Home Health & Hospice Week

Knowing your costs is essential.

If you're worked up about P4P, potential 2007 rate cuts or ABNs, you might be overlooking a huge threat to your home health agency.

The growth of managed care market penetration, particularly for Medicare managed care, will affect HHAs more than any of those more headline-grabbing events, warns consultant Tom Boyd with Rohnert Park, CA-based Boyd & Nicholas. Extremely low payment rates and unreasonable contracts will drive HHAs out of business much more quickly than more obvious developments.

Forecast gloomy: Now that the Democrats have won control of Congress, the growth seen under the managed care-friendly Bush Administration may slow. But rising Medicare costs are sure to provide more than enough incentive for law- and policymakers to continue to turn to managed care for cost-cutting solutions.

The industry's growing concern about managed care was evidenced by the number of managed care-focused sessions offered at the National Association for Home Care & Hospice's annual meeting in Baltimore in October--one in nearly every time slot.

"Everything changes" when an agency's managed care clientele tops 50 percent, said Kristy Wright, CEO of the VNA of Western Pennsylvania, in an Oct. 17 session. "When you hit 40 percent, you really start to feel it. At 50 percent, life changes." The Butler, PA-based VNA went from 30 percent managed care to 60 percent in about 18 months, Wright told conference attendees.

Use these steps to make sure your managed care contracts are as favorable as possible:

1. Know your costs. Before you can figure out whether you can accept a managed care payment rate, you must determine your direct cost, advised Greg Roof, director of finance for Adventist Home Health Services based in Silver Spring, MD, in the Oct. 17 session, "Lessons Learned: Agencies' Experiences with Managed Care."

Direct cost includes salary, benefits, mileage and any other compensation to clinicians. It also includes medical supplies covered under the payment rate, the cost of case management and the cost to bill. Remember that when you have to obtain pre-authorization or jump through lots of other billing hoops, the cost to bill will go up, Roof cautioned.

2. Figure your contribution margin. Once you know your direct costs, you can subtract them from the net revenue to arrive at your contribution margin, Roof explained. The contribution margin covers your fixed or general and administrative costs, such as rent.

Example: If the managed care company proposes to pay you $90 per visit and your direct cost is $85, then the $5 contribution margin will go toward your fixed and G&A costs.

3. Shoot for full cost. When negotiating with managed care payors, Elaine Stephens, CEO of VNS and Hospice of Greater Rhode Island, works to get "full cost" rates, she told attendees. But her Lincoln, RI-based agency may also accept direct cost plus an acceptable contribution to overhead, she allowed.

Pitfall: You should never accept a contract for less than your direct cost, Roof warned. "If you don't cover your direct cost, you won't make a dime," he said. "It doesn't matter how many visits you do."

That's why it's so important to know your direct cost accurately, Roof stressed. "No business is better than bad business."

And don't fall for the trick of exchanging basement-level payment rates in exchange for promises of patient volume. Managed care organizations rarely make good on their volume projections, Roof contended.

"In most cases, it's better to be small and profitable than larger with losses," Roof recommended.

4. Press your advantages. Don't be afraid to negotiate with your managed care payors. If you're the only provider in town, use that weight, Roof urged. And if you're part of a larger health care system, use its leverage to your advantage too.

Be sure to tout your high quality services and care, perhaps with concrete numbers like patient outcomes. And promote your accreditations, Roof said.

"Managed care wants to pay the lowest rate, but they also don't want to incur the wrath of their beneficiaries for poor service," Roof counseled.

5. Assess your contracts. Stephens' VNS, which has 48 percent of its clients on managed care, runs monthly reports of profit and loss by payor source, she said.