Assessing the Challenging Home Health Valuation Environment

Article

Changing Medicare populations, staffing shortages and other issues create challenges for valuations of home health care agencies.

5 minute read

January 24, 2024

Corey Palasota

Partner, Health Care Valuation Services

Elliott Jeter

Managing Director, Health Care Valuation Services

Health Care

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Reimbursement and Operating Challenges Hampering Industry’s Ability to Meet Demand

Home health agencies (HHAs) are facing multiple and simultaneous challenges to their operating environment. In 2024, Medicare reimbursement will decrease 2.9% on an episodic basis, adding to the cuts of the last few years. At the same time, demand for home health is accelerating, as Medicare beneficiaries increasingly prefer to receive care at home instead of in institutional setting.

Utilization and spending declined sharply during the pandemic, but Medicare home health service volume was declining even before the pandemic. Because more beneficiaries are enrolling in Medicare Advantage, the demand for traditional Medicare home health services is lower. Since the onset of the pandemic, many home health providers have reported that staffing shortages limit the volume of services they can provide.

By the Numbers

According to data from MedPac released in March 2023, traditional Medicare visits have decreased over the last few years.

Home-Health-Agencies-Graphic

Source: MedPac 2023 Report

Based on the MedPac data:

Traditional Medicare users decreased from 3.4 million in 2017 to 3.0 million in 2021.
The share of Medicare beneficiaries using home health decreased from 8.8% in 2017 to 8.3% in 2021. Total visits decreased from 104.8 million to 76.0 million in 2021.
In person visits per user decreased from 30.7 to 25.5 from 2017 to 2021. Reducing in-person visits allowed HHAs to offset reported price increases in labor and other services needed to deliver home health care.

Why it Matters

Private Medicare Advantage payors typically pay on a “per visit” basis. In addition, the per visit rates are often significantly lower than effective traditional Medicare per-visit rates. Home health agencies should be disciplined in their negotiations regarding Medicare advantage payors and should not be afraid to terminate the contract or walk away if the rates or the terms are not acceptable. Negotiations with private Medicare plans should introduce the concept of episodic type reimbursement, similar to traditional Medicare.
When negotiating with Medicare Advantage payors, it is helpful to be a large and sophisticated company with capacity and scale in a certain market. It is important to understand that cancelling Medicare Advantage contracts could affect traditional Medicare referrals, as both are often discharged from the same referral source.
The Medicare Advantage population is growing faster than traditional Medicare. Even in an inflationary environment, Medicare Advantage payors expect low payment rates to HHAs. Those in the home health industry hope that although Medicare Advantage rates will always be less than traditional Medicare, revenue per visit will increase over time.
Acquiring clinical talent in a tight home health labor environment is challenging. The lack of labor affects capacity and the ability to accept new patients.

Health Care Valuation Takeaways

During this time of reimbursement and operational uncertainty, the valuator should focus on determining the viability of the HHA in an inflationary environment with declining reimbursement. The valuator should determine whether the HHA has the negotiating clout to increase Medicare Advantage rates over time.
Traditional Medicare rate cuts should be modeled into the valuation analysis. The valuator should understand Medicare rate cuts and take into consideration the long-term valuation view. As time passes and future cuts are further understood, more clarity will evolve in the reimbursement environment.
Home health demand is at an all-time high as patients and payors recognize that more care can be delivered at home. Demand for services, across all payor and patient categories, remains strong.
The valuator should understand the HHA’s ability to recruit and retain employees during a tight labor market environment. High labor costs affect profit margins by increasing expenses and they also affect the HHAs capacity to serve patients, restricting the ability to grow the patient base.

For more information about these observations and the effect on health care valuations, contact us.

This is one in a series of related health care valuation posts:

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