As we approach the last quarter of 2024, all Home Health Agencies (HHAs) should ramp up their budgeting protocols for 2025.  Every HHA should prepare a budget for the upcoming year, and those that do not squander an opportunity to better manage their agency and better understand their operational and financial results. Budgeting is a business fundamental that all organizations should use that wish to be successful in home health.  Budgeting helps agencies improve their cost-effectiveness and resource utilization; thereby improving their overall profitability. For HHAs that are new to budgeting, I recommend beginning in September (4 months before year-end) as budgeting properly in home health is more complex than what most learned via a textbook.  However, even the most experienced HHAs in regards to budgeting should begin October 1st (the start of their 4th quarter) to ensure that they have time to prepare, review, modify as necessary, review again, get approved, and finalize before the start of the budgeted year.

Why don’t more HHAs budget?

For the last 20+ years, less than 50% of all HHAs prepare an annual budget.  They are actually doing a disservice to their agency.  Most HHAs do not do budgets because they either never have, and managed fine without them.  Others no longer prepare budgets because the budgets that they did prepare were not helpful in the management of their operations.  This latter point is a significant one because the budgets that just about all these HHAs used were inappropriate for our industry if they wanted to use them to help manage their agency during the budgeted period.  In fact, I would guesstimate that 80+% of those HHAs that do prepare a budget still prepare a budget that is truly inappropriate for the home health industry. The most common shortcoming of these inadequate budgets is that almost all of them start with revenues as the ‘driver’ of revenues and expenses.  This may seem counterintuitive because you certainly want to try to accurately project revenues and expenses with your budget.  However, using revenues as the ‘driver’ of revenues is shortsighted at best, and detracts from the potential benefits of preparing an annual budget.  Revenues are NOT a ‘driver’ of revenues.  The reason that most organizations use revenues as a primary ‘driver’ of revenues is because management intimates that they want to have revenues increase by ‘X’% for the upcoming year.  Well, that’s fine, and management can still set those kind of parameters for the budget.  However, you should be budgeting the ‘drivers’ that will enable you to increase your revenues by the ‘X’% established by management. This is why so many HHAs do not prepare an annual budget and so many that do, do not use their budget to help manage the budgeted period.  Because if you start with revenues and increase (change up or down), all you do is come up with a projected revenue amount for each month, but you have no real idea of what you need to happen to generate that revenue!  And, when you compare your actual revenue for a given month to the budgeted revenue, all you can identify is the difference (the variance), not why the difference occurred. And this “Why” is key!

What are the ‘drivers’ of revenues and expenses?

This is where most budgets fall short; not using the proper ‘drivers’ of revenues and/or expenses.

Budgeting Revenues

The ‘drivers’ of revenue are pretty straightforward; certainly more so than those of expenses.  However, developing these values with a reasonable level of accuracy can be challenging.  In the simplest sense, revenues are just a by-product of “Patients by Payor by Pay Rate”.

• • How many payors will you budget for?
  • And will you break any payors down into sub-groups?
    • Sub-groups being useful for those large volume patient types, for example, Medicare
    • Maybe your Medicare volume justifies breaking your Medicare patients into 5-sub-groups (MIN, LOW, MOD, HIGH, MAX)
    • Such that you project your monthly admits, discharges, and census by each of the Medicare sub-groups
    • As well as your projected reimbursement rates by these Medicare sub-groups
  • How many patients will you admit, discharge, and carry over from one month to the next by payor (or sub-group)?
  • What is the average reimbursement rate for each patient by payor (or sub-group)?

When you budget your revenues like this, you greatly enhance your ability to manage your agency during the budgeted period.  When you identify a variance between what your projected monthly revenue was (budget) compared to your actual monthly revenue, you can drill down to the admits/discharges/census by payor and the pay rates to get a better understanding as to why the variance exists and what you can do about it going forward.  This is so much more beneficial than just identifying the $ variance between budget and actual.

• • So how do you organize and group payors?
  • When do you use sub-groups?
  • How do we project the per-patient reimbursement rate by patient by payor (or sub-group)?
  • It’s this ability, this expertise that makes all the difference in developing and preparing a useful, industry-specific budget
    • This is the art, on top of the science of budgeting
  • If you do not have this expertise in-house, you need to find someone that can help you that does

Budgeting Expenses

The ‘drivers’ of expenses are a little more complicated, but once established are usually a bit easier to project (at least somewhat).  Generally speaking, about 75-85% of HHAs costs can be tied directly to a ‘driver’ of that cost (e.g., Payroll-related costs, rent, mileage expense, etc…), meaning somewhere between 15-25% of an HHAs costs don’t necessarily have a ‘direct-driver’ but should be budgeted nonetheless.

• • Payroll-related costs generally account for 60-70+% of an HHAs costs
    • So how do you compensate your staff?
      • This dictates how you budget
      • FTEs, Hours, Visits, Salaries are all potential ‘drivers’ of an HHAs Salaries/Wages expense
    • Payroll Taxes and Employee Benefits are each generally based on a % of the Salaries/Wages expense
    • Budget these properly and your payroll-related costs become a by-product of these calculations and you have a greater ability to understand any variances that occur (and they always occur) when you compare budget to actual
  • Rent is based on the rental agreement, or if the property is owned, it is based on the related expenses of ownership (e.g., interest, property tax, common area maintenance, etc…)
  • Mileage expense (if you have), is generally based on a ‘per-visit rate‘ x ‘the # of visits for that discipline (cost center)’, or a stipend that is pre-set
  • Additionally, other expenses may or may not have ‘direct-drivers’, and these you’d generally base off of the prior year’s actual results and adjust as believed necessary for the budgeted year

Challenges of Budgeting

First, a budget should be specific to the industry.  Home Health is a service industry and the budget should reflect that.  Unfortunately, most budgets that I have seen utilized throughout the industry are more representative of a manufacturing industry and do not appropriately account for the nuances specific to the home health industry. But the biggest challenge has always been and continues to be identifying the appropriate ‘drivers’ to use for projecting revenues and expenses; and even if properly identified, calculating/using them properly in the agency’s budget. Another challenge would be that there are very few financial managers who have experience with preparing and using budgets.  If you decide to prepare a budget (and every HHA in the industry should be preparing a budget every year), you’ll want someone who is experienced and knows what they are doing.  You really do not want someone that’s trying to figure it out as they are going through the process. Keep in mind that the 2025 budget should also be able to account for the impact all HHAs will realize for 2025 due to this year being the first year of the financial impact attributable to the Home Health Value-Based Performance Model (HH VBPM).

Benefits of Budgeting

The benefits of budgeting far outweigh the costs/effort of preparing a budget!

1. 1. Every year you complete a budget, you would learn more about your agency
   2. A budget helps improve decision making
   3. The budget-to-actual comparisons you could do would significantly enhance your decision-making capabilities
   4. When you’ve used a good budget, you can make more precise adjustments in a timely manner
   5. A budget helps you gain better control over agency expenditures
   6. A budget helps you keep on track with your financial and operational goals
   7. Budgeting helps with staying organized and focused on what you need to focus on
   8. Budgeting can help identify and eliminate bad habits
   9. Budgeting helps an agency better manage the limited resources available to it, and
   10. Budgeting helps to identify otherwise hidden inefficiencies in an agency’s operations

The above is by no means all the benefits of preparing a budget.  It is just 10 concepts that are greatly enhanced when you utilize a proper, industry-specific budget for your agency.

Summary

Incorporating the budget process into your operations can and will improve your overall operational results.  Maybe you have never prepared a budget before.  Maybe you have done budgets in the past, but just were not happy with the results.  Regardless, home health operations, reimbursement, and profitability are all becoming more challenging.  Using a budget; a proper budget, can help mitigate the challenges we face and help us to manage and even improve our profitability in these challenging times. John, of IFS4hh has been preparing home health specific budgets for over 25 years; dating back to the cost-based era, through the Interim Payment System (IPS) and the various iterations of the Prospective Payment System (PPS), through the Patient-Driven Grouping Model (PDGM) home health currently operates under.  I’d love to help you prepare a budget for 2025 and beyond to help you see and realize the benefits achievable through the budgeting process.  But I recommend everyone to start utilizing a budget for 2025 and beyond, whether or not you use John’s services.

Approaching Year End Follow-up:

As we near the end of the year, it’s crucial to remember the importance of budgeting for the upcoming year.  This is when all calendar year-end agencies should be finalizing their CY2025 budgets.  However, it’s a fact that most home health agencies (HHAs) do not prepare a budget for the upcoming year.  This is a missed opportunity, as a well-prepared budget is one of the most important management tools an agency can have.  Therefore, I say ‘bravo’ to those HHAs who prepare a budget for the upcoming year, especially to those who use their budget to manage their agency during their budgeted period. Most agency owners/operators cite the complexity and the lack of viable budget models applicable to the home health (HH) industry as reasons they do not prepare budgets.  That is quite understandable, as most HHAs are not large enough to be able to spend the time and resources necessary to create their own budget model.  I can sympathize, as I have worked on developing budgets for HH for upwards of 30 years, and I still tweak and adjust my models almost every year based on client needs. This leads me to the following questions:

1. Does your agency prepare a budget for each fiscal year?
   • If you do, does your agency use the budget to manage financial and operational results during the budgeted period?
   • Do you prepare budget-to-actual analyses?
2. Would your agency be willing to prepare a budget if a user-friendly, pre-packaged budget model specifically designed for the home health industry was available?