Incentives, Upheaval Under New Home Health Payment Model Present Major Skilled Nursing Opportunity

While the skilled nursing world has largely adapted to its new Medicare payment model, the home health industry is currently in the midst of its own seismic shift — a change that could potentially open the door for nursing homes to grow in the space as smaller agencies rush for the exits.

The new Patient-Driven Groupings Model (PDGM) for home health may present skilled nursing operators with a chance to gain more control over patients as they move along the health continuum, S&P Global Ratings asserted in a report released last week.

“We expect skilled nursing facility (SNFs) and long-term acute care hospital (LTACHs) companies could enter the home-health market, for the right opportunity, as that would give them the ability to better manage their discharged patients through the continuum of care (more control to avoid readmissions), and enable them to establish a relationship with potential future customers,” S&P noted.

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Like the new Patient-Driven Payment Model (PDPM) for nursing homes, PDGM was designed to more closely link Medicare reimbursements for home health operators with actual resident need, with the goal of reducing fraud by eliminating a direct connection between payments and service volume.

While there are some key differences between PDPM and PDGM — including a downward payment adjustment of 4.36% to account for assumed provider behavior changes under the latter system — S&P asserted that the two models are fundamentally aligned, with specific incentives for partnerships across the divide.

“The new payment scheme is designed to reduce total costs in the health care system with a higher reimbursement for referrals sourced from the more acute and expensive setting such as SNFs and LTACHs (to reduce readmissions), compared with community-based referrals (which are thought to sometimes be less necessary or unnecessary),” S&P concluded.

Aside from the new Medicare financial incentives, PDGM could allow skilled nursing operators to capitalize on distress: Though it’s too early to tell, many industry leaders warned that the changes could force about 30% of existing home health agencies out of business in the lead-up to PDGM’s January 1 implementation.

Executives at top home health players Amedisys Inc. (Nasdaq: AMED) and LHC Group (Nasdaq: LHCG) have also reported significant numbers of unsolicited offers from smaller agencies looking to sell their operations since start of the year.

“There’s a lot of people picking up the phone and calling us,” Amedisys CEO Paul Kusserow said on his company’s most recent earnings call, held earlier this month. “More than I thought.”

LHC CEO Keith Myers seconded Kusserow’s observations on his company’s fourth-quarter 2019 earnings call last week.

“As a result of this transition in Q4 and the first few months of 2020, we have seen an increase in the number of inbound calls from smaller agencies looking to exit the business,” Myers said. “Some of these opportunities could be good acquisition candidates, and others we can naturally roll into our organic growth through market share gains.”

But those home health heavyweights can’t absorb all of the excess supply, and skilled nursing operators could find themselves with extremely competitive offers falling into their laps over the coming year.

“If they were previously contemplating getting involved in home health, now would be a time where you can pick up maybe an opportunity in your market at a relatively low cost — possibly even without any cost,” S&P Global Ratings director David Kaplan said.

Kusserow backed up the potential for picking up home health agencies for no actual cost — aside from agreeing to keep on certain staff members — in response to an analyst question about PDGM’s effect on pricing during the Amedisys fourth-quarter earnings call.

“It’s generally free. The idea is you have some conditions there that you hire certain people, but generally the patients come,” he said. “So when it’s in our license area, we don’t expect to pay anything.”

The concept of SNF-home health partnerships isn’t new in the post-acute and long-term health care space. As the Centers for Medicare & Medicaid Services (CMS) has pushed the industry toward more value-based models, including bundled and episodic payments, many nursing home operators have seen the upside in either launching their own home health businesses or forming durable relationships with existing companies.

If CMS will hold skilled nursing operators accountable for what happens 90 days after discharge, the thinking goes, it makes both clinical and business sense to know exactly what’s going on in a former resident’s home life.

Contrasting with the “offensive” play of picking up home health agencies on the cheap, Kaplan called this cross-continuum strategy a more “defensive” move: If a SNF’s preferred home health partners suddenly start going out of business, its hospital referral sources could become skittish and begin looking elsewhere for their post-acute business.

“It’s a little bit of a defensive [strategy] to make sure that you have a home health option — a reliable home health option to discharge to, to make sure that you don’t look bad to the hospitals that are giving you patients,” Kaplan said.

And while Kaplan and S&P Global Markets credit analyst Viral Patel emphasized that patient-choice regulations mean that direct referrals between SNFs and their home health divisions aren’t automatic, a logical next destination could prove appealing to post-acute residents — particularly given the tight Medicare-eligibility timeframes.

“We all know that consumers prefer the path with least resistance,” Patel said. “I mean, if I’m a patient in a SNF, and the SNF says they have their own home health division, that’s probably where I end up going, just because I don’t want to shop around.”

Aside from the specific financial upside for skilled nursing facilities under PDGM, some industry leaders have emphasized that both new Medicare payment models represent a way station on the road to fully site-neutral reimbursements for post-acute care — a long-standing goal of policymakers and advocates.

For that reason, pretending that PDGM won’t affect skilled nursing facilities may not lead to long-term success in the industry.

“That sort of blinders-on way of looking at the post-acute care continuum is dangerous, because the regulators and the payers are not looking at it that way,” Bill Goulding, lead consultant at Aegis, told SNN last month. “They’re clearly moving towards a setting-agnostic payment system. And the patients don’t experience it that way either. It is part of the continuum.”

Robert Holly contributed reporting to this story.

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