Healthcare Industry Insight: Medicare Home Health and PDGM

Healthcare Industry Insight: Medicare Home Health and PDGM

Medicare Home Health and PDGM
A brief history of Medicare Home Health Care

It seems clear, all else being equal, that patients prefer to receive care in their homes. Now, the “all else being equal” is a big caveat that encompasses severity of the patient’s condition, the situation at home, availability of suitable care options, technology, and many other factors. However, it should not come as a surprise that people would rather be in their homes (which includes senior housing) than in any kind of institutional setting, such as hospital, skilled nursing facility (“SNF”), long-term acute care hospital (“LTACH”) and such. And, due to advances in technology (remote monitoring, telemedicine, etc.), new bio-pharmaceutical therapies, assistive devices, and home modifications, home health care has become a viable option for many more patients.

History of Medicare Home Health Care (1997-Present)

The Balanced Budget Act of 1997 (“BBA97”) was enacted into law on August 5, 1997 during the second term of President Clinton. In response to explosive growth in the costs associated with paying for Medicare-related home health care from the late 1980’s through 1997, BBA97 mandated that the Health Care Finance Administration (“HCFA”), the precursor to The Centers for Medicare and Medicaid Services (“CMS”), adopt a prospective payment system (“PPS”) for reimbursement of home health care costs as a replacement for fee-for-service (“FFS”) payments.

The first phase of the move from FFS to PPS was the introduction of an interim payment system, or IPS, in 1998. Congress mandated the IPS be implemented until the PPS was fully developed and implemented in 2000. Among the many impacts of this change in reimbursement methodology, total payments for Medicare home health care services declined from approximately $16.4 billion in 1997 to $7.5 billion in 2000, or 54%. The dramatic decrease in reimbursement dollars drove the number of home health care agencies down by approximately 35%. Agencies went out of business, stopped providing Medicare-reimbursed home health care, or merged with other agencies.

On October 1, 2000, HCFA implemented PPS for Medicare home health care. With this stable regulatory framework in place for a decade, the home health care industry enjoyed a period of strong growth – the number of agencies increased to pre-BBA97 levels – and margin expansion. On March 23, 2010, President Obama signed into law The Patient Protection and Affordable Care Act, which had the net effect of only modestly reducing the payments for Medicare home health care visits.

Patient Driven Groupings Model

So, since the introduction of the PPS mandated by BBA97, the home health care industry has been operating in a fairly benign environment. That came to a screeching halt effective January 1, 2020 as a result of the implementation by CMS of a new prospective payment system for payment of Medicare home health services. This new reimbursement methodology was created by CMS in response to The Bipartisan Budget Act of 2018 (“BBA 2018”), which was signed into law on February 9, 2018 by President Trump.

BBA 2018 mandated that CMS revise its existing reimbursement scheme to provide for reimbursement based on increased clinical specificity. This new system is referred to as the Patient Driven Groupings Model, or PDGM, and it, among other things, increases the number of possible patient classifications from 153 clinical groupings to 432. PDGM is intended to be revenue neutral to the federal budget.

In implementing PDGM, CMS also incorporated a number of other important changes:

  • Payments are now based on a 30-day episode of care rather than the 60-day episode previously used.
  • Therapy thresholds for determining payments have been removed.
  • Request for Anticipated Payments, or RAP, is being phased out – from 60% to 20% in 2020 and eliminated all together in 2021.
  • Starting in 2021, agencies will be forced to report their admissions, first as a “no pay” RAP and then as a notice of admission, or NOA, creating additional administrative burden and potential for financial penalties due to non-compliance.
  • Costs associated with technology, such as that involved in remote patient monitoring, can now be included on Medicare cost reports.
  • Some payments will receive higher reimbursement, such as those for patients coming from institutional settings or those with high co-morbidity.
  • Thresholds for LUPA (low utilization payment adjustment) payments are estimated to increase, which may cause more cases to be reimbursed on a per visit basis. LUPA payments may be a fraction of the case-mix adjusted payment.
  • Most importantly, a decrease in payment rates of 8% based on prospective behavioral changes on the part of participating home health care agencies to PDGM was proposed but later amended to 4.36%.

Taken together, the implemented (and soon to be implemented) changes to CMS’s reimbursement methodology for home health care has the potential to create significant chaos and disruption in the home health care sector, potentially on par with what was seen after BBA97.

A couple of factors can mitigate against such a downside scenario. First, there is significant, bipartisan interest in both the House of Representatives and the Senate to fix through legislation CMS’s reduction in reimbursement rates based on future changes in home health care agency behavior which CMS attributes to the agencies’ responses to PDGM. The argument here is that the behavioral changes have not actually been observed, so CMS is not making assumptions based on facts. If Congress does make a change, and bills have been introduced in both the House of Representatives and the Senate, it is likely that the behavioral-related decrease will be limited to something around 2% per year and will be based upon observed behavior.

Second, more sophisticated industry players have the data and analytical tools to help them optimize their operations to survive and, hopefully, thrive under PDGM. By focusing on different levers like patient mix, utilization and intensity of services, coding optimization, and labor mix and cost, they can reduce the hit from PDGM, and possibly, even benefit from it.

Third, given that PDGM is intended to be a revenue neutral initiative, there will be winners and losers. Those agencies with limited exposure to clinical groupings that historically have required a higher utilization of therapy visits (multiple sclerosis rehabilitation, neurological rehabilitation, etc.) are likely to benefit from the new payment system.

The combination of increased technology requirements needed to manage through PDGM, the payment rate decreases and also, importantly, the cash flow impact of rising DSO’s as a result of the RAP elimination, will likely cause many smaller and less sophisticated agencies to go out of business, exit the Medicare home health care business, or merge with another agency with the financial wherewithal and systems to survive. The salutary effect of this for the sophisticated players is that they will be able to acquire additional home health care assets at reduced valuations or capture market share from shuttered businesses.


It will be interesting to look back in a few years to see if we’ve entered another “golden age” of Medicare home health care similar to the 2001 to 2010 time period (and even to 2019, if you include the somewhat modest changes ACA made) OR if we’ve set back the cause of home health care by squeezing providers so hard that they choose not to participate, leaving patients without adequate home health care provider resources. If the latter is the case, look for costs elsewhere in the system to balloon as ER visits, hospital admissions, and SNF utilization all increase.

In any event, as with any major reimbursement or regulatory changes, the more sophisticated home health care companies are likely to thrive and continue to consolidate the highly fragmented market, as the ever-increasing demand for home health care services is not going to diminish.


John Patterson
Managing Director, Healthcare Industry Leader

Marc Gondek

Alex Wolodzko