Big Picture Finances
Analyzing the new system 8 months into its use
by Richard Cheng

On Jan. 1, 2020, the Patient Driven Groupings Model (PDGM) was officially implemented for home health services by the Centers for Medicaid & Medicare Services (CMS). Under PDGM, home health agencies (HHAs) have new financial incentives to consider when admitting and continuing care for Medicare beneficiaries. The financial incentives include higher rates for admitted beneficiaries after an inpatient institutional stay, such as at hospitals and skilled nursing facilities (SNFs). Lower rates are provided for admitted beneficiaries from the community, such as hospital outpatients and hospital patients in observation status, along with beneficiaries who start care from their home without a prior inpatient institutional stay.

The new PDGM case-mix system categorizes episodes into 432 payment groups based on several characteristics:

  • episode timing
  • referral source (as stated above in reference to hospitals or SNFs)
  • clinical category
  • functional/cognitive level (via OASIS data)
  • the presence of comorbidities.

As was true before PDGM, low-use episodes with relatively few visits in an episode will be paid on a per-visit basis. The threshold for the low utilization payment adjustment (LUPA) will vary from two to six visits, depending on the payment group to which an episode has been assigned. However, episodes at or above the threshold will receive the full case-mix adjusted 30-day payment under PDGM.

Despite the changes associated with case-mix adjustment methodology and the unit of payment, under PDGM, eligibility criteria and Medicare coverage for home health services remain the same. If a Medicare beneficiary meets the criteria for home health services as pursuant to 42 CFR § 409.42, the beneficiary can receive Medicare home health services, including therapy services. Payment under the home health prospective payment system continues to be a bundled payment structure designed to cover all home health services under 42 CFR § 409.44, including nursing, medical supplies, home health aides and therapy services.

Financial & Market Impact

CMS landed on a 30-day payment rate of $1,864.03 for the 2020 calendar year. The agency predicted in its fact sheet that Medicare payments to HHAs will increase by roughly 1.3%, or $250 million, for 2020. CMS further states that this projected “increase reflects the effects of the 1.5% home health payment update percentage ($250 million increase) mandated by Congress in the Bipartisan Budget Act; and a 0.2% payment aggregate decrease (-$40 million) in payments to HHAs due to the changes in the rural add on percentages, as required in the Bipartisan Budget Act.”

CMS also estimated PDGM’s likely impact in the 2020 home health payment rule, predicting:

  • Payments in 2020 increasing by 2.8% for nonprofit agencies and 3.7% for facility-based HHAs;
  • Payments falling by 0.3% for freestanding agencies and by 1.1% for for-profit HHAs;
  • HHAs in urban areas seeing a 0.5% payment decrease while those in rural areas should see a 3.4% increase;
  • Payments going up for smaller providers and falling for larger providers. For example, payments would increase by 1.9% for the 2,841 HHAs with fewer than 100 episodes in annual volume and drop 0.2% for larger HHAs (those with more than a 1,000 episodes a year).

Based on these financial projections, HHAs large and small are assessing the market for growth, opportunities and market share. HHAs are generally less capital-intensive than SNFs, hospitals, assisted living communities, etc., because agencies do not need elaborate physical infrastructures, such as land, buildings or landscaping. There tends to be a smaller capital market for HHAs. Despite knowing PDGM would be implemented in 2020, providers continued seeking growth through acquisitions before the new payment system was put in place (e.g., LHC Group acquired seven new HHAs and a hospice in 2018). However, PDGM, in conjunction with the effects of the COVID-19 pandemic, has slowed the growth of HHAs through acquisition because investors, private equity groups and HHAs are likely assessing the financial impacts of PDGM before attempting to acquire more HHAs.

PDGM Primer

Need a refresher on how PDGM came about and what it entails? Here you go:

In 2018, the Centers for Medicare & Medicaid Services (CMS) issued a final rule (CMS-1689-FC) that updated the Medicare Home Health Prospective Payment System (HH PPS) rates and wage index for calendar year (CY) 2019. The final rule implemented several changes, including a 2.2% increase ($420 million) in payments to HHAs in 2019, rural add-on payment methodologies through 2022, certification and recertification for patient eligibility for home health services and remote patient monitoring.

The final rule also removed seven measures from the HHQRP, a regulatory text change regarding OASIS data and refinements to the HHVBP model. It also finalized payment policies for the new 2021 home health infusion therapy services benefit.

Throughout this process, the Bipartisan Budget Act (BBA) of 2018 created multiple requirements for home health payment reform, using a new case-mix methodology, starting Jan. 1, 2020. CMS stated in the final rule that PDGM “relies more heavily on clinical characteristics and other patient information to place patients into meaningful payment categories and eliminates the use of therapy service thresholds.” The final rule also implemented a new 30-day unit of payment in lieu of the traditional 60-day unit and eliminated the volume of therapy visits to determine payment amount.

Before PDGM, the PPS used a series of nine payment thresholds that increased payment as the number of therapy visits in an episode increased. Through the eyes of the federal government, this incentivized HHAs to provide more therapy visits. The Medicare Payment Advisory Commission identified that HHAs tended to adjust their services to maximize financial results, and an investigation by the U.S. Senate Committee on Finance found that many agencies were targeting therapy services based on financial incentives and called for Medicare to move away from using therapy as a payment factor. Consequently, this was a major factor in eliminating the therapy thresholds
under PDGM.

Staff & Therapy

Because PDGM lowers the financial incentive to provide additional therapy, beneficiaries and therapy staff have been impacted. Since PDGM has been implemented, widespread layoffs of physical therapists, occupational therapists and speech-language pathologists have increased, adversely impacting patient care (there are examples of patients being told that Medicare does not pay for therapy under PDGM, which is not true) and fewer employment opportunities for therapists. CMS has issued its own position on the role of therapy under PDGM:

“The need for therapy services under PDGM remains unchanged. Therapy provision should be determined by the individual needs of the patient without restriction or limitation on the types of disciplines provided or the frequency or duration of visits. The number of needed visits to achieve the goals outlined on the plan of care is determined through the therapist’s assessment of the patient in collaboration with the physician responsible for the home health plan of care. The home health Conditions of Participation (CoPs) (42 CFR 484.60) require that each patient must receive an individualized written plan of care. The individualized plan of care must specify the care and services necessary to meet the patient-specific needs as identified in the comprehensive assessment, including identification of the responsible discipline(s); the measurable outcomes that the HHA anticipates will occur as a result of implementing and coordinating the plan of care, and; the patient and caregiver education and training. All services must be furnished in accordance with physician orders and accepted standards of practice. Therefore, the visit patterns of therapists should not be altered without consultation and agreement from the physician responsible for the home health plan of care. Any changes to the frequency or duration of therapy visits must be in accordance with the home health CoPs at 42 CFR 484.60 …”

Notice Requirements & Fraud

HHAs must meet the quality data reporting requirements under the Home Health Quality Reporting Program (HHQRP). HHAs must submit this data and patient assessment data to CMS or be subject to a 2% reduction to the home health market basket percentage increase. The final rule added two additional quality measures to the HHQRP:

  • Transfer of Health Information to Provider Post-Acute Care; and
  • Transfer of Health Information to Patient Post-Acute Care.

CMS believes transferring health information quality measures will ensure better coordination of care, specifically increasing the likelihood that the patients’ medication lists are provided to the patient and the provider upon discharge. Also, since the implementation of PDGM, CMS adopted changes to the Home Health Value-Based Purchasing Model (HHVMP). CMS believes that reporting HHAs’ performance data under the HHVMP contributes to a meaningful choice and allows patients to compare HHAs. In the final rule, CMS describes that it will publicly report each agency’s total performance scores (TPS) and TPS percentile ranking from the Year 5 (CY 2020) Annual TPS and Payment Adjustment Report in the nine model states that qualified for a payment adjustment.

In an effort to address Medicare fraud, CMS has reduced the Request for Anticipated Payment (RAP) to 20% in 2020. RAP payments will be eliminated entirely by 2021. Despite the payments being zero, RAPs in 2021 must still be submitted within five days of each 30-day period or be subject to a late penalty. CMS identified fraud as a concern in October 2019, citing an “increase in RAP fraud schemes,” and saying that “eliminating RAP payments over the next two years would serve to mitigate potential fraud schemes while minimally impacting HHAs due to implementation of the PDGM, which increases the frequency of payment for services to HHAs.”

COVID-19 Impacting PDGM Codes

Two ICD-10 CM diagnosis codes were recently implemented by the Centers for Disease Control and Prevention’s National Center for Health Statistics (NCHS), effective April 1, 2020:

  1. In response to the national public health emergency, NCHS is implementing a new diagnosis code, U07.1, COVID-19, into the International Classification of Diseases, Tenth Revision, Clinical Modification (ICD-10-CM) and;
  2. In response to recent occurrences of vaping-related disorders, the NCHS is implementing a new diagnosis code, U07.0, Vaping-related disorder, into the International Classification of Diseases, Tenth Revision, Clinical Modification (ICD-10-CM), for reporting vaping-related disorder.

More importantly, according to CMS, the clinical group assignment for both COVID-19 and vaping-related disorder and the low comorbidity adjustment for COVID-19 will be included in the PDGM grouper software.

Looking Ahead

Given the payment changes for HHAs, anticipation for changes in the home health industry should be considered. Only time will tell how the industry will adapt to PDGM.

Richard Cheng is a health care regulatory attorney focused on corporate transactions, regulatory and compliance matters. He represents a variety of health care providers (e.g., nursing facilities, home health agencies, hospices, assisted living facilities), investors and private equity groups. He is certified in health care compliance and worked as an occupational therapist before becoming an attorney.