Exploring Overall Profitability of Home Health Agencies and the Impact of MA
In the previous articles, we looked at margins for HHAs from the perspective of CMS. This was done to analyze their math for these margins and their perspectives of the results. From the perspective of CMS, the relevant costs to consider are those directly related to caring for patients. As someone responsible for the financial health of your agency, all costs necessary to run the business must be considered when calculating profitability.
In the cost report, these administrative expenses are included. CMS refers to these as “allowable” expenses on the cost report. They include all of the expenses necessary for keeping the lights on, the cost of management, advertising, software, office expenses, vendors and so on. The cost reports refer to the total of these expenses, along with the clinician costs we discussed earlier, as operating expenses. You can find these expenses listed individually on Worksheet A and the total on Worksheet F1, Line 17, column 2.
We can take this total and calculate operating expenses per census just like we did with revenue. This allows us to create margins that best represent the actual profitability of agencies from this data. To the degree that CMS allowable expenses include the expenses that you report on your internal financials, these figures should match those you produce for your ownership and collectively represent the true overall health of HHAs in general.
Home Health Profitability Under Medicare Part A
Using this logic, we can see Medicare Part A revenue (blue) per census compared to operating expenses (red) per census for the first 3 years of PDGM and the profit margins under this reimbursement (green).
A couple things stand out to me here, one is the increase in operating expenses per census in 2022. This is in contrast to the predicted decline by CMS used to estimate costs for the 2024 proposed rule. The other is the slight reduction in revenue in 2021. How did this happen when the base payment increased? This revenue decrease is evident in the claim data as well.
Many times while working on analyzing data for a specific purpose you will stumble on something that makes you curious and you have the temptation to explore it. I have found that this happens so often, that if you explore each of these when you find them, you may never complete your initial task. For this reason, I keep a list of these curiosities for future research. This is on that list.
In our previous discussions, we have talked about the factors influencing these expenses. Visit reductions in 2020 and 2021 drove down these costs while inflation, rising clinician wages and other economic factors increased them. This chart reflects the net result. I believe the spike in expenses in 2022 is the result of these inflationary pressures taking hold as the visit reductions appeared to have hit a “floor”. As long as future visits remain stable, future expenses per census unit will continue to increase due to these inflationary pressures and staffing issues.
As stated in the 2024 proposed rule, in MedPAC’s 2022 report to congress, they calculated that margins under Medicare increased from 15.4% in 2019 to 20.2% in 2020. Their projected margin for 2022 was 17%. In 2022, because of the delay in the collection of this data, they would not have had access to these completed cost reports for that year, but we can see that these actual figures are similar to their estimates, until we get to 2022. I believe that this is because they used the same expense estimate calculation used by CMS, discussed in my last article
This data reflects the recent past, but what about 2023? Do you think expenses are increasing or decreasing? If Medicare revenue base rate calculations include poor estimates of these expenses, we can expect these margins under Medicare to continue to decline and we can expect 2023 to end up with lower Medicare margins than the previous years, continuing this existing trend.
This data already includes the permanent behavioral adjustment applied by CMS for these years, what about the temporary adjustment? MedPAC recommended that CMS begin applying adjustments to the base rate to begin collecting on this “debt” at the rate of $502.5 million per year, starting in 2023, in addition to the permanent adjustments already implemented by CMS. Using the relative cost adjustments included in the 2024 proposed rule, this would be another revenue reduction of approximately 3% that would go straight to your bottom line.
Each year, when CMS has calculated the behavioral adjustment (permanent and temporary), they have included these adjustment calculations in the proposed rules. Each year, they back down and reduce the implemented permanent adjustment in the final rule based on the vague justification that these full permanent adjustments would create an adjusted base payment that would be “burdensome” to HHAs.
CMS calculates the temporary adjustment which is the accumulated debt of HHAs to CMS based on the unpaid behavioral adjustments CMS believes are owed to them by HHAs. Although MedPAC recommended that they start collecting on temporary adjustments in 2023, CMS did not. They do not propose collecting them in 2024 either. Again, stating that they would “adversely affect HHAs”.
If CMS and MedPAC are confident in their calculations that support the behavioral adjustment, why are they reluctant to implement these adjustments? If the data they provide is correct, these adjustments would not threaten the survival of most agencies, only reduce their “increasing” profits. MedPAC seems eager to do so, but it ends up being the decision of CMS and CMS will not pull the trigger.
It is obvious that these reductions would contribute toward the CMS goal of reducing spending on Medicare HHA reimbursement, but how would this affect their second goal, the survivability of these agencies? As we discussed in the previous articles, CMS’s words and data presented in the proposed rules portray these agencies as financially healthy institutions whose profit margins are capable of absorbing these cuts. However, their actions speak differently. Why?
I believe that the answer lies in the data they do not discuss and we can’t see in the proposed rules, the “dark matter” that influences the HHA universe, Medicare Advantage.
Using the cost reports, we can talk about this part of the HHA business and the net impact of both. I believe that CMS is aware of this data that I will share with you and it is what is driving their reluctance to fully implement the behavioral adjustment, by the end of this article, it should be clear why they take this position.
CMS describes HHAs in the proposed rule using data from their own claims and cost report data related to Medicare Part A. I give CMS a hard time in these articles regarding their calculations and assumptions, but the truth is that they provide a level of transparency regarding their revenue cycle process that is unavailable from other health plans. Many HHA advocates complain that their numbers still lack transparency, and it is partially true, but none of this data I am sharing with you would be available if CMS did not make the effort to provide it. This type of “open source” governing is essential for examining the actual impact of legislation and developing tools for dealing with it or even changing it. This perspective is completely absent when it comes to MA plans.
The Transition from Medicare Part A to Medicare Advantage
Before we begin, we need to develop a complete picture of the HHA business. HHA customers (patients) are measured by census and financial class in the cost reports. Here is a snapshot of this distribution of census by financial class for 2020 and 2022.
What this shows is a trend over time of patients transitioning from Medicare Part A, conventional Medicare, to Medicare Advantage plans or Medicare Part C nationally. Data from the LDS (Limited Data Set or published claim data) confirms these numbers. This transfer rate is accelerating. LDS data shows similar ratios of Medicare Part A beneficiaries to Medicare Part C. In both the cost reports and the LDS, we can see that the beneficiaries in both groups became equal to each other during 2021 and there are now more beneficiaries covered under MA than Medicare Part A. What this also tells us is that nearly all of the “Other” insurance described in the HHA cost reports nationally is MA (Medicare Advantage) health plans. For the rest of this article, I will refer to the “Other” financial class in the cost reports as MA.
Based on this data, the proposed rules represent only half of what is going on financially with HHAs. Medicaid data is also included, but it represents only 4% of the HHA census activity so we will exclude this financial class for the rest of this article and stick with the Yin and Yang of HHAs, Medicare Part A and MA.
So far I have spent most of my time in these initial articles talking about Medicare Part A profit margins, adjustments affecting them, and the proposed rules. In the cost report data, I have combined all agencies as if they were one single agency for the entire country with all the revenue, expenses, visits and census represented collectively. This is useful for analyzing these issues at a macro level.
When I initially discovered this data about two years ago, I was using it to develop a list of HHAs and their financial characteristics using Sisense. Out of curiosity, I created the pie chart above showing the split of MA census compared to Medicare Part A because I had been researching this trend in the LDS claim data. I created another pie chart next to it showing how revenue was split by financial class. This is what it looked like for 2021, my most current data at the time:
When you deal with data using business intelligence tools, most of the time you see results confirming what you know or suspect. However, there are results I think of as “WTF outcomes” that you will encounter that can change your perspective on what you thought you knew. For me, this was one of those moments.
In this situation, my first instinct was that I made a mistake. When I eliminated that possibility, and the meaning of this data began to sink in, I started a journey of data exploration on this topic that led to some chilling conclusions.
If I were a journalist, I could be accused of burying the lead, so let’s continue by exploring profit margins under MA using the same math, units and charts we used for Medicare Part A.
Home Health Profitability Under Medicare Advantage
Here is the chart comparing MA revenue by census for the first three years of PDGM and another chart showing the associated profit margins:
The results are shocking. On average, HHAs are paid less than half of their expenses when treating MA patients. Now, let’s combine the Medicare data and the MA data to create a true net profit for agencies under both reimbursement systems netted together.
I believe that this image more accurately represents the true health of HHAs than the picture painted by CMS in the proposed rules. Furthermore, I believe that CMS is aware of this as well.
Again, these numbers are so unexpected, at least from my own perspective, that I wanted to try to cross check them somehow. Maybe I was including or excluding some income or expense I had overlooked.
In the cost report is a reported net income. Just like taxable income in our tax returns, it is the net result of all the income and reported expenses on the cost report. It is on Worksheet F1. Using Sisense, I counted the agencies with validated cost reports each year, the number of these agencies reporting a negative net income, and the percentage. Here are the results:
I actually expected these percentages to be higher, but the trend of agencies with losses matches the trend in declining profit margins from the previous charts. It is also in direct conflict with the image of the financial health of HHAs portrayed by CMS and MedPAC in the proposed rules.
Each year, in the comments regarding the proposed rule, agencies submit comments describing this issue and the impact that proposed cuts have on their overall net profits, including MA plans. Each year, CMS includes a response to one of these comments. Here is one and the CMS response from the 2023 final rule:
One note, based on the cost report data, the small portion of patients being reimbursed under Medicaid actually get higher reimbursement per census than either Medicare Part A or MA.
To paraphrase CMS’s position on MA plans and their reimbursement to HHAs, “it is not our problem”.
I think that this argument is vulnerable. MA plans are also managed under HHS (Health and Human Services) which is the parent of CMS in the federal government. However, the first thing that came to my mind when I started on this path is, if this MA money is not going to HHAs through the reimbursement of MA claims, where is it going? My first instinct regarding the answer was the most simple explanation, it is going to the MA plans.
To find out if this was happening, I had to develop a better understanding of the MA health plan business model. I discovered that CMS has proposed rules for these MA plans as well that monitor the MA business, profits and quality of service from the perspective of CMS. I also rediscovered a regulation that was introduced under the ACA (Affordable Care Act) that caps the profits that can be kept by all health plans, even MA. This regulation is referred to as the MLR (Medical Loss Ratio). It states that large health plans must pay out 80% of their premiums as reimbursement to claims with some expenses directly beneficial to beneficiaries also allowed. MA plans are considered large health plans.
Under MA, CMS pays a premium to MA plans based on actual Medicare Part A spending at the county level. Each year, they calculate the overall spending in each county for all provider types and calculate a price per beneficiary that includes all Medicare Part A (institutional) and Part B (physician) payments. They publish these prices and when a MA plan provides coverage to a patient in one of these counties, their reimbursement is related to this price. In exchange, the MA plan must cover all the services that would have been covered under Medicare Part A and Part B for that beneficiary. This is a very simplified explanation, but it covers the important points for this discussion.
From the perspective of the MA plan, and all health plans, their financial goal under the MLR is to pay out in claims as much as possible toward the 80% of the premium, without going over. If you end up paying out less than 80% of your premiums as claims, you must rebate the remaining amount. Going too far below the 80% means that you are reimbursing providers less than your competition. This might threaten your ability to cover your beneficiaries if these providers stop accepting your coverage. If you go over the 80%, you are sacrificing profits you could have otherwise kept to pay your operating expenses and shareholders.
As an employer, I had a health plan for my employees. Each year I would receive a rebate from my health plan calculated under these MLR regulations. In my case, it was approximately equal to one monthly premium payment.
On the MLR site, I found a way to download spreadsheets for each MA plan that included their financials, just like we have in the cost reports. One section of these financials split out MA activity from all other health plans these institutions marketed. It was very time consuming, but the bottom line is that I found that nearly all MA health plans were compliant with the MLR. I also found that the other allowable expenses that could count toward the MLR, in addition to claim payments, were minimal in proportion to the premium revenue, under 3% overall.
What this means is that, in general, MA plans pay out almost 80% of their CMS premium revenue as claim payments. Since these payments are related to what Medicare pays providers, we should then expect that MA plans should pay out, overall, almost 80% of what CMS pays these same providers under Medicare Part A, on average.
Instead of 80%, here are the ratios of MA payments compared to Medicare Part A home health payments by year:
The new cost report format used for home health beginning in 2020 includes this valuable data by financial class. Without it, we would not be able to “follow the money” and view the overall relative impact of Medicare and MA in the home health revenue cycle. Unfortunately, unless I am missing something, I am unable to find this financial class breakdown in the cost reports for other provider types. So, where does the rest of this MA reimbursement go?
I believe the answer lies in the same question asked of two different providers. If you ask a home health agency, would you prefer to admit patients with Medicare Part A or Other (Commercial) insurance? For most HHAs, the answer is obviously Medicare Part A.
If you ask this question of a hospital provider familiar with their revenue cycle process, what would they say?
In my next article, I will explore this issue and the relative impact of low MA reimbursement and Medicare behavioral adjustment cuts. Which is the bigger problem? What can be done about them?
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