The Centers for Medicare and Medicaid Services (CMS) released the highly anticipated regulations adjusting Medicare reimbursement rates for Home Health Agencies (HHAs) for calendar year (CY) 2010. CMS also issued new regulations restricting the transferability of Medicare provider agreements in HHA acquisitions and requiring deactivated HHAs to obtain an initial state survey or accreditation by an accreditation organization before Medicare billing privileges may be reactivated. The regulations, published in The Federal Register on Nov. 10, 2009, are available at this link.
Updates to Reimbursement Rates
In updating the Home Health Prospective Payment System (HH PPS), CMS will increase the Market Basket by 2.0% to account for inflation in CY 2010 instead of the proposed increase of 2.2%. In an effort to advance home health care quality improvement, CMS will require that HHAs satisfy the quality reporting requirements in CY 2010 in order to receive the full home health Market Basket increase. HHAs that do not meet the reporting requirements will be subject to a 2% reduction to the Market Basket increase. The four-year case mix adjustment phase-out will continue into its third year in 2010, with a 2.75% reduction for FY 2010 and a 2.71% reduction for FY 2011. CMS will decrease the target percentage of outlier payments in CY 2010 from 5% to 2.5% as a result of information it received from an association of home health agencies that reflected an average of outlier payments of less than 2%. CMS also will set the Agency Outlier Cap at 10% of total HH PPS payments. CMS intends to closely monitor the outlier payments and may even consider elimination of the outlier policy in future years. Additionally, the National Standardized 60-day Episode Rates, National Per-Visit Rates, Non-Routine Medical Supply (NRS) Conversion Factors, and Low Utilization Payment Amount (LUPA) Add-On Payment Amounts will be adjusted by 2.5% in CY 2010, rather than by the former rate of 5%.
These changes decrease overall reimbursement rates by 1.03%. It is estimated that the decrease in rates will result in a reduction in reimbursement of approximately $140 million. Providers should adjust projections accordingly, and acquisitive agencies will need to adjust their financial models of targeted entity cash flows to take into account the new rates.
Major Changes Affecting HHA Acquisitions
Effective Jan. 1, 2010, CMS will prohibit the transfer of a provider agreement and corresponding provider number to the new owner of an HHA that acquires an HHA (whether by asset purchase or stock transfer) if the change of ownership takes place within 36 months of the HHA’s enrollment in Medicare. This rule will apply even to an HHA that has a change of ownership application pending as of Jan. 1, 2010. CMS believes that this change will ensure that those establishing an HHA are doing so with a long-term vision of providing services (as opposed to development with intent to sell the HHA), and to ensure that such owners and operators have an understanding of the business and satisfy the conditions of participation. In February 2009, the Government Accountability Office (GAO) issued a report entitled “Improvements Needed to Address Improper Payments in Home Health,” which identified an increase of Medicare home health spending of 44% from 2002 through 2006, despite a less than 17% increase in the number of beneficiaries receiving the benefit. The GAO determined that a portion of this increased spending was the result of upcoding, kickbacks and billing for services not rendered, all of which violate the conditions of participation, and criticized CMS for inadequate administration of the home health benefit. This new rule is one of the measures taken by CMS to ensure compliance with the conditions of participation.
Accordingly, if a company or individual intends to acquire an HHA, and the HHA has been enrolled in Medicare for less than 36 months, the new owner will be required to enroll as a new provider, undergo a state survey or accreditation, and execute a new provider agreement prior to billing Medicare for services rendered. This will result in a significant gap in Medicare reimbursement and may prove to be cost-prohibitive in some instances, as well as potentially decrease the value of certain HHAs. Additionally, the change is particularly troublesome given the fact that many states have significant delays for surveys, and, in some states, there are moratoriums on such surveys. Several individuals submitted comments to the proposed rule explaining these significant delays to CMS and requested that transactions currently in process as of Jan. 1, 2010 be allowed to proceed. A hardship exemption was also requested for situations in which HHAs are forced to divest for entirely legitimate and unavoidable reasons, such as when a partner in a partnership dies or leaves the business and a new entity is created. Additionally, some comments criticized the arbitrary nature of the 36-month timeframe suggesting it be reduced to a 12 months. CMS rejected all of these proposals. Therefore, companies currently in the process of completing a transaction and companies considering transactions will need to take this new rule into consideration.
In addition, CMS will require an HHA that has its Medicare billing privileges deactivated to obtain an initial state survey or accreditation by an approved accreditation organization before its Medicare billing privileges may be reactivated. Although the billing privileges will be revoked, the HHA will continue to be enrolled in Medicare and the provider agreement will remain in place during such period of deactivation. According to CMS, the purpose of this rule is to ensure that an HHA is in compliance with the HHA conditions of participation, which in turn should guard against inappropriate billing. An HHA should be mindful of the requisite billing guidelines to avoid deactivation. If the HHA's billing privileges are deactivated, it will need to (i) submit certain requested information to Medicare and (ii) undergo a state survey or obtain accreditation before it can resume billing.
In addition to the aforementioned changes, CMS also made additional changes with respect to quality reporting requirements, which will be the subject of a forthcoming bulletin.
What These Changes Mean for the Home Health Industry
The updates to the reimbursement rates will place even more pressure on struggling HHAs to operate efficiently and force them to make further cuts in expenses. It is anticipated that many HHAs will find themselves unable to operate at the margins to which they are accustomed, and in some cases, unable to operate profitably. As a result, we expect to see consolidation within the home health industry. Companies with the capital or excess cash flow for acquisitions will have an opportunity to grow. Companies desiring to acquire HHAs, however, should be mindful of the restrictions on transfers of provider agreements and corresponding numbers and should take these restrictions into consideration when performing due diligence on a potential target. Finally, HHAs should comply with the requisite billing guidelines to avoid deactivation.
For more information, please contact Ken Marlow, Stephen Page, James Bowden, or any member of the Waller Lansden Healthcare practice at 800-487-6380.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.