What happens when cost allocation dies?

The future after the end of cost shifting

Along with Medicare’s plans for a prospective payment system (PPS) comes the question of cost allocation. Will hospitals still find it profitable to be in the home care business once they aren’t allowed to shift costs?

Medicare, after all, has allowed hospitals to shift the costs of operating non-revenue- producing departments of the hospital to home health, but what happens now?

Change is certain, but at this point, no one really knows what path the hospital-based home health industry will follow. Will they cope with PPS or sell off their agencies?

"I think it’s pretty much going to depend on the relationship of home care with the hospital," says Lorraine Waters, BSN, C, MA, director of Southern Home Care in Jeffersonville, IN. "If it’s a matter of the continuum of care, then it is easier to use the hospital home health department."

Waters says she doesn’t think freestanding agencies can match the efficiency or quality of care of hospital-based agencies. "But still," she predicts, "after PPS, I think you are going to see a lot of divestiture of home health agencies by hospitals."

Some see PPS as an interim step

Tony Orlando, senior manager with Ernst and Young’s National Health Care Practice in Washington, DC, sees something quite different: bundling payments to providers.

"I think PPS is interim for home health. The bundled payment is not something that’s only a dream."

Because PPS is already well-established in hospitals, Orlando sees the transition from cost reimbursement to PPS to bundling taking place rapidly. "What took hospitals 10 to 13 years won’t take home health one-half or one-third that long.

"Today, with so many new cost-cutting strategies, I don’t think HCFA [Health Care Financing Administration] will park on PPS. Medicare wants the risk off its back. With bundled payment, Medicare is not at risk for cost utilization issues. They just say, ‘here’s your X dollars,’ based of their diagnosis of a hip replacement, for instance. That’s it; you’ve got $32,000 for everything. Now, the provider purchases all services."

Orlando foresees other industries growing in the once-fertile fields of cost reimbursement. What happens, he asks, to patients who need more care than HCFA will allow per episode? "Who is going to be the big winner out of home health? When hospitals went to PPS, home health agencies were the big winners. Say you get 20 visits, not 21, but a patient may need care. There has to be alternative delivery of care outside the home."

Orlando sees an opportunity in all this for private-pay providers to deliver services. "Perhaps you have a personal concierge to do the [non-medical] things the home health aide used to do. It would be private-pay, outside Medicare."

Orlando predicts that when the industry begins to "feel the squeeze" over reduced revenues and numbers of visits, "they’ll be looking to create those [opportunities]."

No-pay patients cheaper in home care

The change seen by Jean Kruse, BSN, PHN, operations manager of Grossmont Home Health and Hospice in San Diego, is that "hospital-based agencies become cost centers, where once they were revenue centers."

Then a hospital CFO will look at home care as a way to save a system money, she says. "If you have a no-pay patient in the hospital, it’s costly. But a no-pay in home care is cheaper than in the hospital."

A wary Greg Solecki, administrator of Henry Ford Home Health System in Detroit, acknowledges these are uncertain times for hospital systems and home care, but he isn’t ready to throw in the towel. "Many think this [PPS] is the death knell for home health because of the end of the step-down cost allocation. But I certainly hope that hospitals and/or systems don’t change their outlook on home care. I know Henry Ford isn’t. Home health has become too valuable in the overall strategy."