Financial Fundamentals in Home Health: where have they gone?

Financial Fundamentals in Home Health have greatly deteriorated since the inception of PPS. To succeed, HHAs will have to re-introduce them to their operations.  Most HHAs do have some level of financial management and organization in their operations, but most do not currently incorporate all the financial fundamentals that they will need to succeed in home health.

So what happened to financial fundamentals, such as they did exist in home health at one time?

  • The answer is PPS!


PPS inadvertently caused the erosion of financial fundamentals in home health.  The reason why is that for the first dozen or so years of PPS, it was extremely easy to be extremely profitable (profit margins in the 30-40+% range) and as such, financial fundamentals were not necessary to generate/realize sizeable profits in home health.  So the prevailing thought process was, if I don’t have to expend the time/cost for these activities and I am still generating strong profits, why don’t I eliminate that function/cost and that savings will go straight to my bottom-line, increasing my profits further.  And for a very short span of time that held true; but eventually it did not: a common occurrence when you apply a short-term perspective to a long-term issue (and my contention is that if they would have continued/improved their financial fundamentals, that even though they would have been incurring those costs, their profit margins would have been even higher).  What eventually began to happen (and much quicker than most even realized) was that inefficiencies began to crop up in various aspects of an agency’s operations and they were not identified; because the analyses that could identify them were no-longer being done.  And HH operations became less and less efficient as time passed by; meaning more and more costs were required to do the same tasks.  Many will argue that as not being possible; but I would counter by saying how do so many HHAs still survive when you consider that over the last 10 years reimbursement has been reduced in excess of 30% than where it would have been but for the cuts over the last 10 years!  There is no question that financial fundamentals have eroded significantly since the inception of PPS, and a significant # of HHAs now open, did not even exist pre-PPS and as such they had no experience with what little financial fundamentals did exist in home health per-PPS.

Prior to the introduction of PPS to the home health industry in Oct 2000, the industry was reimbursed under the ‘cost-based’ approach by Medicare.  Pre-PPS, a HHA was reimbursed the lesser of:

  • its costs
  • its charges or
  • its cost limits


Therefore, it was all but impossible to make a profit in home health (and was set up to be that way).  At this time, HHAs strived to be reimbursed at their ‘costs’, meaning that Medicare covered all the costs attributed to services provided on behalf of the program.  This methodology, that was established by the program was certainly not devised with the premise of efficiency in mind, and as such, was exploitable; and was exploited.  Over the years HHAs began having more and more trouble getting reimbursed at their ‘costs’ and were becoming reimbursed more and more often based on their ‘cost limits’.  Therefore, HHAs were having a problem just trying to breakeven for their Medicare operations.  Well, this lead to the exploitation of this methodology that began in the late-’80s and mushroomed in the mid- to late-’90’s, and that was the explosion of visits provided by this industry.  Some financial managers/leaders of that time that had a good grasp of cost-accounting principles came up with the simplistic approach to combat the ‘cost-limit’ issue that more and more HHAs were being reimbursed at (meaning they were not even recovering their costs).  This simplistic, but short-sighted solution was DO MORE VISITS!.  So as you did more and more visits per the average Medicare beneficiary it became easier and easier to get your costs under your cost-limits.  But this became the time when efficiencies became less of a focus and volume became a primary focus; and for that, we have been paying a price for many, many years.  Then in the very-late ’90s there was the Interim Payment System (IPS) which was a complete debacle and one that HCFA/CMS should have paid a heavy price for, for such a poorly designed program: unless the intent was to close a significant # of HHAs, which it did starting in 1998/99 and going through 2003/04.  During this span of time, IPS closed and/or caused to decertify almost 40% of all Certified HHAs prior to its implementation.  And what HHAs suffered the least under IPS?  Well, as a group, it was those agencies that were the worst at providing efficient health care in the home.  Long-lived, historically efficient HHAs suffered greatly under IPS, whereas, long-lived inefficient HHAs were not nearly as negatively impacted.  In fact, I would say that IPS caused more efficient HHAs to close their doors or decertify than it did for inefficient HHAs!  And the more inefficient the HHA historically was, the better it did!

During the pre-PPS days, too many HHAs were doing too many visits on average, but they were also doing a pretty good job of costing out their services, because they were always comparing their costs, their charges and their cost-limits.  So there were some good financial fundamentals at that time; not a lot, but certainly more than exist today at the average HHA.  But this was also the period of time in which the clinical thought process moved from providing ‘the right amount of care’ to providing ‘the maximum amount of care.’ So a short-term and not-efficient approach to patient care became etched in the industry’s approach to providing care and this is something that we are still battling with to some degree today, as we try to break the ‘this is how we’ve always done it’ mentality and try to get our clinicians to look at each patient encounter separately and to design the most effective, and efficient Plan of Care based on patient needs.  A financial fundamental here would be patient-budgeting for each patient encounter / patient episode.  Do you think Ford and GM know the profit for any/every vehicle that they project to sell?  Of course they do!  In fact most business calculate out what the profit/loss is for every product (or service) they sell (before they sell it).  This should be an everyday aspect of home health operations as well.  Many softwares try to do this, but they do so with limited accuracy and even less so from a ‘user-friendly’ perspective; but that is because every one of them added it on to something that they already had, and it was not the sole/primary reason it was developed.  As such, although many softwares have something that tries to do this (and again, to questionable degrees of accuracy), they do not do in in a manner in which it is widely used and as such is not of much value to the agency.  But that’s kind of like when these same companies say that they will provide you financial assistance when you are required to keep your financial information in separate software.  Although they may be reasonable from a clinical documentation, billing and accounts receivable perspective (and that is not a given that they are good), by definition, they are not going to provide you with much assistance in analyzing/reviewing your financial operations/results.  Proper patient-budgeting will be something that most all HHAs will be doing in 3-5 years, as CMS continues to reduce HH reimbursement, only those HHAs that are proactive in applying strong  financial fundamentals are likely to exist come 2020.

Another financial fundamental lacking in the HH industry is the preparation of an industry-specific budget on an annual basis; and budgeting is considered a basic financial fundamental.  My estimate is less than 1/2 of all HHAs prepare an annual budget, and I would further that by saying that approximately 80% of those that do, do so in a manner that is less than beneficial for their agency (i.e., it is not used to manage the agency and sits in a drawer until it’s time to prepare the following year’s budget).  Budgeting is something that I believe that 100% of all HHAs that survive the next 3-5 years will be doing on an annual basis; and the best will be using/preparing a budget model that was designed specifically for HH PPS.  Beginning a budget with revenues is not proper in most any industry, including home health.  A budget should be built based on the drivers of the revenues and expenses of that budget; and by definition, revenues cannot be a driver of themselves!

A follow up to budgeting is forecasting.  This is a tool that is a by-product of a well organized budget.  Where the budget is a static document that you use to manage your company throughout the year (e.g., using specific revenue & expense amounts for specific periods of time and/or various ratios established in your budget), the Forecaster is a living document in that amounts in the Forecaster can and do change throughout the year.  The Forecaster includes both the actual year-to-date financial information, but also the budgeted amounts for the remainder of the year AND enables you to change budget assumptions for the remainder of the year.  The utility and flexibility in this document is what makes it able to more accurately (than any other way available) project (i.e., forecast) what the expected year-end results for the company should be.  I would expect that in 3 years 50% of all HHAs will be incorporating a Forecaster into their operations (w/that rate probably being much higher for the states included in the VBP demonstration) and that rate being upwards of 75+% by 2020.


Another financial fundamental long lacking in the HH industry is what I call the Financial-Operational Review (FOA Review).  This is something that was much more prevalent during the pre-PPS era; maybe not as thorough as it should have been, but much more common none-the-less.  This is a basic financial fundamental, just like with budgeting.  This is something that is the norm for the vast amount of companies across all most all industries worldwide; not something unique to that industry.  Many of the analyses may be unique to that industry because of the uniqueness of the industry, but the principles employed are anything but unique.  Home Health is unquestionably a unique industry, but we can apply cost accounting and financial/operational reviews/analyses across what we do none-the-less.  How many HHAs do I come across every year that use the Costs per Visit (CPVs) by Discipline right out of their Cost Report for the entire following year?  Way too many!  For the vast majority of HHAs, just using the CPVs by Discipline right out of the Cost Report is inappropriate for operating/managing your agency at any time, let alone using them throughout the entire year (this is one of the problematic issues you confront if/when you rely on your software to help financially guide your agency).  By the following December, those rates are 12-months old; and your CPVs change on a daily (actually continually throughout the day) basis!  However, most HHAs don’t re-calculate these; and this calculation should only be a small portion of what your FOA Review should do.  Now do you have to do this FOA Review on a daily basis?  No.  But you should do this on a monthly basis, to coincide with the monthly closing of your financial reporting process.  Maybe more than 1/2 of all HHAs currently do something along this line, but most do an inadequate job here as they historically have not stayed on top of this issue.  This is a financial fundamental that 100% of all agencies that survive the next 3-5 years will have greatly improved upon from today’s perspective.  Any HHA that thinks that they currently have this covered (it’s possible, but…) is quite likely to be in for a rude awakening very soon (and even sooner for the HHAs in the states selected for the VBP demo).

And then there’s the various periodic analyses/reviews that should be done on so many other aspects of your agency’s operations.  Just trying to continue to operate like you have operated for years is generally not a positive approach to take for your business.  If things were done so well in the past, why do we as an industry have so many problematic issues that we have to deal with today?  Yesterday’s marching orders and approach to running a successful HHA need to be scrapped and a new approach needs to be established that is focused on quality and efficiency; and the HHAs that embrace this approach are going to be the ones that survive and are successful in this brave new world that we are entering.

If you want some help from someone that’s been banging this drum since the early years of PPS, give me a call to discuss how IFS can help you succeed into the future.