American Academy of Home Care Physicians
Turmoil In The Home Healthcare Industry
By Mark McDonnell, MD

The home care industry as been besieged from all sides in the past two years.. The explosive growth of home health care has brought a greater amount of regulatory scrutiny to the industry. Much of this scrutiny is justified by fraudulent practices of some home care companies who take advantage of government reimbursement systems. However, the marketplace has also been buffeted by declining reimbursement from managed care payers, conversion to a prospective payment system by Medicate, and massive consolidation within the industry.

Understanding the forces of influencing the marketplace will help physicians make better-informed decisions regarding home care providers they choose for their patients.

The problems in the home care market are reflected in the performance of publicly traded home care stocks. The Home health business Report Stock Index dropped 14% from its close in June, 1998, and the HHBR Home Health Services Index was down 19.8% during the same time period. Losers led gainers 6-to-1 in the publicly traded index. The biggest surprise came from on large national pediatric home care company whose stock dropped 78.8% (from 512.22 to $3.28) in one day of trading after publishing an unexpected poor earnings report. As a whole, revenue is ip at most home health care companies but earnings are down reflecting difficulty in integrating previous mergers, increasing business at lower margins, and a decrease in government reimbursement for home health services.

Much of the nervousness in the public markets is centered on the Health Care Financing Administration's (HCFA( implementation of the Prospective Payment System (PPS). HCFA was charged by Congress to develop a more cost-efficient means to reimburse for home care services in order to curb the growth in home health expenditures. The current cost-plus system of reimbursement did not promote cost-efficiency in the delivery of home care services. The PPS will provide a capitated-type of reimbursement to home care companies based on historic utilization rates and regional cost difference. The PPS will certainly reduce reimbursement to medicare home care agencies and potentially discourage new home care companies from entering this market. The effect for physicians and their patients would be fewer home health agencies to choose from and higher rates charged to private payer insurance plans leading to higher deductible payments for patients and their families.

The implementation of PPS has been delayed until after HCFA finishes its Year 2000 computer problems. In the meantime HCFA has implemented an Interim payment System (IPS) which will be a transitional payment formula until PPS is in full effect. The IPS has been met with significant criticism by the hone care industry because of consequential reductions in home health reimbursement. The IPS capped payment at the lesser of a percentage of an agency's historical annual reimbursement or a historical national median level in addition to capping per beneficiary payments.

Home care agencies who cared for the sickest patients or who historically provided more efficient care were the most adversely affected by this change in reimbursement. The IPS has been blamed for the closure of 763 (according to the GAO0 or approximately 1,000 (according to NAHC) home care agencies nationally. Congress is currently investigating ways in which to alter the IPS formula in order to relieve the critical reimbursement burden to many home care agencies.

In addition to the reimbursement issues, the federal government has also undertaken an investigative project to eliminate fraud and abuse in the home care industry. Operation Restore Trust (ORT) was launched last year with the intent of saving the federal government billions of dollars in fraudulent home care billing practices. The ORT has been successful in meeting its goals but many upright home care companies have been caught in its crosshairs.

Similar to HCFA's investigation into university faculty hospital billing practices, some home care agencies have been accused of fraud for honest filling mistakes or for misunderstanding complicated Medicare billing rules. Additionally, the Office of Inspector General (OIG) has launched a compliance program for home care agencies, similar to its billing compliance program for hospitals, which seeks to institute elaborate safeguards to prevent fraudulent billing practices. Some estimate that it will cost a home care agency over $50,000 to comply with all of the OIG guidelines. This expensive compliance program has been viewed as economically detrimental to many small community-based home care agencies.

The final regulatory blow for many small home care providers has been the requirement to purchase a surety bond which would be used to guarantee repayment of overpayments to medicate. Unfortunately the bonds were difficult to obtain, and when they could be obtained they were very expensive and required personal guarantees on the part of agency principals. This regulation was net with an outcry equal or greater than that leveled against the IPS, and has since been suspended until HCFA can change the regulations so that more home care companies can obtain these bonds.

Although most pediatric home care agencies do no receive Medicare reimbursement, they are still expected to meet the same HCFA requirements as adult home care agencies. Pediatric agencies have been somewhat protected from the decrease in reimbursement experienced by Medicare agencies because the federal and state governments have been working to increase reimbursement for health care for children through the Medicaid program in accordance with the Child 200 projects.

These agencies that have focused more on private insurance payers have found themselves dealing with other important reimbursement issues. The greatest problem has been assuring timely reimbursement from managed care payers. The healthcare industry traditionally has been very slow to pay providers compared to other types of industries. In home healthcare, however, the time to collect receivables has been greatly prolonged so that having an average days of receivables outstandings past 100 days is considered normal. Even some large national home care companies with information system resources has struggled to decrease their outstanding receivables to less than 110 days. This delay in payment has a tremendous impact on an agency's available cash flow and increased the costs of providing services.

As is typical in a service industry, home care survives on a small profit margin. Typically, the home care industry has achieved profit margins of 5 to 10%. These margins are quickly eroded, especially in smaller agencies, when resources are directed to meet additional regulatory requirements or to fund accounts receivables. The turmoil in the home healthcare industry has put many financially marginal providers out of business and has made it more difficult for the remaining providers to meet their financial and clinical goals. As companies struggle to survive, less emphasis will be placed on developing clinical programs to meet the needs of a growing home care population.

I believe it is important that physicians are aware of the type of agency that they are referring patients to. If the agency is experiencing serious financial problems then the quality of care may also suffer. Recently, a large regional pediatric and adult home are provider on the West Coast closed its doors after struggling for over a year to meet regulatory and financial obligations. The patients were left without home care services once it closed its doors and many families had to scramble to find alternative arrangements.

Physicians should work to build an alliance with their home care providers in order to assure that the needs of their patients are being met. Physicians play an important role in helping a home care provider keep in compliance with statutory regulations. Physicians should talk with their home care agency staff to determine how they can help keep them in compliance with all regulations. Physicians may also be able to assist by appealing claims that have been denied by government and private payers. Physicians who use a significant amount of home care services may want to participate on an agency's Professional Advisory Board or Governing Body. These boards, established by Medicare regulations, have the ultimate responsibility for assuring effective, efficient, appropriate, and adequate services to meet the needs of the patient population served by the agency.

Home Health Agency Closings in 1998