Can your agency survive a 15% cut in Medicare home health payments?

Options include copays, decrease in market updates

The Balance Budget Act (BBA) of 1997 turned reimbursement for home health agencies upside down and sideways. The interim payment system (IPS) that was in place from July 1998 to October 2000 reduced Medicare spending on home health from $16 billion in 1997 to $9 billion in 2000. While the prospective payment system (PPS) that was implemented in October 2000 seems to offer agencies more realistic opportunities to recoup their cost of care, there still are agencies struggling to keep their doors open.1

Another chapter from BBA has yet to be finalized: The 15% cut to Medicare home health payments that was approved in addition to PPS is scheduled for implementation in October 2002, but there is considerable debate among industry representatives and congressional representatives as to the need for the cut.

The 15% cut included in the original BBA was an attempt to ensure that the five-year savings goal of $16.2 billion for Medicare spending would be met, but the reality is that IPS and PPS have resulted in a savings of $35.8 billion between FY 1998 and FY 2000 and a projected savings of $35.3 billion between FY 2001 and FY 2002 for a total of $71.1 billion for the five-year period.1

Help on the way?

"IPS was devastating to the home health industry with between 3,500 to 4,000 home health agencies going out of business across the country," says Ann B. Howard, director of federal policy for the American Association for Homecare in Alexandria, VA.

The elimination of agencies and the restricted access to home health for many Medicare patients resulted in significant savings, so the hope is that the 15% cut will be eliminated, Howard says.

"Every segment of health care is hoping for changes to their proposed cutbacks, and someone has to pay," she says. For example, physicians and the Medicare Plus Choice Plans are scheduled for givebacks or relief, which will pit hospitals against home health to see who gets to lose money to pay for the other industry segment’s relief, she points out.

As different legislators look at ways to eliminate the 15% cut but still maintain cost savings, several proposals have surfaced. "Copays of $50 per episode for 2003 and 1.5% of the national home health resource group payment after 2003, have been suggested," Howard says.

Copays could be hard to collect

Although $50 to be paid by the patient doesn’t sound like a lot to many people, for low- or fixed-income patients with long-term problems and five or six episodes per year, the cost can become prohibitive, she says.

Agencies also will have to set up mechanisms to collect the copays and probably will write off many to bad debt, Howard says.

Another proposal to offset the elimination of a 15% cut is to "tinker with the inflation adjustors," she says. "The proposal is to have no inflation update from October 2002 to October 2003 and to make updates following 2003 a small percentage."

There also is some talk of continuing the 10% rural add-on for some length of time that hasn’t been specified, Howard says.

A report by the General Accounting Office (GAO) said that Medicare paid home health agencies almost 35% more than the cost of providing care during the first six months of 2001.

Proponents of the 15% cut are citing this report as evidence, but Howard points out that the data used are flawed.

"We have no accurate data for home health payments under PPS because the Provider Statistical and Reporting system will not have accurate cost data until 2004." The GAO used out-of-date 1997 cost data, she adds.

"The GAO used simplistic cost data that were not only out of date, but the assumption was made that because the number of home health visits declined, the agencies’ overhead costs declined proportionately," says Jeff Lewis, president of Lewis Computer Services in Baton Rouge, LA.

Not only does it still take the same amount of time to schedule, assess, obtain orders for, and bill a patient, the extra record-keeping requirements of the Outcome and Assessment Information Set and Health Insurance Portability and Accountability Act are not factored in, he adds.

Lewis’ company has evaluated the financial performance of 42 of its clients who are using one of the company’s financial software products and found that, overall, agencies are doing reasonably well under PPS.

"We took a look at what factors were common in the agencies that were breaking even or making a profit and found that many have positioned themselves to handle the 15% cut if it occurs," he says

The challenge will be for home health pro-viders who have not set up care plans and financial plans based upon projections of actual costs and reimbursement levels, he adds.

Some people are suggesting that the decision on the 15% cut be delayed until more accurate cost data are available, but Howard and other home health industry representatives say that decisions need to be made so that home health agencies can plan for the future.

There still is time to act

At press time, the House of Representatives is expected to complete the Medicare legislation in July with the Senate acting later in the summer, Howard says.

This means that there still is time for home health managers and staff to let their congressional representatives know how they stand on these issues, she adds.

[For more information about the 15% Medicare cut and its effect on home health, contact:

  • Ann B. Howard, Director of Federal Policy, American Association for Homecare, 625 Slaters Lane, Suite 200, Alexandria, VA 22314-1171. Telephone: (703) 535-1891. Fax: (703) 836-6730. E-mail:
  • Jeff Lewis, President, Lewis Computer Ser- vices, 9522 Brookline Ave., Baton Rouge, LA 70809. Telephone: (225) 709-2000. Fax: (225) 709-2010. E-mail:

To find the e-mail or mailing address of your representatives, go to the American Association for Homecare at and enter your zip code in the congressional contacts section on the home page. You will be given the option of sending a prepared e-mail message or composing your own message.]


1. Leon J, Davitt JK, Marainen J. Impact of a Further Payment Reduction in the Medicare Home Health Benefit. North Wales, PA: Edward and Esther Polisher Research Institute; March 18, 2002.