Medicare Policymakers Threaten the Viability of Home Care and Hospice

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Originally published in Market Research Letter: Winter 2014

There are several Medicare policy efforts in the offing or currently underway that threaten the financial stability of home health and hospice providers. In recent months, for example, much attention has been focused on both the rebasing of home health and the elimination of “failure to thrive” diagnoses in hospice. For home health agencies, a majority will go into the red on their Medicare business, thanks to an 11% cut in reimbursement over 4 years. In terms of the hospice diagnoses, some patients whose deteriorating condition is part of a natural aging process may go on the hospice benefit, or not at all. Here we discuss these and other imminent threats to home health and hospice, as well as what providers can do to survive and thrive.

Why and How Are Policymakers Seemingly Reducing the Number of Home Health Providers?

First and foremost, policymakers seem focused on reducing the size of the provider communities. Why? Fewer large agencies and hospices are easier to manage and less likely to engage in fraudulent behaviors. The recent response of the Centers for Medicare and Medicaid Services (CMS) to comments on proposed rebasing regulations shows their bias. By neglecting to acknowledge technology and marketing costs as legitimate, for example, the original Medicare methodology was flawed and did not reflect the realities of the business. Cutting the annual reduction rates by 3.5% to 2.75% was an attempt to placate Congressional critics of a poorly thought-out initiative.

Medicare policymakers also view the rapid growth in the number of providers as evidence that these businesses are too financially attractive. It is difficult to rationalize over 12,000 home health providers when compared to 3,700-plus hospices. Although both cover the same geography, average Medicare reimbursement per hospice is almost double the average reimbursement per home health agency. Further, Medicare has shown a willingness to drastically reduce the number of active providers in an industry, evidenced by implementation of competitive bidding for durable medical equipment/respiratory therapy. This is a segment that had been plagued by numerous small suppliers and many high-profile fraud and abuse cases, similar to home health.

New Reimbursement System Likely for Hospice to Reduce Long-Stay Patients

Later this year, we are likely to see regulations regarding a new reimbursement system for hospice. All indications are that this will be “U” or ”J”–shaped with more per-day reimbursement in the beginning of the episode of care and less as the length of stay (LOS) increases. The goal is to discourage long-stay patients, while seeking to raise the median LOS for the industry above 17 days. In fact, Medicare Payment Advisory Commission (MedPAC) showed that 38% of all Medicare hospice spending was for patients on their 181st day and beyond. This goes against one of the primary tenets of the Medicare hospice benefit, which is that the benefit is for enrollees with a prognosis to live 6 months or less.

Although there was a 75% cut in reimbursement for patients in this category in the original MedPAC proposal, we do not expect a reduction as severe. The reduction will likely be sufficient, however, to shake the financial underpinnings of smaller hospices with a skewed length-of-stay mix.

New MedPAC Proposal Includes Hospice in Medicare Advantage Benefits Package

Also gaining momentum is another MedPAC proposal that includes hospice in the benefit package for Medicare Advantage enrollees; hospice is currently delivered through traditional fee-for-service Medicare. Although there appears to be philosophical symmetry in doing this, the financial impact on hospices in the short term likely could be disastrous.

Medicare likely will take the dollars spent on hospice in a given region plus a gross up and incorporate them both into the monthly premiums paid to the Medicare Advantage plans. Then to maximize its margins, Medicare Advantage plans will contract with hospices, offering less than the Medicare fee-for-service (FFS) rate in their area. In highly competitive areas, the discount could be very significant. Since Medicare Advantage represents 27% of all Medicare-eligible patients, these hospices could experience meaningful decline in their overall revenues. This will push these hospices into negative results. Some areas of the country could be particularly hard hit because of high levels of Medicare managed care plans. In Allegheny County, PA (Pittsburgh), for example, 62% of Medicare-eligible patients are in managed-care plans. Also, Medicare Advantage plans may be reluctant to approve for hospice questionable diagnoses, such as dementia.

Proposed Integrated Care and Financial Alignment for Dual-Eligible Beneficiaries

Lastly, there are the Dual-Eligible Demonstration Projects. These are payment and service-delivery models proposed by individual states to integrate care and align financing for patients who receive both Medicare and Medicaid benefits. With 27 states initially expressing interest to participate, there is clear evidence that this is a concept whose time has come. Now it’s only a matter of when it will arrive in your market.

A shift from Medicare FFS to Medicare Advantage will likely mean lower reimbursement per episode of care — and possibly fewer recerts per patients — as managed care organization (MCOs) closely monitor utilization of services. For home health, over 30% of all Medicare reimbursement is for dual-eligible patients. For hospice, the situation is similar, with a chunk of the Medicare business possibly moving to a less-profitable payor.

What Can Home Health and Hospice Providers Do to Survive?

These hits to the top line of home health agencies and hospices are of such a magnitude that they cannot be countered by simply reducing costs or resource utilization. The only solution is to increase the size of your organization so that you can spread overhead expenses over a broader base. Providers must look to increase revenues through organic growth, acquisitions, geographic expansion, or mergers with other agencies or hospices.

Healthcare Market Resources has added new reports to its home health and hospice market profile report sets, which detail the potential impact of the shift of dual-eligible patients to Medicare Advantage. Home care providers are likely to benefit from other parts of the Affordable Care Act with greater volume as accountable care organizations (ACOs), bundled payments, value-based purchasing incentives, and readmission penalties become more widespread. While these changes in referral behavior will take time to implement, the payor and reimbursement shifts will be almost instantaneous as regulations are activated.

If you are looking to identify growth opportunities for your home health agency or hospice, contact Healthcare Market Resources to learn how our information can guide your decisions.