Are the days of excessive profit margins in home health over? To answer that question, we take a look at the trends of several Medicare home health metrics between 2008 and 2011 – including revenue per episode, episodes per discharge, and visits per episode – in this month’s Metrics Matter.
During the prior decade, the Medicare home health business seemed to be unaffected by reimbursement policies enacted by the government. In many years, case mix creep adjustments were combined with less than full inflation index updates with an intent of lowering what the Medicare Payment Advisory Committee (MedPAC) labeled as “excessive margins.” The industry counteracted these hits by:
- Lowering the low-utilization payment adjustment (LUPA) percentage
- Increasing case weight through the use of artificial intelligence programs, as well as staff development on coding and assessment and specialized internal review resources
- Certifying patients for more additional episodes.
Hospitals and skilled nursing facilities have employed similar tactics for years to legitimately maximize their reimbursement. The result was that home health margins stayed in the 16% to 18% range as calculated by MedPAC. For example, MedPAC estimated freestanding margins at 17.0% in 2008 and 17.7% in 2009.
Based on our analysis of Medicare claims data from 2008 to 2011, we can conclude the following:
- Medicare revenues declined by over 5.2% in 2011 compared to the prior year. In 2009, a similar comparison showed a 10.7% increase. This swing in growth trends is striking. It is natural for one to want to understand what lies behind this change.
- The number of episodes was flat in 2011 over 2010, while 2009 benefited from a 6.7% jump in episodes. As we observed previously, it has been the episodes-per-discharge metric that has driven a majority of the year-to-year revenue growth in the prior decade. For 2011, this measurement declined.
- As the episode volume engine sputtered out in 2011, “case mix creep” also stalled in 2010 and 2011, showing very little growth. Changes in LUPA and Partial Episode Payments, however, can have only a marginal impact on revenues. This means that the Medicare-driven reduction in reimbursement rates because of the case mix creep adjustment and the Patient Protection and Affordable Care Act’s negative productivity factor came directly off the industry’s top line; subsequently, providers found themselves unable to counterbalance the drop in rates.
The drop in revenue likely directly impacted the industry’s bottom line, driving margins down on an equal percentage basis. Moreover, future rate declines in 2012 could have the same direct impact.
- In reaction to this drop in revenues, our data shows agencies reduced their visits per episode – by 7.9% in 2010 and another 4.5% in 2011 – in an effort to preserve their margins.
The days of “excessive” profit margins for the home health industry may be quickly coming to a close. Continued downward price pressure will provide an added impetus towards consolidation as agencies have few cards to play in response.
Click here or call 215-657-7373 if you have questions about this metric and to learn more about the many ways Healthcare Market Resources’ data can help you track industry trends and successfully grow your business.