Home Healthcare — CMS Target #1

I’ve begged my friends who own home healthcare assets to get out. Sell. And all but one (way to go George) told me that they had too much upside in the business to consider selling now.

Lesson #1 when running a healthcare company. Sell before major regulatory change. Sell when margins are too high to be sustainable — no one is good enough to make up for it in volume without MANY years of additional work. Sell when someone wants to buy your business — for when the day comes that CMS targets the industry, then NO ONE will be a buyer.

Amedisys is the poster child for the most recent CMS and Congressional action. They have been accused of creating care plans with one eye on the reimbursement rules. Get to a certain threshold of visits, and reimbursement rises substantially. One visit less than the threshold and no bonus. Guess what? CMS thinks the industry is making sure the patient gets the one last, and arguably unnecessary, visit so the home health agency gets the higher payment.

OF COURSE THEY DO. Wouldn’t you? One more treatment will help, not hurt the patient. Yet when the payment system is set up so that one more treatment gives the agency a windfall, only the idiots in Washington would think that industry would stop one treatment short.

Both the Senate Finance Committee and CMS are targeting the industry. On Friday CMS announced a payment reduction for 2011. This is the first of three years of payment reductions. Why is CMS reducing payments? Because they also figured out that the industry was gaming the system when it came to coding. The higher the acuity of a patient, the higher the payment by CMS. Take a patient and move the patient up the acuity ladder (it is highly discretionary) and the agency earns more. Over the years, CMS has determined that this upcoding has cost about 9% of total payments. It is recovering this “over payment” by about 3% annually for three years.

Make no mistake — home health is on the chopping block. It probably doesn’t get as bad as 1999-2000, but it will be bad and my friends who own home health companies? Good luck in exiting anytime in the next three years.