Home Health & Hospice Week

Bigger is generally better when it comes to profit margins. 

Would you like your home care business to be swallowed up by a Wal-Mart-like corporation in order to make policy-makers happy?

That's what could happen if Medicare favors the providers characterized as "strong" in the General Accounting Office's latest report. In a Feb. 27 report conducted for the House Ways & Means Committee, the GAO says home care providers' inefficiencies -- namely high overhead costs -- have led to home health agency losses under the prospective payment system.

In its study of 2001 and 2002 cost report data, the GAO found an average profit margin of 17.2 percent for 2002 for Medicare HHAs. About 20 percent of HHAs had negative margins, two-thirds had margins of more than 10 percent, and 20 percent of HHAs had margins of more than 30 percent, according to the report, "Payments To Most Freestanding Home Health Agencies More Than Covered Their Costs" (GAO-04-359).

Those figures are fairly close to profit margin data issued by the Medicare Payment Advisory Commission in its annual report to Congress March 1. MedPAC reported an average profit margin of 16.2 percent in 2001, with a projected 16.8 percent profit margin in 2004.

The GAO found both profitable and unprofitable HHAs in all category types it investigated, including rural versus urban and large versus small providers, the report claims.

But small providers are hit hard in this type of analysis, protests Bob Wardwell with the Visiting Nurse Associations of America. They must meet "the high costs of achieving a full level of regulatory compliance" with fewer resources and fewer visits to spread the cost over, Wardwell tells Eli. Those burdens include OASIS training and software, coding training, HIPAA privacy and billing measures, and many other duties.

Larger HHAs tend to have higher profit margins, MedPAC found in its analysis.

It is "particularly distorting" for the GAO to suggest it is agencies' "own fault they are 'weak' because of high overhead costs" that are imposed by the Medicare program, fumes Wardwell, a former high-ranking Centers for Medicare & Medicaid Services official.

The report paints HHAs with losses under PPS as inefficient "losers," says William Dombi, vice president for law with the National Association for Home Care and Hospice's Center for Health Care Law.

The GAO's analysis implies "we should close up all the small and medium size home health agencies in favor of a few 'big box,' highly efficient, bottom-line oriented, mega agencies that will minimize their overhead by spending the absolute minimum on regulatory compliance, staff training, etc.," Wardwell continues.

HHAs that spend money on items that help patients but aren't covered by Medicare, such as home monitoring equipment and care management programs, are penalized under the GAO's assessment, Wardwell adds. Agencies that "refuse to spend a dime that is not recognized as a Medicare expense" benefit in this analysis, he criticizes.

More to Margins than Meets the Eye 

Both the GAO and MedPAC take a number of liberties when toting up HHAs' profit margins, Dombi says. Neither included hospital-based agencies in their figures, which is noted in both reports. MedPAC says the profit margin in 2001 for hospital-based agencies was 2.5 percent.

"Since nearly one-third of agencies nationwide are hospital-based," using the freestanding margins to represent the industry is highly questionable, charges American Association for Homecare CEO Kay Cox.

The GAO and MedPAC claim that overhead costs shifted from hospitals makes interpreting hospital-based HHAs' cost report data too confusing, so it was excluded.

Both bodies also weighted the data in figuring the margins, according to Dombi. NAHC has refuted that practice in its own analysis of cost report data and profit margins (see Eli's HCW, Vol. XIII, No. 5). According to NAHC, one-third of agencies will lose money on Medicare in 2004.

But MedPAC's analysis and spending projections for 2004 are particularly "absurd," Dombi protests. The advisory body to Congress claims HHA margins will be as high as previous years, despite reimbursement cuts and obvious increases in labor, insurance and other costs.

And the projection is based on "trends" from 2001 data, MedPAC says in its report. Since that time, there have been significant cuts to HHA payments, including the so-called 15 percent cut that equaled a 7 percent reduction in October 2002, and expiration of the 10 percent add-on for rural HHAs in April 2003 (although a new 5 percent add-on is slated to begin April 1).

"The margins of 2001 are not the margins of today, after all those cuts," Dombi insists.

Case-Mix Shuffle Needed

Some good news: The reports do point out a problem the home care industry has been trying to get CMS to address for quite a while: readjustment of the PPS case mix categories. The wide variance in profit margins found by both the GAO and MedPAC show that the reimbursement allocation for the home health resource groups (HHRGs) needs some serious fine-tuning, Dombi argues.

"It is time for a thorough review of the case mix weights assigned to particular types of patients to determine whether they accurately reflect the resources expended by agencies," Cox insists.

The GAO particularly urges CMS to improve the accuracy of its case mix adjuster soon. In its report, MedPAC says it "and others should examine the payment system to determine whether refinements might promote access to care for all types of eligible beneficiaries."

In its response to the GAO's report, CMS promises substantial "refinement research" currently is in progress.

NAHC hopes Congress will direct CMS to fine tune PPS payments, "or there's no telling when case mix adjustment will happen," Dombi says.

Editor's Note: The GAO report is at www.gao.gov/cgi-bin/getrpt?GAO-04-359. The HHA portion of MedPAC's report is at www.medpac.gov/publications/congressional_reports/Mar04_Ch3D.pdf.