Medicare Margins and you. Your home health agency generated a positive Medicare margin last year. Is that good?

It is certainly better than a loss. But a positive Medicare margin does not necessarily mean an agency is performing well.

Suppose your agency generated a Medicare margin of 6%. That result might initially appear successful: Medicare revenues exceeded Medicare costs, and the agency made money caring for its Medicare patients.

But what if the home health industry’s average Medicare margin was more than 20%?

Your agency would still be profitable, but it would also be substantially underperforming the industry benchmark. And when reimbursement declines, costs increase, or other financial pressures emerge, an agency beginning with a 6% margin will likely have a much more difficult time absorbing the impact than an agency beginning with a margin of 20% or more.

Without an external benchmark, “profitable” can create a false sense of security.

Ten Years of Medicare Spending and Margins

Each year, the Medicare Payment Advisory Commission (MedPAC) analyzes Medicare revenues and Medicare-allowable costs reported through the Medicare cost reports of freestanding home health agencies.

The resulting average Medicare margin provides an important industry benchmark. It shows how much of the industry’s Medicare revenue remained after the Medicare-allowable costs of providing that care. So, this is the industry’s average profit in Medicare for a given year. Average, meaning there were plenty of agencies that did better, and there were many more that did worse.

When the Medicare margins from the most recent ten-year period are placed alongside Medicare Fee-for-Service (FFS) home health spending, the results reveal a significant trend:

Year	Medicare FFS Home Health Spending ($ billions)	Average Medicare Margin
2024	$16.0	21.2%
2023	$15.9	19.8%
2022	$16.2	22.2%
2021	$16.9	24.9%
2020	$17.1	20.2%
2019	$17.9	15.4%
2018	$18.0	15.3%
2017	$17.9	15.2%
2016	$18.4	15.5%
2015	$18.4	15.6%

Sources: Various MedPAC Reports to the Congress and the July 2026 MedPAC Data Book.

From 2015 through 2024, Medicare FFS home health spending declined from $18.4 billion to $16.0 billion—a reduction of approximately $2.4 billion, or 13%.

During that same period, the average Medicare margin increased from 15.6% to 21.2%.

That is an extraordinarily significant disconnect, yet it is rarely presented or discussed. During a period when Medicare FFS home health spending declined by 13%, Medicare profits increased!

What Does the Disconnect Mean?

Medicare spending and Medicare margins measure different things.

Medicare FFS home health spending reflects the total amount Medicare paid for home health services. It can decline because of fewer FFS beneficiaries, lower utilization, fewer payment periods, movement into Medicare Advantage, payment-rate changes, or a combination of factors.

The Medicare margin measures the portion of Medicare payments remaining after Medicare-allowable costs.

Consequently, total Medicare spending can decline while Medicare margins increase if the costs of providing the remaining care decline faster than Medicare payments.

Although the two trends can occur simultaneously, that does not make the disconnect any less important.

HHAs routinely hear that lower reimbursement and declining Medicare spending are creating increasingly difficult financial conditions. Those pressures are real. There are hundreds, if not thousands, of agencies that will attest to this. Nevertheless, MedPAC’s own data show that lower FFS home health spending has not translated into lower average Medicare margins. Why not?

Across the industry, over time, the average Medicare margin increased.

That does not mean every HHA has performed well. It means some agencies have adapted more successfully than others.

The question for each agency becomes:

If Medicare FFS home health spending has declined while the industry’s average Medicare margin has increased, how does your agency compare—and why?

Are Your Results Improving—or Merely Positive?

An agency should compare its current Medicare margin with its own historical results. That comparison can indicate whether the agency’s Medicare financial performance is trending positively or negatively.

But historical performance provides only an internal comparison.

If an agency’s Medicare margin increased from 3% to 6%, the trend is positive. Management should recognize that improvement. However, if the industry average is approximately 20%, the agency continues to substantially underperform the external benchmark. Even better would be a positive trend that takes the agency’s Medicare margin above the MedPAC benchmark.

Both perspectives matter:

Your historical results tell you whether your agency is improving. The MedPAC Medicare Margin helps tell you how well your agency is actually performing compared with the industry.

The MedPAC Medicare margin is directly comparable for freestanding HHAs because it is derived from freestanding HHA Medicare cost reports. Hospital-based HHAs can also benefit from the comparison, although hospital-parent overhead allocations generally contribute to their lower reported margins.

A hospital-based HHA may adjust for allocated parent overhead when evaluating its performance. It can also compare the underlying operational measures that contribute to the margin, including direct costs per visit by discipline, utilization, productivity, staffing, LUPAs, Outliers, and other financial and operational results in a direct manner.

What Should Your Medicare Margin Be?

I recommend that HHAs establish a Medicare margin planning range. Establish a floor—the low end of the range—and a ceiling—the pie-in-the-sky high end of the range.

I further recommend that the average Medicare margin identified by MedPAC serve as the targeted floor (meaning you want to be at least average). The target ceiling should be twice the MedPAC average, with the hope—and expectation—that the agency’s actual Medicare margin will fall somewhere between those two points.

The objective is not to become fixated on a specific percentage. The objective is to try to be above average. The planning range establishes an external standard against which the agency can budget, operate, monitor its results, and identify opportunities for improvement.

An agency below the floor should want to understand why. An agency above the floor should continue looking for reasonable opportunities to improve. And an agency approaching the ceiling should determine which practices are contributing to its success and how those practices can be sustained.

Patient mix will significantly affect what an individual agency can achieve. Some patients need more services and resources than others. Patients must receive the care they need, and clinical judgment must remain central to determining that care. But if an agency routinely provides more services than necessary, overutilization can quickly erode its profit margin.

The financial objective is not to withhold necessary care. It is to learn how to provide the care patients need in the most efficient and cost-effective manner possible.

That requires a willingness to consider alternatives to “this is how we have always done it.” Better approaches may exist, but they can improve results only when an agency is willing to earnestly try them.

Knowing the Margin Does Not Explain the Margin

A benchmark can identify the existence and size of a performance gap. It cannot, by itself, diagnose its cause.

Factors affecting an agency’s Medicare margin may include:

• Patient and payer mix
• Case-Mix Weights
• Visit utilization
• Costs per visit by discipline
• Clinical and administrative productivity
• Staffing levels and compensation
• LUPAs and Outliers
• HHVBP adjustments
• Revenue capture
• Cost allocation
• Financial reporting
• The accuracy and consistency of the Medicare cost report

A little information can be dangerous when it creates the appearance of understanding.

Knowing your Medicare margin is important. Knowing whether it is above or below the industry average is more useful. But neither piece of information explains why the margin is at that level or what the agency should do about it.

Improving one measure in isolation can also unintentionally worsen another. Understanding the relationships among reimbursement, clinical operations, utilization, staffing, productivity, patient needs, costs, and quality is essential.

The objective is not simply to change the numbers. It is to understand the financial and operational decisions producing them so that you can make the changes necessary to achieve the desired results.

Medicare cost-report accuracy also matters. Historically, substantial numbers of HHA cost reports have been excluded from various analyses for multiple reasons, including reports containing significant errors. An agency cannot fully understand its Medicare financial performance if the cost report from which that performance is calculated does not accurately identify, allocate, and calculate its Medicare revenues and costs.

Start With a Budget and Monthly FOA Reviews

The annual budget should establish the agency’s targeted Medicare margin and the financial and operational assumptions necessary to achieve it.

Those assumptions may include anticipated patient mix, Case-Mix Weights, census, payment rates, visit utilization, LUPA and Outlier activity, costs per visit, staffing, productivity, wage levels, HHVBP adjustments, and other revenue and cost drivers.

The budget provides the road map. Monthly Financial-Operational Analysis (FOA) Reviews measure actual performance and determine how it compares with that plan.

A Monthly FOA Review can help management identify things such as:

• Whether the Medicare margin is meeting expectations
• Whether performance is trending positively or negatively
• Which financial or operational measures differ from budget
• Why those variances are occurring
• Whether the issue is isolated or recurring
• What action may be appropriate

The reported margin is the outcome. The Monthly FOA Review helps management understand the causes beneath it—the “why.”

Without that analysis, management may recognize that profitability is declining but still not know why. It may address a visible symptom while leaving the underlying cause unchanged. Understanding the “why” is key.

Agency-Level Margins Begin with Patient-Level Decisions

Medicare margins are reported at the agency level, but many of the decisions affecting those margins are made one patient and one Plan of Care at a time.

The disciplines involved, the number, timing, and length of visits, the risk of a LUPA or Outlier, the agency’s costs per visit by discipline, and the resources required by the patient all contribute to the agency’s eventual financial results.

The Case-Mix Planner™ helps bring those considerations together before and during the patient encounter. It gives clinicians and management better visibility into the relationship among the patient’s Case-Mix Weight, expected Medicare revenue, planned utilization, projected costs for the patient encounter, LUPA or Outlier exposure, and other payment considerations.

It does not determine what care a patient should receive. Clinical judgment determines that.

The Case-Mix Planner™ helps the agency understand the financial and resource implications of the care being planned so that necessary services can be delivered as efficiently and cost-effectively as possible.

Experience Matters

Understanding Medicare margins requires more than general accounting knowledge or familiarity with the current payment methodology. It requires an understanding of how Medicare reimbursement and home health operations have evolved—and how the different financial and operational components interact.

I have worked with the Home Health PPS since its inception—and with Medicare home health reimbursement even before PPS was implemented.

During that time, I have watched and helped agencies respond to repeated changes in Case-Mix Weights, therapy thresholds, rebasing, value-based purchasing, the transition from 60-day episodes to PDGM and 30-day payment periods, and multiple generations of behavioral adjustments—from the nominal change in the case-mix weight adjustment that began during the early PPS years to the permanent and temporary adjustments associated with PDGM.

I have seen the number of Case-Mix Weights increase from 80 during the early years of PPS, later to 153, and then to the current 432. The weights themselves changed repeatedly, as did the relationship among patient characteristics, resource utilization, and reimbursement.

More importantly, I have helped HHAs adapt throughout those changes. So, when the next change comes (and it’s a matter of ‘when’, not ‘if’), I’ll be able to help agencies successfully adapt to those changes as well.

That experience provides a perspective that cannot be gained simply by studying today’s payment methodology. Understanding where the system is today is important. Understanding how it arrived here, why it works as it does, and how successful agencies have adapted along the way can be equally valuable because it can help us envision where we are heading.

How Does Your Agency Compare?

Many HHAs do not know their own Medicare margin—or how to calculate it from their Medicare cost report.

IFS4hh can calculate your agency’s Medicare margin, compare it with the MedPAC benchmark, and help management understand what that comparison means.

The calculation identifies where the agency stands. Establishing a Medicare margin planning range provides a target. A budget and Monthly FOA Reviews can help identify why actual performance differs from expectations and what financial or operational changes may improve the result. The Case-Mix Planner™ can provide greater visibility into certain resource and financial decisions at the individual patient-encounter level. All of these are designed to help an agency become more cost-effective and operationally efficient.

Medicare reimbursement will continue to change. Costs will continue to change. Patient needs will continue to vary.

The agencies best positioned to succeed will not necessarily be those with the most information. They will be the agencies that develop the clearest understanding of what their information means—and use that understanding to make better decisions.

Do you know your agency’s Medicare margin—and what is driving it? Understanding your results is the first step. Knowing what to do about them is the next. Contact IFS4hh to discuss your agency’s performance and explore opportunities for improvement.