The MedPac Payment Policy Report

The Medicare Payment Advisory Commission (MedPac) released their latest Medicare Payment Policy report to Congress on March 15, 2017.

MedPac Report Cover

There are fourteen chapters and some additional administrative information in this report – see the following:

Report Chapters and Administrative Info

As noted above, this report covers the various segments of healthcare that are at least partially impacted by the Medicare program.  Home Health should be interested in Chapters 1, 2, 7, 9 & 13.

My focus for this post will be about Chapter 9: Home Health Care Services.

MedPac Report – Chapter 9: Home Health Care Services

Once again, MedPac demonstrate that they are not friends of the home health industry.  Their recommendation to Congress was:

“The Congress should reduce home health payment rates by 5% in 2018 and implement a two-year rebasing of the payment system beginning in 2019.  The Congress should direct the Secretary to revise the prospective payment system to eliminate the use of the number of therapy visits as a factor in payment determinations, concurrent with rebasing.”  Recommendation 9, pg 250

Spending Implications per MedPac:  The recommendation would lower payments by $750 million to $2 billion in 2018 and by more than $10 billion in 2018 to 2022.” – pg 250

Therefore, if 2017 HH PPS spending is $18.5 billion, then a $750 million reduction would equate to 4% and a $2 billion reduction would equate to 11% of annual HH expenditures!  So the MedPac recommendation for 2018 is to reduce HH spending somewhere between 4% and 11%, and then begin another two-year rebasing of HH spending in 2019.  And, the MedPac’s recommendation would reduce HH spending by an average of $2 BILLION PER YEAR (an 11% cut)  for the five-year period: 2018 to 2022 (2022 being the last year of the HH VBPD).

  • Will your HHA be ready for this?
  • Keep in mind that the financial effects of the HH Value-Based Performance Demonstration (VBPD) begin in 2018.

Issues With MedPac Report?

More HHAs have been closing than opening since the advent of Rebasing, which began in 2014.  Additionally, others have been acquired and absorbed into other entities, yet their licenses still remain active; artificially inflating the # of active HHAs.  Many HHAs are struggling financially under the current constraints.  These cuts proposed by MedPac would be the largest cuts to Home Health (HH) reimbursement since the Interim Payment System (IPS) was introduced in 1998 (and these cuts closed almost 40% of the industry in approx. four-years).  If the home health industry agrees with MedPac’s assessment, it has nothing to do; silence will imply agreement.

Not that I disagree with everything that MedPac says, but these recommendations should demonstrate to everyone in the home health industry that MedPac does not adequately understand this industry, nor really seem to value the services provided.  To further that premise, see the following Section and sub-Section titles MedPac used in their report:

Do You See Positive or Negative Implications?

  • Medicare has Always Overpaid for HH Services Under the PPS
  • Figure 9-1: Medicare Margins of freestanding HHAs Have Remained High since 2001
  • Ensuring Appropriate Use of HHC is Challenging
  • Fraud and Abuse Are Continuing Challenges in HHC
  • Supply of Providers: Agency Supply Surpasses Previous Peak
  • Table 9-5: FFS HHC Svs Have Increased Significantly since 2002
  • Rural Add-On Pmts are Poorly Targeted and Most Pmts Benefit Areas That Do Not Have Low Utilization
  • Provider’s Access to Capital: Access to Capital for Expansion is Adequate
  • Medicare Pmts and Provider’s Costs: Pmts Increased and Costs per Episode Decreased in 2015
  • Medicare Margins Remain High in 2017
  • How Should Medicare Margins Change in 2018?

For Your Review:

Following is a link to open Chapter 9 of this report:  MedPac Report to Congress: Chapter 9 – Home Health Care Services (2017)

If you would like a bookmarked copy of Chapter 9, please either email us directly, or use the “Contact” us section of our website to request this.  This PDF document is approximately 3MB in size, so be sure that your mail server can accept a document of this size.

Medicare has Always Overpaid for HH Services Under the PPS

Following are quotes that I extracted from page 236 of the MedPac Report:

  • “Payments for home health care have substantially exceeded costs since Medicare established the PPS.”
  • “The high margins in the first year suggest that the PPS established a base rate well in excess of costs.”
  • “…, agencies have been able to hold the rate of episode cost growth below 1 percent in many years, lower than the rate of inflation assumed in the home health payment update.”
  • Since 2001, agencies have been able to reduce visits …, and between 2001 and 2014, margins have averaged 15.5 percent.”
  • An audit of 2011 cost reports by CMS found that a sample of 98 agencies overstated their costs by 8 percent, adjusting for the overstatement of costs, margins for this year would have been in excess of 20 percent.”

Something that must be remembered: the HH industry approached the Health Care Financial Administration  (HCFA; the prior name of CMS), when HCFA was developing the PPS for the HH industry back in the ’90’s, and HCFA rebuffed our requests.  There has been a series of headaches and nightmares for the industry ever since; because of what HCFA/CMS designed and how inadequate it was/is.  PPS was a very complex and complicated design for HH, and much of what they did was really good.  However, there were significant shortcomings with various aspects of PPS and they have never adequately been addressed, and most any issue since has been portrayed as the industry abusing/gaming the system, instead of the inadequacy of the initial design.


Medicare Margins of freestanding HHAs Have Remained High since 2001

See Figure 9-1 on page 237 of the report.

This bar graph presents MedPac calculated Medicare Margins for freestanding HHAs for each year since 2001; and they appear to range between 10% to 23% for the entire span.

But note, this is only for freestanding HHAs.  MedPac and CMS have long excluded facility-based HHAs (which account for approx. 15-20% of all HHAs) because their costs are higher.  Therefore, if you exclude a significant portion of any population, the resultant benchmarks are going to be incorrect; not representative of the industry.  Yet it is these manipulated Medicare Margins that MedPac and CMS continually report to Congress to try to justify additional cuts to home health spending.  Considering what has happened for the past decade, it would seem that they have been quite successful!

Issue 1

The industry should be refuting the appropriateness of using deliberately manipulated data as representative of the industry.  Facility-based and freestanding HHAs DO NOT have a separate set of rules that they operate under; nor are the annual updates segregated in that manner.  Therefore, when MedPac and CMS report Medicare Margins, they should report those margins for the entire industry; or they should not report on them at all.

This should be a significant and boisterous point of contention from the industry towards MedPac & CMS!

Issue 2

Additionally, there is an unresolved issue with the accuracy of how the Medicare Cost Report (MCR) segregates costs applicable to Medicare/Medicaid services as opposed to costs applicable to all service-lines.  All this inadequacy of the MCR does is further exacerbate this issue by understating the “TRUE” costs of providing Medicare services (more about this in a future blog).

This should be another significant and boisterous point of contention from the industry towards MedPac & CMS!


Ensuring Appropriate Use of HHC is Challenging

see pages 238-239 of the report

This goes without saying, and in a general sense is though to refute.  There have been too many instances of inappropriate use of the HC benefit to argue this.  However, this must also be taken with a grain of salt considering these contentious times that we operate in where it is easier to accuse the other side of improprieties than it is to work together in a conciliatory manner.  I guess a lesson we have all learned too well from our representatives in the halls of Congress.

That being said, this is an issue that still is a result of the design of the HH PPS.  Remember, HCFA did not want home health involved in a consultative manner in the development of the HH PPS.  Additionally, there have been numerous instances throughout the years where CMS ‘theoretically’ identified aberrant behavior patterns by numerous HHAs in limited geographic areas and instead of directing their focus at those HHAs (i.e., go out and audit them), they issued Industry-wide regulations that generally proved to be most detrimental to the good, law-abiding HHAs.

So, although ensuring appropriate use of HHC is challenging, many of these challenges are self-inflicted by CMS in their approach to their fiduciary responsibility to the Medicare program and the beneficiaries served.


Fraud and Abuse Are Continuing Challenges in HHC

see page 239 of the report

Here, MedPac talks a lot of back-patting and sensationalism; like the stuff you see in headlines, for example:

  • “In 2010, the Commission made a recommendation to curb wasteful and fraudulent home health services…”
  • “… to examine providers with aberrant patterns of utilization for possible fraud and abuse.”
  • “PPACA permits Medicare to implement temporary moratoriums …”
  • “There have been numerous criminal prosecutions for home health fraud …”
  • “…, the Commission observes that many areas continue to have aberrant patterns of utilization.”
  • “… suggests that continued, or perhaps even expanded, efforts by all enforcement agencies are needed …”
  • “…, Medicare has other regulatory powers, such as requiring HHAs to hold surety bonds, but has not exercised this authority.”
  • “A CMS review of 2015 services found that 59 percent of home health claims were missing information needed to justify eligibility for services …”


Self-Serving Comments?

“… Commission made a recommendation to curb wasteful and fraudulent home health services…”
“… suggests that continues, or perhaps even expanded, efforts by all enforcement agencies are needed …”

We in the industry have been pulling for CMS and the MACs to become more proactive in this area for decades!  We have always wanted more precise, directed actions taken (e.g., field audits, etc…), as opposed to the carpet-bombing approach all too often employed by CMS: just regional or industry-wide regulations that generally do little to fight fraud and just create onerous hoops and red-tape that we must jump through; basically creating more cost/waste of the limited industry resources.

“…, the Commission observes that many areas continue to have aberrant patterns of utilization.”

But they don’t say what they observe, or how they observe it, etc…

MedPac has no problem pointing a big-finger at the industry, as the whole, and implies that only the industry is to blame; yet they offer no possible concrete solutions to deal with the problem.  Isn’t there the possibility that some of the so-called ‘aberrant patterns of utilization’ are actually legitimate and directly attributable to other CMS promulgations?

Why don’t they swing the ‘big-stick‘ and strongly recommend specific-focused audits of HHAs in these limited areas?

Words/Actions of Little Value

“PPACA permits Medicare to implement temporary moratoriums …”

As a fraud fighting tool, this is about a worthless as other wide-spread regulations that marginally treat the symptom, but do next to nothing for identifying the cause (just like F2F and the PCR).

Deceptive Presentations of Facts

“There have been numerous criminal prosecutions for home health fraud …”

Although true, a couple of points I’d like to identify here:

  • Who licensed every one of these HH owners/operators?  Not us in home health!  and
  • Just about every significant, successful fraud prosecution of a HH owner/operator also includes a referral source(s) that conspired with the HH owner/operator – so this generally isn’t just a home health issue!  Yet, that is exactly how it is too often presented; like in this report.
“… to examine providers with aberrant patterns of utilization for possible fraud and abuse.”

Again, most of us in HH have been desiring specifically directed actions by CMS and the MACs against these identified, questionable operators (e.g., field audits).  But, they must be taken on with an air of objectivity.  Lately, it seems too much of what is done in/to our industry is lacking in objectivity, but it is all too often more than made up for in the subjectivity applied.  Unfortunately, not a good basis for identifying facts; good for witch-hunts, but not so much for facts.

“…, Medicare has other regulatory powers, such as requiring HHAs to hold surety bonds, but has not exercised this authority.”

Well, I do not think that this is entirely correct.  There was a Federal Register promulgation back in 1998 in which HCFA (now known as CMS) had finalized a rule to require Surety Bonds for all Medicare Certified HHAs.  However, what MedPac seems to have overlooked was that shortly after its publication in the Federal Register, Congress nixed HCFAs Surety Bond regulation.  So HCFA tried to exercise this authority in 1998, but Congress stopped the enforcement of that regulation.

This should be a concern for all HHA owners/operators, as the Surety Bond issue has been talked about more and more in regards to the home health industry.

“A CMS review of 2015 services found that 59 percent of home health claims were missing information needed to justify eligibility for services …”

This is such a misrepresentation of actual results as to be bordering on fraud and abuse itself!  This is almost wholly attributable to the nightmare that is Face-to-Face (F2F).  But MedPac and CMS have no problem at all holding this out as though it is accurate and completely factual, when in fact, the vast amount of these cases that finally get in front of the ALJ are decided in favor of the HHA!  Unfortunately, it currently takes upwards of three-to-three-plus years to get a hearing in front of the ALJ because of the extensive backlog directly due to CMS & the MACs overly-zealous interpretation and application of recent promulgations.


Supply of Providers: Agency Supply Surpasses Previous Peak

see page 240 of the report

This is another misrepresentation of facts.  There were over 13,000 Certified HHAs in the late ’90s.


FFS HHC Services Have Increased Significantly Since 2002

see Table 9-5 on page 241 of the report

MedPac uses 2002 as the baseline for many of the comparisons.

Do you know why?

It’s because almost 40% of all HHAs existing in 1997/early 1998 had closed by late 2002/early 2003 because of IPS, which ran from 1998 through late 2000.  This reimbursement system was horrifically designed and actually punitively penalized the HHAs that were historically the most cost-efficient; all the while, benefitting the HHAs that were historically the most cost-inefficient.

So, 2002 is used because over the last 25+ years, everything was at its lowest:

  • # of HHAs
  • HH spending
  • Patient episodes/encounters
  • etc…

Therefore, it makes it easier to say “look at this explosive growth” in whatever aspect of home health that they want.  Because if they used 1997 as the starting point, many of those same data points would be less today than what they were back then.  That would defeat the argument of explosive growth!


Rural Add-On Payments are Poorly Targeted and Most Payments Benefit Areas that Do Not Have Low Utilization

see page 245 of the report

This should be self-explanatory.

Remember, the Rural Add-on almost ended last year.  It looks like MedPac wants to try to eliminate this from future HH spending.  So those of you that have a fair amount of beneficiaries in Rural America, are you ready to give-up that additional 3% that you receive for each of these episodes?


Access to Capital for Expansion is Adequate

see pages 246-247 of the report

Again, fairly self-explanatory.  But, with the caveat that this is all based on the situations of the largest, publicly traded HHAs.  This DOES NOT consider the capital situation for the majority of HHAs in the industry.

How is your access to capital?

If you are part of Kindred, Amedisys, Almost Family, the LHC Group, etc…, you have access to capital and you have what are known as ‘deep pockets‘.  However, if you are the average HHA, then your access to capital is quite limited.  As most HHA owners have identified over the last handful of years, looking for access to capital is not a task you want to undertake when you are in need of capital!  HHAs that did not establish lines of credit (or any access to capital) prior to their need of that capital do not have anywhere near the access to capital that the largest, publicly traded HHAs do.  This is part of the reason why many HHAs are struggling financially, even though the MedPac paints a rosy picture of the financial fortunes of the HH industry.


Payments Increased and Costs per Episode Decreased in 2015

see pages 247-249 of the report

Quotes from this small section:

“In 2015, average Medicare payments per episode increased by 2.8 percent for freestanding agencies.”

That’s interesting, because when I looked at the FINAL HH PPS Rule for 2015, it identified that industry spending was going to be decreased 0.3%; and that looked to be the smallest spending decrease since at least 2010!  So I guess that the non-freestanding HHAs for this same time period experienced a decrease in their payments by episode of approx. 15%.  Doesn’t seem likely!  This would seem to indicate that someone is way off on their calculations: either CMS or MedPac.  Or, there is the third option: they both are.

As someone that has been doing analyses of the payment changes by episode type since the early days of PPS for EVERY Proposed and FINAL Rule, I just don’t see this.

However, this is another one of those situations where industry inaction will imply agreement with MedPac’s assertions.  Something that certainly won’t (and hasn’t) bode well for future HH spending.


Payments Increased and Costs per Episode Decreased in 2015

see pages 247-248 of the report

Quotes from report:

“In 2015, average Medicare payments per episode increased by 2.8 percent for freestanding agencies.  Total spending increased by 2.3 percent to $18.1 billion.”
“The average cost per episode decreased by 3.4 percent in 2015, …”
“Low or no cost growth has been typical for home health care, and in some years cost per episode declined.”
“The ability to keep costs low in most years has contributed to their high margins under Medicare PPS.”

I don’t necessarily agree 100% with what MedPac notes here, but there is some truth in what they say.  I have not seen that costs across the industry are decreasing, but there are episodes receiving fewer services than before.  This can reduce some costs to an extent, but generally this reduction causes a corresponding increase in the cost per unit of the services being provided, and how accurately is MedPac capturing that data remains to be seen.

Additionally, as previously noted, the Medicare Cost Report (MCR) does a poor job of allocating costs to the Medicare and non-Medicare lines of business.  This generally causes an understatement of costs attributable to Medicare and an overstatement of costs attributable to your non-Medicare lines of business.

So, although there may be some truth in what MedPac identifies, that does not mean for a second that that data is incapable of being manipulated to the detriment of the HH industry.


Medicare Margins Increased in 2015

“In 2015, HHA margins in aggregate were 15.6 percent for freestanding agencies …”

The following is excerpted from the 2015 MedPac report:

“The Commission estimates that the Medicare margins for 2015 will be 10.3 percent.”

Well, that’s quite a discrepancy!  15.6% is approx. 51.5% greater than their own projection for 2015 of 10.3%.

Remember, 2015 was the second year of Rebasing!  Certainly, not a period that will be remembered as one of growth in the home health industry.

Additionally, MedPac identifies here that they exclude hospital-based HHAs, as they are part of the Hospital for Cost Report filing purposes, but they do note that hospital-based HHAs had Medicare Margins of -14.8% for 2015.

Additionally, I am including the final paragraph of this section as taken from the MedPac Report.  See the following:

Final Paragraph - Medicare Margins in 2015

Final Paragraph – Medicare Margins in 2015

Well, they don’t think too highly of the HH industry’s own projections.  However, they also fail to mention their own projections for 2015 as compared to their recent calculations for 2015.  Remember, there was over a 51% discrepancy in what MedPac projected and what MedPac identified as actual Medicare Margins.

Question:  Who from the industry projected Medicare Margins of 4.96% in 2014 and 0.96% in 2015?  Were these projected Medicare Margins for:

  • Only freestanding HHAs?
  • Or ALL HHAs?


How comfortable are you with the accuracy of MedPac’s calculations?



Medicare Margins Remain High in 2017

see pages 248-249 of the report

MedPac projects the industry to have Medicare Margins of 13.7% in 2017; assuming the Sequester remains in effect.

In the MedPac Report to Congress for 2016, they had projected that the industry would average Medicare Margins of 8.8% for 2016.  Therefore, the Medicare Margins that they projected for 2016 (8.8%) were only 56% of what they calculated the 2015 Medicare Margins for freestanding HHAs to be (15.6%).  MedPac attributes the difference to be because of the 3.4% decrease in costs and the 2.3% increase in payment per episode.

Is this what you experienced in 2016?

  • A decrease in costs,
  • and an Increase in episodic reimbursement


How Should Medicare Margins Change in 2018?

see pages 249-251 of the report

“… the Commission has concluded that home health payments need to be significantly reduced.”

Remember, MedPac is calling on Congress (and CMS), to immediately reduce HH spending in 2018 by 5% and begin a two-year rebasing of HH payments in 2019.

Additionally, MedPac want CMS to use the most recent Cost Reporting data possible, and also to use audited Cost Reports to the extent feasible to recalculate Medicare Margins and reduce episodic payments accordingly in 2019 and 2020.  MedPac has also stated that the use of the annual Market-Basket Update (i.e., inflationary updates) has undermined the current rebasing policy by offsetting the intended cuts of rebasing (potential attempt to eliminate the inflationary updates).



This two-year extension of rebasing is certainly not beyond the realm of possibilities, here in this acrimonious environment that we currently operate in.  Something that our industry needs to do a better job of is finally understanding the importance of the accuracy of the completed Medicare Cost Report.  For far too long, too many HHAs have just looked to have the cheapest preparer complete their MCR, and that has come back to bite the industry in a hugely negative manner.  And I believe that most of the MCRs that CMS had audited back when they were preparing for the first round of rebasing were poorly defended, as most HHA owners felt that any disallowances didn’t impact their reimbursement.  Well, that was a lesson that was learned the hard way.  Will the industry have learned from that lesson, or is it bound to make the same mistakes once again if there is a second round of rebasing?  If there is indeed, another round of audits of HHA MCRs, then the industry has got to do a better job of protecting the expenses identified in those MCRs, or this round of rebasing will likely be much worse than the last.

MedPac has historically not been a friend of the HH industry.  But unfortunately, a great deal of the individual HHAs in this industry have not proven to be friends of this industry also.  If this industry doesn’t learn to unite and follow a different approach than what has been followed in the past, I am afraid that this industry is in for more of the same for the indefinite future.

I would recommend that everyone that is concerned about the future of this industry read this MedPac report, especially those chapters impacting HH; which include Chapters 1, 2, 7, 13, and especially Chapter 9.

Remember the old tried and true adage:

United we stand; divided we fall!