On Friday, June 17, 2022, the Centers for Medicare & Medicaid Services (“CMS”) posted a pre-publication copy of the Calendar Year (“CY”) 2023 Home Health Prospective Payment System Rate Update (“PPS Rule”). Although the industry always has some trepidation about the PPS Rule each year, the approach of this year’s rule was of greater concern, due to the potential for the promised Patient-Driven Groupings Model (“PDGM”) behavioral adjustments. Unfortunately, many of the industry’s fears have not only been realized but may have underestimated the negative impact of behavioral adjustments.

Annual Payment Update

The CY2023 annual payment update percentage is 2.9%, which is well below current inflation, which peaked at 8.5% in March. Although a 2.9% increase is insufficient to allow agencies to keep up with inflation and other financial pressures, any increase in reimbursement will help beleaguered agencies. Unfortunately, with CMS determining a behavioral adjustment of -7.69% is necessary to maintain “budget neutrality” under PDGM, the CY2023 payment calculation results in a significant reduction to the home health standardized 30-day payment. The following table shows the episodic rate calculation for 2023:

CY 2022 National Standardized 30-Day Period Payment Permanent BA Adjustment Factor Case-Mix Weights Budget Neutrality Factor Wage Index Budget Neutrality Factor CY 2023 HH Payment Update CY 2023 National, Standardized 30-Day Period Payment
$2,031.64 0.9231 0.9895 0.9975 1.029 $1,904.76

This calculation includes the permanent behavioral adjustment and results in a CY2023 payment that is only 93.75% of last year’s payment, despite the 2.9% payment update. Agencies that fail to submit their quality data, will have an additional 2% deducted from their reimbursement.

CY 2022 National Standardized 30-Day Period Payment Permanent BA Adjustment Factor Case-Mix Weights Budget Neutrality Factor Wage Index Budget Neutrality Factor CY 2023 HH Payment Update Minus 2 Percentage Points CY 2023 National, Standardized 30-Day Period Payment
$2,031.64 0.9231 0.9895 0.9975 1.009 $1,867.74

These are only the proposed rates. Every year the rates in the final rule change slightly as CMS utilizes more current data, but, unless CMS makes a significant change to its proposed budget neutrality adjustment, agencies need to begin planning for a significant rate reduction in 2023. CMS anticipates this change will result in an overall 4.2% reduction in home health spending. This reduction in the home health PPS standardized payment will present a serious challenge to agencies next year.

PDGM Behavioral Adjustments

The proposed reduction to home health reimbursement stems from the requirement that CMS “annually determine the impact of differences between assumed behavior changes … and actual behavior changes on estimated aggregate expenditures” under PDGM every year from 2020 to 2026. CMS can make temporary or permanent changes to the prospective payment to adjust for the identified impact of behavioral change. CMS implemented a -4.36% adjustment at the beginning of PDGM in anticipation of projected behavioral change under PDGM. The industry has been waiting for CMS to assess behavior again since 2020. CMS chose to forego assessing behavior in the last two PPS rules, because the COVID-19 pandemic led to significant changes in utilization, which were not responses to PDGM. CMS concluded that it would be difficult, if not impossible, to identify changes to PDGM and those due to COVID-19. In last year’s rule, CMS solicited comments regarding the methodology CMS proposed to utilize to analyze behavioral change but did not implement any changes. In this year’s proposed rule, CMS assess behavioral change as a result of PDGM.

CMS’s data shows a downward trend in utilization in 2020 but then an increase in utilization in 2021. This data reflects what the industry already knew. Many patients dropped home health in 2020 during the pandemic while at the same time referrals declined due to the impact of the pandemic on the operation of referral sources. Although we have not returned to pre-pandemic levels, we have seen a resurgence in home health utilization since the early days of the pandemic. This slow climb back to pre‑pandemic levels is the result of several factors, including a significant exacerbation of the home health staffing crisis. The following table shows the overall utilization of home health.

Table B2: Overall Utilization of Home Health Services, CYs 2018-2021

Volume of Periods and Number of Beneficiaries CY 2018 (Simulated) CY 2019 (Simulated) CY 2020 CY 2021
30-Day Periods of Care 9,336,898 8,744,171 8,423,688 8,962,690
Unique Beneficiaries 2,980,385 2,802,560 2,850,916 2,944,305
Average Number of 30-Day Periods per Unique Beneficiary 3.13 3.12 2.95 3.04

The number of episodes per beneficiary is trending back up towards the pre-pandemic average. This data is important, because one behavioral concern voiced in 2019 was that PDGM would lead agencies to reduce length of stay on home health. This was speculated due to the fact that under PDGM earlier episodes reimburse at a higher rate. However, as the pandemic wanes, the number of episodes per patient is nearing 2019 numbers. This may be an indicator that the decline in 2020 was driven more by the pandemic than by PDGM driven behavioral changes.

Another area that CMS reviewed is the impact of PDGM on the number of Low Utilization Payment Adjustments (“LUPA”). The industry voiced concerns that the sliding scale LUPA threshold implemented under PDGM would result in an increase in LUPAs. CMS’s data shows that LUPA periods went from 6.7% of 30-day periods in 2018 to 7.8% of 30-day periods in 2021. The LUPA rate of 7.8% is a decline from 2020, in which 8.9% of 30-day periods were LUPAs, but the COVD-19 pandemic resulted in a significant increase to the 2020 LUPA rate.

CMS utilized the visit per episode data and the cost data to determine the average cost per episode and conclude that home health reimbursement is 34% higher than agency costs.

Discipline 2020 Average Costs per Visit with NRS 2021 Home Health Payment Update 2021 Average Number of Visits 2021 Estimated 30-Day Period Costs
Skilled Nursing $154.77 1.02 4.30 $678.82
Physical Therapy $170.04 1.02 2.93 $508.18
Occupational Therapy $165.86 1.02 0.84 $142.11
Speech Pathology $192.39 1.02 0.16 $31.40
Medical Social Services $264.92 1.02 0.06 $16.21
Home Health Aides $82.25 1.02 0.52 $43.63
Total       $1,420.35

As you can see, CMS estimates the average cost per 2021 episode at $1,420.35. CMS explains that its conclusion that costs are 34% less than reimbursement is correct for two reasons. First, agencies have consistently reduced visits in response to reductions in reimbursement. CMS cites to 2017 to show that from 2017 to today, agencies have reduced the number of visits per episode by 16%. Second, CMS states that costs have not grown as fast as reimbursement. This latter claim is hard to fathom given the history of reimbursement updates over the last few years as well as the recent pandemic, record inflation and a significant home health staffing crisis which has driven up employee pay, especially for nurses, which have all contributed to increased costs.

PDGM Therapy Utilization

Since its inception, the home health PPS system included a therapy bonus. PDGM eliminated this bonus payment which led CMS to speculate that therapy utilization would change under PDGM. CMS analyzes therapy utilization data and concludes that home health agencies altered their behavior in response to the elimination of the therapy bonus payments. Although CMS believed agencies might reduce or even eliminate therapy, the data shows something different. For example, in CY2021, the percentage of therapy only episodes increased from 14.4% in 2019 to 17.8%. The percentage of episodes that have therapy and non-therapy visits declined from 48.8% in 2019 to 42.3% in CY2021. The percentage of episodes with no therapy at all went from 37.2% in 2019 to 39.9% in 2021. This same data shows that in 2020 42.6% of episodes did not include therapy, which likely reflects the impact of the pandemic. It also shows a trend downward in the percentage of episodes without therapy. This data appears to support the conclusion that home health agencies continued to provide therapy to patients, despite the fears that PDGM might lead to a significant decline in therapy utilization in home health.

Although CMS data shows continued therapy utilization in home health, the pattern of utilization does appear to change. The percentage of episodes with 1-6 therapy visits increased in 2020 and 2021. The percentage of episodes with seven or more therapy visits declined in 2020 and 2021. The most significant decline came for episodes with 13+ therapy visits. Although the data shows a decline in episodes with higher therapy utilization, the data does not show an elimination of therapy from the home health benefit as some feared. For example, the decline in episodes with 10, 11 or 12 is less than 1% while there appears to be an increase in episodes with 1-6 visits. Changes in therapy utilization were not one of the identified behavioral changes CMS stated it would monitor, but CMS has concluded that “the decline in therapy utilization is indicative of an additional behavior change.” CMS then analyzes how changes in therapy utilization drove case mix change. CMS concludes that the decline in therapy utilization led to a decline in aggregate expenditures under the pre-PDGM PPS.

Behavioral Analysis and COVID-19

CMS addresses concerns about its methodology, including the potential that it is not adequately accounting for the impact of COVID-19 on behavioral changes. CMS acknowledges these concerns and states “we are soliciting comments on how the COVID-19 PHE may have impacted service provision in a manner not reflected in the proposed methodology described above. We expect that such comments will include empirical evidence to support the commenter’s position on how the COVID-19 PHE affected provider behavior.” Providers should consider submitting comments but note providers must support their comments with “empirical evidence” or other objective data. It will take compelling objective data to convince CMS that their methodology fails to account for the impact of the pandemic.

Calculating Impact of the Behavioral Changes

Having reviewed behavioral changes, CMS then seeks to determine the fiscal impact of these changes. CMS utilizes the methodology it announced in last year’s Home Health PPS rule to assess the impact of behavioral change on home health expenditures. This methodology seeks to determine what the aggregate home health expenditure would have been under the old PPS model to determine if PDGM has resulted in an increase or decrease in expenditures. This involves simulating the 2020 and 2021 episodes as 60-day episodes and pricing them under the old system. CMS explains the process by which they prepared 2020 and 2021 claims. After performing their analysis, CMS concluded that under PDGM, CMS’s aggregate expenditures for home health care increased under PDGM. In order to offset this increase and maintain budget neutrality, a permanent adjustment to the home health episodic of -7.69% is required to offset increased expenditures resulting from behavioral changes. CMS acknowledges that this is a significant reduction but proposes to implement the full cut in CY2023. CMS notes that failing to do so could lead to requiring a larger cut in future years.

A 7.69% cut is significant, but there is additional bad news. CMS notes that in 2020 and 2021, home health reimbursement exceeded what it would have been without PDGM by $2 Billion. CMS states a temporary adjustment is necessary to offset this overpayment. In other words, CMS will adjust future payments down farther, to offset this $2 billion. CMS is not proposing a specific adjustment but is seeking comments from the industry regarding how to recover this amount.

Home Health Value Based Purchasing (“HHVBP”)

The nationwide roll out of home health value-based purchasing is rapidly approaching. In anticipation of the arrival of HHVBP, CMS proposes changes to the program. CMS proposes to remove the term baseline year and replace it with the terms Model baseline year and HHA baseline year. This would eliminate confusion over the use of the term baseline year in the HHVPB. CMS proposes to define HHA baseline year as “the calendar year used to determine the improvement threshold for each measure for each individual competing HHA.” CMS proposes to define Model baseline year as “the calendar year used to determine the benchmark and achievement threshold for each measure for all competing HHAs.” CMS proposes to revise other definitions to reflect these changes.

CMS then proposes to modify the Model baseline year and the HHA baseline year. CMS proposes to make the Model baseline year CY2022. For agencies certified on or before December 31, 2021, the HHA baseline year will also be CY2022. As finalized last year, the baseline year was 2019. CMS is proposing this change, in part, because it noted a decline in certain measures in 2020 and 2021 that CMS anticipates resolving by 2022. This change will also allow CMS “to measure competing HHAs’ performance using benchmarks and achievement thresholds that are based on the most recent data available. This would also allow the benchmarks and achievement thresholds to be set using data from after the most acute phase of the COVID-19 PHE, which we believe would provide a more appropriate basis for assessing performance under the expanded Model than the CY 2019 pre-PHE period.”

For agencies certified on or after January 1, 2022, “HHA baseline year is the first full calendar year of services beginning after the date of Medicare certification and the first performance year is the first full calendar year following the HHA baseline year.”

Moving the Model baseline year and HHA baseline year to CY2022 means that agencies will not receive their final achievement thresholds and benchmarks until the summer of CY2023. This means that agencies will not receive this data until midway through the first performance year, which appears to be a significant disadvantage. Anticipating objections from the industry, CMS notes that this is consistent with “the rollout of the original HHVBP Model in which benchmarks and achievement thresholds using 2015 data were made available to HHAs during the summer of the first performance year (CY 2016).”

CMS also is seeking comments on how it can include health equity measures in HHVBP in the future. CMS is “interested in stakeholder feedback on specific actions the expanded HHVBP Model can take to address healthcare disparities and advance health equity.”

Proposed Permanent Cap on Wage Index Decreases

CMS has traditionally implemented transition policies, including caps, when phasing in changes to labor market areas. CMS notes that “because the wage index is a relative measure of the value of labor in prescribed labor market areas, we believe it is important to implement new labor market area delineations with as minimal a transition as is reasonably possible.” These changes have the potential to create instability and significant negative impacts on providers. Wage indexes can fluctuate from year to year due to factors beyond agencies control. CMS recognizes a need to smooth these transitions and help to ensure stability in Medicare payments. CMS proposes to achieve this may implementing a permanent 5% cap on wage index decreases, “regardless of the circumstance for the decline.” CMS further proposes that “if a geographic area’s prior CY wage index is calculated based on the 5-percent cap, then the following year’s wage index would not be less than 95 percent of the geographic area’s capped wage index.” This would predict agencies from significant negative fluctuations in their geographic wage index.

Reassignment of ICD-10-CM Codes Under PDGM

CMS proposes to reassign a number if ICD-10 codes to different PDGM clinical groups or co-morbidity subgroups. The proposed change impacts a wide range of ICD-10 codes. Providers should review the “CY 2023 Proposed Reassignment of ICD–10–CM Diagnosis Codes for HH PDGM Clinical Groups and Comorbidity Subgroups” supplemental file on the Home Health Prospective Payment System Regulations and Notices webpage. That file may be accessed here.

Revisions to LUPA Thresholds and Case Mix

One of the largest changes to home health payment under PDGM was the move to variable LUPA thresholds. Prior to PDGM, every home health episode had the same LUPA threshold. PDGM instituted a variable LUPA level linked to the episode’s HHRG score. CMS previously finalized a policy to reevaluate LUPA thresholds annually. CMS did not reevaluate LUPA thresholds last year, because that would have utilized CY2020 data, which was impacted by the pandemic. CMS has concluded that CY2021 data shows visit patterns have stabilized and therefore CMS proposes to reevaluate LUPA thresholds. CMS’s reevaluation results in 280 case mix groups with no change in their LUPA threshold; 120 case mix groups in which the LUPA threshold decreases by 1 visit; 18 case mix groups in which the LUPA threshold increases by 1 visit; 12 case mix groups where the threshold decreases by 2 visits; and 2 case mix groups where the LUPA threshold decreases by 3 visits.

CMS also evaluates case mix based upon current data. CMS believes that to the extent the COVID-19 pandemic impacted case mix, it impacted all case-mix groups equally. This means that COVID-19 does not prevent CMS from reevaluating case-mix. The case mix evaluation results in “238 case mix groups that experience a -5% to 0% change in [case mix]weights; 183 groups that experience a 0% to +5% change in [case mix] weights compared to their CY 2022 case-mix weights … ten groups that experience a change between +5% and +10% [change in case mix weights] and one group that experiences a 10% to 12% increase in [case mix] weights compared to the CY 2022 case-mix weights.”

Finally, CMS proposes to adjust functional impairment levels and co-morbidity subgroups.

Submission of All-Payer OASIS Data

After years of analysis and consideration, CMS proposes ending the suspension of non‑Medicare/Medicaid OASIS data collection. CMS believes that the industry’s privacy concerns have been addressed. CMS believes now is the right time to revisit this policy, because of the requirement under the IMPACT Act that CMS develop a uniform quality measure system that will allow CMS to compare outcomes across post-acute care providers.

Conclusion

CMS proposes significant changes in this year’s proposed rule. The most challenging proposal is a permanent 7.69% cut to home health payments, which will result in a projected 4.2% reduction in home health reimbursement in 2023. The home health industry needs to start working now to advocate against a cut that will have a serious impact on the industry. Individual agencies need to be begin assessing the fiscal impact of this cut and begin planning steps to take to survive 2023.

Practical Takeaways

  • Begin assessing the impact of a 4.2% cut to Medicare reimbursement and identifying actions to take to try to mitigate the impact of this reduction. This may be difficult in the midst of steadily climbing costs.
  • Submit comments objecting to the cut. The industry will need to advocate against this proposal and make the potential negative impact to home health access clear. Provide objective evidence to support the conclusion that CMS’s analysis for 2020 data fails to consider the full impact of the COVID-19 Pandemic. It will also be useful to provide objective data regarding your costs. CMS needs to understand that home health reimbursement is not 34% greater than home health costs.
  • Begin assessing your OASIS collection in anticipation of all payer OASIS reporting. Be ready to capture and submit OASIS for all of your patients in 2023.
  • Evaluate the impact of LUPA recalibration and case mix adjustments on your census. These changes will impact providers different