Posted by: Robert Markette
June 14, 2007
Topic: New from CMS

So I was in Milwaukee recently a few new seminars for the Health Care Information Network and had a lengthy discussion of the proposed changes to the PPS system with Tom Williams. (You may know him as the head of Stony Hill management or as the developer of HCIN.) Tom was showing me a presentation he gave recently in Las Vegas in which he compared the home health PPS system and its history to that of the hospital inpatient PPS system.

Tom had an interesting theory regarding what these changes mean and where this is going long term. Tom believes we are seeing the hospital inpatient PPS playbook being applied to the home health setting. For those of you who dont know what that playbook is, let me explain.

When the inpatient PPS system came out, there was an allowance for what CMS considered a reasonable profit margin. This margin was drastically reduced in phase two and then further reduced in phase three with the goal of flattening reimbursement. In other words, fewer or smaller rate increases in the future. The belief was that the providers in an effort to keep making a profit would find ways to be more efficient (information technology, etc. in order to reduce costs and maintain some profit margin).

This means that agencies will need to find more ways to cut costs or cease operating. Of course, with home health agencies, there may be some gains in efficiency through the use of technology, etc., but a small or medium home health agency may not be able benefit from the economy of scale as much as a hospital.

Of course, the largest agencies do seem to turn a profit. These agencies serve larger areas, but they are able to turn a minor profit per patient into a larger overall profit, because of their size. This points to the potential for the Home Health PPS system to drive home health the way of hospital care an industry primarily composed of large multi-state super agencies.

For the majority of home health agencies the reduction translates less into an incentive to be efficient (because they already have an incentive their margins are thin already) and more into a further reduction in already narrow profit margins. (I know, some of you would state that the margins were already so thin this is an elimination.) For the smaller agencies, this will be problematic. However, if home health reimbursement follows the trend from Hospital PPS that Tom showed in his speech in the coming years reimbursement rates will continue to remain flat (or near flat) which will eventually even hurt the larger agencies.

No matter what CMS says, operating costs always go up supplies become more expensive due to inflation, software licensing fees increase, rent increases, employees cost of living increases, health insurance rates increase etc. From year to year it costs agencies more to provide the same services, regardless of efficiencies. Eventually, you run out of areas to trim and start seeing profit margins shrink. Even large agencies that can generate a profit due to the large number of patients they serve could see that per patient amount dwindle over time. If rates truly remain flat, agencies go out of business.

I cant help but think, if CMS is looking long term to flatten reimbursent, this could ultimately eliminate the concept of aging in place (at least for Medicare beneficiaries) as there will be fewer and fewer Medicare providers available to care for them. To the extent CMS believes there are economies of scale that can be leveraged as in a hospital setting, they dont realize that many of these economies only apply to the largest agencies and even then, there is only so much efficiency to be gained in any endeavor.

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