The Home Health Outlier Funding Methodology:

Is It Time for Another Look?

Looking Beyond the Mechanics to Examine Whether the Current Funding Methodology Continues to Represent the Best Approach for Achieving Its Intended Purpose

If you haven’t already read the first article in this series, “Outliers: A Benefit… But at What Cost?“, I encourage you to begin there. It explains why the Home Health Outlier Provision exists and how the current funding methodology actually works. This article builds on that foundation by examining whether the current funding methodology continues to represent the best approach for achieving that purpose.

A Question Worth Asking

Most home health professionals recognize that Medicare includes an Outlier Provision to help protect agencies caring for unusually high-cost patients.

Few would argue with that objective.

The Home Health Outlier Provision was established to help preserve beneficiary access to care by providing additional reimbursement for patient encounters requiring unusually high levels of resources.

The purpose of this article is not to question the value of the Home Health Outlier Provision.

It serves an important purpose.

The question explored here is a different one.

Does the current funding methodology continue to represent the best approach for achieving that purpose?

A Brief History

When Medicare implemented the Home Health Prospective Payment System (HH PPS) in 2000, the Health Care Financing Administration (HCFA)—the predecessor to today’s Centers for Medicare & Medicaid Services (CMS)—recognized that some patient encounters would require substantially greater resources than others.

To help preserve beneficiary access to care, HCFA established the Home Health Outlier Provision to provide additional reimbursement for unusually high-cost patient encounters.

At that time, HCFA retained the flexibility to adjust the Outlier funding withhold so that the amount withheld from aggregate Home Health Spending more closely aligned with anticipated Outlier payments.

The objective was straightforward:

Maintain an adequate financial safety net while minimizing unnecessary reductions to overall Medicare Home Health reimbursement.

What Changed?

Implementation of the Patient Protection and Affordable Care Act (PPACA) fundamentally changed the financial mechanics of the Home Health Outlier Provision.

Rather than permitting CMS to continue aligning the Outlier funding withhold with anticipated Outlier payments, PPACA statutorily required the Outlier funding withhold to be established at 5% of aggregate Home Health Spending, while limiting annual Outlier payments to 2.5% of aggregate Home Health Spending.

The result was a structural funding disconnect that continues today.

The purpose of this discussion is not to determine where those funds ultimately went after they were no longer available for Home Health payments.

That is an interesting question in its own right—but one that is beyond the scope of this discussion.

Rather, this article examines whether the methodology that created that disconnect continues to represent the most appropriate approach for financing the Home Health Outlier Provision.

What Has Been the Long-Term Impact?

The annual funding impact has been significant in its own right.

Viewed cumulatively over time, however, the effect becomes even more substantial.

The following illustration summarizes the estimated annual and cumulative impact of the PPACA Outlier funding methodology on Medicare Home Health Spending since implementation in 2011.

The annual and cumulative funding impact illustrated above naturally raises an important policy question.

Does the current funding methodology continue to represent the best approach for financing the Home Health Outlier Provision while preserving beneficiary access to care?

A Note About This Discussion

The purpose of this article is not to advocate for a particular legislative outcome. Rather, it is intended to encourage informed discussion regarding whether the funding methodology established by PPACA continues to represent the most appropriate approach for financing the Home Health Outlier Provision today. Thoughtful public policy begins with a clear understanding of how existing policy actually works.

Two Possible Policy Approaches

The discussion that follows is intended to encourage thoughtful consideration of potential alternatives—not to advocate for a specific policy outcome.

Option 1

Eliminate the Home Health Outlier Provision

Potential Advantages

• Eliminates the Outlier funding withhold.
• Eliminates the statutory funding disconnect.
• Simplifies the Home Health payment methodology.

Potential Considerations

• Would require action by the Secretary of Health and Human Services (HHS).¹
• Eliminates the financial safety net for unusually high-cost patient encounters.
• May increase financial risk for agencies caring for medically complex patients.
• Could influence beneficiary access to care.

Option 2

Preserve the Outlier Provision While Restoring Funding Alignment

Rather than eliminating the Home Health Outlier Provision itself, Congress could amend the applicable provisions of PPACA to once again permit CMS to align the Outlier funding withhold more closely with anticipated Outlier payments.

Potential Advantages

• Preserves the Outlier safety net.
• Eliminates the long-standing funding disconnect.
• Better aligns funding with the purpose for which it was established.
• Better reflects today’s Medicare Home Health environment while preserving beneficiary protections.

Potential Considerations

• Would require congressional action.
• Fiscal and budgetary implications would require careful evaluation.

Since implementation of PPACA, the Medicare population eligible for Home Health services has continued to grow while aggregate Home Health Spending has continued to be affected by the statutory funding disconnect. Some may reasonably question whether restoring CMS’s ability to once again align the Outlier funding withhold with anticipated Outlier payments would better reflect today’s Medicare environment while preserving the Outlier safety net.

¹ Author’s Note

The Social Security Act provides that the Secretary “may” establish Home Health Outlier payment adjustments. The extent to which the Secretary could discontinue the Outlier Provision administratively—and the resulting effect on the existing statutory funding provisions—would require legal analysis beyond the scope of this article.

John’s Observation

In my experience, the most productive policy discussions rarely begin with predetermined answers.

They begin with better questions.

The Home Health Outlier Provision serves an important purpose.

Whether the current funding methodology remains the best approach for supporting that purpose is, in my opinion, a reasonable question worthy of thoughtful discussion.

Closing Thoughts

Every Medicare payment methodology should be evaluated periodically to determine whether it continues to achieve the objective it was originally designed to accomplish.

The Home Health Outlier funding methodology deserves that same thoughtful review.

Whether Congress ultimately decides to modify the current funding methodology or leave it unchanged is a policy decision.

Understanding how the methodology works—and why it was created—allows agency leaders to participate more thoughtfully in discussions that may ultimately influence the future of Medicare reimbursement.

Better understanding leads to better discussions—and better discussions help shape better policy.