Do You Know Your Medicare Margins?
Medicare Margins (as a % of Medicare revenues) have been bandied about for over a decade here in home health. The Medicare Payment Advisory Commission (MedPac) and CMS are the two biggest promoters of this metric. MedPac submits multiple reports to Congress every year. Historically, in March of each year they submit their Medicare Payment Policy report. This report covers all aspects of Medicare, and has specific chapters applicable to various aspects and segments of the Medicare program. Of course, one chapter each year is applicable to their review/findings for the Home Health Industry. Unfortunately, most of the home health industry does not seem to know this, nor understand how much this impacts industry reimbursement (rightly or wrongly).
What Is Wrong with Medicare Margins?
Medicare Margins are what they sound like: Medicare Profits. However, they are Medicare Profits as calculated via the Medicare Cost Report. Initially, most do not see any issue here. Unfortunately, there are several issues with the Medicare Margins calculation, which brings into question the accuracy of this widely-reported metric!
Examples of What is Wrong With the Medicare Margins Calculation:
- The Medicare Cost Report (MCR) does a POOR job of identifying and allocating costs to Medicare vs non-Medicare business. As a result, the Cost Reports that CMS & MedPac use for their ‘Medicare Margins’ calculation are not accurate and therefore, not truly representative of industry costs or profits attributable to Medicare!
- Medicare Margins excludes any/all costs that are deemed non allowable per Medicare (e.g., Marketing, Accelerated Depreciation, Mark-ups to Related Party Costs, etc…) even though most all of these costs are normal and reasonable in all segments of business (including home health); and reasonable and allowable for IRS Tax purposes
- All facility-based Home Health (HH) Cost Reports are excluded from the Medicare Margins calculations by both CMS and MedPac. Their rationale for excluding facility-based Cost Reports is that the costs for these entities are higher than non-facility-based HHAs!
- The cost of Chargeable Medical Supplies are excluded from this calculation!
- The HH MCR has a long history of being poorly prepared. In fact, 39.5% of all 2010 HH MCRs were excluded by CMS for their Rebasing calculations back in 2011/12, and most because they were inadequately/poorly prepared. Finally, beginning in 2017, the MCR preparer information is required.
So based on the above, the Medicare costs as identified by this calculation would seem to be subjectively selected and understated; and quite likely understated significantly!
These issues reduce the overall industry Medicare costs, which are compared to the industry’s Medicare revenues to calculate Medicare Profits by both CMS and MedPac. Does this seem a reasonable and objective measure to you?
MedPac Reported Medicare Margins
As previously noted, MedPac reports annually on Medicare Margins for the home health industry. The following is an extract from Page 210 of the March 2016 MedPac Medicare Payment Policy report:
According to this, the industry has enjoyed double-digit Medicare Margins through 2014 under PPS. Do you think that Congress understands the difference between Medicare Margins and Profit Margins? Do you think it important that Congress does understand this difference?
Additionally, the following Figure (8-1) identifying trends in home health can be found on page 215 of the report:
Look to see if your Medicare Margins equal or exceed those noted above.
- HHAs whose Medicare Margins exceed these are tentatively better positioned to absorb the cuts CMS continually makes.
- HHAs whose Medicare Margins are equal to or are less than those identified by MedPac are not positioned well for the continued cuts to our reimbursement and will have a more difficult time surviving these turbulent times.
You really need to be better than average!
Identifying the Medicare Margins from Your Cost Report
Let me walk you through a real example of how to calculate your Medicare Margins so that you can compare them to your actual Operating Margins (i.e., your actual Profit or Loss).
Calculating Medicare Revenue
To get your Medicare Revenues (we are excluding Out-patient services for this presentation):
Take the amount(s) on W/S D-1, Row 1, Col 4 (include Col 2, for FYs 2013 and before) see the following from the Cost Report:
Medicare Revenue for this reporting period equals: $4,323,359-
Calculating Medicare Costs
Medicare Costs are on W/S C, Part IV, Line 19, Col 6 of the Cost Report (this is for free-standing HHA). Here is our example:
Medicare Costs for this reporting period equals: $3,064,012-
Medicare Margins Compared to Profit Margins
The Medicare Margins calculation is as follows (Medicare Revenues – Medicare Costs):
The Medicare Margins % per this Cost Report equals: 29.1%
Now compare that to the Profit Margin % for this agency for the same period (Profit Margin = Total Revenues – Total Costs [nothing is excluded]). See the following summary from the agency’s Income Statement:
The actual Profit Margin % for this agency equals 2.2%
The Medicare Margin for this agency is 13.23 times greater than the actual Profit Margin for this agency (= 29.1% ÷ 2.2%). Remember, this is an example from a real agency!
What about yours?
You can see that the Medicare Margins for this agency are significantly higher than the Total Operating Profit Margins. This is a very common situation throughout the industry. Not everyone will see this kind of difference, but differences exist throughout the industry; and those differences can be extreme!
The above identifies the difference between an agency’s Medicare Margins and actual Profit Margins. I would recommend that you take a look at yours and compare them to the rates noted by MedPac (recommendation: You really want to be above the rates reported by MedPac).
Is this difference why CMS and MedPac have been reporting to Congress what the Medicare Margins are in Home Health as opposed to what the Profit Margins are?
It’s certainly something to think about!
The MedPac March 2017 Payment Policy Report to Congress was released on March 15, 2017.
Look for our overview of this report in an upcoming post.
Spoiler Alert: MedPac has not historically be a friend of home health!