A hospital-based home health agency may be profitable. It may be losing money. Or it may be generating a profit that falls short of what hospital leadership expects.

In any of those situations, the HHA may be underperforming. But it may also be misunderstood.

Hospital leaders generally have extensive financial and operational information. The difficulty is determining what that information actually says about the HHA—and whether its reported results accurately reflect the agency’s operating cost and the value it brings to the combined organization. There is a difference, and sometimes a significant difference in how you analyze the financial and operational results for an acute-care entity as compared to a post-acute care entity; particularly a home health agency.

Before reducing the services of an apparently underperforming agency, selling it, or closing it, leadership should answer several important questions:

• Is the HHA truly underperforming?
• What is causing that underperformance?
• Can those causes be corrected?
• How much of the agency’s reported cost is directly related to its operations?
• Which costs would actually disappear if the HHA were no longer part of the organization?
• What financial, operational, and strategic value would the hospital lose if the HHA were no longer part of the organization?

The bottom line on the HHA’s departmental financial statement is an important starting point. It should not be the end of the analysis.

Home Health Is Not Acute Care Delivered Somewhere Else

Hospital finance leaders may be exceptionally capable within acute care while still lacking the specialized knowledge necessary to evaluate a home health agency. It is like the hospital language is English, and the language of home health is Greek. To understand home health, you need to have someone on staff or engage with someone who speaks Greek. Short of that, there will likely be a lot lost in the translation.

Home Health has its own reimbursement methodologies, regulatory requirements, staffing challenges, clinical workflows, operational measures, and revenue-and-cost relationships. Analyzing its financial and operational performance differs significantly from analyzing an acute-care operation. You cannot improve its performance by moving down the departmental profit-and-loss statement and requiring each expense category to be reduced by a predetermined percentage.

Evaluating an HHA requires understanding measures such as:

• cost per visit by discipline;
• clinical productivity;
• visit utilization;
• revenue and cost per payment period;
• patient and payer mix;
• case-mix weight;
• LUPAs and Outliers;
• staffing and scheduling models; and
• the relationship between per-unit costs and aggregate expenses.

For example, reducing clinical staff may lower payroll expense. But if the reduction also limits the agency’s capacity, creates scheduling inefficiencies, increases contract labor, or prevents it from accepting appropriate referrals, the agency’s overall performance may worsen—not improve.

Similarly, reducing visits without understanding patient needs, LUPA thresholds, case mix, and the relationship between utilization and outcomes may reduce cost per patient. It may also reduce revenue, adversely affect care, or create other financial and operational consequences.

Home health expenses must be evaluated in the context of how the agency generates revenue and delivers care.

When Allocated Costs Distort the Picture

Hospital overhead allocations are an important part of Medicare cost reporting. Hospitals allocate shared costs among their departments, including subordinate home health agencies, using established cost-allocation methodologies.

CMS recognizes those allocations under its Medicare cost-reporting regulations. The issue is not whether the hospital may allocate these costs; of course it can.

The issue is whether those allocations provide an appropriate measure of the HHA’s performance as an operation—or of the value it brings to the combined organization.

Overhead allocations may reasonably reflect resources used by internal hospital departments physically located within and directly supported by the hospital. Those departments may benefit from the hospital’s facilities, such as rent, mortgage interest, housekeeping, personnel, utilities, maintenance, safety, security, insurance, information systems, and other shared infrastructure.

Many hospital-based HHAs operate differently.

The HHA may be located away from the hospital’s campus. It may lease and maintain its own office, employ its own administrative and clinical personnel, use a separate home-health-specific electronic medical record, and directly incur many of its own facility and operating expenses.

Nevertheless, the HHA may also receive allocations that include costs associated with:

• hospital facility personnel;
• depreciation on hospital-specific buildings and equipment;
• hospital utilities;
• certain hospital maintenance and repair expenses;
• facility safety and on-site security;
• hospital facility insurance; and
• the hospital’s practice-management or information systems, even when the HHA uses and pays for a separate EMR.

If the HHA is physically located within the hospital and benefits from these services, consider an appropriate share of the costs when evaluating the agency.

But when the HHA operates off campus and receives little or no benefit from certain hospital services or assets, the allocation may not accurately represent the cost of operating the agency from a pure business perspective.

A cost may be appropriately allocated to the HHA for Medicare cost-reporting purposes even if the HHA does not benefit from it. The allocation may include costs the hospital can eliminate if the HHA is sold or closed, but likely, most of those allocated costs will still exist at the hospital whether or not the subordinate HHA exists.

That distinction matters.

Allocated Cost Is Not Necessarily Avoidable Cost

Assume a hospital allocates $500,000 of shared overhead to its HHA. An outside analysis determines that approximately $100,000 reasonably represents services, resources, and infrastructure used by the agency. The remaining $400,000 primarily relates to hospital operations or assets from which the HHA receives little or no direct benefit.

Recalculating the HHA’s profitability using the $100,000 (instead of the $500k) does not change the Medicare cost report or challenge the hospital’s established cost-allocation methodology. It provides a separate management view of the agency’s actual operating performance—and a more appropriate starting point for evaluating the value it brings to the combined organization. I have seen hospitals close their subordinate HHAs, because they did not do this analysis (and live to regret that decision).

The analysis must then go further.

If the HHA were sold or closed, the remaining $400,000 would not simply disappear. It would remain a sunk cost to the hospital and would need to be absorbed or redistributed among its remaining departments.

In other words, the HHA’s allocated expenses—and perhaps its apparent loss—would disappear from its departmental financial statement. But most of the hospital-allocated costs would remain within the combined organization and need to be absorbed elsewhere.

Meanwhile, the hospital would lose the HHA’s revenue, its contribution toward shared costs, and any broader operational and strategic value the agency provides.

A decision that appears to eliminate an underperforming department may therefore leave the hospital with much of the same overhead—but without the HHA’s revenue and contribution to help support it.

The question is no longer simply whether the HHA appears profitable on its departmental financial statement after the allocation of hospital overhead. The more important question is:

After removing the HHA’s revenue and contribution, and redistributing the costs that remain, how do the combined organization’s financial results look now?

That is the analysis hospital leadership needs before concluding that selling or closing the HHA will improve the organization’s overall financial performance.

Is the HHA Actually Underperforming?

Adjusting for hospital-specific overhead does not establish that the HHA is operating efficiently. It provides a clearer starting point for determining whether it is.

An efficient agency will be efficient regardless of whether it is hospital-based, freestanding, nonprofit, or proprietary. An inefficient agency will remain inefficient regardless of its organizational structure.

The HHA may have genuine and correctable problems involving:

• excessive costs per visit;
• low clinical productivity;
• inefficient staffing or scheduling;
• inappropriate use of contract labor;
• poorly managed visit utilization;
• high LUPA exposure or costly Outlier encounters;
• weak case-mix performance;
• an unfavorable or misunderstood payer mix;
• inadequate volume relative to its infrastructure;
• weak revenue-cycle performance; or
• management reports that provide information without explaining what is driving the results.

Being hospital-based does not excuse poor financial or operational performance for the HHA. The question is whether leadership has accurately identified what is causing the underperformance. Until leadership identifies the causes, it cannot fix them.

If the causes are operational, the agency should have an opportunity to correct them. If the apparent underperformance is largely the result of hospital-specific overhead allocations, leadership should evaluate the agency through a clearer management lens. If both conditions exist, both must be addressed.

Selling or closing an HHA without first performing that analysis may dispose of an asset whose financial and operational problems could have been corrected—and whose overall contribution to the combined organization exceeds what its departmental financial statement suggests (meaning, it was more valuable to the combined organization than it was credited).

What Value Does the HHA Bring to the Combined Organization?

The HHA’s adjusted profitability is only one part of the analysis. Hospital leadership should also evaluate the value the agency contributes to the combined organization.

That value may include:

• supporting timely hospital discharges;
• helping manage inpatient capacity and patient flow;
• improving communication across care settings;
• supporting continuity following hospitalization;
• maintaining greater visibility into the patient’s recovery;
• helping reduce avoidable rehospitalizations;
• coordinating acute and post-acute services;
• preserving patient relationships within the health system; and
• strengthening the organization’s broader continuum-of-care strategy.

These benefits should not automatically be attributed to the HHA or used to camouflage poor performance. They should be identified, evaluated, and supported.

But they should not be ignored merely because they do not appear as revenue on the HHA’s departmental income statement.

“Continuity of care” is an attractive message for a hospital or health system offering services from acute hospitalization through post-acute recovery. If the HHA is the organization’s only post-acute provider, however, selling or closing it may change the substance behind that message.

The hospital may continue coordinating with independent home health providers, but it no longer owns or directly manages an organization providing post-acute care in the patient’s home. Once that infrastructure, workforce, and capability are gone, rebuilding them can be difficult and expensive, and the ‘continuity of care‘ message may no longer be valid.

Before Reducing, Selling, or Closing the HHA

If a hospital-based HHA is underperforming, the first question should not automatically be whether to sell or close it.

The first question should be why.

Before relinquishing an existing provider, its revenue, workforce, referral relationships, and place within the continuum of care, hospital leadership should determine:

• what the HHA actually costs to operate;
• how efficiently it is operating;
• which shared hospital services it truly uses;
• how much of its reported cost consists of hospital-specific overhead;
• which costs would remain after a sale or closure;
• where those sunk costs would be redistributed;
• what is causing any genuine underperformance;
• whether those causes can be corrected; and
• what financial, operational, and strategic value the organization would lose without the agency.

This requires more than reading a departmental financial statement. It requires a separate, objective financial and operational analysis that recalculates the HHA’s profitability, identifies the causes of underperformance, and evaluates the agency’s contribution to the combined organization.

Having worked with numerous hospital-based HHAs throughout my career, I have seen how hospital overhead allocations, acute-care financial expectations, and an incomplete understanding of home health operations can cloud the picture. I have also seen agencies with genuine performance problems that required more than an adjustment to allocated costs.

The objective should not be to prove that the HHA is performing well—or to justify a conclusion that some in leadership may have already reached. It should be to determine whether the agency is underperforming, misunderstood, or both; and can what has not been working be fixed.

If your hospital or health system needs an experienced outside perspective to objectively evaluate its Home Health Agency’s financial and operational performance and the value it brings to the combined organization, I can help clear up the picture.

Before reducing, selling, or closing a hospital-based HHA, understand what needs fixing, what costs will remain, and what the organization may be giving up.