In the previous blog article, “Dark Matter”, we explored the impact of Medicare Advantage reimbursement on home health using cost report data. To recap the most important facts:
There are now more Medicare beneficiaries covered under MA than under Medicare Part A and this ratio is increasing each year.
In 2022, 38% of agencies reported a net loss on their cost reports, this is increasing each year.
MA plans paid 55% of what Medicare paid for the same services per census in 2022.
The overall net profit for home health in 2022 was -14%, combining cost report data for both Medicare Part A and MA, this loss is growing each year as HHA margins continue to decrease under both health plans.
When a patient changes their health plan from Medicare Part A to MA, the average profit margin for HHAs changes from 12.1% to - 58.5% for that patient.
Despite the CMS depictions in the 2024 proposed rule of home health agencies being healthy and profitable, the cost reports tell a different story.
The Medicare BA (Behavioral Adjustment) has reduced Medicare payments each year under PDGM through direct cuts (permanent adjustments) and the accumulated debt that must be paid in the future (temporary adjustments). In 2024, CMS proposes an additional reduction in payments of 2.2% including a 5.1% decrease associated with the permanent adjustment.
Each year under PDGM, CMS has reduced the proposed permanent adjustments in the final rules. We will find out soon if this is the case for 2024, but regardless, Medicare Part A and MA are pushing down profit margins for HHAs on two separate fronts, squeezing out providers caught in between these two forces.
Each year, HHA advocates fight back against CMS and their behavioral adjustment cuts. They claim they are unfair, that the logic and calculations associated with these cuts lack transparency. These arguments do not seem to have had any success in changing these actions by Medicare. Advocates have backed legislation to freeze these cuts since PDGM began, this has also been ineffective.
Advocates and agencies seem to focus on CMS as the bad actor in this situation. They attempt to appeal to their sense of fairness and their goal of sustaining the home health industry. Is this the best tactic for dealing with the overall problem of decreasing margins? What can be done about MA?
In our last blog article we discussed two facts about MA plans that seemed to be in conflict with each other:
Under the MLR, MA plans can only keep 20% of their CMS premium revenue for profits and operating expenses, the remainder is almost entirely paid out in claims.
Home Health Agencies were reimbursed 55% from MA plans compared to Medicare in 2022.
This leads to the question, where does the remaining 25% of this money go if it is not going to the MA plans?
Only home health cost reports split out revenue, census and visits by financial class so this information is not available through the cost reports from other providers, we will need to explore this issue using other people’s data.
First, it is important to understand how reimbursement works under both health plans. Under Medicare Part A, CMS has developed complex and tested prospective payment models that use costs and clinical factors to calculate reimbursement in a manner that mirrors costs. Unlike the MA plans, each provider type is reimbursed at a rate exceeding their costs. Some providers may argue this point or the actual size of these margins, but the reality is that nearly all institutional providers accept Medicare coverage.
Under Medicare Advantage and other commercial health insurance plans, reimbursement methods vary widely, but very few use costs as a basis of determining reimbursement to providers, instead, these payments are negotiated with providers or dictated by the health plan. Those that use cost as a basis, do so by relating their reimbursement to Medicare reimbursement, applying a negotiated modifier to these rates to adjust them up or down. This is how physician payments have been determined by commercial health plans for many years.
Even among providers of the same type with the same health plan, rates can vary for each provider. This is especially true for hospitals and large health networks. At the end of the last article, I asked a question about which health plan would providers prefer? For home health, it is Medicare Part A. For hospitals, they prefer commercial insurance to Medicare. This leads us to our next assumption, commercial insurance and MA plans pay hospitals more than Medicare and pay home health agencies less.
For many of you, you do not need convincing regarding the accuracy of this assumption, but let’s see if we can find some data to back it up. There are many government studies on spending for healthcare. Most of them are designed to monitor the overall growth of this spending, how it relates to GDP, how to finance it, etc., but this same data can be used to explore this topic of relative reimbursement by provider type.
Comparing Reimbursement of Commercial Insurance for Hospitals and Physicians
In this report from the CBO (Congressional Budget Office), published in 2022, we can view a chart showing growth rates for spending by Medicare vs Commercial insurance for hospitals and physicians from 2013 to 2018. For our purposes, what is important is the ratio of commercial insurance spending compared to Medicare for these providers:
This is nearly the exact opposite of what we see for Medicare vs MA reimbursement for HHAs in the cost reports.
In a report from MedPAC from July 2021, we can see the percentage of spending by financial class for each provider type:
Looking at this, we need to remember that Medicare spending for each of these provider types is directly related to costs. When we see a higher percentage of Medicare spending for home health in 2019, it is not because CMS pays these agencies more than other provider types, it is because commercial insurance pays HHAs much less in comparison to Medicare.
In this study from the Kaiser Foundation, we can see that hospitals are paid by commercial insurance at nearly twice the rate Medicare pays for the same services:
MA plans are classified as commercial insurance organizations in these studies. In most cases, the same plans that provide commercial insurance under employer health plans also provide MA health plans. It is unlikely that these plans use different pricing or reimbursement methodologies when dealing with these provider organizations through both plans. This means that the MA plans that reimburse hospitals and physicians are paying much more to these providers than the 80% of Medicare MA premium resources available. In order for MA plans to retain their 20% margin, these funds must come from other providers. It appears that this is where the “missing” HHA MA reimbursement goes.
Other than providing a method of pricing premiums for MA beneficiaries directly related to Medicare Part A spending, CMS provides very little regulatory oversight on how these MA plans pay providers. They are free to distribute these claim payments to providers in any manner they choose.
MA plans have similar goals regarding provider relationships to CMS. In order to qualify as an MA plan, they must cover all Part A and Part B services for their beneficiaries. This means that they need HHAs in their provider network. If their reimbursement is too low, it could threaten their status as an MA plan.
Are these MA plans aware of this issue? Can this data be used to influence MA HHA reimbursement through negotiations? Using the cost report data for 2022, we can create a “what if” scenario examining what this reimbursement might look like if MA plans could be convinced to mitigate this damage to the home health industry.
3rd Quarter Updates to the Cost Report Data
Before we begin this analysis, between my last blog post and this one, CMS updated the cost report data with the reports processed in the 3rd quarter of 2023. I have imported this new data into Sisense for 2021 and 2022. I explained in my previous article that I believed that with the 2nd quarter data I had loaded from July that enough cost reports were present for 2022 to make accurate assumptions about the financial position of HHAs for 2022.
Here are the counts for HHA cost reports by year using data before and after this update:
This tells us that 2021 is basically complete, but a substantial increase in cost reports were added for 2022 since the major batch from the 2nd quarter. Let’s compare a couple KPIs to see how this new update affected the results:
2nd Quarter HHA Cost Report Data
3rd Quarter HHA Cost Report Data
Although our volume of cost reports for 2022 increased by 29%, these KPIs changed less than 1%. What this tells us is that in the future, we can depend on the July batch of cost report data to provide us with clear financial results for the prior year when looking at averages and ratios.
CMS is familiar with the timing of this data as well which is why when they worked on the 2024 proposed rule in the spring of this year, they knew they could rely on 2021 cost report data, but not 2022. Now, we have access to this data that CMS will not use until next year’s proposed rule, but we can use it now to accurately measure what happened to the home health industry last year, 2022.
Comparing MA Reimbursement to the Behavioral Adjustment Cuts
Using the 2022 data, we can project the relative impact of the upcoming proposed cuts in Medicare Part A payments due to the behavioral adjustment against a projected increase in MA revenue if we could achieve a goal of a modest increase of the ratio of these payments compared to Medicare Part A.
For this experiment, we are not trying to predict future results by estimating or calculating future reimbursement and expenses, this path would include additional assumptions that would muddy the outcomes. Instead, we will try to create a picture of what 2022 would have looked like if these changes were made for that year.
First, let’s look at what would have happened if we could have convinced MA plans to increase their reimbursement collectively so that it represented 65% of Part A payments (MA Projected) instead of 55.54%. This is still below cost and well below what hospitals and physicians are paid, but it would be a step in the right direction. At the same time, let’s look at what would have happened if the current proposed permanent adjustment of 5.1% was applied to 2022, in addition to the cuts already applied for that year.
We see a reduction in revenue per census of about $300 if the full 5.1% permanent adjustment was applied to Medicare Part A reimbursement. For MA, we see an increase of about $550 per census if MA payments increased from 55% to 65% of the Medicare part A payment.
Now, if we net these together based on the actual census for both financial classes, we can see the projected impact on net reimbursement for 2022 for both MA and Part A Medicare combined.
Using 2022 data, what this clearly shows is that even if CMS was to apply the full permanent adjustment to Medicare Part A payments in 2024, this potential loss in revenue is less than what could be gained through a modest increase in MA payments in relation to Medicare Part A (55% to 65%).
This may be easier to visualize as profit margins:
Reducing the BA is something that can only be accomplished at the industry level. Up until now, the only adjustments to the BA have occurred because CMS voluntarily made these adjustments between the proposed and final rules each year of PDGM. This may happen again in 2024, we will find out soon.
As someone in charge of a single agency or group of agencies, all you can do is hope that CMS makes these adjustments to the BA or that advocate organizations are successful through other efforts in reducing these cuts.
Now that we can see the relative impact of these two problems, I would suggest that your efforts be guided toward the larger problem, improving MA reimbursement. Unlike the BA, this goal is achievable. Let’s look at some reasons why.
Just like hospitals, you are capable of negotiating with MA plans for better rates.
These negotiations are not dependent on the fiscal calendar and can be conducted at any time.
The data is on your side, below cost reimbursement is difficult for these plans to defend.
Victory is incremental, but immediate. Each successful negotiation increases your revenue for all patients under the plan.
You do not have to act at the industry level, but within the domain of a health plan’s network area. To the degree that you control access to home health care in that network, you have leverage toward the ability of these plans to provide the required Medicare coverage to their beneficiaries and qualify as a MA plan. Use this leverage to demand better rates.
I am not an expert in these negotiations, but I am experienced in negotiations in general. In this particular situation, it is clear which side of the table has the better negotiating position given current financial conditions.
If your agency or the networks you belong to are not leveraging data to improve your MA plan reimbursement, it is time that you started. Improving MA reimbursement is a zero sum strategy, any victory comes at the expense of other providers. For too long, HHAs have been absorbing the cost of these victories by other providers. This may be starting to change.
Back in my previous blog post, “CMS Home Health Profit Assumptions vs Actual Cost Report Data”, we talked about the spike in costs per census in 2022 as compared to the estimated expenses calculated by CMS for the 2024 proposed rule. In previous years under PDGM, wages and other expenses increased as visits decreased, expenses per census in this chart below was the net of these two opposing forces. In 2022, the actual cost report data showed that the visit decreases hit a floor. The growth in costs did not. This, I believe, explains the spike of expenses per census in 2022 that I expect will continue in 2023 and beyond.
However, there is another curious element to 2022. We saw a spike in 2022 for reimbursement under MA plans per census. I believe that this may be a sign that some providers are dealing with poor reimbursement by these plans through negotiations.
So far, we have used cost report data to view the home health industry as if it was one big free standing agency with all revenue, census and expenses viewed collectively. In my next blog post, we will begin breaking this down into groups with similar characteristics to see if the data reveals any groups that are more successful than others financially and what strategies they might be implementing.
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