,” Boyd tells Eli. That would lead to the auditors “tossing the account because of the E-word,” he relates. To dispute that disallowance, the client would have to supply copies of receipts and explanations that the travel is business related. “Most did not bother, for what did it matter?” Boyd observes. Disallowances in the audits caused “no harm or penalty to provider.”

Another example: If an auditor ruled that community education was marketing, an agency had to provide job descriptions, time studies, invoices, and explanations to fight it. “Again, why bother?” Boyd asks.

One more problem: MedPAC doesn’t address the issue of wide profit margin variation among providers. Cutting HHA rates 5 percent would “wipe out the bottom 40 percent of providers” when you look at margins by tier, Boyd says.

What Will Congress Do?

Despite the decreases in the number of agencies and utilization, MedPAC continues with its 5 percent cut and two-year rebasing recommendation. The report notes that most of the decreases occurred in fraud-prone areas that have seen fraud and abuse enforcement such as moratoria, the Pre-Claim Review demonstration project, and HEAT task force investigations.

While there have been reductions in recent years due to Affordable Care Act-required rebasing and case mix creep, “payment reduction recommendations from MedPAC have fallen on deaf ears in recent years and have not been enacted by Congress,” notes The Health Group in Morgantown, W. Va.

But with lawmakers looking to cut the budget and make big heath care-related changes, it’s hard to say what this year will bring. Neither the American Health Care Act nor President Trump’s recently released budget blueprint address home care spending. The Trump administration has said it will release in the future another phase of its budget plan that will more specifically address Medicare changes.

Note: See the home health chapter of MedPAC’s report to Congress at http://medpac.gov/docs/default-source/reports/mar17_medpac_ch9.pdf.