In this post, we continue to look at the MedPAC report from July of 2023 and their representation of the home health financial data it provides to congress.
In my last post, we looked at the single chart provided by MedPAC in Chapter 8 that represents the financial health of HHAs (Table 8-7). Their chart reports on profit margins calculated by MedPAC through the cost reports. The results of this relatively simple calculation provided by MedPAC are very different compared to my own margins calculated using the same data. Here again are the results.
As puzzling as this might be, it is not the most problematic issue with this report when it comes to representing the financial status of the home health industry to congress.
In my post, I explained in detail where I obtained this data in the cost report. The revenue and expenses come from worksheet F1 (Revenue and Expenses) and the census statistics used to calculate a ratio of total expenses that are Medicare comes from worksheet S3 (Statistics).
These compared results only apply to traditional Medicare because this was all that MedPAC provided in their report on home health, but the cost reports include total revenue and census divided by three financial classes, Medicare, Medicaid and “Other” insurance.
If we look at the cost report data for the most recent year of data provided by MedPAC in their report, 2021, we can look at the ratio of census by these financial classes to see how patients are divided among these categories for all agencies with cost reports that year. Here is what it looks like:
For those of you familiar with your own distribution of patients and the industry totals for all HHAs, these ratios look very familiar. In particular, the comparison of Medicare patients to Other patients. This ratio of Medicare census to Other census is nearly identical to the ratios we see from other sources, including the CMS Limited Data Set (LDS) claim data, that represent the ratio of traditional Medicare patients to patients under Medicare Advantage. Both data sources show that these ratios became equal in 2021 and are now trending toward MA as the primary financial class when it comes to the source of Medicare reimbursement for HHAs and other healthcare providers.
This tells us two important things. First, because cost reports and claims both produce the same ratio of patients under Medicare and commercial insurance, this means that almost all of the patients classified as Other insurance in the home health cost reports are in fact MA patients. Second, because these ratios from the LDS and cost reports are an approximate match, they independently support the accuracy of both sets of data.
If we can trust that these census ratios are correct, then it would be logical to assume that the ratios of revenue in the cost report would also be correct. Here is a pie chart comparing revenue by the three financial classes for 2021:
If these financial classes paid claims equally by census, these two pie charts would match each other. They do not.
This leads us to the largest problem with the MedPAC report as it applies to HHAs in chapter 8, why don’t they use ALL the data in the cost reports to measure HHA profitability and not just traditional Medicare?
Is MedPAC aware that this data exists? Don’t they feel that it is relevant?
To answer these questions, we need to look elsewhere in their report. In Chapter 6 of the MedPAC 2023 report, MedPAC uses cost report data to convey to congress the overall financial health of hospitals in their chapter on Acute Inpatient Services. In chart 6-5, MedPAC provides their first visualization of margins for hospitals. Note that these margins reflect all financial classes, not just traditional Medicare, as reported for home health in Chapter 8.
If you look at their note, they explain how they calculate profit margins. This is omitted from chapter 8 on home health, but we should assume that they calculated margins the same way for HHAs, but using only the Medicare financial class. Their stated formula is the same that I used to calculate my own margins for HHAs using cost report data, but MedPAC and I came up with very different results.
As MedPAC explains in their note, these hospital margins not only reflect all sources of inpatient insurance payments, but it includes covid relief funds.
In the next chart, 6-6, they provide these margins for hospitals in the same format they used for HHAs in chapter 8, but for all financial classes:
What would explain why these two MedPAC charts for hospitals used all financial classes to come up with profit margins and yet home health profits are calculated only using Medicare revenue? The answer is that both these charts for hospitals (6-5 and 6-6)) and the chart representing margins for HHAs (8-7) show the results in the best light if you are wanting your audience to visualize the best possible profit margins by provider sector.
Later in chapter 6, MedPAC provides margins for Medicare only for hospitals, but only after they have laid out the results of margins calculated using overall all payer financial performance. Even in this chart showing negative Medicare margins, they focus on the positive, these hospital margins are “less negative” than before the pandemic.
These charts demonstrate an inconvenient truth for HHAs. Hospitals are paid more through commercial insurance than Medicare for the same services. For HHAs, it is the reverse, Medicare pays much better than commercial insurance.
Going back to home health, we can see that the data is available to MedPAC through the cost reports to look at overall all payer margins for HHAs, just as MedPAC did for hospitals. Why is this missing from their report? To answer this question, let’s look at my all payer margins for HHAs calculated as I did using only Medicare revenue and census.
This is done by combining the data from census and revenue to calculate revenue per census and then applying the same expenses per census to both Medicare and Medicare Advantage (Other). Here is what these revenue and expenses per census look like for the “Other” financial class in home health for 2020 - 2022 using the most current cost report data.
These numbers translate to profit margins for MA at about -60% for the home health industry collectively. If we combine traditional Medicare and “Other” insurance to come up with what Medicare overall would look like for home health, this is what we would see.
In other words, the 25% 2021 Medicare home health profit margins reported by MedPAC in chapter 8 not only do not represent the actual profit margins under Medicare, they drastically misrepresent the actual financial health of HHAs when all sources of insurance revenue are included.
If you translate these ratios of revenue to expenses into overall profit margins combining traditional Medicare and MA, here are the overall margins for HHAs for the same years:
Suddenly, HHAs do not look as fat and healthy as MedPAC represents in their report. Instead, these numbers show an industry in grave danger with expenses exceeding revenue overall.
This data is supported by another key performance indicator in the cost report data. The number of HHAs reporting negative net income. This is a value that is not calculated by me, but comes straight from the cost reports, worksheet F1. Like the other bad news I provide from cost report data, this is ignored by MedPAC. This chart shows the percentage of all HHAs reporting negative net income overall on their cost reports and by agency size:
MedPAC uses cost report data almost exclusively for their analysis of federal spending on health care by provider sector. Their entire purpose as an organization is to create annual reports for congress to share data on the performance of the federal government in dealing with the challenges associated with controlling healthcare spending while preserving access to healthcare for all federally funded government programs.
To me, it is clear by how this data is presented and what data is left out that the actual objective of these reports is not to show the true financial health of these healthcare providers, but to illustrate that the federal government is performing well at their job of managing healthcare spending and access to services.
MedPAC is funded by congress. Their intended purpose was to provide congress with a thorough understanding of how healthcare federal funding is managed and how it impacts the services provided. It seems clear to me that MedPAC feels their objective is to provide data that supports how well the federal government is doing in managing these problems even if it means excluding data that does not support this conclusion or reflect favorably on their performance.
Why would MedPAC do this? By maintaining an image of high profit margins for home health in their reporting, they provide cover for CMS to reduce home health spending through their implementation of the behavioral adjustment and budget neutrality. By the end of 2024, this will have saved CMS over $5 billion in actual spending on the home health benefit since these cuts began in 2020. This does not include the temporary adjustment or the additional savings that will occur if further base payment reductions are made to apply additional home health cuts toward the balance of the CMS temporary adjustment, as MedPAC recommended in their 2023 report.
This inaccurate and incomplete analysis by MedPAC has put the home health benefit at extreme risk. As long as their data stands unchallenged, it will be an uphill fight to convince a majority of congress that HHAs are threatened financially.
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