The MedPAC Blog

New Report on Medicare Home Health Payment Rebasing

by MedPAC Staff | Dec 22, 2014

 

Today, the Commission released a report to the Congress assessing the impact of Medicare’s home healthcare payment rebasing on beneficiary access and quality. The report was mandated by the Patient Protection and Affordable Care Act, which also created the rebasing policy. The report’s primary finding is that rebasing – in other words, reducing the base payment rate for home healthcare – will not threaten beneficiary access to home health services or compromise quality of care. Here, we provide a bit more context for the report and how its findings fit with other analyses about the future of the home health industry.

Why doesn’t the report include data from any year that rebasing is in effect?

The statutory mandate requires MedPAC to report to Congress by January 1, 2015, before data from rebasing (2014-2017) will be available for analysis. In the absence of this data, the Commission relied on more than a decade of historical data as the basis for considering the impact of rebasing. These historical data demonstrate that the home health industry has responded to prior payment changes in ways (e.g., reducing visit costs and altering their coding practices) as to sustain double-digit Medicare profit margins, averaging 17 percent over this period (the top 25 percent of agencies have average margins of 30 percent). Additionally, there has been a sustained entry into the Medicare program by new home health agencies over the last 13 years, despite payment changes. Our research concludes that the industry will respond similarly to upcoming rebasing, and there will be no threat to access for Medicare beneficiaries. Of course, MedPAC will continue to assess the impact of rebasing and other payment changes as a part of our annual Medicare payment adequacy update work. 

Why does MedPAC include the market basket update in its calculation of the impact of rebasing?

To get a complete picture of payment changes that HHAs face in the next several years, it is necessary to account for both rebasing cuts and market basket updates. Rebasing reduces payments, while the scheduled market basket updates increase them. Together, these adjustments result in a net decrease of 2 percent in payments over four years. Net reductions of this magnitude over the last decade have not lead to access problems for beneficiaries. 

The market basket increase is intended to cover providers’ rising input costs. However, over the last decade, market basket increases have overcompensated HHAs – home health episode costs have increased an annual average of 1 percent while the market basket has increased an average of 2.9 percent annually. 

In the 2014 home health payment final rule, CMS included an estimate that approximately 40% of HHAs would have negative margins in 2017. Does this finding contradict MedPAC’s report?

The CMS projections assume that HHAs’ costs are fixed, that agencies will not make adjustments to their costs in response to changes in Medicare payments, and that future annual cost growth will equal the market basket. In contrast, we have found that the home health industry is remarkably responsive to changes in Medicare payment policy, and has historically managed to keep annual average cost growth around 1 percent, which is well below the average market basket. CMS also found that over 80 percent of the agencies with projected negative margins in 2017 were already negative in 2011, suggesting that rebasing is not the cause of their poor financial performance. 

Why do MedPAC’s findings differ from the home health industry, which reports much lower margins?

MedPAC’s analysis focuses on agencies’ Medicare margins in order to determine whether Medicare’s payments are sufficient to cover the costs of caring for Medicare beneficiaries. In contrast, many industry reports look at all-payer margins, which are lower. The industry routinely reports very high Medicare margins, and our own research suggests that even the all-payer margins they report are likely understated. With respect to Medicare margins, it is important to keep in mind:

  • The original payment established in 2000 for home health episodes was based on 32 visits per episode. Since then, visits per episode declined – first to 21 in 2001 and has declined since then to about 18 visits per episode in 2013. 
  • Medicare margins for home health have equaled or exceeded 12 percent for over a decade.
  • Efficient home health agencies (lower cost, higher quality) have average margins that are in the 18-19 percent range.
  • A recent cost report audit found that costs were overstated by 8 percent, suggesting the average margin is much higher than estimated.  

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