The Health of Home Health Care
This past September, the Centers for Medicare and Medicaid Services (CMS) published another in its series of Health Care Industry Market Updates. This report examines the economic status and future prospects for the home health industry.
Of the $45 billion dollars spent on home health care in 2001, $33 billion was spent on freestanding home health agencies (HHA), $9 billion on respiratory and infusion therapy services, and approximately $2.9 billion on durable medical equipment. The industry is highly fragmented and currently comprises more than 7,000 agencies, most of which are small, local, or regional providers ranging from small, publicly traded and privately held companies to visiting nurse associations and nurse registries. Of these, 68% are freestanding agencies and about half are for-profit.
One of the fastest growing Medicare expenditures for 1990 to 1997, HHA costs leapt from $3.3 billion to $18 billion. After the implementation of the Balanced Budget Act of 1997 (BBA 97) and the implementation of a Medicare home health prospective payment system (PPS), more than 3,000 HHAs either closed or merged. However, since October 2000, the industry has stabilized and is expected to grow at an annual rate of 5% to 10%. This growth can be attributed to demographic trends, relative cost advantages, and more efficiencies as a result of BBA 97.
Gauging profitability of HHAs is difficult, although best estimates showed a positive median-operating margin of 2.3% in 2002. Many smaller HHAs have shifted their patient mix to favor Medicare patients because Medicare payments under PPS offer the highest margins. The General Accounting Office (GAO) attributes increased profitability under PPS to fewer visits per episode and a larger proportion of patients categorized into higher payment groups. Some home health providers disagree with this strategy because of the uncertainty of proposed congressional Medicare legislation (eg, a prescription drug benefit and co-payments for home care). Others believe that commercial payors are attracted to home care providers because they demonstrate an increased interest in home care as an alternative solution to costly hospital stays. Some analysts note that the national nursing shortage may also negatively impact the growth of home health care.
Some of the large costs associated with hospitalization or facility-based care are avoided in home care, resulting in costs that are mostly labor-related, which is further exacerbated by the current nursing shortage. The personnel mix in HHA is: 33% professional nurses; 2% social workers, 38% home health aides; 5% physical therapists; 2% occupational therapists; 12% vocational nurses; and 8% other. In addition, HHAs have been forced by efficiency incentives to invest in new technologies such as computer systems, software systems, and telemedicine, a strategy several years behind other industry groups. While these investments will ultimately increase cost-effectiveness and efficiency, the up-front costs to an HHA are significant, especially for smaller agencies.
According to government reports, despite a decreased volume of visits and a reduction in costs per visit, the quality of care delivered by HHAs has not declined. A decline in utilization of home care services has occurred as a result of regulatory changes over the past 5 years, but it is expected to grow in the future.
Medicare spending for HH PPS is projected to increase 2% in 2003 to $10.2 billion. Since the establishment of PPS, base payment for an episode of care has stabilized. This year, the base payment is $2,160; the base rate for 2004 will increase to $2,230 (up $70), accounting for an additional $340 million in Medicare spending.
Large home health providers will continue to benefit from the efficiencies achieved from their economies of scale and information technology improvements, but smaller HHA will continue to struggle. The entire report published on September 22 is available at: www.cms.hhs.gov/marketupdate.