It may be hard to believe, but the home health industry utilized more business and financial fundamentals 25+ years ago than what it utilizes today.  That seems backward, because logic would dictate that as an organization/industry matures, its utilization of business and financial fundamentals would increase.  However, this has not been the case for home health.  I have watched this de-evolution occur over the last 25+ years and have been fighting an uphill battle to counter this occurrence throughout the industry.  Following I will describe how this occurred and point out various business and financial fundamentals that all home health agencies should consider incorporating or strengthening in their operations.

Monthly Financial-Operational Analysis/Review

How/When did this happen?

Prior to the inception of the Prospective Payment System (PPS) for Home Healthcare on October 1, 2000, the home health (HH) industry was reimbursed under what was known as ‘Cost-Based Reimbursement’.  Cost-Based Reimbursement compensated home health agencies (HHA) based on the concept of the ‘lower of Costs or Charges, subject to the agency’s Cost Limits’.  Therefore, at that time, home health reimbursement was based on the lower of the following:

• • • The agency’s Medicare costs, as calculated by the Medicare Cost Report (MCR)
    • The agency’s charges for the services provided to Medicare beneficiaries for the reporting period, or
    • The agency’s Medicare Cost Limits, as calculated by the agency’s MCR

Under this methodology, the very best an agency could hope to do was to break-even under Medicare; which, for a multitude of reasons beyond the scope of this discussion, was near impossible!  This meant that it was impossible for HHAs to generate a profit in Medicare, and it quite-often worked out that an HHAs Medicare business was subsidized by it’s non-Medicare payors (i.e., Commercial Insurance was generally viewed as a potentially better payor than Medicare! – Quite a different perspective than today!).  Therefore, HHAs were extremely motivated to do what they could to keep their costs down.

Additionally, during this time, agency’s had their reimbursement rates calculated periodically in between their MCR filings.  One of two methodologies was employed for these calculations for every HHA, which were:

• • • The Periodic Interim Payment (PIP) approach, or
    • The Per Diem approach.

The PIP Approach

Under the PIP approach, HHAs had to send in summary information of their Trial Balance and their Medicare and Total Visit Utilization Rates for each quarter throughout the year.  Each quarter, the agency’s Fiscal Intermediary (FI; now known as a MAC) would perform an analysis on this information and adjust what the agency’s bi-weekly PIP payment would be.  The FI would ensure that the HHAs reimbursement was the lesser of the HHAs Costs, Charges or Cost Limits.  Under this approach, this analysis was done four times during the year, besides when it was also completed for the ‘as filed’ MCR.

The Per Diem Approach

Generally reserved for smaller agencies.  Under the Per Diem approach, HHAs would send in summary information of their Trial Balance and their Medicare and Total Visit Utilization Rates after the ninth month of their reporting period.  The FI would perform their analysis on this data and adjust the agency’s reimbursement rates accordingly.  The FI would ensure that the HHAs reimbursement was the lesser of the HHAs Costs, Charges or Cost Limits.  Under this approach, this analysis was done one time during the year, besides when it was also completed for the ‘as filed’ MCR.

Resultant Actions by the HHAs

As HHAs Costs, Charges and Cost Limits were analyzed multiple times a year pre-PPS, and their reimbursement was subject to these analyses, they stayed on top of what each of these values were, as they continually changed.  Therefore, HHAs had a vested interest in ensuring that their Medicare Costs were the lowest when comparing Medicare Costs with Medicare Charges and with Medicare Cost Limits.  Because, if Medicare Costs exceed Medicare Charges and/or Medicare Cost Limits, the HHA was reimbursed the lesser of its Charges or Cost Limits.  This, of course, was the least desirable option, so HHAs stayed on top of these calculations and ran their business to ensure that their Medicare Costs were the lowest of the three.

HHAs did this by performing an analysis at the end of each month to calculate what their Medicare Costs, Medicare Charges and Medicare Cost Limits were.  I currently call this type of analysis the Monthly Financial-Operational Analysis/Review (Monthly FOA Review).  Pre-PPS, almost 100% of all HHAs were performing some form of Monthly FOA Review.  The industry was by no means perfect back then as compared to today, nor was it Lilly-white in its actions; which lead to the scrutiny we have been under for the last 20+ years.  But, industry-wide, almost all HHAs were performing some from of monthly analysis on their financial and operational results.

What Changed?  PPS

A great many things changed on October 1, 2000 when the PPS was implemented.  One of the biggest changes was that HHAs could now recognize (and keep) profits that they generated in the Medicare program.  Immediately, Medicare became the best payor in HH and the competition between HHAs was on to obtain as much Medicare business as possible.  The interim analyses that the FI’s used to do (PIP/Per-Diem) were ended and HHAs were reimbursed based on fixed revenue calculation formulas based on the OASIS, not the interim period reports or the MCR.  90+% of all HHAs discontinued their Monthly FOA Reviews within a matter of months and their focus became almost entirely on growth.

For the first handful of years under PPS, this approach worked to a degree, as all HHAs were now able to generate profits under Medicare due to, at the time, very generous reimbursement rates.  But what happened and what was lost that most HHAs failed to see during this time of high profits in Medicare was the introduction (and quick growth) of inefficiencies in their operations, so their Medicare profits, although good, were not as good as they could have been because the profits at that time overshadowed the inefficiencies that were occurring.  Had the HHAs continued to perform their old Monthly FOA Reviews, these inefficiencies could have been timely detected and addressed, ensuring top-tier profits.  However, for most HHAs they were not continuing to use these Monthly FOA Reviews, and therefore these inefficiencies became widespread in most HHAs, eroding the foundations of the agencies and ensuring financial and operational difficulties in the future that the HHAs were unable to readily address (this is where we are today!).

These inefficiencies exist to this day as most HHAs still do not regularly employ the Monthly FOA Reviews that were the norm back in the 1990s.  And, as Home Health Spending under Medicare, and therefore the reimbursement rates, had been reduced more times than increased over the last 20 years, the challenges most HHAs face have increased and become more troubling during this time.  In fact, there has been a net decrease in the number of operating Medicare certified HHAs every year since 2014.  Why?  Because most HHAs throughout the industry complain about cuts to reimbursement but do not analyze their own financial and operational activities/results to identify where they are struggling.  The Monthly FOA Reviews would help every single struggling HHA (and even those that aren’t) improve their ability to survive these turbulent times.

Monthly FOA Reviews are arguably one of the two best business/financial fundamentals that all HHAs should employ.  The second (Budgeting), follows, and dovetails perfectly with the Monthly FOA Reviews and increases ownership/management’s knowledge and understanding of their agency better than any other operational activities you could consider!  And, properly prepared Monthly FOA Reviews provide the perfect format for helping to prepare your annual budget.

Budgeting

Budgeting is arguable the second most important business and financial fundamental (Monthly FOA’s being the first) that all agencies should utilize.  However, less than 50% of HHAs prepare an annual budget, and 80+% of the budgets prepared in HH are not even used to measure and manage the agency during the budgeted period (therefore, of limited value at best) !

Budgeting is both a business and financial fundamental applicable to all industries; not just home health.  Any organization that wants to understand their business operations should prepare an annual budget.  Although budgeting is common throughout all industry, an organization’s annual budget should be built for the industry they operate in.  This is where most agencies fall short that do a annual budget in home healthcare.  A budget for any industry, to the extent it can be, should be built on the ‘drivers’ of the revenues and expenses for that industry.  Where most fail in HH is that most generally use revenue as the ‘driver’ of revenue, and that is not proper.  Management can dictate that they’d like to see a growth rate of “x%” in their revenues for the upcoming year, but the budget should be built on those ‘drivers’ that will create that growth of “x%” in their revenues.

There are agencies that are still successful even though they do not utilize Monthly FOA Reviews and/or Budgeting, but they are successful because they have minimized or eliminated inefficiencies from their operations.  For the rest, Monthly FOA Review and Budgeting helps to identify and properly address these inefficiencies that erode/destroy an agency’s profitability.  Doing this leads to success!

Therefore, all HHAs (even successful ones) should prepare and manage their agency using carefully prepared, industry-specific budgets to ensure success now and in the long-term.

Other Business and Financial Fundamentals that All HHAs should Consider:

Business Fundamentals

Strategic Management

Most do to some degree, but generally not to the extent they should.

This is BIG Picture thinking: What? How? Why?

Financial Management

All do to some degree, but generally not to the extent they should.  Ties into the financial fundamentals.

Overall financial oversight of the financial operations and results and the reporting thereof.  See financial fundamentals below.

Staff/Employee Management

All do to some degree, but generally not to the extent they should.

Managing proper staffing levels, staff productivity (almost unheard of) and staff compensation.

Vendor/Payables Management

All do to some degree, but generally not to the extent they should.  Ties in with cash flow management.

Managing vendor listings & account balances so as to ensure these liabilities do not become unwieldly (these represent future cash outflows) and ensuring proper verifications of vendors listed to minimize the chance of fraud and embezzlement.

Marketing

most do to some degree, but generally not to the extent they should.

This has to do with both product/service placement and recognition in your market(s), as well as managing the value of the investment in marketing activities (your ROI – what is the return on your investment in your marketing activities?).

Networking

All do to some degree, but generally not to the extent they should.

Networking oversight has to do with managing our referral network (and expanding where possible: Marketing) as well as networking within the industry (e.g., activities and/or memberships in State & National Associations, etc…and interactions with other HHAs in your market)

Negotiating

All do to some degree, but generally not to the extent they should.

This has to do with working with referral sources (current and potential) as well as with non-Medicare payors and the reimbursement rates for services provided (the Monthly FOA Reviews prove invaluable here  /  increased volume does not always lead to lower unit costs-this is a misguided notion).

et al …

Financial Fundamentals

Financial Statement Presentation

All do to some degree, but generally not to the extent they should.

Financial Statements should be presented based on the viewer (i.e., is the viewer internal or external to the agency?)

Financial Statement Reviews

All do to some degree, but generally not to the extent they should.

See Monthly FOA Reviews above.

Federal Policy Reviews/Analyses

Few do at all, most do not (a lost opportunity).  

Just about every time Medicare (CMS) makes a change in home health, it impacts an agency’s revenues and/or expenses.  Are you modeling this impact?  Very few do!

Are you participating in the Rule-Making Process (reviewing Proposed Rules and submitting comments, questions, etc… to try to influence the FINAL Rule)?  Very few do!  A lost opportunity to impact your future.  For example:

• • • • • • Each year’s HH PPS Proposed Rule that identifies regulatory and reimbursement changes  (for CY2025 Proposed Rule)
          • the Home Health Value-Based Performance Model (HH VBPM)
          • Review Choice Demonstration for HH
          • etc …

Forecasting

I have never known an HHA to properly do this.

This is the ‘living budget’ that includes the actual results for the completed periods as well as the budgeted projections for the remaining year.  Enhances an agency’s ability to accurately project the year-end financial and operational results for the agency.

However, this requires a high-quality budget as a starting point.

Revenue Cycle Management

All do to some degree, but generally not to the extent they should.

Billing and collections yes.  But improve management of accounts receivable (this is your future cash receipts!) to limit balances growing/extending beyond 90-days and cash-flow management & projections is where improvements could generally be made by most HHAs.

Trending of KPIs/Operational Metrics

Few do at all, most do not (a lost opportunity).  

KPIs/Operational Metrics are intimately tied to the Monthly Financial-Operational Analyses, without which trending (besides annually) KPIs/Operational Metrics is not possible.  Knowing and trending these also enhances your ability to create high-quality budgets!

The most important and valuable KPIs/Metrics (i.e., benchmarks) are internal KPIs/Metrics.  Measuring your own KPIs/Metrics against your own prior KPIs/Metrics is infinitely more valuable than measuring against external benchmarks (you do not know the quality of the data comprising external benchmarks).  External (e.g., industry-wide) benchmarks have value; just not as much as internal benchmarks do.

Risk Management

Few do at all, most do not (a lost opportunity).  

Identifying the potential positive and negative impacts of doing or not doing something with/for the agency.

et al …

Using Business and Financial Fundamentals in Home Health

As noted above, most HHAs do not properly use the business and financial fundamentals at their fingertips.  This is not because they are so difficult or challenging to incorporate into their operations, it is generally because they have not been exposed to the fundamentals in general and/or have not correlated the potential benefits that could be achieved with their use.  Most of the business and financial fundamentals noted above are fairly consistent in their usage/application, regardless of the industry the company operates in.  However, several are industry-specific and need to be used in a specific format and manner for that industry (e.g., Monthly FOA Reviews, Budgeting, Federal Policy Reviews/Modeling, etc…) and if not properly employed can actually be counter-productive to the company.

Proper implementation of these business and financial fundamentals WILL enable a company to elevate its success.  Whether that success is measured in terms of market advantage compared to its competitors, maximized profitability which enables numerous things, including enabling the organization to better reward its staff via compensation and bonus pools, for non-profits, as the enhanced profitability will generate additional resources that can be used to support their Mission Statement, or it just means that you are trying to best position your agency for sale.  Business and financial fundamentals are foundational in nature.  The greater an organization uses business and financial fundamentals in their operations the greater the likelihood of their success: both short-term and long-term success.  Any organization that wishes to achieve and maintain long-term success that is not fully utilizing the business and financial fundamentals described above is just putting hurdles in front of them selves that make achieving that success all the more challenging.  Organizations that do properly utilize the above business and financial fundamentals (specific to their industry) position themselves to be among the most successful in their industry.

Summary/Conclusion

Incorporating business and financial fundamentals is essential to any business that wants to survive in today’s competitive market.  Regarding the HH industry, most HHAs utilize few of these fundamentals, and that is a lost opportunity for them to create/improve a competitive advantage in their market.  All HHAs should review the business and financial fundamentals that they do use and determine if they use them to the degree that they should and look at the other fundamentals that they do not use and consider the potential benefits that they could bring to their operations and financial results.

You may have not used them in the past, but that doesn’t mean that you wouldn’t have benefitted from them.  Do your agency a favor and ensure that you begin using all the business and financial fundamentals discussed above to enable your agency to succeed during these challenging times.

If you need help with incorporating these business and financial fundamentals into your operations, we here at IFS4hh stand ready to assist.  Reach out at your earliest convenience to discuss your needs and what you’d like to accomplish and we will do all we can to help you achieve those goals.  But, if you need help, just be sure that you reach out to someone that understands these business and financial fundamentals; not someone that is just going to learn about them the same time you try to.